<PAGE>
As filed with the Securities and Exchange Commission on October 19, 1999
Registration No. 333-86787
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------
Amendment No. 1
to
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(2)
- --------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.01 par value......... $77,625,000 $21,580
</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.
(2) The fee of $16,680 was previously paid with the initial filing of this
Registration Statement with the Commission on September 9, 1999. A fee of
$4,900 is hereby paid in connection with this filing.
--------------
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 OCTOBER 19, 1999
PROSPECTUS
4,500,000 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 $13.00 and $15.00
per share.
---------
Prior to this offering, there has been no public market for the common stock.
We have applied to have our 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 two selling stockholders have granted the underwriters
options for a period of 30 days to purchase up to 675,000 additional shares of
common stock.
---------
Investing in the common stock involves a high degree of risk.
See "Risk Factors" beginning on page 8.
---------
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
Parents can enter information about their child's education and development in
MySmarterKids to get products recommendations tailored to their child's
developmental profile.
Smarter Products
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
Whether gift-giving or finding great educational products for your child, we've
designed SmarterKids.com to make it easy and convenient to shop.
[PICTURE OF SELECTED PRODUCTS]
Parents Center
Our Parents Resource Center offers fun educational activities and ideas for the
entire family, and a variety of parent-friendly learning resources.
Recommendations
Our popular Best Sellers, Teachers' Favorites and Parents' Favorites product
categories are just one click away.
Additional Resources
SmarterKids.com offers a number of easy-to-use resources that help parents
determine how their individual child learns best.
[PICTURE OF FATHER AND SON READING]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
--- ----
<S> <C> <C>
Prospectus Summary................................................ 4
Risk Factors...................................................... 8
Forward-Looking Statements........................................ 22
Use of Proceeds................................................... 22
Dividend Policy................................................... 22
Capitalization.................................................... 23
Dilution.......................................................... 25
Selected Financial Data........................................... 26
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 28
Business.......................................................... 37
Management........................................................ 49
Principal Stockholders............................................ 58
Shares Eligible for Future Sale................................... 61
Certain Transactions.............................................. 63
Description of Securities......................................... 64
Underwriting...................................................... 67
Legal Matters..................................................... 70
Experts........................................................... 70
Where You Can Find More Information............................... 70
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 broad assortment of
carefully selected, fun and educational products, a trusted brand, competitive
prices and an easy-to-use online shopping environment. We provide educational
content to 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 10th most visited shopping website in August
1999, 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 distribution 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 staff of full-time
certified educators carefully selects and then reviews only those products that
meet our quality standards. Our products includes over 2,400 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 websites that offer children's products. 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 then uses this
profile to make product recommendations from our distinctive assortment of
products tailored to a child's individual developmental profile and goals.
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
by offering additional educational content, products and child
assessment tools on our website
. building brand awareness and expanding our customer base by aggressively
marketing and promoting our website
. pursuing additional revenue opportunities, such as adding products for
additional age ranges and introducing online testing services
4
<PAGE>
. leveraging the power of our customer database by targeting product,
service and promotional offerings to customers for whom they are most
relevant
. maintaining scalable and efficient fulfillment operations to ensure
customer satisfaction by maintaining our relationship with J.L. Hammett
Co. while expanding our client relationships with our vendors and
suppliers
While we select and own our inventory, take all orders and manage our
customer service, our inventory is held at a warehouse owned and maintained by
J.L. Hammett Co. J.L. Hammett Co. picks, packs and ships all orders and
maintains our warehouse management system. Our relationship with J.L. Hammett
Co., a national distributor of educational products, 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. From inception
through March 1998, our activities consisted primarily of the conception,
development, publishing, marketing and sales of proprietary educational and
entertainment CD-ROM software. In March 1998, we began transitioning our
business model to online sales of third-party educational products. In November
of 1998, we launched our website and greatly curtailed the sale of our
proprietary CD-ROM products, which we now offer on a limited basis principally
through our online channel. Due to our new business model, anticipated
operating losses, and the other factors discussed under "Risk Factors,"
investors are cautioned that our business is subject to a high degree of risk.
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.
5
<PAGE>
The Offering
Common stock offered by SmarterKids.com...
Common stock to be outstanding after this 4,500,000 shares
offering..................................
Use of proceeds........................... 18,988,084 shares
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
12,732,887 shares of common stock to be issued upon the consummation of the
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:
. 2,819,151 shares subject to outstanding options at a weighted-average
exercise price of $.27 per share and 2,599,998 additional shares
available for issuance under stock plans that will be in effect
following this offering; and
. warrants to purchase 613,091 shares of common stock at a weighted-
average exercise price of $1.89 per share that are currently outstanding
or that we are obligated to issue subject to certain conditions, 406,091
of which are currently exercisable, and 328,091 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 reflects a
three-for-two 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.
6
<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 receipt of net proceeds of $25.3 million for issuance of the
Series C preferred stock in July 1999 and the automatic conversion of all
outstanding shares of preferred stock, including the shares of series C
preferred stock into an aggregate of 12,732,887 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 $57.6 million from the sale of
4,500,000 shares of common stock in this offering, at an assumed initial public
offering price of $14.00 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.. $ (.32) $ (.98) $ (1.10) $ (.72) $ (2.34) $ (.62) $ (4.43)
Shares used to compute
basic and diluted net
loss per common share.. 1,500,000 1,500,000 1,500,606 1,502,148 1,533,524 1,507,607 1,646,898
Pro forma basic and
diluted net loss per
common share........... $ (.43) $ (.92)
Shares used to compute
pro forma basic and
diluted net loss per
common share........... 7,840,274 7,953,648
</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 $83,579
Working capital (deficit)............................... (3,605) 79,287
Total assets............................................ 1,759 84,651
Redeemable preferred stock.............................. 10,287 --
Stockholders' equity (deficit).......................... (13,770) 79,409
</TABLE>
7
<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 been operating under our
new business model for less than one year. 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. 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. From
inception through March 1998, our activities consisted primarily of the
conception, development, publishing, marketing and sales of proprietary
educational and entertainment CD-ROM software. In March 1998, we began
transitioning our business model to online sales of third-party educational
products. In November 1998, we launched our website and greatly curtailed the
sale of our proprietary CD-ROM products, which we now offer on a limited basis
principally through our online channel. 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.
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 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.
8
<PAGE>
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
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 incurred net losses of $7.3 million in the six months ended June 30,
1999 and $4.4 million in the quarter ended June 30, 1999. We currently
anticipate that the net proceeds of this offering, together with our available
funds, will be sufficient to meet our anticipated needs for working capital and
capital expenditures through at least the next 12 months. 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. In the three months ended June 30, 1999, we spent $3.7 million on
marketing and sales efforts and recorded a net loss of $4.4. Even if we are
successful at attracting additional online customers, we expect it will take
several years to adequately build our customer base to the size required to
achieve long-term profitability. Factors that could prevent us from attracting
and retaining customers include:
. lack of consumer awareness of our website
9
<PAGE>
. 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
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. The
Company's operating results may fall below investor or analyst expectations
irregardless of the Company's success or profitability. Factors that may cause
our operating results to fluctuate include:
. decreases in the number of visitors to our website or our inability to
convert visitors on our website to customers
. the mix of children's educational books, toys and games, and software
sold by us
. seasonality due to the academic year and Holiday season
. our inability to manage supplier or distributor relationships
. price competition
. an increase in the level of product returns
. increases in the cost of advertising
. the amount and timing of operating costs and capital expenditures
relating to expansion of our operations
. unexpected increases in shipping costs and delivery times, particularly
during the Holiday season
. technical difficulties or system interruptions
In addition, general economic conditions and fluctuations in the demand for
children's educational product, over which we have no control, may also cause
our operating results to fluctuate.
