<PAGE>
As filed with the Securities and Exchange Commission on September 9, 1999
Registration No. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
--------------
SmarterKids.com, Inc.
(Exact name of registrant as specified in its charter)
--------------
Delaware 5945 06-1364380
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction Classification Code Number) Identification Number)
of incorporation or
organization)
--------------
200 Highland Avenue
Needham, MA 02494
(781) 449-7567
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
--------------
David A. Blohm
President and Chief Executive Officer
SmarterKids.com, Inc.
200 Highland Avenue
Needham, MA 02494
(781) 449-7567
(Name, address including zip code, and telephone
number, including area code, of agent for service)
--------------
Copies to:
<TABLE>
<S> <C>
Gordon H. Hayes, Esq. John A. Burgess, Esq.
Edwin L. Miller, Jr., Esq. William S. Gehrke, Esq.
Testa, Hurwitz & Thibeault, LLP Hale and Dorr LLP
125 High Street 60 State Street
Boston, Massachusetts 02110 Boston, Massachusetts 02109
Tel: (617) 248-7000 Tel: (617) 526-6000
Fax: (617) 248-7100 Fax: (617) 526-5000
</TABLE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date hereof.
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,
check the following box. [_]
--------------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Title of Each Class of Proposed Maximum Amount of
Securities to be Registered Aggregate Offering Price(1) Registration Fee
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.01 par value..... $60,000,000 $16,680
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
--------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this registration
statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. +
+Underwriters may not confirm sales of these securities until the registration +
+statement filed with the Securities and Exchange Commission becomes +
+effective. This prospectus is not an offer to sell these securities and it is +
+not soliciting offers to buy these securities in any jurisdiction where the +
+offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED SEPTEMBER 9, 1999
PROSPECTUS
Shares
(LOGO)
Common Stock
This is an initial public offering of common stock by SmarterKids.com, Inc.
The estimated initial public offering price will be between $ and $ per
share.
---------
Prior to this offering, there has been no public market for the common stock.
SmarterKids.com has applied to have the common stock approved for quotation on
the Nasdaq National Market under the symbol SKDS.
---------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price................................... $ $
Underwriting discounts and commissions.......................... $ $
Proceeds to SmarterKids.com, before expenses.................... $ $
</TABLE>
SmarterKids.com and certain selling stockholders have granted the
underwriters options for a period of 30 days to purchase up to additional
shares of common stock.
---------
Investing in the common stock involves a high degree of risk.
See "Risk Factors" beginning on page 7.
---------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
Hambrecht & Quist
U.S. Bancorp Piper Jaffray
E*OFFERING
, 1999
<PAGE>
[COMPANY LOGO APPEARS HERE]
HELPING PARENTS HELP THEIR CHILDREN LEARN
[PICTURE OF HAPPY CHILD]
MySmarterKids
We believe that MySmarterKids offers the most personalized shopping experience
in e-commerce for children's educational products. Parents enter information
about their child's education and development to build a profile and
MySmarterKids uses the information to present a refined assortment of products
and services.
Parents Center
Our Parents Resource Center, developed and staffed by teachers offers fun and
educational activities, provides answers to educational questions, and provides
resources for parents seeking to help their children learn.
Smarter Products
We carry only the best educational books, toys and games, and software. Every
product at SmarterKids.com has been carefully selected and reviewed by teachers
and education specialists for quality, depth, content and fun.
[PICTURE OF SELECTED PRODUCTS]
The Destination for Educational Products and Resources
[PICTURE OF COMPANY WEBSITE SHOWING PRODUCTS, SERVICES AND ADDITIONAL RESOURCES
OFFERED BY THE COMPANY]
[PICTURE OF MOTHER WITH 2 CHILDREN]
Age/Grade Based Shopping
We've designed SmarterKids.com to make it easy and convenient to shop. Our site
is organized in the same way parents think about their kids, as individuals with
unique learning styles and goals.
Recommendations
By providing a continually updated assortment of our Best Sellers, Teachers'
Favorites and Parents' Favorites, dozens of our recommended products are just
one click away.
[PICTURE OF SELECTED PRODUCTS]
Additional Resources
SmarterKids.com offers a number of easy-to-use tests and surveys to both measure
abilities, and help parents determine how their child learns best.
[PICTURE OF FATHER AND SON READING]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
--- ----
<S> <C> <C>
Prospectus Summary................................................ 4
Risk Factors...................................................... 7
Forward-Looking Statements........................................ 21
Use of Proceeds................................................... 21
Dividend Policy................................................... 21
Capitalization.................................................... 22
Dilution.......................................................... 24
Selected Financial Data........................................... 25
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 27
Business.......................................................... 36
Management........................................................ 48
Principal Stockholders............................................ 57
Shares Eligible for Future Sale................................... 59
Certain Transactions.............................................. 61
Description of Securities......................................... 62
Underwriting...................................................... 65
Legal Matters..................................................... 68
Experts........................................................... 68
Where You Can Find More Information............................... 68
Index to Financial Statements..................................... F-1
</TABLE>
----------------
We maintain a World Wide Web site at www.smarterkids.com. Information
contained on our website does not constitute part of this prospectus.
SmarterKids.com, SmarterKids, MySmarterKids and SmartPicks are trademarks of
SmarterKids.com, Inc. All other brand names or trademarks appearing in this
prospectus are the property of their respective holders.
3
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary does not contain all of the information that you
should consider before investing in our common stock. You should read the
entire prospectus carefully, including "Risk Factors" and our financial
statements and the notes to those financial statements, before making an
investment decision.
SmarterKids.com
SmarterKids.com is a leading online retailer focused on children's
educational books, toys and games, and software. We offer a unique assortment
of fun and educationally relevant products, a trusted brand, competitive prices
and an easy-to-use online shopping environment. We provide extensive
educational content and help parents and gift givers find quality products and
make informed purchase decisions tailored to a child's individual developmental
needs and learning goals.
We launched our website in November 1998. In a survey of the top 40 Web
retailers, SmarterKids.com was the 16th most visited shopping website in July
1999, with almost one million visitors, as estimated by PC Data, an independent
Internet research firm.
With thousands of educational products to choose from and few reliable
information sources, it is difficult for parents to identify and buy quality
products and services that fit the particular needs of their children. Parents
need a resource where they can access reliable product information and trusted
educational content to help them make informed purchase decisions and buy
products conveniently. Traditional retailers of educational products, including
mass market retailers, typically lack a focus on education, do not have an in-
depth understanding of educational products and may not understand the
developmental needs of individual children. In addition, these retailers often
have a narrow product selection, high facilities and staffing costs, offer
limited service, and lack merchandising flexibility and shopping convenience.
Because of the limitations of the traditional retail channel, the Internet has
emerged as an increasingly popular way to shop.
SmarterKids.com integrates carefully selected products, helpful content and
interactive tools with an intuitive and easy-to-use interface to create a
compelling and unique online shopping experience. Our dedicated team of
teachers carefully selects and then reviews only those products that meet our
high quality standards. Our rapidly growing collection of competitively priced
educational products includes over 1,800 books, toys and games, and software
titles from over 300 suppliers. Because we are focused on education, many of
our products, particularly toys and games, are often not found on many of the
other popular e-commerce websites. The MySmarterKids personalization area on
our website allows parents to build a confidential educational profile of their
child that can include information about the child's age and grade, learning
styles, learning goals and performance on standardized tests. Our SmartPicks
technology uses this profile to make tailored product recommendations from
among our distinctive assortment of products.
Key elements of our strategy to be the leading online provider of children's
educational products, services and resources for parents include:
. continuing to enhance our customers' experience to build a trusted brand
. aggressively building brand awareness and expanding our customer base
. pursuing additional revenue opportunities
. leveraging the power of our customer database
. maintaining scalable and efficient fulfillment operations to ensure
customer satisfaction
J.L. Hammett Co., a leading national distributor of educational products,
currently supplies our inventory and performs distribution services for us. Our
relationship with J.L. Hammett Co. provides us with industry and supplier
relationships, favorable credit and price terms from vendors, and the ability
to scale our warehouse operations.
SmarterKids.com, Inc. was incorporated in Delaware in 1994. Our principal
offices are located at 200 Highland Avenue, Needham, Massachusetts 02494, and
our telephone number is 781-449-7567. Our website is located at
www.smarterkids.com. The information contained in our website is not part of
this prospectus.
4
<PAGE>
The Offering
Common stock offered by SmarterKids.com...
shares
Common stock to be outstanding after this
offering..................................
shares
Use of proceeds...........................
For general corporate purposes,
including advertising and other
marketing expenses to promote and
enhance our website, purchasing
inventory, expanding our
fulfillment capabilities,
upgrading our computer systems
and other general purposes,
including possible acquisitions.
Proposed Nasdaq National Market symbol....
SKDS
The number of shares of our common stock that will be outstanding after this
offering, unless otherwise indicated, is based on the number outstanding on
September 7, 1999 with a pro forma adjustment to include an aggregate of
8,488,591 shares of common stock to be issued upon the consummation of this
offering as a result of conversion of all outstanding shares of preferred
stock, including shares of series C preferred stock issued in July 1999. It
excludes:
. 1,879,434 shares subject to outstanding options at a weighted-average
exercise price of $0.41 per share and 1,733,332 additional shares
available for issuance under stock plans that will be in effect
following this offering; and
. warrants to purchase 408,727 shares of common stock at a weighted-
average exercise price of $2.83 per share that are currently outstanding
or that we are obligated to issue subject to certain conditions, 270,727
of which are currently exercisable, and 218,727 of which must be
exercised prior to the closing of this offering.
----------------
Unless otherwise indicated, all information in this prospectus assumes that
the underwriters' over-allotment option will not be exercised and does not
reflect a stock split of our outstanding shares of common stock anticipated to
occur immediately prior to this offering. The term "SmarterKids.com," "we,"
"us" and "our" refer to SmarterKids.com, Inc., a Delaware corporation.
5
<PAGE>
Summary Financial Data
(in thousands, except share and per share data)
The following summary financial data are derived from the financial
statements of SmarterKids.com. The pro forma as adjusted balance sheet data
give effect to the conversion of all outstanding shares of preferred stock,
including the shares of series C preferred stock issued in July 1999 for net
proceeds of $25.3 million, into an aggregate of 8,488,591 shares of common
stock upon the closing of this offering. The pro forma as adjusted balance
sheet data also reflect our receipt of the net proceeds of $ million from the
sale of shares of common stock in this offering, at an assumed initial
public offering price of $ per share, after deducting the estimated
underwriting discounts and commissions and offering expenses.
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
---------------------------------------------------------- ----------------------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues:
Online retail.......... $ -- $ -- $ -- $ -- $ 22 $ -- $ 387
Proprietary CD-ROM(1).. 219 401 1,240 1,416 2,278 1,152 --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total net revenues.... 219 401 1,240 1,416 2,300 1,152 387
---------- ---------- ---------- ---------- ---------- ---------- ----------
Cost of revenues:
Online retail.......... -- -- -- -- 20 -- 279
Proprietary CD-ROM..... 28 319 407 491 908 401 --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total cost of
revenues............. 28 319 407 491 928 401 279
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit............ $ 191 $ 82 $ 833 $ 925 $ 1,372 $ 751 $ 108
========== ========== ========== ========== ========== ========== ==========
Operating expenses...... $ 668 $ 1,553 $ 2,533 $ 1,992 $ 4,733 $ 1,607 $ 7,455
Net loss................ (477) (1,470) (1,649) (1,014) (3,342) (871) (7,295)
Net loss attributable to
common stockholders.... (477) (1,470) (1,649) (1,081) (3,596) (933) (7,295)
Basic and diluted net
loss per common share.. $ (0.48) $ (1.47) $ (1.65) $ (1.08) $ (3.52) $ (0.93) $ (6.64)
Shares used to compute
basic and diluted net
loss per common share.. 1,000,000 1,000,000 1,000,404 1,001,432 1,022,349 1,005,071 1,097,932
Pro forma basic and
diluted net loss per
common share........... $ (0.64) $ (1.38)
Shares used to compute
pro forma basic and
diluted net loss per
common share........... 5,227,349 5,302,932
</TABLE>
- --------
(1) From our incorporation in 1994 until November 1998, our business focused on
the development, marketing and sale of our proprietary educational and
entertainment CD-ROM software.
<TABLE>
<CAPTION>
June 30, 1999
---------------------
Pro Forma
Actual As Adjusted
-------- -----------
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............................... $ 687
Working capital (deficit)............................... (3,605)
Total assets............................................ 1,759
Redeemable preferred stock.............................. 10,287
Stockholders' equity (deficit).......................... (13,770)
</TABLE>
6
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus before purchasing our common stock.
Investing in our common stock involves a high degree of risk. Any of the
following risks could harm our business, operating results and financial
condition and could result in a complete loss of your investment.
Risks Related to Our Business
Our business is difficult to evaluate because we have a limited operating
history with our new business model. Our market may not develop as anticipated,
and we may not successfully execute our business strategy.
We have a limited operating history upon which you can evaluate our
business. Although we began operations in 1994 with the development, marketing
and sales of our proprietary educational and entertainment CD-ROM software, we
did not launch the SmarterKids.com website and begin selling children's
educational products online until November 1998. In addition, most of our
management team was hired within the last eighteen months. You must consider
the challenges, risks and difficulties frequently encountered by early stage
companies using new and unproven business models in new and rapidly evolving
markets. Some of these challenges relate to our ability to:
. increase our brand name recognition
. expand our customer base
. manage our supplier/distributor relationships
. upgrade our website, transaction-processing systems, fulfillment
infrastructure and inventory management systems
We cannot be certain that our business strategy will be successful or that
we will successfully address these and other challenges, risks and
uncertainties.
We have a history of losses, and we expect to incur substantial net losses in
the future. If we do not achieve profitability, our financial condition and our
stock price could suffer.
Since inception, we have incurred significant losses. As of June 30, 1999,
we had an accumulated deficit of $15.6 million. We incurred net losses of $3.3
million for the fiscal year ended December 31, 1998 and $7.3 million for the
six months ended June 30, 1999.
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 significant additional costs and
expenses related to:
. brand development, advertising, marketing and promotional activities,
including product discounts
. expansion of our supplier/distributor relationships
. expansion of our order fulfillment infrastructure
. continued development of our website, transaction-processing systems,
fulfillment capabilities and network infrastructure
. expansion of our product offerings and website content
. strategic relationship development
. employment of additional personnel as our business expands
7
<PAGE>
Our ability to become profitable depends on our ability to generate and
sustain substantially higher revenue while maintaining reasonable expense
levels. In particular, although we intend to increase significantly our
spending on marketing and promotional activities, these efforts may not be
effective in converting a large number of customers from traditional shopping
methods to online shopping for educational products and services or attracting
online customers to our website. If we do achieve profitability, we cannot be
certain that we will be able to sustain or increase profitability on a
quarterly or annual basis in the future.
We have been unable to fund our operations with the cash generated from our
business. If we do not generate cash sufficient to fund our operations, we may
need additional financing to continue our growth or our growth may be limited.
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. However, we may need to raise additional funds prior to or after the
expiration of such period. If we raise additional funds through the issuance of
equity or debt securities, such securities may have rights senior to those of
our stockholders, 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.
We may not be able to rapidly attract a high volume of customers, which would
inhibit our revenue growth.
If we do not attract and retain a high volume of online customers at a
reasonable cost, we will not be able to increase our revenues or achieve
profitability. Although we intend to increase significantly our expenditures
for marketing and promotional activities, these efforts may not be effective in
converting a large number of customers from traditional shopping methods to
online shopping for educational products and services or attracting online
customers to our website. We do not know if the forms of marketing and
promotional activities that we intend to implement will have the desired
result. Even if we are successful at attracting additional online customers, we
expect it will take several years to adequately build our customer base for
long-term success. Factors that could prevent us from attracting and retaining
customers include:
. lack of consumer awareness of our website
. customer concern about the security of online transactions and the
privacy of information customers supply about their children
. shipping charges, which are not incurred when shopping at traditional
stores
. longer delivery times associated with Internet orders, as compared to
the immediate receipt of products at a traditional store
. pricing that does not meet customer expectations or prices offered by
our competitors
. product damage from shipping and improper shipments arising from
incorrectly filled orders
. delayed response to customer service requests
. difficulty in returning or exchanging orders
Our market is highly seasonal and may cause our operating results to fluctuate
from quarter to quarter. Our annual results are highly dependent on the success
of our holiday selling season.
The market for children's educational books, toys and games, and software is
highly seasonal due to the holiday season. In addition, Internet usage
generally declines in the summer. Accordingly, we expect to
8
<PAGE>
experience seasonal fluctuations in our revenue. In particular, we expect a
disproportionate amount of our revenue to be realized during the fourth quarter
of each calendar year. If for any reason our revenue is below expectations
during the fourth quarter, our annual operating results would be adversely
affected.
Because of our limited operations during last year's holiday season, we do
not have meaningful comparative data indicating the volume or timing of holiday
orders. We may not accurately predict appropriate inventory levels or staffing
needs. In the future, our seasonal sales patterns may become more pronounced,
may strain our personnel and fulfillment relationships and may cause a
shortfall in revenue as compared to expenses in a given period. These seasonal
patterns will cause quarterly fluctuations in our operating results and could
adversely affect our financial performance.
Our limited operating history makes forecasting difficult. We may be unable to
adjust our spending in a timely manner to compensate for any unexpected revenue
shortfall.
As a result of our limited operating history with our current business model
introduced in November 1998, it is difficult to accurately forecast future
revenues. Also, 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 revenue. Revenue 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 expand our operations in a timely
manner to adequately meet customer demand to the extent it exceeds our
expectations.
We expect our quarterly operating results to fluctuate. If we fail to meet the
expectations of public market analysts and investors, the market price of our
common stock will decline.
If our quarterly revenue or operating results fall below investor or
securities analyst expectations, our stock price could fall substantially. 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. Many of the other risk factors listed in this
prospectus may negatively affect our quarterly operating results and contribute
to fluctuations. Our limited operating history makes it difficult to assess the
impact of these factors on our operating results. Because of this difficulty in
predicting future performance, our operating results will likely fall below the
expectations of securities analysts or investors in some future quarter or
quarters, which would likely adversely affect the market price of our common
stock.
A third party has claimed that we infringe his intellectual property.
On July 15, 1999, Leslie S. Minkus filed a patent infringement lawsuit
against us and National Computer Systems in the United States District Court
for the Northern District of Illinois, alleging that our use of SmartPicks
infringes a patent held by Mr. Minkus (U.S. Patent No. 5,122,952). We are
obligated to indemnify National Computer Systems in that action. The patent
purports to disclose and claim a computer system for matching appropriate
educational products with a child's developmental profile comprising so-called
"static and dynamic data." Mr. Minkus is seeking temporary and permanent
injunctions, as well as unspecified damages. The hearing for the preliminary
injunction motion is scheduled for November 1999. We believe that the suit is
without merit and that we have meritorious defenses based on non-infringement
and the invalidity of the Minkus patent.
Patent litigation, however, is subject to inherent uncertainties. In
addition, cases like this generally involve issues of law that are evolving,
presenting further uncertainty. Our defense of this litigation, regardless of
the merits of the complaint, has been, and will likely continue to be, time-
consuming and a diversion for our personnel. A failure to prevail in this
litigation could result in:
. our paying monetary damages
. the issuance of a preliminary or permanent injunction requiring us to
stop using SmartPicks
9
<PAGE>
. our having to redesign SmartPicks, which could be costly and time-
consuming, assuming that a redesign is feasible
. our having to reimburse Mr. Minkus for some or all of his attorneys'
fees
. our having to obtain from Mr. Minkus a license to his patent, which
license might not be made available to us on reasonable terms or at all
Any of these results would harm our business, financial condition and
operating results. Furthermore, we expect to continue to incur substantial
costs in defending against this litigation, and these costs could increase
significantly if our dispute goes to trial.
We are dependent on J.L. Hammett Co., our sole product source and distribution
services provider. The loss of this relationship or J.L. Hammett Co.'s
inability, for any reason, to perform these functions could lead to
interruptions in our operations, lost revenues and increased expense.
We are highly dependent upon our relationship with J.L. Hammett Co., a
national distributor of educational products, which serves as our exclusive
provider of products and distribution services. J.L. Hammett Co. works closely
with us to determine our projected inventory needs and then orders and
maintains the physical inventory of children's educational books, toys and
games and software necessary to satisfy customer orders. J.L. Hammett Co.
orders and stocks inventory on our behalf, fulfills our customer orders as they
are received, and then packs and ships the orders using our packaging
materials. J.L. Hammett Co. also handles promotional mailings and product
returns as necessary on our behalf. J.L. Hammett Co. is, to a limited extent, a
competitor. The termination of our relationship with J.L. Hammett Co. could
lead to interruptions in our operations, lost revenues and increased expense
necessary to quickly implement an alternative distribution and order
fulfillment infrastructure.
Our success depends on our ability, in conjunction with J.L. Hammett Co., to
rapidly expand fulfillment operations in order to accommodate a significant
increase in customer orders.
Our current fulfillment operations may not be adequate to accommodate
significant increases in customer demand that may occur during the final
quarter of 1999. We plan to take action, including the hiring of additional
personnel to work directly for us at the J.L. Hammett Co. facility and the
funding of additional inventory in the final quarter of 1999, to satisfy such
anticipated increases in product demand. There can be no assurance that the
measures we take will be successful. If we do not successfully expand our
fulfillment operations to accommodate demand generally and, in particular,
increased demand during the final quarter of each calendar year due to the
seasonal nature of our business, our business will be adversely affected.
We face significant inventory risks because consumer demand can change for
products that we have in inventory or on order.
We anticipate that we will have established direct merchandising
relationships with our vendors and that we will own our inventory by the end of
1999. The demand for certain products can change what we have in inventory or
on order. As a result, we may own inventory that may become obsolete if
customer orders do not materialize. This risk may be greatest in the first
calendar quarter of each year, after we have increased significantly our
inventory levels for the prior holiday season. This risk will increase as we
enter new product categories due to our lack of experience in purchasing
products for these categories. In addition, to the extent that demand for our
products increases over time, we may be forced to increase inventory levels.
Any such increase would subject us to additional inventory risks.
10
<PAGE>
Our business relies on our ability to obtain sufficient quantities of quality
merchandise on acceptable commercial terms. If the J.L. Hammett Co.
relationship is terminated and we do not establish or fail to maintain supplier
relationships on acceptable terms, our revenues and profitability could suffer.
With the exception of our five Skills Test CD-ROMs, which J.L. Hammett Co.
holds on a consignment basis, J.L. Hammett Co. supplies all of the educational
products we sell. We rely on J.L. Hammett Co. and its relationships with
manufacturers and suppliers, to provide the children's educational products we
sell. J.L. Hammett Co. may be unable, or unwilling due to competing priorities
or otherwise, to fulfill our customer orders as directed. In addition, vendors
may stop selling merchandise to us or to J.L. Hammett Co. and we may not be
able to secure identical or comparable merchandise from alternative vendors in
a timely manner or on acceptable terms. From time to time, we expect to
experience difficulty in obtaining sufficient quantities of certain products
from J.L. Hammett Co. due to its inability to obtain such products in a
quantity sufficient to satisfy its needs and the needs of others to whom it may
provide such order fulfillment services. If we cannot supply our products to
consumers at acceptable prices, we may lose sales and market share as consumers
make purchases elsewhere. Further, an increase in supply costs could increase
operating losses beyond current expectations.
If we do not successfully maintain and expand our website and the systems that
process customers' orders, we could lose customers and our revenues could be
reduced.
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 and those systems of J.L. Hammett Co. Our success also depends on our
ability to rapidly expand our website, transaction-processing systems and
network infrastructure without systems interruptions in order to accommodate
significant increases in customer traffic and demand. Many of our software
systems are custom-developed, and we rely on our employees and third-party
contractors to develop and maintain these systems. If any of these employees or
contractors become unavailable to us, we may experience difficulty in improving
and maintaining such systems.
Although we expect to periodically enhance and expand our website,
transaction-processing systems and network infrastructure, we may experience
interruptions in our systems. We may be unable to project the rate or timing of
increases, if any, in the use of our website. This would make it difficult for
us to effectively upgrade and expand our transaction-processing systems and to
integrate smoothly any newly developed or purchased modules with our existing
systems. Due to the seasonal nature of our business, it is particularly
important that we are able to expand our website, transaction-processing
systems and network infrastructure as necessary in preparation for the holiday
season and that we operate during that period without systems interruptions.
Our failure to achieve or maintain high capacity data transmission without
system downtime, particularly during this period, would adversely affect our
business. In addition, we rely on a third party, Exodus Communications, to host
our website and are thus subject to its ability to provide service when and as
we require.
We may fail to compete effectively in our market.
The e-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 websites at a relatively low
cost. In addition, the markets for children's books, toys and games, and
software in general, including those for children's educational products, are
very competitive and highly fragmented, with no clear dominant leader and
increasing public and commercial attention.
Our competitors can be divided into several groups, including:
. mass market retail chains, such as Kmart, Target and Wal-Mart
. mass market book sellers, toy stores and computer hardware and software
stores, such as Barnes & Noble, Toys "R" Us and CompUSA
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. traditional regional or local bookstores, toy stores and computer and
software stores
. traditional specialty educational retailers, such as Learning Express,
Learningsmith, Noodle Kidoodle and Zany Brainy
. online book sellers, toy sellers and computer software sellers, such as
Amazon.com, eToys, Kay Bee Toys, toysmart.com and Beyond.com
. educational catalog distributors, such as Scholastic
Many of our current and potential 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 greater
resources to marketing and promotional campaigns and website and systems
development than we can. Their financial strength could prevent us from
increasing market share. In addition, larger, more well-established and more
well-financed entities are acquiring, investing in and forming joint ventures
with online competitors and publishers or suppliers of children's educational
books, toys and games, and software as the use of the Internet increases.
Our competitors may be able to secure products from vendors on more
favorable terms, fulfill customer orders more efficiently and adopt more
aggressive pricing or inventory availability policies than we can. Traditional
store-based retailers also enable customers to see and feel products in a
manner that is not possible over the Internet. Some of our competitors have
significantly greater experience in selling children's educational products.
Our online competitors are able to use the Internet as a marketing medium to
reach significant numbers of potential customers. Internet consumers can easily
compare prices among online retailers, which may increase pricing pressures.
New Internet technologies and the expansion of existing technologies, such as
price comparison programs that select specific titles from a variety of
websites and may direct customers to other online educational books, games and
software retailers, may increase pricing pressures and competition.
Increased competition may result in reduced operating margins, loss of
market share and diminished brand awareness.
If we enter new business categories and pursue new product offerings and
services that do not achieve market acceptance, our brand and reputation could
be damaged and we could incur financial losses.
We may choose to expand our operations by 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, services 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 product or service 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
supplier/distributor inventory risk and would strain our management, financial
and operational resources.
Establishing the SmarterKids.com brand quickly and cost-effectively is
essential for us to be successful. If we do not establish the SmarterKids.com
brand quickly, we may not capture sufficient market share or increase revenues
enough to achieve profitability.
We believe that establishing, maintaining and enhancing the SmarterKids.com
brand is critical to attracting customers. Promotion of the SmarterKids.com
brand will depend largely on our success in providing a high quality online
experience supported by a high level of customer service, which cannot be
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assured. In addition, to attract and retain online users and to promote and
maintain the SmarterKids.com brand, we have spent and intend to continue to
spend significant amounts on an aggressive brand-enhancement strategy, which
includes advertising, promotional programs and public relations activities.
Revenues generated from these activities may not be sufficient to offset
associated costs.
We rely on our relationships with iVillage, Microsoft's Encarta, Lightspan,
National Computer Systems, and other online services, search engines and
directories to drive traffic to our website. If these relationships do not
continue, it will be difficult for us to increase market share and achieve
profitability.
We rely on our relationships with iVillage, Microsoft's Encarta, Lightspan,
NCS, and other online services, search engines and directories to drive traffic
to our websites. We cannot be sure that such relationships will be available to
us in the future on acceptable commercial terms, if at all. If we are unable to
maintain satisfactory relationships with these or other parties on acceptable
commercial terms, or if our competitors are better able to leverage such
relationships, our business, operating results and financial condition could be
negatively affected. We may not achieve sufficient online traffic or product
purchasing volume to realize sufficient sales to maintain these relationships.
Failure to achieve sufficient traffic or generate sufficient revenues from
purchases originating from third-party websites would likely reduce our profit
margins and may result in termination of these types of relationships. Without
these relationships, it is unlikely that we can sufficiently increase market
share and achieve profitability.
If we are unable to manage our growth and the related expansion in our
operations effectively, our business may be harmed.
Our ability to successfully offer products and services and implement our
business model 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, we have
grown from 15 employees at December 31, 1997, to 39 employees at June 30, 1999.
We will need to add additional personnel in the future. We may be unable to
hire qualified employees as needed. Our growth has placed, and our anticipated
future operations will continue to place, a significant strain on our
management, information systems, network and other resources.
We may not be able to implement and integrate our new financial reporting
systems. Failure to have adequate, accurate and timely financial information
would adversely affect our business.
We will soon implement new accounting and financial reporting software. In
connection with this implementation, we may encounter difficulties integrating
the new software with our other information systems. Additionally, we are in
the process of upgrading certain other information systems and internal
controls, including those related to the ordering and tracking 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, which would adversely affect our business.
We depend upon United Parcel Service to deliver our products on a timely and
consistent basis. A deterioration in our relationship with United Parcel
Service could decrease our ability to track shipments, cause shipment delays,
and increase our shipping costs and the number of damaged products.
Our supply and distribution system is dependent upon our relationship with
United Parcel Service. If our relationship with United Parcel Service is
terminated or impaired or if United Parcel Service is unable to deliver product
for us, whether through labor shortage, slow down or stoppage, deteriorating
financial or business condition or for any other reason, we would be required
to use alternative carriers for the shipment
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of products to our customers. We may be unable to engage an alternative carrier
on a timely basis or upon terms favorable to us. Potential adverse consequences
of changing carriers include:
. reduced visibility into order status and package tracking
. delays in order processing and product delivery
. increased cost of delivery, resulting in reduced gross margins
. reduced shipment quality which may result in damaged products and
customer dissatisfaction
If we do not respond to rapid technological changes, our services could become
obsolete and we could lose customers.
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 website 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
. develop new services and technologies that address the increasingly
sophisticated and varied needs of our prospective customers
. respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis
Ongoing development of our website and other proprietary technology entails
significant expense and technical risks. We may use new technologies
ineffectively or we may fail to adapt our website, 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.
Our facilities and systems are vulnerable to unexpected problems. The
occurrence of a natural disaster or other unexpected problem could damage our
reputation and brand and reduce our revenues.
Substantially all of our computer and communications hardware systems are
located at a third-party facility owned and operated by Exodus Communications
in Waltham, Massachusetts. 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
supplier/distributor's facilities or at Exodus facility could cause
interruptions or delays in our business, loss of data or render us unable to
accept and fulfill customer orders. The occurrence of any or all of these
events could adversely affect our reputation, brand and business.
Intellectual property claims against us can be costly and result in the loss of
significant rights.
We regard trademarks, copyrights, service marks, trade secrets, patents and
similar intellectual property as important 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.
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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, including trademarks, copyrights and patents related to our
business, and we may receive other notices in the future. If we are forced to
defend against any such claims, whether they are with merit or are determined
in our favor, then we may face costly litigation, diversion of technical and
management personnel, and product shipment delays. If there is a successful
claim of infringement against us and we are unable to develop non-infringing
technology or license the infringed or similar technology on a timely basis, or
if we are required to cease using one or more of our business or product names
due to a successful trademark infringement claim against us, it could adversely
affect our business.
In addition, effective trademark, service mark, copyright, trade secret and
patent 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 and our business could be adversely
affected.
The ownership and protection of the SmarterKids.com trademark is uncertain. If
we lose the right to use this name, our brand and reputation could be impaired,
we could lose customers and we would incur significant costs to change our name
and promote a new name.
We conduct business on the Web using the trademark SmarterKids.com. We have
filed applications to register the marks SmarterKids and SmarterKids.com with
the U.S. Patent and Trademark Office (PTO). The PTO's initial responses to
these applications identified conflicts with other marks. An infringement
action could be brought against us at any time by the holders of these
registered marks or of unregistered marks. There is a substantial risk that the
owner of such marks would overcome any defenses that we could raise. If the
owner of such marks were to prevail in such an action, we could lose the
ability to use the SmarterKids and SmarterKids.com trademarks and could be
subject to substantial damages. Such outcomes could adversely affect our
business. If we are required to change our company or domain name, we could
lose customers and brand equity which would have a material adverse effect on
our business and financial condition. Although we may attempt to acquire or
license the rights to potentially relevant third-party trademarks and domain
names, there is no assurance that we will be successful.
If we are unable to retain or acquire the necessary domain names, our brand and
reputation could be damaged and we could lose customers.
We currently hold the Web domain name SmarterKids.com as well as several
other variations of this domain name. The acquisition and maintenance of domain
names generally is regulated by governmental agencies and their designees. In
the United States, the National Science Foundation has appointed Network
Solutions, Inc., and recently several others, as the current registrars 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. 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 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. In addition, other parties hold domain names that are
similar to ours and any confusion of our website with another party's could
diminish our brand.
The success of our business depends on the continuing contribution of our key
personnel.
Our future success is dependent on key members of our management team. The
competition for qualified personnel in the children's educational products
market is extremely intense. The loss of service of one or more of our senior
management could have a material adverse effect on our business.
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Our computer systems and those of our key suppliers and service providers may
not be year 2000 compliant, which may disrupt our operations.
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 UPS and other carriers
to deliver orders to customers.
We have reviewed the proprietary aspects of our internally developed
software and we believe it to be year 2000 compliant. We are currently
assessing the year 2000 readiness of our third-party supplied software,
computer technology and other services as well as those of J.L. Hammett Co.,
our product and distribution services provider. 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 or computer systems or of our
third-party suppliers to be year 2000 compliant would have a material adverse
effect on our business.
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 our business.
We may be subject to product liability claims.
We face an inherent risk of exposure to product liability claims in the
event that the use of the products we sell results in injury. We may not have
adequate resources in the event of a successful claim against us. Our general
liability insurance may not cover these claims or we may not be indemnified for
any or all of the liabilities that may be imposed. We cannot predict whether
product liability claims will be brought against us in the future or if the
resulting adverse publicity would harm our business.
Risks Related to the Internet Industry
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 for commerce. The e-commerce market is new and rapidly
evolving, and the extent of consumer acceptance is uncertain. The issues
concerning the commercial use of the Internet that we expect to affect the
development of the market for our services include security, reliability, cost
of access, ease of access, ease of use, speed and quality of service.
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.
Our business is subject to government regulation of the Internet and other
legal uncertainties which could negatively impact our operations.
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
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privacy, copyrights, taxation and the transmission of sexually explicit
material. The European Union recently enacted its own privacy regulations. The
laws governing the use of the Internet, however, remain 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. Because we receive a significant amount of
orders as a result of e-mail advertising, new regulations affecting the use of
unsolicited e-mail advertising, or spamming, would impair our marketing
efforts.
We may be liable for the content we provide on our website or which is accessed
from our website.
We believe that our future success will depend in part upon our ability to
deliver original and compelling descriptive content about the children's
educational books, toys and games, and software 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.
Our revenues and reputation would be adversely affected if our security
measures fail or if we experience significant credit card fraud.
Consumer concerns regarding the security of transactions conducted on the
Internet and users' privacy may inhibit the growth of use of the Internet and
e-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 we will experience
compromises of, or breaches in, the technologies we use to protect customer
transaction data. Under current credit card practices, merchants are liable for
fraudulent credit card transactions where, as is the case with the transactions
we process, the merchant does not obtain a cardholder's signature. A failure to
adequately control fraudulent credit card transactions would harm our business.
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 security breaches or
alleviate problems caused by any such breaches. We cannot guarantee that
security breaches will not occur, and if our security measures fail our
business could be harmed. Any penetration of our network security or
misappropriation of our users' personal or credit card information could
subject us to liability. We may be liable for claims based on unauthorized
purchases with credit card information, impersonation or other similar fraud
claims. Claims could also be based on other misuses of personal information,
including the use of this information for unauthorized marketing purposes.
These claims could result in litigation.
Privacy concerns and legislation may limit the information we can gather.
When a visitor first arrives at our website, our software creates a profile
for that visitor. If the visitor registers or logs in, the visitor's identity
is added to the profile, preserving any profile information that was gathered
up to that point. We track both explicit user profile data supplied by the user
as well as implicit profile attributes derived from the user's behavior on the
website. We suggest that parents provide us with an educational profile on
their children. This is an important feature of our website. Privacy concerns
relating to
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children are particularly acute. Privacy concerns may cause visitors to resist
providing the personal data or avoid websites that track the Web behavioral
information necessary to support this profiling capability. More importantly,
even the perception of security and privacy concerns, whether or not valid, may
indirectly inhibit market acceptance of our products. For example, the European
Union recently adopted a directive addressing data privacy that may limit the
collection and use of certain information regarding Internet users. This
directive may limit our ability to target advertising or collect and use
information in certain European countries. In addition, legislative or
regulatory requirements may heighten these concerns if businesses must notify
website users that the data captured after visiting websites may be used to
direct product promotion and advertising to that user. Other countries and
political entities, such as the European Union, have adopted such legislation
or regulatory requirements. The United States may adopt similar legislation or
regulatory requirements. If privacy legislation is enacted or consumer privacy
concerns are not adequately addressed, our business, financial condition and
operating results could be harmed.
Websites typically place "cookies" on a user's hard drive without the user's
knowledge or consent. We use cookies for a variety of reasons, including the
collection of data derived from the user's Internet activity. Most currently
available Web browsers allow users to remove cookies at any time or to prevent
cookies from being stored on their hard drives. In addition, some commentators,
privacy advocates and governmental bodies have suggested limiting or
eliminating the use of cookies. Any reduction or limitation in the use of
cookies could limit the effectiveness of our sales and marketing efforts. The
FTC and several states have investigated the use by certain Internet companies
of personal information. We could incur significant additional expenses if new
regulations regarding the use of personal information are introduced or if our
privacy practices were investigated.
Our revenues could decrease if we became 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 Massachusetts. However, one or more
local, state, federal or foreign jurisdictions may seek to impose sales tax
collection obligations on us. In addition, any new operation in states outside
Massachusetts could subject our shipments in such states to state sales taxes
under current or future laws. A number of legislative proposals have been made
at the federal, state and local level, and by foreign governments, that would
impose additional taxes on the sale of goods and services over the Internet and
certain states have taken measures to tax Internet-related activities. Although
Congress recently placed a three-year moratorium on new state and local taxes
on Internet access or on discriminatory taxes on electronic commerce, existing
state or local laws were expressly excepted from this moratorium. Further, once
this moratorium is lifted, some type of federal and/or state taxes may be
imposed upon Internet commerce. Such legislation or other attempts at
regulating commerce over the Internet may substantially impair the growth of
commerce on the Internet and, as a result, adversely affect our opportunity to
derive financial benefit from such activities. 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 and
results of operations.
Risks Associated with this Offering
The broad discretion we have in the use of proceeds of this offering increases
the risk that we may not use them effectively or that we may use them in ways
with which you or the market in general may not agree.
Presently, we intend to use the proceeds from this offering for general
corporate purposes, including advertising and other marketing expenses to
promote and enhance our website, purchasing inventory, expanding our
fulfillment capabilities and upgrading our computer systems. We may also use a
portion of the proceeds to expand our business through strategic alliances and
acquisitions. We have not yet determined the amount of net proceeds to be used
specifically for any of the foregoing purposes. As a result, investors in this
offering will be relying on
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management's judgment with only limited information about its specific
intentions regarding the use of proceeds. Additional information regarding the
ways in which we intend to spend the proceeds of this offering is included in
this prospectus under the heading "Use of Proceeds."
Our officers and directors will exercise significant control over us, which
could delay or prevent someone from acquiring or merging with us.
After this offering, our executive officers, directors and entities
affiliated with them will control approximately % of our common stock. As a
result, these stockholders, acting together, would be able to significantly
influence all matters requiring approval by our stockholders, including the
election of directors and the approval of mergers or other business combination
transactions.
No public market for our common stock currently exists, and our stock price may
fluctuate after this offering. As a result, investors in our common stock may
not be able to resell their shares at or above the initial public offering
price.
There has not been a public market for our common stock. We cannot predict
the extent to which investor interest in our company will lead to the
development of an active, liquid trading market. Active trading markets
generally result in lower price volatility and more efficient execution of buy
and sell orders for investors. The initial public offering price for the shares
will be determined by negotiations between us and the representatives of the
underwriters and may not be indicative of prices that will prevail in the
trading market. The market price of our common stock may decline below the
initial public offering price. A more detailed discussion of the factors to be
considered in determining the initial public offering price is included in this
prospectus under the heading "Underwriting."
Market prices of emerging Internet companies have been highly volatile, and the
market for our stock may be highly volatile as well.
The stock market has experienced significant price and trading volume
fluctuations, and the market prices of technology companies, particularly
Internet companies, have been highly volatile. A number of recent initial
public offerings by Internet companies have been accompanied by exceptional
share price and trading volume changes in the first days and weeks after the
securities were released for public trading. Investors may not be able to
resell their shares at or above the initial public offering price. In the past,
following periods of volatility in the market price of a public company's
securities, securities class action litigation has often been instituted
against that company. Such litigation could result in substantial costs and a
diversion of management's attention and resources.
New investors will suffer immediate and substantial dilution in the net
tangible book value of their shares.
We expect the initial public offering price to be substantially higher than
the net tangible book value per share of the common stock. Therefore, you will
incur immediate dilution in net tangible book value of $ per share,
assuming an initial public offering price of $ per share. You may incur
additional dilution if holders of stock options exercise their options or if
warrantholders exercise their warrants to purchase common stock.
A substantial number of our securities may be sold in the market in the future.
This could cause our stock price to decline significantly, even if our business
is doing well.
The market price of our common stock could decline as a result of sales by
our existing stockholders of a large number of shares of our common stock in
the market after this offering (and after applicable lockup periods in many
cases) or the perception that such sales could occur. These sales also might
make it more difficult for us to sell equity securities in the future at a time
and at a price that we deem appropriate.
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Anti-takeover provisions in our charter documents and Delaware law could
prevent or delay a change in control of our company.
Our Corporate Charter and By-laws may discourage, delay or prevent a merger
or acquisition that a stockholder may consider favorable by:
. authorizing the issuance of "blank check" preferred stock
. providing for a classified board of directors with staggered, three-year
terms
. limiting the persons who may call special meetings of stockholders
. prohibiting stockholder action by written consent
. establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted on at
stockholder meetings
Certain provisions of Delaware law may also discourage, delay or prevent
someone from acquiring or merging with us.
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FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties, and other factors that may cause our or our industry's actual
results, levels of activity, performance, or achievements to be materially
different from any future results, levels of activity, performance, or
achievements expressed or implied by such forward-looking statements. Such
factors include, among other things, those listed under "Risk Factors" and
elsewhere in this prospectus. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expect," "plan,"
"anticipate," "believe," "estimate," "predict," "potential" or "continue" or
the negative of such terms or other comparable terminology. These statements
are only predictions. Actual events or results may differ materially. In
evaluating these statements, you should specifically consider various factors,
including the risks outlined under "Risk Factors." Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. Moreover, neither we nor any other person assumes responsibility
for the accuracy and completeness of such statements. We are under no duty to
update any of the forward-looking statements after the date of this prospectus
to conform such statements to actual results.
USE OF PROCEEDS
We will receive estimated net proceeds of $ from the sale in this
offering of shares of common stock at an assumed initial public offering
price of $ per share after deducting estimated underwriting discounts and
commissions of $ and estimated expenses of $ . If the underwriters' over-
allotment option is exercised in full, we will receive net proceeds of $ .
We will not receive any proceeds from the sale of common stock by the selling
stockholders.
The primary purposes of this offering are to increase our capitalization and
financial flexibility, create a public market for our common stock and
facilitate future access to public markets. We intend to use the proceeds for
working capital and other general corporate purposes, including advertising and
other marketing expenses to promote and enhance our website, purchasing
inventory, expanding our fulfillment capabilities and upgrading our computer
systems.
Although we may use a portion of the net proceeds to acquire technology or
businesses that are complementary to our business, we currently have no
commitments or agreements for such acquisitions and are not involved in
negotiations regarding any acquisitions.
Pending use of the net proceeds for the above purposes, we intend to invest
the net proceeds in short-term, interest-bearing, investment-grade securities.
DIVIDEND POLICY
We currently intend to retain all future earnings, if any, for funding our
growth and, therefore, do not expect to pay any dividends in the foreseeable
future.
21
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999 on an
actual, pro forma and pro forma as adjusted basis. The "actual" column reflects
our capitalization as of June 30, 1999 on a historical basis, without any
adjustments to reflect subsequent events or anticipated events. The "pro forma"
column reflects our actual capitalization as of June 30, 1999 with adjustments
for the following:
. the filing prior to the closing of this offering of an Amended and
Restated Certificate of Incorporation authorizing 90,000,000 shares of
common stock and 10,000,000 shares of undesignated preferred stock.
. the automatic conversion of each share of series A and series B
preferred stock into 1,000 shares of common stock upon the closing of
this offering.
The "pro forma as adjusted" column reflects our capitalization as of June
30, 1999 with the preceding "pro forma" adjustments plus:
. the issuance of 4,284,091 shares of series C preferred stock in July
1999 for net proceeds of $25.3 million and the automatic conversion of
all of the series C preferred stock into 4,284,091 shares of common
stock upon the closing of this offering.
. the receipt of the estimated net proceeds of $ million from our sale
in this offering of shares of common stock at an assumed initial
public offering price of $ per share.
None of the columns set forth below reflect:
. warrants to purchase 408,727 shares of our common stock, 218,727 of
which expire upon the closing of this offering.
. options to purchase 1,879,434 shares of common stock at an average
exercise price of $0.41 per share, and 1,733,332 shares of common stock
reserved for future issuance under our stock plans.
22
<PAGE>
The information shown in the table below is qualified by, and should be read
in conjunction with, our more detailed financial statements and the related
notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of June 30, 1999
-------------------------------
Pro Pro Forma
Actual Forma As Adjusted
-------- -------- -----------
(in thousands, except share
data)
<S> <C> <C> <C>
Redeemable preferred stock:
Series C redeemable convertible preferred
stock, $.01 par value; no shares authorized,
issued and outstanding, actual, pro forma and
pro forma as adjusted........................ $ -- $ -- $ --
Series B redeemable convertible preferred
stock, $.01 par value; 3,518 shares
authorized, issued and outstanding, actual;
no shares authorized, issued and outstanding,
pro forma and pro forma as adjusted.......... 7,036 -- --
Series A convertible preferred stock, $.01 par
value; 687 shares authorized, issued and
outstanding; no shares authorized, issued and
outstanding, pro forma and pro forma as
adjusted..................................... 3,251 -- --
-------- -------- --------
Total redeemable preferred stock............. 10,287 -- --
-------- -------- --------
Stockholders' equity (deficit):
Preferred stock, $.01 par value; no shares
authorized, issued and outstanding, actual;
10,000,000 shares authorized, no shares
issued and outstanding, pro forma and pro
forma as adjusted............................ -- -- --
Common stock, $.01 par value; 10,000,000
shares authorized, 1,170,131 shares issued
and outstanding, actual; 90,000,000 shares
authorized, 5,374,631 shares issued and
outstanding, pro forma; 90,000,000 shares
authorized, shares issued and
outstanding, pro forma as adjusted........... 12 54
Additional paid-in capital.................... 4,042 14,287
Deferred stock compensation................... (2,256) (2,256) (2,256)
Accumulated deficit........................... (15,568) (15,568) (15,568)
-------- -------- --------
Total stockholders' equity (deficit)......... (13,770) (3,483)
-------- -------- --------
Total capitalization....................... $ (3,483) $ (3,483) $
======== ======== ========
</TABLE>
23
<PAGE>
DILUTION
Our pro forma net tangible book value (deficit) as of June 30, 1999 was
$(3.5) million, or $(0.65) per share of common stock. Pro forma net tangible
book value per share represents the amount of our total tangible assets less
total tangible liabilities, divided by 5,374,631 shares of common stock
outstanding after giving effect to the conversion of each outstanding share of
series A and series B preferred stock into 1,000 shares of common stock upon
the closing of this offering. After giving effect to the sale of the
shares of common stock offered hereby at an assumed initial public offering
price of $ per share and after deducting the estimated underwriting
discounts and commissions and estimated offering expenses, the pro forma net
tangible book value as of June 30, 1999 would have been $ , or
approximately $ per share. This represents an immediate increase in pro
forma net tangible book value of $ per share to existing stockholders and
an immediate dilution in net tangible book value of $ per share to new
investors of common stock in this offering. Based upon the midpoint of the
offering price range, new investors will pay $ per share and the net
tangible book value per share is expected to be $ immediately after the
offering. Further, investors in this offering will contribute approximately
% of our net tangible assets, but will own approximately % of our company.
The following table illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $
Pro forma net tangible book value (deficit) per share before
this offering, as of June 30, 1999.......................... $(0.65)
Increase in pro forma net tangible book value per share
attributable to new investors in this offering..............
-------
Pro forma net tangible book value per share after offering.....
---
Dilution in pro forma tangible book value per share to new
investors..................................................... $
===
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1999,
the total number of shares of common stock purchased from us, the total
consideration paid and the average price per share paid by existing
stockholders and by the new investors purchasing shares of common stock in this
offering, before deducting estimated underwriting discounts and commissions and
offering expenses payable by SmarterKids.com:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
----------------- ------------------- Average Price
Number Percent Amount Percent Per Share
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 5,374,631 % $11,300,000 % $2.10
New investors...........
--------- ---- ----------- ----- -----
Total................. 100% $ 100% $
========= ==== =========== ===== =====
</TABLE>
The foregoing discussion and tables above do not reflect the issuance of
4,284,091 shares of series C preferred stock in July 1999 for gross
consideration of $26.9 million and net proceeds to SmarterKids.com of $25.3
million, and assume no conversion of the series C preferred stock into
4,284,091 shares of common stock upon the closing of this offering. The
foregoing discussion and tables above also assume no exercise of stock options
or warrants outstanding as of June 30, 1999. As of June 30, 1999, there were
outstanding options to purchase 1,968,394 shares of common stock at a weighted
average exercise price of $0.19 per share and 579,606 shares were reserved for
issuance under our stock plan. As of June 30, 1999, there were also warrants to
purchase 213,700 shares of common stock at a weighted average exercise price of
$1.32 per share outstanding or that we were obligated to issue subject to
certain conditions. The foregoing discussion also excludes an additional
1,733,332 shares reserved for issuance under stock plans amended or adopted in
connection with this offering. To the extent that any shares available for
issuance upon exercise of outstanding options or warrants or pursuant to our
stock plans are issued, there will be further dilution to new public investors.
24
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with our
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and financial statements and related notes included elsewhere in
this prospectus. The statement of operations data for the years ended December
31, 1996, 1997 and 1998 and the balance sheet data at December 31, 1997 and
1998 are derived from our audited financial statements appearing elsewhere in
this prospectus. The statement of operations data for the year ended December
31, 1995 and the balance sheet data at December 31, 1995 and 1996 are derived
from our audited financial statements not included in this prospectus. The
statement of operations data for the year ended December 31, 1994 and the
balance sheet data at December 31, 1994 are derived from our unaudited
financial statements not included in this prospectus. The unaudited financial
statements, in the opinion of management, reflect all adjustments necessary for
a fair presentation of that data. Interim results at June 30, 1999 and for the
six-month periods ended June 30, 1998 and 1999 are derived from our unaudited
financial statements appearing elsewhere in this prospectus which, in the
opinion of management, reflect all adjustments necessary for a fair
presentation of that data. The pro forma as adjusted balance sheet data as of
June 30, 1999 reflects the automatic conversion of each outstanding share of
series A and series B preferred stock into 1,000 shares of common stock upon
the closing of this offering, the issuance of 4,284,091 shares of series C
preferred stock in July 1999 for net proceeds of $25.3 million and the
automatic conversion of each share of series C preferred stock into one share
of common stock upon the closing of this offering, and the receipt of the
estimated net proceeds from our sale in this offering of shares of common
stock at an assumed initial public offering price of $ per share. Historical
results are not indicative of the results to be expected in the future.
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
----------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ---------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues:
Online retail.......... $ -- $ -- $ -- $ -- $ 22 $ -- $ 387
Proprietary CD-ROM..... 219 401 1,240 1,416 2,278 1,152 --
--------- --------- --------- --------- --------- --------- ---------
Total net revenues.. 219 401 1,240 1,416 2,300 1,152 387
--------- --------- --------- --------- --------- --------- ---------
Cost of revenues:
Online retail.......... -- -- -- -- 20 -- 279
Proprietary CD-ROM..... 28 319 407 491 908 401 --
--------- --------- --------- --------- --------- --------- ---------
Total cost of
revenues............ 28 319 407 491 928 401 279
--------- --------- --------- --------- --------- --------- ---------
Gross profit............ 191 82 833 925 1,372 751 108
--------- --------- --------- --------- --------- --------- ---------
Operating expenses:
Marketing and sales.... 156 645 1,033 756 2,678 846 5,713
Development............ 269 631 887 721 1,378 529 763
General and
administrative........ 243 277 611 430 490 213 399
Stock compensation..... -- -- 2 15 187 19 580
--------- --------- --------- --------- --------- --------- ---------
Total operating
expenses............ 668 1,553 2,533 1,922 4,733 1,607 7,455
--------- --------- --------- --------- --------- --------- ---------
Loss from operations.... (477) (1,471) (1,700) (997) (3,361) (856) (7,347)
Interest and other
income (expense), net.. -- 1 51 (17) 19 (15) 52
--------- --------- --------- --------- --------- --------- ---------
Net loss................ (477) (1,470) (1,649) (1,014) (3,342) (871) (7,295)
Accretion on redeemable
preferred stock........ -- -- -- (67) (254) (62) --
--------- --------- --------- --------- --------- --------- ---------
Net loss attributable to
common stockholders.... $ (477) $ (1,470) $ (1,649) $ (1,081) $ (3,596) $ (933) $ (7,295)
========= ========= ========= ========= ========= ========= =========
Basic and diluted net
loss per common
share (1).............. $ (0.48) $ (1.47) $ (1.65) $ (1.08) $ (3.52) $ (0.93) $ (6.64)
Shares used to compute
basic and diluted net
loss per common share
(1).................... 1,000,000 1,000,000 1,000,404 1,001,432 1,022,349 1,005,071 1,097,932
Pro forma basic and
diluted net loss per
common share (1) ...... $ (0.64) $ (1.38)
Shares used to compute
pro forma basic and
diluted net loss per
common share (1)....... 5,227,349 5,302,932
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
December 31, June 30, 1999
--------------------------------------- ---------------------
Pro Forma
1994 1995 1996 1997 1998 Actual As Adjusted
----- ------- ------ ------ ------- -------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 140 $ 2,307 $ 433 $ 293 $ 4,273 $ 687 $
Working capital
(deficit).............. 274 1,959 333 110 3,066 (3,605)
Total assets............ 425 2,748 1,470 1,145 5,504 1,759
Total long-term debt,
net of current
portion................ -- -- 104 41 -- --
Total redeemable
preferred stock........ -- 3,251 3,251 4,011 10,287 10,287
Total stockholders'
equity (deficit)....... (341) (1,144) (2,791) (3,839) (7,162) (13,770)
</TABLE>
- --------
(1) For an explanation of the computation of historical and pro forma net loss
per share, see Note 2 in our financial statements.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with our financial statements and
related notes included elsewhere in this prospectus. This discussion contains
forward-looking statements based upon current expectations that involve risks
and uncertainties, such as our plans, objectives, expectations and intentions.
Our actual results and the timing of certain events could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Risk Factors," "Business" and
elsewhere in this prospectus. See "Forward-Looking Statements."
Overview
SmarterKids.com is a leading online retailer focused exclusively on
children's educational books, toys and games, and software.
From inception through March 1998, our activities consisted primarily of the
conception, development, publishing, marketing and sales of our proprietary
educational and entertainment CD-ROM software. In March 1998, we commenced
development of the SmarterKids.com website. In November 1998, we launched the
SmarterKids.com website, transitioned our business model to online sales of
third-party educational products and discontinued the sale of our proprietary
CD-ROM products through traditional retail channels.
Due to the transition of our business model in late 1998, we believe that
period-to-period comparisons prior to 1999 are less meaningful than an analysis
of quarterly results in 1999. While we have grown rapidly since launching our
website, total revenues decreased since the beginning of 1999 due to the
discontinuation of our proprietary CD-ROM business. Over the same period,
marketing and sales expenses increased significantly as a result of our
promotional activities. As a result of the ongoing start-up expenses associated
with our new business model, we expect to incur significant operating losses
for the foreseeable future. We also expect that the rate at which we incur
losses will increase significantly from current levels as we continue to incur
additional expenses to advertise and promote our website, expand our product
offerings and website content, enhance and upgrade our website and other
systems, expand our fulfillment capabilities, develop strategic and marketing
relationships, and hire additional personnel.
Prior to November 1998, revenues consisted solely of sales of our
proprietary CD-ROM products and were recognized upon shipment, net of return
allowances. Cost of revenues consisted primarily of production and shipping
costs. Marketing and sales expenses consisted primarily of promotions and
advertising of our products through national computer software retailers.
Development costs consisted primarily of compensation for employees developing
our proprietary CD-ROM software.
Revenues in 1999 consist of online sales of third-party educational products
and charges to customers for shipping. Revenues are recognized upon shipment
and are net of allowances for product returns, promotional discounts and
coupons. Cost of revenues consists primarily of the cost of products sold to
customers and our shipping costs. Marketing and sales expenses consist
primarily of the cost of advertising and promotional activities, fulfillment
fees to J.L. Hammett Co. and expenses for personnel engaged in marketing,
merchandising and customer service activities. We intend to continue to pursue
an aggressive branding and marketing campaign to attract new customers and,
therefore, expect marketing and sales expenses to increase significantly in
future periods. In addition, we expect marketing and sales expenses to increase
significantly as we expand fulfillment and customer service capabilities to
accommodate anticipated increases in sales volume. Development expenses consist
primarily of payroll and related costs for personnel performing website design,
development and testing. We believe that continued investment in website
development is critical to attaining our strategic objectives and therefore
anticipate website development expenses to increase significantly. General and
administrative expenses consist primarily of payroll and
27
<PAGE>
related costs for executive and administrative personnel, professional service
expenses and other general corporate expenses. We expect general and
administrative expenses to increase as we expand our staff and incur additional
costs related to the growth of our business infrastructure and costs associated
with being a public company. Interest and other income (expense), net consist
primarily of interest expense related to short-term lease obligations and
interest earned on the short-term investment of cash.
With respect to our need to attract, retain and motivate qualified employees
and business partners, we provide our employees and business partners with
equity-based compensation. Stock compensation expenses represent non-cash
charges related to stock options and warrants given to employees and directors
and non-employee business partners. For employee and director grants, the
compensation charge reflects the difference between the exercise price of the
options and the estimated fair value of the underlying common stock on the date
of the grant. This compensation charge is deferred initially and amortized to
expense over the vesting period of the applicable options. For non-employee
grants, the compensation charge reflects the fair value of the options and
warrants on the initial measurement date (typically the date of grant for those
exercisable immediately or with fixed vesting periods, or the date when vesting
becomes fixed for those with variable vesting periods), as well as subsequent
remeasurements of such fair value until the options and warrants vest.
Accordingly, we cannot currently estimate additional charges related to future
remeasurement of unvested non-employee options and warrants. As of June 30,
1999, $2.3 million of deferred stock compensation remained to be amortized to
expense in future periods for stock options and warrants granted through June
30, 1999.
The market for children's educational books, toys and games, and software is
highly seasonal due to the holiday season. In addition, Internet usage
generally declines in the summer. Accordingly, we expect to experience seasonal
fluctuations in our revenues. In particular, we expect a disproportionate
amount of our revenues to be realized during the fourth quarter of each
calendar year.
J.L. Hammett Co. is currently our sole supplier and distributor of products
and provides distribution services and inventory management. J.L. Hammett Co.
provides all logistical support for freight and delivery from vendors, and
currently owns and stocks all of our products, supports our purchasing and
forecast system and fulfills all our orders. J.L. Hammett Co. provides these
services for a fixed percentage markup on product cost. In order to have
greater flexibility and scalability, more control over inventory and closer
relationships with our suppliers, we expect to establish direct relationships
with all vendors and purchase our own inventory beginning in late 1999. We
anticipate that this arrangement will increase our cash requirements and that a
significant portion of our working capital will be attributable to the purchase
of inventory.
Results of Operations
Comparison of Six Months Ended June 30, 1998 and June 30, 1999
Revenues. Net revenues decreased from $1.2 million in the six months ended
June 30, 1998 to $387,000 in the six months ended June 30, 1999. This decrease
is a result of the discontinuation of our business model focused on the sales
of our proprietary CD-ROM software and the transition of our business model to
online sales of third-party educational products.
Cost of revenues. Cost of revenues decreased from $401,000 in the six months
ended June 30, 1998 to $279,000 in the six months ended June 30, 1999. Our
gross profit margin decreased from 65.2% of net revenues in the six months
ended June 30, 1998 to 27.9% of net revenues in the six months ended June 30,
1999. These changes are attributable to the transition of our business model to
online sales of third-party educational products.
Marketing and sales. Marketing and sales expenses increased from $846,000 in
the six months ended June 30, 1998 to $5.7 million in the six months ended June
30, 1999. This increase was primarily attributable to the initiation of our
advertising campaigns and promotional activities, fees to our fulfillment
partner, J.L. Hammett Co., as well as to increased headcount and related
expenses required to implement our new Internet business model.
28
<PAGE>
Development. Development expenses increased from $529,000 in the six months
ended June 30, 1998 to $763,000 in the six months ended June 30, 1999. This
increase was attributable primarily to increased headcount and costs related to
enhancing the features, content and functionality of our website. We expect
development expenses to increase as we continue to develop new promotional
programs on our website, as well as add new features and upgrade technology.
General and administrative. General and administrative expenses increased
from $213,000 in the six months ended June 30, 1998 to $399,000 in the six
months ended June 30, 1999. This increase was attributable primarily to
increased headcount and increased professional services expenses. We expect
general and administrative expenses to increase as we expand our operations and
infrastructure to support future growth and transition to being a public
company.
Stock compensation. We recorded deferred stock compensation of $1,185,000
and amortized $364,000 of total deferred stock compensation as an expense in
the six months ended June 30, 1999 related to stock options and warrants
granted to employees. The remaining total deferred stock compensation is being
amortized over the vesting period of the individual options and warrants. We
recorded additional stock compensation of $216,000 as an expense in the six
months ended June 30, 1999 related to warrants and options granted to non-
employees.
Interest and other income (expense), net. Interest and other income
(expense), net increased from $15,000 in other net expense in the six months
ended June 30, 1998 to $52,000 in other net income in the sixth months ended
June 30, 1999. This increase was primarily attributable to an increase in
interest income from invested capital.
Comparison of Years Ended December 31, 1996, 1997 and 1998
Revenues. Revenues increased from $1.2 million in 1996 to $1.4 million in
1997 to $2.3 million in 1998. This increase was primarily attributable to
increased sales of CD-ROM products, which was a result of new product offerings
and expanded marketing and sales efforts through traditional retail channels.
Cost of revenues. Cost of revenues increased from $407,000 in 1996 to
$491,000 in 1997 to $928,000 in 1998. This increase was primarily attributable
to additional costs associated with increased sales of CD-ROM products. Our
gross margin decreased from 67.2% of net revenues in 1996 to 65.3% in 1997, to
59.7% in 1998.
Marketing and sales. Marketing and sales expenses decreased from
$1.0 million in 1996 to $756,000 in 1997. This decrease was primarily
attributable to a decrease in headcount and related expenses as we repositioned
our product line. Marketing and sales expenses increased from $756,000 in 1997
to $2.7 million in 1998. This increase was primarily attributable to additional
costs associated with promotions and advertising for our repositioned
proprietary CD-ROM products and the launch of our website in November 1998.
Development. Development expenses decreased from $887,000 in 1996 to
$721,000 in 1997. This decrease was primarily attributable to a decrease in
headcount and related expenses as we repositioned our product line. Development
expenses increased from $721,000 in 1997 to $1.4 million in 1998. This increase
was primarily attributable to additional costs associated with development of
the SmarterKids.com website.
General and administrative. General and administrative expenses decreased
from $611,000 in 1996 to $430,000 in 1997. This decrease was primarily
attributable to a decrease in headcount and related expenses as we repositioned
our product line. General and administrative expenses increased from $430,000
in 1997 to $490,000 in 1998. This increase was primarily attributable to
increased headcount and related expenses reflecting the momentum of our
repositioned product line.
29
<PAGE>
Stock compensation. With respect to stock options granted, we recorded
deferred stock compensation of $1.5 million and amortized $81,000 of stock
compensation as an expense in 1998 and recorded deferred stock compensation of
$62,000 and amortized $4,000 of stock compensation as an expense in 1997. We
recorded additional stock compensation of $11,000 and $106,000 as an expense in
each of the years ended December 31, 1997 and 1998 related to options and
warrants granted to non-employees.
Interest and other income (expense), net. Interest and other income
(expense), net decreased from $51,000 in other net income in 1996 to $17,000 in
other net expense in 1997. This decrease was primarily attributable to expenses
associated with our capital lease. Interest and other income (expense), net
increased from $17,000 in other net expense in 1997 to $19,000 in other net
income in 1998. This increase was primarily attributable to an increase in
interest income from invested capital.
30
<PAGE>
Selected Quarterly Results of Operations
The following table sets forth selected unaudited statement of operations
data for the six quarters in the period ended June 30, 1999, both in dollar
amounts and as a percentage of total net revenues. This data was derived from
our unaudited financial statements that, in our opinion, reflect all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation of this quarterly information. This data should be read in
conjunction with the audited financial statements and related notes included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30,
1998 1998 1998 1998 1999 1999
-------- -------- --------- -------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
Online retail.......... $ -- $ -- $ -- $ 22 $ 94 $ 293
Proprietary CD-ROM..... 519 633 663 463 -- --
------ ------ ------ ------- --------- ---------
Total net revenues... 519 633 663 485 94 293
------ ------ ------ ------- --------- ---------
Cost of revenues:
Online retail.......... -- -- -- 20 69 210
Proprietary CD-ROM..... 171 230 219 288 -- --
------ ------ ------ ------- --------- ---------
Total cost of
revenues............ 171 230 219 308 69 210
------ ------ ------ ------- --------- ---------
Gross profit............ 348 403 444 177 25 83
------ ------ ------ ------- --------- ---------
Operating expenses:
Marketing and sales ... 377 469 565 1,267 2,023 3,690
Development............ 252 277 303 546 367 396
General and
administrative........ 99 114 117 160 155 244
Stock compensation..... 9 10 48 120 384 196
------ ------ ------ ------- --------- ---------
Total operating
expenses............ 737 870 1,033 2,093 2,929 4,526
------ ------ ------ ------- --------- ---------
Loss from operations.... (389) (467) (589) (1,916) (2,904) (4,443)
Interest and other
income (expense), net.. (5) (10) 4 30 24 28
------ ------ ------ ------- --------- ---------
Net loss................ $ (394) $ (477) $ (585) $(1,886) $ (2,880) $ (4,415)
====== ====== ====== ======= ========= =========
<CAPTION>
As a Percentage of Total Net Revenues
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
Online retail.......... --% --% --% 4.5% 100.0% 100.0%
Proprietary CD-ROM..... 100.0 100.0 100.0 95.5 -- --
------ ------ ------ ------- --------- ---------
Total net revenues... 100.0 100.0 100.0 100.0 100.0 100.0
====== ====== ====== ======= ========= =========
Cost of revenues:
Online retail.......... -- -- -- 4.1 73.4 71.7
Proprietary CD-ROM..... 32.9 36.3 33.0 59.4 -- --
------ ------ ------ ------- --------- ---------
Total cost of
revenues............ 32.9 36.3 33.0 63.5 73.4 71.7
------ ------ ------ ------- --------- ---------
Gross profit............ 67.1 63.7 67.0 36.5 26.6 28.3
------ ------ ------ ------- --------- ---------
Operating Expenses:
Marketing and sales ... 72.6 74.1 85.2 261.2 2,152.1 1,259.4
Development............ 48.6 43.8 45.7 112.6 390.4 135.1
General and
administrative........ 19.1 18.0 17.7 33.0 164.9 83.3
Stock compensation..... 1.7 1.6 7.2 24.8 408.5 66.9
------ ------ ------ ------- --------- ---------
Total operating
expenses............ 142.0 137.5 155.8 431.6 3,115.9 1,544.7
------ ------ ------ ------- --------- ---------
Loss from operations.... (74.9) (73.8) (88.8) (395.1) (3,089.3) (1,516.4)
Interest and other
income (expense), net.. (1.0) (1.6) 0.6 6.2 25.5 9.6
------ ------ ------ ------- --------- ---------
Net loss................ (75.9)% (75.4)% (88.2)% (389.9)% (3,063.8)% (1,506.8)%
====== ====== ====== ======= ========= =========
</TABLE>
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Due to the fact that we transitioned to our online business model in
November 1998, we believe that period-to-period comparisons prior to 1999 are
less meaningful than an analysis of quarterly results in 1999.
Revenues increased in the quarter ended June 30, 1999 over the quarter ended
March 31, 1999 due primarily to increased consumer awareness of our brand and
increased number of customers.
Cost of revenues increased in the quarter ended June 30, 1999 over the
quarter ended March 31, 1999 primarily due to increased revenues. Gross margins
increased in the quarter ended June 30, 1999 over the previous quarter due to a
more favorable mix of product sales.
Marketing and sales expenses increased in the quarter ended June 30, 1999
over the quarter ended March 31, 1999 primarily due to increases in promotional
and advertising activities.
Development expenses increased in the quarter ended June 30, 1999 over the
quarter ended March 31, 1999 primarily due to increased headcount and related
expenses.
General and administrative expenses increased in the quarter ended June 30,
1999 over the quarter ended March 31, 1999 primarily due to increased headcount
and related expenses and professional fees.
Liquidity and Capital Resources
Since inception, the Company has incurred significant losses. The Company
has met its cash requirements primarily through the sale of capital stock and
the use of capital leases. The Company has received capital from investors in
three private venture capital financings totaling $37.0 million through
July 1999.
Net cash used in operating activities was $3.6 million in the six months
ended June 30, 1999 as compared to $612,000 in the six months ended June 30,
1998. This increase in cash used in operating activities was primarily
attributable to increased expenses associated with launching and promoting our
new website and retail internet business. Net cash used in operating activities
was $2.0 million in the year ended December 31, 1998, as compared to $947,000
in the year ended December 31, 1997. In each of these periods, our principal
operating cash requirements were to fund our working capital needs. In future
periods, we expect that operating cash requirements will increase and that a
significant portion of our cash used in operating activities will be
attributable to the purchase of inventory as we anticipate owning our inventory
by the end of 1999.
Net cash used in investing activities was $40,000 in the six months ended
June 30, 1999 as compared to $13,000 in the six months ended June 30, 1998. Net
cash used in investing activities was $33,000 in the year ended December 31,
1998, and cash flows from investing activities was $181,000 in the year ended
December 31, 1997. The cash generated from investing activities in 1997
reflected a release of a restricted cash deposit related to a prior lease
arrangement.
Net cash provided by financing activities was $83,000 in the six months
ended June 30, 1999 as compared to $1.2 million in the six months ended June
30, 1998. Net cash provided by financing activities was $6.0 million in the
year ended December 31, 1998, as compared to $626,000 in the year ended
December 31, 1997. Net cash provided by financing activities in the year ended
December 31, 1998 consisted primarily of net proceeds of $6.1 million from the
issuance of series B redeemable preferred stock. In the year ended December 31,
1997, net cash provided by financing activities consisted primarily of proceeds
of $710,000 derived from the issuance of series B redeemable preferred stock.
As of June 30, 1999, we had $687,000 of cash and cash equivalents. As of
that date, our principal commitments consisted of obligations outstanding under
capital leases in the amount of $17,000 and accounts payable of $3,641,000.
Although we currently have no material commitments for capital
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expenditures, we anticipate that our business model will require us to commit
significant resources to aggressively promote our brand, expand our product and
service offerings and enhance our infrastructure. Subsequent to the June 30,
1999 balance sheet date, we sold 4,284,091 shares of series C preferred stock
in July 1999, resulting in net proceeds to us of $25.3 million.
We currently anticipate that the net proceeds of this offering, together
with current cash and cash equivalents, will be sufficient to meet our
anticipated needs for working capital and capital expenditures through at least
the next 12 months. We anticipate that we are likely to need additional
financing to execute our business model after such 12 months, or sooner if we
need to respond to business contingencies such as lower-than-anticipated
revenues, funding additional advertising expenditures, developing new or
enhancing existing content, features or services, enhancing our operating
infrastructure, responding to competitive pressures, or acquiring complementary
businesses or technologies. If we raise additional funds through the issuance
of equity or convertible debt securities, the percentage ownership of our
stockholders may be reduced, and these newly-issued securities may have rights,
preferences or privileges senior to those of existing stockholders, including
those acquiring shares in this offering. We cannot be certain that additional
financing will be available to us on favorable terms when required, or at all.
Recent Accounting Pronouncements
In March 1998, the AICPA issued Statement of Position No. 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use". SOP
98-1 provides guidance regarding when software developed or obtained for
internal use should be capitalized. SOP 98-1 is effective for fiscal years
beginning after December 15, 1998. The adoption of SOP 98-1 in the six months
ended June 30, 1999 did not have a material impact on our financial position or
results of operations.
In April 1998, the AICPA issued Statement of Position No. 98-5, "Reporting
on Costs of Start-up Activities," which requires all costs associated with pre-
opening, pre-operating and organization activities to be expensed as incurred.
The adoption of SOP 98-5 in the six months ended June 30, 1999 did not have a
material impact on our financial position or results of operations.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. SFAS
133, as amended by SFAS 137, is effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000, with earlier application encouraged. We do
not currently nor do we intend in the foreseeable future to use derivative
instruments, and therefore, do not expect that adoption of SFAS 133 will have
any impact on our financial position or results of operations.
In December 1998, the AICPA issued Statement of Position No. 98-9,
"Modification of SOP No 97-2, Software Revenue Recognition, with Respect to
Certain Transactions". SOP 98-9 amends SOP 97-2 to require recognition of
revenue using the "residual method" in circumstances outlined in SOP 98-9.
Under the residual method, revenue is recognized as follows: (1) the total fair
value of undelivered elements, as indicated by vendor specific objective
evidence, is deferred and subsequently recognized in accordance with the
relevant sections of SOP 97-2 and (2) the difference between the total
arrangement fee and the amount deferred for the undelivered elements is
recognized as revenue related to the delivered elements. SOP 98-9 is effective
for transactions entered into in fiscal years beginning after March 15, 1999.
Also, the provisions of SOP 97-2 that were deferred by SOP 98-4 will continue
to be deferred until the date SOP 98-9 becomes effective. We do not expect that
the adoption of SOP 98-9 will have a significant impact on our results of
operations or financial position.
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Year 2000 Compliance
Our failure or the failure of our key business partners, service vendors,
suppliers, manufacturers or customers to be year 2000 compliant could have
material adverse consequences on our business and results of operations. Such
consequences could include difficulties in operating our website effectively,
taking product orders, shipping products, delivering products and conducting
other essential and fundamental business operations.
The year 2000 computer issue creates a significant risk for us in at least
four areas:
. potential warranty or other claims arising from our software products or
the software products of others that we sell
. systems we use to run our business
. systems used by our suppliers, vendors, and service partners
. systems used by customers
A failure in any of these areas to be year 2000 compliant may seriously harm
our operations.
Background of year 2000 issues. Many currently installed computer and
communications systems and software and hardware products are unable to
distinguish 21st century dates from 20th century dates. This inability could
result in system failures or miscalculations causing business disruptions. As a
result, many software, computer, communications and other systems need to be
upgraded or replaced to become year 2000 compliant.
Our product testing. We have tested those few proprietary CD-ROM products
that we continue to sell online for year 2000 compliance. We derived our
testing method from our review and analysis of the year 2000 testing practices
of other software vendors, relevant industry year 2000 compliance standards and
the specific functions and operating environments of our products. The tests
were run on all supported platforms for each current release of our products
and included testing for date calculations and internal storage of date
information with test numbers starting in 1999 and going beyond the year 2000.
Based on these tests, we believe our current proprietary CD-ROM products to be
year 2000 compliant with respect to date calculations and internal storage of
date information. We have not done any year 2000 compliance testing on any of
the third-party products that we sell online.
Our website testing. We have reviewed the year 2000 compliance of our
externally and internally developed proprietary software that shapes and
controls a person's experience while they interact with our website. This
review included testing to determine how our systems will function at and
beyond the year 2000. Since inception, we have internally developed or reviewed
the development of most of the systems for the operation of our website. These
systems include the software used to provide our website's search, customer
interaction, and transaction processing. Based upon our assessment to date, we
believe that our internally developed proprietary software is year 2000
compliant.
Our external vendors and third party supplied software. The systems and
software of third parties on which we rely may contain errors or faults with
respect to the year 2000. For example, we depend on J.L. Hammett Co. to process
our orders, financial institutions to process credit card transactions,
telecommunications vendors to maintain our network, Exodus Communications to
host our website, shipping companies to deliver products to customers,
affiliate networks to allow other websites to sell through SmarterKids.com, and
software, hardware and systems for use in our administrative, communications,
accounting, database, security, network, electronic mail, product development,
website operations, telephone and other systems. We have sought assurances from
these third parties that their software, computer technology and other services
are year 2000 compliant. J.L. Hammett Co. has stated that it believes that its
systems and software used in our operations are year 2000 compliant.
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The failure of software and computer systems from J.L. Hammett Co. or our
other third-party suppliers to be year 2000 compliant could have a material
adverse effect on us. Known or unknown errors or defects that affect the
operation of our software and systems and those of third parties could result
in delay or loss of revenue, interruption of services, cancellation of
customer orders, diversion of development resources, damage to our reputation,
increased service and warranty costs and litigation costs.