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.
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 experience seasonal
fluctuations in our revenue. In particular, we expect a disproportionate amount
of our
10
<PAGE>
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.
We face significant inventory risks because consumer demand can change for
products that we have in inventory or on order.
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.
We are dependent on J.L. Hammett Co., our sole provider of distribution
services. 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.
Our business relies on our ability to obtain sufficient quantities of quality
merchandise on acceptable commercial terms.
Vendors may stop selling merchandise to us 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
11
<PAGE>
expect to experience difficulty in obtaining sufficient quantities of certain
products 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.
A third party has claimed that our SmartPicks technology infringes his
intellectual property.
On July 15, 1999, Leslie S. Minkus filed a patent infringement lawsuit
against us 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). Our SmartPicks technology uses a child's
development profile provided by parents on the MySmarterkids area of our
website to make targeted product recommendations based on an individual child's
needs and goals. The patent held by Mr. Minkus 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
December 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
. 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.
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.
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.
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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.
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.
We may fail to compete effectively in our market.
The market for children's educational products online 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
. 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.
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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 additional 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 would also require
significant additional expenses, expose us to additional supplier/distributor
inventory risk and would strain our management, financial and operational
resources. Given our lack of capital resources, any expansion program or new
business category that is not successful could strain our financial resources
and detract capital from otherwise successful operations.
We rely on our relationships with 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 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 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. Failure to generate
sufficient revenues from purchases originating from third-party websites could
reduce our revenues and may result in termination of these types of
relationships.
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 73 employees at September 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.
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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 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 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. While we select and own our own
inventory, take all orders and manage our customer service, all our inventory
resides at a warehouse owned and maintained by J.L. Hammett Co. J.L. Hammett
Co. picks, packs and ships all orders, and J.L. Hammett Co. maintains our
warehouse management system. 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.
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.
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
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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.
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. To the extent we are required to outsource any technological
enhancements or become dependent on third party proprietary technology,
expanding and upgrading our systems could become more diffiicult. 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.
Substantially all of our computer and communications hardware systems
related to transaction processing and network infrastructure are hosted at a
third-party facility owned and operated by Exodus Communications in Waltham,
Massachusetts. Our systems and operations, including our fulfillment operation,
which is located at a facility owned and operated by J.L. Hammett Co. are
vulnerable to damage or interruption from fire, flood, power loss,
telecommunications failure, break-ins, earthquake and similar events.
Furthermore, our servers may be vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions. 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 the J.L. Hammett Co. facility or at the 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.
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 assessed the year 2000
readiness of our third party supplied software, computer technology and other
services and those of J.L. Hammett Co., our distribution services provider.
Based upon the results of this assessment, we are developing a remediation plan
for the following major risk areas:
. specific network failures that would result in an ability to transmit
data among J.L. Hammett Co., our website, and our headquarters
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. specific system failures that would result in an inability to print and
process orders at J.L. Hammett Co.
Any sustained inability of J.L. Hammett Co. to receive and process orders
would result in substantial manual effort and processing delay. 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.
The success of our business depends on the continuing contribution of our key
personnel, including Mr. David A. Blohm, our President and Chief Executive
Officer.
Our future success is dependent on key members of our management team and in
particular David A. Blohm, our President and Chief Executive Officer. The
competition for qualified personnel in the e-commerce market is extremely
intense. The loss of service of Mr. Blohm or a significant number of our
employees could 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, such as America Online, Yahoo, Lycos and
Microsoft, 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, including laws relating to children's privacy, taxation
and the transmission of sexually explicit material. The Children's Online
Privacy Protection Act of 1999 allows the Federal Trade Commission to adopt
regulations prohibiting unfair and deceptive acts and practices in connection
with the collection and use of personal information from and about children on
the Internet. This act could severely limit SmarterKids.com's ability to
collect
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information necessary to build profiles about a child resulting in a material
adverse effect on our business. The Child Online Protection Act of 1998
prohibits harmful commercial communications over the World Wide Web that are
available to any person under 17 years old. This act has been subject to a
temporary restraining order since November 19, 1998. If this injunction is
removed, providing information to minors over the Internet would be greatly
limited. The Omnibus Appropriations Act of 1998 places a moratorium on taxes
levied on Internet access from October 1, 1998 to October 21, 2001. However,
states may place taxes on Internet access if taxes had already been generally
imposed and actually enforced prior to October 1, 1998. States which can show
they enforced Internet access taxes prior to October 1, 1998 and states after
October 21, 2001 may be able to levy taxes on Internet access resulting in
increased cost to access the Internet, resulting in a material adverse effect
on our business. The European Union recently enacted its own privacy
regulations. The European Union Data Protection Directive of 1998 fosters
electronic commerce by establishing a stable framework to ensure both a high
level of protection for private individuals and the free movement of personal
data within the European Union. Although the Company has received less than 1%
of revenues from outside of the United States in the six months ended June 30,
1999, this legislation could adversely affect our ability to expand our sales
efforts to Europe by limiting how information about us can be sent over the
Internet in the European Union. 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 by limiting how information can flow
over the Internet and the type of information that can flow over the Internet.
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.
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.
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. 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.
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Our revenues and reputation would be adversely affected if we experience
significant credit card fraud.
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. We may be
liable for claims based on unauthorized purchases with credit card information,
impersonation or other similar fraud claims. A failure to adequately control
fraudulent credit card transactions would harm our business.
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 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 expires, some type of federal and/or state taxes may be imposed
upon Internet commerce. The moratorium is presently scheduled to expire on
October 20, 2001. 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
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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 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 and directors (14 persons), and
entities affiliated with them, will control approximately 47.3% 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.
Market prices of emerging Internet companies have been highly volatile, and the
market for our stock may be highly volatile as well. Litigation may be
instituted following severe market price volatility.
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 $9.69 per share,
assuming an initial public offering price of $14.00 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
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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. In addition to the
4,500,000 shares of common stock to be sold in this offering, based upon shares
outstanding on the date hereof, 10,970,017 shares, including shares subject to
outstanding vested and options and warrants, will first become eligible for
sale in the public market upon the expiration of lock-up agreements with the
Underwriters. At various times thereafter upon the expiration of applicable
holding periods, 19,470,546 shares will become eligible for sale, including
3,069,908 shares subject to outstanding options and warrants.
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, which 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; the existence of "blank check"
preferred stock could facilitate the introduction of a "poison pill"
rights distribution which could discourage or delay a merger or
acquisition
. providing for a classified board of directors with staggered, three-year
terms, which generally increases the time required for stockholders to
change the composition of our Board of Directors
. 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
Our corporate Charter and By-laws require that a 75% stockholder vote is
required to amend or repeal the foregoing provisions and remove directors for
cause. In addition, Section 203 of the General Corporation Law of Delaware
prohibits 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.
21
<PAGE>
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.
USE OF PROCEEDS
We will receive estimated net proceeds of $57,592,000 from the sale in this
offering of 4,500,000 shares of common stock at an assumed initial public
offering price of $14.00 per share after deducting estimated underwriting
discounts and commissions of $4,410,000 and estimated expenses of $998,000. If
the underwriters' over-allotment option is exercised in full, we will receive
net proceeds of $66,380,500. 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.
22
<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 1,500 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 receipt of net proceeds of $25.3 million from the issuance of
4,284,091 shares of series C preferred stock in July 1999 and the
automatic conversion of all of the series C preferred stock into
6,426,137 shares of common stock upon the closing of this offering.
. the receipt of the estimated net proceeds of $57.6 million from our sale
in this offering of 4,500,000 shares of common stock at an assumed
initial public offering price of $14.00 per share.
None of the columns set forth below reflect:
. warrants to purchase 613,091 shares of our common stock, 328,091 of
which expire upon the closing of this offering.
. options to purchase 2,819,151 shares of common stock at an average
exercise price of $.27 per share, and 2,599,998 shares of common stock
reserved for future issuance under our stock plans.
23
<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, 1,755,197 shares issued
and outstanding, actual; 90,000,000 shares
authorized, 8,061,947 shares issued and
outstanding, pro forma; 90,000,000 shares
authorized, 12,561,947 shares issued and
outstanding, pro forma as adjusted........... 18 81 190
Additional paid-in capital.................... 4,036 14,260 97,043
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) 79,409
-------- -------- --------
Total capitalization....................... $ (3,483) $ (3,483) $ 79,409
======== ======== ========
</TABLE>
24
<PAGE>
DILUTION
Our pro forma net tangible book value (deficit) as of June 30, 1999 was
$(3.5) million, or ($.43) 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 8,061,947 shares of common stock
outstanding after giving effect to the conversion of each outstanding share of
series A and series B preferred stock into 1,500 shares of common stock upon
the closing of this offering. After giving effect to the sale of the 4,500,000
shares of common stock offered hereby at an assumed initial public offering
price of $14.00 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 $54.1 million, or
approximately $4.31 per share. This represents an immediate increase in pro
forma net tangible book value of $4.74 per share to existing stockholders and
an immediate dilution in net tangible book value of $9.69 per share to new
investors of common stock in this offering. Based upon the midpoint of the
offering price range, new investors will pay $14.00 per share and the net
tangible book value per share is expected to be $4.31 immediately after the
offering. The following table illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $14.00
Pro forma net tangible book value (deficit) per share
before this offering, as of June 30, 1999................. $(.43)
Increase in pro forma net tangible book value per share
attributable to new investors in this offering............ 4.74
-----
Pro forma net tangible book value per share after offering... 4.31
------
Dilution in pro forma tangible book value per share to new
investors................................................... $ 9.69
======
</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.. 8,061,947 64.2% $11,300,000 15.2% $ 1.40
New investors.......... 4,500,000 35.8 63,000,000 84.8 14.00
---------- ---- ----------- ---- ------
Total................ 12,561,947 100% $74,300,000 100% $ 5.91
========== ==== =========== ==== ======
</TABLE>
The foregoing discussion and tables 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 us of $25.3 million, and assumes no
conversion of the series C preferred stock into 6,426,137 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
2,952,591 shares of common stock at a weighted average exercise price of $0.13
per share and 869,409 shares were reserved for issuance under our stock plan.
As of June 30, 1999, there were also warrants to purchase 320,550 shares of
common stock at a weighted average exercise price of $0.88 per share
outstanding or that we were obligated to issue subject to certain conditions.
The foregoing discussion also excludes an additional 2,599,998 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.
25
<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 1,500 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 1.5 shares
of common stock upon the closing of this offering and the receipt of the
estimated net proceeds from our sale in this offering of 4,500,000 shares of
common stock at an assumed initial public offering price of $14.00 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).............. $ (.32) $ (.98) $ (1.10) $ (.72) $ (2.34) $ (.62) $ (4.43)
Shares used to compute
basic and diluted net
loss per common share
(1).................... 1,500,000 1,500,000 1,500,606 1,502,148 1,533,524 1,507,606 1,646,898
Pro forma basic and
diluted net loss per
common share (1) ...... $ (0.43) $ (.92)
Shares used to compute
pro forma basic and
diluted net loss per
common share (1)....... 7,840,274 7,953,648
</TABLE>
26
<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 $83,579
Working capital
(deficit).............. 274 1,959 333 110 3,066 (3,605) 79,287
Total assets............ 425 2,748 1,470 1,145 5,504 1,759 84,651
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) 79,409
</TABLE>
- --------
(1) For an explanation of the computation of historical and pro forma net loss
per share, see Note 2 in our financial statements.
27
<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 began
transitioning our business model to online sales of third-party educational
products and commenced development of the SmarterKids.com website. In November
1998, we launched our website and greatly curtailed the sale of our proprietary
CD-ROM products, which we now offer on a limited basis principally through our
online channel.
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 as determined by historical trends of actual returns. 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. In the six months ended June 30, 1999,
we derived less than 1% of our revenues from outside of the United States.
Revenues are recognized upon shipment to the customer and are net of
promotional discounts, coupons and return allowances, which are determined by
historical trends of actual returns. Under our new business model, our actual
returns and therefore our allowance for returns are lower than the returns from
our CD-ROM business which utilized an indirect sales channel. Cost of revenues
consists primarily of the cost of products sold to customers and our shipping
costs. We anticipate that our gross margins will fluctuate from quarter to
quarter depending on consumer preferences for our mix of products. 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
28
<PAGE>
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 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, since September 1995, we have provided our employees and
certain companies with which we have a strategic relationship 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, generally over the next four years, 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.
While we select and own our inventory, take all orders and manage our
customer service, our inventory is held at a warehouse owned and maintained by
J.L. Hammett Co. J.L. Hammett Co. picks, packs and ships all orders, and J.L.
Hammett Co. maintains our warehouse management system. Our relationship with
J.L. Hammett Co., a national distributor of educational products, provides us
with industry and supplier relationships, favorable credit and price terms from
vendors, and the ability to scale our warehouse operations.
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
29
<PAGE>
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 the hire of 20 employees and related
expenses required to implement our new Internet business model.
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 the hire of nine employees 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 the
hire of seven employees and increased legal and accounting 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 $12,000 in
the six months ended June 30, 1998 and $1,185,000 in the six months ended June
30, 1999. We amortized $9,000 of deferred stock compensation as an expense in
the six months ended June 30, 1998 and $364,000 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 $10,000 and $216,000 as an expense in the six months ended June
30, 1998 and 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 on children's skills assessment. 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, beginning in
November 1998, for 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
30
<PAGE>
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 which commenced in
March 1998.
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 proprietary CD-ROM 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 of the
repositioning of our product line, which began in late 1997.
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, recorded deferred stock compensation of
$62,000 and amortized $4,000 of stock compensation as an expense in 1997.
During 1996, stock options were granted with exercise prices equal to the then
fair value of the common stock. Accordingly, no deferred stock compensation was
recorded during 1996. We recorded additional stock compensation of $2,000,
$11,000 and $106,000 as an expense in each of the years ended December 31,
1996, 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 equipment 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.
31
<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 53 115 384 196
------ ------ ------ ------- --------- ---------
Total operating
expenses............ 737 870 1,038 2,088 2,929 4,526
------ ------ ------ ------- --------- ---------
Loss from operations.... (389) (467) (594) (1,911) (2,904) (4,443)
Interest and other
income (expense), net.. (5) (10) 4 30 24 28
------ ------ ------ ------- --------- ---------
Net loss................ $ (394) $ (477) $ (590) $(1,881) $ (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 8.0 23.7 408.5 66.9
------ ------ ------ ------- --------- ---------
Total operating
expenses............ 142.0 137.5 156.6 430.5 3,115.9 1,544.7
------ ------ ------ ------- --------- ---------
Loss from operations.... (74.9) (73.8) (89.6) (394.0) (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)% (89.0)% (387.8)% (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 has been primarily for purchases of
fixed assets and was $40,000 in the six months ended June 30, 1999 as compared
to $13,000 in the six months ended June 30, 1998. The increase in cash used in
investing activities was primarily attributable to increased purchases of
equipment. 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.