Our internal systems. We periodically review our internally developed
management information and other systems to identify any products, services or
systems that may not be year 2000 compliant and to take corrective action when
required. To date, we have not identified any material year 2000 problems with
our internally developed computer systems.
Costs of addressing year 2000 compliance. Based on our preliminary
evaluations, we do not believe we will incur significant expenses or be
required to invest heavily in computer system improvements to be year 2000
compliant. However, significant uncertainty exists concerning the potential
costs and effects associated with year 2000 compliance. Any year 2000
compliance problem experienced by our customers, our vendors, our business
partners or us could reduce demand for our products, which could have a
material adverse effect on our business.
Customer claims. We may be subject to customer claims to the extent our
software products or the software products of others that we sell fail to
operate properly as a result of the occurrence of the date January 1, 2000.
Liability may result to the extent our products are not able to store,
display, calculate, compute and otherwise process date-related data. We could
also be subject to claims based on the failure of our software products or the
software products of others that we sell to work with software or hardware
from other vendors.
Contingency planning. Our contingency plan is focused on those activities
and functions specifically related to processing customer orders. It addresses
only those types of failures for which contingency operation is possible. For
example, if all communications links between our website and J.L. Hammett Co.
were to fail, but we were still able to accept customer orders at the website,
customer order data would be copied to physical media and transported by
courier to our fulfillment location.
Our contingency plan does not address any types of failures for which
contingency operations would be impossible. For example, any significant
disruption in the Internet would prevent customers from placing orders via the
Internet. The failure of our credit card processor would prevent customers
from making payments.
It is likely that some types of failures were unforeseen, overlooked, or
otherwise omitted from our analysis and were therefore omitted from our
contingency plan. We believe the reasonably likely worst case scenario would
involve year 2000 issues preventing a significant number of users from
accessing our website and the loss of critical services to our business. A
prolonged failure beyond our control or that was unforeseen could prevent us
from operating our business, prevent users from accessing our website, or
prevent visitors to our website from placing orders. We believe that some of
the business consequences, in the event of such failure, would include:
. lost revenues
. increased operating costs
. loss of customers or visitors to our website
. claims of mismanagement, misrepresentation or breach of contract
Any of these consequences would likely harm our business, operating results
and financial condition.
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BUSINESS
Overview
SmarterKids.com is a leading online retailer focused on children's
educational books, toys and games, and software. We offer a unique assortment
of fun and educationally relevant products, a trusted brand, competitive prices
and an easy-to-use online shopping environment. We provide extensive
educational content and help parents and gift givers find quality products and
make informed purchase decisions tailored to a child's individual developmental
needs and learning goals.
SmarterKids.com integrates carefully selected products, helpful content and
interactive tools with an intuitive and easy-to-use interface to create a
compelling and unique online shopping experience. Our dedicated team of
teachers carefully selects and then reviews only those products that meet our
high quality standards. Our rapidly growing collection of competitively priced
educational products includes over 1,800 books, toys and games, and software
titles from over 300 suppliers. Because we are focused on education, many of
our products, particularly toys and games, are often not found on many of the
other popular e-commerce websites.
The MySmarterKids personalization area on our website allows parents to
build an evolving and confidential educational profile of their child that can
include information about the child's age and grade, learning styles, learning
goals and performance on standardized tests. Our SmartPicks technology uses
this profile to make tailored product recommendations from among our
distinctive assortment of products.
We launched our website in November 1998. In a survey of the top 40 Web
retailers, SmarterKids.com was the 16th most visited shopping website in July,
with almost one million visitors, as estimated by PC Data, an independent
Internet research firm.
Industry Background
Our business lies at the intersection of the consumer market for educational
and developmental products for children and the increasing acceptance of
Internet-based commerce.
The Educational Products Market
As a result of a number of societal trends, including constraints on school
budgets and the increasing use of standardized tests, many parents are taking a
more active role in their children's education. In their efforts to help their
children learn, improve their children's standardized test scores and make
learning fun, parents are increasingly purchasing educational books, toys and
games, and software.
Parents are faced with the challenge of finding quality educational products
and selecting the right products for their children. With thousands of
educational products to choose from and few reliable sources of information,
finding the appropriate products for a specific child's needs and goals can be
overwhelming and confusing. Parents seek a resource for comprehensive and
trusted educational content and product information to help them make informed
purchase decisions.
Limitations of the Traditional Retail Channel
The traditional retail channel, including mass-market retailers, has
numerous participants and is highly fragmented. In general, store-based
retailers face a number of challenges in providing a shopping experience that
meets the needs of parents. These include:
. narrow selection of products due to physical space limitations
. high costs from the need to build and operate multiple retail locations
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. lack of flexibility in product display and merchandising capabilities
. lack of convenience due to limited hours of operation and geographic
location
. lack of focus on educational products and limited educational expertise
Specialty educational and creative toy and game retailers that are focused
on education often lack an in-depth understanding of their products and the
expertise or time to analyze a child's specific needs. As a result, the
traditional retail channel fails to satisfy parents' needs for selection,
convenience, personalized service, and advice and information.
Growth of the Internet and Consumer E-Commerce
Because of the inherent limitations of traditional channels of distribution,
the Internet is dramatically affecting the way consumers and businesses are
buying and selling products and services. International Data Corporation, IDC,
estimates that there were 142 million Internet users worldwide at the end of
1998 and anticipates that this number will grow to over 500 million users by
the end of 2003. IDC also estimates that the worldwide consumer e-commerce
market will grow from approximately $15 billion in 1998 to approximately $171
billion in 2003. The Internet is well-suited for consumer commerce for a number
of reasons:
. increased convenience due to the ability to access the Internet at any
time from almost any location
. virtually unlimited "shelf" space to allow merchants to offer a wide
selection of products and services
. low facilities and staffing costs
. merchandising flexibility due to the merchant's ability to quickly
update and customize product selection and presentation, editorial
content and prices
. enhanced knowledge of customers' needs from the merchant's ability to
gather, process and store large amounts of customer information
. the ability to provide a large amount of targeted information.
In addition, a growing number of consumers are using the Internet to not
only make purchases but also to obtain information and manage personal needs.
Many Internet-based companies have emerged to address these online
opportunities. These companies are focusing on such areas as consumer goods,
travel, personal finance and healthcare.
Limitations of Online Retailers that Offer Educational Products
Although online retailers have a number of advantages, those that offer
educational products as a component of their product mix have been limited in a
number of ways because they:
. are often not focused on education
. do not offer in-depth evaluations of products
. lack extensive educational and editorial content
. lack the ability to assess an individual child's needs to personalize
the online experience
The limitations of traditional and online retailers create a significant
opportunity for an educational resource that combines educational expertise and
assessment tools, a wide range of quality educational products and the power of
the Internet to help parents make informed purchase decisions.
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The SmarterKids.com Solution
SmarterKids.com is a leading online retailer focused on children's
educational books, toys and games, and software. We combine our expertise in
children's education with our sophisticated and proprietary product analysis to
help parents make better purchase decisions. Key features of our solution
include:
Broad Assortment of Carefully Reviewed and Selected Educational
Products. Our rapidly growing collection of competitively priced educational
products includes over 1,800 books, toys and games, and software titles from
over 300 suppliers. SmarterKids.com has a dedicated team of teachers who
carefully select and then review only those products that meet our high quality
standards and that are fun, educationally relevant and effective in helping
children learn. In our KidsLab, children test and review many of our current
and prospective products. Our comprehensive review process determines product
suitability based on the skills taught, effectiveness in addressing each skill,
the appropriate grade level(s), the teaching approach, learning style and the
occasion for use, such as bedtime, travel or group play. Each product is
assigned a rating for "fun," "ease of use" and "reusability" and is then given
an overall "Reviewer's Opinion." Because we are focused on education, many of
our products, particularly toys and games, are not found on many of the other
popular e-commerce websites.
Compelling Educational Content and Contextual Merchandising. We believe that
SmarterKids.com is an authority on educational products. Our staff of
educational experts develops our content, including educational articles,
parenting advice and product reviews, and we also license educational content
from third parties. Our website integrates content with access to relevant
products. The benefit we provide parents comes, first, in our selection of the
best educational products in the marketplace to offer from our website and,
second, by providing extensive online advice and information about specific
products to help parents and gift givers make appropriate selections. For
example, the Smarter Parents Resource Center suggests weekly and monthly
educational activities parents can do with their children and then suggests
products to expand on these activities. Other supporting content includes the
Smarter Parents Resource Center which offers a Teacher Talk Glossary and helps
parents prepare their children for standardized tests. Ask the Teacher enables
parents to submit questions to our staff of teachers regarding their child's
development and review archived answers to previous questions. Smarter Websites
connects parents to other relevant educational websites.
Convenient and Easy-to-Use Website. We integrate carefully selected
products, helpful content and interactive tools, with an intuitive and easy-to-
use interface. We organize our website around age and grade levels, which is
the way parents typically think about the educational development of their
children. We offer full search and browsing capabilities that enable parents to
find products easily. Furthermore, we notify registered parents when we offer
relevant new products or specials. We provide customers the convenience and
flexibility of shopping 24 hours a day, 7 days a week, with dedicated customer
service and reliable and timely product delivery.
Technology That Matches Products With a Child's Unique Educational
Profile. Parents can use our proprietary technology to find products that meet
their child's unique educational needs. The MySmarterKids personalization area
allows parents to build an evolving and confidential educational profile of
their child that can include information about the child's age and grade,
learning goals and results from:
. our Learning Styles Survey that parents can fill out online
. skills check-up assessment tests that children can take online
. CD-ROM based skills tests that parents can order from our website
. scores from state-sponsored standardized tests
Our proprietary SmartPicks technology then uses this developmental profile
to make targeted product recommendations. SmartPicks "reshuffles" our entire
store so that we emphasize those products that our
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educational experts believe are appropriate for the individual child's unique
needs and individual goals. On subsequent visits, our website will recognize
registered members and display increasingly relevant products and services. We
believe we are the first and presently the only educational products and
services website to offer this level of personalization.
Strategy
Our objective is to be the leading online provider of children's educational
products, services and resources for parents. To achieve this objective, our
strategy is to:
Continue to Enhance our Customers' Experience to Build a Trusted Brand. We
intend to make the SmarterKids.com brand synonymous with being the trusted
online provider of children's educational products and services. We build
customer loyalty and trust through the quality of the products we offer, the
depth of our educational content and the high level of our customer service. We
intend to enhance these experiences by offering more content, additional
products and child assessment tools, additional customer service features and
technology enhancements. We also intend to offer subscription programs,
publications and incentives for our most loyal customers.
Aggressively Build Brand Awareness and Expand our Customer Base. We plan to
increase our brand awareness through a variety of marketing and promotional
techniques to drive traffic to our website. We advertise on leading parent-
oriented websites and have developed a number of key strategic marketing
relationships with online media partners such as iVillage and Microsoft's
Encarta, and affiliate marketing relationships with LinkShare and Yahoo!'s
GeoCities. We complement these web-based efforts with carefully targeted print,
radio, television and direct mail advertising, as well as other consumer-
oriented promotional campaigns.
Pursue Additional Revenue Opportunities. We intend to leverage our brand and
customer base to develop additional revenue opportunities. These include:
. increasing product selection in existing categories
. adding new product categories and products for additional age ranges
. introducing private label products
. introducing online learning and testing services
. acquiring or partnering with new or complementary businesses, products,
services or technologies
Leverage the Power of Our Customer Database. Our customer database is
comprised of detailed customer information, buying patterns and educational
profiles. Parents who use MySmarterKids provide us with information about their
children, including demographics, learning goals, learning styles and
standardized or online test scores. This growing database enables us to
accurately target product, service and promotional offerings to customers for
whom they are most relevant. We believe that our customer database will enable
us to optimize our product selection and website design, increase repeat
purchases and maintain long-term, profitable relationships with our customers
while maintaining a strict level of privacy and confidentiality.
Maintain Scalable and Efficient Fulfillment Operations to Ensure Customer
Satisfaction. We intend to maintain an efficient and low-cost inventory and
fulfillment infrastructure that can scale rapidly. Our relationship with J.L.
Hammett Co. provides us with industry and supplier relationships, favorable
credit and pricing terms from suppliers and the ability to scale our warehouse
operations. We intend to provide for even greater flexibility and scalability,
more control of our inventory and closer relationships with our suppliers. To
do so, we anticipate purchasing our own inventory and establishing direct
relationships with our vendors by the end of 1999 while continuing to maintain
and enhance our relationship with
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J.L. Hammett Co. While we will own our own inventory on a going-forward basis
by the end of 1999, we anticipate that we will be able to maintain favorable
purchase and credit terms because of our continuing relationship with J.L.
Hammett Co.
Shopping at SmarterKids.com
We have designed the SmarterKids.com website to make it easy and convenient
to use. Our website provides a wealth of useful information and is organized in
the same way that parents typically think about the educational development of
their kids--by age and grade level.
Website Design and Utility. The primary means by which our products and
features are organized is by SmarterKids.com's five age and grade ranges--
Toddler, Preschool through Kindergarten, Grades 1-3, Grades 4-6 and Grades 7-9.
Parents naturally think about their children in terms of their age and grade,
and by organizing our website in this manner SmarterKids.com is able to
emphasize its unique focus on the individual child.
Within each age and grade range, or "aisle," visitors can browse through
links organized by parents' or teachers' favorites, subject matter, brand,
keyword or theme. Each aisle also has pictures and prices of highlighted
products with links to our teachers' reviews of these products.
From our home page, or within each aisle, customers may access a number of
helpful areas within the website, including:
. product categories such as Parents' Favorites, Teachers' Favorites, Best
Sellers, Monthly Picks, Gift Ideas, Cool and Unique or Twenty Costing
$20 or Less
. product groups, organized by well-known brands or favorite characters
. SmarterKids.com's Learning Styles Survey
. subject links, to find products which address a particular educational
or developmental area
. a keyword search box, where customers can enter a product name,
manufacturer name or descriptive words to find a product
These areas are constantly evaluated and refined to reflect the feedback we
gather from our customers and any seasonal, periodic or promotional
opportunities we choose to pursue.
Products. SmarterKids.com offers three product types--books, toys and games,
and software--ranging in price from under $2.00 to $100.00. These products
range from those based on popular brands and licensed characters to hard-to-
find specialty items. Each product listing has a picture of the product;
narrative review; indication of skills developed, educational approach
utilized, and best application; and ratings for ease of use, fun, reusability
and depth of instruction. With one click, a user can see all applicable brands,
categories and special offers for each product type. For example, a parent
might select a vividly illustrated book that teaches letter recognition,
software that uses an engaging interactive story to develop creativity, or a
puzzle that teaches motor skills and spatial-relationship awareness.
MySmarterKids offers what we believe to be one of the most personalized
shopping experiences in e-commerce. Parents enter information related to their
child's education and development to build a personal profile, and
SmarterKids.com uses the information to present an educationally appropriate
assortment of products. The more information that a parent enters, the more
precise will be the product recommendations made by SmartPicks, our proprietary
personalization technology. MySmarterKids incorporates a child's age and grade,
learning goals and results from:
. our Learning Styles Survey that parents fill out online
. a skills check-up assessment test that children can take online
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. a CD-ROM-based skills test that parents can order from our website
. scores from state-sponsored standardized tests
For example, when a parent wishes to focus a first grade child on pre-
reading skills, SmartPicks presents only those products appropriate to that age
and skill goal. Further individual customization can be achieved when a parent
completes our Learning Styles Survey to determine whether a child learns best
through a linguistic, visual, musical, interpersonal, intrapersonal,
mathematical or physical style. If a child's learning style is visual,
SmartPicks will customize this child's shopping area by suggesting products
that teach pre-reading skills to a first grader through visual learning.
SmartPicks retains a child's information for future reference by the parent.
When a parent returns to our website, new products will automatically be
suggested that achieve the learning goals and fit the learning style and age
range of the child.
We protect all information entered into MySmarterKids and elsewhere and
strictly adhere to commonly accepted privacy standards established by TrustE
and the Better Business Bureau.
Product Selection, Check-out and Payment functions are easy and intuitive.
Because we maintain an integrated inventory system and stock each item that we
sell, we are able to show availability for each product. Our credit card
approval technology prevents customers from experiencing delays in check-out.
Customers receive e-mail confirmations of their orders, notification of
shipment, and the ability to track their shipment through UPS.
Website Content is designed and selected to achieve our mission of helping
parents help their children learn. SmarterKids.com's product reviews, which are
prepared by our team of teachers, we believe are thorough, objective and
reliable. To promote trust, we encourage customers to access explanations of
our product review methodology. Our Parents Center suggests weekly learning
activities that parents can do with their children, helps parents prepare their
children for standardized tests, and offers a Teacher Talk Glossary to explain
terms used by education professionals. Ask the Teacher enables parents to
submit questions regarding their child's development and review archived
answers to previous questions. Smarter Links connects parents to relevant and
powerful information sources. Parents who register for MySmarterKids receive
twice-monthly e-mailed newsletters.
Strategic Relationships
Our strategic relationships primarily increase our visibility, reinforce our
positioning and expand our customer base. Key strategic relationships include:
National Computer Systems is the largest processor of standardized tests for
kindergarten through grade 12 in the United States. NCS provides processing and
scoring for over 30 million student assessment tests, such as the Iowa Test of
Basic Skills, in all 50 states and for the U.S. Department of Education. In May
1999, NCS launched its WeHelpKids.com website, offering a variety of electronic
HelpTests and value-added services aimed at providing assessment and
identification of a student's academic strengths and weaknesses. WeHelpKids.com
contains a direct link to our website, which draws parents eager to support and
encourage their children's learning. Using their results from standardized
tests, our SmartPicks system can provide personalized product recommendations.
WeHelpKids.com has commenced its pilot program in Michigan and plans to add
tests and services for students in other states.
The Lightspan Partnership, Inc. creates and sells curriculum-based
educational CD-ROM software and web programs. It recently launched a monthly
subscription online service that offers customized classroom resource pages for
teachers, students and parents. Our relationship with Lightspan will include a
co-branded store, content sharing and joint marketing activities.
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J.L. Hammett Co. is a leading national distributor of educational products
to schools and also operates over 70 retail stores. It has supplied educational
products for 136 years. We leverage J.L. Hammett Co.'s experience in
distribution and strong knowledge of educational products to better meet the
needs of our customers. In addition, J.L. Hammett Co. promotes SmarterKids.com
by including our literature in the shipments that it delivers to schools and
with retail transactions.
Marketing and Promotion
We use an aggressive and multi-faceted advertising and promotional strategy
to build awareness and attract customers to our website. We use a personalized
database marketing approach to build our customer base and encourage repeat
transactions. We emphasize responsive and reliable customer service to earn our
customers' loyalty.
Online Marketing efforts range from comprehensive partnerships with websites
which are important to our customer base, to banner advertising across the
major banner networks. With our partnership websites we are usually the
preferred, if not exclusive, online retailer of children's educational books,
toys and games, and software. We place banners, buttons and text links on their
websites in return for a specified number of impressions, and we jointly
develop content, promotions and e-mail marketing programs. For example, we
sponsor ABCNews.com's Homework Help section, and have a persistent search box
on the home page of Microsoft's Encarta encyclopedia website.
Affiliates are websites that feature links to SmarterKids.com in return for
a commission on sales that result from such referrals. Our over 10,000
affiliates range from vertically-oriented websites to online malls to
individuals' websites. These programs are managed by LinkShare and Yahoo!'s
GeoCities. We are currently the exclusive educational products reseller in
Yahoo!'s GeoCities' Pages That Pay affiliate program.
Offline Marketing is an increasingly important component of
SmarterKids.com's customer acquisition and branding efforts. We advertise in a
variety of parenting-oriented and other magazines and through direct mail and
free-standing inserts. We also run radio and television advertisements and have
significant promotions with a number of traditional, family-oriented companies.
E-Mail is the primary vehicle by which we communicate with our customers and
registered users. We send them periodic newsletters and notify them of private,
customer-only offers. Increasingly, we personalize our information and offers
to specific subsets of our customers, according to the products they have
purchased and the information they have provided in their children's
MySmarterKids profiles, further enhancing the value we add and our relationship
with them.
Operations
J.L. Hammett Co., a leading national distributor of educational products to
schools, provides our inventory and distribution services. Because of J.L.
Hammett Co.'s leadership position, our relationship has provided us with access
to industry and supplier relationships, favorable credit and price terms due to
its buying power and the ability to scale our warehouse operations as needed.
J.L. Hammett Co. provides us with a well-trained staff and warehouse capacity
to manage seasonal upturns and unanticipated changes in demand.
We select our own inventory, take all orders and manage our customer
service. J.L. Hammett Co. currently owns the inventory, picks, packs and ships
all orders, and maintains the warehouse management system. To provide for even
greater flexibility and scalability, more control of our inventory and closer
relationships with our suppliers, we anticipate purchasing our own inventory
and establishing direct relationships with all vendors by the end of 1999 while
we maintain and enhance our relationship with J.L. Hammett Co.
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Customer Service
We seek to provide a customer experience that exceeds customer expectations.
Our goals include:
. same day shipping
. responding to all e-mail inquiries within the same day
. maintaining a return rate of less than 1%
. maintaining at least 99% of inventory items in stock at any time
We maintain a toll-free telephone customer service center staffed with
customer service representatives trained to assist customers with product
selection, order processing, shipping and billing and any other questions or
problems. We train our representatives to be competent and courteous. We give
representatives wide discretion to ensure that customers are satisfied with
their purchases and their purchasing experience.
Technology
We have implemented a broad array of scalable systems for website
management, search, customer service, electronic transaction management and
data interchange, e-mail, order processing, payment processing, office
administrative services, and accounting. These systems use a combination of our
own and commercially-available technologies. We focus our internal development
efforts on creating and improving specialized software that is unique and able
to enhance our business. We use a set of applications for:
. evaluating and reviewing products for eligibility in our store
. accepting and validating customer orders
. managing customer telephone and e-mail inquiries and requests for
service
. transmitting order and related information among our website,
headquarters, and fulfillment locations
. profiling customers' order histories and purchasing patterns
. conducting and managing customer payment transactions
. interacting with our fulfillment company
We develop or select systems that are based on industry-standard
architectures that have been designed to minimize downtime in case of outages
or catastrophic occurrences. They provide 24-hours-a-day, 7-days-a-week
availability. Our transaction processing methods and databases are designed
without arbitrary capacity constraints and are scalable to any volume of demand
that we expect to encounter. We have implemented load balancing systems and
redundant servers to provide for fault tolerance.
Since September 1999, our systems infrastructure has been hosted at Exodus
Communications in Waltham, Massachusetts. Exodus provides redundant
communication lines from multiple providers, 24-hour monitoring and engineering
support, its own generators and multiple back-up systems. Exodus also maintains
private peering relationships. Private peering refers to a private network that
Exodus built with major tier-one Internet providers. Customers who connect
through those service providers will be routed faster through the private
network and avoid the unpredictable performance of the public Internet.
Competition
The markets for books, toys and games, and software, including those for
children's educational products, are very competitive and highly fragmented,
with no clear dominant leader and increasing public and commercial attention.
In addition, the consumer e-commerce industry is new, rapidly evolving and
intensely competitive, and we expect competition to intensify in the future.
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Our competitors can be divided into several groups including:
. mass market retail chains, such as Kmart, Target and Wal-Mart
. mass market book sellers, toy stores and computer hardware and software
stores, such as Barnes & Noble, Toys "R" Us and CompUSA
. traditional regional or local bookstores, toy stores and computer and
software stores
. traditional and online specialty educational retailers, such as Learning
Express, Learningsmith, Noodle Kidoodle and Zany Brainy
. online book sellers, toy sellers and computer software sellers, such as
Amazon.com, eToys, Kay Bee Toys, toysmart.com and Beyond.com
. educational catalog distributors, such as Scholastic
We believe that the principal competitive factors in our market are:
. brand recognition and trust
. ability to attract and retain consumers
. breadth of product selection
. product pricing
. availability of educational and authoritative information
. quality and responsiveness of customer service
We believe that we compete favorably on many of these factors. We expect our
brand recognition to increase as a result of current and future strategic
relationships and marketing and advertising campaigns. We will also continue to
expand our product selection.
Many of our current and potential competitors have longer operating
histories, larger customer or user bases, greater brand recognition and
significantly greater financial, marketing and other resources than we do.
Additionally, industry consolidation may increase competition. Online retailers
are being acquired by, receiving investments from, and entering into other
commercial relationships with larger, well-established and well-financed
companies as use of the Internet and other electronic services increases.
Competitors have and may continue to adopt aggressive pricing or inventory
availability policies and devote substantially more resources to website and
systems development than we do. Increased competition may result in reduced
operating margins, loss of market share and a diminished brand.
Intellectual Property
We regard the protection of our intellectual property as critical to our
future success and rely on a combination of copyright, trademark, service mark
and trade secret laws, license agreements and contractual restrictions to
establish and protect our proprietary rights in our website architecture and
technology, products, content and services. We have a pending patent
application relating to the SmartPicks product selection algorithm we use on
our website. We have entered into confidentiality and invention assignment
agreements with our employees and contractors in order to limit disclosure of
our proprietary information and to protect our ownership interest in our
website architecture and technology. We cannot assure you 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 deter independent third-party development of similar
technologies.
We conduct business on the Internet using the trademark SmarterKids.com.
There are a number of other trademarks and domain names similar to ours. An
infringement action could be brought against us at
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any time by the holders of these marks. There is a substantial risk that the
owner of other marks would overcome any defenses that we could raise. If the
owner of such marks were to prevail in such an action, we could lose the
ability to use the SmarterKids and SmarterKids.com trademark and domain name
and could be subject to substantial damages. Such outcomes could adversely
affect our business. If we are required to change our company, trademarks or
domain name, we could lose customers and brand equity which would have a
material adverse effect on our business and financial condition. Although we
may attempt to acquire or license the right to use potentially relevant third-
party trademarks and domain names, we may not be successful.
We are presently a party to one patent infringement lawsuit. See "Legal
Proceedings."
We have licensed in the past, and expect that we may license in the future,
certain of our intellectual property rights, such as trademarks or copyrighted
material, to third parties. While we attempt to ensure that the quality of the
SmarterKids.com brand is maintained by such licensees, we cannot assure you
that such licensees will not take actions that might materially adversely
affect the value of our intellectual property rights or reputation, which could
harm our business.
Regulatory Environment
In general, existing laws and regulations apply to transactions and other
activities on the Internet. However, the precise applicability of these laws
and regulations to the Internet is sometimes uncertain. The vast majority of
these laws were adopted prior to the advent of the Internet and, as a result,
do not contemplate or address the unique issues of the Internet or electronic
commerce. Nevertheless, numerous federal and state government agencies have
already demonstrated significant activity in promoting consumer protection and
enforcing other regulatory and disclosure statutes on the Internet.
Additionally, due to the increasing use of the Internet as a medium for
commerce and communication, it is likely that new laws and regulations may be
enacted with respect to the Internet and electronic commerce covering issues
such as user privacy, freedom of expression, advertising, pricing, content and
quality of products and services, taxation, intellectual property rights and
information security. The adoption of such laws or regulations and the
applicability of existing laws and regulations to the Internet may adversely
impact our ability to conduct our business and the growth of Internet use,
thereby negatively affecting our business.
We have adopted a privacy policy that sets forth our policies regarding our
use of personal user information and have posted this policy on our website. It
is possible, however, that federal or state legislation may be enacted
governing user privacy, use of personal user information and privacy policy
requirements. In fact, several states have recently proposed legislation that
would limit the uses of personal user information gathered online and require
the establishment of privacy policies. While we have implemented programs
designed to enhance the protection of the privacy of our users, including
children, we cannot assure you that such programs will conform with any
regulations that may be established. Future regulations may adversely affect
the ability to utilize demographic and personal information from users, which
could have an adverse effect on our ability to provide targeted product sales.
Any such developments could have a material adverse effect on our business.
It is also possible that "cookies" may become subject to laws limiting or
prohibiting their use. The term "cookies" refers to information keyed to a
specific server, file pathway or directory location that is stored on a user's
hard drive, possibly without the user's knowledge or consent, which is used to
track demographic information and to target advertising. Certain currently
available Internet browsers allow users to modify their browser settings to
remove cookies at any time or prevent cookies from being stored on their hard
drives. In addition, a number of Internet commentators, advocates and
governmental bodies in the United States and other countries have urged the
passage of laws limiting or abolishing the use of cookies. Limitations on or
elimination of the use of cookies could restrict the effectiveness of our
targeting of advertisements, which could have a material adverse effect on our
ability to generate advertising revenue.
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We retain on our website personal information about our users that we obtain
with their consent. We have a stringent privacy policy covering this
information. As a matter of corporate policy, we do not supply customer lists
to third parties. However, if third persons were able to penetrate our network
security and gain access to, or otherwise misappropriate, our users' personal
information, we could be subject to liability and our reputation would be
harmed. Liability could include claims for misuses of personal information,
such as for unauthorized marketing purposes or unauthorized use of credit
cards. These claims could result in litigation, our involvement in which,
regardless of the outcome, could require us to expend significant financial
resources.
The European Union has adopted a directive that imposes restrictions on the
collection and use of personal data. Under the European Union directive,
European Union citizens are guaranteed certain rights, including the right of
access to their data, the right to know where the data originated, the right to
have inaccurate data rectified, the right to recourse in the event of unlawful
processing and the right to withhold permission to use their data for direct
marketing. The European Union directive could, among other things, affect U.S.
companies that collect information over the Internet from individuals in
European Union member countries, and may impose restrictions that are more
stringent than current Internet privacy standards in the United States. This
could adversely affect our ability to expand our sales efforts to Europe.
Legislative proposals have been made by the federal government that would
afford broader protection to owners of databases of information, such as stock
quotes and sports scores. Such protection already exists in the European Union.
If enacted, this legislation could result in an increase in the price of
services that provide data to websites. In addition, such legislation could
create potential liability for unauthorized use of such data.
A number of legislative proposals have been made at the federal, state and
local level, and by foreign governments, that would impose additional taxes on
the sale of goods and services over the Internet and certain states have taken
measures to tax Internet-related activities. Although Congress recently placed
a three-year moratorium on new state and local taxes on Internet access or on
discriminatory taxes on electronic commerce, existing state or local laws were
expressly excepted from this moratorium. Further, once this moratorium is
lifted, some type of federal or state taxes may be imposed upon Internet
commerce. The taxation of commerce over the Internet may substantially impair
the growth of commerce on the Internet and, as a result, adversely affect our
business.
Because our services are accessible throughout the United States, a state
may claim that we are required to qualify to do business as a foreign
corporation in that state. We are qualified to do business only in
Massachusetts and Delaware. Our failure to qualify as a foreign corporation in
a state where we are required to do so could subject us to taxes and penalties
and could result in our inability to enforce contracts in such states. 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.
Employees
As of August 31, 1999, SmarterKids.com had 60 full-time employees, including
20 in marketing and sales, 9 in customer service, 7 in editorial and education
review, 14 in development and 10 in general and administrative. From time to
time, we also employ independent contractors to support these operational
areas. Our employees are not represented by a union, and we believe our
employee relations are good.
Facilities
SmarterKids.com is headquartered in Needham, Massachusetts, where we lease
an office with approximately 12,700 square feet of space under leases expiring
in October 2001. We believe that these facilities are adequate to meet our
current requirements and that suitable additional or substitute space will be
available as needed.
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Legal Proceedings
On July 15, 1999, Leslie S. Minkus filed a patent infringement lawsuit
against us and NCS in the United States District Court for the Northern
District of Illinois, alleging that our use of SmartPicks infringes a patent
held by Mr. Minkus (U.S. Patent No. 5,122,952). We are obligated to indemnify
NCS in that action. The patent at issue purports to disclose and claim a
computer system for matching appropriate educational products with a child's
developmental profile comprising so-called "static and dynamic data."
Mr. Minkus is seeking temporary and permanent injunctions, as well as
unspecified damages. The hearing for the preliminary injunction motion is
scheduled for November 1999. We believe that the suit is without merit and that
we have meritorious defenses based on non-infringement and the invalidity of
the Minkus patent.
Patent litigation, however, is subject to inherent uncertainties. In
addition, cases like this generally involve issues of law that are evolving,
presenting further uncertainty. Our defense of this litigation, regardless of
the merits of the complaint, has been, and will likely continue to be, time-
consuming and a diversion for our personnel. A failure to prevail in this
litigation could result in:
. our paying monetary damages
. the issuance of a preliminary or permanent injunction requiring us to
stop using SmartPicks, which could occur at any time
. our having to redesign SmartPicks, which could be costly and time-
consuming, assuming that a redesign is feasible
. our having to reimburse Mr. Minkus for some or all of his attorneys'
fees
. our having to obtain from Mr. Minkus a license to his patent, which
license might not be made available to us on reasonable terms, or at all
Any of these results would harm our business, financial condition and
operating results. Furthermore, we expect to continue to incur substantial
costs in defending against this litigation and these costs could increase
significantly if our dispute goes to trial.
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MANAGEMENT
Directors, Executive Officers and Key Employees
The following table sets forth certain information about our executive
officers and directors, as well as certain members of our senior management.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
David Blohm............. 49 President and Chief Executive Officer
Jeff Pucci.............. 39 Co-Founder and Chairman
Richard Viard........... 39 Co-Founder and Senior Vice President, Product Development
Albert Noyes............ 41 Senior Vice President, Marketing and Sales
Robert Cahill........... 33 Vice President, Finance
Mark DeChambeau......... 38 Vice President, Operations
Neal Goldman............ 38 Vice President, Business Development
Joseph Panepinto........ 35 Vice President, Editorial
Richard Secor........... 39 Vice President, MIS and Chief Information Officer
John Zimmermann......... 40 Vice President, Merchandising
Susan Graham............ 29 Director, Education
Pauline O'Keeffe........ 32 Director, Public Relations
Richard Roseman......... 31 Director, Customer Acquisition and Retention
Lisa Tanzer Lewis....... 32 Director, Product Management
Richard D'Amore......... 45 Director
Michael Fitzgerald...... 46 Director
Brian Hickey............ 54 Director
Michael Kolowich........ 47 Director
</TABLE>
- --------
David Blohm has served as SmarterKids.com's President and Chief Executive
Officer since January 1998 and served as President and Chief Operating Officer
from September 1995 to January 1998. Prior to joining us, Mr. Blohm served as
President of ThinkingWorks, Inc., an educational research company, from June
1994 to September 1995. Mr. Blohm served as the President and Chief Executive
Officer of MathSoft, Inc., a company he co-founded, from August 1985 to May
1994.
Jeff Pucci, our co-founder, has served as SmarterKids.com's Chairman since
August 1995, served as Co-Chief Executive Officer from January 1998 to June
1998 and Chief Executive Officer from August 1995 to January 1998. Mr. Pucci
was President and Chief Executive Officer of SmarterKids.com from May 1994 to
August 1995.
Richard Viard, our co-founder, has served as SmarterKids.com's Senior Vice
President, Product Development since April 1994. Mr. Viard served on our Board
of Directors since our inception to November 1998.
Albert Noyes has served as SmarterKids.com's Senior Vice President,
Marketing and Sales since September 1997. Prior to joining us, Mr. Noyes served
as Vice President of Sales and Marketing of net.Genesis, a developer and
marketer of website usage and performance analysis products, from July 1996 to
May 1997. From November 1995 to May 1996, Mr. Noyes served as Chief Executive
Officer of The Mesa Group, a developer and marketer of messaging and groupware
software, which was subsequently acquired by Microsoft. Mr. Noyes served as
Venture Partner/Entrepreneur-in-Residence for Highland Capital, a venture
capital firm from October 1994 to October 1995.
Robert Cahill has served as SmarterKids.com's Vice President, Finance since
June 1999 and served as Controller from October 1997 to June 1999. Prior to
joining us, Mr. Cahill served as Accounting Manager for Gensym Corp., a
developer and marketer of software products, from May 1995 to October 1997. Mr.
Cahill served as a Senior Accountant for Ernst & Young LLP from January 1993 to
May 1995.
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Mark DeChambeau has served as SmarterKids.com's Vice President, Operations
since November 1998. Prior to joining us, Mr. DeChambeau was self-employed as
an operations consultant from March 1997 to October 1998. Mr. DeChambeau served
as Operations Manager for The Fulfillment Center, a full service fulfillment
and distribution center, from October 1993 through January 1997.
Neal Goldman has served as SmarterKids.com's Vice President, Business
Development since April 1999. Prior to joining us, Mr. Goldman served as Vice
President of Business Development for Dr. Solomon's Software, an anti-virus
software vendor, from November 1996 to October 1998. Mr. Goldman served as
product line manager for FTP Software, an Internet software company, from July
1995 to May 1996. He also served as Vice President of Marketing at Liant
Software, a development tools company, from August 1994 to May 1995.
Mr. Goldman wrote The Complete Idiot's Pocket Reference Guide to the Internet,
published by Macmillan Publishing.
Joseph Panepinto has served as SmarterKids.com's Vice President, Editorial
since April 1999. Prior to joining us, Mr. Panepinto served as Editor of
FamilyPC magazine from August 1997 to February 1999, in a variety of senior
positions for FamilyPC from June 1994 to August 1997 and as a consultant for
FamilyPC from March 1994 to May 1994.
Richard Secor has served as SmarterKids.com's Vice President, MIS and Chief
Information Officer since October 1998. Prior to joining us, Mr. Secor served
as Chief Information Officer for W.A. Wilde Company, a provider of direct mail
advertising services, from February 1996 to October 1998. Mr. Secor served as
Director of Information Services for ResponseNet, a division of W.A. Wilde
Company, from September 1994 to February 1996.
John Zimmermann has served as SmarterKids.com's Vice President,
Merchandising since June 1999. Prior to joining us, Mr. Zimmermann served as
Senior Vice President of Marketing and Merchandising for The Big Party!, a
chain of over 50 party supply super stores, from December 1997 to September
1998. Mr. Zimmermann served as Merchandise Manager for Bradlees, Inc. a
regional discounter, from June 1995 to December 1997. Mr. Zimmermann also
served as Merchandise Manager of Contempo Casuals, a national specialty store,
from June 1994 to June 1995.
Susan Graham has served as SmarterKids.com's Director, Education since June
1998 and served as Educational Product Manager from July 1998 to February 1999.
Ms. Graham served as a kindergarten teacher at the American School in London
from Fall 1995 to Spring 1997 and in the Washington D.C. Public School District
from Fall 1992 to Spring 1994.
Pauline O'Keeffe has served as SmarterKids.com's Director, Public Relations
since July 1999. Prior to joining us, Ms. O'Keeffe served in a variety of
capacities, including as Vice President of Public Relations for The Weber
Group, a public relations firm, from January 1991 to July 1999.
Richard Roseman has served as SmarterKids.com's Director, Customer
Acquisition and Retention since February 1999. Prior to joining us, Mr. Roseman
served as Director of Marketing for Geerlings & Wade, Inc., a marketer of
domestic and imported wine and accessories through the mail and online, from
June 1998 to January 1999. Mr. Roseman served as Marketing Manager for SC
Publishing, Inc., a division of Specialty Catalog Corporation, which markets
educational courses, books and accessories for professionals through catalogs
and online, from June 1995 to May 1998. Mr. Roseman served as Director of
Special Projects for ServiSource, a jewelry manufacturer owned by M. Fabrikant
& Sons, from February 1994 to May 1995.
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Lisa Tanzer Lewis has served as SmarterKids.com's Director, Product
Management since July 1999. Prior to joining us, Ms. Lewis served as the
Director of Business Development for Staples Inc., an office supply retailer,
from June 1998 through June 1999. Ms. Lewis held several marketing and product
development positions, including Director of U.S. Marketing and Director of
Global Marketing in the Preschool Division, at Hasbro, Inc., a manufacturer of
toys and games, from October 1994 to June 1998.
Richard D'Amore has been a director of SmarterKids.com since November 1998.
He has served as a general partner at North Bridge Venture Management Company
since March 1994. Previously, Mr. D'Amore served as a general partner for
Hambro International Equity Investors from July 1982 to March 1994.
Michael Fitzgerald has been a director of SmarterKids.com since November
1998. He is a founder of and has been a general partner of Commonwealth Capital
Ventures since April 1995. Mr. Fitzgerald served as a general partner at Palmer
Partners, the manager of three early stage venture capital funds, from June
1981 to December 1994.
Brian Hickey has been a director of SmarterKids.com since July 1999. Mr.
Hickey has served as the Chairman of Harlequin Enterprises Limited, a book
publishing and printing company, since December 1997 and its Chief Executive
Officer since December 1988. Mr. Hickey also served as President of Harlequin
from December 1988 to December 1997.
Michael Kolowich has been a director of SmarterKids.com since January 1999.
Mr. Kolowich has served as the Vice Chairman and as a Director of NewsEdge
Corporation, a provider of news and information services, since February 1998.
From September 1996 to February 1998, Mr. Kolowich served as the Chairman,
President and Chief Executive Officer of Individual, Inc., which merged with
NewsEdge in February 1998. Mr. Kolowich served as the President of AT&T New
Media Services, a division of AT&T that he founded, from November 1994 to July
1996. Mr. Kolowich also served as President of Ziff-Davis Interactive, a
division of Ziff-Davis Interactive Publishing Company that he founded, from
April 1988 to November 1999.
Election of Officers and Directors
Our Board of Directors consists of six members. Currently, each director is
elected pursuant to a voting agreement among SmarterKids.com and certain
stockholders. This agreement will automatically terminate upon the closing of
this offering; provided, however, that for so long as Brighter Vision Holdings,
Inc. owns at least 500,000 shares of our common stock, we have agreed to
nominate a representative of its choice to our Board of Directors.
Our executive officers are elected by the Board of Directors and serve until
their successors are duly elected and qualified. There are no family
relationships among any of our executive officers or directors.
Upon the closing of this offering, our Board of Directors will be divided
into three classes, with the members of each class of directors serving for
staggered three-year terms. Messrs. Hickey and Kolowich will serve in the class
of directors whose term expires in 2000; Messrs. Fitzgerald and Pucci will
serve in the class of the directors whose term expires in 2001; and Messrs.
Blohm and D'Amore will serve in the class of directors whose term expires in
2002. At each annual meeting of stockholders, a class of directors will be
elected for a three-year term to succeed the directors of the same class whose
term is then expiring.
Committees of the Board of Directors
The Compensation Committee consists of Messrs. D'Amore and Kolowich. The
Compensation Committee reviews and evaluates the compensation and benefits of
all of our executive officers, reviews
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general policy matters relating to compensation and benefits of our employees
and makes recommendations concerning these matters to the Board of Directors.
The Compensation Committee also administers our stock option and stock purchase
plans.
The Audit Committee consists of Messrs. Hickey and Fitzgerald. The Audit
Committee reviews, with our independent auditors, the scope and timing of the
auditors' services, the auditors' report on our financial statements following
completion of their annual audit, and our internal accounting and financial
control policies and procedures. In addition, the Audit Committee will make
annual recommendations to the Board of Directors regarding the appointment of
independent auditors.
Director Compensation
Neither employee nor non-employee directors receive cash compensation for
services performed in their capacity as directors. We reimburse directors for
reasonable out-of-pocket expenses incurred in attending meetings of the Board
of Directors and any of its committees on which they serve. Directors are also
eligible to participate in our 1995 Stock Plan and 1999 Non-Employee Director
Stock Option Plan. Under our 1995 Stock Plan, non-employee directors are
eligible to receive stock option grants at the discretion of the Board. In
November 1998, each of Messrs. D'Amore and Fitzgerald was granted an option to
purchase 30,000 shares of common stock at an exercise price of $0.20. In
January 1999, Mr. Kolowich was granted an option to purchase 50,000 shares of
common stock at an exercise price of $0.20 per share and an option to purchase
50,000 shares of common stock at an exercise price of $2.00 per share. In July
1999, Mr. Hickey was granted an option to purchase 30,000 shares of common
stock at an exercise price of $6.27.
Compensation Committee Interlocks and Insider Participation
The current members of our Compensation Committee are Messrs. D'Amore and
Fitzgerald. No executive officer has served as a director or member of the
Compensation Committee, or other committee serving an equivalent function, of
any other entity whose executive officers served as a member of the
Compensation Committee of our Board of Directors. For a description of
transactions between us and certain entities affiliated with Messrs. D'Amore
and Fitzgerald, see "Certain Transactions" below.
Executive Compensation
The following summary compensation table sets forth certain information
concerning the compensation of our Chief Executive Officer and our four other
most highly paid executive officers for the fiscal year ended December 31,
1998. Mr. Secor joined us in October 1998 with an annual salary of $121,000.
All other compensation paid to the executive officers named below for the
fiscal year ended December 31, 1998 is comprised of insurance premiums paid by
us for life insurance policies of each executive officer. The five officers
listed in the chart below are sometimes referred to as the named executive
officers.
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Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation
-------------------- ------------
Securities All
Underlying Other
Name and Principal Positions Salary ($) Bonus ($) Options (#) Compensation
- ---------------------------- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C>
David Blohm..................... $120,751 $ -- 180,000 $696
President and Chief Executive
Officer
Jeff Pucci...................... 118,643 -- 180,000 696
Co-Founder and Chairman of the
Board
Richard Viard................... 91,892 -- 180,000 696
Co-Founder and Senior Vice
President,
Development
Albert Noyes.................... 105,794 15,073 100,000 696
Senior Vice President,
Marketing and Sales
Richard Secor................... 25,142 -- 50,000 116
Vice President, MIS
and Chief Information Officer
</TABLE>
Option Grants in Last Fiscal Year
The following table provides certain information regarding stock options
granted to the named executive officers during the fiscal year ended December
31, 1998. We granted to our employees options to purchase 822,500 shares of
common stock during the 1998 fiscal year. All options were granted with an
exercise price at least equal to the fair market value of the common stock on
the date of the grant, as determined by the Board of Directors. Options may
terminate before their expiration date if the optionee is no longer an employee
or consultant of the company. Please note that for the purposes of calculating
the potential realizable value, we have calculated the gains or "option
spreads" that would exist for the options assuming an annual compound stock
appreciation of 5% and 10% from the date the option was granted over the full
option term. These assumed annual compound rates are mandated by the SEC and do
not represent our estimate or projection of future stock prices.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term ($)
------------------------------------------------ -----------------
Number of
Securities Percent of Total
Underlying Options
Options Granted to Exercise
Granted Employees in Price Per Expiration
Name (#) Fiscal Year (%) Share ($) Date 5% 10%
- ---- ---------- ---------------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
David Blohm............. 180,000 21.88% $.20 11/6/08 $ 22,640 $ 57,375
Jeff Pucci.............. 180,000 21.88 .22 11/6/03 10,941 24,176
Richard Viard........... 180,000 21.88 .22 11/6/03 10,941 24,176
Albert Noyes............ 100,000 12.15 .20 11/6/08 12,578 31,875
Richard Secor........... 50,000 6.08 .20 10/19/08 6,289 15,937
</TABLE>
52
<PAGE>
Year-End Option Table
The following table sets forth information regarding exercisable and
unexercisable stock options held as of December 31, 1998 by each of the named
executive officers. The value realized upon exercise of stock options is
calculated by determining the difference between the exercise price per share
and the fair market value on the date of exercise. There was no public trading
market for our common stock as of December 31, 1998. Accordingly, the value of
unexercised in-the-money options has been calculated by determining the
difference between the exercise price per share and an assumed initial public
offering price of $ .
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
<TABLE>
<CAPTION>
Number of Securities
Shares Underlying Unexercised Value of Unexercised In-
Acquired on Options at Fiscal Year End the-Money Options at Fiscal
Exercise Value (#) Year End ($)
Name (#) Realized($) (Exercisable/Unexercisable) (Exercisable/Unexercisable)
- ---- ----------- ----------- --------------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
David Blohm............. -- -- 200,0000 / 314,000
Jeff Pucci.............. -- -- -- 180,000
Richard Viard........... -- -- -- 180,000
Albert Noyes............ 28,000 -- 17,000 / 235,000
Richard Secor........... -- -- -- 50,000
</TABLE>
Employment Contracts, Termination of Employment Agreements and Change in
Control Arrangements
Messrs. Pucci and Viard have employment agreements with us each dated
November 6, 1998. If we terminate the employment of Mr. Pucci or Mr. Viard for
any reason during the term of his respective employment agreement, Mr. Pucci or
Mr. Viard, as the case may be, will continue to receive his salary for the
remaining term of the agreement, regardless of whether he obtains other
employment, and his stock options granted in connection with the commencement
of his employment will continue to vest for the remaining term of the
agreement. Pursuant to these employment agreements, each of Messrs. Pucci and
Viard was granted options to purchase 180,000 shares of our common stock on
November 6, 1998 with an exercise price of $.22 per share. The shares vest over
four years with 45,000 shares vesting on November 6, 1999 and 11,250 shares
vesting in equal installments at the end of each calendar quarter beginning
December 31, 1999. These employment agreements expire on November 6, 2000.
Certain nonqualified and incentive stock option agreements with each of
David Blohm, Michael Kolowich, Albert Noyes, Jeff Pucci, Richard Viard and
other senior management provide for the acceleration of certain unvested
options upon the consummation of this offering. See "Principal Stockholders."
Employee Benefit Plans
1995 Stock Plan
The 1995 Stock Plan, as amended, was adopted by the Board of Directors and
approved by our stockholders on September 5, 1995. The aggregate number of
shares of common stock which may be issued under the 1995 Stock Plan is
2,548,000. Under the 1995 Stock Plan, we are authorized to grant incentive
stock options and non-qualified stock options, as well as awards of common
stock and opportunities to make direct purchases of common stock to our
employees, consultants, directors and officers. The 1995 Stock Plan is
administered by the Board of Directors and the Compensation Committee. The 1995
Stock Plan provides that the Board of Directors and the Compensation Committee
each has the authority to select the participants and determine the terms of
the stock options, awards and purchase rights granted under the 1995 Stock
Plan.
53
<PAGE>
An incentive stock option is not transferable by the recipient except by
will or by the laws of descent and distribution. Non-qualified stock options
and other awards are transferable only to the extent provided in the agreement
relating to such option or award or in response to a valid domestic relations
order. Generally, no incentive stock options may be exercised more than three
months following termination of employment, and no stock option may be
exercised following termination of employment for cause. However, in the event
that termination is due to death or disability, the stock option is exercisable
for a maximum of 180 days after such termination.
In September 1999, the Board of Directors voted to terminate the 1995 Stock
Plan effective on the consummation of this offering. As of June 30, 1999, we
had outstanding under the 1995 Stock Plan stock options exercisable for
1,933,394 shares of common stock.
1999 Stock Option and Incentive Plan
The 1999 Stock Option and Incentive Plan was adopted by the Board of
Directors and approved by our stockholders in September 1999. The 1999 Stock
Option and Incentive Plan is to be effective on the consummation of this
offering and provides for the grant of stock-based awards to our employees,
officers and directors, and consultants or advisors, including incentive stock
options and non-qualified stock options and other equity-based awards.
Incentive stock options may be granted only to our employees. A total of
1,333,333 shares of common stock may be issued upon the exercise of options or
other awards granted under the 1999 Stock Option and Incentive Plan. The
maximum number of shares that may be granted to any employee under the 1999
Stock Option and Incentive Plan shall not exceed 333,333 shares of common stock
during any calendar year.
The 1999 Stock Option and Incentive Plan is administered by the Board of
Directors and the Compensation Committee. The 1999 Stock Option and Incentive
Plan provides that the Board of Directors and the Compensation Committee each
has the authority to select the persons to whom awards are granted and
determine the terms of each award, including the number of shares of common
stock to be granted. Payment of the exercise price of an award may be made in
cash, shares of common stock, a combination of cash or stock or by any other
method approved by the Board or Compensation Committee, consistent with Section
422 of the Internal Revenue Code and Rule 16b-3 under the Exchange Act. Unless
otherwise permitted by us, awards are not assignable or transferable except by
will or the laws of descent and distribution.
Each of the Board of Directors or Compensation Committee may, in its sole
discretion, amend, modify or terminate any award granted or made under the 1999
Stock Option and Incentive Plan, so long as such amendment, modification or
termination would not materially and adversely affect the participant. Each of
the Board or Compensation Committee may also, in its sole discretion,
accelerate or extend the date or dates on which all or any particular option or
options granted under the 1999 Stock Option and Incentive Plan may be
exercised. No options or shares have been granted to date under the 1999 Stock
Option and Incentive Plan.
1999 Non-Employee Director Stock Option Plan
The 1999 Non-Employee Director Stock Option Plan was adopted by the Board of
Directors and approved by our stockholders in September 1999. The 1999 Non-
Employee Director Stock Option Plan will take effect upon completion of this
offering. The 1999 Non-Employee Director Stock Option Plan provides for the
grant of options to purchase a maximum of 133,333 shares of Common Stock of the
Company to non-employee directors of the Company.
The 1999 Non-Employee Director Stock Option Plan will be administered by a
committee appointed by the Board of Directors. In the event the Board of
Directors does not appoint such a committee, then the Board shall have all
power and authority to administer the 1999 Non-Employee Director Stock Option
Plan.
54
<PAGE>
Under the 1999 Non-Employee Director Stock Option Plan, each director who is
not also an employee or officer of the Company and who is not a director at the
time of this offering shall be automatically granted on the date such person is
first elected to the Board of Directors an option to purchase 30,000 shares of
common stock. Each time a non-employee director is re-elected to the Board,
including current directors, such non-employee director will automatically
receive an option to purchase 1,333 shares of common stock. Provided that the
director continues to serve as a member of the Board of Directors, one-third of
the shares included in each grant will become exercisable on each of the first,
second and third anniversaries of the date of grant. All options granted under
the 1999 Non-Employee Director Stock Option Plan will have an exercise price
equal to the fair market value of the common stock on the date of grant. The
term of each option will be for a period of ten years from the date of grant.
Options may not be assigned or transferred except by will or by the laws of
descent and distribution and are exercisable to the extent vested only while
the optionee is serving as a director or within 90 days after the optionee
ceases to serve as a director (except that if a director dies or becomes
disabled while he or she is serving as a director, the option is exercisable
until the scheduled expiration date of the option). No options have been
granted to date under the 1999 Non-Employee Director Stock Option Plan.
1999 Employee Stock Purchase Plan
The 1999 Employee Stock Purchase Plan was adopted by the Board of Directors
and approved by our stockholders in September 1999. The 1999 Employee Stock
Purchase Plan will take effect upon completion of this offering. The 1999
Employee Stock Purchase Plan provides for the issuance of a maximum of 266,666
shares of common stock. The 1999 Employee Stock Purchase Plan is administered
by the Board of Directors and the Compensation Committee. All employees whose
customary employment is for more than 20 hours per week and for more than three
months in any calendar year and who have completed more than 90 days of
employment on or before the first day of any six-month payment period are
eligible to participate in the 1999 Employee Stock Purchase Plan. Outside
directors and employees who would own 5% or more of the total combined voting
power of value of our stock immediately after the grant may not participate in
the 1999 Employee Stock Purchase Plan.
To participate in the 1999 Employee Stock Purchase Plan, an employee must
authorize us to deduct an amount not less than one percent nor more than 10
percent of a participant's total cash compensation from his or her pay during
six-month payment periods. The payment periods will commence on January 1 and
July 1, and end on June 30 and December 31, respectively, of each year. In no
case shall an employee be entitled to purchase more than 666 shares in any one
payment period. The exercise price for the option granted in each payment
period is 85% of the lesser of the average market price of the common stock on
the first or last business day of the payment period, in either event rounded
up to the nearest cent. If an employee is not a participant on the last day of
the payment period, such employee is not entitled to exercise his or her
option, and the amount of his or her accumulated payroll deductions will be
refunded.
Options granted under the 1999 Employee Stock Purchase Plan may not be
transferred or assigned. An employee's rights under the 1999 Employee Stock
Purchase Plan terminate upon his or her voluntary withdrawal from the plan at
any time or upon termination of employment. No options or shares have been
granted to date under the 1999 Employee Stock Purchase Plan.
401(k) Plan
We maintain a 401(k) Retirement Savings Plan, which is intended to qualify
under Section 401(a) of the Internal Revenue Code. All employees who are at
least 21 years of age and who have completed six months of service are eligible
to participate in the 401(k) Plan. Under the 401(k) Plan, participants
generally may elect to defer up to 15% of their compensation. In addition, at
the discretion of the Board of Directors, we may make matching contributions to
the 401(k) Plan for all eligible employees. We have not made any matching
contributions to the 401(k) Plan to date.
55
<PAGE>
Limitation of Liability and Indemnification of Officers and Directors
Our Amended and Restated Certificate of Incorporation and Amended and
Restated By-Laws provide that our directors and officers shall be indemnified
by us to the fullest extent permitted by Delaware law, as it now exists or may
in the future be amended, against all expenses and liabilities reasonably
incurred in connection with their service for us or on our behalf. In addition,
our Amended and Restated Certificate of Incorporation provides that our
directors will not be personally liable for monetary damages to us for breaches
of their fiduciary duty as directors, unless they violated their duty of
loyalty to us or our stockholders, acted in bad faith, knowingly or
intentionally violated the law, authorized illegal dividends or redemptions or
derived an improper personal benefit from their action as directors. We intend
to obtain insurance which insures our directors and officers against certain
losses and which insures us against our obligations to indemnify our directors
and officers.
56
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to us regarding
beneficial ownership of our common stock as of July 31, 1999 by:
. each of the named executive officers
. each of our directors
. each person known by us to be the beneficial owner of more than 5% of
our common stock
. all executive officers and directors as a group
Unless otherwise noted below, the address of each person listed in the table
is c/o SmarterKids.com, Inc., 200 Highland Avenue, Needham, Massachusetts
02494, and each person has sole voting and investment power over the shares
shown as beneficially owned except to the extent authority is shared by spouses
under applicable law and except as set forth in the footnotes to the table.
We have determined beneficial ownership in accordance with the rules of the
SEC. We have assumed the conversion into common stock of all outstanding shares
of preferred stock. Shares of common stock subject to options that are either
currently exercisable or exercisable within 60 days after July 31, 1999 and
shares of common stock subject to options that are exercisable upon the closing
of this offering are treated as outstanding and beneficially owned by the
option holder for the purpose of computing the percentage ownership of the
option holder. However, these shares are not treated as outstanding for the
purpose of computing the percentage ownership of any other person. The
percentages contained in the "After the Offering" column assume that the
underwriters do not exercise their over-allotment option to purchase up to an
aggregate of additional shares from us and from certain of the selling
stockholders listed in the table below.
57
<PAGE>
<TABLE>
<CAPTION>
Percentage of Common
Shares of Stock Outstanding
Common Stock -----------------------
Beneficially Before the After the
Name and Address of Beneficial Owner Owned(#) Offering(%) Offering(%)
- ------------------------------------ ------------ ----------- -----------
<S> <C> <C> <C>
David Blohm(1)......................... 379,000 3.7%
Jeff Pucci(2).......................... 379,000 3.8
Richard Viard(3)....................... 378,000 3.8
Albert Noyes(4)........................ 209,000 2.1
Richard Secor.......................... -- --
Richard D'Amore(5)..................... 1,978,545 20.2
Michael Fitzgerald(6).................. 1,239,272 12.6
Michael Kolowich(7).................... 100,000 1.0
Brian Hickey(8)........................ -- --
225 Duncan Mill Road
Don Mills, Ontario, Canada M3B 3K9
North Bridge Venture Partners III,
L.P.(5)............................... 1,978,545 20.2
950 Winter Street, Suite 4600
Waltham, MA 02451
Commonwealth Capital Ventures II,
L.P.(6)............................... 1,239,272 12.6
20 William Street
Wellesley, MA 02181
Brighter Vision Holdings, Inc.......... 1,116,605 11.4
c/o Torstar Corporation
One Yonge Street
Toronto, Canada M5E IP9
Intel Corporation...................... 797,575 8.1
2200 Mission College Blvd., Mailstop
RN6-46
Santa Clara, CA 95952
Van Wagoner Capital Management......... 638,060 6.5
245 California Street, Suite 2450
San Francisco, CA 94104
WMUR TV, Inc.(9)....................... 634,000 6.5
100 Commercial Street
Manchester, NH 02105
All executive officers and directors as
a group (14 persons)(10).............. 4,700,317 44.7
</TABLE>
- --------
* Less than 1%
(1) Consists of 267,000 shares issuable upon the exercise of options
exercisable within 60 days of July 31, 1999 and 112,000 shares which will
become exercisable upon the closing of this offering.
(2) Includes 45,000 shares which will become exercisable upon the closing of
this offering.
(3) Includes 45,000 shares which will become exercisable upon the closing of
this offering.
(4) Includes 36,000 shares issuable upon the exercise of options exercisable
within 60 days of July 31, 1999 and 115,000 shares which will become
exercisable upon the closing of this offering.
(5) Consists of 1,978,545 shares held by North Bridge Venture Partners III,
L.P. Mr. D'Amore is a general partner of the general partner of North
Bridge Venture Partners III, L.P. and may be deemed to share voting and
investment power with respect to all shares held by North Bridge Venture
Partners III, L.P. Mr. D'Amore disclaims beneficial ownership of such
shares, except to the extent of his pecuniary interest therein, if any.
(6) Consists of 1,228,000 shares held by Commonwealth Capital Ventures II, L.P.
and 11,272 shares held by CCV II Associates Fund, L.P. Mr. Fitzgerald is a
general partner of the general partner of Commonwealth Capital Ventures II,
L.P. and the general partner of CCV II Associates Fund, L.P. and may be
deemed to share voting and investment power with respect to all shares held
by Commonwealth Capital Ventures II, L.P. and CCV II Associates Fund, L.P.
Mr. Fitzgerald disclaims beneficial ownership of such shares, except to the
extent of his pecuniary interest therein, if any.
(7) Includes 50,000 shares which will become exercisable upon the closing of
the offering.
(8) Excludes 1,116,605 shares held by Brighter Vision Holdings, Inc. Mr. Hickey
is the chairman and chief executive officer of Harlequin Enterprises
Limited. Harlequin Enterprises Limited and Brighter Vision Holdings, Inc.
are both wholly-owned subsidiaries of Torstar Corporation. Mr. Hickey
disclaims beneficial ownership of such shares.
(9) Excludes 386,000 shares held by Frank Imes, the President and controlling
shareholder of WMUR TV, Inc. Mr. Imes may be deemed to share voting and
investment power with respect to all shares held by WMUR TV, Inc. Mr. Imes
disclaims beneficial ownership of such shares held by WMUR TV, Inc., except
to the extent of his pecuniary interest therein, if any.
(10) Includes an aggregate of 310,500 shares issuable upon the exercise of
options exercisable within 60 days of July 31, 1999 and an aggregate of
397,000 shares which will become exercisable upon the closing of this
offering.
58
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. Future sales of substantial amounts of common stock in the public market
could lower prevailing market prices. As described below, no shares currently
outstanding will be available for sale immediately after this offering because
of contractual restrictions on resale. Sales of substantial amounts of our
common stock in the public market after the restrictions lapse could harm the
prevailing market price and impair our ability to raise equity capital in the
future.
Upon completion of the offering, we will have outstanding shares of
common stock assuming the exercise of warrants to purchase 218,727 shares of
common stock which terminate upon the closing of the offering. 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. In general,
affiliates include officers, directors or 10% stockholders.
The remaining 10,051,509 shares outstanding are "restricted securities"
within the meaning of SEC Rule 144. Restricted securities may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rules 144 or 701 promulgated under the Securities Act, which
are summarized below. Sales of the restricted securities in the public market,
or the availability of such shares for sale, could adversely affect the market
price of the common stock.
We anticipate that our directors, officers and significant securityholders
will enter 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 Hambrecht & Quist LLC. Taking into account the lock-up agreements, and
assuming Hambrecht & Quist LLC does not release stockholders from these
agreements, the number of shares that will be available for sale in the public
market under the provisions of Rule 144 and 701 will be as follows:
. Beginning on the date of this prospectus, only the shares sold in this
offering will be immediately available for sale in the public market.
. Beginning 180 days after the date of this prospectus, approximately
7,125,762 shares will be eligible for sale, including 1,299,344 shares
subject to outstanding vested options and warrants.
. At various times thereafter upon the expiration of applicable holding
periods, 5,724,247 shares will become eligible for sale, including
1,423,156 shares subject to outstanding options and warrants.
In general, under Rule 144, after the expiration of the lock-up agreements,
a person who has beneficially owned restricted securities for at least one year
would be entitled to sell within any three-month period a number of shares that
does not exceed the greater of:
. one percent of the number of shares of common stock then outstanding
which will equal approximately shares immediately after the
offering; or
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale.
Sales under Rule 144 are also subject to requirements with respect to manner
of sale, notice and the availability of current public information about us.
Under Rule 144(k), a person who is not deemed to have been our affiliate at any
time during the three months preceding a sale and who has beneficially owned
the shares proposed to be sold for at least two years, is entitled to sell such
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
59
<PAGE>
Rule 701 permits our employees, officers, directors or consultants who
purchased shares pursuant to a written compensatory plan or contract to resell
such shares in reliance upon Rule 144 but without compliance with specific
restrictions. Rule 701 provides that affiliates may sell their Rule 701 shares
under Rule 144 without complying with the holding period requirement and that
non-affiliates may sell such shares in reliance on Rule 144 without complying
with the holding period, public information, volume limitation or notice
provisions of Rule 144.
60
<PAGE>
CERTAIN TRANSACTIONS
Between May 1997 and November 1998, we issued and sold an aggregate of 3,518
shares of our series B preferred stock to certain private investors for an
aggregate purchase price of $7,036,000 or $2,000 per share. Each share of
series B preferred stock will convert into 1,000 shares of common stock upon
the closing of this offering. On November 9, 1998, North Bridge Venture
Partners III, L.P. purchased 1,500 shares of series B preferred stock for an
aggregate purchase price of $3,000,000, and Commonwealth Capital Ventures II,
L.P. purchased 1,000 shares of series B preferred stock for an aggregate
purchase price of $2,000,000. Richard A. D'Amore, a member of the Board of
Directors, is general partner of the general partner of North Bridge Venture
Partners III, L.P. Michael T. Fitzgerald, a member of the Board of Directors,
is general partner of the general partner of Commonwealth Capital Ventures II,
L.P.
In July 1999, we issued and sold an aggregate of 4,284,091 shares of our
series C preferred stock to certain private investors for an aggregate purchase
price of $26,856,966.53 or $6.27 per share. Each share of series C preferred
stock will convert into one share of common stock upon the closing of this
offering. North Bridge Venture Partners III, L.P. purchased 478,545 shares of
series C preferred stock for an aggregate purchase price of $2,999,999,
Commonwealth Capital Ventures II, L.P. and one of its affiliates, of which Mr.
Fitzgerald is a general partner, purchased an aggregate of 239,272 shares of
series C preferred stock for an aggregate purchase price of $1,499,996.
61
<PAGE>
DESCRIPTION OF SECURITIES
Effective upon the closing of this offering and the filing of our Amended
and Restated Certificate of Incorporation, our authorized capital stock will
consist of 90,000,000 shares of common stock, par value $.01 per share, and
10,000,000 shares of preferred stock, par value $.01 per share. The following
summary description of our capital stock is not intended to be complete and is
qualified by reference to the provisions of applicable law and to our Amended
and Restated Certificate of Incorporation and Amended and Restated By-laws,
filed as exhibits to the registration statement of which this prospectus is a
part.
Common Stock
As of July 31, 1999, there were 1,327,171 shares of common stock outstanding
held by 18 stockholders of record. Based upon the number of shares outstanding
as of that date and giving effect to the issuance of the shares of common
stock offered by us in this offering and the conversion of the outstanding
shares of preferred stock, there will be shares of common stock
outstanding upon the closing of this offering. In addition, as of July 31,
1999, there were outstanding stock options and warrants to purchase 2,342,121
shares of common stock.
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Directors are elected by a plurality of the votes of the shares present
in person or by proxy at the meeting and entitled to vote in such election.
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
therefor, after provision has been made for any preferential dividend rights of
outstanding preferred stock. Upon our liquidation, dissolution or winding up,
the holders of common stock are entitled to receive ratably the net assets
available after the payment of all of our debts and other liabilities, and
after the satisfaction of the rights of any outstanding preferred stock.
Holders of the common stock have no preemptive, subscription, redemption or
conversion rights, nor are they entitled to the benefit of any sinking fund.
The outstanding shares of common stock are, and the shares offered by us in
this offering will be, when issued and paid for, validly issued, fully paid and
non-assessable. The rights, powers, preferences and privileges of holders of
common stock are subordinate to, and may be adversely affected by, the rights
of the holders of shares of any series of preferred stock which we may
designate and issue in the future.
Preferred Stock
Upon closing of this offering, all outstanding shares of preferred stock
will automatically convert into an aggregate of 8,488,591 shares of common
stock. Thereafter, the Board of Directors will generally be authorized, without
further stockholder approval, to issue from time to time up to an aggregate of
10,000,000 shares of preferred stock, in one or more series. Each series of
preferred stock shall have such number of shares, designations, preferences,
voting powers, qualifications and special or relative rights or privileges as
shall be determined by the Board of Directors, which may include, among others,
dividend rights, voting rights, redemption and sinking fund provisions,
liquidation preferences, conversion rights and preemptive rights.
Our stockholders have granted the Board of Directors authority to issue the
preferred stock and to determine the rights and preferences of the preferred
stock in order to eliminate delays associated with a stockholder vote on
specific issuances. The rights of the holders of common stock will be
subordinate to the rights of holders of any preferred stock issued in the
future. The issuance of preferred stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, could
adversely affect the voting power or other rights of the holders of common
stock, and could make it more difficult for a third party to acquire, or
discourage a third party from attempting to acquire, a majority of our
outstanding voting stock. We have not, to date, issued any shares of such
preferred stock, and we have no present plans to issue any shares of preferred
stock.
62
<PAGE>
Warrants
As of September 7, 1999, there were outstanding warrants to purchase:
. 110,000 shares of common stock issued to J.L. Hammett Co. at an exercise
price of $2.00. These warrants expire on September 29, 2003.
. 80,700 shares of common stock issued to Edu Ventures, Inc. at an
exercise price of $.20 and 25,000 shares of common stock issued to Edu
Ventures, Inc. at an exercise price of $2.00. These warrants expire
immediately prior to this offering.
. 75,000 shares of common stock issued to National Computer Systems, Inc.
at an exercise price of $2.00 per share.
. five shares of series B preferred stock issued to Silicon Valley Bank at
an exercise price of $2,000 per share that will expire on March 24,
2003. Upon the closing of this offering, these warrants will convert
into warrants to purchase 5,000 shares of common stock at an exercise
price of $2.00 per share.
. 113,027 shares of series C preferred stock issued to Thomas Weisel
Partners, LLC at an exercise price of $6.269. These warrants expire
immediately prior to this offering.
Included in the warrants to purchase 110,000 shares of common stock above
and pursuant to our arrangement with J.L. Hammett Co., we are obligated to
issue warrants to purchase an aggregate of 60,000 shares of common stock, to be
issued in six month intervals through October 1, 2000 at an exercise price of
$2.00 per share. In addition, the warrants issued to National Computer Systems,
Inc. are comprised of 75,000 shares of common stock, which we are obligated to
issue at an exercise price of $2.00 per share upon its achievement of specific
milestones.
Registration Rights
Upon the expiration of the contractual lock-up period with the underwriters,
certain stockholders will be entitled to require us to register under the
Securities Act up to a total of 9,213,591 shares of outstanding common stock
under the terms of an investor rights agreement between us and the rights
holders. In addition, a holder of a warrant exercisable for 5,000 shares of
common stock will have certain registration rights. The investor rights
agreement provides that if we propose to register in a firm commitment
underwritten offering any of our securities under the Securities Act at any
time or times, the stockholders having registration rights will generally be
entitled to include shares of common stock held by them in such registration.
However, the managing underwriter of any offering may exclude for marketing
reasons some or all of the shares from the registration. Some of these
stockholders also have the right to require us, on no more than two occasions,
to prepare and file a registration statement under the Securities Act
registering the shares of common stock held by them. We are generally required
to bear the expenses of all such registrations, except underwriting discounts
and commissions. These rights terminate on the fifth anniversary of this
offering.
Anti-Takeover Effects of Delaware Law and Certain Charter and By-Law Provisions
Upon completion of this offering, the provisions of Section 203 of the
General Corporation Law of Delaware will prohibit us from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an
interested stockholder, unless the business combination is approved in a
prescribed manner. A "business combination" includes mergers, asset sales and
other transactions resulting in a financial benefit to the interested
stockholder. An "interested stockholder" is generally defined as a person who,
together with affiliates and associates, owns, or within three years did own,
15% or more of the corporation's voting stock.
63
<PAGE>
Our Amended and Restated Certificate of Incorporation provides for the
division of the Board of Directors into three classes as nearly equal in size
as possible with staggered three-year terms. In addition, our Amended and
Restated Certificate of Incorporation provides that directors may be removed
only for cause by the affirmative vote of the holders of 75% of the shares of
our capital stock entitled to vote. Under our Amended and Restated Certificate
of Incorporation, any vacancy on the Board of Directors, however occurring,
including a vacancy resulting from an enlargement of the Board, may only be
filled by vote of a majority of the directors then in office. The likely
effect of the classification of the Board of Directors and the limitations on
the removal of directors and filling of vacancies is an increase in the time
required for the stockholders to change the composition of the Board of
Directors. For example, in general, at least two annual meetings of the
stockholders will be necessary for stockholders to effect a change in a
majority of the members of the Board of Directors.
Our Amended and Restated Certificate of Incorporation also provides that,
after the effective date of the registration statement of which this
prospectus is a part, any action required or permitted to be taken by our
stockholders at an annual meeting or special meeting of stockholders may only
be taken if it is properly brought before the meeting and may not be taken by
written action in lieu of a meeting. Our Amended and Restated By-laws provide
that special meetings of the stockholders may only be called by the Board of
Directors, the Chairman of the Board of Directors, the Chief Executive Officer
or the President. Our Amended and Restated By-laws further provide that in
order for any matter to be considered "properly brought" before a meeting, a
stockholder must comply with requirements regarding advance notice to us. The
foregoing provisions could have the effect of delaying until the next
stockholders meeting stockholder actions which are favored by the holders of a
majority of our outstanding voting securities. These provisions may also
discourage another person or entity from making a tender offer for our common
stock, because such person or entity, even if it acquired a majority of our
outstanding voting securities, would be able to take action as a stockholder,
such as electing new directors or approving a merger, only at a duly called
stockholders meeting, and not by written consent.
The General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or by-laws,
unless a corporation's certificate of incorporation or by-laws, as the case
may be, requires a greater percentage. Our Amended and Restated Certificate of
Incorporation requires the affirmative vote of the holders of at least 75% of
the shares of our capital stock that are issued and outstanding and entitled
to vote to amend or repeal any of the foregoing provisions of the Amended and
Restated Certificate of Incorporation. Our Amended and Restated By-laws may
generally be amended or repealed by a majority vote of the Board of Directors
and may also be amended or repealed by the affirmative vote of the holders of
at least 75% of the shares of our capital stock that are issued and
outstanding and entitled to vote. The 75% stockholder vote would be in
addition to any separate class vote that might in the future be required in
accordance with the terms of any series of preferred stock that might be
outstanding at the time any such amendments are submitted to stockholders.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services, L.L.C.
64
<PAGE>
UNDERWRITING
The underwriters named below, through their representatives, Hambrecht &
Quist LLC, U.S. Bancorp Piper Jaffray Inc. and E*OFFERING Corp., have severally
agreed to purchase, and we have agreed to sell them, an aggregate of shares of
common stock pursuant to an underwriting agreement. The number of shares of
common stock that each underwriter has agreed to purchase is listed opposite
its name below:
<TABLE>
<CAPTION>
Number
of
Name Shares
---- ------
<S> <C>
Hambrecht & Quist LLC.................................................
U.S. Bancorp Piper Jaffray Inc........................................
E*OFFERING Corp.......................................................
------
Total ................................................................
======
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are conditioned on the absence of any material adverse change in our business
and the receipt of certificates, opinions and letters from us and the selling
stockholders, their counsel and the independent auditors. The nature of the
underwriters' obligation is such that they are committed to purchase all shares
of common stock offered by this prospectus if any of the shares are purchased.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by SmarterKids.com and the selling
stockholders. These amounts are shown assuming both no exercise and full
exercise of the underwriters' over-allotment option to purchase additional
shares.
<TABLE>
<CAPTION>
Paid by SmarterKids.com
-----------------------
No Full
Exercise Exercise
----------- -----------
<S> <C> <C>
Per share........................................ $ $
Total............................................ $ $
</TABLE>
<TABLE>
<CAPTION>
Paid by Selling
Stockholders
---------------
No Full
Exercise Exercise
-------- --------
<S> <C> <C>
Per share.................................................. -- $
Total...................................................... -- $
</TABLE>
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the initial public offering price listed on the
cover page of this prospectus and part to selected dealers at a price that
represents a concession not in excess of $ per share under the public
offering price. The underwriters may allow, and such dealers may reallow a
concession not in excess of $ per share to other underwriters or selected
other dealers. After the initial public offering of the shares of common stock,
the offering price and other selling terms may be changed by the
representatives of the underwriters.
A prospectus in electronic format is being made available on the website
maintained by E*OFFERING Corp. Other than the prospectus in electronic format
and the information that is identified as being a part of the prospectus, the
information on E*OFFERING Corp.'s website and any information provided on any
other website maintained by E*OFFERING Corp. is not part of this prospectus and
has not been approved or endorsed by SmarterKids.com or any underwriter and
should not be relied upon by prospective investors.
In the underwriting agreement, SmarterKids.com, , and have
granted to the underwriters options, exercisable no later than 30 days after
the date of this prospectus, to purchase up to an aggregate of additional
shares of common stock at the initial public offering price, less
65
<PAGE>
underwriting discounts and commissions, listed on the cover page of this
prospectus. To the extent that the underwriters exercise these options, each
underwriter will have a firm commitment to purchase approximately the same
percentage which the number of shares of common stock to be purchased by it
shown in the above table bears to the total number of shares of common stock
offered by this prospectus.
At our request, the underwriters have reserved up to shares of common
stock to be sold in the offering and offered for sale, at the public offering
price, to our directors, officers, employees, business associates and related
persons. The number of shares of common stock available for sale to the general
public will be reduced to the extent these individuals purchase the reserved
shares. Any reserved shares which are not so purchased will be offered by the
underwriters to the general public on the same basis as the other shares
offered by this prospectus.
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
SmarterKids.com and the selling stockholders have agreed to indemnify the
underwriters against liabilities, including liabilities under the Securities
Act, and to contribute to payments the underwriters may be required to make
with respect to these liabilities.
We anticipate that our directors, officers and our significant stockholders
will agree not to directly or indirectly, without the prior written consent of
Hambrecht & Quist LLC on behalf of the underwriters, whether any such
transaction described above is to be settled by delivery of common stock or
such other securities, in cash or otherwise, during the 180-day period
following the date of this prospectus:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock
(whether any such shares or any such securities are then owned by such
person or are later acquired directly from us); or
. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of
common stock.
We have also agreed that we will not, without the prior written consent of
Hambrecht & Quist LLC, offer or sell any shares of common stock, options or
warrants to acquire shares of our common stock or securities exchangeable for
or convertible into shares of common stock during the 180-day period following
the date of this prospectus.
The restrictions described in the previous paragraphs do not apply to:
. the sale to the underwriters of the shares of common stock under the
underwriting agreement
. the issuance of shares of our common stock upon the exercise of an
option or warrant or the conversion of a security outstanding on the
date of this prospectus or that we are obligated to issue
. transactions by any person other than SmarterKids.com relating to shares
of common stock or other securities acquired in open market transactions
after the completion of the offering of the shares of common stock
. issuance of shares of common stock in connection with acquisitions of
businesses or assets or strategic partnership arrangements, provided
that such shares may not be sold without the prior written consent of
Hambrecht & Quist LLC during the 180-day period following the date of
this prospectus
. issuance of shares of common stock or options to purchase shares of
common stock pursuant to our employee benefit plans as in existence on
the date of the prospectus
66
<PAGE>
The underwriters participating in this offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the common stock at levels above those which might otherwise prevail in the
open market, including by entering stabilizing bids, effecting syndicate
covering transactions or imposing penalty bids. A stabilizing bid means the
placing of any bid or effecting of any purchase, for the purpose of pegging,
fixing or maintaining the price of the common stock. A syndicate covering
transaction means the placing of any bid on behalf of the underwriting
syndicate or the effecting of any purchase to reduce a short position created
in connection with the offering. A penalty bid means an arrangement that
permits the underwriters to reclaim a selling concession from a syndicate
member in connection with the offering when shares of common stock sold by the
syndicate member are purchased in syndicate covering transactions. These
transactions may be effected on the Nasdaq National Market, in the over-the-
counter market or otherwise. Stabilizing, if commenced, may be discontinued at
any time.
The representatives of the underwriters have advised us that the
underwriters do not intend to confirm discretionary sales in excess of five
percent of the shares offered hereby.
E*OFFERING Corp., one of the representatives of the underwriters, was
organized and registered as a broker-dealer on January 12, 1999. Since its
inception, E*OFFERING Corp. has been named as a lead or co-manager of 10 filed
public offerings of equity securities and has acted as a syndicate member in an
additional 14 public offerings of equity securities. E*OFFERING Corp. does not
have any material relationship with us or any of our officers, directors or
controlling persons, except with respect to its contractual relationship with
us under the underwriting agreement entered into in connection with this
offering.
Prior to the offering, there has been no public market for the common stock.
The initial public offering price for the common stock will be determined by
negotiation among SmarterKids.com, the selling stockholders and the
representatives of the underwriters. The factors that will be considered in
determining the initial public offering price are prevailing market and
economic conditions, our revenues and earnings, market valuations of other
companies engaged in activities similar to us, estimates of our business
potential and prospects, the present state of our business operations, our
management and other factors deemed relevant. The estimated initial public
offering price range on the cover of this preliminary prospectus is subject to
change as a result of market conditions or other factors.
67
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock to be issued in this offering
will be passed upon for SmarterKids.com by Testa, Hurwitz & Thibeault, LLP,
Boston, Massachusetts. Certain legal matters in connection with this offering
will be passed upon for the underwriters by Hale and Dorr LLP, Boston,
Massachusetts.
EXPERTS
The financial statements of SmarterKids.com, Inc. as of December 31, 1997
and 1998 and for each of the three years in the period ended December 31, 1998
included in this prospectus have been so included in reliance upon the report
of PricewaterhouseCoopers LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act registering the common stock to be sold in this offering. As
permitted by the rules and regulations of the SEC, this prospectus omits
certain information contained in the registration statement and the exhibits
and schedules filed as a part of the registration statement. For further
information concerning us and the common stock to be sold in this offering, you
should refer to the registration statement and to the exhibits and schedules
filed as part of the registration statement. Statements contained in this
prospectus regarding the contents of any agreement or other document filed as
an exhibit to the registration statement are not necessarily complete, and in
each instance reference is made to the copy of the agreement filed as an
exhibit to the registration statement each statement being qualified by this
reference. The registration statement, including the exhibits and schedules
filed as a part of the registration statement, may be inspected at the public
reference facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at its regional offices located
at Seven World Trade Center, New York, New York 10007 and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, and copies of all or any part
thereof may be obtained from such offices upon payment of the prescribed fees.
You may call the SEC at 1-800-SEC-0330 for further information on the operation
of the public reference rooms, and you can request copies of the documents upon
payment of a duplicating fee by writing to the SEC. In addition, the SEC
maintains a website that contains reports, proxy and information statements and
other information regarding registrants (including us) that file electronically
with the SEC which can be accessed at http://www.sec.gov.
68
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants......................................... F-2
Balance Sheet as of December 31, 1997 and 1998, as of June 30, 1999
(unaudited) and pro forma as of June 30, 1999 (unaudited)................ F-3
Statement of Operations for the years ended December 31, 1996, 1997 and
1998 and for the six months ended June 30, 1998 and 1999 (unaudited)..... F-4
Statement of Stockholders' Equity (Deficit) for the years ended December
31, 1996, 1997 and 1998 and for the six months ended June 30, 1999
(unaudited).............................................................. F-5
Statement of Cash Flows for the years ended December 31, 1996, 1997 and
1998 and for the six months ended June 30, 1998 and 1999 (unaudited)..... F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of SmarterKids.com, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of stockholders' equity (deficit), and of cash flows present
fairly, in all material respects, the financial position of SmarterKids.com,
Inc. at December 31, 1998 and 1997 and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998,
in conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
September 9, 1999
F-2
<PAGE>
SMARTERKIDS.COM, INC.
BALANCE SHEET
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31, Pro forma
---------------- June 30, June 30,
1997 1998 1999 1999
------- ------- -------- ---------
(unaudited)
ASSETS (Note 2)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.............. $ 293 $ 4,273 $ 687 $ 687
Accounts receivable, net of allowance
for doubtful accounts of $28, $27 and
$27 at December 31, 1997 and 1998 and
June 30, 1999 (unaudited),
respectively.......................... 567 915 311 311
Inventories............................ 154 104 241 241
Other current assets................... 28 153 398 398
------- ------- -------- --------
Total current assets................. 1,042 5,445 1,637 1,637
Property and equipment, net.............. 77 44 70 70
Other assets............................. 26 15 52 52
------- ------- -------- --------
Total assets......................... $ 1,145 $ 5,504 $ 1,759 $ 1,759
======= ======= ======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt...... $ 30 $ -- $ -- $ --
Current portion of capital lease
obligations........................... 44 41 17 17
Accounts payable....................... 312 833 3,641 3,641
Accrued expenses....................... 305 787 1,077 1,077
Sales returns allowances............... 241 718 507 507
------- ------- -------- --------
Total current liabilities............ 932 2,379 5,242 5,242
Capital lease obligations................ 41 -- -- --
------- ------- -------- --------
Total liabilities.................... 973 2,379 5,242 5,242
------- ------- -------- --------
Commitments and contingencies (Notes 12
and 13)................................. -- -- -- --
Redeemable preferred stock:
Series B redeemable convertible
preferred stock, $0.01 par value;
3,518 shares authorized; 380, 3,518
and 3,518 shares issued and
outstanding at December 31, 1997 and
1998 and June 30, 1999 (unaudited),
respectively; no shares authorized,
issued and outstanding at June 30,
1999 on a pro forma basis
(unaudited)........................... 760 7,036 7,036 --
Series A convertible preferred stock,
$0.01 par value; 687 shares
authorized, issued and outstanding at
December 31, 1997 and 1998 and June
30, 1999 (unaudited), respectively; no
shares authorized, issued and
outstanding at June 30, 1999 on a pro
forma basis (unaudited)............... 3,251 3,251 3,251 --
------- ------- -------- --------
Total redeemable preferred stock 4,011 10,287 10,287 --
------- ------- -------- --------
Stockholders' equity (deficit):
Common stock, $0.01 par value;
10,000,000 shares authorized;
1,001,833, 1,085,673, 1,170,131 and
5,374,631 shares issued and
outstanding at December 31, 1997 and
1998, June 30, 1999 (unaudited) and
June 30, 1999 on a pro forma basis
(unaudited), respectively............. 10 11 12 54
Additional paid-in capial.............. 886 2,535 4,042 14,287
Deferred stock compensation............ (58) (1,435) (2,256) (2,256)
Accumulated deficit.................... (4,677) (8,273) (15,568) (15,568)
------- ------- -------- --------
Total stockholders' equity
(deficit)........................... (3,839) (7,162) (13,770) (3,483)
------- ------- -------- --------
Total liabilities, redeemable
preferred stock and stockholders'
equity (deficit).................... $ 1,145 $ 5,504 $ 1,759 $ 1,759
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
SMARTERKIDS.COM, INC.
STATEMENT OF OPERATIONS
(In thousands, except per share and share data)
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net revenues:
Online retail......... $ -- $ -- $ 22 $ -- $ 387
Proprietary CD-ROM.... 1,240 1,416 2,278 1,152 --
--------- --------- --------- --------- ---------
Total net revenues.. 1,240 1,416 2,300 1,152 387
--------- --------- --------- --------- ---------
Cost of revenues:
Online retail......... -- -- 20 -- 279
Proprietary CD-ROM.... 407 491 908 401 --
--------- --------- --------- --------- ---------
Total cost of
revenues........... 407 491 928 401 279
--------- --------- --------- --------- ---------
Gross profit............ 833 925 1,372 751 108
--------- --------- --------- --------- ---------
Operating expenses:
Marketing and sales .. 1,033 756 2,678 846 5,713
Development........... 887 721 1,378 529 763
General and
administrative....... 611 430 490 213 399
Stock compensation.... 2 15 187 19 580
--------- --------- --------- --------- ---------
Total operating
expenses........... 2,533 1,922 4,733 1,607 7,455
--------- --------- --------- --------- ---------
Loss from operations.... (1,700) (997) (3,361) (856) (7,347)
Interest income......... 48 3 41 2 59
Interest expense........ (10) (15) (18) (14) (2)
Other income (expense).. 13 (5) (4) (3) (5)
--------- --------- --------- --------- ---------
Net loss................ (1,649) (1,014) (3,342) (871) (7,295)
Accretion of redeemable
preferred stock........ -- (67) (254) (62) --
--------- --------- --------- --------- ---------
Net loss attributable to
common stockholders.... $ (1,649) $ (1,081) $ (3,596) $ (933) $ (7,295)
========= ========= ========= ========= =========
Basic and diluted net
loss per common share.. $ (1.65) $ (1.08) $ (3.52) $ (0.93) $ (6.64)
Weighted average shares
used in computing basic
and diluted net loss
per common share....... 1,000,404 1,001,432 1,022,349 1,005,071 1,097,932
Unaudited pro forma
basic and diluted net
loss per common share.. $ (0.64) $ (1.38)
Weighted average shares
used in computing
unaudited pro forma
basic and diluted net
loss per common share.. 5,227,349 5,302,932
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
SMARTERKIDS.COM, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except share data)
<TABLE>
<CAPTION>
Total
Common Stock Additional Deferred Stockholders'
---------------- Paid-In Stock Accumulated Equity
Shares Amount Capital Compensation Deficit (Deficit)
--------- ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... 1,000,000 $10 $ 793 $ -- $ (1,947) $ (1,144)
Issuance of common
stock pursuant to
exercise of stock
options............... 1,250 -- --
Issuance of stock
options to
consultants........... 2 2
Net loss............... (1,649) (1,649)
--------- --- ------ ------- -------- --------
Balance at December 31,
1996................... 1,001,250 10 795 -- (3,596) (2,791)
Issuance of common
stock pursuant to
exercise of stock
options............... 583 -- --
Accretion of redeemable
preferred stock
related to issuance
costs................. 18 (67) (49)
Issuance of stock
options to
consultants........... 11 11
Deferred stock
compensation related
to employee stock
option grants......... 62 (62) --
Amortization of
deferred stock
compensation.......... 4 4
Net loss............... (1,014) (1,014)
--------- --- ------ ------- -------- --------
Balance at December 31,
1997................... 1,001,833 10 886 (58) (4,677) (3,839)
Issuance of common
stock pursuant to
exercise of stock
options............... 83,840 1 9 10
Accretion of redeemable
preferred stock
related to issuance
costs................. 69 (254) (185)
Issuance of warrants
for amendment of debt
agreement............. 7 7
Issuance and
revaluation of stock
options and warrants
to consultants........ 106 106
Deferred stock
compensation related
to employee stock
option grants......... 1,458 (1,458) --
Amortization of
deferred stock
compensation.......... 81 81
Net loss............... (3,342) (3,342)
--------- --- ------ ------- -------- --------
Balance at December 31,
1998................... 1,085,673 11 2,535 (1,435) (8,273) (7,162)
Issuance of common
stock pursuant to
exercise of options
(unaudited)........... 84,458 1 106 107
Issuance and
revaluation of stock
options and warrants
to consultants
(unaudited)........... 216 216
Deferred stock
compensation related
to stock option and
warrant grants
(unaudited)........... 1,185 (1,185) --
Amortization of
deferred stock
compensation
(unaudited)........... 364 364
Net loss (unaudited)... (7,295) (7,295)
--------- --- ------ ------- -------- --------
Balance at June 30, 1999
(unaudited)............ 1,170,131 $12 $4,042 $(2,256) $(15,568) $(13,770)
========= === ====== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
SMARTERKIDS.COM, INC.
STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
December 31, June 30,
------------------------- --------------
1996 1997 1998 1998 1999
------- ------- ------- ----- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Increase (Decrease) in Cash
Cash flows from operating
activities:
Net loss............................ $(1,649) $(1,014) $(3,342) $(871) $(7,295)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization....... 71 60 66 34 14
Compensation expense related to
stock option and warrant grants.... 2 15 187 19 580
Debt issue costs.................... -- -- 7 7 --
Changes in assets and liabilities:
Accounts receivable................. (315) (22) (348) (142) 604
Inventories......................... (90) (1) 50 (28) (137)
Other current assets................ (13) (14) (125) (17) (245)
Other assets........................ 12 (17) 11 (85) (37)
Accounts payable.................... 140 (16) 521 (102) 2,808
Accrued expenses.................... 93 54 482 230 290
Sales returns allowances............ (62) 8 477 343 (211)
------- ------- ------- ----- -------
Net cash used in operating
activities......................... (1,811) (947) (2,014) (612) (3,629)
------- ------- ------- ----- -------
Cash flows from investing
activities:
Purchases of property and
equipment.......................... (63) (18) (33) (13) (40)
(Deposit) release of restricted
cash............................... (199) 199 -- -- --
------- ------- ------- ----- -------
Net cash provided by (used in)
investing activities............... (262) 181 (33) (13) (40)
------- ------- ------- ----- -------
Cash flows from financing
activities:
Proceeds from sale-leaseback of
property and equipment............. -- 112 -- -- --
Repayments of long-term debt and
capital lease obligations.......... (5) (196) (74) (39) (24)
Proceeds from issuance of Series B
redeemable preferred stock, net of
issuance costs..................... -- 710 6,091 1,215 --
Proceeds from exercise of common
stock options...................... -- -- 10 1 107
Proceeds from long-term debt........ 204 -- -- -- --
------- ------- ------- ----- -------
Net cash provided by financing
activities......................... 199 626 6,027 1,177 83
------- ------- ------- ----- -------
Net increase (decrease) in cash and
cash equivalents................... (1,874) (140) 3,980 552 (3,586)
Cash and cash equivalents at
beginning of period................ 2,307 433 293 293 4,273
------- ------- ------- ----- -------
Cash and cash equivalents at end of
period............................. $ 433 $ 293 $ 4,273 $ 845 $ 687
======= ======= ======= ===== =======
Supplemental disclosure of cash flow
information:
Cash paid during the year for
interest........................... $ 11 $ 15 $ 11 $ 7 $ 2
Supplemental disclosure of noncash
investing and financing activities:
Capital lease obligations incurred
for property and equipment......... $ -- $ 112 $ -- $ -- $ --
Issuance of warrants to purchase
common stock in exchange for
services related to Series B
redeemable preferred stock
offering........................... -- 18 69 -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
SMARTERKIDS.COM, INC.
NOTES TO FINANCIAL STATEMENTS
1. Formation and Operations of the Company:
SmarterKids.com, Inc. (the "Company") is a leading online retailer focused
on children's educational books, toys and games, and software. Prior to 1999,
the Company was engaged in developing, marketing and selling proprietary
educational and entertainment software. The Company primarily sold its products
to national distributors and its principal market was the domestic consumer
market. In March 1998, the Company commenced development of the SmarterKids.com
website. In November 1998, the Company launched the SmarterKids.com website and
transitioned its business model to sell third-party educational products online
and discontinued its efforts to develop and sell proprietary CD-ROM products
through conventional retail channels. The Company was incorporated in Delaware
on March 28, 1994 and changed its name to Virtual Knowledge, Inc. effective
August 4, 1997. Effective September 1998, the Company changed its name to
SmarterKids.com, Inc.
2. Summary of Significant Accounting Policies:
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The Company
invested its excess cash primarily in money market funds at major financial
institutions in 1997 and 1998. These investments are subject to minimal credit
and market risks. At December 1997 and 1998, the Company classified its cash
equivalent investments, totaling $201,000 and $4,251,000, respectively, as
available for sale. The carrying amount in the financial statements
approximates fair value because of the short maturity and holding period of
these instruments.
Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, long-term debt and capital lease
obligations. The carrying amounts of these instruments at December 31, 1997 and
1998 approximate their fair values.
Inventories
Inventories of proprietary CD-ROM products are stated at the lower of cost
or market, cost being determined on a first-in, first-out basis. All inventory
consists of finished goods.
Property and Equipment
Property and equipment assets are recorded at cost and depreciated using the
straight-line method over their estimated useful lives, generally three years.
Concentrations of Credit Risk and Significant Customers
At December 31, 1997 and 1998, accounts receivable from the Company's three
largest customers, all of which are distributors of the Company's proprietary
CD-ROM products, accounted for 80% and 96%, respectively, of total amounts due
to the Company. Management believes its credit policies are prudent and reflect
normal industry terms and business risk. The Company does not anticipate non-
performance by the counterparties and, accordingly, does not require
collateral.
Sales to three customers accounted for 34%, 30% and 21% of the Company's
total net revenue in 1996. Sales to four customers accounted for 16%, 14%, 16%
and 25% of the Company's total net revenue in 1997. Sales to two customers
accounted for 40% and 35% of the Company's total net revenue in 1998.
F-7
<PAGE>
SMARTERKIDS.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Concentrations of Vendor and Distributor Risk
The Company outsourced manufacturing of its proprietary CD-ROM products to
two vendors. As of December 31, 1998 and into 1999, the Company had only
limited product manufacturing. Also, the Company outsources distribution of its
products to one vendor. Although this creates a concentration in sources of
supply and distribution, management believes that other distributors are
available to provide similar products and services on comparable terms. A
failure of or change in the Company's distributor, however, could cause a delay
in the fulfillment of orders and a possible loss of sales, which would
adversely affect operating results.
Revenue Recognition
The Company recognizes revenue from product sales, net of any discounts and
allowances made for estimated product returns, when the products are shipped to
customers, provided that no significant Company obligations remain and
collection of the receivable is probable. Outbound shipping and handling
charges billed to customers are included in net revenues.
Cost of Revenues
Cost of revenues consist of the cost of merchandise sold to customers and
the Company's shipping costs.
Marketing and Sales Expenses
Marketing and sales expenses consist primarily of advertising and
promotional expenditures, as well as payroll and related costs for personnel
engaged in marketing and sales. Fulfillment costs related to online retail
products, including the outsourced cost of operating and staffing distribution
centers and customer service, are also included in marketing and sales
expenses. Advertising costs are charged to operations when the advertisement is
initially placed. Advertising expenses for 1996, 1997 and 1998 were $406,000,
$276,000 and $1,154,000, respectively.
Development Expenses
Costs incurred in the development of the Company's proprietary CD-ROM
products through the establishment of technological feasibility, as defined by
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed," are
expensed as incurred. Development costs incurred thereafter and until the
products are first available for release have not been material and, therefore,
have not been capitalized. Development expenses also includes payroll and
related costs for personnel engaged in website design, development and testing.
General and Administrative Expenses
General and administrative expenses consist of payroll and related costs for
executive and administrative personnel, as well as costs for professional fees
and other general corporate expenses.
Stock Compensation
Stock options issued to employees and members of the Company's Board of
Directors are accounted for in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to
F-8
<PAGE>
SMARTERKIDS.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Employees" ("APB 25") and related interpretations; accordingly, compensation
expense is recorded for options awarded to employees and directors to the
extent that the exercise prices are less than the common stock's fair market
value on the date of grant, where the number of options and exercise price are
fixed. The difference between the fair value of the Company's common stock and
the exercise price of the stock option is recorded as deferred stock
compensation. Deferred stock compensation is amortized to compensation expense
over the vesting period of the underlying stock option. The Company follows the
disclosure requirements of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") (Note 9). All
stock-based awards to non-employees are accounted for at their fair value in
accordance with SFAS No. 123.
Net loss per common share -- Historical
The Company computes net loss per common share in accordance with SFAS No.
128, "Earnings Per Share," ("SFAS 128") and SEC Staff Accounting Bulletin No.
98 ("SAB 98"). Under the provisions of SFAS 128 and SAB 98, basic net loss per
common share is computed by dividing net loss attributable to common
stockholders by the weighted average number of common shares outstanding. The
calculation of diluted net loss per common share for the years ended December
31, 1996, 1997 and 1998 does not include 815,400, 1,031,567 and 1,850,094
potential shares of common stock equivalents, respectively, as their inclusion
would be antidilutive.
Net loss per common share -- Pro Forma (Unaudited)
Pro forma net loss per common share is calculated assuming the automatic
conversion of all preferred stock outstanding at December 31, 1998 and June 30,
1999, which converts automatically into 4,204,500 shares of common stock upon
the completion of the Company's initial public offering (Note 6). Therefore,
accretion of redeemable preferred stock is excluded from the calculation of pro
forma net loss per common share. The calculation of pro forma net loss per
common share for the year ended December 31, 1998 and the six months ended June
30, 1999 does not include 1,754,394 and 2,086,394 potential shares of common
stock equivalents, respectively, as their inclusion would be antidilutive.
Unaudited Interim Financial Statements
The financial statements and related notes as of June 30, 1999 and for the
six months ended June 30, 1998 and 1999 are unaudited. In the opinion of the
Company's management, the June 30, 1998 and 1999 unaudited interim financial
statements include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial position and
results of operations for these interim periods. The results of operations for
the six months ended June 30, 1999 are not necessarily indicative of the
results of operations for the year ended December 31, 1999 or any other future
period.
Unaudited Pro Forma Balance Sheet
Under the terms of the Company's convertible preferred stock (Note 6), all
of such preferred stock will be converted automatically into shares of common
stock prior to the closing of an initial public offering of common stock with
an offering price of at least $10.00 per share and proceeds to the Company of
at least $15,000,000, or upon the vote of the holders of a majority of the
outstanding shares of preferred stock. The unaudited pro forma balance sheet
reflects the conversion of each share of Series A and Series B preferred stock
into 1,000 shares of common stock as if the conversion had occurred on June 30,
1999.
F-9
<PAGE>
SMARTERKIDS.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Segment Reporting
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS 131"). This statement requires companies to report information about
operating segments consistent with management's internal view of the Company.
The Company adopted SFAS 131 effective for its fiscal year ended December 31,
1998. The Company operates in a single segment: retail domestic software and
other product sales. The Company has no organizational structure dictated by
product lines, geography or customer type.
Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Comprehensive Income" ("SFAS
130"). SFAS 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Adoption of SFAS 130 did not impact the Company's
financial statements as the Company had no items of other comprehensive income
during the three year period ended December 31, 1998 or the six months ended
June 30, 1998 and 1999.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosures of contingent liabilities at the period end, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Recent Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AICPA") issued Statement of
Position No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides guidance regarding
when software developed or obtained for internal use should be capitalized. SOP
98-1 is effective for fiscal years beginning after December 15, 1998. The
adoption of SOP 98-1 in the six months ended June 30, 1999 did not have a
material impact on the Company's financial position or results of operations.
In April 1998, the AICPA issued Statement of Position No. 98-5, "Reporting
on Costs of Start-up Activities" ("SOP 98-5"), which requires all costs
associated with pre-opening, pre-operating and organization activities to be
expensed as incurred. The adoption of SOP 98-5 in the six months ended June 30,
1999 did not have a material impact on the Company's financial position or
results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging
activities. SFAS 133, as amended by SFAS 137, is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000, with earlier
application encouraged. The Company does not currently nor does it intend in
the foreseeable future to use derivative instruments and, therefore, does not
expect that adoption of SFAS 133 will have any impact on its financial position
or results of operations.
In December 1998, the AICPA issued Statement of Position No. 98-9,
"Modification of SOP No 97-2, Software Revenue Recognition, with Respect to
Certain Transactions" ("SOP 98-9"). SOP 98-9 amends SOP 97-2 to require
recognition of revenue using the "residual method" in circumstances outlined in
SOP 98-9.
F-10
<PAGE>
SMARTERKIDS.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Under the residual method, revenue is recognized as follows: (1) the total fair
value of undelivered elements, as indicated by vendor specific objective
evidence, is deferred and subsequently recognized in accordance with the
relevant sections of SOP 97-2 and (2) the difference between the total
arrangement fee and the amount deferred for the undelivered elements is
recognized as revenue related to the delivered elements. SOP 98-9 is effective
for transactions entered into in fiscal years beginning after March 15, 1999.
Also, the provisions of SOP 97-2 that were deferred by SOP 98-4 will continue
to be deferred until the date SOP 98-9 becomes effective. The Company does not
expect that the adoption of SOP 98-9 will have a significant impact on the
Company's results of operations or financial position.
3.Allowances for Doubtful Accounts and Sales Returns:
Allowances for doubtful accounts and sales returns consist of the following
(in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year...................... $ 309 $ 262 $ 269
Additions:
Charged against revenues or expense............. 98 237 601
Deductions:
Write-offs and returns.......................... (145) (230) (125)
------- ------- -------
Balance at end of year............................ $ 262 $ 269 $ 745
======= ======= =======
</TABLE>
4.Property and Equipment:
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------
1997 1998
------ ------
<S> <C> <C>
Software...................................................... $ 18 $ 28
Furniture and fixtures........................................ 1 5
Computer and office equipment................................. 214 233
------ ------
233 266
Less--Accumulated depreciation and amortization............... 156 222
------ ------
$ 77 $ 44
====== ======
</TABLE>
Furniture and fixtures and computer and office equipment includes $214,000
at December 31, 1997 and 1998 related to assets held under capital leases.
Accumulated depreciation related to assets held under these leases was $152,000
and $214,000 at December 31, 1997 and 1998, respectively. Depreciation and
amortization expense for the years ended December 31, 1996, 1997 and 1998 was
approximately $71,000, $60,000 and $66,000, respectively.
F-11
<PAGE>
SMARTERKIDS.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. Accrued Expenses:
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------
1997 1998
------ ------
<S> <C> <C>
Marketing...................................................... $ 57 $ 268
Commissions.................................................... 63 94
Professional fees.............................................. 123 172
Advertising.................................................... -- 159
Other.......................................................... 62 94
------ ------
$ 305 $ 787
====== ======
</TABLE>
6. Preferred Stock:
In October 1995, the Company authorized 10,000 shares of preferred stock and
designated 687 preferred shares as Series A convertible preferred stock (the
"Series A preferred"). The Company sold 634 shares of Series A preferred to an
entity affiliated with a common stockholder and member of the Board of
Directors of the Company for net proceeds of $3,000,000. In addition, 53 shares
of Series A preferred were issued in connection with the conversion of a
$240,000 note payable, plus accrued interest of $11,000, due to the same common
stockholder.
In 1997, the Company designated and sold 380 shares of Series B redeemable
convertible preferred stock (the "Series B preferred") for net proceeds of
$710,000. Included in this offering, the Company sold 125 shares of the Series
B preferred for net proceeds of $234,000 to an entity with which the Company
subsequently entered a marketing and licensing agreement. The Company also
entered into a stock purchase agreement with this entity allowing for the
purchase of preferred stock having a conversion value of 250,000 common shares,
at the same terms as the Series B preferred. The option expired unexercised in
July 1998. As payment for certain costs associated with the issuance of the
Series B preferred, the Company issued warrants to purchase 44,000 shares of
common stock (Note 8).
In 1998, the Company issued an additional 3,138 shares of the Series B
preferred for net proceeds of $6,091,000. As payment for certain costs
associated with the issuance of the Series B preferred, the Company issued
warrants to purchase 36,700 shares of common stock (Note 8).
The Series A and Series B preferred have the following characteristics:
Voting
Holders of Series A and Series B preferred are entitled to the number of
votes equal to the number of common shares into which the shares of preferred
stock are convertible.
Dividends
Holders of Series A and Series B preferred are entitled to receive dividends
when and if declared by the Board of Directors.
Liquidation Preference
In the event of any liquidation, dissolution or winding-up of the affairs of
the Company, (including via merger or acqusition) the holders of Series A and
Series B preferred are entitled to receive, on a pro rata basis, prior to and
in preference to holders of common stock, an amount equal to the greater of (i)
$4,732
F-12
<PAGE>
SMARTERKIDS.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
and $2,000 per share, respectively, plus any declared but unpaid dividends or
(ii) such amount per share as would have been payable had each preferred share
been converted to common stock immediately prior to such liquidation,
dissolution or winding-up. Because this preference applies to mergers and
acquisitions, the Company has classified its Series A preferred as redeemable
preferred stock on its balance sheet.
Conversion
Each Series A and Series B preferred share may be converted at any time, at
the option of the stockholder, into 1,000 shares of common stock, subject to
certain anti-dilution adjustments.
The Series A and Series B preferred is automatically converted into 1,000
shares of common stock upon the closing of an initial public offering in which
proceeds to the Company equal or exceed $15,000,000 and in which the price to
the public is at least $10.00 per common share.
Redemption
The Series B preferred is redeemable on or after October 31, 2003 over a
three-year period at the option of the holders at a redemption price of $2,000
per share plus any declared but unpaid dividends. Redemption amounts for Series
B preferred stock, excluding any declared but unpaid dividends, are as follows:
<TABLE>
<CAPTION>
Series B
Cumulative Redemption
Year Percentage Amount
---- ---------- --------------
(in thousands)
<S> <C> <C>
2003............................................... 33% $2,343
2004............................................... 50% 1,175
2005............................................... 100% 3,518
------
$7,036
======
</TABLE>
7. Common Stock:
As of December 31, 1998, the Company had reserved 6,806,027 shares of common
stock for issuance upon conversion of the Series A and Series B preferred (Note
6) and upon exercise of warrants (Note 8) and common stock options (Note 9).
8. Warrants:
In 1997 and 1998, in connection with issuance of the Series B preferred
(Note 6), the Company issued warrants to purchase a total of 44,000 and 36,700
shares, respectively, of the Company's common stock with an exercise price of
$0.20 per share. These warrants were exercisable immediately and expire at the
earlier of a change in control of the Company, completion of an initial public
offering, or five years from the date of grant. The fair values ascribed to
these warrants at the time of issuance were estimated by management to be
$18,000 and $69,000 for 1997 and 1998, respectively. The values of these
warrants were recorded as a decrease to accumulated deficit and an increase to
additional paid-in capital.
In March 1998, in connection with an amended debt agreement, the Company
granted warrants to purchase 5 shares of Series B preferred with an exercise
price of $2,000 per share. These warrants were exercisable immediately and
expire in five years. The fair value ascribed to these warrants was $7,000 and
was recorded as interest expense in 1998. Upon completion of an initial public
offering, there warrants will convert into warrants to purchase 5,000 shares of
common stock at an exercise price of $2.00 per share.
F-13
<PAGE>
SMARTERKIDS.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
In September 1998, the Company issued warrants to its distribution partner
to purchase 38,000 shares of the Company's common stock with an exercise price
of $2.00 per share. Of these warrants 10,000 vested immediately. An additional
28,000 warrants vest in increments of 7,000 on each of March 1, 1999, October
1, 1999, March 1, 2000 and October 1, 2000, providing that the parties maintain
an on-going relationship. These warrants expire in five years. The fair value
ascribed to these warrants was $51,000 which was recorded as compensation
expense in 1998. The unvested warrants were remeasured at June 30, 1999 and the
Company recorded additional deferred stock compensation of $58,000 and
amortized to stock compensation expense of $8,000 in the six months ended June
30, 1999 (unaudited).
In December 1998, the Company granted warrants to a consultant to purchase
15,000 shares of the Company's common stock with an exercise price of $2.00 per
share. These warrants were exercisable immediately and expire at the earlier of
a change in control of the Company, completion of an initial public offering,
or five years from the date of grant. The fair value ascribed to these warrants
at the time of issuance was $22,000 and was recorded as compensation expense in
1998.
(Unaudited)--In March 1999, the Company issued warrants to an affiliated
party to purchase 75,000 shares of the Company's common stock with an exercise
price of $2.00 per share. These warrants vest upon the attainment of certain
performance targets and expire in five years. The value of these warrants will
be determined upon the attainment of these performance goals based on their
fair value. Related compensation expense of $216,000 was recorded in the six
months ended June 30, 1999.
(Unaudited)--In July 1999, in connection with the issuance of Series C
redeemable convertible preferred stock (Note 13), the Company issued warrants
to purchase 113,027 shares of the Company's Series C preferred stock with an
exercise price of $6.27 per share. These warrants were exercisable immediately
and expire at the earlier of a change in control of the Company, completion of
an initial public offering, or four years from the date of grant. The value
ascribed to these warrants was $515,000 based on the fair value on the date of
issuance and will be recorded in the issuance period as a decrease to
accumulated deficit and an increase to additional paid-in capital.
A summary of the status of stock warrant activity as of December 1996, 1997
and 1998 and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
Weighted-
Number of Average
Shares Exercise Price
--------- --------------
<S> <C> <C>
Outstanding--December 31, 1995..................... -- --
Granted (weighted average fair value of $0.00)... -- --
Exercised........................................ -- --
Forfeited........................................ -- --
-------
Outstanding--December 31, 1996..................... -- --
Granted (weighted average fair value of $0.42)... 44,000 $0.20
Exercised........................................ -- --
Forfeited........................................ -- --
-------
Outstanding--December 31, 1997..................... 44,000 0.20
Granted (weighted average fair value of $1.45)... 94,700 1.30
Exercised........................................ -- --
Forfeited........................................ -- --
-------
Outstanding--December 31, 1998..................... 138,700 $0.95
=======
</TABLE>
F-14
<PAGE>
SMARTERKIDS.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The fair value of each warrant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions for the three
years ended December 31, 1998: 0% dividend yield, 90% volatility, risk-free
interest rates of 6.2%, 6.1% and 5.0% for 1996, 1997 and 1998, respectively;
and an expected term of five years.
9. Stock Option Plan:
In 1995, the Company adopted the 1995 Stock Plan (the "Plan"). The Plan
provides for issuance of incentive stock options to employees of the Company
and nonqualified stock options, awards of stock, and direct stock purchase
opportunities to directors, officers, employees and consultants of the Company.
The Board of Directors determines the term of each option, option price, number
of shares for which each option is granted and the rate at which each option is
exercisable. The total number of shares which may be issued under the Plan is
2,548,000. For holders of 10% or more of the Company's outstanding common
stock, options may not be granted at less than 110% of the fair market value of
the common stock at the date of grant and the option term may not exceed five
years. The option term for nonqualified stock options may not exceed ten years
from the date of grant.
The Company recorded deferred stock compensation of $62,000 and $1,500,000
in 1997 and 1998, respectively, related to employee stock option grants. The
Company recognized $4,000 and $81,000 in non-cash stock compensation expense
related to amortization of deferred stock compensation on employee stock option
grants during 1997 and 1998, respectively.
During 1996, 1997 and 1998, the Company granted nonqualified stock options
under the Plan to non-employees, for services performed, to purchase 126,000,
20,000 and 3,500 shares of common stock, respectively. Accordingly, the Company
recorded stock compensation expense of $2,000, $11,000 and $33,000 in 1996,
1997 and 1998, respectively. Such amounts were determined under the Black-
Scholes model based on the fair value of the options granted, including
adjustments for revaluation at each period-end for unvested options.
A summary of the status of the Plan as of December 31, 1996, 1997 and 1998
and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
Weighted-
Average
Number of Exercise
Shares Price
--------- ---------
<S> <C> <C>
Outstanding--December 31, 1995.......................... 657,400 $0.64
Granted (weighted average fair value of $0.03)........ 309,500 0.13
Exercised............................................. (1,250) 0.04
Forfeited............................................. (150,250) 0.09
---------
Outstanding--December 31, 1996.......................... 815,400 0.55
Granted (weighted average fair value of $0.22)........ 375,000 0.20
Exercised............................................. (583) 0.15
Forfeited............................................. (202,250) 2.03
---------
Outstanding--December 31, 1997.......................... 987,567 0.11
Granted (weighted average fair value of $1.83)........ 825,500 0.21
Exercised............................................. (83,840) 0.12
Forfeited............................................. (17,833) 0.19
---------
Outstanding--December 31, 1998.......................... 1,711,394 $0.11
=========
</TABLE>
F-15
<PAGE>
SMARTERKIDS.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Weighted-
Average
Remaining
Contractual Number
Exercise Number Life of Shares
Price of Shares (years) Exercisable
-------- --------- ----------- -----------
<S> <C> <C> <C>
$0.02--$0.04 441,560 6.7 438,185
$0.10--$0.20 905,334 8.8 190,032
$0.22--$0.50 364,500 9.9 4,500
--------- -------
1,711,394 632,717
========= =======
</TABLE>
In March 1997, the Company's Board of Directors determined that because
certain options held by an employee of the Company had an exercise price
significantly higher than the fair value of the Company's common stock, such
options were not providing the incentive intended. Accordingly, options to
purchase 134,000 shares of common stock with an exercise price of $3.00 per
share were cancelled and reissued at a price of $0.20 per share. The exercise
price of the reissued options equaled the fair market value of the Company's
common stock on the date of repricing.
Stock compensation expense has been recognized for options granted under
the Plan pursuant to APB No. 25. Had stock compensation cost been determined
based on the fair value of the options at the grant date consistent with the
provisions of SFAS No. 123, the Company's net loss attributable to common
stockholders would have been increased to the pro forma amounts indicated
below. Because options vest over several years and additional option grants
are expected to be made in future years, the pro forma results for 1996, 1997
and 1998 are not representative of pro forma results for future years.
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1996 1997 1998
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Net loss attributable to common stockholders:
As reported.................................... $(1,649) $(1,081) $(3,596)
Pro forma...................................... (1,654) (1,086) (3,621)
Net loss per common share:
As reported.................................... $ (1.65) $ (1.08) $ (3.52)
Pro forma...................................... (1.65) (1.08) (3.54)
</TABLE>
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions
for grants in 1996, 1997 and 1998: no dividend yield; no volatility; risk-free
interest rates of 6.2%, 6.1% and 5.0%, respectively, and expected option terms
of five years.
(Unaudited)--During the six months ended June 30, 1999, stock options to
purchase 274,000 and 50,000 shares of common stock were granted to employees
with exercise prices of $0.20 and $2.00 per share, respectively. These
exercise prices were below the estimated fair market value of the Company's
common stock at the date of grant. Deferred stock compensation of $985,000 was
recorded in accordance with APB No. 25, and will be amortized over the related
vesting periods ranging from immediate vesting to four years. Related stock
compensation expense of $331,000 was recorded during the six months ended June
30, 1999.
F-16
<PAGE>
SMARTERKIDS.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Unaudited)--During the six months ended June 30, 1999, the Company granted
nonqualified stock options to non-employees for services performed to purchase
29,500 shares of common stock. Accordingly, the Company recorded additional
deferred stock compensation expense of $175,000 in the six months ended June
30, 1999 related to non-employee option grants. Such amounts were determined
under the Black-Scholes model based on the fair value of the options granted,
including adjustments for revaluation at each period end of unvested options
granted previously to non-employees. The Company recognized $25,000 in stock
compensation expense related to amortization of deferred stock compensation on
non-employee option grants during the six months ended June 30, 1999.
10. Income Taxes:
Deferred tax assets consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------
1997 1998
------ ------
<S> <C> <C>
Net operating loss carryforwards............................. $1,229 $2,261
Research and development credit carryforwards................ 55 90
Other........................................................ 172 485
------ ------
Deferred tax assets......................................... 1,456 2,836
Deferred tax asset valuation allowance....................... (1,456) (2,836)
------ ------
$ -- $ --
====== ======
</TABLE>
The Company has provided a valuation allowance for the full amount of the
net deferred tax asset at December 31, 1997 and 1998 since the realization of
these future benefits is not sufficiently assured. At December 31, 1998,
available net operating loss carryforwards for federal and state tax purposes
were $5,615,000, which expire through 2018. At December 31, 1998, the Company
has research and development tax credit carryforwards of approximately $60,000
and $45,000 available to reduce future federal and state tax liabilities,
respectively, which expire through 2018.
Under the provisions of the Internal Revenue Code, certain substantial
changes in the Company's ownership could result in an annual limitation of the
amount of net operating loss carryforwards and research and development credit
carryforwards which can be utilized in future years.
Income taxes computed using the federal statutory income tax rate differ
from the Company's effective tax rate primarily due to the following (in
thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------------
1996 1997 1998
----- ----- -------
<S> <C> <C> <C>
Income tax expense (benefit) at US federal
statutory tax rate................................ $(561) $(345) $(1,136)
State income taxes, net of federal tax effect...... (125) (59) (221)
Permanent items.................................... 19 1 1
Other.............................................. (20) 13 (24)
Change in deferred tax asset valuation allowance... 687 390 1,380
----- ----- -------
Provision for income taxes......................... $ -- $ -- $ --
===== ===== =======
</TABLE>
F-17
<PAGE>
SMARTERKIDS.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
11. Defined Contribution Plan:
In January 1996, the Company adopted a defined contribution plan under
Section 401(k) of the Internal Revenue Code covering substantially all
employees. Under the plan, employees may contribute the lower of up to 15% of
their salaries or a dollar amount prescribed by the Internal Revenue Code. The
Board of Directors may elect to make a discretionary contribution to the plan.
The Company made no contributions during the years ended December 31, 1996,
1997 and 1998.
12. Commitments:
Leases
The Company leases its facilities and certain computer equipment under
noncancelable operating leases. Rental expense under operating leases for the
years ended December 31, 1996, 1997 and 1998 was $101,000, $101,000 and
$121,000, respectively. In April 1997, the Company entered into an agreement
for the sale and capital leaseback of substantially all of the Company's fixed
assets. Proceeds from the sale were $112,000 and the sale did not result in a
gain or loss. The Company's obligations under capital leases reflect an annual
interest rate of 13% and are secured by most of the Company's fixed assets.
Future minimum lease obligations as of December 31, 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
--------- -------
<S> <C> <C>
Year Ending December 31,
1999..................................................... $171 $44
2000..................................................... 148 --
---- ---
Total minimum lease payments............................... $319 44
====
Less--amount representing interest, imputed at 13%......... 3
---
$41
===
</TABLE>
License Agreements
The Company has entered into agreements with various third parties whereby
the Company is obligated to pay a royalty ranging from 3% to 10% of the
revenues on certain of its software products. Royalty payments in the years
ended December 31, 1996, 1997 and 1998 were not significant.
13. Subsequent Events:
Equity Financing
On July 12, 1999, the Company issued 4,284,091 shares of newly designated
Series C redeemable preferred stock (the "Series C preferred") for net proceeds
of $25,300,000. The Series C preferred has voting, dividends, liquidation and
redemption rights similar to the Series B preferred. The Series C preferred is
convertible into one share of common stock for each issued and outstanding
share upon the date of conversion. In connection with this financing, the
Company issued warrants to purchase 113,027 shares of Series C preferred with
an exercise price of $6.27 per share (Note 8).
F-18
<PAGE>
SMARTERKIDS.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Litigation
On July 15, 1999, a patent infringement suit was filed against the Company.
Specifically, the suit alleges that the SmartPicks technology developed by the
Company in connection with its web-based product line infringes on a patent
held by the plaintiff. This patent purports to disclose and claim a computer
system for matching appropriate educational products with a child's
developmental profile comprising so-called "static and dynamic data." The
complaint seeks temporary and permanent injunctions, as well as unspecified
damages. The hearing for the preliminary injunction motion is scheduled for
November 1999.
During August 1999, the Company incurred legal expenses of $60,000 pursuant
to the above referenced patent litigation. These expenses have been included in
general and administrative expenses in the Company's statement of operations
for the month ended August 31, 1999. Management anticipates that further
material expenditures will be incurred in defense of this case at least through
December 1999. Management believes that the suit is without merit and that the
Company has meritorious defenses based on non-infringement and the invalidity
of the subject patent. However, the action has not progressed sufficiently for
the Company to estimate a range of possible loss, if any, should it not prevail
in its defense related to this action.
The Company is party from time to time to certain other litigation matters
and claims which are normal in the course of its operations and, while the
results of litigation and claims cannot be predicted with certainty, management
believes that the final outcome of such matters will not have a materially
adverse effect on the Company's financial position or results from operations.
1999 Stock Option and Incentive Plan
In September 1999, the Board of Directors voted to terminate the 1995 Stock
Option Plan effective on the consummation of the current initial public
offering. As of June 30, 1999, the Company had outstanding under the 1995 Stock
Option Plan stock options exercisable for 676,591 shares of common stock. The
1999 Stock Option and Incentive Plan provides for the grant of stock-based
awards to employees, officers and directors, and consultants or advisors,
including incentive stock options and non-qualified stock options and other
equity-based awards. A total of 1,333,333 shares of common stock may be issued
upon the exercise of options or other awards granted under the 1999 Stock
Option and Incentive Plan.
1999 Non-Employee Director Stock Option Plan
The 1999 Non-Employee Director Stock Option Plan (the "Director Plan") was
adopted by the Board of Directors and approved by stockholders in September
1999 and will take effect upon completion of the current initial public
offering. The Director Plan provides for the grant of options to purchase a
maximum of 133,333 shares of common stock of the Company to non-employee
directors of the Company. The Director Plan will be administered by a committee
appointed by the Board of Directors. Under the Director Plan, each director who
is not an employee or officer of the Company and who is not a director at the
time of the current initial public offering shall be automatically granted on
the date such person is first elected to the Board of Directors an option to
purchase 30,000 shares of common stock. Each time a non-employee director is
re-elected to the Board, such non-employee director will automatically receive
an option to purchase 1,333 shares of common stock. Provided that the director
continues to serve as a member of the Board of Directors, one-third of the
shares included in each grant will become exercisable on each of the first,
second and third anniversaries of the date of grant. All options granted under
the Director Plan will have an exercise price equal to the fair market value of
the common stock on the date of grant. No options have been granted under the
Director Plan.
F-19
<PAGE>
SMARTERKIDS.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
1999 Employee Stock Purchase Plan
The 1999 Employee Stock Purchase Plan was adopted by the Board of Directors
and approved by stockholders in September 1999 and will take effect upon
completion of the current initial public offering. The 1999 Employee Stock
Purchase Plan provides for the issuance of a maximum of 266,666 shares of
common stock. The 1999 Employee Stock Purchase Plan is administered by the
Board of Directors and the Compensation Committee. All employees whose
customary employment is for more than 20 hours per week and for more than three
months in any calendar year and who have completed more than 90 days of
employment on or before the first day of any six-month payment period are
eligible to participate in the 1999 Employee Stock Purchase Plan. Outside
directors and employees who would own 5% or more of the total combined voting
power or value of the Company's common stock immediately after the grant may
not participate in the 1999 Employee Stock Purchase Plan.
Amended and Restated Certificate of Incorporation
In September 1999, the Board of Directors approved the filing upon the
effectiveness of the registration statement covering this offering of an
Amended and Restated Certificate of Incorporation authorizing 90,000,000 shares
of common stock and 10,000,000 shares of undesignated preferred stock.
F-20
<PAGE>
[FOR E*OFFERING ONLINE PROSPECTUS ONLY]
"MEET THE MANAGEMENT" PRESENTATION FOR
SMARTERKIDS.COM
Prospective investors will be able to log on to a website maintained by
E*OFFERING Corp. at www.eoffering.com, where a prospectus is available for
review. Within designated sections of the prospectus, including [click here for
"Meet the Management" Presentation], embedded hyperlinks will provide exclusive
access to the "Meet the Management" Presentation. This presentation is made in
conjunction with the prospectus and is qualified in its entirety by the written
prospectus, and should be viewed in conjunction with the written prospectus.
Visual 1: Disclaimer
Imagery: Company logo (with disclaimer).
Visual text: The "Meet the Management" Presentation is part of our prospectus.
This presentation is made in conjunction with such prospectus and is qualified
in its entirety by the written prospectus and should be viewed in conjunction
with the written prospectus. Prospective investors should carefully consider
the information set forth under the heading of "Risk Factors" beginning on page
7 of the prospectus.
Script (David Blohm): The "Meet the Management" Presentation is part of our
prospectus. This presentation is made in conjunction with such prospectus and
is qualified in its entirety by the written prospectus and should be viewed in
conjunction with the written prospectus. Prospective investors should carefully
consider the information set forth under the heading of "Risk Factors"
beginning on page 7 of the prospectus.
Visual 2: Introduction
Imagery: Company logo and watermark of children in the background.
Visual Text: "Helping You Help Your Children"
Script (David Blohm) (see "Business--Overview"): Welcome to SmarterKids.com.
I'm David Blohm, President and Chief Executive Officer. I would also like to
introduce Albert Noyes, our Senior Vice President, Marketing and Sales and
Robert Cahill, our Vice President, Finance. We would like to talk with you
about SmarterKids.com, a leading online retailer focused on children's
educational books, toys and games, and software. We provide extensive
educational content and help parents and gift givers find quality products and
make informed purchase decisions tailored to a child's individual developmental
needs and learning goals.
Visual 3: Market Landscape
Imagery: Surrounding border containing three photos of children and the company
logo.
Visual Text: Company logo and bulleted text as follows:
. many parents are taking a more active role in their children's education
. parents are increasingly purchasing educational books, toys and games,
and software
Script (David Blohm) (see "Business--Industry Background"): As a result of a
number of societal trends, including constraints on school budgets and the
increasing use of standardized tests, many parents are taking a more active
role in their children's education. In their efforts to help their children
learn, improve their children's standardized test scores and make learning fun,
parents are increasingly purchasing educational books, toys and games, and
software.
A-1
<PAGE>
[FOR E*OFFERING ONLINE PROSPECTUS ONLY]
Parents are faced with the challenge of finding quality educational products
and selecting the right products for their children. With thousands of
educational products to choose from and few reliable sources of information,
finding the appropriate products for a specific child's needs and goals can be
overwhelming and confusing. Parents seek a resource for comprehensive and
trusted educational content and product information to help them make informed
purchase decisions.
Visual 4: Market Landscape (con't)
Visual Text: The traditional retail channel, including mass-market retailers,
has numerous participants and is highly fragmented. In general, store-based
retailers face a number of challenges in providing a shopping experience that
meets the needs of parents. These include:
. narrow selection of products due to physical space limitations
. high costs from the need to build and operate multiple retail locations
. lack of flexibility in product display and merchandising capabilities
. lack of convenience due to limited hours of operation and geographic
location
. lack of focus on educational products and limited educational expertise
Script (David Blohm) (see "Business--Industry Background"): The traditional
retail channel, including mass-market retailers, has numerous participants and
is highly fragmented. In general, store-based retailers face a number of
challenges in providing a shopping experience that meets the needs of parents.
These include:
. narrow selection of products due to physical space limitations
. high costs from the need to build and operate multiple retail locations
. lack of flexibility in product display and merchandising capabilities
. lack of convenience due to limited hours of operation and geographic
location
. lack of focus on educational products and limited educational expertise
Visual 5: Market Landscape (con't)
Visual Text: Although online retailers have a number of advantages, those that
offer educational products as a component of their product mix have been
limited in a number of ways because they:
. are often not focused on education
. do not offer in-depth evaluations of products
. lack extensive educational and editorial content
. lack the ability to assess an individual child's needs to personalize
the online experience
Script (David Blohm) (see "Business Industry Background"): Although online
retailers have a number of advantages, those that offer educational products as
a component of their product mix have been limited in a number of ways because
they:
. are often not focused on education
. do not offer in-depth evaluations of products
. lack extensive educational and editorial content
. lack the ability to assess an individual child's needs to personalize
the online experience
A-2
<PAGE>
[FOR E*OFFERING ONLINE PROSPECTUS ONLY]
The limitations of traditional and online retailers create a significant
opportunity for an educational resource that combines educational expertise and
assessment tools, a wide range of quality educational products and the power of
the Internet to help parents make informed purchase decisions.
Visual 6: Shopping at SmarterKids.com
Imagery: Screen shot of the SmarterKids.com website with featured promotions
and pictures of various products and content.
Visual Text: Company logo, tool bar, promotions and recommendations and text
describing site functionality and age categories.
Script (David Blohm) (see "Business--The SmarterKids.com Solution"):
SmarterKids.com is a leading online retailer focused on children's educational
books, toys and games, and software. We combine our expertise in children's
education with our sophisticated and proprietary product analysis to help
parents make better purchase decisions. Key features of our solution include:
We have a broad assortment of carefully reviewed and selected educational
products. Our rapidly growing collection of competitively priced educational
products includes over 1,800 books, toys and games, and software titles from
over 300 suppliers. SmarterKids.com has a dedicated team of teachers who
carefully select and then review only those products that meet our high quality
standards and that are fun, educationally relevant and effective in helping
children learn. In our KidsLab, children test and review many of our current
and prospective products. Because we are focused on education, many of our
products, particularly toys and games, are not found on many of the other
popular e-commerce websites.
We have compelling educational content and contextual merchandising. We believe
that SmarterKids.com is an authority on educational products. Our staff of
educational experts develops our content, including educational articles,
parenting advice and product reviews, and we also license educational content
from third parties. Our website integrates content with access to relevant
products. The benefit we provide parents comes, first, in our selection of the
best educational products in the marketplace to offer from our website and
second, by providing extensive online advice and information about specific
products to help parents and gift givers make appropriate selections. For
example, the Smarter Parents Resource Center suggests weekly and monthly
educational activities parents can do with their children and then suggests
products to expand on these activities. Ask the Teacher enables parents to
submit questions to our staff of teachers regarding their child's development
and review archived answers to previous questions.
We have a convenient and easy-to-use website. We integrate carefully selected
products, helpful content and interactive tools, with an intuitive and easy-to-
use interface. We organize our website around age and grade levels, which is
the way parents typically think about the educational development of their
children. We offer full search and browsing capabilities that enable parents to
find products easily. Furthermore, we notify registered parents when we offer
relevant new products or specials. We provide customers the convenience and
flexibility of shopping 24 hours a day, 7 days a week, with dedicated customer
service and reliable and timely product delivery.
Visual 7: Shopping at SmarterKids.com (con't)
Imagery: Screen shot of the SmarterKids.com website with various text boxes
demonstrating the SmarterKids.com proprietary matching technology and including
a link to a child's hypothetical educational profile.
Visual text: Tool bar, text relating to hypothetical educational profile,
including name of child, age, grade level, learning goal and learning style. At
the bottom of the screen are SmartPicks for the child, followed by hyperlinks
that take the user to recommend products based on the results.
A-3
<PAGE>
[FOR E*OFFERING ONLINE PROSPECTUS ONLY]
Script (David Blohm) (see "Business--The SmarterKids.com Solution"): We have
technology that matches products with a child's unique educational profile.
Parents can use our proprietary technology to find products that meet their
child's unique educational needs. The MySmarterKids personalization area allows
parents to build an evolving and confidential educational profile of their
child that can include information about the child's age and grade as well as
learning goals.
Our proprietary SmartPicks technology then uses this developmental profile to
make targeted product recommendations. SmartPicks "reshuffles" our entire store
so that we emphasize those products that our educational experts believe are
appropriate for the individual child's unique needs and individual goals. On
subsequent visits, our website will recognize registered members and display
increasingly relevant products and services. We believe we are the first and
presently the only educational products and services website to offer this
level of personalization.
Now, for a discussion of our strategic and marketing relationships as well as
our competition, I'll turn it over to Albert Noyes, Al...
Visual 8: Strategic and Marketing Relationships
Imagery: Depiction of various logos of customers/strategic relationships
placed.
Visual Text: Names of companies which have formed strategic and marketing
relationships with SmarterKids.com:
. National Computer Systems
. The Lightspan Partnership, Inc.
. J.L. Hammett Co.
. ABC News.com's Homework Help
. LinkShare
. Yahoo! GeoCities
. iVillage
. Microsoft's Encarta
Script (Albert Noyes) (see "Business--Strategic Relationships, and--Strategy"):
Thanks, David. Our strategic relationships primarily increase our visibility,
reinforce our positioning and expand our customer base. Our key strategic
relationships include:
National Computer Systems is the largest processor of standardized tests for
kindergarten through grade 12 in the United States. NCS provides processing and
scoring for over 30 million student assessment tests, such as the Iowa Test of
Basic Skills, in all 50 states and for the U.S. Department of Education. In May
1999, NCS launched its WeHelpKids.com website, offering a variety of electronic
HelpTests and value-added services aimed at providing assessment and
identification of a student's academic strengths and weaknesses. WeHelpKids.com
contains a direct link to our website, which draws parents eager to support and
encourage their children's learning. Using their results from standardized
tests, our SmartPicks system can provide personalized product recommendations.
In addition to promotion of SmarterKids.com on its website, NCS often features
SmarterKids.com in its communications with schools and parents. WeHelpKids.com
has commenced its pilot program in Michigan and plans to add tests and services
for students in other states.
The Lightspan Partnership, Inc. creates and sells curriculum-based educational
CD-ROM software and web programs. It recently launched a monthly subscription
online service that offers customized classroom resource pages for teachers,
students and parents. Our relationship with Lightspan will include a co-branded
store, content sharing and joint marketing activities.
A-4
<PAGE>
[FOR E*OFFERING ONLINE PROSPECTUS ONLY]
J.L. Hammett Co. is a leading national distributor of educational products to
schools and also operates over 70 retail stores. It has supplied educational
products for 136 years. We leverage J.L. Hammett Co.'s experience in
distribution and strong knowledge of educational products to better meet the
needs of our customers. In addition, J.L. Hammett Co. promotes SmarterKids.com
by including our literature in the shipments that it delivers to schools and
with retail transactions.
Also, we plan to increase our brand awareness through a variety of marketing
and promotional techniques to drive traffic to our website. We advertise on
leading parent-oriented websites and have developed a number of key strategic
marketing relationships with online media partners such as iVillage and
Microsoft's Encarta, and affiliate marketing relationships with LinkShare and
Yahoo!'s GeoCities. We complement these web-based efforts with carefully
targeted print, radio, television and direct mail advertising, as well as other
consumer promotional campaigns.
Visual 9: Competition
Imagery: Listing of various industry sectors and companies that provide
competition within the SmarterKids.com retail business line, i.e., educational
products for children.
Visual Text: Bullet points identifying and describing SmarterKids.com
competitors:
Our competitors can be divided into several groups including:
. mass market retail chains, such as Kmart, Target, and Wal-Mart
. mass market book sellers, toy stores and computer hardware and software
stores such as Barnes & Noble, Toys"R"Us and CompUSA
. traditional regional or local bookstores, toy stores and computer and
software stores
. traditional and online specialty educational retailers, such as Learning
Express, Learningsmith, Noodle Kidoodle, Zany Brainy
. online book sellers, toy sellers and computer software sellers such as
Amazon.com, eToys, Kay Bee Toys, toysmart.com and Beyond.com
. educational catalog distributors such as Scholastic
Script (Albert Noyes) (see "Business--Competition"): The markets for books,
toys and games, and software including those for children's educational
products, are very competitive and highly fragmented, with no clear dominant
leader and increasing public and commercial attention. In addition, the
consumer e-commerce industry is new, rapidly evolving and intensely competitive
and we expect competition to intensify in the future.
Our competitors can be divided into several groups including:
. mass market retail chains, such as Kmart, Target, and Wal-Mart
. mass market book sellers, toy stores and computer hardware and software
stores, such as Barnes & Noble, Toys"R"Us and CompUSA
. traditional regional or local bookstores, toy stores and computer and
software stores
. traditional and online specialty educational retailers, such as Learning
Express, Learningsmith, Noodle Kidoodle, Zany Brainy
. online book sellers, toy sellers and computer software sellers, such as
Amazon.com, eToys, Kay Bee Toys, toysmart.com and Beyond.com, and
. educational catalog distributors, such as Scholastic
A-5
<PAGE>
[FOR E*OFFERING ONLINE PROSPECTUS ONLY]
We believe that the principal competitive factors in our market are:
. brand recognition and trust
. ability to attract and retain consumers
. breadth of product selection
. product pricing
. availability of educational and authoritative information
. quality and responsiveness of customer service
And with that, I will turn it over to Bob for a discussion of our quarterly
financial results. Bob...
Visual 10: Historical Financials
Imagery: Selected Quarterly Results of Operations (March 31, 1998-June 30,
1999).
Visual Text: "Selected Quarterly Results of Operations" table.
Script (Robert Cahill) (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations-- Selected Quarterly Results of
Operations"): Thanks, Al. The following table sets forth selected unaudited
statement of operations data for the six quarters in the period ended June 30,
1999 both in dollar amounts and as a percentage of total net revenues. This
data was derived from our unaudited financial statements that, in our opinion,
reflect all adjustments, consisting of only normal recurring adjustments,
necessary for a fair presentation of this quarterly information. This data
should be read in conjunction with our "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the audited financial
statements and related notes included elsewhere in the prospectus.
Due to the fact that we transitioned to our online business model in November
1998, we believe that period-to-period comparisons prior to 1999 are less
meaningful than an analysis of quarterly results in 1999.
Revenues increased in the quarter ended June 30, 1999 over the quarter ended
March 31, 1999 due primarily to increased consumer awareness of our brand and
increased number of customers.
Cost of revenues increased in the quarter ended June 30, 1999 over the quarter
ended March 31, 1999 primarily due to increased revenues. Gross margins
increased in the quarter ended June 30, 1999 over the previous quarter due to a
more favorable mix of product sales.
Marketing and sales expenses increased in the quarter ended June 30, 1999 over
the quarter ended March 31, 1999 primarily due to increases in promotional and
advertising activities.
Development expenses increased in the quarter ended June 30, 1999 over the
quarter ended March 31, 1999 primarily due to increased headcount and related
expenses.
General and administrative expenses increased in the quarter ended June 30,
1999 over the quarter ended March 31, 1999 primarily due to increased headcount
and related expenses and professional fees.
David...
Visual 11: End of Presentation
Imagery: Company logo and watermark of children in the background
Visual Text: Helping You Help Your Children (the text is part of company logo)
Script (David Blohm): We hope that this presentation was helpful in
understanding the business model of SmarterKids.com and the strategy that our
management team intends to execute. We encourage you to refer back to the
prospectus for additional support and disclosure as well as to take a look at
the "risk factors" in detail. Again, thank you for your interest in
SmarterKids.com.
A-6
<PAGE>
[ALTERNATIVE PAGE 3 FOR E*OFFERING ONLINE PROSPECTUS]
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
--- ----
<S> <C> <C>
Prospectus Summary................................................ 4
Risk Factors...................................................... 7
Forward-Looking Statements........................................ 21
Use of Proceeds................................................... 21
Dividend Policy................................................... 21
Capitalization.................................................... 22
Dilution.......................................................... 24
Selected Financial Data........................................... 25
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 27
Business.......................................................... 36
Management........................................................ 48
Principal Stockholders............................................ 57
Shares Eligible for Future Sale................................... 59
Certain Transactions.............................................. 61
Description of Securities......................................... 62
Underwriting...................................................... 65
Legal Matters..................................................... 68
Experts........................................................... 68
Where You Can Find More Information............................... 68
Index to Financial Statements..................................... F-1
Appendix: "Meet the Management" Presenation....................... A-1
[click here for "Meet the Management" Presentation]
</TABLE>
----------------
We maintain a World Wide Web site at www.smarterkids.com. Information
contained on our website does not constitute part of this prospectus.
SmarterKids.com, SmarterKids, MySmarterKids and SmartPicks are trademarks of
SmarterKids.com, Inc. All other brand names or trademarks appearing in this
prospectus are the property of their respective holders.
A-7
<PAGE>
EDUCATIONAL PRODUCTS MEET E-COMMERCE
At SmarterKids.com, we sell a wide range of educational books and software, toys
and games online that encourage learning, creativity, social skills and a sense
of accomplishment.
[PICTURE OF TEACHER WITH CHILD]
To Shop, click on the appropriate Age/Grade Area
[PICTURE OF AGE/GRADE GROUPS USED BY COMPANY TO ORGANIZE PRODUCTS]
TEACHER REVIEWED EDUCATIONAL PRODUCTS
We only sell products that meet our high standards for quality, content and fun.
All products are evaluated by our team of experienced teachers and childhood
development specialists.
[PICTURE OF SELECTED PRODUCTS]
[COMPANY LOGO]
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Shares
(LOGO)
Common Stock
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PROSPECTUS
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Hambrecht & Quist
U.S. Bancorp Piper Jaffray
E*OFFERING
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, 1999
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You should rely only on information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
No action is being taken in any jurisdiction outside the United States to
permit a public offering of the common stock or possession or distribution of
this prospectus in any such jurisdiction. Persons who come into possession of
this prospectus in jurisdictions outside the United States are required to
inform themselves about and to observe any restrictions as to this offering and
the distribution of this prospectus applicable to that jurisdiction.
Until , 1999, all dealers that buy, sell or trade in the common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
Estimated expenses, other than underwriting discounts and commissions,
payable by us in connection with the sale of the common stock being registered
under this registration statement are as follows:
<TABLE>
<S> <C>
SEC registration fee............................................. $16,680
NASD filing fee.................................................. 6,500
Nasdaq National Market listing fee............................... 75,625
Printing and engraving expenses.................................. *
Legal fees and expenses.......................................... *
Accounting fees and expenses..................................... *
Transfer agent and registrar fees and expenses................... *
Miscellaneous.................................................... *
-------
Total.......................................................... $ *
=======
</TABLE>
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* To be filed by amendment.
Item 14. Indemnification of Directors and Officers.
The Delaware General Corporation Law and our charter and by-laws provide for
indemnification of our directors and officers for liabilities and expenses that
they may incur in such capacities. In general, directors and officers are
indemnified with respect to actions taken in good faith in a manner reasonably
believed to be in, or not opposed to, our best interests and, with respect to
any criminal action or proceeding, actions that the indemnitee had no
reasonable cause to believe were unlawful. Reference is made to our charter and
bylaws filed as Exhibits 3.2 and 3.3 to this registration statement,
respectively.
The underwriting agreement provides that the underwriters are obligated,
under certain circumstances, to indemnify our directors, officers and
controlling persons against certain liabilities, including liabilities under
the Securities Act. Reference is made to the form of underwriting agreement
filed as Exhibit 1.1 to this registration statement.
In addition, we intend to apply for directors and officers liability
insurance policy.
Item 15. Recent Sales of Unregistered Securities.
In the three years preceding the filing of this registration statement, we
have issued the following securities that were not registered under the
Securities Act:
(a) Issuances of Capital Stock.
Between May 15, 1997 and November 6, 1998, we issued and sold an aggregate
of 3,518 shares of Series B Preferred Stock in a private financing for an
aggregate price of $7,036,000.
On July 12, 1999, we issued and sold an aggregate of 4,284,091 shares of
series C preferred stock to 10 institutional investors and to 5 individual
investors in a private financing for an aggregate price of $26,856,966.53.
With the exception of the sales of securities in July 1999, no underwriters
were used in the foregoing transactions. All sales of securities described
above were made in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act for transactions by an issuer not involving
a public offering.
II-1
<PAGE>
(b) Issuances of Warrants.
On December 31, 1997 and November 6, 1998, we issued warrants to Edu
Ventures, Inc. to purchase 44,000 and 36,700 shares of common stock,
respectively, each at an exercise price of $.20. On December 31, 1998 and
September 1, 1999, we issued warrants to Edu Ventures, Inc. to purchase 15,000
and 10,000 shares of common stock, respectively, each at an exercise price of
$2.00. These warrants expire immediately prior to the offering.
On March 8, 1999, we issued a warrant to National Computer Systems, Inc. to
purchase 75,000 shares of common stock at an exercise price of $2.00. The
issuance of shares pursuant to this warrant depends on the achievement of
specific milestones.
On March 25, 1998, we issued a warrant to Silicon Valley Bank for five
shares of series B preferred stock at an exercise price of $2,000 per share
that will expire on March 24, 2003.
On September 29, 1998, we issued a warrant to J.L. Hammett Co. to purchase
38,000 shares of common stock at an exercise price of $2.00 that will expire on
September 29, 2003. On September 7, 1999, we issued an additional 72,000 shares
of common stock at an exercise price of $2.00 that will expire on September 7,
2004
On July, 12, 1999, we issued a warrant to Thomas Weisel Partners LLC for
113,027 shares of series C preferred stock at an exercise price of $6.269. This
warrant expires immediately prior to this offering.
(c) Grants and Exercises of Stock Options.
Since June 30, 1996, we have granted stock options to purchase 1,641,600
shares of common stock with exercise prices ranging from $0.20 to $6.27 per
share, to employees, directors and consultants pursuant to our 1995 Stock Plan.
Of these options, 132,666 have been exercised for a weighted average exercise
price of $0.88 as of September 7, 1999. The issuance of common stock upon
exercise of the options was exempt either pursuant to Rule 701, as a
transaction pursuant to a compensatory benefit plan, or pursuant to
Section 4(2), as a transaction by an issuer not involving a public offering.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1 Amended and Restated Certificate of Incorporation, as amended, of
SmarterKids.com currently in effect
3.2 Form of Second Amended and Restated Certificate of Incorporation
of SmarterKids.com to be filed with the Secretary of State of
Delaware and effective upon the effectiveness of the registration
statement
3.3 Form of Amendment to the Second Amended and Restated Certificate
of Incorporation of SmarterKids.com to be filed with the Secretary
of State of Delaware and effective upon the closing of the
offering
3.4 Amended and Restated By-laws of SmarterKids.com currently in
effect
3.5 Form of Second Amended and Restated By-laws of SmarterKids.com to
be effective upon the effectiveness of the offering
4.4* Specimen certificate for shares of SmarterKids.com's common stock
5.1* Legal opinion of Testa, Hurwitz & Thibeault, LLP
10.1 1995 Stock Plan, as amended
10.2 1999 Stock Option and Incentive Plan
10.3 1999 Non-Employee Director Stock Option Plan
10.4 1999 Employee Stock Purchase Plan
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.5 Amended and Restated Investor Rights Agreement dated as of July
12, 1999 by and among SmarterKids.com, certain stockholders of
SmarterKids.com and certain senior management of SmarterKids.com
10.6 Amended and Restated Stockholders Voting Agreement dated as of
July 12, 1999 among SmarterKids.com, certain stockholders of
SmarterKids.com and certain senior management of SmarterKids.com
10.7 Lease Agreement dated as of September 1, 1998 between
SmarterKids.com and McFarland FLP
10.8*+ Contract for Services and Term Sheet dated September 29, 1998
between SmarterKids.com and J.L. Hammett Co.
10.9 Letter Agreement dated November 6, 1998 between SmarterKids.com
and Jeff Pucci
10.10 Letter Agreement dated November 6, 1998 between SmarterKids.com
and Richard Viard
11.1 Statement re: Computation of Per Share Earnings (This exhibit has
been omitted because the information is shown in the financial
statements or notes thereto.)
23.1* Consent of Testa, Hurwitz & Thibeault, LLP (contained in Exhibit
5.1)
23.2 Consent of PricewaterhouseCoopers LLP
24.1 Power of Attorney (contained on page II-4)
27.1 Financial Data Schedule (This exhibit has been omitted because the
information is shown in the financial statements or notes
thereto.)
</TABLE>
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* To be filed by amendment.
+ Confidential materials to be omitted and filed separately with the SEC.
(b) Financial Statement Schedules.
No financial statement schedules for which provision is made in the
applicable accounting regulations of the SEC are included here since the
required information is disclosed in the notes to the financial statements or
the schedules are inapplicable and therefore have been omitted.
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14 above, or otherwise,
the registrant has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser; (2) that for
purposes of determining any liability under the Securities Act, 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; and (3) that for the purpose of determining
any liability under the Securities Act, 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-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, SmarterKids.com,
Inc. has duly caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in Boston, Massachusetts, on
September 9, 1999.
SmarterKids.com, Inc.
By: /s/ David Blohm
----------------------------------
David Blohm
President and Chief Executive
Officer
POWER OF ATTORNEY AND SIGNATURES
The undersigned officers and directors of SmarterKids.com, Inc. hereby
constitute and appoint David Blohm and Robert Cahill, and each of them singly,
with full power of substitution, our true and lawful attorneys-in-fact and
agents to take any actions to enable SmarterKids.com, Inc. to comply with the
Securities Act, and any rules, regulations and requirements of the Securities
and Exchange Commission, in connection with this registration statement,
including the power and authority to sign for us in our names in the capacities
indicated below any and all amendments to this registration statement and any
other registration statement filed pursuant to the provisions of Rule 462 under
the Securities Act.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title(s) Date
--------- -------- ----
<S> <C> <C>
/s/ David Blohm President, Chief Executive September 9, 1999
______________________________________ Officer and Director
David Blohm (principal executive
officer)
/s/ Robert Cahill Vice President, Finance September 9, 1999
______________________________________ (principal financial and
Robert Cahill accounting officer)
/s/ Jeff Pucci Co-Founder, Chairman and September 9, 1999
______________________________________ Director
Jeff Pucci
/s/ Richard D'Amore Director September 9, 1999
______________________________________
Richard D'Amore
/s/ Michael Fitzgerald Director September 9, 1999
______________________________________
Michael Fitzgerald
/s/ Michael Kolowich Director September 9, 1999
______________________________________
Michael Kolowich
/s/ Brian Hickey Director September 9, 1999
______________________________________
Brian Hickey
</TABLE>
II-4
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1 Amended and Restated Certificate of Incorporation, as amended, of
SmarterKids.com currently in effect
3.2 Form of Second Amended and Restated Certificate of Incorporation
of SmarterKids.com to be filed with the Secretary of State of
Delaware and effective upon the effectiveness of the registration
statement
3.3 Form of Amendment to the Second Amended and Restated Certificate
of Incorporation of SmarterKids.com to be filed with the Secretary
of State of Delaware and effective upon the closing of the
offering
3.4 Amended and Restated By-laws of SmarterKids.com currently in
effect
3.5 Form of Second Amended and Restated By-laws of SmarterKids.com to
be effective upon the effectiveness of the offering
4.4* Specimen certificate for shares of SmarterKids.com's common stock
5.1* Legal opinion of Testa, Hurwitz & Thibeault, LLP
10.1 1995 Stock Plan, as amended
10.2 1999 Stock Option and Incentive Plan
10.3 1999 Non-Employee Director Stock Option Plan
10.4 1999 Employee Stock Purchase Plan
10.5 Amended and Restated Investor Rights Agreement dated as of July
12, 1999 by and among SmarterKids.com, certain stockholders of
SmarterKids.com and certain senior management of SmarterKids.com
10.6 Amended and Restated Stockholders Voting Agreement dated as of
July 12, 1999 among SmarterKids.com, certain stockholders of
SmarterKids.com and certain senior management of SmarterKids.com
10.7 Lease Agreement dated as of September 1, 1998 between
SmarterKids.com and McFarland FLP
10.8*+ Contract for Services and Term Sheet dated September 29, 1998
between SmarterKids.com and J.L. Hammett Co.
10.9 Letter Agreement dated November 6, 1998 between SmarterKids.com
and Jeff Pucci
10.10 Letter Agreement dated November 6, 1998 between SmarterKids.com
and Richard Viard
11.1 Statement re: Computation of Per Share Earnings (This exhibit has
been omitted because the information is shown in the financial
statements or notes thereto.)
23.1* Consent of Testa, Hurwitz & Thibeault, LLP (contained in Exhibit
5.1)
23.2 Consent of PricewaterhouseCoopers LLP
24.1 Power of Attorney (contained on page II-4)
27.1 Financial Data Schedule (This exhibit has been omitted because the
information is shown in the financial statement or notes thereto.)
</TABLE>
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* To be filed by amendment.
+ Confidential materials to be omitted and filed separately with the SEC.
<PAGE>
EXHIBIT 3.1
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AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
VIRTUAL ENTERTAINMENT, INC.
* * * * * *
We, the undersigned, the President and Secretary, respectively, of Virtual
Entertainment, Inc. (the "Corporation"), hereby certify:
1. The name of the Corporation is Virtual Entertainment, Inc.
2. The Certificate of Incorporation of the Corporation was filed with the
Secretary of State of Delaware on March 28, 1994.
3. The Certificate of Incorporation of the Corporation is hereby amended by
amending Articles 1 through 10 as set forth in the Restated Certificate of
Incorporation hereinafter provided for.
4. The provisions of the Certificate of Incorporation, as herein amended, are
hereby restated and integrated into the single instrument which is
hereinafter set forth, and which is entitled the Restated Certificate of
Incorporation of Virtual Entertainment, Inc.