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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 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. Although it has stated that
its systems and software used in our operations are year 2000 compliant, J.L.
Hammett Co., our fulfillment vendor, has not provided us with any written
assurances. All third parties whose systems are material to our operations have
posted their year 2000 compliance statements on their websites, where they have
given assurances that their systems are year 2000 compliant or
35
<PAGE>
that they will be year 2000 compliant by the end of the year. As part of our
continuing year 2000 preparation, we intend to pursue year 2000 related
corrections or updates offered by our vendors.
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 believe we have reviewed all relevant systems. 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. To date, we have spent approximately $41,000, and approximately 450
person-hours, on year 2000 issues. 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, J.L. Hammett Co. 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.
36
<PAGE>
BUSINESS
Overview
SmarterKids.com is a leading online retailer focused on children's
educational books, toys and games, and software. We offer a broad assortment of
carefully selected, fun and educational products, a trusted brand, competitive
prices and an easy-to-use online shopping environment. We provide educational
content to 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 staff of full-time
certified educators 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 2,400 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 websites offering children's products.
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 then
uses this profile to make product recommendations from our distinctive
assortment of products tailored to a child's individual developmental profile
and goals.
We launched our website in November 1998. In a survey of the top 40 Web
retailers, SmarterKids.com was the 10th most visited shopping website in
August, 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
37
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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 retail channels of
distribution, the Internet is dramatically affecting the way consumers and
businesses are buying and selling products and services. There were an
estimated 142 million Internet users worldwide at the end of 1998. This number
is anticipated to grow to over 500 million users by the end of 2003. It is also
estimated 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 larger product mix have been
limited in a number of ways because they:
. 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.
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:
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Broad Assortment of Carefully Selected and Reviewed Educational
Products. Our collection of competitively priced educational products includes
over 2,400 books, toys and games, and software titles from over 300 suppliers.
We continue to carefully select and add products to our assortment that meet
our high quality standards. Our staff selects only products that have
educational, developmental or learning value. In our KidsLab, children test and
review many of our current and prospective products. Once selected, our review
process then 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 websites that offer
children's products.
Compelling Educational Content and Contextual Merchandising. We believe that
SmarterKids.com is an authority on educational products. Each member of our
staff of full-time educators holds a degree in education, has experience in an
educational setting and has designed and implemented developmental and
educationally appropriate curriculum for children. Our staff of educators
develops our content, including educational articles, parenting advice and
product reviews, and we also license educational content from third parties.
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 online advice and information about specific products to help
parents and gift givers make appropriate selections. Our website also
integrates content with access to relevant products. 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. Our Teacher Talk Glossary helps parents understand commonly
used educational terms. Our SmarterTips 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. Our customer service center,
which is staffed with representatives trained to assist customers with product
selection, order processing and other questions, operates Monday through Friday
from 9:00 a.m. through 9:00 p.m. Eastern Standard Time and on Saturday from
9:00 a.m. through 5:00 p.m. Eastern Standard Time.
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 educational team believes
are appropriate for the individual child's unique needs and individual goals.
On
39
<PAGE>
subsequent visits, our website will recognize registered members and display
products and services tailored to a child's developmental profile and goals. 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 marketing relationships with
online media companies such as Yahoo! and Microsoft's Encarta, and affiliate
marketing relationships with LinkShare and GeoCities. In addition, we conduct
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. While we select and own our inventory, take all orders and manage
our customer service, all our inventory is held at a warehouse owned and
maintained by J.L. Hammett Co., and J.L. Hammett Co. picks, packs and ships all
orders, and maintains our warehouse management system.
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Shopping at SmarterKids.com
We have designed the SmarterKids.com website to make it easy and convenient
to use. Our website provides informative reviews of our products and other
useful educational 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,
each grade range is referred to as an "aisle" on our website. 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. We set our prices on parity with the average prices of
similar products offered by our online competitors. 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
. a CD-ROM-based skills test that parents can order from our website
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. 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.
We stock each item that we sell and are able to show the customer the
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 staff of full-time educators. 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 several direct links to our website, which draws parents eager to
support and encourage their children's learning. The links are promoted through
both a banner promotion and the NCS ReportCard service. The NCS ReportCard
service allows parents to enter the results of their children's state
standardized tests on WeHelpKids.com and receive personalized product
recommendations from our SmartPicks system based on those test results.
WeHelpKids has commenced this service as a pilot program for Michigan
standardized tests and intends to add tests and services for tests given in
other states. The agreement with NCS provides for a revenue sharing arrangement
and expires in March 2001 unless renewed.
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 includes a co-
branded store, which was launched in October 1999, content sharing and joint
marketing activities. Promotions are intended to encourage teachers to visit
and promote the co-branded store. We have agreed to various
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content sharing opportunities, including offering Lightspan content in our
ParentCenter and links to their learning activities from various locations on
our site, including from the MySmarterKids location of our site. Lightspan has
agreed to link to the co-branded store from specific learning activities on the
Lightspan network. The agreement with Lightspan provides for revenue sharing
and expires in December 2000 unless renewed.
J.L. Hammett Co. is a 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. While we select and own our inventory, take all orders
and manage our customer service, all our inventory is held at a warehouse owned
and maintained by J.L. Hammett Co., and J.L. Hammett Co. picks, packs and ships
all orders, and maintains our warehouse management system. 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.
Our Online Marketing efforts primarily consist of relationships with
companies who maintain websites which are important to our customer base. 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. These relationships generally include revenue and
content sharing arrangements. In these relationships we are usually the
preferred, if not exclusive, online retailer of children's educational books,
toys and games, and software. We also advertise on major banner networks such
as Burst, 24/7, Flycast and Adsmart.
Affiliates are websites that feature links to SmarterKids.com in return for
a commission based on net 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 who recruit affiliates, collect commissions from us and pay the
affiliate. We are currently the exclusive educational products reseller in
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 national distributor of educational products to schools,
is our provider of distribution services. Our relationship with J.L. Hammett
Co. 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
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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 own and select our own inventory, take all orders and manage our customer
service. All of our inventory resides at a warehouse owned and maintained by
J.L. Hammett Co. and J.L. Hammett Co. picks, packs and ships all orders, and
maintains the warehouse management system. In connection with the establishment
of our relationship with J.L. Hammett Co. we issued J.L. Hammett Co. warrants
to purchase 57,000 shares of common stock at a price of $1.33 per share in
September 1998, and an additional 108,000 shares of common stock at a price of
$1.33 per share in September 1999. Such warrants are immediately exercisable.
Customer Service
We seek to provide a customer experience that exceeds customer expectations.
Our goals include:
. prompt 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. Our customer service center
operates Monday through Friday from 9:00 a.m. to 9:00 p.m. Eastern Standard
Time and on Saturday from 9:00 a.m. to 5:00 p.m. Eastern Standard Time.
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.
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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
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.
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.
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.
The Children's Online Privacy Protection Act of 1999 allows the Federal
Trade Commission to adopt regulations prohibiting unfair and deceptive acts and
practices in connection with the collection and use of personal information
from and about children on the Internet. This act could severely limit
SmarterKids.com's ability to collect information necessary to build profiles
about a child resulting in a material adverse effect on our business. The Child
Online Protection Act of 1998 prohibits harmful commercial communications over
the World Wide Web that are available to any person under 17 years old. This
act has been subject to a temporary restraining order since November 19, 1998.