5. The amendment and the restatement of the Certificate of Incorporation have
been authorized by a majority of the outstanding shares entitled to vote
thereon pursuant to a written consent of stockholders executed on or as of
October 30, 1995 in accordance with Sections 228, 242 and 245 of the General
Corporation Law of the State of Delaware.
6. The Certificate of Incorporation of the Corporation, as amended and restated
herein, shall, upon the effective date of this Restated Certificate of
Incorporation, read as follows:
FIRST. The name of the corporation is Virtual Entertainment, Inc. (the
"Corporation").
SECOND. The address of the registered office of the Corporation in the State
of Delaware is 1209 Orange Street, in the City of Wilmington, New Castle County,
Delaware 19801. The name of its registered agent at such address is The
Corporation Trust Company.
THIRD. The nature of the business or purposes to be conducted or promoted
by the Corporation is to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of the State of
Delaware.
FOURTH. The total number of shares of all classes of capital stock which
the Corporation shall have authority to issue is 10,010,000 shares, consisting
of 10,000,000 shares of Common Stock with a par value of $.01 per share (the
"Common Stock") and 10,000 shares of Preferred Stock with a par value of $.01
per share (the "Preferred Stock"), of which 687 shares have been designated
"Series A Convertible Preferred Stock" and the balance of which may be
designated from time to time by additional amendments hereto.
A description of the respective classes of stock and a statement of the
designations, preferences, voting powers (or no voting powers), relative,
participating, optional or other special rights and privileges and the
qualifications, limitations and restrictions of the Common Stock and Series A
Convertible Preferred Stock are as follows:
A. SERIES A CONVERTIBLE PREFERRED STOCK
<PAGE>
1. Number of Shares. The series of Preferred Stock designated and known
as "Series A Convertible Preferred Stock" shall consist of 687 shares.
2. Voting.
2A. General. Except as may be otherwise provided in these terms of
the Series A Convertible Preferred Stock or by law, the Series A Convertible
Preferred Stock shall vote together with all other classes and series of stock
of the Corporation as a single class on all actions to be taken by the
stockholders of the Corporation. Each share of Series A Convertible Preferred
Stock shall entitle the holder thereof to such number of votes per share on each
such action as shall equal the number of shares of Common Stock (including
fractions of a share) into which each share of Series A Convertible Preferred
Stock is then convertible.
2B. Board Size. The Corporation shall not, without the written
consent or affirmative vote of the holders of at least two-thirds of the then
outstanding shares of Series A Convertible Preferred Stock, given in writing or
by vote at a meeting, consenting or voting (as the case may be) separately as a
series, increase the maximum number of directors constituting the Board of
Directors to a number in excess of nine.
3. Dividends. The holders of the Series A Convertible Preferred Stock
shall be entitled to receive, out of funds legally available therefor, when and
if declared by the Board of Directors, quarterly dividends at the rate per annum
of $387.56 per share (the "Accruing Dividends"). Accruing Dividends shall accrue
from day to day, whether or not earned or declared, and shall be cumulative.
4. Liquidation. Upon any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the holders of the shares of
Series A Convertible Preferred Stock shall be entitled, before any distribution
or payment is made upon any stock ranking on liquidation junior to the Series A
Convertible Preferred Stock, to be paid an amount equal to the greater of (i)
$4,732.00 per share plus, in the case of each share, an amount equal to all
Accruing Dividends unpaid thereon (whether or not declared) and any other
dividends declared but unpaid thereon, computed to the date payment thereof is
made available, or (ii) such amount per share as would have been payable had
each such share been converted to Common Stock pursuant to paragraph 6
immediately prior to such liquidation, dissolution or winding up, and the
holders of Series A Convertible Preferred Stock shall not be entitled to any
further payment, such amount payable with respect to one share of Series A
Convertible Preferred Stock being sometimes referred to as the "Liquidation
Preference Payment" and with respect to all shares of Series A Convertible
Preferred Stock being sometimes referred to as the "Liquidation Preference
Payments". If upon such liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the assets to be distributed
among the holders of Series A Convertible Preferred Stock shall be insufficient
to permit payment to the holders of Series A Convertible Preferred Stock of the
amount distributable as aforesaid, then the entire assets of the Corporation to
be so distributed shall be distributed ratably among the holders of Series A
Convertible Preferred Stock. Upon any such liquidation, dissolution or winding
up of the Corporation, after the holders of Series A Convertible Preferred Stock
shall have been paid in full the amounts to which they shall be entitled, the
remaining net assets of the Corporation may be distributed to the holders of
stock ranking on liquidation junior to the Series A Convertible Preferred Stock.
Written notice of such liquidation, dissolution or winding up, stating a payment
date, the amount of the Liquidation Preference Payments and the place where said
Liquidation Preference Payments shall be payable, shall be delivered in person,
mailed by certified or registered mail, return receipt requested, or sent by
telecopier or telex, not less than 20 days prior to the payment date stated
therein, to the holders of record of Series A Convertible Preferred Stock, such
notice to be addressed to each such holder at its address as shown by the
records of the Corporation. The consolidation or merger of the Corporation into
or with any other entity or entities which results in the exchange of
outstanding shares of the Corporation for securities or other consideration
issued or paid or caused to be issued or paid by any such entity or affiliate
thereof (other than a merger to reincorporate the Corporation in a different
jurisdiction), and the sale, lease, abandonment, transfer or other disposition
by the Corporation of all or substantially all its assets, shall be deemed to be
a liquidation, dissolution or winding up of the Corporation within the meaning
of the provisions of this paragraph 4. For purposes hereof, the Common Stock
shall rank on liquidation junior to the Series A Convertible Preferred Stock.
<PAGE>
5. Conversions. The holders of shares of Series A Convertible Preferred
Stock shall have the following conversion rights:
5A. Right to Convert. Subject to the terms and conditions of this
paragraph 5, the holder of any share or shares of Series A Convertible Preferred
Stock shall have the right, at its option at any time, to convert any such whole
or fractional shares of Series A Convertible Preferred Stock (except that upon
any liquidation of the Corporation the right of conversion shall terminate at
the close of business on the business day fixed for payment of the amount
distributable on the Series A Convertible Preferred Stock) into such number of
fully paid and nonassessable shares of Common Stock (initially 1,000 shares of
Common Stock for each share of Series A Convertible Preferred Stock) as is
obtained by (i) multiplying the number of shares of Series A Convertible
Preferred Stock so to be converted by $4,732,000 and (ii) dividing the result by
the conversion price of $4,732.00 per share or, in case an adjustment of such
price has taken place pursuant to the further provisions of this paragraph 5,
then by the conversion price as last adjusted and in effect at the date any
share or shares of Series A Convertible Preferred Stock are surrendered for
conversion (such price, or such price as last adjusted, being referred to as the
"Conversion Price"). Such rights of conversion shall be exercised by the holder
thereof by giving written notice that the holder elects to convert a stated
number of shares of Series A Convertible Preferred Stock into Common Stock and
by surrender of a certificate or certificates for the shares so to be converted
to the Corporation at its principal office (or such other office or agency of
the Corporation as the Corporation may designate by notice in writing to the
holders of the Series A Convertible Preferred Stock) at any time during its
usual business hours on the date set forth in such notice, together with a
statement of the name or names (with address) in which the certificate or
certificates for shares of Common Stock shall be issued.
5B. Issuance of Certificates; Time Conversion Effected. Promptly
after the receipt of the written notice referred to in subparagraph 5A and
surrender of the certificate or certificates for the share or shares of Series A
Convertible Preferred Stock to be converted, the Corporation shall issue and
deliver, or cause to be issued and delivered, to the holder, registered in such
name or names as such holder may direct, a certificate or certificates for the
number of whole shares of Common Stock issuable upon the conversion of such
share or shares of Series A Convertible Preferred Stock. To the extent permitted
by law, such conversion shall be deemed to have been effected and the Conversion
Price shall be determined as of the close of business on the date on which such
written notice shall have been received by the Corporation and the certificate
or certificates for such share or shares shall have been surrendered as
aforesaid, and at such time the rights of the holder of such share or shares of
Series A Convertible Preferred Stock shall cease, and the person or persons in
whose name or names any certificate or certificates for shares of Common Stock
shall be issuable upon such conversion shall be deemed to have become the holder
or holders of record of the shares represented thereby.
5C. Fractional Shares; Dividends; Partial Conversion. No fractional
shares shall be issued upon conversion of Series A Convertible Preferred Stock
into Common Stock and no payment or adjustment shall be made upon any conversion
on account of any cash dividends on the Common Stock issued upon such
conversion. At the time of each conversion, the Corporation shall pay in cash an
amount equal to all dividends, excluding Accruing Dividends, accrued and unpaid
on the shares of Series A Convertible Preferred Stock surrendered for conversion
to the date upon which such conversion is deemed to take place as provided in
subparagraph 5B. In case the number of shares of Series A Convertible Preferred
Stock represented by the certificate or certificates surrendered pursuant to
subparagraph 5A exceeds the number of shares converted, the Corporation shall,
upon such conversion, execute and deliver to the holder, at the expense of the
Corporation, a new certificate or certificates for the number of shares of
Series A Convertible Preferred Stock represented by the certificate or
certificates surrendered which are not to be converted. If any fractional share
of Common Stock would, except for the provisions of the first sentence of this
subparagraph 5C, be delivered upon such conversion, the Corporation, in lieu of
delivering such fractional share, shall pay to the holder surrendering the
Series A Convertible Preferred Stock for conversion an amount in cash equal to
the current market price of such fractional share as determined in good faith by
the Board of Directors of the Corporation.
5D. Subdivision or Combination of Common Stock. In case the
Corporation shall at any time subdivide (by any stock split, stock dividend or
otherwise) its outstanding shares of Common
<PAGE>
Stock into a greater number of shares, the Conversion Price in effect
immediately prior to such subdivision shall be proportionately reduced, and,
conversely, in case the outstanding shares of Common Stock shall be combined
into a smaller number of shares, the Conversion Price in effect immediately
prior to such combination shall be proportionately increased.
5E. Reorganization or Reclassification. If any capital
reorganization or reclassification of the capital stock of the Corporation shall
be effected in such a way that holders of Common Stock shall be entitled to
receive stock, securities or assets with respect to or in exchange for Common
Stock, then, as a condition of such reorganization or reclassification, lawful
and adequate provisions shall be made whereby each holder of a share or shares
of Series A Convertible Preferred Stock shall thereupon have the right to
receive, upon the basis and upon the terms and conditions specified herein and
in lieu of the shares of Common Stock immediately theretofore receivable upon
the conversion of such share or shares of Series A Convertible Preferred Stock,
such shares of stock, securities or assets as may be issued or payable with
respect to or in exchange for a number of outstanding shares of such Common
Stock equal to the number of shares of such Common Stock immediately theretofore
receivable upon such conversion had such reorganization or reclassification not
taken place, and in any such case appropriate provisions shall be made with
respect to the rights and interests of such holder to the end that the
provisions hereof (including without limitation provisions for adjustments of
the Conversion Price) shall thereafter be applicable, as nearly as may be, in
relation to any shares of stock, securities or assets thereafter deliverable
upon the exercise of such conversion rights.
5F. Notice of Adjustment. Upon any adjustment of the Conversion
Price, then and in each such case the Corporation shall give written notice
thereof, by delivery in person, certified or registered mail, return receipt
requested, telecopier or telex, addressed to each holder of shares of Series A
Convertible Preferred Stock at the address of such holder as shown on the books
of the Corporation, which notice shall state the Conversion Price resulting from
such adjustment, setting forth in reasonable detail the method upon which such
calculation is based.
5G. Other Notices. In case at any time:
(1) the Corporation shall declare any dividend upon its Common Stock
payable in cash or stock or make any other distribution to the holders of its
Common Stock;
(2) the Corporation shall offer for subscription pro rata to the
holders of its Common Stock any additional shares of stock of any class or
other rights;
(3) there shall be any capital reorganization or reclassification of
the capital stock of the Corporation, or a consolidation or merger of the
Corporation with or into another entity or entities, or a sale, lease,
abandonment, transfer or other disposition of all or substantially all its
assets; or
(4) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;
then, in any one or more of said cases, the Corporation shall give, by delivery
in person, certified or registered mail, return receipt requested, telecopier or
telex, addressed to each holder of any shares of Series A Convertible Preferred
Stock at the address of such holder as shown on the books of the Corporation,
(a) at least 20 days' prior written notice of the date on which the books of the
Corporation shall close or a record shall be taken for such dividend,
distribution or subscription rights or for determining rights to vote in respect
of any such reorganization, reclassification, consolidation, merger,
disposition, dissolution, liquidation or winding up and (b) in the case of any
such reorganization, reclassification, consolidation, merger, disposition,
dissolution, liquidation or winding up, at least 20 days' prior written notice
of the date when the same shall take place. Such notice in accordance with the
foregoing clause (a) shall also specify, in the case of any such dividend,
distribution or subscription rights, the date on which the holders of Common
Stock shall be entitled thereto and such notice in accordance with the foregoing
clause (b) shall also specify the date on which the holders of Common Stock
shall be entitled to exchange their Common Stock for securities or other
property deliverable upon such
<PAGE>
reorganization, reclassification, consolidation, merger, disposition,
dissolution, liquidation or winding up, as the case may be.
5H. Stock to be Reserved. The Corporation will at all times reserve
and keep available out of its authorized Common Stock, solely for the purpose of
issuance upon the conversion of Series A Convertible Preferred Stock as herein
provided, such number of shares of Common Stock as shall then be issuable upon
the conversion of all outstanding shares of Series A Convertible Preferred
Stock. The Corporation covenants that all shares of Common Stock which shall be
so issued shall be duly and validly issued and fully paid and nonassessable and
free from all taxes, liens and charges with respect to the issue thereof, and,
without limiting the generality of the foregoing, the Corporation covenants that
it will from time to time take all such action as may be requisite to assure
that the par value per share of the Common Stock is at all times equal to or
less than the Conversion Price in effect at the time. The Corporation will take
all such action as may be necessary to assure that all such shares of Common
Stock may be so issued without violation of any applicable law or regulation, or
of any requirement of any national securities exchange upon which the Common
Stock may be listed. The Corporation will not take any action which results in
any adjustment of the Conversion Price if the total number of shares of Common
Stock issued and issuable after such action upon conversion of the Series A
Convertible Preferred Stock would exceed the total number of shares of Common
Stock then authorized by the Restated Certificate of Incorporation.
5I. No Reissuance of Series A Convertible Preferred Stock. Shares of
Series A Convertible Preferred Stock which are converted into shares of Common
Stock as provided herein shall not be reissued.
5J. Issue Tax. The issuance of certificates for shares of Common
Stock upon conversion of Series A Convertible Preferred Stock shall be made
without charge to the holders thereof for any issuance tax in respect thereof,
provided that the Corporation shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than that of the holder of the Series A Convertible
Preferred Stock which is being converted.
5K. Closing of Books. The Corporation will at no time close its
transfer books against the transfer of any Series A Convertible Preferred Stock
or of any shares of Common Stock issued or issuable upon the conversion of any
shares of Series A Convertible Preferred Stock in any manner which interferes
with the timely conversion of such Series A Convertible Preferred Stock, except
as may otherwise be required to comply with applicable securities laws.
5L. Definition of Common Stock. As used in this paragraph 5, the
term "Common Stock" shall mean and include the Corporation's authorized Common
Stock, par value $.01 per share, as constituted herein and shall also include
any capital stock of any class of the Corporation thereafter authorized which
shall not be limited to a fixed sum or percentage in respect of the rights of
the holders thereof to participate in dividends or in the distribution of assets
upon the voluntary or involuntary liquidation, dissolution or winding up of the
Corporation; provided that the shares of Common Stock receivable upon conversion
of shares of Series A Convertible Preferred Stock shall include only shares
designated as Common Stock of the Corporation on the date of filing of this
instrument, or in case of any reorganization or reclassification of the
outstanding shares thereof, the stock, securities or assets provided for in
subparagraph 5F.
5M. Mandatory Conversion. If at any time the Corporation shall
effect a firm commitment underwritten public offering of shares of Common Stock
in which (i) the aggregate price paid for such shares by the public shall be at
least $5,000,000 and (ii) the price paid by the public for such shares shall be
at least $6.92 per share (appropriately adjusted to reflect the occurrence of
any event described in subparagraph 5E), then effective upon the closing of the
sale of such shares by the Corporation pursuant to such public offering, all
outstanding shares of Series A Convertible Preferred Stock shall automatically
convert to shares of Common Stock on the basis set forth in this paragraph 5.
Holders of shares of Series A Convertible Preferred Stock so converted may
deliver to the Corporation at its principal office (or such other office or
agency of the Corporation as the Corporation may designate by notice in writing
to such holders) during its usual business hours, the certificate or
certificates for the shares so converted. As
<PAGE>
promptly as practicable thereafter, the Corporation shall issue and deliver to
such holder a certificate or certificates for the number of whole shares of
Common Stock to which such holder is entitled, together with any cash dividends
and payment in lieu of fractional shares to which such holder may be entitled
pursuant to subparagraph 5C. Until such time as a holder of shares of Series A
Convertible Preferred Stock shall surrender his or its certificates therefor as
provided above, such certificates shall be deemed to represent the shares of
Common Stock to which such holder shall be entitled upon the surrender thereof.
B. COMMON STOCK
1. Relative Rights of Preferred Stock and Common Stock. All
preferences, voting powers, relative, participating, optional or other special
rights and privileges, and qualifications, limitations, or restrictions of the
Common Stock are expressly made subject and subordinated to those that may be
fixed with respect to any shares of the Preferred Stock.
2. Voting Rights. Except as otherwise required by law or this
Certificate of Incorporation, each holder of Common Stock shall have one vote in
respect of each shares of stock held by him of record on the books of the
Corporation for the election of directors and on all matters submitted to a vote
of stockholders of the Corporation. The number of authorized shares of Common
Stock may be increased or decreased (but not below the number of shares then
outstanding) by the affirmative vote of the holders of a majority of the
outstanding shares of capital stock of the Corporation, with each such share
being entitled to such number of votes per shares as is provided in this Article
FOURTH.
3. Dividends. Subject to the preferential rights of the Preferred
Stock, if any, the holders of shares of Common Stock shall be entitled to
receive, when and if declared by the Board of Directors, out of the assets of
the Corporation which are by law available therefor, dividends payable either in
cash, in property or in shares of capital stock.
4. Dissolution, Liquidation or Winding Up. In the event of any
dissolution, liquidation or winding up of the affairs of the Corporation, after
distribution in full of the preferential amounts, if any, to be distributed to
the holders of shares of the Preferred Stock, holders of Common Stock shall be
entitled, unless otherwise provided by law or this Certificate of Incorporation,
to receive all of the remaining assets of the Corporation of whatever kind
available for distribution to stockholders ratably in proportion to the number
of shares of Common Stock held by them respectively.
FIFTH. The Corporation is to have perpetual existence.
SIXTH. In furtherance and not in limitation of the powers conferred by
the laws of the State of Delaware:
A. The Board of Directors of the Corporation is expressly authorized to
adopt, amend or repeal the By-Laws of the Corporation.
B. Elections of directors need not be by written ballot unless the By-Laws
of the Corporation shall so provide.
C. The books of the Corporation may be kept at such place within or without
the State of Delaware as the By-Laws of the Corporation may provide or as may be
designated from time to time by the Board of Directors of the Corporation.
SEVENTH. The Corporation eliminates the personal liability of each member
of its Board of Directors to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided, however, that, to
the extent provided by applicable law, the foregoing shall not eliminate the
liability of a director (i) for any breach of such director's duty of loyalty to
the Corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of Title 8 of the Delaware Code or (iv) for any
transaction from which such director derived an improper personal benefit. No
amendment to or repeal of this
<PAGE>
provision shall apply to or have any effect on the liability or alleged
liability of any director for or with respect to any acts or omissions of such
director occurring prior to such amendment or repeal.
EIGHTH. The Corporation reserves the right to amend or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon a stockholder
herein are granted subject to this reservation.
<PAGE>
IN WITNESS WHEREOF, Virtual Entertainment, Inc. has caused this certificate to
be signed by David Blohm, its President, and attested by Gordon H. Hayes, Jr.,
its Secretary, as of this ____ day of October, 1995.
VIRTUAL ENTERTAINMENT, INC.
By: /s/ David Blohm
--------------------------------
David Blohm, President
ATTEST:
/s/ Gordon H. Hayes
- -------------------------------
Gordon H. Hayes, Jr., Secretary
<PAGE>
CERTIFICATE OF AMENDMENT TO CERTIFICATE OF
INCORPORATION OF VIRTUAL ENTERTAINMENT, INC.
Pursuant to Section 242
of the General Corporation Law of the State of Delaware
Virtual Entertainment, Inc. (hereinafter called the "Corporation"),
organized and existing under and by virtue of the General Corporation Law of the
State of Delaware, does hereby certify as follows:
By written consent of the Board of Directors of the Corporation a
resolution was duly adopted, pursuant to Sections 141(f) and 242 of the General
Corporation Law of the State of Delaware, setting forth an amendment to the
Certificate of Incorporation of the Corporation and declaring said amendment to
be advisable. The stockholders of the Corporation duly approved said proposed
amendment by unanimous written consent in accordance with Sections 228 and 242
of the General Corporation Law of the State of Delaware. The resolution setting
forth the amendment is as follows:
RESOLVED: That Article FOURTH of the Certificate of Incorporation of the
- ---------
Corporation be and hereby is amended in its entirety to read as set
forth in Exhibit A.
---------
IN WITNESS WHERFOF, Virtual Entertainment, Inc. has caused this Certificate
to be signed by its President and attested by its Secretary this day of May 14,
1997.
By: /s/ David Blohm
-------------------------
David Blohm, President
ATTEST:
/s/ Jeff Pucci
- -------------------------------
Jeff Pucci, Assistant Secretary
[Corporate Seal]
<PAGE>
Exhibit A
---------
FOURTH. The total number of shares of all classes of capital stock which
the Corporation shall have authority to issue is 10,011,000 shares, consisting
of 10,000,000 shares of Common Stock with a par value of $.01 per share (the
"Common Stock") and 11,000 shares of Preferred Stock with a par value of $.01
per share (the "Preferred Stock"), of which 687 shares have been designated
"Series A Convertible Preferred Stock," and 1,000 shares have been designated as
"Series B Convertible Preferred Stock" and the balance of which may be
designated from time to time by additional amendments hereto.
A description of the respective classes of stock and a statement of the
designations, preferences, voting powers (or no voting powers), relative,
participating, optional or other special rights and privileges and the
qualifications, limitations and restrictions of the Common Stock and the
Preferred Stock are as follows:
A. PREFERRED STOCK
---------------
1. Voting.
-------
1A. General. Except as may be otherwise provided in these terms of the
-------
Preferred Stock or by law, the Preferred Stock shall vote together with all
other classes and series of stock of the Corporation as a single class on all
actions to be taken by the stockholders of the Corporation. Each share of
Preferred Stock shall entitle the holder thereof to such number of votes per
share on each such action as shall equal the number of shares of Common Stock
(including fractions of a share) into which each share of Preferred Stock is
then convertible.
1B. Board Size. The Corporation shall not, without the written consent or
----------
affirmative vote of the holders of at least two-thirds of the then outstanding
shares of Preferred Stock, given in writing or by vote at a meeting, consenting
or voting (as the case may be) separately as a series, increase the maximum
number of directors constituting the Board of Directors to a number in excess of
nine.
2. Dividends. The holders of the Series A Convertible Preferred Stock
---------
shall be entitled to receive, out of funds legally available therefor, when and
if declared by the Board of Directors, quarterly dividends at the rate per annum
of $387.56 per share (the "Series A Accruing Dividends"). The holders of the
Series B Convertible Preferred Stock shall be entitled to receive, out of funds
legally available therefor, when and if declared by the Board of Directors,
quarterly dividends at the rate per annum of $160.00 per share (the "Series B
Accruing Dividends"). The Series A Accruing Dividends and the Series B Accruing
Dividends are referred to collectively herein as the "Accruing Dividends".
Accruing Dividends shall accrue from day to day, whether or not earned or
declared, and shall be cumulative.
3. Liquidation. Upon any liquidation, dissolution or winding up of the
-----------
Corporation, whether voluntary or involuntary, the holders of shares of
Preferred Stock shall be entitled to be paid out of the assets of the
Corporation available for distribution to
<PAGE>
its stockholders, after and subject to the payment in full of all amounts
required to be distributed to the holders of any other class or series of stock
of the Corporation ranking on liquidation prior and in preference to such series
of Preferred Stock (collectively referred to as "Senior Preferred Stock"), but,
before any distribution or payment shall be made to the holders of Common Stock
or before any other class or series of stock ranking on liquidation junior to
such Preferred Stock (such Common Stock and other stock being collectively
referred to as "Junior Stock") by reason of their ownership thereof, an amount
equal to the greater of: (i) (A) $4,732.00 per share of Series A Convertible
Preferred Stock plus, in the case of each share, an amount equal to all Series A
Accruing Dividends unpaid thereon (whether or not declared) and any other
dividends declared but unpaid thereon, computed to the date payment thereof is
made available, and (B) $2,000.00 per share of Series B Convertible Preferred
Stock plus, in the case of each share, an amount equal to all Series B Accruing
Dividends unpaid thereon (whether or not declare d) and any other dividends
declared but unpaid thereon, computed to the date payment thereof is made
available or (ii) such amount per share as would have been payable had each such
share been converted to Common Stock pursuant to paragraph 4 immediately prior
to such liquidation, dissolution or winding up, and the holders of Preferred
Stock shall not be entitled to any further payment, such amount payable with
respect to one share of Preferred Stock being sometimes referred to as the
"Liquidation Preference Payment" and with respect to all shares of Preferred
Stock being sometimes referred to as the "Liquidation Preference Payments". If
upon such liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, the assets to be distributed among the holders of
Preferred Stock shall be insufficient to permit payment to the holders of
Preferred Stock of the amount distributable as aforesaid, then the entire assets
of the Corporation to be so distributed shall be distributed ratably among the
holders of Preferred Stock, in proportion to the respective amounts which would
otherwise be payable in respect of the shares held by them upon such
distribution if all amounts payable on or with respect to such shares were paid
in full. Upon any such liquidation, dissolution or winding up of the
Corporation, after the holders of Senior Preferred Stock, Preferred Stock and
any other class or series of stock of the Corporation ranking on liquidation on
a parity with the Preferred Stock shall have been paid in full the amounts to
which they shall be entitled, the remaining net assets of the Corporation may be
distributed to the holders of shares of Junior Stock. Written notice of such
liquidation, dissolution or winding up, stating a payment date, the amount of
the Liquidation Preference Payments and the place where said Liquidation
Preference Payments shall be payable, shall be delivered in person, mailed by
certified or registered mail, return receipt requested, or sent by telecopier or
telex, not less than 20 days prior to the payment date stated therein, to the
holders of record of Preferred Stock, such notice to be addressed to each such
holder at its address as shown by the records of the Corporation. The
consolidation or merger of the Corporation into or with any other entity or
entities which results in the exchange of outstanding shares of the Corporation
for securities or other consideration issued or paid or caused to be issued or
paid by any such entity or affiliate thereof (other than a merger to
reincorporate the Corporation in a different jurisdiction), and the sale, lease,
abandonment, transfer or other disposition by the Corporation of all or
substantially all its assets, shall be deemed to bc a liquidation, dissolution
or winding up of the Corporation within the meaning of the provisions of this
paragraph 4.
<PAGE>
4. Conversions. The holders of shares of Preferred Stock shall have the
-----------
following conversion rights:
4A. Right to Convert.
----------------
(1) Subject to the terms and conditions of this paragraph 4, the holder of
any share or shares of Series A Convertible Preferred Stock shall have the
right, at its option at any time, to convert any such whole or fractional shares
of Series A Convertible Preferred Stock (except that upon any liquidation of the
Corporation the right of conversion shall terminate at the close of business on
the business day fixed for payment of the amount distributable on the Series A
Convertible Preferred Stock) into such number of fully paid and nonassessable
shares of Common Stock (initially 1,000 shares of Common Stock for each share of
Series A Convertible Preferred Stock) as is obtained by (i) multiplying the
number of shares of Series A Convertible Preferred Stock so to be converted by
$4,732,000 and (ii) dividing the result by the conversion price of $4,732.00 per
share or, in case an adjustment of such price has taken place pursuant to the
further provisions of this paragraph 4, then by the conversion price as last
adjusted and in effect at the date any share or shares of Series A Convertible
Preferred Stock are surrendered for conversion (such price, or such price as
last adjusted, being referred to as the "Series A Conversion Price", Such
rights of conversion shall be exercised by the holder thereof by giving written
notice that the holder elects to convert a stated number of shares of Series A
Convertible Preferred Stock into Common Stock and by surrender of a certificate
or certificates for the shares so to be converted to the Corporation at its
principal office (or such other office or agency of the Corporation as the
Corporation may designate by notice in writing to the holders of the Series A
Convertible Preferred Stock) at any time during its usual business hours on the
date set forth in such notice, together with a statement of the name or names
(with address) in which the certificate or certificates for shares of Common
Stock shall be issued.
(2) Subject to the terms and conditions of this paragraph 4, the holder of
any share or shares of Series B Convertible Preferred Stock shall have the
right, at its option at any time, to convert any such whole or fractional shares
of Series B Convertible Preferred Stock (except that upon any liquidation of the
Corporation the right of conversion shall terminate at the close of business on
the business day fixed for payment of the amount distributable on the Series B
Convertible Preferred Stock) into such number of fully paid and nonassessable
shares of Common Stock (initially 1,000 shares of Common Stock for each share of
Series B Convertible Preferred Stock) as is obtained by (i) multiplying the
number of shares of Series B Convertible Preferred Stock so to be converted by
$2,000,000 and (ii) dividing the result by the conversion price of $2,000.00 per
share or, in case an adjustment of such price has taken place pursuant to the
further provisions of this paragraph 4, then by the conversion price as last
adjusted and in effect at the date any share or shares of Series B Convertible
Preferred Stock are surrendered for conversion (such price, or such price as
last adjusted, being referred to as the "Series B Conversion Price"). Such
rights of conversion shall be exercised by the holder thereof by giving written
notice that the holder elects to convert a stated number of shares of Series B
Convertible Preferred Stock into Common Stock and by surrender of a certificate
or certificates for the shares so to be converted to the Corporation at its
principal office (or such other Office or agency of the Corporation as the
Corporation
<PAGE>
may designate by notice in writing to the holders of the Series B Convertible
Preferred Stock) at any time during its usual business hours on the date set
forth in such notice, together with a statement of the name or names (with
address) in which the certificate or certificates for shares of Common Stock
shall be issued.
4B. Issuance of Certificates: Time Conversion Effected. Promptly after
--------------------------------------------------
the receipt of the written notice referred to in subparagraph 4A and surrender
of the certificate or certificates for the share or shares of Preferred Stock to
be converted, the Corporation shall issue and deliver, or cause to be issued and
delivered, to the holder, registered in such name or names as such holder may
direct, a certificate or certificates for the number of whole shares of Common
Stock issuable upon the conversion of such share or shares of Preferred Stock.
To the extent permitted by law, such conversion shall be deemed to have been
effected and the Series A Conversion Price or the Series B Conversion Price, as
applicable, shall be determined as of the close of business on the date on which
such written notice shall have been received by the Corporation and the
certificate or certificates for such share or shares shall have been surrendered
as aforesaid, and at such time the rights of the holder of such share or shares
of Preferred Stock shall cease, and the person or persons in whose name or names
any certificate or certificates for shares of Common Stock shall be issuable
upon such conversion shall be deemed to have become the holder or holders of
record of the shares represented thereby.
4C. Fractional Shares: Dividends: Partial Conversion. No fractional
------------------------------------------------
shares shall be issued upon conversion of Preferred Stock into Common Stock and
no payment or adjustment shall be made upon any conversion on account of any
cash dividends on the Common Stock issued upon such conversion. At the time of
each conversion, the Corporation shall pay in cash an amount equal to all
dividends, excluding Accruing Dividends, accrued and unpaid on the shares of
Preferred Stock, surrendered for conversion to the date upon which such
conversion is deemed to take place as provided in subparagraph 4B. In case the
number of shares of Preferred Stock represented by the certificate or
certificates surrendered pursuant to subparagraph 4A exceeds the number of
shares converted, the Corporation shall, upon such conversion, execute and
deliver to the holder, at the expense of the Corporation, a new certificate or
certificates for the number of shares of Preferred Stock represented by the
certificate or certificates surrendered which are not to be converted. If any
fractional share of Common Stock would, except for the provisions of the first
sentence of this subparagraph 4C, be delivered upon such conversion, the
Corporation, in lieu of delivering such fractional share, shall pay to the
holder surrendering the Preferred Stock for conversion an amount in cash equal
to the current market price of such fractional share as determined in good faith
by the Board of Directors of the Corporation.
4D. Subdivision or Combination of Common Stock. In case the Corporation
-------------------------------------------
shall at any time subdivide (by any stock split, stock dividend or otherwise)
its outstanding shares of Common Stock into a greater number of shares, the
Series A Conversion Price and the Series B Conversion Price in effect
immediately prior to such subdivision shall be proportionately reduced, and,
conversely, in case the outstanding shares of Common Stock shall be combined
into a smaller number of shares, the Series A Conversion Price and the Series B
Conversion Price in effect immediately prior to such combination shall be
proportionately increased.
<PAGE>
4E. Reorganization or Reclassification. If any capital reorganization or
----------------------------------
reclassification of the capital stock of the Corporation shall be effected in
such a way that holders of Common Stock shall be entitled to receive stock,
securities or assets with respect to or in exchange for Common Stock, then, as a
condition of such reorganization or reclassification, lawful and adequate
provisions shall be made whereby each holder of a share or shares of preferred
Stock shall thereupon have the right to receive, upon the basis and upon the
terms and conditions specified herein and in lieu of the shares of Common Stock
immediately theretofore receivable upon the conversion of such share or shares
of Preferred Stock, such shares of stock, securities or assets as may be issued
or payable with respect to or in exchange for a number of outstanding shares of
such Common Stock equal to the number of shares of such Common Stock immediately
theretofore receivable upon such conversion had such reorganization or
reclassification not taken place, and in any such case appropriate provisions
shall be made with respect to the rights and interests of such holder to the end
that the provisions hereof (including without limitation provisions for
adjustments of the Series A Conversion Price and the Series B Conversion Price)
shall thereafter be applicable, as nearly as may be, in relation to any shares
of stock, securities or assets thereafter deliverable upon the exercise of such
conversion rights.
4F. Notice of Adjustment. Upon any adjustment of the Series A Conversion
--------------------
Price or the Series B Conversion Price, then and in each such case the
Corporation shall give written notice thereof, by delivery in person, certified
or registered mail, return receipt requested, telecopier or telex, addressed to
each holder of shares of such series of Preferred Stock at the address of such
holder as shown on the books of the Corporation, which notice shall state the
Series A Conversion Price or the Series B Conversion Price, as the case may be,
resulting from such adjustment, setting forth in reasonable detail the method
upon which such calculation is based.
4G. Other Notices. In case at any time:
-------------
(1) the Corporation shall declare any dividend upon its Common Stock
payable in cash or stock or make any other distribution to the holders of its
Common Stock;
(2) the Corporation shall offer for subscription pro rata to the holders
of its Common Stock any additional shares of stock of any class or other
rights;
(3) there shall be any capital reorganization or reclassification of the
capital stock of the Corporation, or a consolidation or merger of the
Corporation with or into another entity or entities, or a sale, lease,
abandonment, transfer or other disposition of all or substantially all its
assets; or
(4) there shall be a voluntary or involuntary dissolution, liquidation or
winding up of the Corporation;
then, in any one or more of said cases, the Corporation shall give, by delivery
in person, certified or registered mail, return receipt requested, telecopier or
telex, addressed to each
<PAGE>
holder of any shares of Preferred Stock at the address of such holder as shown
on the books of the Corporation, (a) at least 20 days' prior written notice of
the date on which the books of the Corporation shall close or a record shall be
taken for such dividend, distribution or subscription rights or for determining
rights to vote in respect of any such reorganization, reclassification,
consolidation, merger, disposition, dissolution, liquidation or winding up and
(b) in the case of any such reorganization, reclassification, consolidation,
merger, disposition, dissolution, liquidation or winding up, at least 20 days'
prior written notice of the date when the same shall take place. Such notice in
accordance with the foregoing clause (a) shall also specify, in the case of any
such dividend, distribution or subscription rights, the date on which the
holders of Common Stock shall be entitled thereto and such notice in accordance
with the foregoing clause (b) shall also specify the date on which the holders
of Common Stock shall be entitled to exchange their Common Stock for securities
or other property deliverable upon such reorganization, reclassification,
consolidation, merger, disposition, dissolution, liquidation or winding up, as
the case may be.
4H. Stock to be Reserved. The Corporation will at all times reserve and
--------------------
keep available out of its authorized Common Stock, solely for the purpose of
issuance upon the conversion of the Preferred Stock as herein provided, such
number of shares of Common Stock as shall then be issuable upon the conversion
of all outstanding shares of Preferred Stock. The Corporation covenants that
all shares of Common Stock which shall be so issued shall be duly and validly
issued and fully paid and nonassessable and free from all taxes, liens and
charges with respect to the issue thereof, and, without limiting the generality
of the foregoing, the Corporation covenants that it will from time to time take
all such action as may be requisite to assure that the par value per share of
the Common Stock is at all times equal to or less than the lesser of the Series
A Conversion Price or the Series B Conversion Price in effect at the time. The
Corporation will take all such action as may be necessary to assure that all
such shares of Common Stock may be so issued without violation of any applicable
law or regulation, or of any requirement of any national securities exchange
upon which the Common Stock may be listed. The Corporation will not take any
action which results in any adjustment of the Series A Conversion Price or the
Series B Conversion Price if the total number of shares of Common Stock issued
and issuable after such action upon conversion of the Preferred Stock would
exceed the total number of shares of Common Stock then authorized by the
Restated Certificate of Incorporation,
4I. No Reissuance of Preferred Stock. Shares of Preferred Stock which are
--------------------------------
converted into shares of Common Stock as provided herein shall not be reissued.
4J. Issue Tax. The issuance of certificates for shares of Common Stock
---------
upon conversion of Preferred Stock shall be made without charge to the holders
thereof for any issuance tax in respect thereof, provided that the Corporation
shall not be required to pay any tax which may be payable in respect of any
transfer involved in the issuance and delivery of any certificate in a name
other than that of the holder of the Preferred Stock which is being converted.
4K. Closing of Books. The Corporation will at no time close its transfer
----------------
books against the transfer of any Preferred Stock or of any shares of Common
Stock issued or
<PAGE>
issuable upon the conversion of any shares of Preferred Stock in any manner
which interferes with the timely conversion of such Preferred Stock, except as
may otherwise be required to comply with applicable securities laws.
4L. Definition of Common Stock. As used in this paragraph 4, the term
---------------------------
"Common Stock" shall mean and include the Corporation's authorized Common Stock,
par value $.01 per share, as constituted herein and shall also include any
capital stock of any class of the Corporation thereafter authorized which shall
not be limited to a fixed sum or percentage in respect of the rights of the
holders thereof to participate in dividends or in the distribution of assets
upon the voluntary or involuntary liquidation, dissolution or winding up of the
Corporation; provided that the shares of Common Stock receivable upon conversion
of shares of Preferred Stock shall include only shares designated as Common
Stock of the Corporation on the date of filing of this instrument, or in case of
any reorganization or reclassification of the outstanding shares thereof, the
stock, securities or assets provided for in subparagraph 4F.
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
* * * * *
Virtual Entertainment, Inc., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of said corporation, adopted a
resolution proposing and declaring advisable the following
amendment to the Certificate of Incorporation of said corporation:
RESOLVED: That Article FIRST of the Certificate of Incorporation be deleted
in its entirety and the following Article FIRST be inserted in
lieu thereof:
"FIRST. The name of the Corporation is Virtual Knowledge,
Inc.
SECOND: That in lieu of a meeting and vote of stockholders, the
stockholders have given written consent to said amendment in
accordance with the provisions of Section 228 of the General
Corporation Law of the State of Delaware.
THIRD: That the aforesaid amendment has been duly adopted in accordance
with the applicable provisions of Section 242 and 228 of the
General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, said Virtual Entertainment, Inc., has caused
this certificate to be signed by David Blohm, its President this 31st day of
July, 1997.
Virtual Entertainment, Inc.
By /s/ David Blohm
------------------------------
David Blohm, President
<PAGE>
CERTIFICATE OF AMENDMENT TO
CERTIFICATE OF INCORPORATION
OF
VIRTUAL KNOWLEDGE, INC.
Pursuant to Section 242
of the General Corporation Law of the State of Delaware
Virtual Knowledge, Inc. (hereinafter called the "Corporation"), organized
and existing under and by virtue of the General Corporation Law of the State of
Delaware, does hereby certify as follows:
By written consent of the Board of Directors of the Corporation,
resolutions were duly adopted, pursuant to Sections 141(f) and 242 of the
General Corporation Law of the State of Delaware, setting forth amendments to
the Certificate of Incorporation of the Corporation (the "Certificate of
Incorporation") and declaring said amendments to be advisable. The stockholders
duly approved said proposed amendments by written consent in accordance with
Sections 228 and 242 of the General Corporation Law of the State of Delaware,
and written notice of such consent has been given to all stockholders who have
not consented in writing to said amendments. The resolutions setting forth the
amendments are as follows:
RESOLVED: That Article FIRST of the Certificate of Incorporation be deleted in
its entirety and the following Article FIRST be inserted in lieu
thereof:
"FIRST. The name of the Corporation is SmarterKids.com, Inc."
RESOLVED: That the first paragraph of Article FOURTH of the Certificate of
Incorporation be and hereby is amended to read as follows:
<PAGE>
"FOURTH. The total number of shares of all classes of capital stock which
the Corporation shall have the authority to issue is 10,011,000 shares,
consisting of 10,000,000 shares of Common Stock with a par value of $.01 per
share (the "Common Stock") and 11,000 shares of Preferred Stock with a par value
of $.01 per share (the "Preferred Stock"), of which 687 shares have been
designated "Series A Convertible Preferred Stock" and 1,018 shares have been
designated "Series B Convertible Preferred Stock" and the balance of which may
be designated from time to time by additional amendments thereto."
IN WITNESS WHEREOF, Virtual Knowledge, Inc. has caused this Certificate to
be signed by its President and attested by its Assistant Secretary this 1st day
of September, 1998.
By: /s/ David Blohm
---------------------------
David Blohm, President
ATTEST:
/s/ Jeff Pucci
- -------------------------------
Jeff Pucci, Assistant Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
SMARTERKIDS.COM, INC.
Pursuant to Section 242
of the General Corporation Law of
the State of Delaware
SmarterKids.com, Inc. (hereinafter called the "Corporation") organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, does hereby certify as follows:
By written consent of the Board of Directors of the Corporation a
resolution was duly adopted pursuant to Section 242 of the General Corporation
Law of the State of Delaware, setting forth an amendment to the Certificate of
Incorporation of the Corporation and declaring said amendment to be advisable.
The stockholders of the Corporation duly approved said proposed amendment by
written consent in accordance with Sections 228 and 242 of the General
Corporation Law of the State of Delaware, and written notice of such consent has
been given to all stockholders who have not consented in writing to said
amendment. The resolution setting forth the amendment as follows:
RESOLVED: That Article FOURTH of the Certificate of Incorporation of the
- --------- ------
Corporation be and hereby is deleted in its entirety and Article FOURTH in the
form attached as Exhibit A (the "Charter Amendment") is inserted in lieu
---------
thereof.
Exhibit A referred to in such resolution is as follows:
---------
Exhibit A
FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is (i) 13,000,000 shares of Common
Stock, $.01 par value per share ("Common Stock") and (ii) 4,401,323 shares of
Preferred Stock, $.01 par value per share ("Preferred Stock").
The following is a statement of the designations and powers, privileges and
rights, and the qualifications, limitations or restrictions thereof in respect
of each class of capital stock of the Corporation.
<PAGE>
A. COMMON STOCK
1. General. The voting, dividend and liquidation rights of the
-------
holders of the Common Stock are subject to and qualified by the rights of
the holders of the Preferred Stock of any series as may be designated by
the Board of Directors upon any issuance of the Preferred Stock of any
series.
2. Voting. The holders of the Common Stock are entitled to one vote
------
for each share held at all meetings of stockholders (and written actions in
lieu of meetings). There shall be no cumulative voting.
The number of authorized shares of Common Stock may be increased or
decreased (but not below the number of shares thereof then outstanding) by
the affirmative vote of the holders of a majority of the stock of the
Corporation entitled to vote, irrespective of the provisions of Section 242
(b) (2) of the General Corporation Law of Delaware.
3. Dividends. Dividends may be declared and paid on the Common Stock
---------
from funds lawfully available therefor as and when determined by the Board
of Directors and subject to any preferential dividend rights of any then
outstanding Preferred Stock.
4. Liquidation. Upon the dissolution or liquidation of the
-----------
Corporation, whether voluntary or involuntary, holders of Common Stock will
be entitled to receive all assets of the Corporation available for
distribution to its stockholders, subject to any preferential rights of any
then outstanding Preferred Stock.
B. PREFERRED STOCK.
Six Hundred Eighty Seven (687) shares of the authorized and unissued
Preferred Stock of the Corporation are hereby designated "Series A
Convertible Preferred Stock" (the 'Series A Preferred Stock"); Three
Thousand Five Hundred Eighteen (3,518) shares of the authorized and
unissued Preferred Stock of the Corporation are hereby designated, "Series
B Convertible Preferred Stock" (the "Series B Preferred Stock") and Four
Million Three Hundred Ninety Seven Thousand One Hundred Eighteen
(4,397,118) shares of the authorized and unissued Preferred Stock of the
Corporation are hereby designated, "Series C Convertible Preferred Stock"
(the "Series C Preferred Stock"), with the following rights, preferences,
powers, privileges and restrictions, qualifications and limitations. The
Series A Preferred Stock, the Series B Preferred Stock and the Series C
Preferred Stock are collectively referred to herein as the "Series
Preferred Stock." The Series B Preferred Stock and the Series C Preferred
Stock are collectively referred to herein as the "Series B and C Preferred
Stock."
1. Dividends.
---------
<PAGE>
(a) The Corporation shall not declare or pay any dividends or
distributions on shares of Common Stock (other than dividends or distributions
consisting of securities of the Corporation) until the holders of the Series
Preferred Stock then outstanding shall have first received a dividend or
distribution on each outstanding share of Series Preferred Stock in an amount at
least equal to the product of (i) the per share amount, if any, of the dividends
or other distributions to be declared, paid or set aside for the Common Stock,
multiplied by (ii) the number of whole shares of Common Stock into which such
share of Series Preferred Stock is then convertible.
(b) The Corporation shall not declare or pay any dividends or
distributions on shares of Series A Preferred Stock unless the holders of the
Series B and C Preferred Stock then outstanding shall have first or concurrently
received a dividend or distribution on each outstanding share calculated as
follows:
(1) For each share of Series B Preferred Stock in an amount at
least equal to the product of (i) the per share amount, if any, of (x) the
dividends or other distributions to be declared, paid or set aside for
Series A Preferred Stock, divided by (y) the number of whole shares of
Common Stock into which each such share of Series A Preferred Stock is then
convertible multiplied by (ii) the number of whole shares of Common Stock
into which each share of Series B Preferred Stock is then convertible and
(2) For each share of Series C Preferred Stock in an amount at
least equal to the product of (i) the per share amount, if any, of (x) the
dividends or other distributions to be declared, paid or set aside for
Series A Preferred Stock, divided by (y) the number of whole shares of
Common Stock into which each such share of Series A Preferred Stock is then
convertible multiplied by (ii) the number of whole shares of Common Stock
into which each share of Series C Preferred Stock is then convertible.
(c) Any and all accrued but unpaid dividends or other distributions
with respect to any Series Preferred Stock which accrued prior to the filing of
this Certificate of Amendment are hereby waived and are of no further force or
effect.
2. Liquidation, Dissolution or Winding Up, Certain Mergers,
--------------------------------------------------------
Consolidations and Asset Sales.
------------------------------
(a) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the holders of shares of Series B
and C Preferred Stock then outstanding shall be entitled to be paid out of the
assets of the Corporation available for distribution to its stockholders, before
any payment shall be made to the holders of Series A Preferred Stock, Common
Stock or an other class or series of stock ranking on liquidation junior to the
Series B and C Preferred Stock by reason of their ownership thereof, an amount
equal to:
(i) For each share of Series B Preferred Stock an
amount equal to the greater of (1) $2,000.00 per share
(subject to appropriate adjustment in the event of any stock
<PAGE>
dividend, stock split, combination or other similar
recapitalization affecting such shares), plus any dividends
declared but unpaid thereon, or (2) such amount per share as
would have been payable had each such share (and each share
of Series A Preferred Stock and, if the amount that the
holders of shares of Series C Preferred Stock would be
entitled to receive upon such event would be the amount
specified in clause (ii)(2) below, the Series C Preferred
Stock) been converted into Common Stock pursuant to Section 4
immediately prior to such liquidation, dissolution or winding
up; and
(ii) For each share of Series C Preferred Stock an
amount equal to the greater of (1) $6.269 per share (subject
to appropriate adjustment in the event of any stock dividend,
stock split, combination or other similar recapitalization
affecting such shares), plus any dividends declared but
unpaid thereon, or (2) such amount per share as would have
been payable had each such share (and each share of Series A
Preferred Stock and, if the amount that the holders of shares
of Series B Preferred Stock would be entitled to receive upon
such event would be the amount specified in clause (i)(2)
above, the Series B Preferred Stock) been converted into
Common Stock pursuant to Section 4 immediately prior to such
liquidation, dissolution or winding up
and after such payment in full all rights of the holders of shares of Series B
and C Preferred Stock, and all obligations of the Corporation with respect
thereto, shall be automatically terminated. If upon any such liquidation,
dissolution or winding up of the Corporation the remaining assets of the
Corporation available for distribution to its stockholders shall be insufficient
to pay the holders of shares of Series B and C Preferred the full amount to
which they shall be entitled, the holders of shares of Series B and C Preferred
Stock and any class or series of stock ranking on a parity with the Series B and
C Preferred Stock shall share ratably in any distribution of the remaining
assets and funds of the Corporation in proportion to the respective amounts
which would otherwise be payable in respect of the shares held by them upon such
distribution if all amounts payable on or with respect to such shares were paid
in full.
(b) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the holders of shares of Series A
Preferred Stock then outstanding shall be entitled to be paid out of the assets
of the Corporation available for distribution to its stockholders, after payment
to the holders of Series B and C Preferred Stock (and any other class or series
of stock ranking on liquidation senior to the Series A Preferred Stock) but
before any payment shall be made to the holders of Common Stock or any other
class or series of stock ranking on liquidation junior to the Series A Preferred
Stock (such Common Stock and other stock ranking Junior on any liquidation being
collectively referred to as "Junior Stock") by reason of their ownership
thereof, an
<PAGE>
amount equal to the greater of (i) $4,732.00 per share (subject to appropriate
adjustment in the event of any stock dividend, stock split, combination or other
similar recapitalization affecting such shares), plus any dividends declared,
but unpaid thereof, or (ii) such amount per share as would have been payable had
each such share (and each share of Series B and C Preferred Stock) been
converted into Common Stock pursuant to Section 4 immediately prior to such
liquidation, dissolution or winding up, and after such payment in full all
rights of the holders of shares of Series A Preferred Stock and all obligations
of the Corporation with respect thereto, shall be automatically terminated. If
upon any such liquidation, dissolution or winding up of the Corporation the
remaining assets of the Corporation available for distribution to its
stockholders shall be insufficient to pay the holders of shares of Series A
Preferred Stock the full amount to which they shall be entitled, the holders of
shares of Series A Preferred Stock and any class or series of stock ranking on
liquidation on a parity with the Series A Preferred Stock shall share ratably in
any distribution of the remaining assets and funds of the Corporation in
proportion to the respective amounts which would otherwise be payable in respect
of the shares held by them upon such distribution is all amounts payable on or
with respect to such shares were paid in full.
(c) After the payment of all preferential amounts required to be paid
to the holders of Series Preferred Stock and any other class or series of stock
of the Corporation ranking on liquidation on a parity with the Series Preferred
Stock, upon the dissolution, liquidation or winding up of the Corporation the
holders of shares of Junior Stock then outstanding shall be entitled to receive
the remaining assets and funds of the Corporation available for distribution to
its stockholders.
(d) Any merger or consolidation of the Corporation or a subsidiary of
the Corporation into or with another corporation, or other reorganization of the
Corporation, (except one in which the holders of capital stock of the
Corporation immediately prior to such merger, consolidation or reorganization
continue to hold at least 51% by voting power of the capital stock of the
surviving or acquiring corporation), or sale of all or substantially all the
assets of the Corporation shall be deemed to be liquidation of the Corporation
for purposes of this Section 2, and the agreement or plan of merger,
consolidation or reorganization with respect to such merger, consolidation,
reorganization or sale shall provide that the consideration payable to the
Corporation, together with all other available assets of the Corporation (in the
case of an asset sale), shall be distributed to the holders of capital stock of
the Corporation in accordance with Subsections 2(a) through 2(c) above. The
amount deemed distributed to the holders of Series Preferred Stock upon any such
merger, consolidation, reorganization or sale shall be the cash or the value of
the property, rights or securities distributed to such holders by the
corporation or the acquiring person, firm or other entity. The value of such
property, rights or other securities shall be determined in good faith by the
Board of Directors of the Corporation.
3. Voting.
------
(a) Each holder of outstanding shares of Series Preferred stock shall
be entitled to the number of votes equal to the number of whole shares of Common
Stock into which the shares of Series Preferred Stock held by such holder are
then convertible
<PAGE>
(as adjusted from time to time pursuant to Section 4 hereof), at each meeting of
stockholders of the Corporation (and written actions of stockholders in lieu of
meetings) with respect to any and all matters presented to the stockholders of
the Corporation for their action or consideration. Except as provided by law, by
the provisions of Subsection 3(b) through 3(d) below or by the provisions
establishing any other series of Preferred Stock, holders of Series Preferred
Stock and of any other outstanding series of Preferred Stock shall vote together
with the holders of Common Stock as a single class.
(b) The holders of record of (i) the shares of Series B Preferred
Stock, exclusively and as a separate class shall be entitled to elect two
directors of the Corporation, (ii) the shares of Series C Preferred Stock,
exclusively and as a separate class shall be entitled to elect one director of
the Corporation and (iii) the holders of record of the shares of Common Stock
and of any other class or series of voting (including the Series A Preferred
Stock and the Series B and C Preferred Stock), voting together as a single class
in which each holder of outstanding shares of Series Preferred Stock is entitled
to the number of votes equal to the number of whole shares of Common Stock into
which the shares of Series Preferred Stock held by such holder are then
convertible (as adjusted from time to time pursuant to Section 4 hereof), shall
be entitled to elect the balance of the total number of directors of the
Corporation. At any meeting held for the purpose of electing directors, the
presence in person or by proxy of the holders of a majority of (i) the shares of
Series B Preferred Stock then outstanding shall constitute a quorum of the
Series B Preferred Stock for the purpose of electing directors by holders of the
Series B Preferred Stock and (ii) the shares of Series C Preferred Stock then
outstanding shall constitute a quorum of the Series C Preferred Stock for the
purpose of electing directors by holders of the Series C Preferred Stock. A
vacancy in any directorship filled by the holders of Series B Preferred Stock
shall be filled only by vote or written consent in lieu of a meeting of the
holders of the Series B Preferred Stock or by any remaining director or
directors elected by the holders of Series B Preferred Stock pursuant to this
Subsection 3(b). A vacancy in any directorship filled by the holders of Series
C Preferred Stock shall be filled only by vote or written consent in lieu of a
meeting of the holders of the Series C Preferred Stock. The rights of the
holders of the Series B Preferred Stock under this Subsection 3(b) shall
terminate on the first date on which there are issued and outstanding less than
1,375 shares of Series B Preferred Stock (subject to appropriate adjustment in
the event of any dividend, stock split, combination or other similar
recapitalization affecting such shares). The rights of the holders of the
Series C Preferred Stock under this Subsection 3(b) shall terminate on the first
date on which there are issued and outstanding less than 1,000,000 shares of
Series C Preferred Stock (subject to appropriate adjustment in the event of any
dividend, stock split, combination or other similar recapitalization affecting
such shares).
(c) The Corporation, shall not amend, alter or repeal the preferences,
special rights or other powers of the Series Preferred Stock so as to affect
adversely the Series Preferred Stock, without the written consent or affirmative
vote of the holders of a majority of the then outstanding shares of Series
Preferred Stock, given in writing or by vote at a meeting, consenting or voting
(as the case may be) separately as a single class. For this purpose, without
limiting the generality of the foregoing, (i) the authorization of any shares of
capital stock with preference or priority over, or on a parity with, the Series
B Preferred Stock or the Series C Preferred Stock as to the right to receive
either
<PAGE>
dividends or amounts distributable upon liquidation, dissolution or winding up
of the Corporation shall be deemed to affect adversely the Series B Preferred
Stock and the Series C Preferred Stock, and (ii) the authorization of any shares
of capital stock with preference or priority over, or on a parity with Series A
Preferred Stock as to the right to receive either dividends or amounts
distributable upon liquidation, dissolution or winding up of the Corporation
shall not be deemed to affect adversely the Series A Preferred Stock. The number
of authorized shares of Series Preferred Stock may be increased or decreased
(but not below the number of shares then outstanding) by the affirmative vote of
the holders of a majority of the then outstanding shares of the Common Stock,
Series Preferred Stock and all other classes or series of stock of the
Corporation entitled to vote thereon, voting as a single class, irrespective of
the provisions of the Section 242(b)(2) of the General Corporation Law of
Delaware.
(d) In addition to any other rights provided by law, so long as no
less than 1,375 shares of Series B Preferred Stock (the "Minimum Series B
Shares") remain outstanding, or no less than 1,000,000 shares of Series C
Preferred Stock (the "Minimum Series C Shares") remain outstanding (in each case
subject to appropriate adjustment in the event of any dividend, stock split,
combination or similar recapitalization affecting such shares), the Corporation
shall not without the affirmative vote or written consent of (A) the holders of
a majority of the then outstanding shares (treating each share of Preferred
Stock as being equal to the number of shares of Common Stock into which such
share is then convertible) of the Series B and C Preferred Stock if the Minimum
Series B Shares and the Minimum Series C Shares remain outstanding, (B) the
holders of a majority of the then outstanding shares of Series B- Preferred
Stock, if the Minimum Series B Shares but less than the Minimum Series C Shares
remain outstanding, or (C) the holders of a majority of the then outstanding
shares of Series C Preferred Stock, if the Minimum Series C Shares but less than
the Minimum Series B Shares remain outstanding:
(i) amend or repeal any provision of, or add any provision to
the Corporation's Certificate of Incorporation;
(ii) merge or consolidate into or with any other corporation or
other entity or sell all, substantially all or any substantial portion of the
Corporation's assets;
(iii) dissolve liquidate or wind up its affairs;
(iv) declare or pay any dividends or distributions on Common
Stock; or
(v) reclassify any outstanding shares into shares having
preferences or priority as to dividends or assets senior to or on a parity with
the preference of the Series B and C Preferred Stock.
4. Original Conversion. The holders of the Series Preferred Stock shall
-------------------
have conversion rights as follows (the "Conversion Rights"):
<PAGE>
(a) Right to Convert. Each share of Series Preferred Stock shall be
----------------
convertible, at the option of the holder thereof, at any time and from time to
time, and without payment of additional consideration by the holder thereof,
into such number of fully paid and nonassessable shares of Common Stock as is
determined by (i) for Series A Preferred Stock by dividing $4,732.00 by the
Series A Conversion Price (as defined below) in effect at the time of
conversion; (ii) for the Series B Preferred Stock by dividing $2,000.00 by the
Series B Conversion Price (as defined below) in effect at the time of conversion
and (iii) for the Series C Preferred Stock by dividing $6.269 by the Series C
Conversion Price (as defined below) in effect at the time of conversion. The
"Series A Conversion Price" shall initially be $4.732; the "Series B Conversion
Price" shall initially be $2.00; and the "Series C Conversion Price" shall
initially be $6.269. Such initial Series A Conversion Price, Series B Conversion
Price and Series C Conversion Price, and the rate at which shares of Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock,
respectively, may be converted into shares of Common Stock, shall be subject to
adjustment as provided below.
In the event of a notice of redemption of any shares of Series B and C
Preferred Stock pursuant to Section 6 hereof, the Conversion Rights of the
shares of Series B and C Preferred Stock designated for redemption shall
terminate at the close of business on the fifth full day preceding the date
fixed for redemption, unless the redemption price is not paid when due, in which
case the Conversion Rights for such shares of Series B and C Preferred Stock
shall continue until such price is paid in full. In the event of a liquidation
of the Corporation, the Conversion Rights for the Series Preferred Stock shall
terminate at the close of business on the first full day preceding the date
fixed for the payment of any amounts distributable on liquidation to the holders
of Series Preferred Stock.
(b) Fractional Shares. No fractional shares of Common Stock shall be
-----------------
issued upon conversion of the Series Preferred Stock. In lieu of any fractional
shares to which the holder would otherwise be entitled, the Corporation shall
pay cash equal to such fraction multiplied by the then effective Series A
Conversion Price, Series B Conversion Price or Series C Conversion Price, as the
case may be.
(c) Mechanics of Conversion.
-----------------------
(i) In order for a holder of Series Preferred Stock to convert
shares of Series Preferred Stock into shares of Common Stock, such holder shall
surrender the certificate or certificates for such shares of Series Preferred
Stock, at the office of the transfer agent for the Series Preferred Stock (or at
the principal office of the Corporation if the Corporation serves as its own
transfer agent), together with written notice that such holder elects to convert
all or any number of shares of the Series Preferred Stock represented by such
certificate or certificates. Such notice shall state such holder's name or the
names of the nominees in which such holder wishes the certificate or
certificates for shares of Common Stock to be issued. If required by the
Corporation, certificates surrendered for conversion shall be endorsed or
accompanied by a written instrument or instruments of transfer, in form
satisfactory to the Corporation, duly executed by the registered holder or his
or its attorney duly authorized in writing. The date of receipt of such
certificate and notice by the transfer agent (or by the corporation if the
Corporation serves as its own transfer agent) shall be the conversion
<PAGE>
date ("Conversion Date"). The Corporation shall, as soon as practicable after
the Conversion Date, issue and deliver at such office to such holder of Series
Preferred Stock, or to his or its nominees, a certificate or certificates for
the number of shares of Common Stock to which such holder shall be entitled
together with cash in lieu of any fraction of a share.
(ii) The Corporation shall at all times when any shares of
Series Preferred Stock shall be outstanding, reserve and keep available out of
its authorized but unissued stock, for the purpose of effecting the conversion
of the Series Preferred Stock, such number of its duly authorized shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all outstanding Series Preferred Stock. Before taking any action which would
cause an adjustment reducing the Series A Conversion Price, Series B Conversion
Price or Series C Conversion Price below the then par value of the shares of
Common Stock issuable upon conversion of the Series A Preferred Stock, Series B
Preferred Stock or Series C Conversion Price, respectively, the Corporation will
take any corporate action which may, in the opinion of its counsel, be necessary
in order that the Corporation may validly and legally issue fully paid and
nonassessable shares of Common Stock at such adjusted Series A Conversion Price,
Series B Conversion Price or Series C Conversion Price, as the case may be.
(iii) Upon any such conversion, no adjustment to the Series A
Conversion Price, Series B Conversion Price or Series C Conversion Price shall
be made for any declared but unpaid dividends on the Series Preferred Stock
surrendered for conversion or on the Common Stock delivered upon conversion.
(iv) All shares of Series Preferred Stock which shall have been
surrendered for conversion as herein provided shall no longer be deemed to be
outstanding and all rights with respect to such shares, including the rights, if
any, to receive notices and to vote, shall immediately cease and terminate on
the Conversion Date, except only the right of the holders thereof to receive
shares of Common Stock in exchange therefor and payment of any dividends
declared but unpaid thereon. Any shares of Series Preferred Stock so converted
shall be retired and cancelled and shall not be reissued, and the Corporation
(without the need for stockholder action) may from time to time take such
appropriate action as may be necessary to reduce the authorized number of shares
of Series Preferred Stock accordingly.
(v) The Corporation shall pay any and all issue and other taxes
that may be payable in respect of any issuance or delivery of shares of Common
Stock upon conversion of shares of Series Preferred Stock pursuant to this
Section 4. The Corporation shall not, however, be required to pay any tax which
may be payable in respect of any transfer involved in the issuance and delivery
of shares of Common Stock in a name other than that in which the shares of
Series Preferred Stock so converted were registered, and no such issuance or
delivery shall be made unless and until the person or entity requesting such
issuance has paid to the Corporation the amount of any such tax or has
established, to the satisfaction of the Corporation, that such tax has been
paid.
<PAGE>
(d) Adjustments to Series B Conversion Price and Series C Conversion
----------------------------------------------------------------
Price - Diluting Issues:
- -----------------------
(i) Special Definitions. For purposes of this Subsection 4(d),
the following definitions shall apply:
(A) "Option" shall mean rights, options or warrants to
subscribe for, purchase or otherwise acquire Common Stock or Convertible
Securities.
(B) "Series C Original Issue Date" shall mean July 12,
1999.
(C) "Convertible Securities" shall mean any evidences or
indebtedness, shares or other securities directly or indirectly convertible into
or exchangeable for Common Stock.
(D) "Additional Shares of Common Stock" shall mean all
---------------------------------
shares of Common Stock issued (or, pursuant to Subsection 4(d)(iii) below,
deemed to be issued) by the Corporation after the Series C Original Issue Date,
other than:
(I) shares of Common Stock issued or issuable upon
conversion of any Convertible Securities or
exercise of any warrants outstanding on the
Series C Original Issue Date;
(II) shares of Common Stock issued or issuable as a
dividend or distribution on Series B Preferred
Stock or Series C Preferred Stock;
(III) shares of Common Stock issued or issuable by
reason of a dividend, stock split, split up or
other distribution on shares of Common Stock
that is covered by Subsection 4(e) or 4(f)
below;
(IV) up to 2,548,000 shares of Common Stock (subject
to appropriate adjustment in the event of any
stock dividend, stock split, combination or
other similar recapitalization affecting such
shares), issued or issuable to employees or
directors of, or consultants to the Corporation
pursuant to a plan or arrangement approved by
the Board of Directors of the Corporation and
by a majority of the members of the Board of
Directors who are not employees of the Company
or any of its subsidiaries (provided that any
Options for such shares
<PAGE>
that expire or terminate unexercised shall not
be counted toward such maximum number);
(V) up to 125 Series B Shares, or shares of Common
Stock issuable upon conversion of such Series B
Shares, issuable to Education Products, Inc. or
its parent, Sylvan Learning Systems, Inc.
("Sylvan") pursuant to that certain letter
agreement, dated July 23, 1997, between Sylvan
and the Corporation;
(VI) warrants to purchase up to 105,700 shares, or
shares of Common Stock issuable upon exercise
of such warrants, issued or issuable to Edu
Ventures;
(VII) warrants to purchase up to 38,000 shares, or up
to 38,000 shares of Common Stock issuable upon
exercise of any warrants, issuable to J.L.
Hammett Co. pursuant to that Contract for
Services and Term Sheet dated September 29,
1998;
(VIII) warrants to purchase up to 75,000 shares, or up
to 75,000 shares of Common Stock issuable upon
exercise of any warrants, issuable to National
Computer Systems, Inc.; and
(IX) warrants to purchase Series C Preferred Stock,
or shares of Series C Preferred Stock issuable
upon exercise of any warrants, or shares of
Common Stock issuable upon conversion of Series
C Preferred Stock, issuable pursuant to that
certain letter agreement, dated March 19, 1999,
between Thomas Weisel Partners LLC and the
Corporation.
(ii) No Adjustment of Series B Conversion Price or Series C
------------------------------------------------------
Conversion Price. No adjustment in the number of shares of Common Stock into
- ----------------
which the Series B Preferred Stock or Series C Preferred Stock, respectively, is
convertible shall be made, by adjustment in the applicable Series B Conversion
Price or Series C Conversion Price respectively (a) unless the consideration per
share (determined pursuant to Subsection 4(d)(v)) for an Additional Share of
Common Stock issued or deemed to be issued by the Corporation is less than the
applicable Series B Conversion Price or Series C Conversion Price, respectively,
in effect immediately prior to the issue of such
<PAGE>
Additional Shares, or (b) if the Corporation receives written notice from the
holders of at least 66 2/3% of the then outstanding shares of Series B and C
Preferred Stock, voting as a single class, that no such adjustment shall be made
as the result of any particular issuance of Additional Shares of Common Stock or
generally as the result of any issuance of Additional Shares of Common Stock.
(iii) Issue of Securities Deemed Issue of Additional Shares of
--------------------------------------------------------
Common Stock.
- ------------
If the Corporation at any time or from time to time after the Series C
Original Issue Date shall issue any Options (excluding Options covered by
Subsection 4(d)(i)(D)(IV) above) or Convertible Securities or shall fix a record
date for the determination of holders of any class of securities entitled to
receive any such Options or Convertible Securities, then the maximum number of
shares of Common Stock (as set forth in the instrument relating thereto without
regard to any provision contained therein for a subsequent adjustment of such
number) issuable upon the exercise of such Options or, in the case of
Convertible Securities and Options therefor, the conversion or exchange of such
Convertible Securities, shall be deemed to be Additional Shares of Common Stock
for the purpose of the adjustment to the Series B Conversion Price or Series C
Conversion Price, respectively, issued as of the time of such issue or, in case
such a record date shall have been fixed, as of the close of business on such
record date, provided that Additional Shares of Common Stock shall not be deemed
to have been issued unless the consideration per share (determined pursuant to
Subsection 4(d)(v) hereof) of such Additional Shares of Common Stock would be
less than the applicable Series B Conversion Price or Series C Conversion Price,
respectively, in effect on the date of and immediately prior to such issue, or
such record date, as the case may be, and provided further that in any such case
in which Additional Shares of Common Stock are deemed to be issued:
(A) No further adjustment in the Series B Conversion
Price or Series C Conversion Price shall be made upon the subsequent issuance of
Convertible Securities or shares of Common Stock upon the exercise of such
Options or conversion or exchange of such Convertible Securities;
(B) If such Options or Convertible Securities by their
terms provide, with the passage of time or otherwise, for any increase or
decrease in the consideration payable to the Corporation upon the exercise,
conversion or exchange thereof, the Series B Conversion Price or Series C
Conversion Price, as the case may be, computed upon the original issue thereof
(or upon the occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon any such increase or decrease
becoming effective, be recomputed to reflect such increase or decrease insofar
as it affects such Options or the rights of conversion or exchange under such
Convertible Securities;
(C) Upon the expiration or termination of any such
unexercised Option, the Series B Conversion Price or Series C Conversion Price,
as the case may be, shall be recomputed to reflect such expiration or
termination;
<PAGE>
(D) In the event of any change in the number of shares
of Common Stock issuable upon the exercise, conversion or exchange of any such
Option or Convertible Security, including, but not limited to, a change
resulting from the antidilution provisions thereof, the Series B Conversion
Price or Series C Conversion Price, respectively, then in effect shall forthwith
be readjusted to such Series B Conversion Price or Series C Conversion Price,
respectively, as would have obtained had the adjustment which was made upon the
issuance of such Option or Convertible Security not exercised or converted prior
to such change been made upon the basis of such change; and
(E) No readjustment pursuant to clause (B), (C) or (D)
above shall have the effect of increasing the Series B Conversion Price or
Series C Conversion Price, respectively, to an amount which exceeds the lower of
(i) the Series B Conversion Price or Series C Conversion Price, respectively, on
the original adjustment date, or (ii) the Series B Conversion Price or Series C
Conversion Price, respectively, that would have resulted from any issuances of
Additional Shares of Common Stock between the original adjustment date and such
readjustment date.
In the event the Corporation, after the Series C Original Issue Date,
amends the terms of any such Options or Convertible Securities (whether such
Options or Convertible Securities were outstanding on the Series C Original
Issue Date or were issued after the Series C Original Issue Date), than such
Options or Convertible Securities, as so amended, shall be deemed to have been
issued after the Series C Original Issue Date and the provisions of this
Subsection 4(d)(iii) shall apply.
(iv) Adjustment of Series B Conversion Price and Series C
----------------------------------------------------
Conversion Price Upon Issuance of Additional Shares of Common Stock.
- -------------------------------------------------------------------
In the event the Corporation shall at any time after the Series C Original
Issue Date issue Additional Shares of Common Stock (including Additional Shares
of Common Stock deemed to be issued pursuant to Subsection 4(d)(iii), but
excluding shares issued as a stock split or combination as provided in
Subsection 4(e) or upon a dividend or distribution as provided in Subsection
4(f)), without consideration or for a consideration per share less than the
applicable Series B Conversion Price or Series C Conversion Price,
respectively, in effect immediately prior to such issue, then and in such
event, such Series B Conversion Price and Series C Conversion Price,
respectively, shall be reduced, concurrently with such issue, to a price
(calculated to the nearest cent) determined by multiplying such Series B
Conversion Price or Series C Conversion Price, respectively, by a fraction, (A)
the numerator of which shall be (1) the number of shares of Common Stock
------
outstanding immediately prior to such issue plus (2) the number of shares of
Common Stock which the aggregate consideration received or to be received by
the Corporation for the total number of Additional Shares of Common Stock so
issued would purchase at such Series B Conversion Price or Series C Conversion
Price, respectively; and (B) the denominator of which shall be the number of
shares of Common Stock outstanding immediately prior to such issue plus the
number of such Additional Shares of Common Stock so issued; provided that (i)
-------- ----
for the purpose of this Subsection 4(d)(iv), all shares of Common Stock
issuable upon exercise or conversion of Options or Convertible Securities
outstanding immediately prior to
<PAGE>
such issue and all shares issuable as set forth in clauses (V), (VI) and (VII)
of subsection 4(d)(i)(D) above shall be deemed to be outstanding, and (ii) the
number of shares of Common Stock deemed issuable upon exercise or conversion of
such outstanding Options and Convertible Securities shall not give effect to any
adjustments to the conversion price or conversion rate of such Options or
Convertible Securities resulting from the issuance of Additional Shares of
Common Stock that is the subject of this calculation.
(v) Determination of Consideration. For purposes of this
------------------------------
Subsection 4 (d), the consideration received by the Corporation for issue of any
Additional Shares of Common Stock shall be computed as follows:
(A) Cash and Property: Such consideration shall:
(I) insofar as it consists of cash, be
computed at the aggregate of cash
received by the Corporation, excluding
amounts paid or payable for accrued
interest;
(II) insofar as it consists of property other
than cash, be computed at the fair market
value thereof at the time of such issue,
as determined in good faith by the Board
of Directors; and
(III) in the event Additional Shares of Common
Stock are issued together with other
shares or securities or other assets of
the Corporation for consideration which
covers both, be the proportion of such
consideration so received computed as
provided in clauses (1) and (II above, as
determined in good faith by the Board of
Directors.
(B) Options and Convertible Securities. The
----------------------------------
consideration per share received by the Corporation for Additional Shares of
Common Stock deemed to have been issued pursuant to Subsection 4(d)(iii),
relating to Options and Convertible Securities shall be determined by dividing
(x) the total amount, if any, received or
receivable by the Corporation as consideration for the issue of such Options or
Convertible Securities, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment of such
consideration) payable to the Corporation upon the exercise of such Options or
the conversion or exchange of such Convertible
<PAGE>
Securities, or in the case of Options for Convertible Securities, the exercise
of such Options for Convertible Securities and the conversion or exchange of
such Convertible Securities, by
(y) the maximum number of shares of Common Stock (as
set forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such number) issuable upon the
exercise of such Options or the conversion or exchange of such Convertible
Securities.
(vi) Multiple Closing-Dates. In the event the Corporation shall
----------------------
issue on more than one date Additional Shares of Common Stock which are
comprised of shares of the same series or class of Preferred Stock, and such
issuance dates occur within a period of no more than 120 days, then, upon the
final such issuance, the Series B Conversion Price and Series C Conversion
Price, respectively, shall be adjusted to give effect to all such issuances as
if they occurred on the date of the final such issuance (and without giving
effect to any adjustments as a result of such prior issuances within such
period).
(e) Adjustments for Stock Splits and Combinations. If the
---------------------------------------------
Corporation shall at any time or from time to time after the Series C Original
Issue Date effect a subdivision of the outstanding Common Stock, the Series A
Conversion Price, Series B Conversion Price and Series C Conversion Price then
in effect immediately before that subdivision shall each be proportionately
decreased. If the Corporation shall at any time or from time to time after the
Series C Original Issue Date combine the outstanding shares of Common Stock, the
Series A Conversion Price, Series B Conversion Price and Series C Conversion
Price then in effect immediately before the combination shall each be
proportionately increased. Any adjustment under this paragraph shall become
effective at the close of business on the date the subdivision or combination
becomes effective.
(f) Adjustment for Certain Dividends and Distributions. In the event
--------------------------------------------------
the Corporation at any time, or from time to time after the Series C Original
Issue Date shall make or issue, or fix a record date for the determination of
holders of Common Stock entitled to receive, a dividend or other distribution
payable in additional shares of Common Stock, then and in each such event the
Series A Conversion Price, Series B Conversion Price and Series C Conversion
Price then in effect immediately before such event shall each be decreased as of
the time of such issuance or, in the event such a record date shall have been
fixed, as of the closed business on such record date, by multiplying each such
Conversion Price then in effect by a fraction;
(1) the numerator of which shall be the total number of
shares of Common Stock issued and outstanding immediately prior
to the time of such issuance or the close of business on such
record date; and
(2) the denominator of which shall be the total number of
shares of Common Stock issued and outstanding immediately prior
to the time of such issuance or the close of business on such
<PAGE>
record date plus the number of shares of Common stock
issuable in payment of such dividend or distribution;
provided, however, if such record date shall have been fixed and such dividend
is not fully paid or if such distribution is not fully made on the date fixed
therefor, the Series A Conversion Price, Series B Conversion Price and Series C
Conversion Price shall each be recomputed accordingly as of the close of
business on such record date and thereafter the Series A Conversion Price,
Series B Conversion Price and Series C Conversion Price shall each be adjusted
pursuant to this paragraph as of the time of actual payment of such dividends or
distributions; and provided further, however, that no such adjustment shall be
made if the holders of Series Preferred Stock simultaneously receive (i) a
dividend or other distribution of shares of Common Stock in a number equal to
the number of shares of Common Stock as they would have received if all
outstanding shares of Series Preferred Stock had been converted into Common
Stock on the date of such event or (ii) a dividend or other distribution of
shares of the such kind of Series Preferred Stock, which are convertible, as of
the date of such event, into such number of shares of Common Stock as is equal
to the number of additional shares of Common Stock being issued with respect to
each share of Common Stock in such dividend or distribution.