If this injunction is removed, providing information to minors over the
Internet would be greatly limited. The Omnibus Appropriations Act of 1998
places a moratorium on taxes levied on Internet access from October 1, 1998 to
October 21, 2001. However, states may place taxes on Internet access if taxes
had already been generally imposed and actually enforced prior to October 1,
1998. States which can show they enforced Internet access taxes prior to
October 1, 1998 and states after October 21, 2001 may be able to levy taxes on
Internet access resulting in increased cost to access the Internet, resulting
in a material adverse effect on our business.
Employees
As of September 30, 1999, SmarterKids.com had 73 full-time employees,
including 24 in marketing and sales, 11 in customer service, 7 in editorial and
education review, 18 in development and 13 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.
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Facilities
SmarterKids.com is headquartered in Needham, Massachusetts, where we lease
an office with approximately 12,700 square feet under leases expiring in
October 2000. We have executed an additional lease for 39,152 square feet in
Needham, Massachusetts for our new principal offices under a lease expiring in
October 2004. We anticipate that this space will be available for occupancy by
the end of 1999. We believe that these facilities are adequate to meet our
current requirements and that suitable additional or substitute space will be
available as needed.
Legal Proceedings
On July 15, 1999, Leslie S. Minkus filed a patent infringement lawsuit
against us 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). Our SmartPicks technology uses a child's
development profile provided by parents on the MySmarterKids area of our
website to make targeted product recommendations based on an individual child's
needs and goals. 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 December 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 of Education
Pauline O'Keeffe........ 32 Director of Public Relations
Richard Roseman......... 31 Director of Customer Acquisition and Retention
Lisa Tanzer Lewis....... 32 Director of 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 March 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 March 1999.
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 of 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. Ms. Graham has a Masters in Education
from Harvard University, which she attended from September 1994 through June
1995. From Spring 1997 through July 1998, Ms. Graham was self-employed as a
curriculum author and educational researcher.
Pauline O'Keeffe has served as SmarterKids.com's Director of 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 and most
recently as Account Director for The Weber Group, a public relations firm, from
January 1991 to July 1999.
Richard Roseman has served as SmarterKids.com's Director of 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 of 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, most recently as 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
as a nominee of NorthBridge Venture Partners III, L.P. 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 as a nominee of Commonwealth Capital Ventures II, L.P. 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 April
1995.
Brian Hickey has been a director of SmarterKids.com since July 1999 as a
nominee of Brighter Vision Holdings, Inc. 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 December 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 December 1994.
Election of Officers and Directors
Our Board of Directors consists of six members. Currently, each director is
elected pursuant to our Amended and Restated Stochkholders" Voting Agreement
among SmarterKids.com and our 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 750,000 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.
51
<PAGE>
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 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. We are required by the rules and regulations of The
Nasdaq Stock Market to maintain an audit committee, a majority of whose members
must be independent directors. Messrs Hickey and Fitzgerald are considered
independent directors under such rules.
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 our 1999 Stock Option and
Incentive Plan Non-Employee directors are eligible to also participate in our
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 45,000 shares of common stock at
an exercise price of $0.13. In January 1999, Mr. Kolowich was granted an option
to purchase 75,000 shares of common stock at an exercise price of $0.13 per
share and an option to purchase 75,000 shares of common stock at an exercise
price of $1.33 per share. In July 1999, Mr. Hickey was granted an option to
purchase 45,000 shares of common stock at an exercise price of $4.18.
Compensation Committee Interlocks and Insider Participation
The current members of our Compensation Committee are Messrs. D'Amore and
Kolowich. 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
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 $121,000.
All other compensation paid to the executive officers named below for the
fiscal year ended December 31, 1998 is comprised of insurance premiums paid by
us for life insurance policies of each executive officer. The five officers
listed in the chart below are sometimes referred to as the named executive
officers.
52
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation
-------------------- ------------
Securities All
Underlying Other
Name and Principal Positions Salary ($) Bonus ($) Options (#) Compensation
- ---------------------------- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C>
David Blohm..................... $120,751 $ -- 270,000 $696
President and Chief Executive
Officer
Jeff Pucci...................... 118,643 -- 270,000 696
Co-Founder and Chairman of the
Board
Richard Viard................... 91,892 -- 270,000 696
Co-Founder and Senior Vice
President,
Development
Albert Noyes.................... 105,794 15,073 150,000 696
Senior Vice President,
Marketing and Sales
Richard Secor................... 25,142 -- 75,000 116
Vice President, MIS
and Chief Information Officer
</TABLE>
Option Grants in Last Fiscal Year
The following table provides certain information regarding stock options
granted to the named executive officers during the fiscal year ended December
31, 1998. We granted to our employees options to purchase 1,233,750 shares of
common stock during the 1998 fiscal year. All options were granted with an
exercise price at least equal to the fair market value of the common stock on
the date of the grant, as determined by the Board of Directors. Options may
terminate before their expiration date if the optionee is no longer an employee
or consultant of the company. Please note that for the purposes of calculating
the potential realizable value, we have calculated the gains or "option
spreads" that would exist for the options assuming an annual compound stock
appreciation of 5% and 10% from the date the option was granted over the full
option term. These assumed annual compound rates are mandated by the SEC and do
not represent our estimate or projection of future stock prices.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term ($)
------------------------------------------------ -----------------
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............. 270,000 21.88% $.13 11/6/08 $ 22,640 $ 57,375
Jeff Pucci.............. 270,000 21.88 .15 11/6/03 10,941 24,176
Richard Viard........... 270,000 21.88 .15 11/6/03 10,941 24,176
Albert Noyes............ 150,000 12.15 .13 11/6/08 12,578 31,875
Richard Secor........... 75,000 6.08 .13 10/19/08 6,289 15,937
</TABLE>
53
<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> <C>
David Blohm............. -- -- 300,000 / 471,000 4,193,100 / 6,532,770
Jeff Pucci.............. -- -- -- / 270,000 -- / 3,739,500
Richard Viard........... -- -- -- / 270,000 -- / 3,739,500
Albert Noyes............ 42,000 -- 31,500 / 352,500 437,307 / 4,882,240
Richard Secor........... -- -- -- / 75,000 -- / 1,040,500
</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 270,000 shares of our common stock on
November 6, 1998 with an exercise price of $.15 per share. The shares vest over
four years with 67,500 shares vesting on November 6, 1999 and 16,875 shares
vesting in equal installments at the end of each calendar quarter beginning
December 31, 1999. These employment agreements expire on November 6, 2000.
Upon the consummation of this offering the following vested options granted
to the following individuals will be exercisable and not subject to a right of
repurchase by SmarterKids.com: David Blohm 636,000 shares, Michael Kolowich
75,000 shares, Albert Noyes 258,000 shares, Jeff Pucci 135,000 shares, Richard
Secor 18,750, and Richard Viard 135,000 shares. 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
3,822,000. 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.
54
<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
2,952,591 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
2,000,000 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 500,000 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. Options to purchase 800,000 shares of common stock 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 200,000 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.
55
<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 45,000 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 2,000 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 399,999
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 1,000 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.
56
<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.
57
<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 675,000 additional shares from us and two selling stockholders.
58
<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)......................... 771,000 5.0% 3.9%
Jeff Pucci(2).......................... 771,000 5.1 4.0
Richard Viard(3)....................... 769,500 5.1 3.9
Albert Noyes(4)........................ 426,000 2.8 2.2
Richard Secor(5)....................... 18,750 * *
Richard D'Amore(6)..................... 2,967,817 20.1 15.4
Michael Fitzgerald(7).................. 1,858,908 12.6 9.7
Michael Kolowich(8).................... 150,000 1.0 *
Brian Hickey(9)........................ -- -- --
225 Duncan Mill Road
Don Mills, Ontario, Canada M3B 3K9
North Bridge Venture Partners III,
L.P.(6)............................... 2,967,817 20.1 15.4
950 Winter Street, Suite 4600
Waltham, MA 02451
Commonwealth Capital Ventures II,
L.P.(7)............................... 1,858,908 12.6 9.7
20 William Street
Wellesley, MA 02181
Brighter Vision Holdings, Inc.......... 1,674,907 11.4 8.7
c/o Torstar Corporation
One Yonge Street
Toronto, Canada M5E IP9
Intel Corporation...................... 1,196,362 8.1 6.2
2200 Mission College Blvd., Mailstop
RN6-46
Santa Clara, CA 95952
Van Wagoner Capital Management......... 957,090 6.5 5.0
245 California Street, Suite 2450
San Francisco, CA 94104
WMUR TV, Inc.(10)...................... 951,000 6.5 4.9
100 Commercial Street
Manchester, NH 02105
All executive officers and directors as
a group (14 persons)(11).............. 47.3 37.2
</TABLE>
- --------
* Less than 1%
(1) Consists of 771,000 shares issuable upon the exercise of options
immediately exercisable. As of sixty days after July 31, 1999, 370,500 of
these shares if exercised will be subject to a right of repurchase by
SmarterKids.com. This right of repurchase will terminate for 168,000 shares
upon the closing of this offering.
(2) Includes 270,000 shares issuable upon the exercise of options immediately
exercisable. As of sixty days after July 31, 1999, all of these shares if
exercised will be subject to a right of repurchase by SmarterKids.com. This
right of repurchase will terminate for 67,500 shares upon the closing of
this offering.
(3) Includes 270,000 shares issuable upon the exercise of options immediately
exercisable. As of sixty days after July 31, 1999, all of these shares if
exercised are subject to a right of repurchase by SmarterKids.com. This
right of repurchase will terminate for 67,500 shares upon the closing of
this offering.
(4) Includes 339,000 shares issuable upon the exercise of options immediately
exercisable. As of sixty days after July 31, 1999, 285,000 of these shares
if exercised are subject to a right of repurchase by SmarterKids.com. This
right of repurchase will terminate for 172,500 shares upon the closing of
this offering.
(5) Consists of 18,750 shares which will become immediately exercisable upon
the closing of this offering.
59
<PAGE>
(6) Consists of 2,967,817 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.
(7) Consists of 1,771,500 shares held by Commonwealth Capital Ventures II, L.P.
and 87,408 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.
(8) Includes 75,000 shares which will become exercisable upon the closing of
the offering.
(9) Excludes 1,674,907 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.
(10) Excludes 579,000 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.
(11) See footnotes (1) through (9) above. Also includes an aggregate of 114,375
shares issuable upon the exercise of options immediately exercisable or
upon the closing of the offering.
60
<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 19,700,256 outstanding shares
of common stock assuming the exercise of warrants to purchase 328,091 shares of
common stock which terminate upon the closing of the offering. Of these shares,
the 4,500,000 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 15,200,256 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.
The underwriters have required that our directors, officers and
securityholders listed under "Principal Stockholders" 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
10,970,017 shares will be eligible for sale, including 2,233,390 shares
subject to outstanding vested options and warrants.
. At various times thereafter upon the expiration of applicable holding
periods, 9,470,546 shares will become eligible for sale, including
3,069,908 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 197,003 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.
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<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.
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<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 1,500 shares of common stock upon
the closing of this offering. In this financing, 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. which beneficially owns 20.1% of our common stock. Michael T. Fitzgerald,
a member of the Board of Directors, is general partner of the general partner
of Commonwealth Capital Ventures II, L.P. which beneficially owns 12.6% of our
Common Stock. Pursuant to our Amended and Restated Stockholders' Voting
Agreement, NorthBridge and Commonwealth Capital each have the right to appoint
a director to our Board of Directors. These rights will expire upon the
consummation of this offering.
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 1.5 shares 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.
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<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 1,990,757 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 4,500,000 shares of
common stock offered by us in this offering and the conversion of the
outstanding shares of preferred stock, there will be 19,232,635 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
3,513,182 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 12,732,887 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.
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<PAGE>
Warrants
As of September 7, 1999, there were outstanding warrants to purchase:
. 165,000 shares of common stock issued to J.L. Hammett Co. at an exercise
price of $1.33. These warrants expire on September 29, 2003.
. 121,050 shares of common stock issued to Edu Ventures, Inc. at an
exercise price of $.13 and 37,500 shares of common stock issued to Edu
Ventures, Inc. at an exercise price of $1.33. These warrants expire
immediately prior to this offering.
. 112,500 shares of common stock issued to National Computer Systems, Inc.
at an exercise price of $1.33 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 7,500 shares of common stock at an exercise
price of $1.33 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.
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 13,820,386 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 7,500 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.
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
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<PAGE>
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.
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<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 ............................................................. 4,500,000
=========
</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 fee to be paid to the Underwriters by us is equal to the public company
offering price per share of the common stock to be sold in this offering less
the amount paid by us to the underwriters per share of common stock. 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. The underwriting discount was determined based on an arms' length
negotiation between the representative of the underwriters and SmarterKids.com.
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.
E*OFFERING Corp. is the exclusive Internet underwriter for this offering.
E*OFFERING has agreed to allocate a portion of the shares that it purchases to
E*TRADE Securities, Inc. E*OFFERING and E*TRADE will allocate shares to their
respective customers in accordance with usual and customary industry practices.
A prospectus in electronic format, from which you can link to a "Meet the
Management"
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presentation, is being made available on the website maintained by E*OFFERING
Corp., www.eoffering.com. Other than the prospectus in electronic format, the
information that is identified as being a part of the prospectus and any other
information that references SmartKids.com, 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 two stockholders, who
together had 25,500 shares, 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 675,000 additional shares of common stock at the
initial public offering price, less 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 225,000 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
persons related to, or affiliated with, the foregoing 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
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<PAGE>
. 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
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 and our
management. 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.
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<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.
Upon effectiveness of the Registration Statement, we will become subject to the
reporting requirements of the Exchange Act of 1934, as amended. As a reporting
company, we will be filing quarterly, annual and other periodic and current
reports and proxy statements with the SEC. 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.
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<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.
The 3-for-2 stock split approved on September 7, 1999 described in Note 13
to the financial statements has not been consummated at October 19, 1999. When
it has been consummated, we will be in a position to furnish the following
report:
"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;
1,502,750, 1,628,510, 1,755,197 and
8,061,947 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............. 15 16 18 81
Additional paid-in capial.............. 881 2,530 4,036 14,260
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.. $ (1.10) $ (0.72) $ (2.34) $ (0.62) $ (4.43)
Weighted average shares
used in computing basic
and diluted net loss
per common share....... 1,500,606 1,502,148 1,533,524 1,507,607 1,646,898
Unaudited pro forma
basic and diluted net
loss per common share.. $ (0.43) $ (0.92)
Weighted average shares
used in computing
unaudited pro forma
basic and diluted net
loss per common share.. 7,840,274 7,953,648
</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................... 1,500,000 $15 $ 788 $ -- $ (1,947) $ (1,144)
Issuance of common
stock pursuant to
exercise of stock
options............... 1,875 -- --
Issuance of stock
options to
consultants........... 2 2
Net loss............... (1,649) (1,649)
--------- --- ------ ------- -------- --------
Balance at December 31,
1996................... 1,501,875 15 790 -- (3,596) (2,791)
Issuance of common
stock pursuant to
exercise of stock
options............... 875 -- --
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................... 1,502,750 15 881 (58) (4,677) (3,839)
Issuance of common
stock pursuant to
exercise of stock
options............... 125,760 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................... 1,628,510 16 2,530 (1,435) (8,273) (7,162)
Issuance of common
stock pursuant to
exercise of options
(unaudited)........... 126,887 2 105 107
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)............ 1,755,397 $18 $4,036 $(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 1,223,100, 1,547,351 and 2,775,141
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 6,306,750 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 2,631,591 and 3,129,591 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 1,500 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 375,000 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 66,000 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 55,050 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 1,500 shares of common stock, subject to
certain anti-dilution adjustments.