(g) Adjustments for Other Dividends and Distributions. In the event
-------------------------------------------------
the Corporation at any time or from time to time after the Series C Original
Issue Date shall make or issue, or fix a record date for the determination of
holders of Common Stock entitled to receive, a dividend or other distribution
payable in securities of the Corporation other than shares of Common Stock, then
and in each such event provision shall be made so that the holders of the Series
Preferred Stock shall receive upon conversion thereof in addition to the number
of shares of Common Stock receivable thereupon, the amount of securities of the
Corporation that they would have received had the Series Preferred Stock been
converted into Common Stock on the date of such event and had thereafter, during
the period from the date of such event to and including the conversion date,
retained such securities receivable by them as aforesaid during such period,
giving application to all adjustments called for during such period under this
paragraph with respect to the respective rights of the holders of the Series
Preferred Stock; and provided further, however, that no such adjustment shall be
made if the holders of Series Preferred Stock simultaneously receive a dividend
or other distribution of such securities in an amount equal to the amount of
such securities as they would have received if all outstanding shares of Series
Preferred Stock had been converted into Common Stock on the date of such event.
(h) Adjustment for Reclassification, Exchange, or Substitution. If
----------------------------------------------------------
the Common Stock issuable upon the conversion of the Series Preferred Stock
shall be changed into the same or different number of shares of any class or
classes of stock, whether by capital reorganization, reclassification, or
otherwise (other than a subdivision or combination of shares or stock dividend
provided for above, or a reorganization, merger, consolidation, or sale of
assets provided for below), then and in each such event the holder of each such
share of Series Preferred Stock have the right thereafter to convert such share
into the kind and amount of shares of stock and other securities and property
receivable, upon such reorganization, reclassification, or other change, by
holders of the number of shares of Common Stock into which such shares of Series
<PAGE>
Preferred Stock might have been converted immediately prior to such
reorganization, reclassification, or change, all subject to further adjustment
as provided herein.
(i) Adjustment for Merger or Reorganization, etc. In case of any
--------------------------------------------
consolidation or merger of the Corporation with or into another corporation or
the sale of all or substantially all of the assets of the Corporation to another
corporation (other than a consolidation, merger or sale which is covered by
Subsection 2(d)), each share of Series Preferred Stock shall thereafter be
convertible (or shall be converted into a security which shall be convertible)
into the kind and amount of shares of stock or other securities or property to
which a holder of the number of shares of Common Stock of the Corporation
deliverable upon conversion of such Series Preferred Stock would have been
entitled upon such consolidation, merger or sale; and, in such case, appropriate
adjustment (as determined in good faith by the Board of Directors) shall be made
in the application of the provisions in this Section 4 set forth with respect to
the rights and interest thereafter of the holders of the Series Preferred Stock,
to the end that the provisions set forth in this Section 4 (including provisions
with respect to changes in and other adjustments of the Series A Conversion
Price, Series B Conversion Price or Series C Conversion Price, as the case may
be) shall thereafter be applicable, as nearly as reasonably may be, in relation
to any shares of stock or other property thereafter deliverable upon the
conversion of the Series Preferred Stock.
(j) No Impairment. The Corporation will not, by amendment of its
-------------
Certificate of Incorporation or through any reorganization, 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 provision 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 the
Series Preferred Stock against impairment.
(k) Certificate as to Adjustments. Upon the occurrence of each
-----------------------------
adjustment or readjustment of the Series A Conversion Price, Series B Conversion
Price or Series C Conversion Price pursuant to this Section 4, the Corporation
at its expense shall promptly compute such adjustment or readjustment in
accordance with the terms hereof and furnish to each holder of Series 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
Preferred Stock, furnish or cause to be furnished to such holder a similar
certificate setting forth (i) such adjustments and readjustments, (ii) the
Series A Conversion Price, Series B Conversion Price and Series C Conversion
Price then in effect, and (iii) the number of shares of Common Stock and the
amount, if any, of other property which then would be received upon the
conversion of Series Preferred Stock.
(1) Notice of Record Date. In the event:
---------------------
(i) that the Corporation declares a dividend (or any other
distribution) on its Common Stock payable in Common Stock or other securities of
the Corporation;
<PAGE>
(ii) that the Corporation subdivides or combines its
outstanding shares of Common Stock;
(iii) of any reclassification of the Common Stock of the
Corporation (other than a subdivision or combination of its outstanding shares
of Common Stock or a stock dividend or stock distribution thereon), or of any
consolidation or merger of the Corporation into or with another corporation, or
of the sale of all or substantially all of the assets of the Corporation; or
(iv) of the involuntary or voluntary dissolution, liquidation
or winding up of the Corporation;
then the Corporation shall cause to be filed at its principal office or at the
office of the transfer agent of the Series Preferred Stock, and (unless waived
by the holders of a majority of the shares of the Series Preferred Stock) shall
cause to be mailed to the holders of the Series Preferred Stock at their last
addresses as shown on the records of the Corporation or such transfer agent, at
least ten days prior to the date specified in (A) below or twenty days before
the date specified in (B) below, a notice stating
(A) the record date of such dividend, distribution,
subdivision or combination, or, if a record is not to be
taken, the date as of which the holders of Common Stock of
record to be entitled to such dividend, distribution,
subdivision or combination are to be determined, or
(B) the date on which such reclassification,
consolidation, merger, sale, dissolution, liquidation or
winding up is expected to become effective, and the date as
of which it is expected that holders of Common Stock of
record shall be entitled to exchange their shares of Common
Stock for securities or other property deliverable upon
such reclassification, consolidation, merger, sale,
dissolution or winding up.
5. Mandatory Conversion.
--------------------
(a) Upon the closing of the sale of shares of Common Stock, at a
price to the public of at least $10.00 per share (subject to appropriate
adjustment for stock splits, stock dividends, combinations and other similar
recapitalizations affecting such shares), in a public offering pursuant to an
effective registration statement under the Securities Act of 1933, as amended,
resulting in at least $15,000,000 of gross proceeds to the Corporation (the
"Mandatory Conversion Date"), (i) all outstanding shares of Series Preferred
Stock shall automatically be converted into shares of Common Stock, at the then
effective conversion rates and (ii) the number of authorized shares of Preferred
Stock shall be automatically reduced by the number of shares of Preferred Stock
that had been designated as Series A Preferred Stock, Series B Preferred Stock
and Series C Preferred Stock, and all provisions included under the caption
"Preferred Stock," and all
<PAGE>
references to the Series Preferred Stock shall be deleted and shall be of no
further force or effect.
(b) All holders of record shares of Series Preferred Stock shall be
given written notice of the Mandatory Conversion Date and the place designated
for mandatory conversion of all such shares of Series Preferred Stock pursuant
to this Section 5. Such notice need not be given in advance of the occurrence
of the Mandatory Conversion Date. Such notice shall be sent by first class or
registered mail, postage prepaid, to each record holder of Series Preferred
Stock at such holder's address last shown on the records of the transfer agent
for the Series Preferred Sock (or the records of the Corporation, if it serves
as its own transfer agent). Upon receipt of such notice, each holder of shares
of Series Preferred Stock shall surrender his or its certificate or certificates
for all such shares to the Corporation at the place designated in such notice,
and shall thereafter receive certificates for the number of shares of Common
Stock to which such holder is entitled pursuant to this Section 5. On the
Mandatory Conversion Date all rights with respect to the Series Preferred Stock
so converted, including the rights, if any, to receive notices and vote (other
than as a holder of Common Stock) will terminate, except only the rights of the
holders thereof, upon surrender of their certificate or certificates therefor,
to receive certificates for the number of shares of Common Stock into which such
Series Preferred Stock has been converted, and payment of any declared but
unpaid dividends thereon. If so required by the Corporation, certificates
surrendered for conversion shall be endorsed or accompanied by a written
instrument or instruments of transfer, in form satisfactory to the Corporation,
duly executed by the registered holder or by his or its attorney duly authorized
in writing. As soon as practicable after the Mandatory Conversion Date and the
surrender of the certificate or certificates for Series Preferred Stock, the
Corporation shall cause to be issued and delivered to such holder, or on his or
its written order, a certificate or certificates for the number of full shares
of Common Stock issuable on such conversion in accordance with the provisions
hereof and cash as provided in Subsection 4(b) in respect of any fraction of a
share of Common Stock otherwise issuable upon such conversion.
(c) All certificates evidencing shares of Series Preferred Stock
which are required to be surrendered for conversion in accordance with the
provisions hereof shall, from and after the Mandatory Conversion Date, be deemed
to have been retired and cancelled and the shares of Series Preferred Stock
represented thereby converted into Common Stock for all purposes,
notwithstanding the failure of the holder or holders thereof to surrender such
certificates on or prior to such date. Such converted Series Preferred Stock may
not be reissued, and the Corporation may thereafter take such appropriate action
(without the need for stockholder action) as may be necessary to reduce the
authorized number of shares of Series Preferred Stock accordingly.
6. Series B and C Preferred Stock Redemption
-----------------------------------------
(a) The Corporation will, subject to the conditions set forth below,
on June 30, 2004 and on each of the first and second anniversaries thereof (each
such date being referred to hereinafter as a "Series B and C Mandatory
Redemption Date"), upon receipt not less than 60 nor more than 120 days prior to
the applicable Series B and C Mandatory Redemption Date of written request(s)
for redemption from holders of at least
<PAGE>
a majority of the shares of Series B and C Preferred Stock then outstanding,
voting together as a single class on an "as converted" basis (an "Initial
Redemption Request"), redeem from each holder of shares of Series B and C
Preferred Stock that requests redemption pursuant to the Initial Redemption
Request or pursuant to a subsequent election made in accordance with Section
6(b) below (a "Series B and C Requesting Holder"), at price equal to the greater
of, in the case of the Series B Preferred Stock, $2,000.00 per share, and in the
case of the Series C Preferred Stock, $6.269 per share, plus in each case any
dividends declared but unpaid thereon, subject to appropriate adjustment in the
event of any stock dividend stock split, combination or other similar
recapitalization affecting such shares and fair market value as determined in
good faith by the Board of Directors (the "Mandatory Redemption Price"), the
number of shares of Series B and C Preferred Stock requested to be redeemed by
each Series B and C Requesting Holder, but not more than the following
respective portion of the number of shares of Series B and C Preferred Stock
held by such Series B and C Requesting Holder on the applicable Series B and C
Mandatory Redemption Date.
Series B and C Mandatory Maximum Portion of Shares of Series B and C
Redemption Date Preferred Stock to Be Redeemed
--------------- ------------------------------
June 30, 2004 33%
June 30, 2005 50%
June 30, 2006 All outstanding shares of
Series B and C Preferred Stock
(b) The Corporation shall provide notice of its receipt of an
Initial Redemption Request, specifying the time, manner and place of redemption
and the Series B and C Mandatory Redemption Price ("Redemption Notice"), by
first class or registered mail, postage prepaid, to each holder of record of
Series B and C Preferred Stock at the address for such holder last shown on the
records of the transfer agent therefor (or the records of the Corporation, if it
serves as its own transfer agent), not less than 45 days prior to the applicable
Series B and C Mandatory Redemption Date. Each holder of Series B and C
Preferred Stock (other than a holder who has made the Initial Redemption
Request) may elect to become a Series B and C Requesting Holder on such Series B
and C Mandatory Redemption Date by so indicating in a written notice mailed to
the Company, by first class or registered mail, postage prepaid, at least 30
days prior to the applicable Series B and C Mandatory Redemption Date. Except as
provided in Section 6(c) below, each Series B and C Requesting Holder shall
surrender to the Corporation on the applicable Series B and C Mandatory
Redemption Date the certificate(s) representing the shares to be redeemed on
such date, in the manner and at the place designated in the Redemption Notice.
Thereupon, the Mandatory Redemption Price shall be paid to the order of each
such Series B and C Requesting Holder and each certificate surrendered for
redemption shall be cancelled.
(c) If the funds of the Corporation legally available for redemption
of Series B and C Preferred Stock on any Series B and C Mandatory Redemption
Date are insufficient to redeem the number shares of Series B and C Preferred
Stock required under this Section 6 to be redeemed on such date from Series B
and C Requesting Holders, those funds which are legally available will be used
to redeem the maximum possible number of such shares of Series B and C Preferred
Stock ratably in proportion to
<PAGE>
the respective amounts which would be payable in respect of such shares if the
funds of the Corporation legally available therefor had been sufficient to
redeem all shares of Series B and C Preferred Stock required to be redeemed on
such date. At any time thereafter when additional funds of the Corporation
become legally available for the redemption of Series B and C Preferred Stock,
such funds will be used, at the end of next succeeding fiscal quarter, to redeem
the balance of the shares which the Corporation was therefore obligated to
redeem, ratably on the basis set forth in the preceding sentence.
(d) Unless there shall have been a default in payment of the
Mandatory Redemption Price, on the Series B and C Mandatory Redemption Date all
rights of theholder of the share redeemed on such date as a stockholder of the
Corporation by reasonof the ownership of such share will cease, except the right
to receive the Mandatory Redemption Price of such share, without interest upon
presentation and surrender of the certificate representing such share and such
share will not from and after such Series B and C Mandatory Redemption Date be
redeemed to be outstanding.
(e) Any Series B and C Preferred Stock redeemed pursuant to this
Section 6 will be cancelled and will not under any circumstances be reissued,
sold or transferred and the Corporation may from time to time take such
appropriate action as may be necessary to reduce the authorized Series B and C
Preferred Stock accordingly.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment
to be signed by its President this 9th day of July, 1999.
SmartKids.com, Inc.
By: /s/ David Blohm
----------------------------
David Blohm, President
<PAGE>
EXHIBIT 3.2
-----------
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
SMARTERKIDS.COM, INC.
________________________________________________
Pursuant to Sections 228, 242 and 245 of the
General Corporation Law of the State of Delaware
________________________________________________
SmarterKids.com, Inc. (the "Corporation"), a corporation organized and
existing under the General Corporation Law of the State of Delaware, does hereby
certify as follows:
1. The name of the Corporation is SmarterKids.com, Inc. The Corporation was
originally incorporated under the name Virtual Entertainment, Inc. The original
certificate of incorporation of the Corporation was filed with the office of the
Secretary of State of Delaware on March 28, 1994. An amended and restated
certificate of incorporation of the Corporation was filed with the office of the
Secretary of State of Delaware on October 31, 1995.
2. This Second Amended and Restated Certificate of Incorporation was
recommended to the stockholders for approval as being advisable and in the best
interests of the Corporation by action of the Board of Directors on September 7,
1999.
3. That in lieu of a meeting and vote of stockholders, consents in writing
have been signed by holders of outstanding stock having not less than the
minimum number of votes that is necessary to consent to this amendment and
restatement, and, if required, prompt notice of such action shall be given in
accordance with the provisions of Section 228 of the General Corporation Law of
the State of Delaware.
4. This Second Amended and Restated Certificate of Incorporation restates
and integrates and further amends the certificate of incorporation of the
Corporation, as heretofore amended or supplemented.
The text of the Corporation's amended and restated certificate of
incorporation is amended and restated in its entirety as follows:
FIRST. The name of the Corporation is SmarterKids.com, Inc.
SECOND. The address of the registered office of the Corporation in the
State of Delaware is 1209 Orange Street, Wilmington, County of New Castle,
Delaware 19801. The name of its registered agent at such address is The
Corporation Trust Company.
<PAGE>
-2-
THIRD. The nature of the business or purposes to be conducted or promoted
is to engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of the State of Delaware.
FOURTH. The total number of shares of all classes of capital stock which
the Corporation shall have authority to issue is 104,401,323 shares consisting
of 90,000,000 shares of Common Stock with a par value of $.01 per share (the
"Common Stock") and 14,401,323 shares of Preferred Stock with a par value of
$.01 per share, (the "Preferred Stock"), of which 10,000,000 are undesignated,
687 shares are designated as Series A Convertible Preferred Stock, 3,518 shares
are designated as Series B Convertible Preferred Stock and 4,397,118 shares are
designated as Series C Convertible Preferred Stock.
A description of the respective classes of stock and a statement of the
designations, powers, preferences and rights, and the qualifications,
limitations and restrictions of the Preferred Stock and Common Stock are as
follows:
A. COMMON STOCK
------------
1. General. All shares of Common Stock will be identical and will entitle
-------
the holders thereof to the same rights, powers and privileges. The rights,
powers and privileges of the holders of the Common Stock are subject to and
qualified by the rights of holders of the Preferred Stock.
2. Dividends. Dividends may be declared and paid on the Common Stock from
---------
funds lawfully available therefor as and when determined by the Board of
Directors and subject to any preferential dividend rights of any then
outstanding Preferred Stock.
3. Dissolution, Liquidation or Winding Up. In the event of any
--------------------------------------
dissolution, liquidation or winding up of the affairs of the Corporation,
whether voluntary or involuntary, each issued and outstanding share of Common
Stock shall entitle the holder thereof to receive an equal portion of the net
assets of the Corporation available for distribution to the holders of Common
Stock, subject to any preferential rights of any then outstanding Preferred
Stock.
4. Voting Rights. Except as otherwise required by law or this Second
-------------
Amended and Restated Certificate of Incorporation, each holder of Common Stock
shall have one vote in respect of each share of stock held of record by such
holder on the books of the Corporation for the election of directors and on all
matters submitted to a vote of stockholders of the Corporation. Except as
otherwise required by law or provided herein, holders of Common Stock shall vote
together with holders of the Preferred Stock as a single class, subject to any
special or preferential voting rights of any then outstanding Preferred Stock.
There shall be no cumulative voting.
B. PREFERRED STOCK
---------------
The Preferred Stock may be issued in one or more series at such time or
times and for such consideration or considerations as the Board of Directors of
the Corporation may determine.
<PAGE>
-3-
Each series shall be so designated as to distinguish the shares thereof from the
shares of all other series and classes. Except as otherwise provided in this
Second Amended and Restated Certificate of Incorporation, different series of
Preferred Stock shall not be construed to constitute different classes of shares
for the purpose of voting by classes.
C. UNDESIGNATED PREFERRED STOCK
----------------------------
The Board of Directors is expressly authorized to provide for the issuance
of all or any shares of the undesignated Preferred Stock in one or more series,
each with such designations, preferences, voting powers (or special,
preferential or no voting powers), relative, participating, optional or other
special rights and privileges and such qualifications, limitations or
restrictions thereof as shall be stated in the resolution or resolutions adopted
by the Board of Directors to create such series, and a certificate of said
resolution or resolutions (a "Certificate of Designation") shall be filed in
accordance with the General Corporation Law of the State of Delaware. The
authority of the Board of Directors with respect to each such series shall
include, without limitation of the foregoing, the right to provide that the
shares of each such series may be: (i) subject to redemption at such time or
times and at such price or prices; (ii) entitled to receive dividends (which may
be cumulative or non-cumulative) at such rates, on such conditions, and at such
times, and payable in preference to, or in such relation to, the dividends
payable on any other class or classes or any other series; (iii) entitled to
such rights upon the dissolution of, or upon any distribution of the assets of,
the Corporation; (iv) convertible into, or exchangeable for, shares of any other
class or classes of stock, or of any other series of the same or any other class
or classes of stock of the Corporation at such price or prices or at such rates
of exchange and with such adjustments, if any; (v) entitled to the benefit of
such limitations, if any, on the issuance of additional shares of such series or
shares of any other series of Preferred Stock; or (vi) entitled to such other
preferences, powers, qualifications, rights and privileges, all as the Board of
Directors may deem advisable and as are not inconsistent with law and the
provisions of this Second Amended and Restated Certificate of Incorporation.
D. SERIES A, SERIES B AND SERIES C PREFERRED STOCK
-----------------------------------------------
The Series A Preferred Stock, and Series B Preferred Stock and the Series C
Preferred Stock are collectively referred to herein as the "Series Preferred
Stock." The Series B Preferred Stock and the Series C Preferred Stock are
collectively referred to herein as the "Series B and C Preferred Stock."
1. Dividends.
---------
(a) The Corporation shall not declare or pay any dividends or
distributions on shares of Common Stock (other than dividends or distributions
consisting of securities of the Corporation) until the holders of the Series
Preferred Stock then outstanding shall have first received a dividend or
distribution on each outstanding share of Series Preferred Stock in an amount at
least equal to the product of (i) the per share amount, if any, of the dividends
or other distributions to be declared, paid or set aside for the Common Stock,
multiplied by (ii) the number of whole shares of Common Stock into which such
share of Series Preferred Stock is then convertible.
<PAGE>
-4-
(b) The Corporation shall not declare or pay any dividends or
distributions on shares of Series A Preferred Stock unless the holders of the
Series B and C Preferred Stock then outstanding shall have first or concurrently
received a dividend or distribution on each outstanding share calculated as
follows:
(1) For each share of Series B Preferred Stock in an amount at
least equal to the product of (i) the per share amount, if any, of (x) the
dividends or other distributions to be declared, paid or set aside for
Series A Preferred Stock, divided by (y) the number of whole shares of
Common Stock into which each such share of Series A Preferred Stock is then
convertible multiplied by (ii) the number of whole shares of Common Stock
into which each share of Series B Preferred Stock is then convertible and
(2) For each share of Series C Preferred Stock in an amount at
least equal to the product of (i) the per share amount, if any, of (x) the
dividends or other distributions to be declared, paid or set aside for
Series A Preferred Stock, divided by (y) the number of whole shares of
Common Stock into which each such share of Series A Preferred Stock is then
convertible multiplied by (ii) the number of whole shares of Common Stock
into which each share of Series C Preferred Stock is then convertible.
(c) Any and all accrued but unpaid dividends or other distributions
with respect to any Series Preferred Stock which accrued prior to the filing of
this Certificate of Amendment are hereby waived and are of no further force or
effect.
2. Liquidation, Dissolution or Winding Up, Certain Mergers, Consolidations
-----------------------------------------------------------------------
and Asset Sales.
---------------
(a) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the holders of shares of Series B
and C Preferred Stock then outstanding shall be entitled to be paid out of the
assets of the Corporation available for distribution to its stockholders, before
any payment shall be made to the holders of Series A Preferred Stock, Common
Stock or an other class or series of stock ranking on liquidation junior to the
Series B and C Preferred Stock by reason of their ownership thereof, an amount
equal to:
(i) For each share of Series B Preferred Stock an
amount equal to the greater of (1) $2,000.00 per share
(subject to appropriate adjustment in the event of any stock
dividend, stock split, combination or other similar
recapitalization affecting such shares), plus any dividends
declared but unpaid thereon, or (2) such amount per share as
would have been payable had each such share (and each share
of Series A Preferred Stock and, if the amount that the
holders of shares of Series C Preferred Stock would be
entitled to receive upon such event would be the amount
specified in clause
<PAGE>
-5-
(ii)(2) below, the Series C Preferred Stock) been converted
into Common Stock pursuant to Section 4 immediately prior to
such liquidation, dissolution or winding up; and
(ii) For each share of Series C Preferred Stock an
amount equal to the greater of (1) $6.269 per share (subject
to appropriate adjustment in the event of any stock
dividend, stock split, combination or other similar
recapitalization affecting such shares), plus any dividends
declared but unpaid thereon, or (2) such amount per share as
would have been payable had each such share (and each share
of Series A Preferred Stock and, if the amount that the
holders of shares of Series B Preferred Stock would be
entitled to receive upon such event would be the amount
specified in clause (i)(2) above, the Series B Preferred
Stock) been converted into Common Stock pursuant to Section
4 immediately prior to such liquidation, dissolution or
winding up
and after such payment in full all rights of the holders of shares of Series B
and C Preferred Stock, and all obligations of the Corporation with respect
thereto, shall be automatically terminated. If upon any such liquidation,
dissolution or winding up of the Corporation the remaining assets of the
Corporation available for distribution to its stockholders shall be insufficient
to pay the holders of shares of Series B and C Preferred the full amount to
which they shall be entitled, the holders of shares of Series B and C Preferred
Stock and any class or series of stock ranking on a parity with the Series B and
C Preferred Stock shall share ratably in any distribution of the remaining
assets and funds of the Corporation in proportion to the respective amounts
which would otherwise be payable in respect of the shares held by them upon such
distribution if all amounts payable on or with respect to such shares were paid
in full.
(b) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the holders of shares of Series A
Preferred Stock then outstanding shall be entitled to be paid out of the assets
of the Corporation available for distribution to its stockholders, after payment
to the holders of Series B and C Preferred Stock (and any other class or series
of stock ranking on liquidation senior to the Series A Preferred Stock) but
before any payment shall be made to the holders of Common Stock or any other
class or series of stock ranking on liquidation junior to the Series A Preferred
Stock (such Common Stock and other stock ranking Junior on any liquidation being
collectively referred to as "Junior Stock") by reason of their ownership
thereof, an amount equal to the greater of (i) $4,732.00 per share (subject to
appropriate adjustment in the event of any stock dividend, stock split,
combination or other similar recapitalization affecting such shares), plus any
dividends declared, but unpaid thereof, or (ii) such amount per share as would
have been payable had each such share (and each share of Series B and C
Preferred Stock) been converted into Common Stock pursuant to Section 4
immediately prior to such liquidation, dissolution or winding up, and after such
payment in full all rights of the holders of shares of Series A Preferred Stock
and all obligations of the Corporation with respect thereto, shall be
<PAGE>
-6-
automatically terminated. If upon any such liquidation, dissolution or winding
up of the Corporation the remaining assets of the Corporation available for
distribution to its stockholders shall be insufficient to pay the holders of
shares of Series A Preferred Stock the full amount to which they shall be
entitled, the holders of shares of Series A Preferred Stock and any class or
series of stock ranking on liquidation on a parity with the Series A Preferred
Stock shall share ratably in any distribution of the remaining assets and funds
of the Corporation in proportion to the respective amounts which would otherwise
be payable in respect of the shares held by them upon such distribution is all
amounts payable on or with respect to such shares were paid in full.
(c) After the payment of all preferential amounts required to be paid
to the holders of Series Preferred Stock and any other class or series of stock
of the Corporation ranking on liquidation on a parity with the Series Preferred
Stock, upon the dissolution, liquidation or winding up of the Corporation the
holders of shares of Junior Stock then outstanding shall be entitled to receive
the remaining assets and funds of the Corporation available for distribution to
its stockholders.
(d) Any merger or consolidation of the Corporation or a subsidiary of
the Corporation into or with another corporation, or other reorganization of the
Corporation, (except one in which the holders of capital stock of the
Corporation immediately prior to such merger, consolidation or reorganization
continue to hold at least 51% by voting power of the capital stock of the
surviving or acquiring corporation), or sale of all or substantially all the
assets of the Corporation shall be deemed to be liquidation of the Corporation
for purposes of this Section 2, and the agreement or plan of merger,
consolidation or reorganization with respect to such merger, consolidation,
reorganization or sale shall provide that the consideration payable to the
Corporation, together with all other available assets of the Corporation (in the
case of an asset sale), shall be distributed to the holders of capital stock of
the Corporation in accordance with Subsections 2(a) through 2(c) above. The
amount deemed distributed to the holders of Series Preferred Stock upon any such
merger, consolidation, reorganization or sale shall be the cash or the value of
the property, rights or securities distributed to such holders by the
corporation or the acquiring person, firm or other entity. The value of such
property, rights or other securities shall be determined in good faith by the
Board of Directors of the Corporation.
3. Voting.
------
(a) Each holder of outstanding shares of Series Preferred stock shall
be entitled to the number of votes equal to the number of whole shares of Common
Stock into which the shares of Series Preferred Stock held by such holder are
then convertible (as adjusted from time to time pursuant to Section 4 hereof),
at each meeting of stockholders of the Corporation (and written actions of
stockholders in lieu of meetings) with respect to any and all matters presented
to the stockholders of the Corporation for their action or consideration. Except
as provided by law, by the provisions of Subsection 3(b) through 3(d) below or
by the provisions establishing any other series of Preferred Stock, holders of
Series Preferred Stock
<PAGE>
-7-
and of any other outstanding series of Preferred Stock shall vote together with
the holders of Common Stock as a single class.
(b) The holders of record of (i) the shares of Series B Preferred
Stock, exclusively and as a separate class shall be entitled to elect two
directors of the Corporation, (ii) the shares of Series C Preferred Stock,
exclusively and as a separate class shall be entitled to elect one director of
the Corporation and (iii) the holders of record of the shares of Common Stock
and of any other class or series of voting (including the Series A Preferred
Stock and the Series B and C Preferred Stock), voting together as a single class
in which each holder of outstanding shares of Series Preferred Stock is entitled
to the number of votes equal to the number of whole shares of Common Stock into
which the shares of Series Preferred Stock held by such holder are then
convertible (as adjusted from time to time pursuant to Section 4 hereof), shall
be entitled to elect the balance of the total number of directors of the
Corporation. At any meeting held for the purpose of electing directors, the
presence in person or by proxy of the holders of a majority of (i) the shares of
Series B Preferred Stock then outstanding shall constitute a quorum of the
Series B Preferred Stock for the purpose of electing directors by holders of the
Series B Preferred Stock and (ii) the shares of Series C Preferred Stock then
outstanding shall constitute a quorum of the Series C Preferred Stock for the
purpose of electing directors by holders of the Series C Preferred Stock. A
vacancy in any directorship filled by the holders of Series B Preferred Stock
shall be filled only by vote or written consent in lieu of a meeting of the
holders of the Series B Preferred Stock or by any remaining director or
directors elected by the holders of Series B Preferred Stock pursuant to this
Subsection 3(b). A vacancy in any directorship filled by the holders of Series C
Preferred Stock shall be filled only by vote or written consent in lieu of a
meeting of the holders of the Series C Preferred Stock. The rights of the
holders of the Series B Preferred Stock under this Subsection 3(b) shall
terminate on the first date on which there are issued and outstanding less than
1,375 shares of Series B Preferred Stock (subject to appropriate adjustment in
the event of any dividend, stock split, combination or other similar
recapitalization affecting such shares). The rights of the holders of the Series
C Preferred Stock under this Subsection 3(b) shall terminate on the first date
on which there are issued and outstanding less than 1,000,000 shares of Series C
Preferred Stock (subject to appropriate adjustment in the event of any dividend,
stock split, combination or other similar recapitalization affecting such
shares).
(c) The Corporation, shall not amend, alter or repeal the preferences,
special rights or other powers of the Series Preferred Stock so as to affect
adversely the Series Preferred Stock, without the written consent or affirmative
vote of the holders of a majority of the then outstanding shares of Series
Preferred Stock, given in writing or by vote at a meeting, consenting or voting
(as the case may be) separately as a single class. For this purpose, without
limiting the generality of the foregoing, (i) the authorization of any shares of
capital stock with preference or priority over, or on a parity with, the Series
B Preferred Stock or the Series C Preferred Stock as to the right to receive
either dividends or amounts distributable upon liquidation, dissolution or
winding up of the Corporation shall be deemed to affect adversely the Series B
Preferred Stock and the Series C Preferred Stock, and (ii) the authorization of
any shares of capital stock with preference or priority over, or on a parity
with Series A Preferred Stock as to the right to receive either dividends or
amounts distributable
<PAGE>
-8-
upon liquidation, dissolution or winding up of the Corporation shall not be
deemed to affect adversely the Series A Preferred Stock. The number of
authorized shares of Series Preferred Stock may be increased or decreased (but
not below the number of shares then outstanding) by the affirmative vote of the
holders of a majority of the then outstanding shares of the Common Stock, Series
Preferred Stock and all other classes or series of stock of the Corporation
entitled to vote thereon, voting as a single class, irrespective of the
provisions of the Section 242(b)(2) of the General Corporation Law of Delaware.
(d) In addition to any other rights provided by law, so long as no
less than 1,375 shares of Series B Preferred Stock (the "Minimum Series B
Shares") remain outstanding, or no less than 1,000,000 shares of Series C
Preferred Stock (the "Minimum Series C Shares") remain outstanding (in each case
subject to appropriate adjustment in the event of any dividend, stock split,
combination or similar recapitalization affecting such shares), the Corporation
shall not without the affirmative vote or written consent of (A) the holders of
a majority of the then outstanding shares (treating each share of Preferred
Stock as being equal to the number of shares of Common Stock into which such
share is then convertible) of the Series B and C Preferred Stock if the Minimum
Series B Shares and the Minimum Series C Shares remain outstanding, (B) the
holders of a majority of the then outstanding shares of Series B- Preferred
Stock, if the Minimum Series B Shares but less than the Minimum Series C Shares
remain outstanding, or (C) the holders of a majority of the then outstanding
shares of Series C Preferred Stock, if the Minimum Series C Shares but less than
the Minimum Series B Shares remain outstanding:
(i) amend or repeal any provision of, or add any provision to
the Corporation's Certificate of Incorporation;
(ii) merge or consolidate into or with any other corporation or
other entity or sell all, substantially all or any substantial portion of the
Corporation's assets;
(iii) dissolve liquidate or wind up its affairs;
(iv) declare or pay any dividends or distributions on Common
Stock; or
(v) reclassify any outstanding shares into shares having
preferences or priority as to dividends or assets senior to or on a parity with
the preference of the Series B and C Preferred Stock.
4. Original Conversion. The holders of the Series Preferred Stock shall
-------------------
have conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Series Preferred Stock shall be
----------------
convertible, at the option of the holder thereof, at any time and from time to
time, and without payment of additional consideration by the holder thereof,
into such number of fully paid and nonassessable shares of Common Stock as is
determined by (i) for Series A Preferred Stock by
<PAGE>
-9-
dividing $4,732.00 by the Series A Conversion Price (as defined below) in effect
at the time of conversion; (ii) for the Series B Preferred Stock by dividing
$2,000.00 by the Series B Conversion Price (as defined below) in effect at the
time of conversion and (iii) for the Series C Preferred Stock by dividing $6.269
by the Series C Conversion Price (as defined below) in effect at the time of
conversion. The "Series A Conversion Price" shall initially be $4.732; the
"Series B Conversion Price" shall initially be $2.00; and the "Series C
Conversion Price" shall initially be $6.269. Such initial Series A Conversion
Price, Series B Conversion Price and Series C Conversion Price, and the rate at
which shares of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock, respectively, may be converted into shares of Common Stock,
shall be subject to adjustment as provided below.
In the event of a notice of redemption of any shares of Series B and C
Preferred Stock pursuant to Section 6 hereof, the Conversion Rights of the
shares of Series B and C Preferred Stock designated for redemption shall
terminate at the close of business on the fifth full day preceding the date
fixed for redemption, unless the redemption price is not paid when due, in which
case the Conversion Rights for such shares of Series B and C Preferred Stock
shall continue until such price is paid in full. In the event of a liquidation
of the Corporation, the Conversion Rights for the Series Preferred Stock shall
terminate at the close of business on the first full day preceding the date
fixed for the payment of any amounts distributable on liquidation to the holders
of Series Preferred Stock.
(b) Fractional Shares. No fractional shares of Common Stock shall be
-----------------
issued upon conversion of the Series Preferred Stock. In lieu of any fractional
shares to which the holder would otherwise be entitled, the Corporation shall
pay cash equal to such fraction multiplied by the then effective Series A
Conversion Price, Series B Conversion Price or Series C Conversion Price, as the
case may be.
(c) Mechanics of Conversion.
-----------------------
(i) In order for a holder of Series Preferred Stock to
convert shares of Series Preferred Stock into shares of Common Stock, such
holder shall surrender the certificate or certificates for such shares of Series
Preferred Stock, at the office of the transfer agent for the Series Preferred
Stock (or at the principal office of the Corporation if the Corporation serves
as its own transfer agent), together with written notice that such holder elects
to convert all or any number of shares of the Series Preferred Stock represented
by such certificate or certificates. Such notice shall state such holder's name
or the names of the nominees in which such holder wishes the certificate or
certificates for shares of Common Stock to be issued. If required by the
Corporation, certificates surrendered for conversion shall be endorsed or
accompanied by a written instrument or instruments of transfer, in form
satisfactory to the Corporation, duly executed by the registered holder or his
or its attorney duly authorized in writing. The date of receipt of such
certificate and notice by the transfer agent (or by the corporation if the
Corporation serves as its own transfer agent) shall be the conversion date
("Conversion Date"). The Corporation shall, as soon as practicable after the
Conversion Date, issue and deliver at such office to such holder of Series
Preferred Stock, or
<PAGE>
-10-
to his or its nominees, a certificate or certificates for the number of shares
of Common Stock to which such holder shall be entitled together with cash in
lieu of any fraction of a share.
(ii) The Corporation shall at all times when any shares of
Series Preferred Stock shall be outstanding, reserve and keep available out of
its authorized but unissued stock, for the purpose of effecting the conversion
of the Series Preferred Stock, such number of its duly authorized shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all outstanding Series Preferred Stock. Before taking any action which would
cause an adjustment reducing the Series A Conversion Price, Series B Conversion
Price or Series C Conversion Price below the then par value of the shares of
Common Stock issuable upon conversion of the Series A Preferred Stock, Series B
Preferred Stock or Series C Conversion Price, respectively, the Corporation will
take any corporate action which may, in the opinion of its counsel, be necessary
in order that the Corporation may validly and legally issue fully paid and
nonassessable shares of Common Stock at such adjusted Series A Conversion Price,
Series B Conversion Price or Series C Conversion Price, as the case may be.
(iii) Upon any such conversion, no adjustment to the Series A
Conversion Price, Series B Conversion Price or Series C Conversion Price shall
be made for any declared but unpaid dividends on the Series Preferred Stock
surrendered for conversion or on the Common Stock delivered upon conversion.
(iv) All shares of Series Preferred Stock which shall have
been surrendered for conversion as herein provided shall no longer be deemed to
be outstanding and all rights with respect to such shares, including the rights,
if any, to receive notices and to vote, shall immediately cease and terminate on
the Conversion Date, except only the right of the holders thereof to receive
shares of Common Stock in exchange therefor and payment of any dividends
declared but unpaid thereon. Any shares of Series Preferred Stock so converted
shall be retired and cancelled and shall not be reissued, and the Corporation
(without the need for stockholder action) may from time to time take such
appropriate action as may be necessary to reduce the authorized number of shares
of Series Preferred Stock accordingly.
(v) The Corporation shall pay any and all issue and other
taxes that may be payable in respect of any issuance or delivery of shares of
Common Stock upon conversion of shares of Series Preferred Stock pursuant to
this Section 4. The Corporation shall not, however, be required to pay any tax
which may be payable in respect of any transfer involved in the issuance and
delivery of shares of Common Stock in a name other than that in which the shares
of Series Preferred Stock so converted were registered, and no such issuance or
delivery shall be made unless and until the person or entity requesting such
issuance has paid to the Corporation the amount of any such tax or has
established, to the satisfaction of the Corporation, that such tax has been
paid.
(d) Adjustments to Series B Conversion Price and Series C Conversion
----------------------------------------------------------------
Price - Diluting Issues:
- -----------------------
<PAGE>
-11-
(i) Special Definitions. For purposes of this Subsection 4(d),
the following definitions shall apply:
(A) "Option" shall mean rights, options or warrants to
subscribe for, purchase or otherwise acquire Common Stock or Convertible
Securities.
(B) "Series C Original Issue Date" shall mean July 12, 1999.
(C) "Convertible Securities" shall mean any evidences or
indebtedness, shares or other securities directly or indirectly convertible into
or exchangeable for Common Stock.
(D) "Additional Shares of Common Stock" shall mean all shares
---------------------------------
of Common Stock issued (or, pursuant to Subsection 4(d)(iii) below, deemed to be
issued) by the Corporation after the Series C Original Issue Date, other than:
(I) shares of Common Stock issued or issuable upon
conversion of any Convertible Securities or
exercise of any warrants outstanding on the Series
C Original Issue Date;
(II) shares of Common Stock issued or issuable as a
dividend or distribution on Series B Preferred
Stock or Series C Preferred Stock;
(III) shares of Common Stock issued or issuable by
reason of a dividend, stock split, split up or
other distribution on shares of Common Stock that
is covered by Subsection 4(e) or 4(f) below;
(IV) up to 2,548,000 shares of Common Stock (subject to
appropriate adjustment in the event of any stock
dividend, stock split, combination or other
similar recapitalization affecting such shares),
issued or issuable to employees or directors of,
or consultants to the Corporation pursuant to a
plan or arrangement approved by the Board of
Directors of the Corporation and by a majority of
the members of the Board of Directors who are not
employees of the Company or any of its
subsidiaries (provided that any Options for such
shares that expire or terminate unexercised shall
not be counted toward such maximum number);
<PAGE>
-12-
(V) up to 125 Series B Shares, or shares of Common
Stock issuable upon conversion of such Series B
Shares, issuable to Education Products, Inc. or
its parent, Sylvan Learning Systems, Inc.
("Sylvan") pursuant to that certain letter
agreement, dated July 23, 1997, between Sylvan and
the Corporation;
(VI) warrants to purchase up to 105,700 shares, or
shares of Common Stock issuable upon exercise of
such warrants, issued or issuable to Edu Ventures;
(VII) warrants to purchase up to 38,000 shares, or up to
38,000 shares of Common Stock issuable upon
exercise of any warrants, issuable to J.L. Hammett
Co. pursuant to that Contract for Services and
Term Sheet dated September 29, 1998;
(VIII) warrants to purchase up to 75,000 shares, or up to
75,000 shares of Common Stock issuable upon
exercise of any warrants, issuable to National
Computer Systems, Inc.; and
(IX) warrants to purchase Series C Preferred Stock, or
shares of Series C Preferred Stock issuable upon
exercise of any warrants, or shares of Common
Stock issuable upon conversion of Series C
Preferred Stock, issuable pursuant to that certain
letter agreement, dated March 19, 1999, between
Thomas Weisel Partners LLC and the Corporation.
(ii) No Adjustment of Series B Conversion Price or Series C
------------------------------------------------------
Conversion Price. No adjustment in the number of shares of Common Stock into
- ----------------
which the Series B Preferred Stock or Series C Preferred Stock, respectively, is
convertible shall be made, by adjustment in the applicable Series B Conversion
Price or Series C Conversion Price respectively (a) unless the consideration per
share (determined pursuant to Subsection 4(d)(v)) for an Additional Share of
Common Stock issued or deemed to be issued by the Corporation is less than the
applicable Series B Conversion Price or Series C Conversion Price, respectively,
in effect immediately prior to the issue of such Additional Shares, or (b) if
the Corporation receives written notice from the holders of at least 66 2/3% of
the then outstanding shares of Series B and C Preferred Stock, voting as a
single class, that no such adjustment shall be made as the result of any
particular issuance of Additional Shares of Common Stock or generally as the
result of any issuance of Additional Shares of Common Stock.
(iii) Issue of Securities Deemed Issue of Additional Shares of
--------------------------------------------------------
Common Stock.
- ------------
<PAGE>
-13-
If the Corporation at any time or from time to time after the Series C
Original Issue Date shall issue any Options (excluding Options covered by
Subsection 4(d)(i)(D)(IV) above) or Convertible Securities or shall fix a record
date for the determination of holders of any class of securities entitled to
receive any such Options or Convertible Securities, then the maximum number of
shares of Common Stock (as set forth in the instrument relating thereto without
regard to any provision contained therein for a subsequent adjustment of such
number) issuable upon the exercise of such Options or, in the case of
Convertible Securities and Options therefor, the conversion or exchange of such
Convertible Securities, shall be deemed to be Additional Shares of Common Stock
for the purpose of the adjustment to the Series B Conversion Price or Series C
Conversion Price, respectively, issued as of the time of such issue or, in case
such a record date shall have been fixed, as of the close of business on such
record date, provided that Additional Shares of Common Stock shall not be deemed
to have been issued unless the consideration per share (determined pursuant to
Subsection 4(d)(v) hereof) of such Additional Shares of Common Stock would be
less than the applicable Series B Conversion Price or Series C Conversion Price,
respectively, in effect on the date of and immediately prior to such issue, or
such record date, as the case may be, and provided further that in any such case
in which Additional Shares of Common Stock are deemed to be issued:
(A) No further adjustment in the Series B Conversion Price or Series C
Conversion Price shall be made upon the subsequent issuance of Convertible
Securities or shares of Common Stock upon the exercise of such Options or
conversion or exchange of such Convertible Securities;
(B) If such Options or Convertible Securities by their terms provide,
with the passage of time or otherwise, for any increase or decrease in the
consideration payable to the Corporation upon the exercise, conversion or
exchange thereof, the Series B Conversion Price or Series C Conversion Price, as
the case may be, computed upon the original issue thereof (or upon the
occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon any such increase or decrease becoming
effective, be recomputed to reflect such increase or decrease insofar as it
affects such Options or the rights of conversion or exchange under such
Convertible Securities;
(C) Upon the expiration or termination of any such unexercised Option,
the Series B Conversion Price or Series C Conversion Price, as the case may be,
shall be recomputed to reflect such expiration or termination;
(D) In the event of any change in the number of shares of Common Stock
issuable upon the exercise, conversion or exchange of any such Option or
Convertible Security, including, but not limited to, a change resulting from the
antidilution provisions thereof, the Series B Conversion Price or Series C
Conversion Price, respectively, then in effect shall forthwith be readjusted to
such Series B Conversion Price or Series C Conversion Price, respectively, as
would have obtained had the adjustment which was made upon the issuance of such
Option or Convertible Security not exercised or converted prior to such change
been made upon the basis of such change; and
<PAGE>
-14-
(E) No readjustment pursuant to clause (B), (C) or (D) above shall
have the effect of increasing the Series B Conversion Price or Series C
Conversion Price, respectively, to an amount which exceeds the lower of (i) the
Series B Conversion Price or Series C Conversion Price, respectively, on the
original adjustment date, or (ii) the Series B Conversion Price or Series C
Conversion Price, respectively, that would have resulted from any issuances of
Additional Shares of Common Stock between the original adjustment date and such
readjustment date.
In the event the Corporation, after the Series C Original Issue Date,
amends the terms of any such Options or Convertible Securities (whether such
Options or Convertible Securities were outstanding on the Series C Original
Issue Date or were issued after the Series C Original Issue Date), than such
Options or Convertible Securities, as so amended, shall be deemed to have been
issued after the Series C Original Issue Date and the provisions of this
Subsection 4(d)(iii) shall apply.
(iv) Adjustment of Series B Conversion Price and Series C
----------------------------------------------------
Conversion Price Upon Issuance of Additional Shares of Common Stock.
- -------------------------------------------------------------------
In the event the Corporation shall at any time after the Series C Original
Issue Date issue Additional Shares of Common Stock (including Additional Shares
of Common Stock deemed to be issued pursuant to Subsection 4(d)(iii), but
excluding shares issued as a stock split or combination as provided in
Subsection 4(e) or upon a dividend or distribution as provided in Subsection
4(f)), without consideration or for a consideration per share less than the
applicable Series B Conversion Price or Series C Conversion Price, respectively,
in effect immediately prior to such issue, then and in such event, such Series B
Conversion Price and Series C Conversion Price, respectively, shall be reduced,
concurrently with such issue, to a price (calculated to the nearest cent)
determined by multiplying such Series B Conversion Price or Series C Conversion
Price, respectively, by a fraction, (A) the numerator of which shall be (1) the
number of shares of Common Stock outstanding immediately prior to such issue
------
plus (2) the number of shares of Common Stock which the aggregate consideration
received or to be received by the Corporation for the total number of Additional
Shares of Common Stock so issued would purchase at such Series B Conversion
Price or Series C Conversion Price, respectively; and (B) the denominator of
which shall be the number of shares of Common Stock outstanding immediately
prior to such issue plus the number of such Additional Shares of Common Stock so
issued; provided that (i) for the purpose of this Subsection 4(d)(iv), all
-------- ----
shares of Common Stock issuable upon exercise or conversion of Options or
Convertible Securities outstanding immediately prior to such issue and all
shares issuable as set forth in clauses (V), (VI) and (VII) of subsection
4(d)(i)(D) above shall be deemed to be outstanding, and (ii) the number of
shares of Common Stock deemed issuable upon exercise or conversion of such
outstanding Options and Convertible Securities shall not give effect to any
adjustments to the conversion price or conversion rate of such Options or
Convertible Securities resulting from the issuance of Additional Shares of
Common Stock that is the subject of this calculation.
<PAGE>
-15-
(v) Determination of Consideration. For purposes of this
------------------------------
Subsection 4 (d), the consideration received by the Corporation for the issue of
any Additional Shares of Common Stock shall be computed as follows:
(A) Cash and Property: Such consideration shall:
(I) insofar as it consists of cash, be computed at the
aggregate of cash received by the Corporation,
excluding amounts paid or payable for accrued
interest;
(II) insofar as it consists of property other than cash,
be computed at the fair market value thereof at the
time of such issue, as determined in good faith by
the Board of Directors; and
(III) in the event Additional Shares of Common Stock are
issued together with other shares or securities or
other assets of the Corporation for consideration
which covers both, be the proportion of such
consideration so received computed as provided in
clauses (1) and (II above, as determined in good
faith by the Board of Directors.
(B) Options and Convertible Securities. The consideration per
----------------------------------
share received by the Corporation for Additional Shares of Common Stock deemed
to have been issued pursuant to Subsection 4(d)(iii), relating to Options and
Convertible Securities shall be determined by dividing
(x) the total amount, if any, received or receivable by
the Corporation as consideration for the issue of such Options or Convertible
Securities, plus the minimum aggregate amount of additional consideration (as
set forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such consideration) payable to
the Corporation upon the exercise of such Options or the conversion or exchange
of such Convertible Securities, or in the case of Options for Convertible
Securities, the exercise of such Options for Convertible Securities and the
conversion or exchange of such Convertible Securities, by
(y) the maximum number of shares of Common Stock (as set
forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such number) issuable upon the
exercise of such Options or the conversion or exchange of such Convertible
Securities.
<PAGE>
-16-
(vi) Multiple Closing-Dates. In the event the Corporation shall
----------------------
issue on more than one date Additional Shares of Common Stock which are
comprised of shares of the same series or class of Preferred Stock, and such
issuance dates occur within a period of no more than 120 days, then, upon the
final such issuance, the Series B Conversion Price and Series C Conversion
Price, respectively, shall be adjusted to give effect to all such issuances as
if they occurred on the date of the final such issuance (and without giving
effect to any adjustments as a result of such prior issuances within such
period).
(e) Adjustments for Stock Splits and Combinations. If the Corporation
---------------------------------------------
shall at any time or from time to time after the Series C Original Issue Date
effect a subdivision of the outstanding Common Stock, the Series A Conversion
Price, Series B Conversion Price and Series C Conversion Price then in effect
immediately before that subdivision shall each be proportionately decreased. If
the Corporation shall at any time or from time to time after the Series C
Original Issue Date combine the outstanding shares of Common Stock, the Series A
Conversion Price, Series B Conversion Price and Series C Conversion Price then
in effect immediately before the combination shall each be proportionately
increased. Any adjustment under this paragraph shall become effective at the
close of business on the date the subdivision or combination becomes effective.
(f) Adjustment for Certain Dividends and Distributions. In the event
--------------------------------------------------
the Corporation at any time, or from time to time after the Series C Original
Issue Date shall make or issue, or fix a record date for the determination of
holders of Common Stock entitled to receive, a dividend or other distribution
payable in additional shares of Common Stock, then and in each such event the
Series A Conversion Price, Series B Conversion Price and Series C Conversion
Price then in effect immediately before such event shall each be decreased as of
the time of such issuance or, in the event such a record date shall have been
fixed, as of the closed business on such record date, by multiplying each such
Conversion Price then in effect by a fraction;
(1) the numerator of which shall be the total number of
shares of Common Stock issued and outstanding immediately prior to
the time of such issuance or the close of business on such record
date; and
(2) the denominator of which shall be the total number of
shares of Common Stock issued and outstanding immediately prior to
the time of such issuance or the close of business on such record
date plus the number of shares of Common stock issuable in payment
of such dividend or distribution;
provided, however, if such record date shall have been fixed and such dividend
is not fully paid or if such distribution is not fully made on the date fixed
therefor, the Series A Conversion Price, Series B Conversion Price and Series C
Conversion Price shall each be recomputed accordingly as of the close of
business on such record date and thereafter the Series A Conversion Price,
Series B Conversion Price and Series C Conversion Price shall
<PAGE>
-17-
each be adjusted pursuant to this paragraph as of the time of actual payment of
such dividends or distributions; and provided further, however, that no such
adjustment shall be made if the holders of Series Preferred Stock simultaneously
receive (i) a dividend or other distribution of shares of Common Stock in a
number equal to the number of shares of Common Stock as they would have received
if all outstanding shares of Series Preferred Stock had been converted into
Common Stock on the date of such event or (ii) a dividend or other distribution
of shares of the such kind of Series Preferred Stock, which are convertible, as
of the date of such event, into such number of shares of Common Stock as is
equal to the number of additional shares of Common Stock being issued with
respect to each share of Common Stock in such dividend or distribution.
(g) Adjustments for Other Dividends and Distributions. In the event
-------------------------------------------------
the Corporation at any time or from time to time after the Series C Original
Issue Date shall make or issue, or fix a record date for the determination of
holders of Common Stock entitled to receive, a dividend or other distribution
payable in securities of the Corporation other than shares of Common Stock, then
and in each such event provision shall be made so that the holders of the Series
Preferred Stock shall receive upon conversion thereof in addition to the number
of shares of Common Stock receivable thereupon, the amount of securities of the
Corporation that they would have received had the Series Preferred Stock been
converted into Common Stock on the date of such event and had thereafter, during
the period from the date of such event to and including the conversion date,
retained such securities receivable by them as aforesaid during such period,
giving application to all adjustments called for during such period under this
paragraph with respect to the respective rights of the holders of the Series
Preferred Stock; and provided further, however, that no such adjustment shall be
made if the holders of Series Preferred Stock simultaneously receive a dividend
or other distribution of such securities in an amount equal to the amount of
such securities as they would have received if all outstanding shares of Series
Preferred Stock had been converted into Common Stock on the date of such event.
(h) Adjustment for Reclassification, Exchange, or Substitution. If the
----------------------------------------------------------
Common Stock issuable upon the conversion of the Series Preferred Stock shall be
changed into the same or different number of shares of any class or classes of
stock, whether by capital reorganization, reclassification, or otherwise (other
than a subdivision or combination of shares or stock dividend provided for
above, or a reorganization, merger, consolidation, or sale of assets provided
for below), then and in each such event the holder of each such share of Series
Preferred Stock have the right thereafter to convert such share into the kind
and amount of shares of stock and other securities and property receivable, upon
such reorganization, reclassification, or other change, by holders of the number
of shares of Common Stock into which such shares of Series Preferred Stock might
have been converted immediately prior to such reorganization, reclassification,
or change, all subject to further adjustment as provided herein.
(i) Adjustment for Merger or Reorganization, etc. In case of any
--------------------------------------------
consolidation or merger of the Corporation with or into another corporation or
the sale of all or substantially all of the assets of the Corporation to another
corporation (other than a
<PAGE>
-18-
consolidation, merger or sale which is covered by Subsection 2(d)), each share
of Series Preferred Stock shall thereafter be convertible (or shall be converted
into a security which shall be convertible) into the kind and amount of shares
of stock or other securities or property to which a holder of the number of
shares of Common Stock of the Corporation deliverable upon conversion of such
Series Preferred Stock would have been entitled upon such consolidation, merger
or sale; and, in such case, appropriate adjustment (as determined in good faith
by the Board of Directors) shall be made in the application of the provisions in
this Section 4 set forth with respect to the rights and interest thereafter of
the holders of the Series Preferred Stock, to the end that the provisions set
forth in this Section 4 (including provisions with respect to changes in and
other adjustments of the Series A Conversion Price, Series B Conversion Price or
Series C Conversion Price, as the case may be) shall thereafter be applicable,
as nearly as reasonably may be, in relation to any shares of stock or other
property thereafter deliverable upon the conversion of the Series Preferred
Stock.
(j) No Impairment. The Corporation will not, by amendment of its
-------------
Certificate of Incorporation or through any reorganization, 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 provision 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 the
Series Preferred Stock against impairment.
(k) Certificate as to Adjustments. Upon the occurrence of each
-----------------------------
adjustment or readjustment of the Series A Conversion Price, Series B Conversion
Price or Series C Conversion Price pursuant to this Section 4, the Corporation
at its expense shall promptly compute such adjustment or readjustment in
accordance with the terms hereof and furnish to each holder of Series 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
Preferred Stock, furnish or cause to be furnished to such holder a similar
certificate setting forth (i) such adjustments and readjustments, (ii) the
Series A Conversion Price, Series B Conversion Price and Series C Conversion
Price then in effect, and (iii) the number of shares of Common Stock and the
amount, if any, of other property which then would be received upon the
conversion of Series Preferred Stock.
(1) Notice of Record Date. In the event:
---------------------
(i) that the Corporation declares a dividend (or any other
distribution) on its Common Stock payable in Common Stock or other securities of
the Corporation;
(ii) that the Corporation subdivides or combines its outstanding
shares of Common Stock;
<PAGE>
-19-
(iii) of any reclassification of the Common Stock of the
Corporation (other than a subdivision or combination of its outstanding shares
of Common Stock or a stock dividend or stock distribution thereon), or of any
consolidation or merger of the Corporation into or with another corporation, or
of the sale of all or substantially all of the assets of the Corporation; or
(iv) of the involuntary or voluntary dissolution, liquidation or
winding up of the Corporation;
then the Corporation shall cause to be filed at its principal office or at the
office of the transfer agent of the Series Preferred Stock, and (unless waived
by the holders of a majority of the shares of the Series Preferred Stock) shall
cause to be mailed to the holders of the Series Preferred Stock at their last
addresses as shown on the records of the Corporation or such transfer agent, at
least ten days prior to the date specified in (A) below or twenty days before
the date specified in (B) below, a notice stating
(A) the record date of such dividend, distribution,
subdivision or combination, or, if a record is not to be
taken, the date as of which the holders of Common Stock of
record to be entitled to such dividend, distribution,
subdivision or combination are to be determined, or
(B) the date on which such reclassification, consolidation,
merger, sale, dissolution, liquidation or winding up is
expected to become effective, and the date as of which it
is expected that holders of Common Stock of record shall be
entitled to exchange their shares of Common Stock for
securities or other property deliverable upon such
reclassification, consolidation, merger, sale, dissolution
or winding up.
5. Mandatory Conversion.
--------------------
(a) Upon the closing of the sale of shares of Common Stock, at a price
to the public of at least $10.00 per share (subject to appropriate adjustment
for stock splits, stock dividends, combinations and other similar
recapitalizations affecting such shares), in a public offering pursuant to an
effective registration statement under the Securities Act of 1933, as amended,
resulting in at least $15,000,000 of gross proceeds to the Corporation (the
"Mandatory Conversion Date"), (i) all outstanding shares of Series Preferred
Stock shall automatically be converted into shares of Common Stock, at the then
effective conversion rates and (ii) the number of authorized shares of Preferred
Stock shall be automatically reduced by the number of shares of Preferred Stock
that had been designated as Series A Preferred Stock, Series B Preferred Stock
and Series C Preferred Stock, and all provisions included under the caption
"Preferred Stock," and all references to the Series Preferred Stock shall be
deleted and shall be of no further force or effect.
<PAGE>
-20-
(b) All holders of record shares of Series Preferred Stock shall be
given written notice of the Mandatory Conversion Date and the place designated
for mandatory conversion of all such shares of Series Preferred Stock pursuant
to this Section 5. Such notice need not be given in advance of the occurrence of
the Mandatory Conversion Date. Such notice shall be sent by first class or
registered mail, postage prepaid, to each record holder of Series Preferred
Stock at such holder's address last shown on the records of the transfer agent
for the Series Preferred Sock (or the records of the Corporation, if it serves
as its own transfer agent). Upon receipt of such notice, each holder of shares
of Series Preferred Stock shall surrender his or its certificate or certificates
for all such shares to the Corporation at the place designated in such notice,
and shall thereafter receive certificates for the number of shares of Common
Stock to which such holder is entitled pursuant to this Section 5. On the
Mandatory Conversion Date all rights with respect to the Series Preferred Stock
so converted, including the rights, if any, to receive notices and vote (other
than as a holder of Common Stock) will terminate, except only the rights of the
holders thereof, upon surrender of their certificate or certificates therefor,
to receive certificates for the number of shares of Common Stock into which such
Series Preferred Stock has been converted, and payment of any declared but
unpaid dividends thereon. If so required by the Corporation, certificates
surrendered for conversion shall be endorsed or accompanied by a written
instrument or instruments of transfer, in form satisfactory to the Corporation,
duly executed by the registered holder or by his or its attorney duly authorized
in writing. As soon as practicable after the Mandatory Conversion Date and the
surrender of the certificate or certificates for Series Preferred Stock, the
Corporation shall cause to be issued and delivered to such holder, or on his or
its written order, a certificate or certificates for the number of full shares
of Common Stock issuable on such conversion in accordance with the provisions
hereof and cash as provided in Subsection 4(b) in respect of any fraction of a
share of Common Stock otherwise issuable upon such conversion.
(c) All certificates evidencing shares of Series Preferred Stock which
are required to be surrendered for conversion in accordance with the provisions
hereof shall, from and after the Mandatory Conversion Date, be deemed to have
been retired and cancelled and the shares of Series Preferred Stock represented
thereby converted into Common Stock for all purposes, notwithstanding the
failure of the holder or holders thereof to surrender such certificates on or
prior to such date. Such converted Series Preferred Stock may not be reissued,
and the Corporation may thereafter take such appropriate action (without the
need for stockholder action) as may be necessary to reduce the authorized number
of shares of Series Preferred Stock accordingly.
<PAGE>
-21-
6. Series B and C Preferred Stock Redemption
-----------------------------------------
(a) The Corporation will, subject to the conditions set forth below,
on June 30, 2004 and on each of the first and second anniversaries thereof (each
such date being referred to hereinafter as a "Series B and C Mandatory
Redemption Date"), upon receipt not less than 60 nor more than 120 days prior to
the applicable Series B and C Mandatory Redemption Date of written request(s)
for redemption from holders of at least a majority of the shares of Series B and
C Preferred Stock then outstanding, voting together as a single class on an "as
converted" basis (an "Initial Redemption Request"), redeem from each holder of
shares of Series B and C Preferred Stock that requests redemption pursuant to
the Initial Redemption Request or pursuant to a subsequent election made in
accordance with Section 6(b) below (a "Series B and C Requesting Holder"), at
price equal to the greater of, in the case of the Series B Preferred Stock,
$2,000.00 per share, and in the case of the Series C Preferred Stock, $6.269 per
share, plus in each case any dividends declared but unpaid thereon, subject to
appropriate adjustment in the event of any stock dividend stock split,
combination or other similar recapitalization affecting such shares and fair
market value as determined in good faith by the Board of Directors (the
"Mandatory Redemption Price"), the number of shares of Series B and C Preferred
Stock requested to be redeemed by each Series B and C Requesting Holder, but not
more than the following respective portion of the number of shares of Series B
and C Preferred Stock held by such Series B and C Requesting Holder on the
applicable Series B and C Mandatory Redemption Date.
Series B and C Mandatory Maximum Portion of Shares of Series B and C
Redemption Date Preferred Stock to Be Redeemed
--------------- ------------------------------
June 30, 2004 33%
June 30, 2005 50%
June 30, 2006 All outstanding shares of
Series B and C Preferred Stock
(b) The Corporation shall provide notice of its receipt of an Initial
Redemption Request, specifying the time, manner and place of redemption and the
Series B and C Mandatory Redemption Price ("Redemption Notice"), by first class
or registered mail, postage prepaid, to each holder of record of Series B and C
Preferred Stock at the address for such holder last shown on the records of the
transfer agent therefor (or the records of the Corporation, if it serves as its
own transfer agent), not less than 45 days prior to the applicable Series B and
C Mandatory Redemption Date. Each holder of Series B and C Preferred Stock
(other than a holder who has made the Initial Redemption Request) may elect to
become a Series B and C Requesting Holder on such Series B and C Mandatory
Redemption Date by so indicating in a written notice mailed to the Company, by
first class or registered mail, postage prepaid, at least 30 days prior to the
applicable Series B and C Mandatory Redemption Date. Except as provided in
Section 6(c) below, each Series B and C Requesting Holder shall surrender to the
Corporation on the applicable Series B and C Mandatory Redemption Date the
certificate(s) representing the shares to be redeemed on such date, in the
manner and at the place designated in the Redemption Notice. Thereupon, the
Mandatory Redemption Price shall
<PAGE>
-22-
be paid to the order of each such Series B and C Requesting Holder and each
certificate surrendered for redemption shall be cancelled.
(c) If the funds of the Corporation legally available for redemption
of Series B and C Preferred Stock on any Series B and C Mandatory Redemption
Date are insufficient to redeem the number shares of Series B and C Preferred
Stock required under this Section 6 to be redeemed on such date from Series B
and C Requesting Holders, those funds which are legally available will be used
to redeem the maximum possible number of such shares of Series B and C Preferred
Stock ratably in proportion to the respective amounts which would be payable in
respect of such shares if the funds of the Corporation legally available
therefor had been sufficient to redeem all shares of Series B and C Preferred
Stock required to be redeemed on such date. At any time thereafter when
additional funds of the Corporation become legally available for the redemption
of Series B and C Preferred Stock, such funds will be used, at the end of next
succeeding fiscal quarter, to redeem the balance of the shares which the
Corporation was therefore obligated to redeem, ratably on the basis set forth in
the preceding sentence.
(d) Unless there shall have been a default in payment of the Mandatory
Redemption Price, on the Series B and C Mandatory Redemption Date all rights of
the holder of the share redeemed on such date as a stockholder of the
Corporation by reason of the ownership of such share will cease, except the
right to receive the Mandatory Redemption Price of such share, without interest
upon presentation and surrender of the certificate representing such share and
such share will not from and after such Series B and C Mandatory Redemption Date
be redeemed to be outstanding.
(e) Any Series B and C Preferred Stock redeemed pursuant to this
Section 6 will be cancelled and will not under any circumstances be reissued,
sold or transferred and the Corporation may from time to time take such
appropriate action as may be necessary to reduce the authorized Series B and C
Preferred Stock accordingly.
FIFTH. The Corporation is to have perpetual existence.
SIXTH. The following provisions are included for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its Board of Directors and stockholders:
1. The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors of the Corporation.
2. The Board of Directors of the Corporation is expressly authorized
to adopt, amend or repeal the by-laws of the Corporation, subject to any
limitation thereof contained in the by-laws. The stockholders shall also have
the power to adopt, amend or repeal the by-laws of the Corporation; provided,
--------
however, that, in addition to any vote of the holders of any class or series of
- -------
stock of the Corporation required by law or by this Second Amended and Restated
Certificate of Incorporation, the affirmative vote of the holders of at least
seventy-five
<PAGE>
-23-
percent (75%) of the voting power of all of the then outstanding shares of the
capital stock of the Corporation entitled to vote generally in the election of
directors, voting together as a single class, shall be required to adopt, amend
or repeal any provision of the by-laws of the Corporation.
3. Stockholders of the Corporation may not take any action by written
consent in lieu of a meeting.
4. Special meetings of stockholders may be called at any time only by
the Chief Executive Officer, the President, the Chairman of the Board of
Directors (if any) or a majority of the Board of Directors. Business transacted
at any special meeting of stockholders shall be limited to matters relating to
the purpose or purposes stated in the notice of meeting.
5. The books of the Corporation may be kept at such place within or
without the State of Delaware as the by-laws of the Corporation may provide or
as may be designated from time to time by the Board of Directors of the
Corporation.
SEVENTH.
1. Number of Directors. The number of directors which shall constitute
-------------------
the whole Board of Directors shall be determined by resolution of a majority of
the Board of Directors, but in no event shall the number of directors be less
than three. The number of directors may be decreased at any time and from time
to time by a majority of the directors then in office, but only to eliminate
vacancies existing by reason of the death, resignation, removal or expiration of
the term of one or more directors. The directors shall be elected at the annual
meeting of stockholders by such stockholders as have the right to vote on such
election. Directors need not be stockholders of the Corporation.
2. Classes of Directors. The Board of Directors shall be and is divided
--------------------
into three classes: Class I, Class II and Class III. No one class shall have
more than one director more than any other class.
3. Election of Directors. Elections of directors need not be by written
---------------------
ballot except as and to the extent provided in the by-laws of the Corporation.
4. Terms of Office. Each director shall serve for a term ending on the
---------------
date of the third annual meeting following the annual meeting at which such
director was elected; provided, however, that each initial director in Class I
shall serve for a term ending on the date of the annual meeting next following
the end of the Corporation's fiscal year ending February 29, 2000; each initial
director in Class II shall serve for a term ending on the date of the annual
meeting next following the end of the Corporation's fiscal year ending February
28, 2001; and each initial director in Class III shall serve for a term ending
on the date of the annual meeting next following the end of the Corporation's
fiscal year ending February 28, 2002.
5. Allocation of Directors Among Classes in the Event of Increases or
------------------------------------------------------------------
Decreases in the Number of Directors. In the event of any increase or decrease
- ------------------------------------
in the authorized number
<PAGE>
-24-
of directors, (i) each director then serving as such shall nevertheless continue
as director of the class of which he or she is a member until the expiration of
such director's current term or his or her prior death, removal or resignation
and (ii) the newly created or eliminated directorships resulting from such
increase or decrease shall be apportioned by the Board of Directors among the
three classes of directors so as to ensure that no one class has more than one
director more than any other class. To the extent possible, consistent with the
foregoing rule, any newly created directorships shall be added to those classes
whose terms of office are to expire at the earliest dates following such
allocation, unless otherwise provided for from time to time by resolution
adopted by a majority of the directors then in office, though less than a
quorum. No decrease in the number of directors constituting the whole Board of
Directors shall shorten the term of an incumbent director.
6. Tenure. Notwithstanding any provisions to the contrary contained
------
herein, each director shall hold office until his or her successor is elected
and qualified, or until his or her earlier death, resignation or removal.
7. Vacancies. Unless and until filled by the stockholders, any vacancy in
---------
the Board of Directors, however occurring, including a vacancy resulting from an
enlargement of the Board of Directors, may be filled only by vote of a majority
of the directors then in office, even if less than a quorum, or by a sole
remaining director. A director elected to fill a vacancy shall be elected for
the unexpired term of his or her predecessor in office, if applicable, and a
director chosen to fill a position resulting from an increase in the number of
directors shall hold office until the next election of the class for which such
director shall have been chosen and until his or her successor is elected and
qualified, or until his or her earlier death, resignation or removal.
8. Quorum. A majority of the total number of the whole Board of Directors
------
shall constitute a quorum at all meetings of the Board of Directors. In the
event one or more of the directors shall be disqualified to vote at any meeting,
then the required quorum shall be reduced by one for each such director so
disqualified; provided, however, that in no case shall less than one-third (1/3)
of the number so fixed constitute a quorum. In the absence of a quorum at any
such meeting, a majority of the directors present may adjourn the meeting from
time to time without further notice other than announcement at the meeting,
until a quorum shall be present.
9. Action at Meeting. At any meeting of the Board of Directors at which a
-----------------
quorum is present, the vote of a majority of those present shall be sufficient
to take any action, unless a different vote is specified by law or the
Corporation's by-laws.
10. Removal. Any one or more or all of the directors may be removed with
-------
cause only by the holders of at least seventy-five percent (75%) of the shares
then entitled to vote at an election of directors. Directors may not be removed
without cause.
11. Stockholder Nominations and Introduction of Business, Etc. Advance
---------------------------------------------------------
notice of stockholder nominations for election of directors and other business
to be brought by stockholders before a meeting of stockholders shall be given in
the manner provided in the by-laws of the Corporation.
<PAGE>
-25-
12. Rights of Preferred Stock. The provisions of this Article are subject
-------------------------
to the rights of the holders of any series of Preferred Stock from time to time
outstanding.
EIGHTH. No director (including any advisory director) of the Corporation
shall be personally liable to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director notwithstanding any provision
of law imposing such liability; provided, however, that, to the extent provided
by applicable law, this provision shall not eliminate the liability of a
director (i) for any breach of the director's duty of loyalty to the Corporation
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the General Corporation Law of the State of Delaware, or (iv) for
any transaction from which the director derived an improper personal benefit. No
amendment to or repeal of this provision shall apply to or have any effect on
the liability or alleged liability of any director for or with respect to any
acts or omissions of such director occurring prior to such amendment or repeal.
NINTH. The Board of Directors of the Corporation, when evaluating any
offer of another party (a) to make a tender or exchange offer for any equity
security of the Corporation or (b) to effect a business combination, shall, in
connection with the exercise of its judgment in determining what is in the best
interests of the Corporation as whole, be authorized to give due consideration
to any such factors as the Board of Directors determines to be relevant,
including, without limitation:
(i) the interests of the Corporation's stockholders, including the
possibility that these interests might be best served by the continued
independence of the Corporation;
(ii) whether the proposed transaction might violate federal or state
laws;
(iii) not only the consideration being offered in the proposed
transaction, in relation to the then current market price for the
outstanding capital stock of the Corporation, but also to the market price
for the capital stock of the Corporation over a period of years, the
estimated price that might be achieved in a negotiated sale of the
Corporation as a whole or in part or through orderly liquidation, the
premiums over market price for the securities of other corporations in
similar transactions, current political, economic and other factors bearing
on securities prices and the Corporation's financial condition and future
prospects; and
(iv) the social, legal and economic effects upon employees, suppliers,
customers, creditors and others having similar relationships with the
Corporation, upon the communities in which the Corporation conducts its
business and upon the economy of the state, region and nation.
In connection with any such evaluation, the Board of Directors is authorized to
conduct such investigations and engage in such legal proceedings as the Board of
Directors may determine.
<PAGE>
-26-
TENTH. The Corporation reserves the right to amend or repeal any
provision contained in this Second Amended and Restated Certificate of
Incorporation in the manner prescribed by the laws of the State of Delaware and
all rights conferred upon stockholders are granted subject to this reservation,
provided, however, that in addition to any vote of the holders of any class or
- -------- -------
series of stock of the Corporation required by law, this Second Amended and
Restated Certificate of Incorporation or a Certificate of Designation with
respect to a series of Preferred Stock, the affirmative vote of the holders of
shares of voting stock of the Corporation representing at least seventy-five
percent (75%) of the voting power of all of the then outstanding shares of the
capital stock of the Corporation entitled to vote generally in the election of
directors, voting together as a single class, shall be required to (i) reduce or
eliminate the number of authorized shares of Common Stock or the number of
authorized shares of Preferred Stock set forth in Article FOURTH or (ii) amend
or repeal, or adopt any provision inconsistent with, Parts A and B of Article
FOURTH and Articles FIFTH, SIXTH, SEVENTH, EIGHTH, NINTH and this Article TENTH
of this Second Amended and Restated Certificate of Incorporation.
[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]
<PAGE>
-27-
IN WITNESS WHEREOF, the undersigned has hereunto signed his name and
affirms that the statements made in this Second Amended and Restated Certificate
of Incorporation are true under the penalties of perjury this ____ day of
________, 1999.
By:
-------------------------------
Name: Robert Cahill
Title: Vice President, Finance
Attest:
By:
--------------------------
David Blohm
Secretary
<PAGE>
EXHIBIT 3.3
-----------
CERTIFICATE OF AMENDMENT
TO
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
SMARTERKIDS.COM, INC.
SmarterKids.com, Inc. (the "Corporation"), a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, does hereby certify as follows:
FIRST: That the Board of Directors of the Corporation, by unanimous
written consent, duly adopted resolutions setting forth a proposed amendment to
the Corporation's Second Amended and Restated Certificate of Incorporation,
declaring said amendment to be advisable and directing consideration thereof
by the stockholders of the Corporation. The resolutions setting forth the
proposed amendment are as follows:
RESOLVED: That, subject to stockholder approval, Article FOURTH of the
Corporation's Third Amended and Restated Certificate of
Incorporation, be amended and restated and shall read in its
entirety as set forth on Exhibit A attached hereto.
---------
SECOND: The Board of Directors of the Corporation directed that such
amendment be submitted to the stockholders of the Corporation for their consent
and approval and, in lieu of a meeting and vote of stockholders, the
stockholders having not less than the minimum number of votes that is necessary
to consent to this amendment have given written consent to said amendment in
accordance with the provisions of Section 228 of the DGCL.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Sections 242 and 228 of the DGCL.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
-2-
IN WITNESS WHEREOF, the undersigned has executed, signed and
acknowledged this Certificate of Amendment this day of , 1999.
-- ----------
SMARKTERKIDS.COM, INC.
By:
------------------------------
Name: Robert Cahill
Title: Vice President, Finance
Attest:
By:
-----------------------------------
David Blohm
Secretary
<PAGE>
-3-
Exhibit A
---------
"FOURTH. The total number of shares of all classes of capital stock which the
Corporation shall have authority to issue is 100,000,000 shares, consisting of
90,000,000 shares of Common Stock with a par value of $.01 per share (the
"Common Stock") and 10,000,000 shares of Preferred Stock with a par value of
$.01 per share (the "Preferred Stock").
A description of the respective classes of stock and a statement of the
designations, powers, preferences and rights, and the qualifications,
limitations and restrictions of the Preferred Stock and Common Stock are as
follows:
A. COMMON STOCK
------------
1. General. All shares of Common Stock will be identical and will
-------
entitle the holders thereof to the same rights, powers and privileges. The
rights, powers and privileges of the holders of the Common Stock are subject
to and qualified by the rights of holders of the Preferred Stock.