The Series A and Series B preferred is automatically converted into 1,500
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 10,209,040 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 66,000 and 55,050
shares, respectively, of the Company's common stock with an exercise price of
$0.13 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 7,500 shares of
common stock at an exercise price of $1.33 per share.
F-13
<PAGE>
SMARTERKIDS.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
In September 1998, in connection with a warehousing and fulfillment services
agreement, the Company issued warrants to its distribution partner to purchase
57,000 shares of the Company's common stock with an exercise price of $1.33 per
share. Of these warrants 15,000 vested immediately. An additional 42,000
warrants vest in increments of 10,500 on each of March 1, 1999, October 1,
1999, March 1, 2000 and October 1, 2000. 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 $8,000 in the six months ended June
30, 1999 (unaudited). The remaining deferred stock compensation is to be
amortized over the period that the services are provided.
In December 1998, in connection with a management consulting services
agreement, the Company granted warrants to a consultant to purchase 22,500
shares of the Company's common stock with an exercise price of $1.33 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, in connection with a promotional services
program, the Company issued warrants to an affiliated party to purchase 112,500
shares of the Company's common stock with an exercise price of $1.33 per share.
These warrants vest upon the attainment of certain performance targets and
expire in five years. The final value of these warrants will be determined upon
the attainment of these performance goals based on their then-current fair
value. At June 30, 1999, the fair value of this grant was $316,000. Related
compensation expense of $216,000 was recorded in the six months ended June 30,
1999. The remaining deferred stock compensation is to be recognized over the
period that the services are provided.
(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. These
warrants will convert into 169,541 shares of the Company's common stock. 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 $0.28)... 66,000 $0.13
Exercised........................................ -- --
Forfeited........................................ -- --
-------
Outstanding--December 31, 1997..................... 66,000 0.13
Granted (weighted average fair value of $0.97)... 142,050 0.87
Exercised........................................ -- --
Forfeited........................................ -- --
-------
Outstanding--December 31, 1998..................... 208,050 $0.63
=======
</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
3,822,000. 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 189,000,
30,000 and 5,250 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.......................... 986,100 $0.43
Granted (weighted average fair value of $0.02)........ 464,250 0.09
Exercised............................................. (1,875) 0.03
Forfeited............................................. (225,375) 0.06
---------
Outstanding--December 31, 1996.......................... 1,223,100 0.37
Granted (weighted average fair value of $0.15)........ 562,500 0.13
Exercised............................................. (874) 0.10
Forfeited............................................. (303,375) 1.35
---------
Outstanding--December 31, 1997.......................... 1,481,351 0.07
Granted (weighted average fair value of $1.22)........ 1,238,500 0.14
Exercised............................................. (125,760) 0.08
Forfeited............................................. (26,750) 0.13
---------
Outstanding--December 31, 1998.......................... 2,567,091 $0.07
=========
</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>
$0.01--$0.03 662,340 6.7 657,278
$0.07--$0.13 1,358,001 8.8 285,048
$0.15--$0.33 546,750 9.9 6,750
--------- -------
2,567,091 949,076
========= =======
</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 201,000 shares of common stock with an exercise price of $2.00 per
share were cancelled and reissued at a price of $0.13 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.................................... $ (1.10) $ (0.72) $ (2.34)
Pro forma...................................... (1.10) (0.72) (2.36)
</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 411,000 and 75,000 shares of common stock were granted to employees
with exercise prices of $0.13 and $1.33 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
44,250 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 1,014,887 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 2,000,000 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 200,000 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 45,000 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 2,000 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 399,999 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.
Stock Split
On September 7, 1999, the Board of Directors authorized a 3-for-2 stock
split on the Company's common stock, to be effective upon the closing of the
Company's initial public offering of common stock. As a result, all common
stock share data included in the accompanying financial statements and notes
have been retroactively restated for this split.
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 the Underwriting Section of the prospectus, an embedded
hyperlink will provide exclusive access to the "Meet the Management"
Presentation. This presentation highlights selected information contained
elsewhere in this prospectus. This presentation 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 notes to those financial statements, before making an
investment decision.
Visual 1: Disclaimer
Imagery: Surrounding border, company logo and watermark of children and various
games and toys in the background.
Visual text: Text on the bottom: Open Minds, Open Worlds. Text on the slide:
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: Surrounding border, company logo and watermark of children and various
games and toys in the background.
Visual Text: Company logo, text on the bottom: Open Minds, Open Worlds.
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 of Marketing and Sales, and
Robert Cahill, our Vice President of 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 offer a broad assortment of
carefully selected, fun and educational products, a trusted brand, competitive
prices and an easy-to-use online shopping environment. We provide educational
content to 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, company logo, and photo of children.
Visual Text: Company logo, slide title, text on the bottom: Open Minds, Open
Worlds, 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-1
<PAGE>
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.
Visual 4: Market Landscape (con't)
Imagery: Surrounding border, and company logo.
Visual Text: Text on the bottom: Open Minds, Open Worlds. Text on the slide:
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)
Imagery: Surrounding border, and company logo.
Visual Text: Text on the bottom: Open Minds, Open Worlds. Text on the slide:
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:
. 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:
. 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>
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 selected and reviewed educational
products. Our collection of competitively priced educational products includes
over 2,400 books, toys and games, and software titles from over 300 suppliers.
We continue to carefully select and add products to our assortment that meet
our high quality standards. Our staff selects only products that have
educational, developmental or learning value. 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 websites that offer children's products.
We have compelling educational content and contextual merchandising. We believe
that SmarterKids.com is an authority on educational products. Our staff of
educators develops our content, including educational articles, parenting
advice and product reviews, and we also license educational content from third
parties. 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 online advice and information about specific products to
help parents and gift givers make appropriate selections. Our website also
integrates content with access to relevant products. 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. Our Teacher Talk Glossary helps parents understand commonly
used educational terms. Our SmarterTips 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.
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>
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 team believes are
appropriate for the individual child's unique needs and individual goals. On
subsequent visits, our website will recognize registered members and display
products and services tailored to a child's developmental profile and goals. 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: Text on the bottom: Open Minds, Open Worlds. Text on the slide:
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
. 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 several direct links to our website, which draws parents eager to
support and encourage their children's learning.
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 includes a co-branded
store which was launched in October 1999, content sharing and joint marketing
activities.
A-4
<PAGE>
J.L. Hammett Co. is a 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.
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.
Our Online Marketing efforts primarily consist of relationships with
companies who maintain websites which are important to our customer base. 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 based on net 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 who recruit affiliates, collect commissions from us and pay the
affiliate. We are currently the exclusive educational products reseller in
GeoCities' Pages That Pay affiliate program.
Offline Marketing is an increasingly important component of
SmarterKids.com's customer acquisition and branding efforts.