2. Dividends. Dividends may be declared and paid on the Common Stock
---------
from funds lawfully available therefor as and when determined by the Board of
Directors and subject to any preferential dividend rights of any then
outstanding Preferred Stock.
3. Dissolution, Liquidation or Winding Up. In the event of any
--------------------------------------
dissolution, liquidation or winding up of the affairs of the Corporation,
whether voluntary or involuntary, each issued and outstanding share of
Common Stock shall entitle the holder thereof to receive an equal portion of
the net assets of the Corporation available for distribution to the holders
of Common Stock, subject to any preferential rights of any then outstanding
Preferred Stock.
4. Voting Rights. Except as otherwise required by law or this Third
-------------
Amended and Restated Certificate of Incorporation, each holder of Common Stock
shall have one vote in respect of each share of stock held of record by such
holder on the books of the Corporation for the election of directors and on
all matters submitted to a vote of stockholders of the Corporation. Except as
otherwise required by law or provided herein, holders of Common Stock shall
vote together with holders of the Preferred Stock as a single class, subject
to any special or preferential voting rights of any then outstanding Preferred
Stock. There shall be no cumulative voting.
<PAGE>
-4-
B. PREFERRED STOCK
---------------
The Preferred Stock may be issued in one or more series at such time or
times and for such consideration or considerations as the Board of Directors of
the Corporation may determine. Each series shall be so designated as to
distinguish the shares thereof from the shares of all other series and classes.
Except as otherwise provided in this Third Amended and Restated Certificate of
Incorporation, different series of Preferred Stock shall not be construed to
constitute different classes of shares for the purpose of voting by classes.
The Board of Directors is expressly authorized to provide for the
issuance of all or any shares of the undesignated Preferred Stock in one or more
series, each with such designations, preferences, voting powers (or special,
preferential or no voting powers), relative, participating, optional or other
special rights and privileges and such qualifications, limitations or
restrictions thereof as shall be stated in the resolution or resolutions adopted
by the Board of Directors to create such series, and a certificate of said
resolution or resolutions (a "Certificate of Designation") shall be filed in
accordance with the General Corporation Law of the State of Delaware. The
authority of the Board of Directors with respect to each such series shall
include, without limitation of the foregoing, the right to provide that the
shares of each such series may be: (i) subject to redemption at such time or
times and at such price or prices; (ii) entitled to receive dividends (which may
be cumulative or non-cumulative) at such rates, on such conditions, and at such
times, and payable in preference to, or in such relation to, the dividends
payable on any other class or classes or any other series; (iii) entitled to
such rights upon the dissolution of, or upon any distribution of the assets of,
the Corporation; (iv) convertible into, or exchangeable for, shares of any other
class or classes of stock, or of any other series of the same or any other class
or classes of stock of the Corporation at such price or prices or at such rates
of exchange and with such adjustments, if any; (v) entitled to the benefit of
such limitations, if any, on the issuance of additional shares of such series or
shares of any other series of Preferred Stock; or (vi) entitled to such other
preferences, powers, qualifications, rights and privileges, all as the Board of
Directors may deem advisable and as are not inconsistent with law and the
provisions of this Third Amended and Restated Certificate of Incorporation."
<PAGE>
EXHIBIT 3.4
-----------
AMENDED AND RESTATED BY-LAWS
SMARTERKIDS.COM, INC.
A DELAWARE CORPORATION
<PAGE>
* * * *
AMENDED BY-LAWS
* * * *
ARTICLE I
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings. All meetings of the stockholders shall be
-----------------
held at such place within or without the State of Delaware as may be fixed from
time to time by the board of directors or the chief executive officer, or if not
so designated, at the registered office of the corporation.
Section 2. Annual Meeting. Annual meetings of stockholders shall be held
--------------
on March 31 in each year if not a legal holiday, and if a legal holiday, then on
the next secular day following, at 10:00 a.m., or at such other date and time as
shall be designated from time to time by the board of directors or the chief
executive officer, at which meeting the stockholders shall elect by a plurality
vote a board of directors and shall transact such other business as may properly
be brought before the meeting. If no annual meeting is held in accordance with
the foregoing provisions, the board of directors shall cause the meeting to be
held as soon thereafter as convenient, which meeting shall be designated a
special meeting in lieu of annual meeting.
Section 3. Special Meetings. Special meetings of the stockholders, for any
----------------
purpose or purposes, may, unless otherwise prescribed by statute or by the
certificate of incorporation, be called by the board of directors or the chief
executive officer and shall be called by the chief executive officer or
secretary at the request in writing of a majority of the board of directors, or
at the request in writing of stockholders owning a majority in amount of the
-------- --
entire capital stock of the corporation issued and outstanding and entitled to
vote. Such request shall state the purpose or purposes of the proposed meeting.
Business transacted at any special meeting shall be limited to matters relating
to the purpose or purposes stated in the notice of meeting.
Section 4. Notice of Meetings. Except as otherwise provided by law,
------------------
written notice of each meeting of stockholders, annual or special, stating 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, shall be given not less
than ten or more than sixty days before the date of the meeting, to each
stockholder entitled to vote at such meeting.
2
<PAGE>
Section 5. Voting List. The officer who has charge of the stock ledger of
-----------
the corporation shall prepare and make, at least ten days before every meeting
of stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city or town 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 stockholder who is
present.
Section 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, the
certificate of incorporation or these by-laws. Where a separate vote by a class
or classes is required, a majority of the outstanding shares of such class or
classes, present in person or represented by proxy, shall constitute a quorum
entitled to take action with respect to that vote on that matter. If no quorum
shall be present or represented at any meeting of stockholders, such meeting may
be adjourned in accordance with Section 7 hereof, until a quorum shall be
present or represented.
Section 7. Adjournments. Any meeting of stockholders may be adjourned
------------
from time to time to any other time and to any other place at which a meeting of
stockholders may be held under these by-laws, which time and place shall be
announced at the meeting, by a majority of the stockholders present in person or
represented by proxy at the meeting and entitled to vote (whether or not a
quorum is present), or, if no stockholder is present or represented by proxy, by
any officer entitled to preside at or to act as secretary of such meeting,
without notice other than announcement at the meeting. At such adjourned
meeting, any business may be transacted which might have been transacted at the
original meeting, provided that a quorum either was present at the original
meeting or is present at the adjourned meeting. If the adjournment is for more
than thirty 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.
Section 8. Action at Meetings. When a quorum is present at any meeting,
------------------
the affirmative vote of the holders of a majority of the stock present in person
or represented by proxy, entitled to vote and voting on the matter (or where a
separate vote by a class or classes is required, the affirmative vote of the
majority of shares of such class or classes present in person or represented by
proxy at the meeting) shall decide any matter (other than the election of
directors) brought before such meeting, unless the matter is one upon which by
express provision of law, the certificate of incorporation or these by-laws, a
different vote is required, in which case such express provision shall govern
and control the decision of such matter. The stock of holders who abstain from
voting on any matter shall be deemed not to have been voted on such matter.
Directors shall be elected by a plurality of the votes of the shares present in
person or represented by proxy at the meeting, entitled to vote and voting on
the election of directors.
3
<PAGE>
Section 9. Voting and Proxies. Unless otherwise provided in the
------------------
certificate of incorporation, each stockholder shall at every meeting of the
stockholders be entitled to one vote for each share of capital stock having
voting power held of record by such stockholder. Each stockholder entitled to
vote at a meeting of stockholders, or to express consent or dissent to corporate
action in writing without a meeting, may authorize another person or persons to
act for him by proxy, but no such proxy shall be voted or acted upon after three
years from its date, unless the proxy provides for a longer period.
Section 10. Action Without Meeting. Any action required to be taken at
----------------------
any annual or special meeting of stockholders, or any action which may be taken
at any annual or special meeting of such stockholders, may be taken without a
meeting, without prior notice and without a vote, if a consent or consents in
writing, setting forth the action so taken, shall be (1) signed and dated 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 and (2) delivered to
the corporation within sixty days of the earliest dated consent by delivery to
its registered office in the State of Delaware (in which case delivery shall be
by hand or by certified or registered mail, return receipt requested), its
principal place of business, or an officer or agent of the corporation having
custody of the book in which proceedings of meetings of stockholders are
recorded. Prompt notice of the taking of the corporate action without a meeting
by less than unanimous written consent shall be given to those stockholders who
have not consented in writing.
ARTICLE II
DIRECTORS
Section 1. Number, Election and Qualification. Except as provided in the
----------------------------------
certificate of incorporation, as amended, the number of directors which shall
constitute the whole board shall be not less than one. Within such limit, the
number of directors shall be determined by resolution of the board of directors
or by the stockholders at the annual meeting or at any special meeting of
stockholders. The directors shall be elected at the annual meeting or at any
special meeting of the stockholders, except as provided in Section 3 of this
Article, and each director elected shall hold office until his successor is
elected and qualified, unless sooner displaced. Directors need not be
stockholders.
Section 2. Enlargement. The number of the board of directors may be
-----------
increased at any time by vote of a majority of the directors then in office.
Section 3. Vacancies. Except as provided in the certificate of
---------
incorporation, as amended, vacancies and newly created directorships resulting
from any increase in the authorized number of directors may be filled by a
majority of the directors then in office, though less than a quorum, or by a
sole remaining director, and the directors so chosen shall hold office until the
next annual election and until their successors are duly elected and shall
qualify, unless sooner displaced. If there are no directors in office, then an
election of directors may be held in the manner provided by statute. In the
event of a vacancy in the board of directors, the remaining
4
<PAGE>
directors, except as otherwise provided by law or these by-laws, may exercise
the powers of the full board until the vacancy is filled.
Section 4. Resignation and Removal. Any director may resign at any time
-----------------------
upon written notice to the corporation at its principal place of business or to
the chief executive officer or secretary. Such resignation shall be effective
upon receipt unless it is specified to be effective at some other time or upon
the happening of some other event. 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, unless otherwise
specified by law or the certificate of incorporation.
Section 5. General Powers. The business and affairs of the corporation
--------------
shall be managed by its board of directors, which may exercise all powers of the
corporation and do all such lawful acts and things as are not by statute or by
the certificate of incorporation or by these by-laws directed or required to be
exercised or done by the stockholders.
Section 6. Chairman of the Board. If the board of directors appoints a
---------------------
chairman of the board, he shall, when present, preside at all meetings of the
stockholders and the board of directors. He shall perform such duties and
possess such powers as are customarily vested in the office of the chairman of
the board or as may be vested in him by the board of directors.
Section 7. Place of Meetings. The board of directors may hold meetings,
-----------------
both regular and special, either within or without the State of Delaware.
Section 8. 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; provided that any director who is absent when
such a determination is made shall be given prompt notice of such determination.
A regular meeting of the board of directors may be held without notice
immediately after and at the same place as the annual meeting of stockholders.
Section 9. Special Meetings. Special meetings of the board may be called
----------------
by the chief executive officer, secretary, or on the written request of two or
more directors, or by one director in the event that there is only one director
in office. Two days' notice to each director, either personally or by telegram,
cable, telecopy, commercial delivery service, telex or similar means sent to his
business or home address, or three days' notice by written notice deposited in
the mail, shall be given to each director by the secretary or by the officer or
one of the directors calling the meeting. A notice or waiver of notice of a
meeting of the board of directors need not specify the purposes of the meeting.
Section 10. Quorum, Action at Meeting, Adjournments. At all meetings of
---------------------------------------
the board a majority of directors then in office, but in no event less than one
third of the entire board, 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 law or by the certificate of
incorporation. For purposes of this section, the term "entire board" shall mean
the number of directors last fixed by the stockholders or directors, as the case
may be, in accordance with law and these by-laws;
5
<PAGE>
provided, however, that if less than all the number so fixed of directors were
elected, the "entire board" shall mean the greatest number of directors so
elected to hold office at any one time pursuant to such authorization. If a
quorum shall not be present at any meeting of the board of directors, a majority
of the directors present thereat may adjourn the meeting from time to time,
without notice other than announcement at the meeting, until a quorum shall be
present.
Section 11. Action by Consent. Unless otherwise restricted by the
-----------------
certificate of incorporation or these by-laws, 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.
Section 12. Telephonic Meetings. Unless otherwise restricted by the
-------------------
certificate of incorporation or these by-laws, members of the board of directors
or of any committee thereof may participate in a meeting of the board of
directors or of any committee, as the case may be, 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.
Section 13. Committees. The board of directors may, by resolution passed
----------
by a majority of the whole board, designate one or more committees, 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. Any such committee, to the extent provided in the resolution of the
board of directors, 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 which may require it; but no such committee shall have the power or
authority in reference to amending the certificate of incorporation, adopting an
agreement of merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the corporation's property and
assets, recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or amending the by-laws of the corporation; and,
unless the resolution designating such committee or the certificate of
incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend or to authorize the issuance of stock. Such
committee or committees shall have such name or names as may be determined from
time to time by resolution adopted by the board of directors. Each committee
shall keep regular minutes of its meetings and make such reports to the board of
directors as the board of directors may request. Except as the board of
directors may otherwise determine, any committee may make rules for the conduct
of its business, but unless otherwise provided by the directors or in such
rules, its business shall be conducted as nearly as possible in the same manner
as is provided in these by-laws for the conduct of its business by the board of
directors.
Section 14. Compensation. Unless otherwise restricted by the certificate
------------
of incorporation or these by-laws, the board of directors shall have the
authority to fix from time to time the compensation of directors. The directors
may be paid their expenses, if any, of
6
<PAGE>
attendance at each meeting of the board of directors and the performance of
their responsibilities as directors and may be paid a fixed sum for attendance
at each meeting of the board of directors and/or a stated salary as director. No
such payment shall preclude any director from serving the corporation or its
parent or subsidiary corporations in any other capacity and receiving
compensation therefor. The board of directors may also allow compensation for
members of special or standing committees for service on such committees.
ARTICLE III
OFFICERS
Section 1. Enumeration. The officers of the corporation shall be chosen
-----------
by the board of directors and shall be a president, a secretary and a treasurer
and such other officers with such titles, terms of office and duties as the
board of directors may from time to time determine, including a chairman of the
board, one or more vice-presidents, and one or more assistant secretaries and
assistant treasurers. If authorized by resolution of the board of directors, the
chief executive officer may be empowered to appoint from time to time assistant
secretaries and assistant treasurers. Any number of offices may be held by the
same person, unless the certificate of incorporation or these by-laws otherwise
provide.
Section 2. Election. The board of directors at its first meeting after
--------
each annual meeting of stockholders shall choose a president, a secretary and a
treasurer. Other officers may be appointed by the board of directors at such
meeting, at any other meeting, or by written consent.
Section 3. Tenure. The officers of the corporation shall hold office
------
until their successors are chosen and qualify, unless a different term is
specified in the vote choosing or appointing him, or until his earlier death,
resignation or removal. Any officer elected or appointed by the board of
directors or by the chief executive officer may be removed at any time, with or
without cause, by the affirmative vote of a majority of the board of directors
or a committee duly authorized to do so, except that any officer appointed by
the chief executive officer may also be removed at any time, with or without
cause, by the chief executive officer. Any vacancy occurring in any office of
the corporation may be filled by the board of directors, at its discretion. Any
officer may resign by delivering his written resignation to the corporation at
its principal place of business or to the chief executive officer or the
secretary. Such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event.
Section 4. President. The president shall be the chief operating officer
---------
of the corporation. He shall also be the chief executive officer unless the
board of directors otherwise provides. If no chief executive officer shall have
been appointed by the board of directors, all references herein to the "chief
executive officer" shall be to the president. The president shall, unless the
board of directors provides otherwise in a specific instance or generally,
preside at all meetings of the stockholders and the board of directors, have
general and active management of the business of the corporation and see that
all orders and resolutions of the board of directors are carried into effect.
The president shall execute bonds, mortgages, and other contracts requiring a
7
<PAGE>
seal, under the seal of the corporation, except where required or permitted by
law to be otherwise signed and executed and except where the signing and
execution thereof shall be expressly delegated by the board of directors to some
other officer or agent of the corporation.
Section 5. Vice-Presidents. In the absence of the president or in the
---------------
event of his or her inability or refusal to act, the vice-president, or if there
be more than one vice-president, the vice-presidents in the order designated by
the board of directors or the chief executive officer (or in the absence of any
designation, then in the order determined by their tenure in office) shall
perform 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 perform such other duties and have such other powers as the
board of directors or the chief executive officer may from time to time
prescribe.
Section 6. Secretary. The secretary shall have such powers and perform
---------
such duties as are incident to the office of secretary. The secretary shall
maintain a stock ledger and prepare lists of stockholders and their addresses as
required and shall be the custodian of corporate records. The secretary shall
attend all meetings of the board of directors and all meetings of the
stockholders and record all the proceedings of the meetings of the corporation
and of the board of directors in a book to be kept for that purpose and shall
perform like duties for the standing committees when required. The secretary
shall give, or cause to be given, notice of all meetings of the stockholders and
special meetings of the board of directors, and shall perform such other duties
as may be from time to time prescribed by the board of directors or chief
executive officer, under whose supervision the secretary shall be. The secretary
shall have custody of the corporate seal of the corporation and the secretary,
or an assistant secretary, shall have authority to affix the same to any
instrument requiring it and when so affixed, it may be attested by his or her
signature or by the signature of such assistant secretary. The board of
directors may give general authority to any other officer to affix the seal of
the corporation and to attest the affixing by his or her signature.
Section 7. Assistant Secretaries. The assistant secretary, or if there be
---------------------
more than one, the assistant secretaries in the order determined by the board of
directors, the chief executive officer or the secretary (or if there be no such
determination, then in the order determined by their tenure in office), 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 the board of
directors, the chief executive officer or the secretary may from time to time
prescribe. In the absence of the secretary or any assistant secretary at any
meeting of stockholders or directors, the person presiding at the meeting shall
designate a temporary or acting secretary to keep a record of the meeting.
Section 8. Treasurer. The treasurer shall perform such duties and shall
---------
have such powers as may be assigned to him or her by the board of directors or
the chief executive officer. In addition, the treasurer shall perform such
duties and have such powers as are incident to the office of treasurer. The
treasurer shall have the custody of the corporate funds and securities and shall
keep full and accurate accounts of receipts and disbursements in books belonging
to the
8
<PAGE>
corporation and shall deposit all moneys and other valuable effects in the name
and to the credit of the corporation in such depositories as may be designated
by the board of directors. He shall disburse the funds of the corporation as may
be ordered by the board of directors, taking proper vouchers for such
disbursements, and shall render to the chief executive officer and the board of
directors, when the chief executive officer or board of directors so requires,
an account of all his or her transactions as treasurer and of the financial
condition of the corporation.
Section 9. Assistant Treasurers. The assistant treasurer, or if there
--------------------
shall be more than one, the assistant treasurers in the order determined by the
board of directors, the chief executive officer or the treasurer (or if there be
no such determination, then in the order determined by their tenure in office),
shall, in the absence of the treasurer or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the treasurer
and shall perform such other duties and have such other powers as the board of
directors, the chief executive officer or the treasurer may from time to time
prescribe.
Section 10. Bond. If required by the board of directors, any officer
----
shall give the corporation a bond in such sum and with such surety or sureties
and upon such terms and conditions as shall be satisfactory to the board of
directors, including without limitation a bond for the faithful performance of
the duties of his office and for the restoration to the corporation of all
books, papers, vouchers, money and other property of whatever kind in his
possession or under his control and belonging to the corporation.
ARTICLE IV
NOTICES
Section 1. Delivery. Whenever, under the provisions of law, or of the
--------
certificate of incorporation or these by-laws, written notice is required to be
given to any director or stockholder, such notice may be given by mail,
addressed to such director or stockholder, at his address as it appears on the
records of the corporation, with postage thereon prepaid, and such notice shall
be deemed to be given at the time when the same shall be deposited in the United
States mail. Unless written notice by mail is required by law, written notice
may also be given by telegram, cable, telecopy, commercial delivery service,
telex or similar means, addressed to such director or stockholder at his address
as it appears on the records of the corporation, in which case such notice shall
be deemed to be given when delivered into the control of the persons charged
with effecting such transmission, the transmission charge to be paid by the
corporation or the person sending such notice and not by the addressee. Oral
notice or other in-hand delivery (in person or by telephone) shall be deemed
given at the time it is actually given.
Section 2. Waiver of Notice. Whenever any notice is required to be given
----------------
under the provisions of law or of the certificate of incorporation or of these
by-laws, a waiver thereof in writing, signed by the person or persons entitled
to said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
9
<PAGE>
ARTICLE V
INDEMNIFICATION
Section 1. Actions other than 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, 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 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 proceedings, 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 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
reasonable cause to believe that his conduct was unlawful.
Section 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
he or she 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) actually and
reasonably incurred by such person in connection with the defense or settlement
of such action or suit if such person acted in good faith and in a manner he or
she reasonably believed to be in or not opposed to the best interests of the
corporation and 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 unless and only to the extent that the Court of Chancery of the State of
Delaware 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 Court of Chancery of the State of Delaware
or such other court shall deem proper.
Section 3. Success on the Merits. To the extent that any person described
---------------------
in Section I or 2 of this Article V has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in said
Sections, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
10
<PAGE>
Section 4. Specific Authorization. Any indemnification under Section I or
----------------------
2 of this Article V (unless ordered by a court) shall be made by the corporation
only as authorized in the specific case upon a determination that
indemnification of any person described in said Sections is proper in the
circumstances because he has met the applicable standard of conduct set forth in
said Sections. Such determination shall be made (1) by the board of directors by
a majority vote of directors who were not parties to such action, suit or
proceeding (even though less than a quorum), or (2) if there are no
disinterested directors or if a majority of disinterested directors so directs,
by independent legal counsel (who may be regular legal counsel to the
corporation) in a written opinion, or (3) by the stockholders of the
corporation.
Section 5. Advance Paying . Expenses incurred in defending a pending or
---------------
threatened civil or criminal action, suit or proceeding may 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 any person
described in said Section to repay such amount if it shall ultimately be
determined that he or she is not entitled to indemnification by the corporation
as authorized in this Article V.
Section 6. Non-Exclusivity. The indemnification and advancement of
---------------
expenses provided by, or granted pursuant to, the other Sections of this Article
V shall not be deemed exclusive of any other rights to which those provided
indemnification or advancement of expenses may be entitled under any by-law,
agreement, vote of stockholders or disinterested directors or otherwise, both as
to action in his official capacity and as to action in another capacity while
holding such office.
Section 7. Insurance. The board of directors may authorize, by a vote of
---------
the majority of the full board, the corporation 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
him and incurred by him in any such capacity, or arising out of his status as
such, whether or not the corporation would have the power to indemnify him
against such liability under the provisions of this Article V.
Section 8. Continuation of Indemnification and Advancement of Expenses.
-----------------------------------------------------------
The indemnification and advancement of expenses provided by, or granted pursuant
to, this Article V shall 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 a person.
Section 9. Severability. If any word, clause or provision of this Article
------------
V or any award made hereunder shall for any reason be determined to be invalid,
the provisions hereof shall not otherwise be affected thereby but shall remain
in full force and effect.
Section 10. Intent of Article. The intent of this Article V is to provide
-----------------
for indemnification and advancement of expenses to the fullest extent permitted
by Section 145 of the General Corporation Law of Delaware. To the extent that
such Section or any successor section may be amended or supplemented from time
to time, this Article V shall be amended
11
<PAGE>
automatically and construed so as to permit indemnification and advancement of
expenses to the fullest extent from time to time permitted by law.
ARTICLE VI
CAPITAL STOCK
Section 1. Certificate of Stock. Every holder of stock in the corporation
--------------------
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 a vice-president and the treasurer or an assistant treasurer, or
the secretary or an assistant secretary of the corporation, certifying the
number of shares owned by such holder in the corporation. 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 shall have 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 were such officer, transfer agent or registrar at
the date of issue. Certificates may be issued for partly paid shares and in such
case upon the face or back of the certificates issued to represent any such
partly paid shares, the total amount of the consideration to be paid therefor,
and the amount paid thereon shall be specified.
Section 2. Lost Certificates. The board of directors may direct a new
-----------------
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the corporation alleged to have been lost,
stolen or destroyed. When authorizing such issue of a new certificate or
certificates, the board of directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed certificate or certificates, or his legal representative, to give
reasonable evidence of such loss, theft or destruction, to advertise the same in
such manner as it shall require and/or to give the corporation a bond in such
sum as it may direct as indemnity against any claim that may be made against the
corporation with respect to the certificate alleged to have been lost, stolen or
destroyed or the issuance of such new certificate.
Section 3. 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, assignment or authority to
transfer, and proper evidence of compliance with other conditions to rightful
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 upon its books.
Section 4. Record Date. 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, the board of directors may fix a record date, which
shall not precede the date upon which the resolution fixing the record date is
adopted by the board of directors, and which shall not be more than sixty days
nor less then ten days before the date of such meeting. 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.
If no record date is fixed, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of
12
<PAGE>
business on the day before the day on which notice is given, or, if notice is
waived, at the close of business on the day before the day on which the meeting
is held. In order that the corporation may determine the stockholders entitled
to consent to corporate action in writing without a meeting, the board of
directors may fix a record date, which shall not precede the date upon which the
resolution fixing the record date is adopted by the board of directors, and
which shall not be more than ten days after the date upon which the resolution
fixing the record date is adopted by the board of directors. If no record date
is fixed, the record date for determining stockholders entitled to consent to
corporate action in writing without a meeting, when no prior action by the board
of directors is required by statute, shall be the first date on which a signed
written consent setting forth the action taken or proposed to be taken is
delivered to the corporation as provided in Section 10 of Article 1. If no
record date is fixed and prior action by the board of directors is required, the
record date for determining stockholders entitled to consent to corporate action
in writing without a meeting shall be at the close of business on the date on
which the board of directors adopts the resolution taking such prior action. In
order that the corporation may determine the stockholders entitled to receive
payment of any dividend or other distribution or allotment of any rights or the
stockholders 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 a record date, which shall not precede the date
upon which the resolution fixing the record date is adopted, and which shall be
not more than sixty days prior to such action. If no record date is fixed, the
record date for determining stockholders for any such purpose shall be at the
close of business on the day on which the board of directors adopts the
resolution relating to such purpose.
Section 5. 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, and to hold liable
for calls and assessments a 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 any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
the laws of Delaware.
13
<PAGE>
ARTICLE VII
CERTAIN TRANSACTIONS
Section 1. Transactions with Interested Parties. No contract or
------------------------------------
transaction between the corporation and one or more of its directors or
officers, or between the corporation and any other corporation, partnership,
association, or other organization in which one or more of its directors or
officers are directors or officers, or have a financial interest, shall be void
or violable solely for this reason, or solely because the director or officer is
present at or participates in the meeting of the board or committee thereof
which authorizes the contract or transaction or solely because his or their
votes are counted for such purpose, if
(a) The material facts as to his relationship or interest and as to the
contract or transaction are disclosed or are known to the board of
directors or the committee, and the board or committee in good faith
authorizes the contract or transaction by the affirmative votes of a
majority of the disinterested directors, even though the disinterested
directors be less than a quorum; or
(b) The material facts as to his relationship or interest and as to the
contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the stockholders; or
(c) The contract or transaction is fair as to the corporation as of the
time it is authorized, approved or ratified, by the board of directors, a
committee thereof, or the stockholders.
Section 2. Quorum. Common or interested directors may be counted in
------
determining the presence of a quorum at a meeting of the board of directors or
of a committee which authorizes the contract or transaction.
ARTICLE VIII
GENERAL PROVISIONS
Section 1. Dividends. Dividends upon the capital stock of the corporation,
---------
if any, may be declared by the board of directors at any regular or special
meeting or by written consent, pursuant to law. Dividends may be paid in cash,
in property, or in shares of the capital stock, subject to the provisions of the
certificate of incorporation.
Section 2. Reserves. The directors may set apart out of any funds of the
--------
corporation available for dividends a reserve or reserves for any proper purpose
and may abolish any such reserve.
14
<PAGE>
Section 3. Checks. All checks or demands for money and notes of the
------
corporation shall be signed by such officer or officers or such other person or
persons as the board of directors may from time to time designate.
Section 4. Fiscal Year. The fiscal year of the corporation shall be fixed
-----------
by resolution of the board of directors.
Section 5. Seal. The board of directors may, by resolution, adopt a
----
corporate seal. The corporate seal shall have inscribed thereon the name of the
corporation, the year of its organization and the word "Delaware." The seal may
be used by causing it or a facsimile thereof to be impressed or affixed or
reproduced or otherwise. The seal may be altered from time to time by the board
of directors.
ARTICLE IX
AMENDMENTS
These by-laws may be altered, amended or repealed or new by-laws may be
adopted by the stockholders or by the board of directors, when such power is
conferred upon the board of directors by the certificate of incorporation, at
any regular meeting of the stockholders or of the board of directors or at any
special meeting of the stockholders or of the board of directors provided,
however, that in the case of a regular or special meeting of stockholders,
notice of such alteration, amendment, repeal or adoption of new by-laws be
contained in the notice of such meeting.
15
<PAGE>
Register of Amendments to the By-laws
Date Section Affected Change
--------------------------------------------------
16
<PAGE>
EXHIBIT 3.5
-----------
SECOND AMENDED AND RESTATED
BY-LAWS
OF
SMARTERKIDS.COM, INC.
<PAGE>
BY-LAWS
-------
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 1 - Stockholders...................................................... 1
- ------------------------
1.1 Place of Meetings..................................................... 1
1.2 Annual Meeting........................................................ 1
1.3 Special Meetings...................................................... 1
1.4 Notice of Meetings.................................................... 1
1.5 Voting List........................................................... 1
1.6 Quorum................................................................ 2
1.7 Adjournments.......................................................... 2
1.8 Voting and Proxies.................................................... 2
1.9 Action at Meeting..................................................... 3
1.10 Introduction of Business at Meetings.................................. 3
1.11 Action without Meeting................................................ 6
ARTICLE 2 - Directors......................................................... 6
- ---------------------
2.1 General Powers........................................................ 6
2.2 Number; Election and Qualification.................................... 7
2.3 Classes of Directors.................................................. 7
2.4 Terms in Office....................................................... 7
2.5 Allocation of Directors Among Classes in the Event of Increases or
2.6 Tenure................................................................ 8
2.7 Vacancies............................................................. 8
2.8 Resignation........................................................... 8
2.9 Regular Meetings...................................................... 8
2.10 Special Meetings...................................................... 8
2.11 Notice of Special Meetings............................................ 8
2.12 Meetings by Telephone Conference Calls................................ 9
2.13 Quorum................................................................ 9
2.14 Action at Meeting..................................................... 9
2.15 Action by Written Consent............................................. 9
2.16 Removal............................................................... 9
2.17 Committees............................................................ 9
2.18 Compensation of Directors............................................ 10
2.19 Amendments to Article................................................ 10
ARTICLE 3 - Officers......................................................... 10
- --------------------
3.1 Enumeration.......................................................... 10
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
3.2 Election............................................................. 11
3.3 Qualification........................................................ 11
3.4 Tenure............................................................... 11
3.5 Resignation and Removal.............................................. 11
3.6 Vacancies............................................................ 11
3.7 Chairman of the Board and Vice-Chairman of the Board................. 11
3.8 President............................................................ 12
3.9 Vice Presidents...................................................... 12
3.10 Secretary and Assistant Secretaries................................. 12
3.11 Treasurer and Assistant Treasurers.................................. 12
3.12 Salaries............................................................ 13
3.13 Action with Respect to Securities of Other Corporations............. 13
ARTICLE 4 - Capital Stock.................................................... 13
- -------------------------
4.1 Issuance of Stock.................................................... 13
4.2 Certificates of Stock................................................ 13
4.3 Transfers............................................................ 14
4.4 Lost, Stolen or Destroyed Certificates............................... 14
4.5 Record Date.......................................................... 14
ARTICLE 5 - General Provisions............................................... 15
- ------------------------------
5.1 Fiscal Year.......................................................... 15
5.2 Corporate Seal....................................................... 15
5.3 Notices.............................................................. 15
5.4 Waiver of Notice..................................................... 15
5.5 Evidence of Authority................................................ 15
5.6 Facsimile Signatures................................................. 15
5.7 Reliance upon Books, Reports and Records............................. 16
5.8 Time Periods......................................................... 16
5.9 Certificate of Incorporation......................................... 16
5.10 Transactions with Interested Parties................................ 16
5.11 Severability........................................................ 17
5.12 Pronouns............................................................ 17
ARTICLE 6 - Amendments....................................................... 17
- ----------------------
6.1 By the Board of Directors............................................ 17
6.2 By the Stockholders.................................................. 17
</TABLE>
<PAGE>
SECOND AMENDED AND RESTATED
BY-LAWS
OF
SMARTERKIDS.COM, INC. (the "Corporation")
ARTICLE 1 - Stockholders
------------------------
1.1 Place of Meetings. All meetings of stockholders shall be held at
-----------------
such place within or without the State of Delaware as may be designated from
time to time by the Chairman of the Board (if any), the board of directors of
the Corporation (the "Board of Directors") or the President or, if not so
designated, at the registered office of the Corporation.
1.2 Annual Meeting. The annual meeting of stockholders for the
--------------
election of directors and for the transaction of such other business as may
properly be brought before the meeting shall be held on a date to be fixed by
the Chairman of the Board (if any), Board of Directors, the Chief Executive
Officer or the President (which date shall not be a legal holiday in the place
where the meeting is to be held) at the time and place to be fixed by the
Chairman of the Board, the Board of Directors, the Chief Executive Officer or
the President and stated in the notice of the meeting.
1.3 Special Meetings. Special meetings of stockholders may be called
----------------
at any time by the Chairman of the Board (if any), a majority of the Board of
Directors, the Chief Executive Officer or the President and shall be held at
such place, on such date and at such time as shall be fixed by the Board of
Directors or the person calling the meeting. Business transacted at any special
meeting of stockholders shall be limited to matters relating to the purpose or
purposes stated in the notice of meeting.
1.4 Notice of Meetings. Except as otherwise provided by law, written
------------------
notice of each meeting of stockholders, whether annual or special, shall be
given not less than 10 nor more than 60 days before the date of the meeting to
each stockholder entitled to vote at such meeting. The notices of all meetings
shall state the place, date and hour of the meeting. The notice of a special
meeting shall state, in addition, the purpose or purposes for which the meeting
is called. If mailed, notice is given when deposited in the United States mail,
postage prepaid, directed to the stockholder at his or her address as it appears
on the records of the Corporation.
1.5 Voting List. The officer who has charge of the stock ledger of
-----------
the Corporation shall prepare, at least 10 days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
10 days prior to the meeting,
<PAGE>
-2-
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 of the meeting, and
may be inspected by any stockholder who is present. This list shall
presumptively determine the identity of the stockholders entitled to vote at the
meeting and the number of shares held by each of them.
1.6 Quorum. Except as otherwise provided by law, the Corporation's
------
Certificate of Incorporation, as such may be amended from time to time, or these
Amended and Restated By-Laws, as such may be amended from time to time (the
"Restated By-Laws"), the holders of a majority of the shares of the capital
stock of the Corporation issued and outstanding and entitled to vote at the
meeting, present in person or represented by proxy, shall constitute a quorum
for the transaction of business. Shares held by brokers which such brokers are
prohibited from voting (pursuant to their discretionary authority on behalf of
beneficial owners of such shares who have not submitted a proxy with respect to
such shares) on some or all of the matters before the stockholders, but which
shares would otherwise be entitled to vote at the meeting ("Broker Non-Votes")
shall be counted, for the purpose of determining the presence or absence of a
quorum, both (a) toward the total voting power of the shares of capital stock of
the Corporation and (b) as being represented by proxy. If a quorum has been
established for the purpose of conducting the meeting, a quorum shall be deemed
to be present for the purpose of all votes to be conducted at such meeting,
provided that where a separate vote by a class or classes, or series thereof, is
required, a majority of the voting power of the shares of such class or classes,
or series, present in person or represented by proxy shall constitute a quorum
entitled to take action with respect to that vote on that matter. If a quorum
shall fail to attend any meeting, the chairman of the meeting or the holders of
a majority of the voting power of the shares of stock entitled to vote who are
present, in person or by proxy, may adjourn the meeting to another place, date,
or time.
1.7 Adjournments. Any meeting of stockholders may be adjourned to
------------
any other time and to any other place at which a meeting of stockholders may be
held under these Restated By-Laws by the stockholders present or represented at
the meeting and entitled to vote, although less than a quorum, or, if no
stockholder is present, by any officer entitled to preside at or to act as
Secretary of such meeting. It shall not be necessary to notify any stockholder
of any adjournment of less than 30 days if the time and place of the adjourned
meeting are announced at the meeting at which adjournment is taken, unless after
the adjournment a new record date is fixed for the adjourned meeting. At the
adjourned meeting, the Corporation may transact any business which might have
been transacted at the original meeting.
1.8 Voting and Proxies. At any meeting of the stockholders, each
------------------
stockholder shall have one vote for each share of stock entitled to vote at such
meeting held of record by such stockholder and a proportionate vote for each
fractional share so held, unless otherwise provided in the Certificate of
Incorporation. Each stockholder of record entitled to vote at a meeting of
stockholders, or to express consent or dissent to corporate action in writing
without a meeting (to the extent not otherwise prohibited by the Certificate of
Incorporation or these By-laws), may vote or express such consent or dissent in
person or may authorize another person or persons to vote or act for such
stockholder by written proxy executed by such stockholder or his or her
<PAGE>
-3-
authorized agent or by a transmission permitted by law and delivered to the
Secretary of the Corporation. No such proxy shall be voted or acted upon after
three years from the date of its execution, unless the proxy expressly provides
for a longer period. Any copy, facsimile telecommunication or other reliable
reproduction of the writing or transmission created pursuant to this Section 1.8
may be substituted or used in lieu of the original writing or transmission for
any and all purposes for which the original writing or transmission could be
used, provided that such copy, facsimile telecommunication or reproduction shall
be a complete reproduction of the entire original writing or transmission.
In the election of directors, voting shall be by written ballot, and
for any other action, voting need not be by ballot.
The Corporation may, and to the extent required by law or the
Certificate of Incorporation, shall, in advance of any meeting of stockholders,
appoint one or more inspectors to act at such meeting and make a written report
thereof. The Corporation may designate one or more persons as alternate
inspectors to replace any inspector who fails to act. If no inspector or
alternate is able to act at a meeting of stockholders, the person presiding at
such meeting may, and to the extent required by law or the Certificate of
Incorporation, shall, appoint one or more inspectors to act at such meeting.
Each inspector, before entering upon the discharge of his duties, shall take and
sign an oath faithfully to execute the duties of inspector with strict
impartiality and according to the best of his or her ability.
1.9 Action at Meeting. When a quorum is present at any meeting of
-----------------
stockholders, the holders of a majority of the stock present or represented and
voting on a matter (or if there are two or more classes of stock entitled to
vote as separate classes, then in the case of each such class, the holders of a
majority of the stock of that class present or represented and voting on such
matter) shall decide any matter to be voted upon by the stockholders at such
meeting (other than the election of directors), except when a different vote is
required by express provision of law, the Certificate of Incorporation or these
Restated By-Laws. Any election of directors by the stockholders shall be
determined by a plurality of the votes cast by the stockholders entitled to vote
at such election, except as otherwise provided by the Certificate of
Incorporation. For the purposes of this paragraph, Broker Non-Votes represented
at the meeting but not permitted to vote on a particular matter shall not be
counted, with respect to the vote on such matter, in the number of (a) votes
cast, (b) votes cast affirmatively, or (c) votes cast negatively.
1.10 Introduction of Business at Meetings.
A. Annual Meetings of Stockholders.
-------------------------------
(1) Nominations of persons for election to the Board of
Directors and the proposal of business to be considered by the
stockholders may be made at an annual meeting of stockholders (a)
pursuant to the Corporation's notice of meeting, (b) by or at the
direction of the Board of Directors or (c) by any stockholder of the
Corporation who was a stockholder of record at the time of giving of
notice provided for in this Section 1.10, who is entitled to vote at the
meeting and who complies with the notice procedures set forth in this
Section 1.10.
<PAGE>
-4-
(2) For nominations or other business to be properly brought
before an annual meeting by a stockholder pursuant to clause (c) of
paragraph (A)(1) of this Section 1.10, the stockholder must have given
timely notice thereof in writing to the Secretary of the Corporation and
such other business must otherwise be a proper matter for stockholder
action. To be timely, a stockholder's notice shall be delivered to the
Secretary at the principal executive offices of the Corporation not later
than the close of business on the one hundred twentieth (120th) day nor
earlier than the close of business on the one hundred fiftieth (150th)
day prior to the first anniversary of the date of the proxy statement
delivered to stockholders in connection with the preceding year's annual
meeting; provided, however, that if either (i) the date of the annual
meeting is more than thirty (30) days before or more than sixty (60) days
after such an anniversary date or (ii) no proxy statement was delivered
to stockholders in connection with the preceding year's annual meeting,
notice by the stockholder to be timely must be so delivered not earlier
than the close of business on the ninetieth (90th) day prior to such
annual meeting and not later than the close of business on the later of
the sixtieth (60th) day prior to such annual meeting or the close of
business on the tenth (10th) day following the day on which public
announcement of the date of such meeting is first made by the
Corporation. Such stockholder's notice shall set forth (a) 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);
(b) as to any other business that the stockholder proposes to bring
before the meeting, a brief description of the business desired to be
brought before the meeting, 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 (c) as to the stockholder giving the notice and the
beneficial owner, if any, on whose behalf the nomination or proposal is
made (i) the name and address of such stockholder, as they appear on the
Corporation's books, and of such beneficial owner and (ii) the class and
number of shares of capital stock of the Corporation that are owned
beneficially and held of record by such stockholder and such beneficial
owner.
(3) Notwithstanding anything in the second sentence of
paragraph (A)(2) of this Section 1.10 to the contrary, in the event that
the number of directors to be elected to the Board of Directors of the
Corporation is increased and there is no public announcement by the
Corporation naming all of the nominees for director or specifying the
size of the increased Board of Directors at least seventy (70) days prior
to the first anniversary of the preceding year's annual meeting (or, if
the annual meeting is held more than thirty (30) days before or sixty
(60) days after such anniversary date, at least seventy (70) days prior
to such annual meeting), a stockholder's notice required by this Section
1.10 shall also be considered timely, but only with respect to nominees
for any new positions created by such increase, if it
<PAGE>
-5-
shall be delivered to the Secretary at the principal executive office
of the Corporation not later than the close of business on the tenth
(10th) day following the day on which such public announcement is first
made by the Corporation.
B. Special Meetings of Stockholders. Only such business shall be
--------------------------------
conducted at a special meeting of stockholders as shall have been brought
before the meeting pursuant to the Corporation's notice of meeting.
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 the Corporation's notice of meeting (a) by or at the
direction of the Board of Directors or (b) provided that the Board of
Directors has determined that directors shall be elected at such meeting,
by any stockholder of the Corporation who is a stockholder of record at
the time of giving of notice of the special meeting, who shall be
entitled to vote at the meeting and who complies with the notice
procedures set forth in this Section 1.10. If the Corporation calls a
special meeting of stockholders for the purpose of electing one or more
directors to the Board of Directors, any such stockholder may nominate a
person or persons (as the case may be), for election to such position(s)
as specified in the Corporation's notice of meeting, if the stockholder's
notice required by paragraph (A)(2) of this Section 1.10 shall be
delivered to the Secretary at the principal executive offices of the
Corporation not earlier than the ninetieth (90th) day prior to such
special meeting nor later than the later of (x) the close of business on
the sixtieth (60th) day prior to such special meeting or (y) the close of
business on the tenth (10th) day following the day on which public
announcement is first made of the date of such special meeting and of the
nominees proposed by the Board of Directors to be elected at such
meeting.
C. General.
-------
(1) Only such persons who are nominated in accordance with
the procedures set forth in this Section 1.10 shall be eligible to serve
as directors and only such business shall be conducted at a meeting of
stockholders as shall have been brought before the meeting in accordance
with the procedures set forth in this Section 1.10. Except as otherwise
provided by law, the Certificate of Incorporation or these Restated By-
Laws, the chairman of the meeting shall have the power and duty to
determine whether a nomination or any business proposed to be brought
before the meeting was made or proposed, as the case may be, in
accordance with the procedures set forth in this Section 1.10 and, if any
proposed nomination or business is not in compliance herewith, to declare
that such defective proposal or nomination shall be disregarded.
(2) For purposes of this Section 1.10, "public announcement"
shall mean disclosure in a press release reported by the Dow Jones News
Service, Associated Press or comparable national news service or in a
document publicly filed by the Corporation with the Securities and
Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange
Act.
<PAGE>
-6-
(3) Notwithstanding the foregoing provisions of this Section
1.10, a stockholder shall also comply with all applicable requirements of
the Exchange Act and the rules and regulations thereunder with respect to
the matters set forth herein. Nothing in this Section 1.10 shall be
deemed to affect any rights (i) of stockholders to request inclusion of
proposals in the Corporation's proxy statement pursuant to Rule 14a-8
under the Exchange Act or (ii) of the holders of any series of Preferred
Stock to elect directors under specified circumstances.
1.11 Action without Meeting. Stockholders of the Corporation may not
----------------------
take any action by written consent in lieu of a meeting. Notwithstanding any
other provision of law, the Certificate of Incorporation or these Restated By-
Laws, and notwithstanding the fact that a lesser percentage may be specified by
law, the affirmative vote of the holders of at least seventy-five percent (75%)
of the votes which all the stockholders would be entitled to cast at any annual
election of directors or class of directors shall be required to amend or
repeal, or to adopt any provision inconsistent with, this Section 1.11.
ARTICLE 2 - Directors
---------------------
2.1 General Powers. The business and affairs of the Corporation
--------------
shall be managed by or under the direction of a Board of Directors, who may
exercise all of the powers of the Corporation except as otherwise provided by
law or the Certificate of Incorporation. In the event of a vacancy in the Board
of Directors, the remaining directors, except as otherwise provided by law or
the Certificate of Incorporation, may exercise the powers of the full Board of
Directors until the vacancy is filled. Without limiting the foregoing, the
Board of Directors may:
(a) declare dividends from time to time in accordance with law;
(b) purchase or otherwise acquire any property, rights or
privileges on such terms as it shall determine;
(c) authorize the creation, making and issuance, in such form as it
may determine, of written obligations of every kind, negotiable or
non-negotiable, secured or unsecured, to borrow funds and guarantee
obligations, and to do all things necessary in connection
therewith;
(d) remove any officer of the Corporation with or without cause,
and from time to time to devolve the powers and duties of any
officer upon any other person for the time being;
(e) confer upon any officer of the Corporation the power to
appoint, remove and suspend subordinate officers, employees and
agents;
(f) adopt from time to time such stock option, stock purchase,
bonus or other compensation plans for directors, officers,
employees, consultants and agents of the Corporation and its
subsidiaries as it may determine;
<PAGE>
-7-
(g) adopt from time to time such insurance, retirement, and other
benefit plans for directors, officers, employees, consultants and
agents of the Corporation and its subsidiaries as it may determine;
and
(h) adopt from time to time regulations, not inconsistent herewith,
for the management of the Corporation's business and affairs.
2.2 Number; Election and Qualification. The number of directors
----------------------------------
which shall constitute the whole Board of Directors shall be determined by
resolution of the Board of Directors, but in no event shall be less than three.
The number of directors may be decreased at any time and from time to time by a
majority of the directors then in office, but only to eliminate vacancies
existing by reason of the death, resignation, removal or expiration of the term
of one or more directors. The directors shall be elected at the annual meeting
of stockholders (or, if so determined by the Board of Directors pursuant to
Section 10 hereof, at a special meeting of stockholders), by such stockholders
as have the right to vote on such election. Directors need not be stockholders
of the Corporation.
2.3 Classes of Directors. The Board of Directors shall be and is
--------------------
divided into three classes: Class I, Class II and Class III. No one class
shall have more than one director more than any other class.
2.4 Terms in Office. Each director shall serve for a term ending on
---------------
the date of the third annual meeting following the annual meeting at which such
director was elected; provided, however, that each initial director in Class I
shall serve for a term ending on the date of the annual meeting next following
the end of the Corporation's fiscal year ending December 31, 1999; each initial
director in Class II shall serve for a term ending on the date of the annual
meeting next following the end of the Corporation's fiscal year ending December
31, 2000; and each initial director in Class III shall serve for a term ending
on the date of the annual meeting next following the end of the Corporation's
fiscal year ending December 31, 2001.
2.5 Allocation of Directors Among Classes in the Event of Increases
---------------------------------------------------------------
or Decreases in the Number of Directors. In the event of any increase or
- ---------------------------------------
decrease in the authorized number of directors, (i) each director then serving
as such shall nevertheless continue as a director of the class of which he or
she is a member until the expiration of such director's current term or his or
her prior death, removal or resignation and (ii) the newly created or eliminated
directorships resulting from such increase or decrease shall be apportioned by
the Board of Directors among the three classes of directors, subject to the
second sentence of Section 2.3. To the extent possible, consistent with the
foregoing rule, any newly created directorships shall be added to those classes
whose terms of office are to expire at the earliest dates following such
allocation, unless otherwise provided for from time to time by resolution
adopted by a majority of the directors then in office, although less than a
quorum. No decrease in the number of directors constituting the whole Board of
Directors shall shorten the term of an incumbent Director.
<PAGE>
-8-
2.6 Tenure. Notwithstanding any provisions to the contrary contained
------
herein, each director shall hold office until his or her successor is elected
and qualified, or until his or her earlier death, resignation or removal.
2.7 Vacancies. Unless and until filled by the stockholders, any
---------
vacancy in the Board of Directors, however occurring, including a vacancy
resulting from an enlargement thereof, may be filled by vote of a majority of
the directors then in office, although less than a quorum, or by a sole
remaining director. A director elected to fill a vacancy shall be elected for
the unexpired term of his or her predecessor in office, if any, and a director
chosen to fill a position resulting from an increase in the number of directors
shall hold office until the next election of directors of the class for which
such director was chosen and until his or her successor is elected and
qualified, or until his or her earlier death, resignation or removal.
2.8 Resignation. Any director may resign by delivering his or her
-----------
written resignation to the Corporation at its principal office or to the
President or Secretary. Such resignation shall be effective upon receipt unless
it is specified to be effective at some other time or upon the happening of some
other event.
2.9 Regular Meetings. Regular meetings of the Board of Directors may
----------------
be held without notice at such time and place, either within or without the
State of Delaware, as shall be determined from time to time by the Board of
Directors; provided that any director who is absent when such a determination is
made shall be given notice of the determination.
2.10 Special Meetings. Special meetings of the Board of Directors be
----------------
held at any time and place, within or without the State of Delaware, designated
in a call by the Chairman of the Board (if any), the Chief Executive Officer,
the President, two or more directors, or by one director in the event that there
is only a single director in office.
2.11 Notice of Special Meetings. Notice of any special meeting of
--------------------------
directors shall be given to each director by the Secretary or by the officer or
one of the directors calling the meeting. Notice shall be duly given to each
director (i) by giving notice to such director in person or by telephone at
least 48 hours in advance of the meeting, (ii) by sending a telegram or
delivering written notice by facsimile transmission or by hand, to his or her
last known business or home address at least 48 hours in advance of the meeting,
or (iii) by mailing written notice to his or her last known business or home
address at least 72 hours in advance of the meeting. A notice or waiver of
notice of a meeting of the Board of Directors need not specify the purposes of
the meeting.
2.12 Meetings by Telephone Conference Calls. Directors or any members
--------------------------------------
of any committee designated by the Board of Directors may participate in a
meeting of the Board of Directors or such 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 participation by such
means shall be deemed to constitute presence in person at such meeting.
2.13 Quorum. A majority of the total number of the whole Board of
------
Directors shall constitute a quorum at all meetings of the Board of Directors.
In the event one or more of the
<PAGE>
-9-
directors shall be disqualified to vote at any meeting, then the required quorum
shall be reduced by one for each such director so disqualified; provided,
however, that in no case shall less than one-third (1/3) of the total number of
the whole Board of Directors constitute a quorum. In the absence of a quorum at
any such meeting, a majority of the directors present may adjourn the meeting
from time to time without further notice other than announcement at the meeting,
until a quorum shall be present.
2.14 Action at Meeting. At any meeting of the Board of Directors at
-----------------
which a quorum is present, the vote of a majority of those present shall be
sufficient to take any action, unless a different vote is specified by law, the
Certificate of Incorporation or these Restated By-Laws.
2.15 Action by Written Consent. Any action required or permitted to
-------------------------
be taken at any meeting of the Board of Directors or of any committee of the
Board of Directors may be taken without a meeting, if all members of the Board
of Directors or committee, as the case may be, consent to such action in
writing, and the written consents are filed with the minutes of proceedings of
the Board of Directors or committee.
2.16 Removal. Unless otherwise provided in the Certificate of
-------
Incorporation, any one or more or all of the directors may be removed with cause
only by the holders of at least seventy-five percent (75%) of the shares then
entitled to vote at an election of directors. Directors may not be removed
without cause.
2.17 Committees. The Board of Directors may, by resolution passed by
----------
a majority of the whole Board, designate one or more committees, 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
such committee. In the absence or disqualification of a member of a committee,
the member or members of such committee 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 such 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
and subject to the provisions of the General Corporation Law of the State of
Delaware, 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 which
may require it. Each such committee shall keep minutes and make such reports as
the Board of Directors may from time to time request. Except as the Board of
Directors may otherwise determine or as provided herein, any committee may make
rules for the conduct of its business, but unless otherwise provided by the
directors or in such rules, its business shall be conducted as nearly as
possible in the same manner as is provided in these Restated By-Laws for the
Board of Directors. Adequate provisions shall be made for notice to members of
all meeting of committees. One-third (1/3) of the members of any committee shall
constitute a quorum unless the committee shall consist of one (1) or two (2)
members, in which event one (1) member shall constitute a quorum; and all
matters shall be determined by a majority vote of the members present. Action
may be taken by any committee without a meeting if all members thereof consent
thereto in writing, and the writing or writings are filed with the minutes of
the proceedings of such committee.
<PAGE>
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2.18 Compensation of Directors. Directors may be paid such
-------------------------
compensation for their services and such reimbursement for expenses of
attendance at meetings as the Board of Directors may from time to time
determine. No such payment shall preclude any director from serving the
Corporation or any of its parent or subsidiary corporations in any other
capacity and receiving compensation for such service.
2.19 Amendments to Article. Notwithstanding any other provisions of
---------------------
law, the Certificate of Incorporation or these Restated By-Laws, and
notwithstanding the fact that a lesser percentage may be specified by law, the
affirmative vote of the holders of a least seventy-five percent (75%) of the
votes which all the stockholders would be entitled to cast at any annual
election of directors or class of directors shall be required to amend or
repeal, or to adopt any provision inconsistent with, this Article 2.
ARTICLE 3 - Officers
--------------------
3.1 Enumeration. The officers of the Corporation shall consist of a
-----------
President, a Secretary, a Treasurer and such other officers with such other
titles as the Board of Directors shall determine, including, but not limited to,
a Chairman of the Board, a Vice-Chairman of the Board, and one or more Vice
Presidents, Assistant Treasurers and Assistant Secretaries. The Board of
Directors may appoint such other officers as it may deem appropriate.
3.2 Election. The President, Treasurer and Secretary shall be
--------
elected annually by the Board of Directors at its first meeting following the
annual meeting of stockholders. Other officers may be appointed by the Board of
Directors at such meeting or at any other meeting.
3.3 Qualification. No officer need be a stockholder. Any two or
-------------
more offices may be held by the same person.
3.4 Tenure. Except as otherwise provided by law, by the Certificate
------
of Incorporation or by these Restated By-Laws, each officer shall hold office
until his or her successor is elected and qualified, unless a different term is
specified in the vote choosing or appointing such officer, or until his or her
earlier death, resignation or removal.
3.5 Resignation and Removal. Any officer may resign by delivering
-----------------------
his or her written resignation to the Chairman of the Board (if any), to the
Board of Directors at a meeting thereof, to the Corporation at its principal
office or to the President or Secretary. Such resignation shall be effective
upon receipt unless it is specified to be effective at some other time or upon
the happening of some other event.
Any officer may be removed at any time, with or without cause, by vote
of a majority of the entire number of directors then in office.
<PAGE>
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Except as the Board of Directors may otherwise determine, no officer
who resigns or is removed shall have any right to any compensation as an officer
for any period following his or her resignation or removal, or any right to
damages on account of such removal, whether his or her compensation be by the
month or by the year or otherwise, unless such compensation is expressly
provided in a duly authorized written agreement with the Corporation.
3.6 Vacancies. The Board of Directors may fill any vacancy occurring
---------
in any office for any reason and may, in its discretion, leave unfilled for such
period as it may determine any offices other than those of President, Treasurer
and Secretary. Each such successor shall hold office for the unexpired term of
his predecessor and until his or her successor is elected and qualified, or
until his or her earlier death, resignation or removal.
3.7 Chairman of the Board and Vice-Chairman of the Board. The
----------------------------------------------------
Chairman of the Board, if any, shall preside at all meetings of the Board of
Directors and stockholders at which he or she is present and shall perform such
duties and possess such powers as are designated by the Board of Directors. If
the Board of Directors appoints a Vice-Chairman of the Board, he or she shall,
in the absence or disability of the Chairman of the Board, perform the duties
and exercise the powers of the Chairman of the Board and shall perform such
other duties and possess such other powers as may from time to time be
designated by the Board of Directors.
3.8 President. The President shall, subject to the direction of the
---------
Board of Directors, have general charge and supervision of the business of the
Corporation. Unless otherwise provided by the Board of Directors, and provided
that there is no Chairman of the Board or that the Chairman and Vice-Chairman,
if any, are not available, the President shall preside at all meetings of the
stockholders, and, if a director, at all meetings of the Board of Directors.
Unless the Board of Directors has designated another officer as the Chief
Executive Officer, the President shall be the Chief Executive Officer of the
Corporation. The President shall perform such other duties and shall have such
other powers as the Board of Directors may from time to time prescribe. The
President shall have the power to enter into contracts and otherwise bind the
Corporation in matters arising in the ordinary course of the Corporation's
business.
3.9 Vice Presidents. Any Vice President shall perform such duties
---------------
and possess such powers as the Board of Directors or the President may from time
to time prescribe. In the event of the absence, inability or refusal to act of
the President, the Vice President (or if there shall be more than one, the Vice
Presidents in the order determined by the Board of Directors) shall perform the
duties of the President and, when so performing, shall have all the powers of
and be subject to all the restrictions upon the President. The Board of
Directors may assign to any Vice President the title of Executive Vice
President, Senior Vice President or any other title selected by the Board of
Directors. Unless otherwise determined by the Board of Directors, any Vice
President shall have the power to enter into contracts and otherwise bind the
Corporation in matters arising in the ordinary course of the Corporation's
business.
3.10 Secretary and Assistant Secretaries. The Secretary shall
-----------------------------------
perform such duties and shall have such powers as the Board of Directors or the
President may from time to time prescribe. In addition, the Secretary shall
perform such duties and have such powers as are incident to the office of
secretary, including without limitation the duty and power to give notices
<PAGE>
-12-
of all meetings of stockholders and special meetings of the Board of Directors,
to attend all meetings of stockholders and the Board of Directors and keep a
record of the proceedings, to maintain a stock ledger and prepare lists of
stockholders and their addresses as required, to be custodian of corporate
records and the corporate seal and to affix and attest to the same on documents.
Any Assistant Secretary shall perform such duties and possess such
powers as the Board of Directors, the President or the Secretary may from time
to time prescribe. In the event of the absence, inability or refusal to act of
the Secretary, the Assistant Secretary (or if there shall be more than one, the
Assistant Secretaries in the order determined by the Board of Directors) shall
perform the duties and exercise the powers of the Secretary.
In the absence of the Secretary or any Assistant Secretary at any
meeting of stockholders or directors, the person presiding at the meeting shall
designate a temporary secretary to keep a record of the meeting.
3.11 Treasurer and Assistant Treasurers. The Treasurer shall perform
----------------------------------
such duties and shall have such powers as the Board of Directors or the
President may from time to time prescribe. In addition, the Treasurer shall
perform such duties and have such powers as are incident to the office of
treasurer, including without limitation the duty and power to keep and be
responsible for all funds and securities of the Corporation, to deposit funds of
the Corporation in depositories selected in accordance with these Restated By-
Laws, to disburse such funds as ordered by the Board of Directors, to make
proper accounts for such funds, and to render as required by the Board of
Directors statements of all such transactions and of the financial condition of
the Corporation.
The Assistant Treasurers shall perform such duties and possess such
powers as the Board of Directors, the President or the Treasurer may from time
to time prescribe. In the event of the absence, inability or refusal to act of
the Treasurer, the Assistant Treasurer (or if there shall be more than one, the
Assistant Treasurers in the order determined by the Board of Directors) shall
perform the duties and exercise the powers of the Treasurer.
3.12 Salaries. Officers of the Corporation shall be entitled to such
--------
salaries, compensation or reimbursement as shall be fixed or allowed from time
to time by the Board of Directors.
3.13 Action with Respect to Securities of Other Corporations. Unless
-------------------------------------------------------
otherwise directed by the Board of Directors, the President or any officer of
the Corporation authorized by the President shall have power to vote and
otherwise act on behalf of the Corporation, in person or by proxy, at any
meeting of stockholders of or with respect to any action of stockholders of any
other corporation in which the Corporation may hold securities and otherwise to
exercise any and all rights and powers which this Corporation may possess by
reason of its ownership of securities in such other corporation.
<PAGE>
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ARTICLE 4 - Capital Stock
-------------------------
4.1 Issuance of Stock. Unless otherwise voted by the stockholders
-----------------
and subject to the provisions of the Certificate of Incorporation, the whole or
any part of any unissued balance of the authorized capital stock of the
Corporation or the whole or any part of any issued, authorized capital stock of
the Corporation held in its treasury may be issued, sold, transferred or
otherwise disposed of by vote of the Board of Directors in such manner, for such
consideration and on such terms as the Board of Directors may determine.
4.2 Certificates of Stock. Every holder of stock of the Corporation
---------------------
shall be entitled to have a certificate, in such form as may be prescribed by
law and by the Board of Directors, certifying the number and class of shares
owned by such stockholder in the Corporation. Each such certificate shall be
signed by, or in the name of the Corporation by, the Chairman or Vice-Chairman,
if any, of the Board of Directors, or the President or a Vice President, and the
Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary
of the Corporation. Any or all of the signatures on such certificate may be a
facsimile.
Each certificate for shares of stock which are subject to any
restriction on transfer pursuant to the Certificate of Incorporation, the
Restated By-Laws, applicable securities laws or any agreement among any number
of shareholders or among such holders and the Corporation shall have
conspicuously noted on the face or back of such certificate either the full text
of such restriction or a statement of the existence of such restriction.
4.3 Transfers. Except as otherwise established by rules and
---------
regulations adopted by the Board of Directors, and subject to applicable law,
shares of stock may be transferred on the books of the Corporation by the
surrender to the Corporation or its transfer agent of the certificate
representing such shares, properly endorsed or accompanied by a written
assignment or power of attorney properly executed, and with such proof of
authority or the authenticity of signature as the Corporation or its transfer
agent may reasonably require. Except as may be otherwise required by law, by
the Certificate of Incorporation or by these Restated By-Laws, the Corporation
shall be entitled to treat the record holder of stock as shown on its books as
the owner of such stock for all purposes, including the payment of dividends and
the right to vote with respect to such stock, regardless of any transfer, pledge
or other disposition of such stock, until the shares have been transferred on
the books of the Corporation in accordance with the requirements of these
Restated By-Laws.
4.4 Lost, Stolen or Destroyed Certificates. The Corporation may
--------------------------------------
issue a new certificate of stock in place of any previously issued certificate
alleged to have been lost, stolen, or destroyed, upon such terms and conditions
as the President may prescribe, including the presentation of reasonable
evidence of such loss, theft or destruction and the giving of such indemnity as
the President may require for the protection of the Corporation or any transfer
agent or registrar.
4.5 Record Date. The Board of Directors may fix in advance a date
-----------
as a record date for the determination of the stockholders entitled to notice of
or to vote at any meeting of stockholders or, to the extent permitted by the
Certificate of Incorporation and these By-laws, to
<PAGE>
-14-
express consent (or dissent) to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights in respect of any change, conversion or exchange of
stock, or for the purpose of any other lawful action. Such record date 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 to which such record date relates.
If no record date is fixed, 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 before the day on which notice is given,
or, if notice is waived, at the close of business on the day before the day on
which the meeting is held. The record date for determining stockholders
entitled to express consent to corporate action in writing without a meeting (to
the extent permitted by the Certificate of Incorporation and these By-laws) when
no prior action by the Board of Directors is necessary, shall be the day on
which the first written consent is expressed. 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 to such purpose.
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.
ARTICLE 5 - General Provisions
------------------------------
5.1 Fiscal Year. The fiscal year of the Corporation shall be fixed
-----------
by resolution of the Board of Directors.
5.2 Corporate Seal. The corporate seal shall be in such form as shall
--------------
be approved by the Board of Directors.
5.3 Notices. Except as otherwise specifically provided herein or
-------
required by law or the Certificate of Incorporation, all notices required to be
given to any stockholder, director, officer, employee or agent of the
Corporation shall be in writing and may in every instance be effectively given
by hand delivery to the recipient thereof, by depositing such notice in the
mails, postage paid, or by sending such notice by prepaid telegram or facsimile
transmission. Any such notice shall be addressed to such stockholder, director,
officer, employee or agent at his or her last known address as the same appears
on the books of the Corporation. The time when such notice is received shall be
deemed to be the time of the giving of the notice.
5.4 Waiver of Notice. Whenever any notice whatsoever is required to
----------------
be given by law, by the Certificate of Incorporation or by these Restated By-
Laws, a waiver of such notice either in writing signed by the person entitled to
such notice or such person's duly authorized attorney, or by telegraph,
facsimile transmission or any other available method, whether before, at or
after the time stated in such waiver, or the appearance of such person or
persons at such meeting in person or by proxy, shall be deemed equivalent to
such notice.
<PAGE>
-15-
5.5 Evidence of Authority. A certificate by the Secretary, or an
---------------------
Assistant Secretary, or a temporary Secretary, as to any action taken by the
stockholders, directors, a committee or any officer or representative of the
Corporation shall, as to all persons who rely on the certificate in good faith,
be conclusive evidence of such action.
5.6 Facsimile Signatures. In addition to the provisions for use of
--------------------
facsimile signatures elsewhere specifically authorized in these Restated By-
Laws, facsimile signatures of any officer or officers of the Corporation may be
used whenever and as authorized by the Board of Directors or a committee
thereof.
5.7 Reliance upon Books, Reports and Records. Each director, each
----------------------------------------
member of any committee designated by the Board of Directors, and each officer
of the Corporation shall, in the performance of his or her duties, be fully
protected in relying in good faith upon the books of account or other records of
the Corporation and upon such information, opinions, reports or statements
presented to the Corporation by any of its officers or employees or committees
of the Board of Directors so designated, or by any other person as to matters
which such director or committee member reasonably believes are within such
other person's professional or expert competence and who has been selected with
reasonable care by or on behalf of the Corporation.
5.8 Time Periods. In applying any provision of these Restated By-
------------
Laws that requires that an act be done or not be done a specified number of days
prior to an event or that an act be done during a period of a specified number
of days prior to an event, calendar days shall be used, the day of the doing of
the act shall be excluded, and the day of the event shall be included.
5.9 Certificate of Incorporation. All references in these Restated
----------------------------
By-Laws to the Certificate of Incorporation shall be deemed to refer to the
Third Amended and Restated Certificate of Incorporation of the Corporation, as
amended and in effect from time to time.
5.10 Transactions with Interested Parties. No contract or
------------------------------------
transaction between the Corporation and one or more of the directors or
officers, or between the Corporation and any other corporation, partnership,
association, or other organization in which one or more of the directors or
officers are directors or officers, or have a financial interest, shall be void
or voidable solely for this reason, or solely because such director or officer
is present at or participates in the meeting of the Board of Directors or a
committee of the Board of Directors which authorizes the contract or transaction
or solely because his, her or their votes are counted for such purpose, if:
(1) The material facts as to his or her relationship or interest
and as to the contract or transaction are disclosed or are known to the Board
of Directors or the committee, and the Board or committee in good faith
authorizes the contract or transaction by the affirmative vote of a majority
of the disinterested directors, even though the disinterested directors be
less than a quorum;
(2) The material facts as to his or her relationship or interest
and as to the contract or transaction are disclosed or are known to the
stockholders entitled to vote thereon, and the contract or transaction is
specifically approved in good faith by vote of the stockholders; or
<PAGE>
-16-
(3) The contract or transaction is fair as to the Corporation as of
the time it is authorized, approved or ratified, by the Board of Directors, a
committee of the Board of Directors, or the stockholders.
Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a committee
which authorizes the contract or transaction.
5.11 Severability. Any determination that any provision of these
------------
Restated By-Laws is for any reason inapplicable, illegal or ineffective shall
not affect or invalidate any other provision of these Restated By-Laws.
5.12 Pronouns. All pronouns used in these Restated By-Laws shall be
--------
deemed to refer to the masculine, feminine or neuter, singular or plural, as the
identity of the persons or persons so designated may require.
ARTICLE 6 - Amendments
----------------------
6.1 By the Board of Directors. Except as is otherwise set forth in
-------------------------
these Restated By-Laws, these Restated By-Laws may be altered, amended or
repealed, or new by-laws may be adopted, by the affirmative vote of a majority
of the directors present at any regular or special meeting of the Board of
Directors at which a quorum is present.
6.2 By the Stockholders. Except as otherwise set forth in these
-------------------
Restated By-Laws, these Restated By-Laws may be altered, amended or repealed or
new by-laws may be adopted by the affirmative vote of the holders of seventy-
five percent (75%) of the shares of the capital stock of the Corporation issued
and outstanding and entitled to vote at any regular meeting of stockholders, or
at any special meeting of stockholders, provided notice of such alteration,
amendment, repeal or adoption of new by-laws shall have been stated in the
notice of such special meeting.
<PAGE>
EXHIBIT 10.1
------------
SMARTERKIDS.COM, INC.
(FORMERLY, VIRTUAL ENTERTAINMENT, INC. AND VIRTUAL KNOWLEDGE, INC.)
1995 STOCK PLAN, AS AMENDED
---------------------------
1. PURPOSE. The purpose of the SMARTERKIDS.COM, INC. 1995 Stock Plan (the
-------
"Plan") is to encourage key employees of SMARTERKIDS.COM, INC. (the "Company")
and of any present or future parent or subsidiary of the Company (collectively,
"Related Corporations") and other individuals who render services to the Company
or a Related Corporation, by providing opportunities to participate in the
ownership of the Company and its future growth through (a) the grant of options
which qualify as "incentive stock options" ("ISOs") under Section 422(b) of the
Internal Revenue Code of 1986, as amended (the "Code"); (b) the grant of options
which do not qualify as ISOs ("Non-Qualified Options"); (c) awards of stock in
the Company ("Awards"); and (d) opportunities to make direct purchases of stock
in the Company ("Purchases"). Both ISOs and Non-Qualified Options are referred
to hereafter individually as an "Option" and collectively as "Options."
Options, Awards and authorizations to make Purchases are referred to hereafter
collectively as "Stock Rights." As used herein, the terms "parent" and
"subsidiary" mean "parent corporation" and "subsidiary corporation,"
respectively, as those terms are defined in Section 424 of the Code.
2. ADMINISTRATION OF THE PLAN.
---------------------------
A. BOARD OR COMMITTEE ADMINISTRATION. The Plan shall be administered
---------------------------------
by the Board of Directors of the Company (the "Board") or by a committee
appointed by the Board (the "Committee"); provided that the Plan shall be
administered: (i) to the extent required by applicable regulations under
Section 162(m) of the Code, by two or more "outside directors" (as defined in
applicable regulations thereunder) and (ii) to the extent required by Rule
16b-3 promulgated under the Securities Exchange Act of 1934 or any successor
provision ("Rule 16b-3"), by a disinterested administrator or administrators
within the meaning of Rule 16b-3. Hereinafter, all references in this Plan
to the "Committee" shall mean the Board if no Committee has been appointed.
Subject to ratification of the grant or authorization of each Stock Right by
the Board (if so required by applicable state law), and subject to the terms
of the Plan, the Committee shall have the authority to (i) determine to whom
(from among the class of employees eligible under paragraph 3 to receive
ISOs) ISOs shall be granted, and to whom (from among the class of individuals
and entities eligible under paragraph 3 to receive Non-Qualified Options and
Awards and to make Purchases) Non-Qualified Options, Awards and
authorizations to make Purchases may be granted; (ii) determine the time or
times at which Options or Awards shall be granted or Purchases made; (iii)
determine the purchase price of shares subject to each Option or Purchase,
which prices shall not be less than the minimum price specified in paragraph
6;
<PAGE>
-2-
(iv) determine whether each Option granted shall be an ISO or a Non-
Qualified Option; (v) determine (subject to paragraph 7) the time or times
when each Option shall become exercisable and the duration of the exercise
period; (vi) extend the period during which outstanding Options may be
exercised; (vii) determine whether restrictions such as repurchase options
are to be imposed on shares subject to Options, Awards and Purchases and
the nature of such restrictions, if any, and (viii) interpret the Plan and
prescribe and rescind rules and regulations relating to it. If the
Committee determines to issue a Non-Qualified Option, it shall take
whatever actions it deems necessary, under Section 422 of the Code and the
regulations promulgated thereunder, to ensure that such Option is not
treated as an ISO. The interpretation and construction by the Committee of
any provisions of the Plan or of any Stock Right granted under it shall be
final unless otherwise determined by the Board. The Committee may from time
to time adopt such rules and regulations for carrying out the Plan as it
may deem advisable. No member of the Board or the Committee shall be liable
for any action or determination made in good faith with respect to the Plan
or any Stock Right granted under it.
B. COMMITTEE ACTIONS. The Committee may select one of its members as
-----------------
its chairman, and shall hold meetings at such time and places as it may
determine. A majority of the Committee shall constitute a quorum and acts of
a majority of the members of the Committee at a meeting at which a quorum is
present, or acts reduced to or approved in writing by all the members of the
Committee (if consistent with applicable state law), shall be the valid acts
of the Committee. From time to time the Board may increase the size of the
Committee and appoint additional members thereof, remove members (with or
without cause) and appoint new members in substitution therefor, fill
vacancies however caused, or remove all members of the Committee and
thereafter directly administer the Plan.
C. GRANT OF STOCK RIGHTS TO BOARD MEMBERS. Subject to the provisions
--------------------------------------
of the first sentence of paragraph 2(A) above, if applicable, Stock Rights
may be granted to members of the Board. All grants of Stock Rights to
members of the Board shall in all other respects be made in accordance with
the provisions of this Plan applicable to other eligible persons. Consistent
with the provisions of the first sentence of Paragraph 2(A) above, members of
the Board who either (i) are eligible to receive grants of Stock Rights
pursuant to the Plan or (ii) have been granted Stock Rights may vote on any
matters affecting the administration of the Plan or the grant of any Stock
Rights pursuant to the Plan, except that no such member shall act upon the
granting to himself or herself of Stock Rights, but any such member may be
counted in determining the existence of a quorum at any meeting of the Board
during which action is taken with respect to the granting to such member of
Stock Rights.
3. ELIGIBLE EMPLOYEES AND OTHERS. ISOs may be granted only to employees of
-----------------------------
the Company or any Related Corporation. Non-Qualified Options, Awards and
authorizations to make Purchases may be granted to any employee, officer or
director (whether or not also an employee) or consultant of the Company or any
Related
2
<PAGE>
-3-
Corporation. The Committee may take into consideration a recipient's
individual circumstances in determining whether to grant a Stock Right. The
granting of any Stock Right to any individual or entity shall neither entitle
that individual or entity to, nor disqualify such individual or entity from,
participation in any other grant of Stock Rights.
4. STOCK. The stock subject to Stock Rights shall be authorized but
-----
unissued shares of Common Stock of the Company, $.01 par value (the "Common
Stock"), or shares of Common Stock reacquired by the Company in any manner. The
aggregate number of shares which may be issued pursuant to the Plan is
2,548,000, subject to adjustment as provided in paragraph 13. If any Stock Right
granted under the Plan shall expire or terminate for any reason without having
been exercised in full or shall cease for any reason to be exercisable in whole
or in part or shall be repurchased by the Company, the shares of Common Stock
subject to such Stock Right shall again be available for grants of Stock Rights
under the Plan.
5. GRANTING OF STOCK RIGHTS. Stock Rights may be granted under the Plan at
------------------------
any time on or after September 5, 1995 and prior to September 4, 2005. The date
of grant of a Stock Right under the Plan will be the date specified by the
Committee at the time it grants the Stock Right; provided, however, that such
date shall not be prior to the date on which the Committee acts to approve the
grant.
6. MINIMUM OPTION PRICE; ISO LIMITATIONS.
-------------------------------------
A. PRICE FOR NON-QUALIFIED OPTIONS, AWARDS AND PURCHASES. The exercise
-----------------------------------------------------
price per share specified in the agreement relating to each Non-Qualified
Option granted, and the purchase price per share of stock granted in any
Award or authorized as a Purchase, under the Plan shall in no event be less
than the minimum legal consideration required therefor under the laws of any
jurisdiction in which the Company or its successors in interest may be
organized. Non-Qualified Options granted under the Plan, with an exercise
price less than the fair market value per share of Common Stock on the date
of grant, are intended to qualify as performance-based compensation under
Section 162(m) of the Code and any applicable regulations thereunder. Any
such Non-Qualified Options granted under the Plan shall be exercisable only
upon the attainment of a pre-established, objective performance goal
established by the Committee. If the Committee grants Non-Qualified Options
with an exercise price less than the fair market value per share of Common
Stock on the date of grant, such grant will be submitted for, and will be
contingent upon shareholder approval.
B. PRICE FOR ISOs. The exercise price per share specified in the
--------------
agreement relating to each ISO granted under the Plan shall not be less than
the fair market value per share of Common Stock on the date of such grant.
In the case of an ISO to be granted to an employee owning stock possessing
more than ten percent (10%) of the total combined voting power of all classes
of stock of the Company or any Related Corporation, the price per share
specified in the agreement relating to such ISO shall not be less than one
hundred ten percent (110%) of the fair market value
3
<PAGE>
-4-
per share of Common Stock on the date of grant. For purposes of determining
stock ownership under this paragraph, the rules of Section 424(d) of the
Code shall apply.
C. $100,000 ANNUAL LIMITATION ON ISO VESTING. Each eligible employee
-----------------------------------------
may be granted Options treated as ISOs only to the extent that, in the
aggregate under this Plan and all incentive stock option plans of the Company
and any Related Corporation, ISOs do not become exercisable for the first
time by such employee during any calendar year with respect to stock having a
fair market value (determined at the time the ISOs were granted) in excess of
$100,000. The Company intends to designate any Options granted in excess of
such limitation as Non-Qualified Options.
D. DETERMINATION OF FAIR MARKET VALUE. If, at the time an Option is
----------------------------------
granted under the Plan, the Company's Common Stock is publicly traded, "fair
market value" shall be determined as of the date of grant or, if the prices
or quotes discussed in this sentence are unavailable for such date, the last
business day for which such prices or quotes are available prior to the date
of grant and shall mean (i) the average (on that date) of the high and low
prices of the Common Stock on the principal national securities exchange on
which the Common Stock is traded, if the Common Stock is then traded on a
national securities exchange; or (ii) the last reported sale price (on that
date) of the Common Stock on the Nasdaq National Market, if the Common Stock
is not then traded on a national securities exchange; or (iii) the closing
bid price (or average of bid prices) last quoted (on that date) by an
established quotation service for over-the-counter securities, if the Common
Stock is not reported on the Nasdaq National Market. If the Common Stock is
not publicly traded at the time an Option is granted under the Plan, "fair
market value" shall mean the fair value of the Common Stock as determined by
the Committee after taking into consideration all factors which it deems
appropriate, including, without limitation, recent sale and offer prices of
the Common Stock in private transactions negotiated at arm's length.
7. OPTION DURATION. Subject to earlier termination as provided in
---------------
paragraphs 9 and 10 or in the agreement relating to such Option, each Option
shall expire on the date specified by the Committee, but not more than (i) ten
years from the date of grant in the case of Options generally and (ii) five
years from the date of grant in the case of ISOs granted to an employee owning
stock possessing more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or any Related Corporation, as determined
under paragraph 6(B). Subject to earlier termination as provided in paragraphs
9 and 10, the term of each ISO shall be the term set forth in the original
instrument granting such ISO, except with respect to any part of such ISO that
is converted into a Non-Qualified Option pursuant to paragraph 16.
8. EXERCISE OF OPTION. Subject to the provisions of
------------------
paragraphs 9 through 12, each Option granted under the Plan
shall be exercisable as follows:
4
<PAGE>
-5-
A. VESTING. The Option shall either be fully exercisable on the date
-------
of grant or shall become exercisable thereafter in such installments as the
Committee may specify.
B. FULL VESTING OF INSTALLMENTS. Once an installment becomes
----------------------------
exercisable it shall remain exercisable until expiration or termination of
the Option, unless otherwise specified by the Committee.
C. PARTIAL EXERCISE. Each Option or installment may be exercised at
----------------
any time or from time to time, in whole or in part, for up to the total
number of shares with respect to which it is then exercisable.
D. ACCELERATION OF VESTING. The Committee shall have the right to
-----------------------
accelerate the date that any installment of any Option becomes exercisable;
provided that the Committee shall not, without the consent of an optionee,
accelerate the permitted exercise date of any installment of any Option
granted to any employee as an ISO (and not previously converted into a Non-
Qualified Option pursuant to paragraph 16) if such acceleration would violate
the annual vesting limitation contained in Section 422(d) of the Code, as
described in paragraph 6(C).
9. TERMINATION OF EMPLOYMENT. Unless otherwise specified in the agreement
-------------------------
relating to such ISO, if an ISO optionee ceases to be employed by the Company
and all Related Corporations other than by reason of death or disability as
defined in paragraph 10, no further installments of his or her ISOs shall become
exercisable, and his or her ISOs shall terminate on the earlier of (a) ninety
(90) days after the date of termination of his or her employment, or (b) their
specified expiration dates, except to the extent that such ISOs (or unexercised
installments thereof) have been converted into Non-Qualified Options pursuant to
paragraph 16. For purposes of this paragraph 9, employment shall be considered
as continuing uninterrupted during any bona fide leave of absence (such as those
attributable to illness, military obligations or governmental service) provided
that the period of such leave does not exceed 90 days or, if longer, any period
during which such optionee's right to reemployment is guaranteed by statute. A
bona fide leave of absence with the written approval of the Committee shall not
be considered an interruption of employment under this paragraph 9, provided
that such written approval contractually obligates the Company or any Related
Corporation to continue the employment of the optionee after the approved period
of absence. ISOs granted under the Plan shall not be affected by any change of
employment within or among the Company and Related Corporations, so long as the
optionee continues to be an employee of the Company or any Related Corporation.
Nothing in the Plan shall be deemed to give any grantee of any Stock Right the
right to be retained in employment or other service by the Company or any
Related Corporation for any period of time.
10. DEATH; DISABILITY.
-----------------
A. DEATH. If an ISO optionee ceases to be employed by the Company and
-----
all Related Corporations by reason of his or her death, any ISO owned by such
5
<PAGE>
-6-
optionee may be exercised, to the extent otherwise exercisable on the date of
death, by the estate, personal representative or beneficiary who has acquired
the ISO by will or by the laws of descent and distribution, until the earlier
of (i) the specified expiration date of the ISO or (ii) 180 days from the
date of the optionee's death.
B. DISABILITY. If an ISO optionee ceases to be employed by the Company
----------
and all Related Corporations by reason of his or her disability, such
optionee shall have the right to exercise any ISO held by him or her on the
date of termination of employment, for the number of shares for which he or
she could have exercised it on that date, until the earlier of (i) the
specified expiration date of the ISO or (ii) 180 days from the date of the
termination of the optionee's employment. For the purposes of the Plan, the
term "disability" shall mean "permanent and total disability" as defined in
Section 22(e)(3) of the Code or any successor statute.
11. ASSIGNABILITY. No Stock Right shall be assignable or transferable by the
-------------
grantee except by will, by the laws of descent and distribution [or, in the case
of Non-Qualified Options only, pursuant to a valid domestic relations order].
Except as set forth in the previous sentence, during the lifetime of a grantee
each Stock Right shall be exercisable only by such grantee.
12. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by
-------------------------------
instruments (which need not be identical) in such forms as the Committee may
from time to time approve. Such instruments shall conform to the terms and
conditions set forth in paragraphs 6 through 11 hereof and may contain such
other provisions as the Committee deems advisable which are not inconsistent
with the Plan, including restrictions applicable to shares of Common Stock
issuable upon exercise of Options. The Committee may specify that any Non-
Qualified Option shall be subject to the restrictions set forth herein with
respect to ISOs, or to such other termination and cancellation provisions as the
Committee may determine. The Committee may from time to time confer authority
and responsibility on one or more of its own members and/or one or more officers
of the Company to execute and deliver such instruments. The proper officers of
the Company are authorized and directed to take any and all action necessary or
advisable from time to time to carry out the terms of such instruments.
13. ADJUSTMENTS. Upon the occurrence of any of the following events, an
-----------
optionee's rights with respect to Options granted to such optionee hereunder
shall be adjusted as hereinafter provided, unless otherwise specifically
provided in the written agreement between the optionee and the Company relating
to such Option:
A. STOCK DIVIDENDS AND STOCK SPLITS. If the shares of Common Stock
--------------------------------
shall be subdivided or combined into a greater or smaller number of shares or
if the Company shall issue any shares of Common Stock as a stock dividend on
its outstanding Common Stock, the number of shares of Common Stock
deliverable upon the exercise of Options shall be appropriately increased or
decreased proportionately, and appropriate adjustments shall be made in the
purchase price per share to reflect such subdivision, combination or stock
dividend.
6
<PAGE>
-7-
B. CONSOLIDATIONS OR MERGERS. If the Company is to be consolidated
-------------------------
with or acquired by another entity in a merger or other reorganization in
which the holders of the outstanding voting stock of the Company immediately
preceding the consummation of such event, shall, immediately following such
event, hold, as a group, less than a majority of the voting securities of the
surviving or successor entity, or in the event of a sale of all or
substantially all of the Company's assets or otherwise (each, an
"Acquisition"), the Committee or the board of directors of any entity
assuming the obligations of the Company hereunder (the "Successor Board"),
shall, as to outstanding Options, either (i) make appropriate provision for
the continuation of such Options by substituting on an equitable basis for
the shares then subject to such Options either (a) the consideration payable
with respect to the outstanding shares of Common Stock in connection with the
Acquisition, (b) shares of stock of the surviving or successor corporation or
(c) such other securities as the Successor Board deems appropriate, the fair
market value of which shall not materially exceed the fair market value of
the shares of Common Stock subject to such Options immediately preceding the
Acquisition; or (ii) upon written notice to the optionees, provide that all
Options must be exercised, to the extent then exercisable or to be
exercisable as a result of the Acquisition, within a specified number of days
of the date of such notice, at the end of which period the Options shall
terminate; or (iii) terminate all Options in exchange for a cash payment
equal to the excess of the fair market value of the shares subject to such
Options (to the extent then exercisable or to be exercisable as a result of
the Acquisition) over the exercise price thereof.
C. RECAPITALIZATION OR REORGANIZATION. In the event of a
----------------------------------
recapitalization or reorganization of the Company (other than a transaction
described in subparagraph B above) pursuant to which securities of the
Company or of another corporation are issued with respect to the outstanding
shares of Common Stock, an optionee upon exercising an Option shall be
entitled to receive for the purchase price paid upon such exercise the
securities he or she would have received if he or she had exercised such
Option prior to such recapitalization or reorganization.
D. MODIFICATION OF ISOs. Notwithstanding the foregoing, any
--------------------
adjustments made pursuant to subparagraphs A, B or C with respect to ISOs
shall be made only after the Committee, after consulting with counsel for the
Company, determines whether such adjustments would constitute a
"modification" of such ISOs (as that term is defined in Section 424 of the
Code) or would cause any adverse tax consequences for the holders of such
ISOs. If the Committee determines that such adjustments made with respect to
ISOs would constitute a modification of such ISOs or would cause adverse tax
consequences to the holders, it may refrain from making such adjustments.
E. DISSOLUTION OR LIQUIDATION. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, each Option will terminate
immediately prior to the
7
<PAGE>
-8-
consummation of such proposed action or at such
other time and subject to such other conditions as shall be determined by the
Committee.
F. ISSUANCES OF SECURITIES. Except as expressly provided herein, no
-----------------------
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or
price of shares subject to Options. No adjustments shall be made for
dividends paid in cash or in property other than securities of the Company.
G. FRACTIONAL SHARES. No fractional shares shall be issued under the
-----------------
Plan and the optionee shall receive from the Company cash in lieu of such
fractional shares.
H. ADJUSTMENTS. Upon the happening of any of the events described in
-----------
subparagraphs A, B or C above, the class and aggregate number of shares set
forth in paragraph 4 hereof that are subject to Stock Rights which previously
have been or subsequently may be granted under the Plan shall also be
appropriately adjusted to reflect the events described in such subparagraphs.
The Committee or the Successor Board shall determine the specific adjustments
to be made under this paragraph 13 and, subject to paragraph 2, its
determination shall be conclusive.
14. MEANS OF EXERCISING OPTIONS. An Option (or any part or installment
---------------------------
thereof) shall be exercised by giving written notice to the Company at its
principal office address, or to such transfer agent as the Company shall
designate. Such notice shall identify the Option being exercised and specify
the number of shares as to which such Option is being exercised, accompanied by
full payment of the purchase price therefor either (a) in United States dollars
in cash or by check, (b) at the discretion of the Committee, through delivery of
shares of Common Stock having a fair market value equal as of the date of the
exercise to the cash exercise price of the Option, (c) at the discretion of the
Committee, by delivery of the grantee's personal recourse note bearing interest
payable not less than annually at no less than 100% of the lowest applicable
Federal rate, as defined in Section 1274(d) of the Code, (d) at the discretion
of the Committee and consistent with applicable law, through the delivery of an
assignment to the Company of a sufficient amount of the proceeds from the sale
of the Common Stock acquired upon exercise of the Option and an authorization to
the broker or selling agent to pay that amount to the Company, which sale shall
be at the participant's direction at the time of exercise, or (e) at the
discretion of the Committee, by any combination of (a), (b), (c) and (d) above.
If the Committee exercises its discretion to permit payment of the exercise
price of an ISO by means of the methods set forth in clauses (b), (c), (d) or
(e) of the preceding sentence, such discretion shall be exercised in writing at
the time of the grant of the ISO in question. The holder of an Option shall not
have the rights of a shareholder with respect to the shares covered by such
Option until the date of issuance of a stock certificate to such holder for such
shares. Except as expressly provided above in paragraph 13 with respect to
changes in capitalization and stock dividends, no adjustment shall be made for
8
<PAGE>
-9-
dividends or similar rights for which the record date is before the date such
stock certificate is issued.
15. TERM AND AMENDMENT OF PLAN. This Plan was adopted by the Board on
--------------------------
September 5, 1995, subject, with respect to the validation of ISOs granted under
the Plan, to approval of the Plan by the stockholders of the Company at the next
Meeting of Stockholders or, in lieu thereof, by written consent. If the
approval of stockholders is not obtained prior to September 4, 1996, any grants
of ISOs under the Plan made prior to that date will be rescinded. The Plan
shall expire at the end of the day on September 4, 2005 (except as to Options
outstanding on that date). Subject to the provisions of paragraph 5 above,
Options may be granted under the Plan prior to the date of stockholder approval
of the Plan. The Board may terminate or amend the Plan in any respect at any
time, except that, without the approval of the stockholders obtained within 12
months before or after the Board adopts a resolution authorizing any of the
following actions: (a) the total number of shares that may be issued under the
Plan may not be increased (except by adjustment pursuant to paragraph 13); (b)
the benefits accruing to participants under the Plan may not be materially
increased; (c) the requirements as to eligibility for participation in the Plan
may not be materially modified; (d) the provisions of paragraph 3 regarding
eligibility for grants of ISOs may not be modified; (e) the provisions of
paragraph 6(B) regarding the exercise price at which shares may be offered
pursuant to ISOs may not be modified (except by adjustment pursuant to paragraph
13); (f) the expiration date of the Plan may not be extended; and (g) the Board
may not take any action which would cause the Plan to fail to comply with Rule
16b-3. Except as otherwise provided in this paragraph 15, in no event may
action of the Board or stockholders alter or impair the rights of a grantee,
without such grantee's consent, under any Option previously granted to such
grantee.
16. CONVERSION OF ISOs INTO NON-QUALIFIED OPTIONS. The Committee, at the
---------------------------------------------
written request or with the written consent of any optionee, may in its
discretion take such actions as may be necessary to convert such optionee's ISOs
(or any installments or portions of installments thereof) that have not been
exercised on the date of conversion into Non-Qualified Options at any time prior
to the expiration of such ISOs, regardless of whether the optionee is an
employee of the Company or a Related Corporation at the time of such conversion.
Such actions may include, but shall not be limited to, extending the exercise
period or reducing the exercise price of the appropriate installments of such
ISOs. At the time of such conversion, the Committee (with the consent of the
optionee) may impose such conditions on the exercise of the resulting Non-
Qualified Options as the Committee in its discretion may determine, provided
that such conditions shall not be inconsistent with this Plan. Nothing in the
Plan shall be deemed to give any optionee the right to have such optionee's ISOs
converted into Non-Qualified Options, and no such conversion shall occur until
and unless the Committee takes appropriate action.
17. APPLICATION OF FUNDS. The proceeds received by the Company from the sale
--------------------
of shares pursuant to Options granted and Purchases authorized under the Plan
shall be used for general corporate purposes.
9
<PAGE>
-10-
18. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION. By accepting an ISO
----------------------------------------------
granted under the Plan, each optionee agrees to notify the Company in writing
immediately after such optionee makes a Disqualifying Disposition (as described
in Sections 421, 422 and 424 of the Code and regulations thereunder) of any
stock acquired pursuant to the exercise of ISOs granted under the Plan. A
Disqualifying Disposition is generally any disposition occurring on or before
the later of (a) the date two years following the date the ISO was granted or
(b) the date one year following the date the ISO was exercised.
19. WITHHOLDING OF ADDITIONAL INCOME TAXES. Upon the exercise of a Non-
--------------------------------------
Qualified Option, the grant of an Award, the making of a Purchase of Common
Stock for less than its fair market value, the making of a Disqualifying
Disposition (as defined in paragraph 18), the vesting or transfer of restricted
stock or securities acquired on the exercise of an Option hereunder, or the
making of a distribution or other payment with respect to such stock or
securities, the Company may withhold taxes in respect of amounts that constitute
compensation includible in gross income. The Committee in its discretion may
condition (i) the exercise of an Option, (ii) the grant of an Award, (iii) the
making of a Purchase of Common Stock for less than its fair market value, or
(iv) the vesting or transferability of restricted stock or securities acquired
by exercising an Option, on the grantee's making satisfactory arrangement for
such withholding. Such arrangement may include payment by the grantee in cash
or by check of the amount of the withholding taxes or, at the discretion of the
Committee, by the grantee's delivery of previously held shares of Common Stock
or the withholding from the shares of Common Stock otherwise deliverable upon
exercise of a Option shares having an aggregate fair market value equal to the
amount of such withholding taxes.
20. GOVERNMENTAL REGULATION. The Company's obligation to sell and deliver
-----------------------
shares of the Common Stock under this Plan is subject to the approval of any
governmental authority required in connection with the authorization, issuance
or sale of such shares.
Government regulations may impose reporting or other obligations on the
Company with respect to the Plan. For example, the Company may be required to
send tax information statements to employees and former employees that exercise
ISOs under the Plan, and the Company may be required to file tax information
returns reporting the income received by grantees of Options in connection with
the Plan.
21. GOVERNING LAW. The validity and construction of the Plan and the
-------------
instruments evidencing Options shall be governed by the laws of the Commonwealth
of Massachusetts.
10
<PAGE>
EXHIBIT 10.2
------------
SMARTERKIDS.COM, INC.
1999 STOCK OPTION AND INCENTIVE PLAN
------------------------------------
1. Purpose and Eligibility
-----------------------
The purpose of this 1999 Stock Option and Incentive Plan (the "Plan") of
----
SmarterKids.com, Inc. (the "Company") is to provide stock options and other
-------
equity interests in the Company (each an "Award") to employees, officers,
-----
directors, consultants and advisors of the Company and its Subsidiaries, all of
whom are eligible to receive Awards under the Plan. Any person to whom an Award
has been granted under the Plan is called a "Participant". Additional
-----------
definitions are contained in Section 8.
2. Administration
--------------
a. Administration by Board of Directors. The Plan will be administered by
------------------------------------
the Board of Directors of the Company (the "Board"). The Board, in its sole
-----
discretion, shall have the authority to grant and amend Awards, to adopt, amend
and repeal rules relating to the Plan and to interpret and correct the
provisions of the Plan and any Award. All decisions by the Board shall be
final and binding on all interested persons. Neither the Company nor any member
of the Board shall be liable for any action or determination relating to the
Plan.
b. Appointment of Committees. To the extent permitted by applicable law,
-------------------------
the Board may delegate any or all of its powers under the Plan to one or more
committees or subcommittees of the Board (a "Committee"). All references in the
---------
Plan to the "Board" shall mean such Committee or the Board.
-----
c. Delegation to Executive Officers. To the extent permitted by applicable
--------------------------------
law, the Board may delegate to one or more executive officers of the Company the
power to grant Awards and exercise such other powers under the Plan as the Board
may determine, provided that the Board shall fix the maximum number of Awards to
be granted and the maximum number of shares issuable to any one Participant
pursuant to Awards granted by such executive officers.
3. Stock Available for Awards
--------------------------
a. Number of Shares. Subject to adjustment under Section 3(c), the
----------------
aggregate number of shares of Common Stock of the Company (the "Common Stock")
------------
that may be issued pursuant to the Plan is 2,000,000 shares. If any Award
expires, or is terminated, surrendered or forfeited, in whole or in part, the
unissued Common Stock covered by such Award shall again be available for the
grant of Awards under the Plan. If shares of Common Stock issued pursuant to the
Plan are repurchased by, or are surrendered or forfeited to, the Company at no
more than cost, such shares of Common Stock shall again be available for the
grant of Awards under the Plan; provided, however, that the cumulative number of
such shares that may be so reissued under the Plan will not exceed 3,500,000
shares. Shares issued under the Plan may consist in whole or in part of
authorized but unissued shares or treasury shares.
<PAGE>
b. Per-Participant Limit. Subject to adjustment under Section 3(c), no
---------------------
Participant may be granted Awards during any one fiscal year to purchase more
than 500,000 shares of Common Stock.
c. Adjustment to Common Stock. In the event of any stock split, stock
--------------------------
dividend, extraordinary cash dividend, recapitalization, reorganization, merger,
consolidation, combination, exchange of shares, liquidation, spin-off, split-up,
or other similar change in capitalization or event, (i) the number and class of
securities available for Awards under the Plan and the per-Participant share
limit, (ii) the number and class of securities, vesting schedule and exercise
price per share subject to each outstanding Option, (iii) the repurchase price
per security subject to repurchase, and (iv) the terms of each other outstanding
stock-based Award shall be adjusted by the Company (or substituted Awards may be
made) to the extent the Board shall determine, in good faith, that such an
adjustment (or substitution) is appropriate. If Section 7(e)(i) applies for any
event, this Section 3(c) shall not be applicable.
4. Stock Options
-------------
a. General. The Board may grant options to purchase Common Stock (each, an
-------
"Option") and determine the number of shares of Common Stock to be covered by
- -------
each Option, the exercise price of each Option and the conditions and
limitations applicable to the exercise of each Option and the Common Stock
issued upon the exercise of each Option, including vesting provisions,
repurchase provisions and restrictions relating to applicable federal or state
securities laws, as it considers advisable.
b. Incentive Stock Options. An Option that the Board intends to be an
-----------------------
"incentive stock option" as defined in Section 422 of the Code (an "Incentive
---------
Stock Option") shall be granted only to employees of the Company and shall be
- ------------
subject to and shall be construed consistently with the requirements of Section
422 of the Code. The Board and the Company shall have no liability if an Option
or any part thereof that is intended to be an Incentive Stock Option does not
qualify as such. An Option or any part thereof that does not qualify as an
Incentive Stock Option is referred to herein as a "Nonstatutory Stock Option".
-------------------------
c. Exercise Price. The Board shall establish the exercise price (or
--------------
determine the method by which the exercise price shall be determined) at the
time each Option is granted and specify it in the applicable option agreement.
d. Duration of Options. Each Option shall be exercisable at such times and
-------------------
subject to such terms and conditions as the Board may specify in the applicable
option agreement.
e. Exercise of Option. Options may be exercised only by delivery to the
------------------
Company of a written notice of exercise signed by the proper person together
with payment in full as specified in Section 4(f) for the number of shares for
which the Option is exercised.
f. Payment Upon Exercise. Common Stock purchased upon the exercise of an
---------------------
Option shall be paid for by one or any combination of the following forms of
payment:
-2-
<PAGE>
(i) by check payable to the order of the Company;
(ii) except as otherwise explicitly provided in the applicable option
agreement, and only if the Common Stock is then publicly traded, delivery of an
irrevocable and unconditional undertaking by a creditworthy broker to deliver
promptly to the Company sufficient funds to pay the exercise price, or delivery
by the Participant to the Company of a copy of irrevocable and unconditional
instructions to a creditworthy broker to deliver promptly to the Company cash or
a check sufficient to pay the exercise price; or
(iii) to the extent explicitly provided in the applicable option
agreement, by (x) delivery of shares of Common Stock owned by the Participant
valued at fair market value (as determined by the Board or as determined
pursuant to the applicable option agreement), (y) delivery of a promissory note
of the Participant to the Company (and delivery to the Company by the
Participant of a check in an amount equal to the par value of the shares
purchased), or (z) payment of such other lawful consideration as the Board may
determine.
5. Restricted Stock
----------------
a. Grants. The Board may grant Awards entitling recipients to acquire
------
shares of Common Stock, subject to (i) delivery to the Company by the
Participant of a check in an amount at least equal to the par value of the
shares purchased, and (ii) the right of the Company to repurchase all or part of
such shares at their issue price or other stated or formula price from the
Participant in the event that conditions specified by the Board in the
applicable Award are not satisfied prior to the end of the applicable
restriction period or periods established by the Board for such Award (each, a
"Restricted Stock Award").
----------------------
b. Terms and Conditions. The Board shall determine the terms and conditions
--------------------
of any such Restricted Stock Award. Any stock certificates issued in respect of
a Restricted Stock Award shall be registered in the name of the Participant and,
unless otherwise determined by the Board, deposited by the Participant, together
with a stock power endorsed in blank, with the Company (or its designee). After
the expiration of the applicable restriction periods, the Company (or such
designee) shall deliver the certificates no longer subject to such restrictions
to the Participant or, if the Participant has died, to the beneficiary
designated by a Participant, in a manner determined by the Board, to receive
amounts due or exercise rights of the Participant in the event of the
Participant's death (the "Designated Beneficiary"). In the absence of an
----------------------
effective designation by a Participant, Designated Beneficiary shall mean the
Participant's estate.
6. Other Stock-Based Awards
------------------------
The Board shall have the right to grant other Awards based upon the Common
Stock having such terms and conditions as the Board may determine, including,
without limitation, the grant of shares based upon certain conditions, the grant
of securities convertible into Common Stock and the grant of stock appreciation
rights, phantom stock awards or stock units.
7. General Provisions Applicable to Awards
---------------------------------------
-3-
<PAGE>
a. Transferability of Awards. Except as the Board may otherwise determine
-------------------------
or provide in an Award, Awards shall not be sold, assigned, transferred, pledged
or otherwise encumbered by the person to whom they are granted, either
voluntarily or by operation of law, except by will or the laws of descent and
distribution, and, during the life of the Participant, shall be exercisable only
by the Participant. References to a Participant, to the extent relevant in the
context, shall include references to authorized transferees.
b. Documentation. Each Award under the Plan shall be evidenced by a
-------------
written instrument in such form as the Board shall determine or as executed by
an officer of the Company pursuant to authority delegated by the Board. Each
Award may contain terms and conditions in addition to those set forth in the
Plan provided that such terms and conditions do not contravene the provisions of
the Plan.
c. Board Discretion. The terms of each type of Award need not be
----------------
identical, and the Board need not treat Participants uniformly.
d. Termination of Status. The Board shall determine the effect on an Award
---------------------
of the disability, death, retirement, authorized leave of absence or other
change in the employment or other status of a Participant and the extent to
which, and the period during which, the Participant, or the Participant's legal
representative, conservator, guardian or Designated Beneficiary, may exercise
rights under the Award.
e. Acquisition of the Company
--------------------------
(i) Consequences of an Acquisition.
------------------------------
Unless otherwise expressly provided in the applicable Option or
Award, upon the occurrence of an Acquisition, the Board or the board of
directors of the surviving or acquiring entity (as used in this Section
7(e)(i)(B), also the "Board"), shall, as to outstanding Awards (on the same
-----
basis or on different bases, as the Board shall specify), make appropriate
provision for the continuation of such Awards by the Company or the assumption
of such Awards by the surviving or acquiring entity and by substituting on an
equitable basis for the shares then subject to such Awards either (a) the
consideration payable with respect to the outstanding shares of Common Stock in
connection with the Acquisition, (b) shares of stock of the surviving or
acquiring corporation or (c) such other securities as the Board deems
appropriate, the fair market value of which (as determined by the Board in its
sole discretion) shall not materially differ from the fair market value of the
shares of Common Stock subject to such Awards immediately preceding the
Acquisition. In addition to or in lieu of the foregoing, with respect to
outstanding Options, the Board may, upon written notice to the affected
optionees, provide that one or more Options must be exercised, to the extent
then exercisable or to be exercisable as a result of the Acquisition, within a
specified number of days of the date of such notice, at the end of which period
such Options shall terminate; or terminate one or more Options in exchange for a
cash payment equal to the excess of the fair market value (as determined by the
Board in its sole discretion) of the shares subject to such Options (to the
-4-
<PAGE>
extent then exercisable or to be exercisable as a result of the Acquisition)
over the exercise price thereof.
(A) Acquisition Defined. An "Acquisition" shall mean: (x) any
------------------- -----------
merger or consolidation after which the voting securities of the Company
outstanding immediately prior thereto represent (either by remaining outstanding
or by being converted into voting securities of the surviving or acquiring
entity) less than 50% of the combined voting power of the voting securities of
the Company or such surviving or acquiring entity outstanding immediately after
such event; or (y) any sale of all or substantially all of the assets or capital
stock of the Company (other than in a spin-off or similar transaction) or (z)
any other acquisition of the business of the Company, as determined by the
Board.
(ii) Assumption of Options Upon Certain Events. In connection with a
-----------------------------------------
merger or consolidation of an entity with the Company or the acquisition by the
Company of property or stock of an entity, the Board may grant Awards under the
Plan in substitution for stock and stock-based awards issued by such entity or
an affiliate thereof. The substitute Awards shall be granted on such terms and
conditions as the Board considers appropriate in the circumstances.
(iii) Pooling-of Interests-Accounting. If the Company proposes to
-------------------------------
engage in an Acquisition intended to be accounted for as a pooling-of-interests,
and in the event that the provisions of this Plan or of any Award hereunder, or
any actions of the Board taken in connection with such Acquisition, are
determined by the Company's or the acquiring company's independent public
accountants to cause such Acquisition to fail to be accounted for as a pooling-
of-interests, then such provisions or actions shall be amended or rescinded by
the Board, without the consent of any Participant, to be consistent with
pooling-of-interests accounting treatment for such Acquisition.
(iv) Parachute Awards. Notwithstanding the provisions of Section
----------------
7(e)(i)(A), if, in connection with an Acquisition described therein, a tax under
Section 4999 of the Code would be imposed on the Participant (after taking into
account the exceptions set forth in Sections 280G(b)(4) and 280G(b)(5) of the
Code), then the number of Awards which shall become exercisable, realizable or
vested as provided in such section shall be reduced (or delayed), to the minimum
extent necessary, so that no such tax would be imposed on the Participant (the
Awards not becoming so accelerated, realizable or vested, the "Parachute
---------
Awards"); provided, however, that if the "aggregate present value" of the
- ------ -----------------------
Parachute Awards would exceed the tax that, but for this sentence, would be
imposed on the Participant under Section 4999 of the Code in connection with the
Acquisition, then the Awards shall become immediately exercisable, realizable
and vested without regard to the provisions of this sentence. For purposes of
the preceding sentence, the "aggregate present value" of an Award shall be
-----------------------
calculated on an after-tax basis (other than taxes imposed by Section 4999 of
the Code) and shall be based on economic principles rather than the principles
set forth under Section 280G of the Code and the regulations promulgated
thereunder. All determinations required to be made under this Section 7(e)(iv)
shall be made by the Company.
f. Withholding. Each Participant shall pay to the Company, or make
-----------
provisions satisfactory to the Company for payment of, any taxes required by law
to be withheld in
-5-
<PAGE>
connection with Awards to such Participant no later than the date of the event
creating the tax liability. The Board may allow Participants to satisfy such tax
obligations in whole or in part by transferring shares of Common Stock,
including shares retained from the Award creating the tax obligation, valued at
their fair market value (as determined by the Board or as determined pursuant to
the applicable option agreement). The Company may, to the extent permitted by
law, deduct any such tax obligations from any payment of any kind otherwise due
to a Participant.
g. Amendment of Awards. The Board may amend, modify or terminate any
-------------------
outstanding Award including, but not limited to, substituting therefor another
Award of the same or a different type, changing the date of exercise or
realization, and converting an Incentive Stock Option to a Nonstatutory Stock
Option, provided that, except as otherwise provided in Section 7(e)(iii), the
Participant's consent to such action shall be required unless the Board
determines that the action, taking into account any related action, would not
materially and adversely affect the Participant.
h. Conditions on Delivery of Stock. The Company will not be obligated to
-------------------------------
deliver any shares of Common Stock pursuant to the Plan or to remove
restrictions from shares previously delivered under the Plan until (i) all
conditions of the Award have been met or removed to the satisfaction of the
Company, (ii) in the opinion of the Company's counsel, all other legal matters
in connection with the issuance and delivery of such shares have been satisfied,
including any applicable securities laws and any applicable stock exchange or
stock market rules and regulations, and (iii) the Participant has executed and
delivered to the Company such representations or agreements as the Company may
consider appropriate to satisfy the requirements of any applicable laws, rules
or regulations.
i. Acceleration. The Board may at any time provide that any Options shall
------------
become immediately exercisable in full or in part, that any Restricted Stock
Awards shall be free of some or all restrictions, or that any other stock-based
Awards may become exercisable in full or in part or free of some or all
restrictions or conditions, or otherwise realizable in full or in part, as the
case may be, despite the fact that the foregoing actions may (i) cause the
application of Sections 280G and 4999 of the Code if a change in control of the
Company occurs, or (ii) disqualify all or part of the Option as an Incentive
Stock Option.
8. Miscellaneous
-------------
a. Definitions.
-----------
(i) "Company," for purposes of eligibility under the Plan, shall
-------
include any or future subsidiary corporations of SmarterKids.com, Inc., as
defined in Section 424(f) of the Code (a "Subsidiary"), and any present or
----------
future parent corporation of SmarterKids.com, Inc., as defined in Section 424(e)
of the Code. For purposes of Awards other than Incentive Stock Options, the term
"Company" shall include any other business venture in which the Company has a
-------
direct or indirect significant interest, as determined by the Board in its sole
discretion.
-6-
<PAGE>
(ii) "Code" means the Internal Revenue Code of 1986, as amended, and
----
any regulations promulgated thereunder.
(iii) "employee" for purposes of eligibility under the Plan shall
--------
include a person to whom an offer of employment has been extended by the
Company.
b. No Right To Employment or Other Status. No person shall have any claim
--------------------------------------
or right to be granted an Award, and the grant of an Award shall not be
construed as giving a Participant the right to continued employment or any other
relationship with the Company. The Company expressly reserves the right at any
time to dismiss or otherwise terminate its relationship with a Participant free
from any liability or claim under the Plan.
c. No Rights As Stockholder. Subject to the provisions of the applicable
------------------------
Award, no Participant or Designated Beneficiary shall have any rights as a
stockholder with respect to any shares of Common Stock to be distributed with
respect to an Award until becoming the record holder thereof.
d. Effective Date and Term of Plan. The Plan shall become effective on the
-------------------------------
date on which it is adopted by the Board. No Awards shall be granted under the
Plan after the completion of ten years from the date on which the Plan was
adopted by the Board, but Awards previously granted may extend beyond that date.
e. Amendment of Plan. The Board may amend, suspend or terminate the Plan
------------------
or any portion thereof at any time.
f. Governing Law. The provisions of the Plan and all Awards made hereunder
-------------
shall be governed by and interpreted in accordance with the laws of Delaware,
without regard to any applicable conflicts of law.
Adopted by the Board of Directors on
_______________
Approved by the stockholders on
_______________
-7-
<PAGE>
EXHIBIT 10.3
------------
SMARTERKIDS.COM, INC.
1999 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
1. Purpose. This Non-Qualified Stock Option Plan, to be known as the 1999
-------
Non-Employee Director Stock Option Plan (hereinafter, this "Plan") is intended
to promote the interests of SmarterKids.com, Inc. (hereinafter, the "Company")
by providing an inducement to obtain and retain the services of qualified
persons who are not employees or officers of the Company to serve as members of
its Board of Directors (the "Board").
2. Available Shares. The total number of shares of Common Stock, par value
----------------
$.01 per share, of the Company (the "Common Stock") for which options may be
granted under this Plan shall not exceed 200,000 shares, subject to adjustment
in accordance with paragraph 10 of this Plan. Shares subject to this Plan are
authorized but unissued shares or shares that were once issued and subsequently
reacquired by the Company. If any options granted under this Plan are
surrendered before exercise or lapse without exercise, in whole or in part, the
shares reserved therefor shall continue to be available under this Plan.
3. Administration. This Plan shall be administered by the Board or by a
--------------
committee appointed by the Board (the "Committee"). In the event the Board
fails to appoint or refrains from appointing a Committee, the Board shall have
all power and authority to administer this Plan. In such event, the word
"Committee" wherever used herein shall be deemed to mean the Board. The
Committee shall, subject to the provisions of the Plan, have the power to
construe this Plan, to determine all questions hereunder, and to adopt and amend
such rules and regulations for the administration of this Plan as it may deem
desirable. No member of the Board or the Committee shall be liable for any
action or determination made in good faith with respect to this Plan or any
option granted under it.
4. Automatic Grant of Options. The Plan shall first become effective upon
--------------------------
the date on which the Common Stock of the Company becomes registered under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Subject to
the availability of shares under this Plan, (a) each person who first becomes a
member of the Board after the effectiveness of this Plan and who is not an
employee or officer of the Company (a "Non-Employee Director") shall be
automatically granted on the later of (i) the date such person is first elected
to the Board (such date being referred to herein as the "Grant Date"), without
further action by the Board, an option to purchase 45,000 shares of the Common
Stock, and (b) each Non-Employee Director (whether or not such person was
elected initially before or after the effectiveness of this Plan) upon
reelection to the Board of Directors during the term of this Plan, shall be
automatically granted on each such date an option to purchase an additional
2,000 shares of Common Stock. The options to be granted under this
<PAGE>
paragraph 4 shall be the only options ever to be granted at any time to such
member under this Plan. The number of shares covered by options granted under
this paragraph 4 shall be subject to adjustment in accordance with the
provisions of paragraph 10 of this Plan. Notwithstanding anything to the
contrary set forth herein, if this Plan is not approved by a majority of the
Company's stockholders present, or represented, and voting on such matter at the
first meeting of Stockholders of the Company following the Approval Date, then
the Plan and the options granted pursuant to this Section 4 shall terminate and
become void, and no further options shall be granted under this Plan.
5. Option Price. The purchase price of the stock covered by an option
------------
granted pursuant to this Plan shall be 100% of the fair market value of such
shares on the day the option is granted. The option price will be subject to
adjustment in accordance with the provisions of paragraph 10 of this Plan. For
purposes of this Plan, if, at the time an option is granted under the Plan, the
Company's Common Stock is publicly traded, "fair market value" shall be
determined as of the last business day for which the prices or quotes discussed
in this sentence are available prior to the date such option is granted and
shall mean (i) the average (on that date) of the high and low prices of the
Common Stock on the principal national securities exchange on which the Common
Stock is traded, if the Common Stock is then traded on a national securities
exchange; or (ii) the last reported sale price (on that date) of the Common
Stock on the Nasdaq National Market, if the Common Stock is not then traded on a
national securities exchange; or (iii) the closing bid price (or average of bid
prices) last quoted (on that date) by an established quotation service for over-
the-counter securities, if the Common Stock is not reported on the Nasdaq
National Market List. However, if the Common Stock is not publicly traded at
the time an option is granted under the Plan, "fair market value" shall be
deemed to be the fair value of the Common Stock as determined by the Committee
after taking into consideration all factors which it deems appropriate,
including, without limitation, recent sale and offer prices of the Common Stock
in private transactions negotiated at arm's length.
6. Period of Option. Unless sooner terminated in accordance with the
----------------
provisions of paragraph 8 of this Plan, an option granted hereunder shall expire
on the date which is ten (10) years after the date of grant of the option.
7. (a) Vesting of Shares and Non-Transferability of Options. Options
----------------------------------------------------
granted under this Plan shall vest in the optionee and thus become exercisable,
in accordance with the following schedule, provided that the optionee has
continuously served as a member of the Board through such vesting date:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Percentage Option
Shares for which
Option Will be Exercisable Date of Vesting
- ------------------------------------------------------------------------------------------
<S> <C>
33 1/3% One year from the date of grant
- ------------------------------------------------------------------------------------------
66 2/3% Two years from the date of grant
- ------------------------------------------------------------------------------------------
</TABLE>
-2-
<PAGE>
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------------
100% Three years from the date of grant
- ------------------------------------------------------------------------------------------
</TABLE>
The number of shares as to which options may be exercised shall be
cumulative, so that once the option shall become exercisable as to any shares it
shall continue to be exercisable as to said shares, until expiration or
termination of the option as provided in this Plan.
(b) Non-transferability. Any option granted pursuant to this Plan shall
-------------------
not be assignable or transferable other than by will or the laws of descent and
distribution or pursuant to a domestic relations order and shall be exercisable
during the optionee's lifetime only by him or her.
8. Termination of Option Rights.
----------------------------
(a) In the event an optionee ceases to be a member of the Board for any
reason other than death or permanent disability, any than unexercised portion of
options granted to such optionee shall, to the extent not then vested,
immediately terminate and become void; any portion of an option which is then
vested but has not been exercised at the time the optionee so ceases to be a
member of the Board may be exercised, to the extent it is then vested, by the
optionee within 90 days of the date the optionee ceased to be a member of the
Board; and all options shall terminate after such 90 days have expired.
(b) In the event that an optionee ceases to be a member of the Board by
reason of his or her death or permanent disability, any option granted to such
optionee shall be immediately and automatically accelerated and become fully
vested and all unexercised options shall be exercisable by the optionee (or by
the optionee's personal representative, heir or legatee, in the event of death)
until the scheduled expiration date of the option.
(c) No portion of an option may be exercised if the optionee is removed
from the Board of Directors for any one of the following reasons: (i)
disloyalty, gross negligence, dishonesty or breach of fiduciary duty to the
Company; or (ii) the commission of an act of embezzlement, fraud or deliberate
disregard of the rules or policies of the Company which results in loss, damage
or injury to the Company, whether directly or indirectly; or (iii) the
unauthorized disclosure of any trade secret or confidential information of the
Company; or (iv) the commission of an act which constitutes unfair competition
with the Company or which induces any customer of the Company to break a
contract with the Company; or (v) the conduct of any activity on behalf of any
organization or entity which is a competitor of the Company (unless such conduct
is approved by a majority of the members of the Board of Directors).
9. Exercise of Option. Subject to the terms and conditions of this Plan and
------------------
the option agreements, an option granted hereunder shall, to the extent then
exercisable, be
-3-
<PAGE>
exercisable in whole or in part by giving written notice to the Company by mail
or in person addressed to SmarterKids.com, 200 Highland Avenue, Needham, MA
02494, at its principal executive offices, stating the number of shares with
respect to which the option is being exercised, accompanied by payment in full
for such shares. Payment may be (a) in United States dollars in cash or by
check, (b) in whole or in part in shares of the Common Stock of the Company
already owned by the person or persons exercising the option or shares subject
to the option being exercised (subject to such restrictions and guidelines as
the Board may adopt from time to time), valued at fair market value determined
in accordance with the provisions of paragraph 5 or (c) consistent with
applicable law, through the delivery of an assignment to the Company of a
sufficient amount of the proceeds from the sale of the Common Stock acquired
upon exercise of the option and an authorization to the broker or selling agent
to pay that amount to the Company, which sale shall be at the participant's
direction at the time of exercise. There shall be no such exercise at any one
time as to fewer than one hundred (100) shares or all of the remaining shares
then purchasable by the person or persons exercising the option, if fewer than
one hundred (100) shares. The Company's transfer agent shall, on behalf of the
Company, prepare a certificate or certificates representing such shares acquired
pursuant to exercise of the option, shall register the optionee as the owner of
such shares on the books of the Company and shall cause the fully executed
certificate(s) representing such shares to be delivered to the optionee as soon
as practicable after payment of the option price in full. The holder of an
option shall not have any rights of a stockholder with respect to the shares
covered by the option, except to the extent that one or more certificates for
such shares shall be delivered to him or her upon the due exercise of the
option.
10. Adjustments Upon Changes in Capitalization and Other Events. Upon the
-----------------------------------------------------------
occurrence of any of the following events, an optionee's rights with respect to
options granted to him or her hereunder shall be adjusted as hereinafter
provided:
(a) Stock Dividends and Stock Splits. If the shares of Common Stock
--------------------------------
shall be subdivided or combined into a greater or smaller number of shares or
if the Company shall issue any shares of Common Stock as a stock dividend on
its outstanding Common Stock, the number of shares of Common Stock
deliverable upon the exercise of options shall be appropriately increased or
decreased proportionately, and appropriate adjustments shall be made in the
purchase price per share to reflect such subdivision, combination or stock
dividend.
(b) Recapitalization Adjustments. In the event of a reorganization,
----------------------------
recapitalization, merger, consolidation, or any other change in the corporate
structure or shares of the Company, to the extent permitted by Rule 16b-3
under the Securities Exchange Act of 1934, adjustments in the number and kind
of shares authorized by this Plan and in the number and kind of shares
covered by, and in the option price of outstanding options under this Plan
necessary to maintain the proportionate interest of the optionee and
preserve, without exceeding, the value of such option, shall be made.
Notwithstanding the foregoing, no such adjustment shall be made which would,
within the meaning of any applicable provisions of the Internal Revenue
-4-
<PAGE>
Code of 1986, as amended, constitute a modification, extension or renewal of
any Option or a grant of additional benefits to the holder of an Option.
(c) Issuances of Securities. Except as expressly provided herein, no
-----------------------
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or
price of shares subject to options. No adjustments shall be made for
dividends paid in cash or in property other than securities of the Company.
(d) Adjustments. Upon the happening of any of the foregoing events, the
-----------
class and aggregate number of shares set forth in paragraphs 2 and 4 of this
Plan that are subject to options which previously have been or subsequently
may be granted under this Plan shall also be appropriately adjusted to
reflect such events. The Board shall determine the specific adjustments to
be made under this paragraph 10 and its determination shall be conclusive.
11. Restrictions on Issuance of Shares. Notwithstanding the provisions of
----------------------------------
paragraphs 4 and 9 of this Plan, the Company shall have no obligation to deliver
any certificate or certificates upon exercise of an option until one of the
following conditions shall be satisfied:
(i) The issuance of shares with respect to which the option has been
exercised is at the time of the issue of such shares effectively registered
under applicable Federal and state securities laws as now in force or
hereafter amended; or
(ii) Counsel for the Company shall have given an opinion that the
issuance of such shares is exempt from registration under Federal and state
securities laws as now in force or hereafter amended; and the Company has
complied with all applicable laws and regulations with respect thereto,
including without limitation all regulations required by any stock exchange
upon which the Company's outstanding Common Stock is then listed.
12. Legend on Certificates. The certificates representing shares issued
----------------------
pursuant to the exercise of an option granted hereunder shall carry such
appropriate legend, and such written instructions shall be given to the
Company's transfer agent, as may be deemed necessary or advisable by counsel to
the Company in order to comply with the requirements of the Securities Act of
1933 or any state securities laws.
13. Representation of Optionee. If requested by the Company, the optionee
--------------------------
shall deliver to the Company written representations and warranties upon
exercise of the option that are necessary to show compliance with Federal and
state securities laws, including representations and warranties to the effect
that a purchase of shares under the option is made for investment and not with a
view to their distribution (as that term is used in the Securities Act of 1933).
-5-
<PAGE>
14. Option Agreement. Each option granted under the provisions of this Plan
----------------
shall be evidenced by an option agreement, which agreement shall be duly
executed and delivered on behalf of the Company and by the optionee to whom such
option is granted. The option agreement shall contain such terms, provisions
and conditions not inconsistent with this Plan as may be determined by the
officer executing it.
15. Termination and Amendment of Plan. Options may no longer be granted
---------------------------------
under this Plan after _______, 2009, and this Plan shall terminate when all
options granted or to be granted hereunder are no longer outstanding. The Board
may at any time terminate this Plan or make such modification or amendment
thereof as it deems advisable; provided, however, that the Board may not,
-------- -------
without approval of the stockholders, (a) increase the maximum number of shares
for which options may be granted under this Plan (except by adjustment pursuant
to Section 10), (b) materially modify the requirements as to eligibility to
participate in this Plan or (c) materially increase benefits accruing to option
holders under this Plan. Termination or any modification or amendment of this
Plan shall not, without consent of a participant, affect his or her rights under
an option previously granted to him or her.
16. Withholding of Income Taxes. Upon the exercise of an option, the
---------------------------
Company, in accordance with Section 3402(a) of the Internal Revenue Code, may
require the optionee to pay withholding taxes in respect of amounts considered
to be compensation includible in the optionee's gross income.
17. Compliance with Regulations. It is the Company's intent that the Plan
---------------------------
comply in all respects with Rule 16b-3 under the Securities Exchange Act of 1934
(or any successor or amended provision thereof) and any applicable Securities
and Exchange Commission interpretations thereof. If any provision of this Plan
is deemed not to be in compliance with Rule 16b-3, the provision shall be null
and void.
18. Governing Law. The validity and construction of this Plan and the
-------------
instruments evidencing options shall be governed by the laws of the State of
Delaware, without giving effect to the principles of conflicts of law thereof.
Date Approved by Board of Directors of the Company:
Date Approved by Shareholders of the Company:
-6-
<PAGE>
EXHIBIT 10.4
------------
SMARTERKIDS.COM
1999 EMPLOYEE STOCK PURCHASE PLAN
Article 1 - Purpose.
- -------------------
This 1999 Employee Stock Purchase Plan (the "Plan") is intended to encourage
stock ownership by all eligible employees of SmarterKids.com, a Delaware
corporation, (the "Company"), and its participating subsidiaries (as defined in
Article 17) so that they may share in the growth of the Company by acquiring or
increasing their proprietary interest in the Company. The Plan is designed to
encourage eligible employees to remain in the employ of the Company and its
participating subsidiaries. The Plan is intended to constitute an "employee
stock purchase plan" within the meaning of Section 423(b) of the Internal
Revenue Code of 1986, as amended (the "Code").
Article 2 - Administration of the Plan.
- --------------------------------------
The Plan may be administered by a committee appointed by the Board of
Directors of the Company (the "Committee"). The Committee shall consist of not
less than two members of the Company's Board of Directors. The Board of
Directors may from time to time remove members from, or add members to, the
Committee. Vacancies on the Committee, howsoever caused, shall be filled by the
Board of Directors. The Committee may select one of its members as Chairman,
and shall hold meetings at such times and places as it may determine. Acts by a
majority of the Committee, or acts reduced to or approved in writing by a
majority of the members of the Committee, shall be the valid acts of the
Committee.
The interpretation and construction by the Committee of any provisions of the
Plan or of any option granted under it shall be final, unless otherwise
determined by the Board of Directors. The Committee may from time to time adopt
such rules and regulations for carrying out the Plan as it may deem best,
provided that any such rules and regulations shall be applied on a uniform basis
to all employees under the Plan. No member of the Board of Directors or the
Committee shall be liable for any action or determination made in good faith
with respect to the Plan or any option granted under it.
In the event the Board of Directors fails to appoint or refrains from
appointing a Committee, the Board of Directors shall have all power and
authority to administer the Plan. In such event, the word "Committee" wherever
used herein shall be deemed to mean the Board of Directors.
Article 3 - Eligible Employees.
- ------------------------------
All employees of the Company or any of its participating subsidiaries whose
customary employment is more than 20 hours per week and for more than five
months in any calendar year and who have completed 90 days employment with the
Company shall be eligible to receive options under the Plan to purchase common
stock of the Company, and all eligible employees shall have the same rights and
privileges hereunder. Persons who are eligible employees on the first business
day of any Payment Period (as defined in Article 5) shall receive their options
as of such day. Persons who become eligible employees after any date on which
options are granted under the Plan shall be granted options on the first day of
the next succeeding Payment Period on which options are granted to eligible
employees under the
<PAGE>
-2-
Plan. In no event, however, may an employee be granted an option if such
employee, immediately after the option was granted, would be treated as owning
stock possessing five percent or more of the total combined voting power or
value of all classes of stock of the Company or of any parent corporation or
subsidiary corporation, as the terms "parent corporation" and "subsidiary
corporation" are defined in Section 424(e) and (f) of the Code. For purposes of
determining stock ownership under this paragraph, the rules of Section 424(d) of
the Code shall apply, and stock which the employee may purchase under
outstanding options shall be treated as stock owned by the employee.
Article 4 - Stock Subject to the Plan.
- -------------------------------------
The stock subject to the options under the Plan shall be shares of the
Company's authorized but unissued common stock, par value $.01 per share (the
"Common Stock"), or shares of Common Stock reacquired by the Company, including
shares purchased in the open market. The aggregate number of shares which may
be issued pursuant to the Plan is 400,000, subject to adjustment as provided in
Article 12. If any option granted under the Plan shall expire or terminate for
any reason without having been exercised in full or shall cease for any reason
to be exercisable in whole or in part, the unpurchased shares subject thereto
shall again be available under the Plan.
Article 5 - Payment Period and Stock Options.
- --------------------------------------------
Payment Periods shall consist of the six-month periods commencing on January
1 and July 1 and ending on June 30 and December 31 of each calendar year.
On the first business day of each Payment Period, the Company will grant to
each eligible employee who is then a participant in the Plan an option to
purchase on the last day of such Payment Period, at the Option Price hereinafter
provided for, a maximum of 1,000 shares, on condition that such employee remains
eligible to participate in the Plan throughout the remainder of such Payment
Period. The participant shall be entitled to exercise the option so granted
only to the extent of the participant's accumulated payroll deductions on the
last day of such Payment Period. If the participant's accumulated payroll
deductions on the last day of the Payment Period would enable the participant to
purchase more than 1,000 shares except for the 1,000-share limitation, the
excess of the amount of the accumulated payroll deductions over the aggregate
purchase price of the 1,000 shares shall be promptly refunded to the participant
by the Company, without interest. The Option Price per share for each Payment
Period shall be the lesser of (i) 85% of the average market price of the Common
Stock on the first business day of the Payment Period and (ii) 85% of the
average market price of the Common Stock on the last business day of the Payment
Period, in either event rounded up to the nearest cent. The foregoing
limitation on the number of shares subject to option and the Option Price shall
be subject to adjustment as provided in Article 12.
For purposes of the Plan, the term "average market price" on any date means
(i) the average (on that date) of the high and low prices of the Common Stock on
the principal national securities exchange on which the Common Stock is traded,
if the Common Stock is then traded on a national securities exchange; or (ii)
the last reported sale price (on that date) of the Common Stock on the Nasdaq
National Market, if the Common Stock is not then traded on a national securities
exchange; or (iii) the average of the closing bid and asked prices last quoted
(on that date) by an established quotation service for over-the-counter
securities, if the Common Stock is not reported on the Nasdaq National Market;
or (iv) if the Common Stock is not publicly traded, the fair market value of the
Common Stock as determined by the Committee after taking into consideration all
factors which it deems appropriate, including, without
<PAGE>
-3-
limitation, recent sale and offer prices of the Common Stock in private
transactions negotiated at arm's length.
For purposes of the Plan, the term "business day" means a day on which there
is trading on the Nasdaq National Market or the aforementioned national
securities exchange, whichever is applicable pursuant to the preceding
paragraph; and if neither is applicable, a day that is not a Saturday, Sunday or
legal holiday in the Commonwealth of Massachusetts.
No employee shall be granted an option which permits the employee's right to
purchase stock under the Plan, and under all other Section 423(b) employee stock
purchase plans of the Company and any parent or subsidiary corporations, to
accrue at a rate which exceeds $25,000 of fair market value of such stock
(determined on the date or dates that options on such stock were granted) for
each calendar year in which such option is outstanding at any time. The purpose
of the limitation in the preceding sentence is to comply with Section 423(b)(8)
of the Code. If the participant's accumulated payroll deductions on the last
day of the Payment Period would otherwise enable the participant to purchase
Common Stock in excess of the Section 423(b)(8) limitation described in this
paragraph, the excess of the amount of the accumulated payroll deductions over
the aggregate purchase price of the shares actually purchased shall be promptly
refunded to the participant by the Company, without interest.
Article 6 - Exercise of Option.
- ------------------------------
Each eligible employee who continues to be a participant in the Plan on the
last day of a Payment Period shall be deemed to have exercised his or her option
on such date and shall be deemed to have purchased from the Company such number
of full shares of Common Stock reserved for the purpose of the Plan as the
participant's accumulated payroll deductions on such date will pay for at the
Option Price, subject to the 1,000-share limit of the option and the Section
423(b)(8) limitation described in Article 5. If the individual is not a
participant on the last day of a Payment Period, the he or she shall not be
entitled to exercise his or her option. Only full shares of Common Stock may be
purchased under the Plan. Unused payroll deductions remaining in a
participant's account at the end of a Payment Period by reason of the inability
to purchase a fractional share shall be carried forward to the next Payment
Period.
Article 7 - Authorization for Entering the Plan.
- -----------------------------------------------
An employee may elect to enter the Plan by filling out, signing and
delivering to the Company an authorization:
A. Stating the percentage to be deducted regularly from the employee's
pay;
B. Authorizing the purchase of stock for the employee in each Payment
Period in accordance with the terms of the Plan; and
C. Specifying the exact name or names in which stock purchased for the
employee is to be issued as provided under Article 11 hereof.
Such authorization must be received by the Company at least ten days before the
first day of the next succeeding Payment Period and shall take effect only if
the employee is an eligible employee on the first business day of such Payment
Period.
<PAGE>
-4-
Unless a participant files a new authorization or withdraws from the Plan,
the deductions and purchases under the authorization the participant has on file
under the Plan will continue from one Payment Period to succeeding Payment
Periods as long as the Plan remains in effect.
The Company will accumulate and hold for each participant's account the
amounts deducted from his or her pay. No interest will be paid on these
amounts.
Article 8 - Maximum Amount of Payroll Deductions.
- ------------------------------------------------
An employee may authorize payroll deductions in an amount (expressed as a
whole percentage) not less than one percent (1%) but not more than ten percent
(10%) of the employee's total compensation, including base pay or salary and any
overtime, bonuses or commissions.
Article 9 - Change in Payroll Deductions.
- ----------------------------------------
Deductions may not be increased or decreased during a Payment Period.
However, a participant may withdraw in full from the Plan.
Article 10 - Withdrawal from the Plan.
- -------------------------------------
A participant may withdraw from the Plan (in whole but not in part) at any
time prior to the last day of a Payment Period by delivering a withdrawal notice
to the Company.
To re-enter the Plan, an employee who has previously withdrawn must file a
new authorization at least ten days before the first day of the next Payment
Period in which he or she wishes to participate. The employee's re-entry into
the Plan becomes effective at the beginning of such Payment Period, provided
that he or she is an eligible employee on the first business day of the Payment
Period.
Article 11 - Issuance of Stock.
- ------------------------------
Certificates for stock issued to participants shall be delivered as soon as
practicable after each Payment Period by the Company's transfer agent.
Stock purchased under the Plan shall be issued only in the name of the
participant, or if the participant's authorization so specifies, in the name of
the participant and another person of legal age as joint tenants with rights of
survivorship.
Article 12 - Adjustments.
- ------------------------
Upon the happening of any of the following described events, a participant's
rights under options granted under the Plan shall be adjusted as hereinafter
provided:
A. In the event that the shares of Common Stock shall be subdivided or
combined into a greater or smaller number of shares or if, upon a
reorganization, split-up, liquidation, recapitalization or the like of the
Company, the shares of Common Stock shall be exchanged for other securities
of the Company, each participant shall be entitled, subject to the conditions
herein stated, to purchase such number of shares of Common Stock or amount of
other securities of the Company as were exchangeable for the number of shares
of Common Stock that such participant
<PAGE>
-5-
would have been entitled to purchase except for such action, and appropriate
adjustments shall be made in the purchase price per share to reflect such
subdivision, combination or exchange; and
B. In the event the Company shall issue any of its shares as a stock
dividend upon or with respect to the shares of stock of the class which shall
at the time be subject to option hereunder, each participant upon exercising
such an option shall be entitled to receive (for the purchase price paid upon
such exercise) the shares as to which the participant is exercising his or
her option and, in addition thereto (at no additional cost), such number of
shares of the class or classes in which such stock dividend or dividends were
declared or paid, and such amount of cash in lieu of fractional shares, as is
equal to the number of shares thereof and the amount of cash in lieu of
fractional shares, respectively, which the participant would have received if
the participant had been the holder of the shares as to which the participant
is exercising his or her option at all times between the date of the granting
of such option and the date of its exercise.
Upon the happening of any of the foregoing events, the class and aggregate
number of shares set forth in Article 4 hereof which are subject to options
which have been or may be granted under the Plan and the limitations set forth
in the second paragraph of Article 5 shall also be appropriately adjusted to
reflect the events specified in paragraphs A and B above. Notwithstanding the
foregoing, any adjustments made pursuant to paragraphs A or B shall be made only
after the Committee, based on advice of counsel for the Company, determines
whether such adjustments would constitute a "modification" (as that term is
defined in Section 424 of the Code). If the Committee determines that such
adjustments would constitute a modification, it may refrain from making such
adjustments.
If the Company is to be consolidated with or acquired by another entity in a
merger, a sale of all or substantially all of the Company's assets or otherwise
(an "Acquisition"), the Committee or the board of directors of any entity
assuming the obligations of the Company hereunder (the "Successor Board") shall,
with respect to options then outstanding under the Plan, either (i) make
appropriate provision for the continuation of such options by arranging for the
substitution on an equitable basis for the shares then subject to such options
either (a) the consideration payable with respect to the outstanding shares of
the Common Stock in connection with the Acquisition, (b) shares of stock of the
successor corporation, or a parent or subsidiary of such corporation, or (c)
such other securities as the Successor Board deems appropriate, the fair market
value of which shall not materially exceed the fair market value of the shares
of Common Stock subject to such options immediately preceding the Acquisition;
or (ii) terminate each participant's options in exchange for a cash payment
equal to the excess of (a) the fair market value on the date of the Acquisition,
of the number of shares of Common Stock that the participant's accumulated
payroll deductions as of the date of the Acquisition could purchase, at an
option price determined with reference only to the first business day of the
applicable Payment Period and subject to the1,000-share, Code Section 423(b)(8)
and fractional-share limitations on the amount of stock a participant would be
entitled to purchase, over (b) the result of multiplying such number of shares
by such option price.
The Committee or Successor Board shall determine the adjustments to be made
under this Article 12, and its determination shall be conclusive.
Article 13 - No Transfer or Assignment of Employee's Rights.
- -----------------------------------------------------------
An option granted under the Plan may not be transferred or assigned and may
be exercised only by the participant.
<PAGE>
-6-
Article 14 - Termination of Employee's Rights.
- ---------------------------------------------
Whenever a participant ceases to be an eligible employee because of
retirement, voluntary or involuntary termination, resignation, layoff,
discharge, death or for any other reason, his or her rights under the Plan shall
immediately terminate, and the Company shall promptly refund, without interest,
the entire balance of his or her payroll deduction account under the Plan.
Notwithstanding the foregoing, eligible employment shall be treated as
continuing intact while a participant is on military leave, sick leave or other
bona fide leave of absence, for up to 90 days, or for so long as the
participant's right to re-employment is guaranteed either by statute or by
contract, if longer than 90 days.
If a participant's payroll deductions are interrupted by any legal process, a
withdrawal notice will be considered as having been received from the
participant on the day the interruption occurs.
Article 15 - Termination and Amendments to Plan.
- -----------------------------------------------
Unless terminated sooner as provided below, the Plan shall terminate on
_______, 2009. The Plan may be terminated at any time by the Company's Board of
Directors but such termination shall not affect options then outstanding under
the Plan. It will terminate in any case when all or substantially all of the
unissued shares of stock reserved for the purposes of the Plan have been
purchased. If at any time shares of stock reserved for the purpose of the Plan
remain available for purchase but not in sufficient number to satisfy all then
unfilled purchase requirements, the available shares shall be apportioned among
participants in proportion to the amount of payroll deductions accumulated on
behalf of each participant that would otherwise be used to purchase stock, and
the Plan shall terminate. Upon such termination or any other termination of the
Plan, all payroll deductions not used to purchase stock will be refunded,
without interest.
The Committee or the Board of Directors may from time to time adopt
amendments to the Plan provided that, without the approval of the stockholders
of the Company, no amendment may (i) increase the number of shares that may be
issued under the Plan; (ii) change the class of employees eligible to receive
options under the Plan, if such action would be treated as the adoption of a new
plan for purposes of Section 423(b) of the Code; or (iii) cause Rule 16b-3 under
the Securities Exchange Act of 1934 to become inapplicable to the Plan.
Article 16 - Limits on Sale of Stock Purchased under the Plan.
- -------------------------------------------------------------
The Plan is intended to provide shares of Common Stock for investment and not
for resale. The Company does not, however, intend to restrict or influence any
employee in the conduct of his or her own affairs. An employee may, therefore,
sell stock purchased under the Plan at any time the employee chooses, subject to
compliance with any applicable federal or state securities laws and subject to
any restrictions imposed under Article 21 to ensure that tax withholding
obligations are satisfied. THE EMPLOYEE ASSUMES THE RISK OF ANY MARKET
FLUCTUATIONS IN THE PRICE OF THE STOCK.
<PAGE>
-7-
Article 17 - Participating Subsidiaries.
- ---------------------------------------
The term "participating subsidiary" shall mean any present or future
subsidiary of the Company, as that term is defined in Section 424(f) of the
Code, which is designated from time to time by the Board of Directors to
participate in the Plan. The Board of Directors shall have the power to make
such designation before or after the Plan is approved by the stockholders.
Article 18 - Optionees Not Stockholders.
- ---------------------------------------
Neither the granting of an option to an employee nor the deductions from his
or her pay shall constitute such employee a stockholder of the shares covered by
an option until such shares have been actually purchased by the employee.
Article 19 - Application of Funds.
- ---------------------------------
The proceeds received by the Company from the sale of Common Stock pursuant
to options granted under the Plan will be used for general corporate purposes.
Article 20 - Notice to Company of Disqualifying Disposition.
- -----------------------------------------------------------
By electing to participate in the Plan, each participant agrees to notify the
Company in writing immediately after the participant transfers Common Stock
acquired under the Plan, if such transfer occurs within two years after the
first business day of the Payment Period in which such Common Stock was
acquired. Each participant further agrees to provide any information about such
a transfer as may be requested by the Company or any subsidiary corporation in
order to assist it in complying with the tax laws. Such dispositions generally
are treated as "disqualifying dispositions" under Sections 421 and 424 of the
Code, which have certain tax consequences to participants and to the Company and
its participating subsidiaries.
Article 21 - Withholding of Additional Income Taxes.
- ---------------------------------------------------
By electing to participate in the Plan, each participant acknowledges that
the Company and its participating subsidiaries are required to withhold taxes
with respect to the amounts deducted from the participant's compensation and
accumulated for the benefit of the participant under the Plan, and each
participant agrees that the Company and its participating subsidiaries may
deduct additional amounts from the participant's compensation, when amounts are
added to the participant's account, used to purchase Common Stock or refunded,
in order to satisfy such withholding obligations. Each participant further
acknowledges that when Common Stock is purchased under the Plan the Company and
its participating subsidiaries may be required to withhold taxes with respect to
all or a portion of the difference between the fair market value of the Common
Stock purchased and its purchase price, and each participant agrees that such
taxes may be withheld from compensation otherwise payable to such participant.
It is intended that tax withholding will be accomplished in such a manner that
the full amount of payroll deductions elected by the participant under Article 7
will be used to purchase Common Stock. However, if amounts sufficient to satisfy
applicable tax withholding obligations have not been withheld from compensation
otherwise payable to any participant, then, notwithstanding any other provision
of the Plan, the Company may withhold such taxes from the participant's
accumulated payroll deductions and apply the net amount to the purchase of
Common Stock, unless the participant pays to the Company, prior to the exercise
date, an amount sufficient to satisfy such withholding obligations. Each
participant further acknowledges that the Company and its participating
subsidiaries
<PAGE>
-8-
may be required to withhold taxes in connection with the disposition of stock
acquired under the Plan and agrees that the Company or any participating
subsidiary may take whatever action it considers appropriate to satisfy such
withholding requirements, including deducting from compensation otherwise
payable to such participant an amount sufficient to satisfy such withholding
requirements or conditioning any disposition of Common Stock by the participant
upon the payment to the Company or such subsidiary of an amount sufficient to
satisfy such withholding requirements.
Article 22 - Governmental Regulations.
- -------------------------------------
The Company's obligation to sell and deliver shares of Common Stock under the
Plan is subject to the approval of any governmental authority required in
connection with the authorization, issuance or sale of such shares.
Government regulations may impose reporting or other obligations on the
Company with respect to the Plan. For example, the Company may be required to
identify shares of Common Stock issued under the Plan on its stock ownership
records and send tax information statements to employees and former employees
who transfer title to such shares.
Article 23 - Governing Law.
- --------------------------
The validity and construction of the Plan shall be governed by the laws of
[Delaware], without giving effect to the principles of conflicts of law thereof.
Article 24 - Approval of Board of Directors and Stockholders of the Company.
- ---------------------------------------------------------------------------
The Plan was adopted by the Board of Directors on [ ], 1999 and was
approved by the stockholders of the Company on [ ], 1999.
<PAGE>
EXHIBIT 10.5
------------
SmarterKids.com, Inc.
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
----------------------------------------------
This Agreement dated as of July 12, 1999, which amends and restates in its
entirety that certain Investor Rights Agreement dated as of November 6, 1998, is
entered into by and among SmarterKids.com, Inc., a Delaware corporation (the
"Company"), David Blohm, Al Noyes, Jeffrey Pucci and Richard Viard
(collectively, the "Senior Managers" and, individually, a "Senior Manager"), the
entities listed on Exhibit A attached hereto (the "Purchasers") and the persons
---------
and entities listed on Exhibit B (the "Prior Holders").
---------
Recitals
--------
WHEREAS, the Company and the Prior Holders have entered into an Investor
Rights Agreement dated as of November 6, 1998 (the "Prior Agreement");
WHEREAS, in order to assure that rights of first refusal and registration
rights of the Prior Holders and the Purchasers are consistent, the Prior Holders
desire to amend and restate the Prior Agreement and the Purchasers desire to
become parties to this Agreement;
WHEREAS, the Company and the Purchasers have entered into a Series C
Convertible Preferred Stock Purchase Agreement of even date herewith (the
"Purchase Agreement") pursuant to which the Purchasers will purchase shares of
Series C Convertible Preferred Stock, $.01 par value per share (the "Series C
Shares"); and
WHEREAS, the Company, the Prior Holders and the Purchasers desire to
provide for certain arrangements with respect to (i) the registration of shares
of capital stock of the Company under the Securities Act of 1933, (ii) the
Purchasers' right of first refusal with respect to certain issuances of
securities of the Company and (iii) certain negative covenants of the Company;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained in this Agreement, the parties hereto agree as follows:
1. Certain Definitions.
-------------------
As used in this Agreement, the following terms shall have the following
respective meanings:
"Commission" means the Securities and Exchange Commission, or any
----------
other federal agency at the time administering the Securities Act.
<PAGE>
"Common Stock" means the common stock, $.01 par value per share, of
------------
the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
------------
or any successor federal statute, and the rules and regulations of the
Commission issued under such Act, as they each may, from time to time, be in
effect.
"Initiating Holders" means the Stockholders initiating a request for
------------------
registration pursuant to Section 2(a), 2(b) or 2(c), as the case may be.
"Initial Public Offering" means the initial underwritten public
-----------------------
offering of shares of Common Stock pursuant to an effective Registration
Statement.
"Other Holders" shall have the meaning set forth in Section 2.1(e).
-------------
"Prior Preferred Shares" shall mean the shares of Series A Convertible
----------------------
Preferred Stock, $.01 par value per share (the "Series A Shares"), and the
shares of Series B Convertible Preferred Stock, $.01 par value per share (the
"Series B Shares"), owned by the Prior Holders on the date hereof.
"Prospectus" means the prospectus included in any Registration
----------
Statement, as amended or supplemented by an amendment or prospectus supplement,
including post-effective amendments, and all material incorporated by reference
or deemed to be incorporated by reference in such Prospectus.
"Registration Statement" means a registration statement filed by the
----------------------
Company with the Commission for a public offering and sale of securities of the
Company (other than a registration statement on Form S-8 or Form S-4, or their
successors, or any other form for a similar limited purpose, or any registration
statement covering only securities proposed to be issued in exchange for
securities or assets of another corporation).
"Registration Expenses" means the expenses described in Section 2.4.
---------------------
"Registrable Shares" means (i) the shares of Common Stock issued or
------------------
issuable upon conversion of the Series C Shares (the "Series C Registrable
Shares"), the Series B Shares (the "Series B Registrable Shares") and the Series
A Shares (the "Series A Registrable Shares"), (ii) any shares of Common Stock,
and any shares of Common Stock issued or issuable upon the conversion or
exercise of any other securities, acquired by the Purchasers pursuant to Section
3 of this Agreement, (iii) any other shares of Common Stock issued in respect of
such shares (because of stock splits, stock dividends, reclassifications,
recapitalizations, or similar events), and (iv) with respect to a registration
pursuant to Section 2.2, Common Stock held by the Senior Managers; provided,
--------
however, that shares of Common Stock which are Registrable Shares shall cease to
- -------
be Registrable Shares upon (1) any sale pursuant to a Registration Statement or
Rule 144
-2-
<PAGE>
under the Securities Act or (2) any sale in any manner to a person or entity
which, by virtue of Section 5 of this Agreement, is not entitled to the rights
provided by this Agreement. Wherever reference is made in this Agreement to a
request or consent of holders of a certain percentage of Registrable Shares, the
determination of such percentage shall include shares of Common Stock issuable
upon conversion of the Shares even if such conversion has not been effected.
"Securities Act" means the Securities Act of 1933, as amended, or any
--------------
successor federal statute, and the rules and regulations of the Commission
issued under such Act, as they each may, from time to time, be in effect.
"Selling Stockholder" means any Stockholder owning Registrable Shares
-------------------
included in a Registration Statement.
"Series A Holder" means a holder of Series A Shares.
---------------
"Series B Holder" means a holder of Series B Shares.
---------------
"Shares" shall mean (i) the Series C Shares, (ii) the Series B Shares
------
owned by the Purchasers, and (iii) the Prior Preferred Shares.
"Stockholders" means (i) the Purchasers and any persons or entities to
------------
whom the rights granted under this Agreement are transferred by any Purchasers,
their successors or assigns pursuant to Section 5 hereof, (ii) with respect to
registrations effected pursuant to Section 2.2, the Senior Managers and (iii)
the Prior Holders.
2. Registration Rights
-------------------
2.1 Required Registrations.
----------------------
(a) At any time after the earlier of (x) October 31, 2001 or (y)
six months following the closing of the Initial Public Offering, a Purchaser (or
Purchasers) holding in the aggregate at least 40% of the Series C Registrable
Shares and Series B Registrable Shares may request, in writing, that the Company
effect the registration on Form S-1 or Form S-2 (or any successor form) of
Series C Registrable Shares and Series B Registrable Shares owned by such
Purchaser (or Purchasers) having an aggregate value of at least $5,000,000
(based on the then current market price or fair value).
(b) At any time after six months following the closing of the
Initial Public Offering, a Prior Holder (or Prior Holders) holding in the
aggregate at least 40% of the Prior Preferred Registrable Shares may request, in
writing, that the Company effect the registration on Form S-1 or Form S-2 (or
any successor form) of Prior Preferred Registrable Shares owned by such Prior
Holder or Prior Holders having an aggregate value of at least $5,000,000 (based
on the then current market price or fair value).
-3-
<PAGE>
(c) At any time after the Company becomes eligible to file a
Registration Statement on Form S-3 (or any successor form relating to secondary
offerings), a Stockholder or Stockholders holding in the aggregate at least 10%
of the Registrable Shares may request, in writing, that the Company effect the
registration on Form S-3 (or such successor form), of Registrable Shares having
an aggregate value of at least $1,000,000 (based on the then current public
market price).
(d) Upon receipt of any request for registration pursuant to
this Section 2, the Company shall promptly give written notice of such proposed
registration to all other Stockholders. Such Stockholders shall have the right,
by giving written notice to the Company within 30 days after the Company
provides its notice, to elect to have included in such registration such of
their Registrable Shares as such Stockholders may request in such notice of
election, subject in the case of an underwritten offering to the approval of the
managing underwriter as provided in Section 2(e) below. Thereupon, the Company
shall, as expeditiously as possible, use its best efforts to effect the
registration on an appropriate registration form of all Registrable Shares which
the Company has been requested to so register (provided, however, that in the
case of a registration requested under Section 2.1(c), the Company will only be
obligated to effect such registration on Form S-3 (or any successor form)).
(e) If the Initiating Holders intend to distribute the
Registrable Shares covered by their request by means of an underwriting, they
shall so advise the Company as a part of their request made pursuant to Section
2.1(a), (b) or (c), as the case may be, and the Company shall include such
information in its written notice referred to in Section 2.1(d). The right of
any other Stockholder to include its Registrable Shares in such registration
pursuant to Section 2.1(a), (b) or (c), as the case may be, shall be conditioned
upon such other Stockholder's participation in such underwriting on the terms
set forth herein.
If the Company desires that any officers or directors of the Company
holding securities of the Company be included in any registration for an
underwritten offering requested pursuant to Section 2.1 or if other holders of
securities of the Company who are entitled, by contract with the Company, to
have securities included in such a registration (the "Other Holders") request
such inclusion, the Company may include the securities of such officers,
directors and Other Holders in such registration and underwriting on the terms
set forth herein. The Company shall (together with all Stockholders, officers,
directors and Other Holders proposing to distribute their securities through
such underwriting) enter into an underwriting agreement in customary form
(including, without limitation, customary indemnification and contribution
provisions on the part of the Company) with the managing underwriter.
Notwithstanding any other provision of this Section 2.1(e), if the managing
underwriter advises the Company that the inclusion of all shares requested to be
registered would adversely affect the offering, the securities of the Company
held by officers or directors of the Company (other than Registrable Shares) and
the securities held by Other Holders (other than Registrable Shares) shall be
excluded from such registration and underwriting to the extent deemed advisable
by the managing underwriter, and if a further
-4-
<PAGE>
limitation of the number of shares is required, the number of shares that may be
included in such registration and underwriting shall be allocated among all
holders of Registrable Shares requesting registration in proportion, as nearly
as practicable, to the respective number of Registrable Shares held by them at
the time of the request for registration made by the Initiating Holders pursuant
to Section 2.1(a), (b) or (c), as the case may be. If any holder of Registrable
Shares, officer, director or Other Holder who has requested inclusion in such
registration as provided above disapproves of the terms of the underwriting,
such person may elect to withdraw therefrom by written notice to the Company,
and the securities so withdrawn shall also be withdrawn from registration. If
the managing underwriter has not limited the number of Registrable Shares or
other securities to be underwritten, the Company may include securities for its
own account in such registration if the managing underwriter so agrees and if
the number of Registrable Shares and other securities which would otherwise have
been included in such registration and underwriting will not thereby be limited.
(f) The Initiating Holders shall have the right to select the
managing underwriter(s) for any underwritten offering requested pursuant to
Section 2.1(a), (b) or (c), subject to the approval of the Company, which
approval will not be unreasonably withheld.
(g) The Company shall not be required to effect more than two (2)
registrations pursuant to Section 2.1(a) and one (1) registration pursuant to
Section 2.1(b). In addition, the Company shall not be required to effect any
registration (other than on Form S-3 or any successor form relating to secondary
offerings) within six months after the effective date of any other Registration
Statement of the Company. For purposes of this Section 2.1(g), a Registration
Statement shall not be counted until such time as such Registration Statement
has been declared effective by the Commission (unless the Initiating Holders
withdraw their request for such registration (other than as a result of
information concerning the business or financial condition of the Company which
is made known to the Stockholders after the date on which such registration was
requested) and elect not to pay the Registration Expenses therefor pursuant to
Section 2.4).
(h) If at the time of any request to register Registrable Shares by
Initiating Holders pursuant to this Section 2.1, the Company is engaged or has
plans to engage in a registered public offering or is engaged in any other
activity which, in the good faith determination of the Company's Board of
Directors, would be adversely affected by the requested registration, then the
Company may at its option direct that such request be delayed for a period not
in excess of 90 days from the date of such request, such right to delay a
request to be exercised by the Company not more than once in any 12-month
period.
2.2 Incidental Registration.
-----------------------
(a) Whenever the Company proposes to file a Registration
Statement (other than a Registration Statement filed pursuant to Section 2.1) at
any time and from time to time, it will, prior to such filing, give written
notice to all Stockholders of its intention to do so;
-5-
<PAGE>
provided, that no such notice need be given if no Registrable Shares are to be
- --------
included therein as a result of a determination of the managing underwriter
pursuant to Section 2.2(b). Upon the written request of a Stockholder or
Stockholders given within 20 days after the Company provides such notice (which
request shall state the intended method of disposition of such Registrable
Shares), the Company shall use its best efforts to cause all Registrable Shares
which the Company has been requested by such Stockholder or Stockholders to
register to be registered under the Securities Act to the extent necessary to
permit their sale or other disposition in accordance with the intended methods
of distribution specified in the request of such Stockholder or Stockholders;
provided that the Company shall have the right to postpone or withdraw any
registration effected pursuant to this Section 2.2 without obligation to any
Stockholder.
(b) If the registration for which the Company gives notice pursuant
to Section 2.2(a) is a registered public offering involving an underwriting, the
Company shall so advise the Stockholders as a part of the written notice given
pursuant to Section 2.2(a). In such event, the right of any Stockholder to
include its Registrable Shares in such registration pursuant to Section 2.2
shall be conditioned upon such Stockholder's participation in such underwriting
on the terms set forth herein. All Stockholders proposing to distribute their
securities through such underwriting shall (together with the Company, Other
Holders, and any officers or directors distributing their securities through
such underwriting) enter into an underwriting agreement in customary form with
the underwriter or underwriters selected for the underwriting by the Company.
Notwithstanding any other provision of this Section 2.2, if the managing
underwriter determines that the inclusion of all shares requested to be
registered would adversely affect the offering, the Company may limit the number
of Registrable Shares to be included in the registration and underwriting. The
Company shall so advise all holders of Registrable Shares requesting
registration, and the number of shares that are entitled to be included in the
registration and underwriting shall be allocated in the following manner. The
securities of the Company held by officers and directors of the Company (other
than Registrable Shares) shall be excluded from such registration and
underwriting to the extent deemed advisable by the managing underwriter, and, if
a further limitation on the number of shares is required, the number of shares
that may be included in such registration and underwriting shall be allocated
among all Stockholders and Other Holders requesting registration in proportion,
as nearly as practicable, to the respective number of shares of Common Stock (on
an as-converted basis) which they held at the time the Company gives the notice
specified in Section 2.2(a). If any Stockholder or Other Holder would thus be
entitled to include more securities than such holder requested to be registered,
the excess shall be allocated among other requesting Stockholders and Other
Holders pro rata in the manner described in the preceding sentence. If any
holder of Registrable Shares or any officer, director or Other Holder
disapproves of the terms of any such underwriting, such person may elect to
withdraw therefrom by written notice to the Company, and any Registrable Shares
or other securities excluded or withdrawn from such underwriting shall be
withdrawn from such registration.
2.3 Registration Procedures.
-----------------------
-6-
<PAGE>
(a) If and whenever the Company is required by the provisions of
this Agreement to use its best efforts to effect the registration of any
Registrable Shares under the Securities Act, the Company shall:
(1) file with the Commission a Registration Statement with
respect to such Registrable Shares and use its best efforts to cause that
Registration Statement to become and remain effective for 180 days from the
effective date or such lesser period until all such Registrable Shares are sold;
(2) as expeditiously as possible prepare and file with the
Commission any amendments and supplements to the Registration Statement and the
prospectus included in the Registration Statement as may be necessary to comply
with the provisions of the Securities Act (including the anti-fraud provisions
thereof) and to keep the Registration Statement effective for 180 days from the
effective date or such lesser period until all such Registrable Shares are sold;
(3) as expeditiously as possible furnish to each Selling
Stockholder such reasonable numbers of copies of the Prospectus, including any
preliminary Prospectus, in conformity with the requirements of the Securities
Act, and such other documents as such Selling Stockholder may reasonably request
in order to facilitate the public sale or other disposition of the Registrable
Shares owned by such Selling Stockholder;
(4) as expeditiously as possible use its best efforts to
register or qualify the Registrable Shares covered by the Registration Statement
under the securities or Blue Sky laws of such states as the Selling Stockholders
shall reasonably request, and do any and all other acts and things that may be
necessary or desirable to enable the Selling Stockholders to consummate the
public sale or other disposition in such states of the Registrable Shares owned
by the Selling Stockholder; provided, however, that the Company shall not be
-------- -------
required in connection with this paragraph (iv) to qualify as a foreign
corporation or execute a general consent to service of process in any
jurisdiction;
(5) as expeditiously as possible, cause all such
Registrable Shares to be listed on each securities exchange or automated
quotation system on which similar securities issued by the Company are then
listed;
(6) promptly provide a transfer agent and registrar for all
such Registrable Shares not later than the effective date of such registration
statement;
(7) promptly make available for inspection by the Selling
Stockholders, any managing underwriter participating in any disposition pursuant
to such Registration Statement, and any attorney or accountant or other agent
retained by any such underwriter or selected by the Selling Stockholders, all
financial and other records, pertinent corporate documents and properties of the
Company and cause the Company's officers, directors,
-7-
<PAGE>
employees and independent accountants to supply all information reasonably
requested by any such seller, underwriter, attorney, accountant or agent in
connection with such Registration Statement;
(8) as expeditiously as possible, notify each Selling
Stockholder, promptly after it shall receive notice thereof, of the time when
such Registration Statement has become effective or a supplement to any
Prospectus forming a part of such Registration Statement has been filed; and
(9) as expeditiously as possible following the
effectiveness of such Registration Statement, notify each seller of such
Registrable Shares of any request by the Commission for the amending or
supplementing of such Registration Statement or Prospectus.
(b) If the Company has delivered a Prospectus to the Selling
Stockholders and after having done so the Prospectus is amended to comply with
the requirements of the Securities Act, the Company shall promptly notify the
Selling Stockholders and, if requested, the Selling Stockholders shall
immediately cease making offers of Registrable Shares and return all
Prospectuses to the Company. The Company shall promptly provide the Selling
Stockholders with revised Prospectuses and, following receipt of the revised
Prospectuses, the Selling Stockholders shall be free to resume making offers of
the Registrable Shares.
(c) In the event that, in the judgment of the Company, it is
advisable to suspend use of a Prospectus included in a Registration Statement
due to pending material developments or other events that have not yet been
publicly disclosed and as to which the Company believes public disclosure would
be detrimental to the Company, the Company shall notify all Selling Stockholders
to such effect, and, upon receipt of such notice, each such Selling Stockholder
shall immediately discontinue any sales of Registrable Shares pursuant to such
Registration Statement until such Selling Stockholder has received copies of a
supplemented or amended Prospectus or until such Selling Stockholder is advised
in writing by the Company that the then current Prospectus may be used and has
received copies of any additional or supplemental filings that are incorporated
or deemed incorporated by reference in such Prospectus. Notwithstanding anything
to the contrary herein, the Company shall not exercise its rights under this
Section 2.3(c) to suspend sales of Registrable Shares for a period in excess of
60 days in any 365-day period.
2.4 Allocation of Expenses. The Company will pay all Registration
----------------------
Expenses for all registrations under this Agreement; provided, however, that if
-------- -------
a registration under Section 2.1 is withdrawn at the request of the Initiating
Holders (other than as a result of information concerning the business or
financial condition of the Company which is made known to the Stockholders after
the date on which such registration was requested) and if the Initiating Holders
elect not to have such registration counted as a registration requested under
Section 2.1, the requesting Stockholders shall pay the Registration Expenses of
such registration
-8-
<PAGE>
pro rata in accordance with the number of their Registrable Shares included in
such registration. For purposes of this Section, the term "Registration
Expenses" shall mean all expenses incurred by the Company in complying with this
Agreement, including, without limitation, all registration and filing fees,
exchange listing fees, printing expenses, fees and expenses of counsel for the
Company and the fees and expenses of one counsel selected by the Selling
Stockholders to represent the Selling Stockholders, state Blue Sky fees and
expenses, and the expense of any special audits incident to or required by any
such registration, but excluding underwriting discounts, selling commissions and
the fees and expenses of Selling Stockholders' own counsel (other than the
counsel selected to represent all Selling Stockholders).
2.5 Indemnification and Contribution.
--------------------------------
(a) In the event of any registration of any of the Registrable
Shares under the Securities Act pursuant to this Agreement, the Company will
indemnify and hold harmless the seller of such Registrable Shares, each
underwriter of such Registrable Shares, and each other person, if any, who
controls such seller or underwriter within the meaning of the Securities Act or
the Exchange Act against any losses, claims, damages or liabilities, joint or
several, to which such seller, underwriter or controlling person may become
subject under the Securities Act, the Exchange Act, state securities or Blue Sky
laws or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in any Registration
Statement under which such Registrable Shares were registered under the
Securities Act, any preliminary prospectus or final prospectus contained in the
Registration Statement, or any amendment or supplement to such Registration
Statement, or arise out of or are based upon the omission or alleged omission to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading; and the Company will reimburse such seller,
underwriter and each such controlling person for any legal or any other expenses
reasonably incurred by such seller, underwriter or controlling person in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company will not be liable in
-------- -------
any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon any untrue statement or omission made in such
Registration Statement, preliminary prospectus or prospectus, or any such
amendment or supplement, in reliance upon and in conformity with information
furnished to the Company, in writing, by or on behalf of such seller,
underwriter or controlling person specifically for use in the preparation
thereof.
(b) In the event of any registration of any of the Registrable
Shares under the Securities Act pursuant to this Agreement, each seller of
Registrable Shares, severally and not jointly, will indemnify and hold harmless
the Company, each of its directors and officers and each underwriter (if any)
and each person, if any, who controls the Company or any such underwriter within
the meaning of the Securities Act or the Exchange Act, against any losses,
claims, damages or liabilities, joint or several, to which the Company, such
directors and officers, underwriter or controlling person may become subject
under the Securities Act,
-9-
<PAGE>
Exchange Act, state securities or Blue Sky laws or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of a
material fact contained in any Registration Statement under which such
Registrable Shares were registered under the Securities Act, any preliminary
prospectus or final prospectus contained in the Registration Statement, or any
amendment or supplement to the Registration Statement, or arise out of or are
based upon any omission or alleged omission to state a material fact required to
be stated therein or necessary to make the statements therein not misleading, if
the statement or omission was made in reliance upon and in conformity with
information relating to such seller furnished in writing to the Company by or on
behalf of such seller specifically for use in connection with the preparation of
such Registration Statement, prospectus, amendment or supplement; provided,
--------
however, that the obligations of a Stockholder hereunder shall be limited to an
- -------
amount equal to the net proceeds to such Stockholder of Registrable Shares sold
in connection with such registration.
(c) Each party entitled to indemnification under this Section
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom; provided, that counsel for the Indemnifying
--------
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld); and, provided, further, that the failure of any Indemnified Party to
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give notice as provided herein shall not relieve the Indemnifying Party of its
obligations under this Section except to the extent that the Indemnifying Party
is adversely affected by such failure. The Indemnified Party may participate in
such defense at such party's expense; provided, however, that the Indemnifying
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Party shall pay such expense 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 the Indemnified Party and any other
party represented by such counsel in such proceeding; provided further that in
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no event shall the Indemnifying Party be required to pay the expenses of more
than one law firm per jurisdiction as counsel for the Indemnified Party. The
Indemnifying Party also shall be responsible for the expenses of such defense if
the Indemnifying Party does not elect to assume such defense. No Indemnifying
Party, in the defense of any such claim or litigation shall, except with the
consent of each Indemnified Party, consent to entry of any judgment or enter
into any settlement which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such Indemnified Party of a release from
all liability in respect of such claim or litigation, and no Indemnified Party
shall consent to entry of any judgment or settle such claim or litigation
without the prior written consent of the Indemnifying Party, which consent shall
not be unreasonably withheld.
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in this Section 2.5 is
due in accordance with its terms but for any reason is held to be unavailable to
an Indemnified Party in respect to any losses, claims, damages and liabilities
referred to herein, then the Indemnifying Party shall,
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Amended & Restates Investor Rights Agreement
in lieu of indemnifying such Indemnified Party, contribute to the amount paid or
payable by such Indemnified Party as a result of such losses, claims, damages or
liabilities to which such party may be subject in such proportion as is
appropriate to reflect the relative fault of the Company on the one hand and the
Stockholders on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities, as well as any other
relevant equitable considerations. The relative fault of the Company and the
Stockholders shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of material fact related to information
supplied by the Company or the Stockholders and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and the Stockholders agree that it would not
be just and equitable if contribution pursuant to this Section 2.5 were
determined by pro rata allocation or by any other method of allocation which
does not take account of the equitable considerations referred to above.
Notwithstanding the provisions of this paragraph of Section 2.5, (a) in no case
shall any one Stockholder be liable or responsible for any amount in excess of
the net proceeds received by such Stockholder from the offering of Registrable
Shares and (b) the Company shall be liable and responsible for any amount in
excess of such proceeds; provided, however, that no person guilty of fraudulent
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misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. Any party entitled to contribution will, promptly
after receipt of notice of commencement of any action, suit or proceeding
against such party in respect of which a claim for contribution may be made
against another party or parties under this Section, notify such party or
parties from whom contribution may be sought, but the omission so to notify such
party or parties from whom contribution may be sought shall not relieve such
party from any other obligation it or they may have thereunder or otherwise
under this Section. No party shall be liable for contribution with respect to
any action, suit, proceeding or claim settled without its prior written consent,
which consent shall not be unreasonably withheld.
2.6 Other Matters with Respect to Underwritten Offerings. In the
----------------------------------------------------
event that Registrable Shares are sold pursuant to a Registration Statement in
an underwritten offering pursuant to Section 2.1, the Company agrees to (a)
enter into an underwriting agreement containing customary representations and
warranties with respect to the business and operations of the Company and
customary covenants and agreements to be performed by the Company, including
without limitation customary provisions with respect to indemnification by the
Company of the underwriters of such offering; (b) use its best efforts to cause
its legal counsel to render customary opinions to the underwriters with respect
to the Registration Statement; and (c) use its best efforts to cause its
independent public accounting firm to issue customary "cold comfort letters" to
the underwriters with respect to the Registration Statement.
2.7 Information by Holder. Each holder of Registrable Shares included
---------------------
in any registration shall furnish to the Company such information regarding such
holder and the distribution proposed by such holder as the Company may
reasonably request in writing and as shall be required in connection with any
registration, qualification or compliance referred to in this Agreement.
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Amended & Restated Investor Rights Agreement
2.8 "Stand-Off " Agreement; Confidentiality of Notices. Each
--------------------------------------------------
Stockholder, if requested by the Company and the managing underwriter of an
offering by the Company of Common Stock or other securities of the Company,
agrees not to sell or otherwise transfer or dispose of any Registrable Shares or
other securities of the Company held by such Stockholder for a period of 180
days following the effective date of a Registration Statement; provided, that:
--------
(a) such agreement shall only apply to the initial public
offering of Common Stock of the Company sold in an underwritten offering; and
(b) all stockholders of the Company then holding at least 5% of
the outstanding Common Stock (on an as-converted basis) and all officers and
directors of the Company enter into similar agreements.
The Company may impose stop-transfer instructions with respect to the
Registrable Shares or other securities subject to the foregoing restriction
until the end of such 180-day period. Any Stockholder receiving any written
notice from the Company regarding the Company's plans to file a Registration
Statement shall treat such notice confidentially and shall not disclose such
information to any person other than as necessary to exercise its rights under
this Agreement.
2.9 Limitations on Subsequent Registration Rights. The Company shall
---------------------------------------------
not, without the prior written consent of Stockholders holding at least 66 2/3%
of the Registrable Shares then held by all Stockholders, enter into any
agreement (other than this Agreement) with any holder or prospective holder of
any securities of the Company which grant such holder or prospective holder
rights to include securities of the Company in any Registration Statement,
unless (a) such rights to include securities in a registration initiated by the
Company or by Stockholders are not more favorable than the rights granted to
Other Holders under Sections 2.1 and 2.2 of this Agreement, and (b) any such
rights to initiate a registration provide that Stockholders are entitled to
include Registrable Shares on a pro rata basis with such holders based on the
number of shares of Common Stock (on an as-converted basis) owned by
Stockholders and such holders.
2.10 Rule 144 Requirements. After the earliest of (i) the closing of
---------------------
the sale of securities of the Company pursuant to a Registration Statement, (ii)
the registration by the Company of a class of securities under Section 12 of the
Exchange Act, or (iii) the issuance by the Company of an offering circular
pursuant to Regulation A under the Securities Act, the Company agrees to:
(a) make and keep current public information about the Company
available, as those terms are understood and defined in Rule 144;
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Amended & Restated Investor Rights Agreement
(b) use its best efforts to file with the Commission in a
timely manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act (at any time after it has become subject to
such reporting requirements); and
(c) furnish to any holder of Registrable Shares upon request
(i) a written statement by the Company as to its compliance with the reporting
requirements of Rule 144 and of the Securities Act and the Exchange Act (at any
time after it has become subject to such reporting requirements), (ii) a copy of
the most recent annual or quarterly report of the Company, and (iii) such other
reports and documents of the Company as such holder may reasonably request to
avail itself of any similar rule or regulation of the Commission allowing it to
sell any such securities without registration.
2.11 Termination. All of the Company's obligations to register
-----------
Registrable Shares under Sections 2.1 and 2.2 of this Agreement shall terminate
five years after the closing of the Initial Public Offering.
3. Right Of First Refusal
3.1 Rights of Purchasers and Prior Holders
--------------------------------------
(a) The Company shall not issue, sell or exchange, agree to
issue, sell or exchange, or reserve or set aside for issuance, sale or exchange,
(i) any shares of its Common Stock, (ii) any other equity securities of the
Company, including, without limitation, shares of preferred stock, (iii) any
option, warrant or other right to subscribe for, purchase or otherwise acquire
any equity securities of the Company, or (iv) any debt securities convertible
into capital stock of the Company (collectively, the "Offered Securities"),
unless in each such case the Company shall have first complied with this Section
3.1. The Company shall deliver to each Stockholder a written notice of any
proposed or intended issuance, sale or exchange of Offered Securities (the
"Offer"), which Offer shall (i) identify and describe the Offered Securities,
(ii) describe the price and other terms upon which they are to be issued, sold
or exchanged, and the number or amount of the Offered Securities to be issued,
sold or exchanged, (iii) identify the persons or entities (if known) to which or
with which the Offered Securities are to be offered, issued, sold or exchanged,
(iv) offer to issue and sell to or exchange with the Purchasers (the "Purchaser
Offered Securities"), the Series B Holders (the "Series B Offered Securities")
and the Series A Holders (the "Series A Offered Securities") such aggregate
number of the Offered Securities as would be necessary to permit each Purchaser
and Prior Holder to maintain its same proportionate equity ownership in the
Company as of the date of the Offer determined on an "as converted to Common
Stock" basis (the Purchaser Offered Securities, the Series B Offered Securities
and the Series A Offered Securities being collectively referred to as the
"Subject Offered Securities"). The Subject Offered Securities shall be eligible
for issuance, sale or exchange with Stockholders as follows: (A) each Purchaser
and Prior Holder may subscribe for its portion of the Offered Securities
determined by dividing the aggregate number of shares of Common Stock then held
by such Purchaser or Prior Holder (giving effect to the conversion of all shares
of convertible preferred stock then held) by the total number of shares of
Common Stock then outstanding (giving effect to the conversion of
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Amended & Restated Investor Rights Agreement
all shares of convertible preferred stock then held) by the total number of
shares of Common Stock then outstanding (giving effect to the conversion of all
outstanding shares of convertible preferred stock) (the "Basic Amount"); and (B)
any additional portion of the Subject Offered Securities attributable to the
Basic Amounts of other Purchasers and Prior Holders as such Purchaser or Prior
Holder shall indicate it will purchase or acquire should the other Purchasers
and Prior Holders subscribe for less than their Basic Amounts (the
"Undersubscription Amount"), provided that if the additional portion of the
Offered Securities indicated to be purchased by the Purchasers and Prior Holders
exceeds the Undersubscription Amount, the Undersubscription Amount shall be
allocated among such Purchasers and Prior Holders in proportion to the
additional portion indicated to be purchased by each (but not more than each has
requested), or as they may otherwise agree among themselves.
(b) To accept an Offer, in whole or in part, a Stockholder must
deliver a written notice to the Company prior to the end of the 30-day period of
the Offer, setting forth the portion of the Stockholder's Basic Amount that such
Stockholder elects to purchase and, if such Stockholder shall elect to purchase
all of its Basic Amount, the Undersubscription Amount (if any) that such
Stockholder elects to purchase (the "Notice of Acceptance").
(c) The Company may issue all or any part of the Offered
Securities which are not Subject Offered Securities (the "Non-Subject Offered
Securities") at any time after delivery of the Offer until 90 days from the
expiration of the period set forth in Section 3.1(b) above, but only to the
offerees or purchasers described in the Offer (if so described therein) and only
upon terms and conditions (including, without limitation, unit prices and
interest rates) which are not more favorable, in the aggregate, to the acquiring
person or persons or less favorable to the Company than those set forth in the
Offer. The Company shall have 90 days from the expiration of the period set
forth in Section 3.1(b) above to issue, sell or exchange all or any part of such
Subject Offered Securities as to which a Notice of Acceptance has not been given
by the Stockholders (the "Refused Securities"), but only to the offerees or
purchasers described in the Offer (if so described therein) and only upon terms
and conditions (including, without limitation, unit prices and interest rates)
which are not more favorable, in the aggregate, to the acquiring person or
persons or less favorable to the Company than those set forth in the Offer.
(d) In the event the Company shall propose to sell less than
all the Non-Subject Offered Securities (any such sale to be in the manner and on
the terms specified in Section 3.1(c) above), then each Stockholder may, at its
sole option and in its sole discretion, reduce the number or amount of the
Subject Offered Securities specified in its Notice of Acceptance to an amount
that shall be not less than the number or amount of the Subject Offered
Securities that the Stockholder elected to purchase pursuant to Section 3.1(b)
above multiplied by a fraction, (i) the numerator of which shall be the number
or amount of Non-Subject Offered Securities the Company actually proposes to
issue, sell or exchange and (ii) the denominator of which shall be the original
amount of the Non-Subject Offered Securities. In the event that any Stockholder
so elects to reduce the number or amount of Subject Offered Securities specified
in
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Amended & Restated Investor Rights Agreement
its Notice of Acceptance, the Company may not issue, sell or exchange more than
the reduced number or amount of the Offered Securities unless and until such
securities have again been offered to the Stockholders in accordance with
Section 3.1(a) above.
(e) Upon the closing of the issuance, sale or exchange of all
or less than all of the Refused Securities, the Stockholders shall acquire from
the Company, and the Company shall issue to the Stockholders, the number or
amount of Subject Offered Securities specified in the Notices of Acceptance, as
reduced pursuant to Section 3.1(d) above if the Stockholders have so elected,
upon the terms and conditions specified in the Offer. The purchase by the
Stockholders of any Subject Offered Securities is subject in all cases to the
preparation, execution and delivery by the Company and the Stockholders of a
purchase agreement relating to such Subject Offered Securities reasonably
satisfactory in form and substance to the Stockholders and their respective
counsel.
(f) Any Offered Securities not acquired by the Stockholders or
other persons in accordance with Section 3.1(c) above may not be issued, sold or
exchanged until they are again offered to the Stockholders under the procedures
specified in this Agreement.
(g) The rights of the Stockholders under this Section 3 shall
not apply to:
(1) Common Stock issued as a stock dividend to holders of
Common Stock or upon any subdivision or combination of shares of Common Stock;
(2) the issuance of any shares of Common Stock upon
conversion of shares of convertible preferred stock;
(3) the issuance of up to Two Million Five Hundred Forty-
Eight Thousand (2,548,000) shares of Common Stock, or the grant of options
therefor, including shares issued upon exercise of options outstanding on the
date of this Agreement (such number to be proportionately adjusted in the event
of any stock splits, stock dividends, recapitalizations or similar events
occurring on or after the date of this Agreement) issuable to officers,
directors, consultants and employees of the Company or any subsidiary pursuant
to any plan, agreement or arrangement approved by a vote of not less than a
majority of the Board of Directors of the Company (it being understood that any
shares subject to options that expire or terminate unexercised shall not count
towards the maximum number set forth in this clause (3));
(4) securities issued solely in consideration for the
acquisition (whether by merger or otherwise) by the Company or any of its
subsidiaries of all or substantially all of the stock or assets of any other
entity;
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Amended & Restated Investor Rights Agreement
(5) shares of Common Stock sold by the Company in an
underwritten public offering pursuant to an effective registration statement
under the Securities Act;
(6) up to 5,000 shares of Common Stock issued or issuable
upon exercise of any warrants issued to Silicon Valley Bank;
(7) up to 125 Series B Shares, or shares of Common Stock
issuable upon conversion of such Series B Shares, issuable to Education
Products, Inc. or its parent, Sylvan Learning Systems, Inc. ("Sylvan") pursuant
to that certain letter agreement, dated July 23, 1997, between Sylvan and the
Company;
(8) warrants to purchase up to 105,700 shares, or shares
of Common Stock issuable upon exercise of such warrants, issued or issuable to
EduVentures;
(9) warrants to purchase up to 38,000 shares of Common
Stock, or up to 38,000 shares of Common Stock issuable upon exercise of any such
warrants, issuable to J. L. Hammett Co. pursuant to that Contract for Services
and Term Sheet dated September 29, 1998.
(10) warrants to purchase up to 75,000 shares, or up to
75,000 shares of Common Stock issuable upon exercise of any warrants, issuable
to National Computer Systems, Inc.; and
(11) warrants to purchase Series C Convertible Preferred
Stock, or shares of Series C Convertible Preferred Stock issuable upon exercise
of any warrants, or shares of Common Stock issuable upon conversion of Series C
Convertible Preferred Stock, issuable pursuant to that certain letter agreement,
dated March 19, 1999, between Thomas Weisel Partners LLC and the Corporation.
3.2 Initial Public Offering.
-----------------------
(a) Right of First Refusal. Subject to the limitations set
----------------------
forth in this Section 3.2, the Company hereby grants to each Purchaser a right
of first refusal to purchase such Purchaser's Proportionate Share of the shares
of Common Stock from the shares of Common Stock to be issued at the closing of
the Company's Initial Public Offering, if any (the "IPO Shares"). The price per
share of Common Stock which each such Purchaser becomes entitled to purchase by
reason hereof shall be the public offering price per share of Common Stock in
the Initial Public Offering (the "Offering Price").
(b) Limitations. Subject to the limitations set forth in the following
-----------
sentence, the "Proportionate Share" for each such Purchaser shall be that number
of IPO Shares necessary so that, after giving effect to such issuance,
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Amended & Restated Investor Rights Agreement
the IPO Shares issued to such Purchaser, plus
the shares of Common Stock of such Purchaser (including without limitation
any right to acquire shares upon conversion of Series C Shares) which
shares were issued or issuable to such Purchaser with respect to such
Purchaser's Series C Shares (such Purchaser's "Series C Derived Shares"),
determined after giving effect to such issuance,
shall equal the same proportionate equity ownership in the Company as was
represented by such Purchaser's Series C Derived Shares as of the date
immediately prior to the effective date of the registration statement covering
the Initial Public Offering, on a fully diluted basis assuming, among other
things, the shares reserved for issuance upon the exercise of options have been
issued. Notwithstanding the foregoing sentence, such Proportionate Share, in
the aggregate for all Purchasers, may not exceed 8% of the number of shares of
Common Stock issued by the Company in the Initial Public Offering (exclusive of
the number of shares of Common Stock issued pursuant to any underwriter's
overallotment option); provided, however, the managing underwriter of such
-------- -------
offering shall be entitled to reduce in whole or in part the Proportionate Share
to the extent determined necessary by the managing underwriter in its sole
discretion (X) to the success of such offering (including without limitation
that purchase by a Purchaser of its Proportionate Share would adversely affect
any of the offering price, offering size, likelihood of completion or completion
date) for reasons set forth in writing to the Purchasers no less than five days
prior to the anticipated effective date of the registration statement covering
such offering or (Y) to comply with the rules or regulations of the Securities
and Exchange Commission, the National Association of Securities Dealers, Inc.,
the Nasdaq Stock Market, Inc., or other regulatory body or exchange for reasons
set forth in writing to the requesting Purchasers no less than one day prior to
the anticipated effective date of the registration statement covering such
offering. Any reduction (in whole or in part) in any Purchaser's Proportionate
Share shall be pro rata among the Purchasers expressing an interest in receiving
an offer from the Company in accordance with subsection 3.2(d) below (the "IPO
Purchasers") based upon the number of Series C Derived Shares then held by the
IPO Purchasers.
(c) Solicitation of Interest. Except as (and to the extent)
------------------------
prohibited by law, the Company shall, no less than one day prior to the
anticipated effective date of the registration statement covering the Initial
Public Offering, deliver by facsimile transmission to the Purchasers holding
Series C Shares a notice (a "Solicitation of Interest") with respect to the
Initial Public Offering stating the Company's bona fide intention to offer
shares of Common Stock in the Initial Public Offering. The Company shall send
the Solicitation of Interest to each such Purchaser at the fax number for such
Purchaser set forth in the Company's corporate records or such other fax number
that such Purchaser shall from time to time specify in writing to the Company.
(d) Expression of Interest. Each such Purchaser shall, on or before
----------------------
5:00 p.m. (Boston time) on the immediately succeeding business day after receipt
of the Solicitation of Interest (the "Expression of Interest Deadline"), by
facsimile transmission to the Company and
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Amended & Restated Investor Rights Agreement
its counsel, notify the Company of its desire (an "expression of interest") in
receiving an offer to purchase (i) all or part of its Proportionate Share
(specifying, if less than its Proportionate Share, the number of shares it
desires to receive an offer to purchase) and (ii) a number of shares, if any, in
excess of such Purchaser's Proportionate Share that it desires to receive an
offer to purchase (the "Excess Shares"), subject in each case to the limitations
set forth in this Section 3.2. A Purchaser shall be deemed to have waived its
right to receive an offer to purchase any of the shares in the Initial Public
Offering if the Company does not receive the Purchaser's expression of interest
as aforesaid by the Expression of Interest Deadline. The Company may, during the
60-day period after expiration of the Expression of Interest Deadline, either
solicit expression of interests from any person or persons with respect to that
portion of such Common Stock for which the such Purchasers have not made an
expression of interest or determine not to offer or sell such portion, in whole
or in part; provided, however, if the Company does not consummate the sale of
-------- -------
the IPO Shares in the Initial Public Offering within 60 days of the Solicitation
of Interest, the right provided hereunder shall be deemed revived as to all
Purchasers holding Series C Shares. If any Purchaser expresses an interest in
receiving an offer to purchase a number of shares that is less than its
Proportionate Share (or is deemed to waive its right to receive an offer to
purchase its Proportionate Share in the Initial Public Offering), each IPO
Purchaser requesting Excess Shares, if any, shall be entitled to receive an
offer from the Company for that number of additional shares equal to the lesser
of (A) the number of Excess Shares with respect to which such IPO Purchaser
expressed an interest and (B) such IPO Purchaser's allocable portion of all
Excess Shares based on the number of Excess Shares requested to be purchased by
each IPO Purchaser.
(e) An IPO Purchaser's notification pursuant to subsection 3.2(d)
shall be deemed an expression of interest in receiving an offer by the Company
to purchase the number of shares of Common Stock indicated by such IPO Purchaser
pursuant to subsection 3.2(d) above (including any Excess Shares), in each case
subject to the limitations set forth in this Section 3.2. The Company's offer
to sell such shares to the IPO Purchasers shall be deemed to occur automatically
two hours after the latest to occur of (A) the effectiveness of the registration
statement covering the Initial Public Offering and (B) the Company's
determination of the Offering Price (the completion of the last to occur of the
foregoing, the "Offer Commencement"). Each IPO Purchaser shall have an
unconditional right to withdraw its expression of interest by written notice to
the Company on or before the Offer Commencement. Once so withdrawn, the Company
shall have no obligation to offer or to sell, and the IPO Purchaser shall have
no obligation to purchase, any shares. An IPO Purchaser's expression of
interest shall, unless so withdrawn by such IPO Purchaser on or before the Offer
Commencement, automatically be deemed to be a binding commitment to purchase the
shares of Common Stock, including any Excess Shares, indicated by such IPO
Purchaser pursuant to subsection 3.2(d) above, but subject to the limitations
set forth in this Section 3.2 immediately after the Offer Commencement. The IPO
Purchasers' purchase of such shares shall occur simultaneously with the closing
of the purchase and sale of the other shares of Common Stock distributed in the
Initial Public Offering pursuant to a stock purchase agreement in form
satisfactory to the Company, and each IPO Purchaser shall thereat pay the
purchase price for its shares by wire transfer to the Company of
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Amended & Restated Investor Rights Agreement
immediately available funds. As promptly as practicable (and in any event within
ten days) thereafter, the Company shall issue and deliver to each IPO Purchaser
at the last known address of the IPO Purchaser in the records of the Company a
certificate or certificates for such shares.
(f) Notwithstanding anything in this Agreement to the contrary, the
Company shall not be required to take any actions pursuant to this Section 3.2
that would be inconsistent with any federal or state securities laws, rules,
regulations or interpretations (including without limitation Rule 134 under the
Securities Act) or the rules or regulations of the National Association of
Securities Dealers, Inc., the NASDAQ Stock Market, Inc. or other regulatory body
or exchange.
(g) The Purchasers agree that none of the Company or its officers,
directors, employees, shareholders, affiliates, successors, transferees,
assigns, agents or representatives or any underwriter shall have any liability
to the Purchasers arising in connection with any reduction or elimination of any
Proportionate Share taken in accordance with subsection 3.2(b) except to the
extent arising out of the Company's bad faith.
3.3 Termination. This Section 3 shall terminate upon the earlier
-----------
of the following events:
(a) the sale of all or substantially all of the assets or
business of the Company, by merger, sale of assets or otherwise; or
(b) immediately after the Offer Commencement (assuming the
Company has complied with its obligations in Section 3.2).
4. Negative Covenants. So long as at least 1,375 shares of Series B
------------------
Preferred Stock or at least 1,000,000 shares of Series C Preferred Stock (in
each case subject to appropriate adjustment in the event of any dividend, stock
split, combination or similar recapitalization affecting such shares) shall be
outstanding, the Company shall not, without first obtaining the affirmative vote
or written consent of the holders of not less than a majority of the then
outstanding shares of Series B Preferred Stock and Series C Preferred Stock
voting together as a single class:
(a) amend the Certificate of Incorporation of the Company;
(b) declare or pay any dividends or distributions on Common
Stock other than dividends payable solely in Common Stock;
(c) make (or permit any corporation, a majority of the voting
stock of which is owned or controlled by the Company, to make) any loan or
advance to, or own any
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Amended & Restated Investor Rights Agreement
stock or other securities of, any subsidiary or other corporation, partnership,
or other entity unless it is wholly owned by the Company;
(d) make any loan or advance to any person, including, without
limitation, any employee or director of the Company or any subsidiary, except
advances and similar expenditures in the ordinary course of business or under
the terms of an employee stock or option plan approved by the Board of
Directors;
(e) incur any indebtedness for borrowed money after the date
hereof in excess of $1,000,000 in the aggregate:
(f) guarantee directly or indirectly, any indebtedness or
obligations except for trade accounts of any subsidiary arising in the ordinary
course of business;
(g) merge with or into or consolidate with any other
corporation;
(h) sell, lease, or otherwise dispose of all or any substantial
portion of its properties or assets;
(i) acquire all or substantially all of the properties, assets
or stock of any other corporation or entity (except for a consideration of less
than 10% of the Company's consolidated net worth as of the end of the prior
fiscal quarter);
(j) voluntarily liquidate or dissolve;
(k) amend any provision of, or add any provision to, the
Company's By-Laws which would adversely affect the Series C Shares or the Series
B Shares; or
(l) apply any of its assets to the redemption, retirement,
purchase or acquisition, directly or indirectly, of any shares of its Common
Stock (other than purchases of Common Stock from employees, directors or
consultants, at cost, upon termination of their employment or services).
5. Transfers of Rights. This Agreement, and the rights and obligations of
-------------------
each Stockholder hereunder, may be assigned by such Stockholder only to (i) any
person or entity to which at least 1,000,000 Series C Shares or 750 Series B
Shares are transferred by such Stockholder or (ii) to any partner or stockholder
of such Stockholder, and such transferee shall be deemed a "Purchaser" or "Prior
Holder," as applicable for purposes of this Agreement; provided that the
transferee provides written notice of such assignment to the Company and agrees
in writing to be bound hereby.
6. General.
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Amended & Restated Investor Rights Agreement
(a) Severability. The invalidity or unenforceability of any
------------
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement.
(b) Specific Performance. In addition to any and all other
--------------------
remedies that may be available at law in the event of any breach of this
Agreement, each Purchaser shall be entitled to specific performance of the
agreements and obligations of the Company hereunder and to such other injunctive
or other equitable relief as may be granted by a court of competent
jurisdiction.
(c) Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the internal laws of the Commonwealth of
Massachusetts (without reference to the conflicts of law provisions thereof).
(d) Notices. All notices, requests, consents, and other
-------
communications under this Agreement shall be in writing and shall be deemed
delivered (i) two business days after being sent by registered or certified
mail, return receipt requested, postage prepaid or (ii) one business day after
being sent via a reputable nationwide overnight courier service guaranteeing
next business day delivery, in each case to the intended recipient as set forth
below:
If to the Company, at 200 Highland Ave., Needham, MA 02494, Attention:
President, or at such other address or addresses as may have been furnished in
writing by the Company to the Purchasers, with a copy to William Contente, c/o
Lucash, Gesmer & Updegrove, LLP, 40 Broad Street, Boston, MA 02109; or
If to a Stockholder, at his or its address set forth on Exhibit A, or at
---------
such other address or addresses as may have been furnished to the Company in
writing by such Stockholder, with a copy to Jay E. Bothwick, Hale and Dorr LLP,
60 State Street, Boston, MA 02109.
Any party may give any notice, request, consent or other communication
under this Agreement using any other means (including, without limitation,
personal delivery, messenger service, telecopy, first class mail or electronic
mail), but no such notice, request, consent or other communication shall be
deemed to have been duly given unless and until it is actually received by the
party for whom it is intended. Any party may change the address to which
notices, requests, consents or other communications hereunder are to be
delivered by giving the other parties notice in the manner set forth in this
Section.
(e) Complete Agreement. This Agreement constitutes the entire
------------------
agreement and understanding of the parties hereto with respect to the subject
matter hereof and supersedes all prior agreements and understandings relating to
such subject matter.
(f) Amendments and Waivers. Any term of this Agreement may be
----------------------
amended or terminated and the observance of any term of this Agreement may be
waived (either generally or in a particular instance and either retroactively or
prospectively), with the written
-21-
<PAGE>
Amended & Restated Investor Rights Agreement
consent of the Company and the holders of at least 66 2/3% of the Registrable
Shares held by all of the Stockholders; provided, that this Agreement may be
--------
amended with the consent of the holders of less than all Registrable Shares
(including for this purpose the Senior Managers) only in a manner which affects
all such holders in the same fashion. Any such amendment, termination or waiver
effected in accordance with this Section 6(f) shall be binding on all parties
hereto, even if they do not execute such consent. No waivers of or exceptions to
any term, condition or provision of this Agreement, in any one or more
instances, shall be deemed to be, or construed as, a further or continuing
waiver of any such term, condition or provision.
(g) Pronouns. Whenever the context may require, any pronouns used in
--------
this Agreement shall include the corresponding masculine, feminine or neuter
forms, and the singular form of nouns and pronouns shall include the plural, and
vice versa.
(h) Counterparts; Facsimile Signatures. This Agreement may be
----------------------------------
executed in any number of counterparts, each of which shall be deemed to be an
original, and all of which together shall constitute one and the same document.
This Agreement may be executed by facsimile signatures.
(i) Section Headings. The section headings are for the
----------------
convenience of the parties and in no way alter, modify, amend, limit or restrict
the contractual obligations of the parties.
(j) Waiver of Right of First Refusal: By execution of this
--------------------------------
Agreement, and only with respect to (i) the Purchase Agreement, and (ii) the
issuance of a Warrant to EduVentures to purchase 95,700 shares of Common Stock,
each of the Prior Holders, North Bridge Venture Partners II, L.P. and
Commonwealth Capital Ventures II, L.P. hereby waives his or its right of first
refusal pursuant to Section 3 of the Prior Agreement.
(k) Termination and Amendment of Other Agreements: By execution
---------------------------------------------
of this Agreement, the Company and the Prior Holders do hereby amend and restate
the Prior Agreement pursuant to Section 6(f) thereof.
-22-
<PAGE>
Amended & Restated Investor Rights Agreement
Executed as of the date first written above.
COMPANY:
SmarterKids.com, Inc.
By: /s/ David Blohm
---------------------------------
Name: David Blohm
-----------------------------
Title: CEO
----------------------------
PURCHASERS:
BRIGHTER VISION HOLDINGS, INC.
By: /s/ David Wetherald
---------------------------------
Name: David Wetherald
-----------------------------
Title: Asst. Secretary
----------------------------
INTEL CORPORATION
By: /s/ Arvind Sodhani
---------------------------------
Name: Arvind Sodhani
-----------------------------
Title: Vice President and Treasurer
----------------------------
VAN WAGONER CAPITAL MANAGEMENT
By: /s/ Garrett Van Wagoner
---------------------------------
Name: Garrett Van Wagoner
-----------------------------
Title: President
----------------------------
-23-
<PAGE>
Amended & Restated Investor Rights Agreement
ADVENT CROWN FUND C.V.
By: Advent International Limited Partnership, General
Partner
By: Advent International Corporation, General Partner
By: /s/ Marcia J. Hooper
--------------------------------------------
Name: Marcia J. Hooper
--------------------------------------
Title: Vice President/Senior Vice President
DIGITAL MEDIA & COMMUNICATIONS II LIMITED PARTNERSHIP
By: Advent International Limited Partnership, General
Partner
By: Advent International Corporation, General Partner
By: /s/ Marcia J. Hooper
--------------------------------------------
Name: Marcia J. Hooper
--------------------------------------
Title: Vice President/Senior Vice President
OAKSTONE VENTURES LIMITED PARTNERSHIP
By: Advent International Limited Partnership, General
Partner
By: Advent International Corporation, General Partner
By: /s/ Marcia J. Hooper
--------------------------------------------
Name: Marcia J. Hooper
--------------------------------------
Title: Vice President/Senior Vice President
-24-
<PAGE>
Amended & Restated Investor Rights Agreement
RRE INVESTORS, L.P.
By: /s/ Illegible
-------------------------------------
Name:
-------------------------------
Title: General Partner
RRE INVESTORS FUND, L.P.
By: /s/ Illegible
-------------------------------------
Name:
-------------------------------
Title: General Partner
RH II PARTNERS, LLC
By: /s/ James Carpenter
-------------------------------------
James Carpenter, General Partner
REAL ESTATE EQUITIES LIMITED PARTNERSHIP
By: First Capital Financial Corporation
By: /s/ Robert DeWitt
-------------------------------------
Robert E. DeWitt, President
NORTH BRIDGE VENTURE PARTNERS III, L.P.
By: NORTH BRIDGE VENTURE MANAGEMENT III, L.P., its
General Partner
By: /s/ Richard D'Amore
-------------------------------------
Name: Richard D'Amore
-------------------------------
Title: General Partner
-25-
<PAGE>
Amended & Restated Investor Rights Agreement
COMMONWEALTH CAPITAL VENTURES II L.P.
By: COMMONWEALTH CAPITAL VENTURES II, L.P., its
General Partner
By: /s/ Rob Chandra
------------------------------------
Name: Rob S. Chandra
------------------------------
Title: General Partner
CCV II ASSOCIATES L.P.
By: /s/ Rob Chandra
------------------------------------
Name: Rob S. Chandra
------------------------------
Title: General Partner
By: /s/ Peter Way
------------------------------------
Peter Way
CARDINAL CREST PARTNERS
By: /s/ Thomas Davidson
------------------------------------
Name: Thomas N. Davidson
------------------------------
Title: Partner
By: /s/ Jon Baker
------------------------------------
Jon Baker
By: /s/ Eugene Harris
------------------------------------
Eugene Harris
-26-
<PAGE>
Amended & Restated Investor Rights Agreement
By: /s/ Walter Bernheimer
-----------------------------------
Walter s. Bernheimer II
By: /s/ David Solomont
-----------------------------------
David Solomont
SENIOR MANAGERS:
/s/ David Blohm
-----------------------------------
David Blohm
Address: 12 Rambling Road
--------------------------
Sudbury, MA 01776
--------------------------
/s/ Al Noyes
-----------------------------------
Al Noyes
Address: 252 Commonwealth Ave., #6
--------------------------
Boston, MA 02116
--------------------------
/s/ Jeffrey Pucci
-----------------------------------
Jeffrey Pucci
Address: 205 Rosemary Street
--------------------------
Needham, MA 02494
--------------------------
/s/ Richard Viard
-----------------------------------
Richard Viard
Address: 169 North Street
--------------------------
Walpole, MA 02081
--------------------------
-27-
<PAGE>
Amended & Restated Investor Rights Agreement
Exhibit A
---------
Pursuant to a letter agreement dated March 19, 1999, Thomas Weisel Partners LLC
("TWP") shall be issued a warrant to purchase shares of Series C Convertible
Preferred Stock. From and after the exercise of such warrant and the issuance
to TWP of such shares, solely for purposes of Article 2 hereof (including
without limitation any definitions in Article 1 as they relate to Article 2) and
Article 6, (i) TWP shall be considered a "Purchaser" hereunder, including
without limitation for purposes of defining "Stockholders", and (ii) the shares
of Series C Convertible Preferred Stock issued to TWP shall be considered Series
C Shares, including without limitation for purposes of defining "Registrable
Shares".
[List of Purchasers - See Attached]
-28-
<PAGE>
Exhibit 10.6
------------
SmarterKids.com, Inc.
AMENDED & RESTATED STOCKHOLDERS' VOTING AGREEMENT
-------------------------------------------------
This Agreement dated as of July 12, 1999, which amends and restates in its
entirety that certain Stockholders' Voting Agreement dated as of November 6,
1998, is entered into by and among the persons and entities listed on Exhibit A
---------
hereto (individually, a "Purchaser" and collectively, the "Purchasers"), those
persons and entities listed on Exhibit B hereto who have executed counterpart
---------
signature pages to this Agreement (collectively, the "Existing Preferred
Holders"), David Blohm, Al Noyes, Jeffrey Pucci and Richard Viard (individually,
a "Senior Manager" and, collectively, the "Senior Managers") and
SmarterKids.com, Inc., a Delaware corporation (the "Company"). The Purchasers,
the Existing Preferred Holders and the Senior Managers are sometimes referred to
in this Agreement collectively as the "Stockholders."
Recitals:
---------
1. The Senior Managers own certain outstanding shares of the Common
Stock, par value $.01 per share ("Common Stock"), of the Company;
2. The Existing Preferred Holders own certain outstanding shares of
Series A Convertible Preferred Stock, par value $.01 per share, and Series B
Convertible Preferred Stock, par value $.01 per share, of the Company
(collectively, the "Existing Preferred Stock");
3. The Purchasers are purchasing, concurrently herewith, certain shares
of Series C Convertible Preferred Stock of the Company pursuant to the Series C
Convertible Preferred Stock Purchase Agreement of even date herewith (the
"Purchase Agreement"); and
4. The Purchasers, the Existing Preferred Holders and Senior Managers
wish to provide for continuing representation on the Board of Directors of the
Company in the manner set forth below.
In consideration of the mutual covenants contained herein and the
consummation of the sale and purchase of shares of capital stock of the Company
pursuant to the Purchase Agreement, and for other valuable consideration,
receipt of which is hereby acknowledged, the parties hereto agree as follows:
1. Voting of Shares.
----------------
(a) In any and all elections of directors of the Company (whether at a
meeting or by written consent in lieu of a meeting), each Stockholder shall vote
or cause to be voted all Shares (as defined in Section 2 below) owned by him or
it, or over which he or it has voting control, and otherwise use his or its
respective best efforts, so as to fix the number of directors of the Company at
seven (7) and to elect (i) one (1) member designated by North Bridge Venture
Partners II, L.P.; (ii) one (1) member designated by Commonwealth Capital
Ventures II, L.P.; (iii) the Chief Executive Officer of the Company; (iv) the
Chairman of the Board; (v) for so long
-1-
<PAGE>
as Brighter Vision Holdings, Inc. owns at least 500,000 shares, one (1) member
designated by Brighter Vision Holdings, Inc.; and (vi) two (2) members
designated by a majority of the other directors of the Company. The director
initially designated by North Bridge Venture Partners II, L.P. is Richard
D'Amore, the director initially designated by Commonwealth Capital Ventures II,
L.P. is Michael Fitzgerald, the director initially designated by Brighter Vision
Holdings, Inc. is Brian E. Hickey, David Blohm shall initially be the Chief
Executive Officer of the Company and Jeffrey Pucci shall initially be the
Chairman of the Board of the Company. The parties acknowledge that, pursuant to
that certain letter agreement dated July 23, 1997, the Company has granted
Sylvan Learning Systems, Inc. ("Sylvan") "the right to a seat on [the Company's]
board of directors." The parties agree that, should Sylvan exercise its right to
nominate a director, (A) all of the parties hereto shall vote or cause to be
voted all Shares owned by him or it, or over which he or it has voting control,
and otherwise use his or its respective best efforts, to elect the nominee of
Sylvan to the board of directors, and (B) the nominee of Sylvan shall be deemed
to be one of the members designated pursuant to clause 1(a)(vi) above.
(b) No Stockholder shall vote to remove any director designated by any
other Stockholder unless the designating Stockholder also votes for such
removal.
2. Shares. "Shares" shall mean and include any and all shares of Common
------
Stock and/or shares of capital stock of the Company, by whatever name called,
which carry voting rights (including voting rights which arise by reason of
default) and shall include any such shares now owned or subsequently acquired by
a Stockholder, however acquired, including without limitation stock splits and
stock dividends.
3. Termination. This Agreement shall terminate in its entirety on the
-----------
earliest of (a) the closing of the Company's initial public offering of shares
of Common Stock pursuant to an effective registration statement under the
Securities Act of 1933, as amended (the "Act"), resulting in at least
$15,000,000 of gross proceeds to the Company at a minimum price to the public of
$10.00 per share (subject to appropriate adjustment for stock splits, stock
dividends, recapitalizations and other similar events) (a "Qualified Public
Offering"), or (b) the sale of all or substantially all of the assets or
business of the Company, by merger, sale of assets or otherwise; provided, that
the occurrence of the Company's initial public offering as described in Section
3(a) above shall not terminate this Agreement with respect to the obligation
pursuant to Section 1(a) to vote or cause to be voted all Shares so as to elect
one member designated pursuant to Section 1(a)(v). For so long as the condition
under Section 1(a)(v) above exists, the Company agrees to nominate Mr. Brian E.
Hickey (or such replacement as Brighter Vision Holdings, Inc. shall identify) as
a Brighter Vision Holdings, Inc. nominee to the Company's Board of Directors at
all elections of directors and to recommend to its stockholders the election of
Mr. Brian E. Hickey (or such replacement as Brighter Vision Holdings, Inc. shall
identify), all subject to the fiduciary obligations of the Board of Directors.
4. No Revocation. The voting agreements contained herein are coupled
-------------
with an interest and may not be revoked, except by an amendment, modification or
termination effected in accordance with Section 7(e) hereof. Nothing in this
Section 4 shall be construed as limiting the provisions of Section 3 or 7(e)
hereof.
-2-
<PAGE>
5. Restrictive Legend. All certificates representing Shares owned or
------------------
hereafter acquired by the Stockholders or any transferee of the Stockholders
bound by this Agreement shall have affixed thereto a legend substantially in the
following form:
"The shares of stock represented by this certificate are subject to
certain voting agreements as set forth in a Stockholders' Voting
Agreement, as amended from time to time, by and among the registered
owner of this certificate, the Company and certain other stockholders
of the Company, a copy of which is available for inspection at the
offices of the Secretary of the Company."
6. Transfers of Rights. Prior to a Qualified Public Offering, any
-------------------
transferee to whom Shares are transferred by a Stockholder, whether voluntarily
or by operation of law, shall be bound by the voting obligations imposed upon
the transferor under this Agreement, to the same extent as if such transferee
were a Stockholder hereunder and no Stockholder shall transfer any Shares unless
the transferee agrees in writing to be bound by this Agreement.
7. General.
-------
(a) Severability. The invalidity or unenforceability of any provision
------------
of this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement.
(b) Specific Performance. In addition to any and all other remedies
--------------------
that may be available at law in the event of any breach of this Agreement, each
Purchaser shall be entitled to specific performance of the agreements and
obligations of the Stockholders hereunder and to such other injunctive or other
equitable relief as may be granted by a court of competent jurisdiction.
(c) Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the internal laws of the Commonwealth of Massachusetts
(without reference to the conflicts of law provisions thereof).
(d) Notices. All notices, requests, consents, and other
-------
communications under this Agreement shall be in writing and shall be deemed
delivered (i) two business days after being sent by registered or certified
mail, return receipt requested, postage prepaid or (ii) one business day after
being sent via a reputable nationwide overnight courier service guaranteeing
next business day delivery, in each case to the intended recipient as set forth
below:
If to a Purchaser, at his or its address set forth in Schedule A hereto, or
at such other address or addresses as may have been furnished to the other
parties hereto in writing by such Purchaser, with a copy to Jay E. Bothwick at
Hale and Dorr LLP, 60 State Street, Boston, MA 02109; or
-3-
<PAGE>
If to a Senior Manager or Existing Preferred Stockholder, at the address
below his signature hereto, or at such other address or addresses as may have
been furnished to the other parties hereto in writing by such Senior Manager or
Existing Preferred Stockholder.
Any party may give any notice, request, consent or other communication
under this Agreement using any other means (including, without limitation,
personal delivery, messenger service, telecopy, first class mail or electronic
mail), but no such notice, request, consent or other communication shall be
deemed to have been duly given unless and until it is actually received by the
party for whom it is intended. Any party may change the address to which
notices, requests, consents or other communications hereunder are to be
delivered by giving the other parties notice in the manner set forth in this
Section 7.
(e) Complete Agreement; Amendments. This Agreement constitutes the
------------------------------
entire agreement and understanding of the parties hereto with respect to the
subject matter hereof, and supersedes all prior agreements and understandings
relating to such subject matter. No amendment, modification or termination of,
or waiver under, any provision of this Agreement shall be valid unless in
writing and signed by (i) Senior Managers then employed by the Company holding
at least 51% of the voting power of the Shares held by all of the Senior
Managers then employed by the Company and (ii) Purchasers and Existing Preferred
Holders holding 66-2/3% of the voting power of the Shares then held by all of
the Purchasers and Existing Preferred Holders (giving effect to the conversion
into Common Stock of all securities convertible thereinto), and any such
amendment, modification, termination or waiver shall be binding on all parties
hereto; provided that the consent of a party shall not be required for any
amendment, modification or termination of, or waiver under, any provision of
this Agreement if such party is not adversely affected thereby.
(f) Pronouns. Whenever the context may require, any pronouns used in
--------
this Agreement shall include the corresponding masculine, feminine or neuter
forms, and the singular form of nouns and pronouns shall include the plural, and
vice versa.
(g) Counterparts; Facsimile Signatures. This Agreement may be
----------------------------------
executed in any number of counterparts, each of which shall be deemed to be an
original, and all of which together shall constitute one and the same document.
This Agreement may be executed by facsimile signatures.
(h) Section Headings. The section headings are for the convenience of
----------------
the parties and in no way alter, modify, amend, limit or restrict the
contractual obligations of the parties.
-4-
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK.]
-5-
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto
as of the day and year first above written.
COMPANY:
SmarterKids.com, Inc.
By: /s/ David Blohm
____________________________
Name: David Blohm
________________________
Title: CEO
_______________________
PURCHASERS:
BRIGHTER VISION HOLDINGS, INC.
By: /s/ David Wetherald
____________________________________
Name: David Wetherald
Title: Asst. Secretary
_____________________________
INTEL CORPORATION
By: /s/ Arind Sodhani
____________________________________
Name: Arind Sodhani
______________________________
Title: Vice President and Treasurer
_____________________________
VAN WAGONER CAPITAL MANAGEMENT
By: /s/ G. Van Wagoner
____________________________________
Name: Garrett Van Wagoner
______________________________
Title: President
____________________________
-6-
<PAGE>
ADVENT CROWN FUND C.V.
By: Advent International Limited Partnership, General
Partner
By: Advent International Corporation, General Partner
By: /s/ Marcia J. Hooper
____________________________________
Name: Marcia J. Hooper
______________________________
Title: Vice President/Senior Vice President
DIGITAL MEDIA & COMMUNICATIONS II LIMITED PARTNERSHIP
By: Advent International Limited Partnership, General
Partner
By: Advent International Corporation, General Partner
By: /s/ Marcia J. Hooper
____________________________________
Name: Marcia J. Hooper
______________________________
Title: Vice President/Senior Vice President
OAKSTONE VENTURES LIMITED PARTNERSHIP
By: Advent International Limited Partnership, General
Partner
By: Advent International Corporation, General Partner
By: /s/ Marcia J. Hooper
____________________________________
Name: Marcia J. Hooper
______________________________
Title: Vice President/Senior Vice President
-7-
<PAGE>
RRE INVESTORS, L.P.
By: /s/ Illegible
____________________________________
Name:
______________________________
Title: General Partner
RRE INVESTORS FUND, L.P.
By: /s/ Illegible
____________________________________
Name: ______________________________
Title: General Partner
RH II PARTNERS, LLC
By: /s/ James Carpenter
____________________________________
James Carpenter, General Partner
REAL ESTATE EQUITIES LIMITED PARTNERSHIP
By: First Capital Financial Corporation
By: /s/ Robert DeWitt
____________________________________
Robert E. DeWitt, President
NORTH BRIDGE VENTURE PARTNERS III, L.P.
By: NORTH BRIDGE VENTURE MANAGEMENT III, L.P., its
General Partner
By: /s/ Richard D'Amore
____________________________________
Name: Richard D'Amore
______________________________
Title: General Partner
-8-
<PAGE>
COMMONWEALTH CAPITAL VENTURES II L.P.
By: COMMONWEALTH CAPITAL VENTURES II, L.P., its
General Partner
By: /s/ Rob S. Chandra
____________________________________
Name: Rob S. Chandra
______________________________
Title: General Partner
CCV II ASSOCIATES L.P.
By: /s/ Rob S. Chandra
____________________________________
Name: ______________________________
Title: General Partner
By: /s/ Peter Way
____________________________________
Peter Way
CARDINAL CREST PARTNERS
By: /s/ Thomas N. Davidson
____________________________________
Name: Thomas N. Davidson
______________________________
Title: Partner
____________________________
By: /s/ Jon Baker
____________________________________
Jon Baker
By:/s/ Eugene Harris
____________________________________
Eugene Harris
By: /s/ Walter S. Bernheimer II
___________________________________
Walter S. Bernheimer II
-9-
<PAGE>
By: /s/ David Solomont
____________________________________
David Solomont
SENIOR MANAGERS:
/s/ David Blohm
______________________________
David Blohm
Address: 12 Rambling Road
______________________
Sudbury, MA 01776
______________________
/s/ Al Noyes
______________________________
Al Noyes
Address: 252 Commonwealth Ave, #6
_________________________
Boston, MA 02116
______________________
/s/ Jeffrey Pucci
______________________________
Jeffrey Pucci
Address: 205 Rosemary Street
______________________
Needham, MA 02454
______________________
/s/ Richard Viard
______________________________
Richard Viard
Address:169 North Street
______________________
Walpole, MA 02081
______________________
-10-
<PAGE>
EXISTING PREFERRED HOLDERS:
_________________________________
Name: _______________________
Address: _____________________
_____________________
-11-
<PAGE>
EXHIBIT 10.7
------------
STANDARD FORM COMMERCIAL LEASE
Member Greater Boston Real Estate Board
1. PARTIES LESSOR, which expression shall include McFarland
(fill in) FLP heirs, successors, and assigns where the
context so admits, does hereby lease to
2. PREMISES LESSEE, which expression shall include Virtual
(fill in and include, Knowledge, Inc. successors, executors,
if applicable, suite administrators, and assigns where the context so
number, floor number, admits, and the LESSEE hereby leases the following
and square feet) described premises:
7,715 rentable square feet on the top floor of 200
Highland Avenue, Needham, Massachusetts together
with the right to use in common, with others
entitled thereto, the hallways, stairways, and
elevators, necessary for access to said leased
premises and lavatories nearest thereto.
3. TERM The term of this lease shall be for see section 23
(fill in) A commencing on and ending on
4. [deleted]
5. [deleted]
6. [deleted]
7. UTILITIES The Lessor shall pay, as they become due, all
bills for electricity and other utilities
(whether they are used for furnishing heat or
other purposes) that are furnished to the leased
premises and presently separately metered, and
all bills for fuel furnished to a separate tank
servicing the leased premises exclusively. The
LESSOR agrees to provide other utility service and
to furnish reasonably hot and cold water and
reasonable heat and air conditioning (except
delete "air to the extent that the through separately
conditioning" if not metered utilities or separate fuel tanks as set
applicable forth above) to the leased premises, the
hallways, stairways, elevators, and lavatories
during normal business hours on regular business
days of the heating and air conditioning seasons
of each year, to furnish elevator service and to
light passageways and stairways during business
hours, and to furnish such cleaning service as is
customary in similar buildings in said city or
town, all subject to interruption due to any
accident, to the making of repairs, alterations,
or improvements, to labor difficulties, to trouble
in obtaining fuel, electricity, service, or
supplies from the sources from which they are
usually obtained for said building, or to any
cause beyond the LESSOR'S control. Lessee shall be
separately metered and pay for lights and plugs.
LESSOR shall have no obligation to provide
utilities or equipment other than the utilities
and equipment within the premises as of the
commencement date of this
<PAGE>
-2-
lease. In the event LESSEE requires additional
utilities or equipment, the installation shall be
subject to the written consent of the LESSOR.
8. USE OF LEASED The LESSEE shall use the leased promises only for
PREMISES the purpose of General Office Use
(fill in)
9. COMPLIANCE The LESSEE acknowledges that no trade or
WITH LAWS occupation shall be conducted in the leased
premises or use made thereof which will be
unlawful, improper, noisy or offensive, or
contrary to any law or any municipal by-law or
ordinance in force in the city or town in which
the premises are situated.
10. FIRE INSURANCE The LESSEE shall not permit any use of the leased
premises which will make voidable any insurance on
the property of which the leased premises are a
part, or on the contents of said property or which
shall be contrary to any law or regulation from
time to time established by the New England Fire
Insurance Rating Association, or any similar body
succeeding to its powers. The LESSEE shall on
demand reimburse the LESSOR, and all other
tenants, all extra insurance premiums caused by
the LESSEE'S use of the premises.
11. MAINTENANCE The LESSEE agrees to maintain the leased premises
in good condition, damage by fire and other
casualty only excepted, and whenever necessary, to
A. LESSEE'S replace plate glass and other glass therein,
OBLIGATIONS acknowledging that the leased premises are now in
good order and the glass whole. The LESSEE shall
not permit the leased premises to be overloaded,
damaged, stripped, or defaced, nor suffer any
waste. LESSEE shall obtain written consent of
LESSOR before erecting any sign on the premises.
B. LESSOR'S The LESSOR agrees to maintain the structure of the
OBLIGATIONS building of which the leased premises are a
part in the same condition as it is at the
commencement of the term or as it may be put in
during the term of this lease, reasonable wear and
tear, damage by fire and other casualty only
excepted, unless such maintenance is required
because of the LESSEE or those for whose conduct
the LESSEE is legally responsible.
12. ALTERATIONS - The LESSEE shall not make structural alterations
ADDITIONS or additions to the leased premises, but may make
non-structural alterations provided the LESSOR
consents thereto in writing, which consent shall
not be unreasonably withheld or delayed. All such
allowed alterations shall be at LESSEE'S expense
and shall be in quality at least equal to the
payment compensation. LESSEE shall not permit any
mechanics' liens, or similar liens, to remain upon
the leased premises for labor and material
furnished to LESSEE or claimed to have been
furnished by the LESSEE in connection with work of
any character performed or claimed to have been
performed at the direction of LESSEE and shall
cause any such lien to be released of record
forthwith without cost to LESSOR. Any alterations
or improvements made by the LESSEE shall become
the property of the LESSOR at the termination of
occupancy as provided herein.
13. ASSIGNMENT - The LESSEE shall not assign or sublet the whole or
any part of the leased premises
<PAGE>
-3-
SUBLEASING without LESSOR'S prior written consent which
consent shall be unreasonably withheld or delayed.
________________________. Notwithstanding such
consent, LESSEE shall remain liable to LESSOR for
the payment of all ______ and for the full
performance of the covenants and conditions of
this lease.
14. SUBORDINATION This lease shall be subject and subordinate to any
and all mortgages, now or at any time hereafter, a
lien or liens on the property of which the leased
premises are a part and the LESSEE shall, when
requested, promptly execute and deliver such
written instruments as shall be necessary to show
the subordination of this lease to said mortgages,
deeds of trust or other such instruments in the
nature of a mortgage.
15. LESSOR'S ACCESS The LESSOR or agents of the LESSOR may, at
reasonable times, enter to view the leased
premises and may remove placards and signs not
approved and affixed as herein provided, and make
repairs and alterations as LESSOR should elect to
do and may show the leased premises to others, and
at any time within three (3) months before the
expiration of the term, may affix to any suitable
part of the leased premises a notice for letting
or selling the leased premises or property of
which the leased premises are a part and keep the
same as affixed without hindrance or molestation.
16. INDEMNIFICATION AND The LESSEE shall save the LESSOR harmless from all
LIABILITY loss and damage occasioned by the use or escape of
(fill in) water or by the bursting of pipes, as well as from
any claim or damage resulting from neglect in not
removing snow and ice from the roof of the
building or from the sidewalks bordering upon the
premises so leased, or by any nuisance made or
suffered on the leased premises, unless such loss
is caused by the neglect of the LESSOR. The
removal of snow and ice from the sidewalks
bordering upon the leased premises shall be
Lessor's responsibility.
17. LESSEE'S LIABILITY The LESSEE shall maintain with respect by the
INSURANCE leased premises and the property of which the
(fill in) leased premises are a part comprehensive public
liability insurance in the amount of $1,000,000
with property damage insurance in limits of
$50,000 - $100,000 in responsible companies
qualified to do business in Massachusetts and in
good standing therein insuring the LESSOR as well
as LESSEE against injury to persons or damage to
property as provided. The LESSEE shall deposit
with the LESSOR certificates for such insurance at
or prior to the commencement of the term, and
thereafter within thirty (30) days prior to the
expiration of any such policies. All such
insurance certificates shall provide that such
policies shall not be cancelled without at least
ten (10) days prior written notice to each assured
named therein.
18. FIRE, CASUALTY - Should a substantial portion of the leased
EMINENT DOMAIN premises, or of the property of which they are a
part, be substantially damaged by the fire or
other casualty, or be taken by eminent domain, the
LESSOR may elect to terminate this lease. When
such fire, casualty, or taking renders the leased
premises unsuitable for their intended use, a just
and proportionate abatement of rent shall be made,
and the LESSEE may elect to terminate this lease
if:
(a) The LESSOR fails to give written notice
within thirty (30) days of
<PAGE>
-4-
intention to restore leased premises, or
(b) The LESSOR fails to restore the leased premises to
a condition substantially suitable for their
intended use within ninety (90) days of said fire,
casualty or taking.
The LESSOR reserves, and the LESSEE imparts to the Lessor,
all rights which the LESSEE may have for damages or injury
to the leased premises for any taking by eminent domain,
except for damage to the LESSEE'S fixtures, property, or
equipment.
19. DEFAULT AND In the event that:
BANKRUPTCY
(fill in) (a) The LESSEE shall default in the payment of any
installment of rent or other sum herein specified
and such default shall continue for ten (10) days
after written notice thereof; or
(b) The LESSEE shall default in the observance or
performance of any other of the LESSEE'S covenants,
agreements, or obligations hereunder and such
default shall not be corrected within thirty (30)
days after written notice thereof; or
(c) The LESSEE shall be declared bankrupt or insolvent
according to law, or, if any assignment shall be
made of LESSEE'S property for the benefit of
creditors,
then the LESSOR shall have the right thereafter, while such
default continues, to re-enter and take complete possession
of the leased premises, to declare the term of this lease
ended, and remove the LESSEE'S effects, without prejudice to
any remedies which might be otherwise used for arrears of
rent or other default. The LESSEE shall indemnify the LESSOR
against all loss of rent and other payments which the LESSOR
may incur by reason of such termination during the residue
of the term. If the LESSEE shall default, after reasonable
notice thereof, in the observance or performance of any
conditions or covenants on LESSEE'S part to be observed or
performed under or by virtue of any of the provisions in any
article of this lease, the LESSOR, without being under any
obligation to do so and without thereby waiving such
default, may remedy such default for the account and at the
expense of the LESSEE. If the LESSOR makes any expenditures
or incurs any obligations for the payment of money in
connection therewith, including but not limited to,
reasonable attorney's fees in instituting, prosecuting or
defending any action or proceeding, such sums paid or
obligations insured, with interest at the rate of six (6)
percent per annum and costs, shall be paid to the LESSOR by
the LESSEE as additional rent.
20. NOTICE Any notice from the LESSOR to the LESSEE relating to the
(fill in) leased premises or to the occupancy thereof, shall be deemed
duly served, if left at the leased premises addressed to the
LESSEE, or if mailed to the leased premises, registered or
certified mail, return receipt requested, postage prepaid,
addressed to the LESSEE. Any notice from the LESSEE to the
LESSOR relating to the leased premises or to the occupancy
thereof, shall be deemed duly served, if mailed to the
LESSOR by
<PAGE>
-5-
registered or certified mail, return receipt requested,
postage prepaid, addressed to the LESSOR at such address as
the LESSOR may from time to time advise in writing. All rent
notices shall be paid and sent to the LESSOR at 15 Cefalo
Road, Boston, MA 02132.
21. SURRENDER The LESSEE shall at the expiration of such termination of
this lease remove all LESSEE'S goods and effects from the
leased premises (including, without hereby limiting the
generality of the foregoing, all signs and lettering affixed
or painted by the LESSEE either inside or outside the leased
premises). LESSEE shall deliver to the LESSOR the leased
premises and all keys, locks thereto, and other fixtures
connected therewith and all alterations and additions made
to or upon the leased premises, in good condition, damage by
fire or other casualty only excepted. In the event of the
LESSEE'S failure to remove any of LESSEE'S property from the
premises, LESSOR is hereby authorized, without liability to
LESSEE for loss or damage thereto, and at the sole risk of
LESSEE, to remove and store any of the property at LESSEE'S
expense, or to retain same under LESSOR'S control or to sell
at public or private sale without notice any or all of the
property not so removed and to apply the net proceeds of
such sale to the payment of any sum due hereunder, or to
destroy such property.
22. [deleted]
23. OTHER It is also understood and agreed that:
PROVISIONS
A.) Term of lease for Suite 401, 2,538 sq. ft. shall be two
years two months with one, one year option commencing
9/1/98-10/31/00 Term of lease for Suite 402, 5,177 sq.
ft. shall be two years with one, one year option
commencing 11/1/98-10/31/00
B.) Rent for 9/1/98-10/31/98 $ 8,248.50
Rent for 11/1/98-10/31/99 169,730.00
Rent for 11/1/99-10/31/00 177,445.00
Option Year 11/1/00-10/31/01 185,160.00
C.) Before tenant moves in to Suite 401 9/1/98, Lessor will
touch up paint and add doorway from the kitchen area of
Suite 401 to connect with Suite 402.
D.) Lessee shall have the exclusive right to exterior
signage at two locations at the building where the
"HomeView" signs are currently. Lessor hereby consents
to Lessee affixing a sign depicting Lessee's company
name on said location provided the sign is in
compliance with all applicable rules and regulations in
the Town of Needham. Which approvals shall be the
Lessee's responsibility. Costs associated with removal
and/or disposal of unusable portions of "Homeview"
signage are the responsibility of Lessor.
<PAGE>
-6-
IN WITNESS WHEREOF, the said parties hereunto set their hands and seals this
________________ day of ______________ 19___
/s/ Robert Cahill, Controller /s/ James O. McFarland
- ----------------------------- ---------------------------
LESSEE LESSOR
- ----------------------------- ---------------------------
LESSEE LESSOR
---------------------------
BROKER(S)
<PAGE>
EXHIBIT 10.9
------------
SmarterKids.com, Inc.
200 Highland Avenue
Needham, Massachusetts 02494
November 6, 1998
Jeffrey A. Pucci
205 Rosemary Street
Unit #1
Needham, MA 02494
Dear Jeffrey:
This letter agreement will document the terms of your employment with
SmarterKids.com, Inc. (formerly Virtual Knowledge, Inc.) (the "Company") as
approved by the Board of Directors:
1. You will be employed by the Company for a period no less than two years
from today's date or receive the benefits set forth in section 4 below.
2. You will initially have the title of Chairman of the Board.
3. During this two-year period, you will be paid a salary and bonuses, and
will receive equity related compensation, no less than that of the
Company's chief executive officer, which shall be payable on the same terms
and conditions as those for the Company's chief executive officer.
4. At any time during the two years following today's date, if the Company
terminates your employment, the Company will continue to pay you your
salary, and will continue to vest your options according to the schedule in
section 5 below, through the end of such two-year period. This will occur
regardless of whether you obtain other employment.
5. On the date hereof, the Company will grant to you options to purchase an
aggregate of 180,000 shares of the Company's common stock with an exercise
price of $.20 per share (its fair market value) pursuant to the Company's
stock option plan. These options will have ten-year terms and be
exercisable to the extent vested at any time after the date hereof and up
to 90 days after termination of your employment. The shares will vest in 16
equal installments of 11,250 shares, with an installment vesting every
three months, commencing on the date three months from today. Upon a merger
or sale of the Company, the last four installments of shares issuable upon
exercise of these options will vest.
Sincerely,
SMARTERKIDS.COM, INC.
By: /s/ David Blohm
-------------------------
Accepted and Agreed to:
/s/ Jeffrey A. Pucci
- -----------------------------
Jeffrey A. Pucci
<PAGE>
EXHIBIT 10.10
-------------
SmarterKids.com, Inc.
200 Highland Avenue
Needham, Massachusetts 02494
November 6, 1998
Richard Viard
c/o SmarterKids.com, Inc.
200 Highland Avenue
Needham, MA 02494
Dear Richard:
This letter agreement will document the terms of your employment with
SmarterKids.com, Inc. (formerly Virtual Knowledge, Inc.) (the "Company") as
approved by the Board of Directors:
1. You will be employed by the Company for a period no less than two years
from today's date or receive the benefits set forth in section 2 below.
2. At any time during the two years following today's date, if the Company
terminates your employment, the Company will continue to pay you your
salary, and will continue to vest your options according to the schedule in
section 3 below, through the end of such two-year period. This will occur
regardless of whether you obtain other employment.
3. On the date hereof, the Company will grant to you options to purchase an
aggregate of 180,000 shares of the Company's common stock with an exercise
price of $.20 per share (its fair market value) pursuant to the Company's
stock option plan. These options will have ten-year terms and be
exercisable to the extent vested at any time after the date hereof and up
to 90 days after termination of your employment. The shares will vest in 16
equal installments of 11,250 shares, with an installment vesting every
three months, commencing on the date three months from today. Upon a merger
or sale of the Company, the last four installments of shares issuable upon
exercise of these options will vest.
Sincerely,
SMARTERKIDS.COM, INC.
By: /s/ David Blohm
------------------------------
Accepted and Agreed to:
/s/ Richard Viard
- ----------------------------------
Richard Viard
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this registration statement on Form S-1 of
our report dated September 9, 1999, relating to the financial statements of
SmartKids.com, Inc., which appears in such registration statement. We also
consent to the reference to us under the heading "Experts" in such registration
statement.
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
September 9, 1999