E-Mail is the primary vehicle by which we communicate with our customers and
registered users.
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: Slide title, text on the bottom: Open Minds, Open Worlds. Text on
the slide: 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" and "Risk Factors"): The
market for children's educational products online 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.
A-5
<PAGE>
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
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: Slide title, text on the bottom: Open Minds, Open Worlds.
"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 the audited financial statements and related
notes included elsewhere in the prospectus.
Since inception, we have incurred significant losses. 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.
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.
A-6
<PAGE>
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: Surrounding border, company logo and watermark of children and various
games and toys in the background.
Visual Text: Company logo, text on the bottom: Open Minds, Open Worlds.
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-7
<PAGE>
EDUCATIONAL PRODUCTS MEET E-COMMERCE
At SmarterKids.com, we sell a wide range of educational books, software, games
and toys 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]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4,500,000 Shares
(LOGO)
Common Stock
------------
PROSPECTUS
------------
Hambrecht & Quist
U.S. Bancorp Piper Jaffray
E*OFFERING
------------
, 1999
------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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............................................ $ 21,580
NASD filing fee................................................. 8,263
Nasdaq National Market listing fee.............................. 95,000
Printing and engraving expenses................................. 150,000
Legal fees and expenses......................................... 350,000
Accounting fees and expenses.................................... 350,000
Transfer agent and registrar fees and expenses.................. 5,000
Miscellaneous................................................... 18,157
--------
Total......................................................... $998,000
========
</TABLE>
--------
* 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.
On September 7, 1999 we issued an aggregate of 25,500 shares of our common
stock to two related companies in exchange for the transfer of a registered
trademark similar to SmarterKids.
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 66,000 and 55,050 shares of common stock,
respectively, each at an exercise price of $0.13. On December 31, 1998 and
September 1, 1999, we issued warrants to Edu Ventures, Inc. to purchase 22,500
and 15,000 shares of common stock, respectively, each at an exercise price of
$1.33. These warrants expire immediately prior to the offering.
On March 8, 1999, we issued a warrant to National Computer Systems, Inc. to
purchase 112,500 shares of common stock at an exercise price of $1.33. 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
57,000 shares of common stock at an exercise price of $1.33 that will expire on
September 29, 2003. On September 7, 1999, we issued an additional 108,000
shares of common stock at an exercise price of $1.33 that will expire on
September 7, 2004
In connection with its services rendered to us in our private placement in
July 1999, 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 is convertible into 169,541 shares of Company's common stock and
expires immediately prior to this offering.
(c) Grants and Exercises of Stock Options.
Since June 30, 1996, we have granted stock options to purchase 2,462,400
shares of common stock with exercise prices ranging from $0.13 to $4.18 per
share, to employees, directors and consultants pursuant to our 1995 Stock Plan.
Of these options, 198,999 have been exercised for a weighted average exercise
price of $0.59 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
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
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, Inc., certain stockholders
of SmarterKids.com, Inc. and certain senior management of
SmarterKids.com, Inc.
10.6++ Amended and Restated Stockholders Voting Agreement dated as of
July 12, 1999 among SmarterKids.com, Inc., certain stockholders of
SmarterKids.com, Inc. and certain senior management of
SmarterKids.com, Inc.
10.7. Lease Agreements dated as of September 1, 1998 and April 16, 1999
between SmarterKids.com, Inc. and McFarland FLP
10.8.+ Agreement for Product Distribution Services dated as of October 8,
1999 between SmarterKids.com, Inc. and J.L. Hammett Co.
10.9++ Letter Agreement dated November 6, 1998 between SmarterKids.com,
Inc. and Jeff Pucci
10.10++ Letter Agreement dated November 6, 1998 between SmarterKids.com,
Inc. and Richard Viard
10.11. Office Lease dated September 8, 1999 by and between BHX, LLC, as
Trustee of Crawford Realty Trust and SmarterKids.com, Inc.
10.12*+ Business Agreement dated as of March 9, 1999 between National
Computer Systems and SmarterKids.com, Inc.
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
27.1 Financial Data Schedule (This exhibit has been omitted because the
information is shown in the financial statements or notes
thereto.)
</TABLE>
- --------
* To be filed by amendment
+ Confidential materials to be omitted and filed separately with the SEC
++ Previously filed
. Filed herewith
(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.
II-3
<PAGE>
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-4
<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
October 19, 1999.
SmarterKids.com, Inc.
By:
/s/ Robert Cahill
----------------------------------
Robert Cahill
Vice President, Finance
SIGNATURES
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>
* President, Chief Executive October 19, 1999
______________________________________ Officer and Director
David Blohm (principal executive
officer)
/s/ Robert Cahill Vice President, Finance October 19, 1999
______________________________________ (principal financial and
Robert Cahill accounting officer)
* Co-Founder, Chairman and October 19, 1999
______________________________________ Director
Jeff Pucci
* Director October 19, 1999
______________________________________
Richard D'Amore
* Director October 19, 1999
______________________________________
Michael Fitzgerald
* Director October 19, 1999
______________________________________
Michael Kolowich
* Director October 19, 1999
______________________________________
Brian Hickey
</TABLE>
/s/ Robert Cahill
*By:
------------------------------
Robert Cahill
Attorney-in-Fact
II-5
<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, Inc., certain stockholders
of SmarterKids.com, Inc. and certain senior management of
SmarterKids.com, Inc.
10.6++ Amended and Restated Stockholders Voting Agreement dated as of
July 12, 1999 among SmarterKids.com, Inc., certain stockholders of
SmarterKids.com, Inc. and certain senior management of
SmarterKids.com, Inc.
10.7. Lease Agreements dated as of September 1, 1998 and April 16, 1999
between SmarterKids.com, Inc. and McFarland FLP
10.8.+ Agreement for Product Distribution Services dated as of October 8,
1999 between SmarterKids.com, Inc. and J.L. Hammett Co.
10.9++ Letter Agreement dated November 6, 1998 between SmarterKids.com,
Inc. and Jeff Pucci
10.10++ Letter Agreement dated November 6, 1998 between SmarterKids.com,
Inc. and Richard Viard
10.11. Office Lease dated September 8, 1999 by and between BHX, LLC, as
Trustee of Crawford Realty Trust and SmarterKids.com, Inc.
10.12*+ Business Agreement dated as of March 9, 1999 between National
Computer Systems and SmarterKids.com, Inc.
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
27.1 Financial Data Schedule (This exhibit has been omitted because the
information is shown in the financial statements or notes
thereto.)
</TABLE>
- --------
* To be filed by amendment
+ Confidential materials to be omitted and filed separately with the SEC
++ Previously filed
. Filed herewith
<PAGE>
EXHIBIT 3.1
-----------
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, Jr.
- -------------------------------
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 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 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 be 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 31/st/ 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 1/st/
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 (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 is 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
<PAGE>
FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is (i) 10,000,000 shares of Common
Stock, $.01 par value per share ("Common Stock") and (ii) 4,205 shares of
Preferred Stock, $.01 par value per share ("Preferred Stock").
The following is a statement of the designations and the powers, privileges
and rights, and the qualifications, limitations or restrictions thereof in
respect of each class of capital stock of the Corporation.
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.
A. 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") and Three Thousand Five
Hundred and 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"), with the following rights, preferences,
powers, privileges and restrictions, qualifications and limitations. The Series
A Preferred Stock and the Series B Preferred Stock are collectively referred to
herein as the "Series 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 until the holders of the
Series B Preferred Stock then outstanding shall have first received a dividend
or distribution on each outstanding 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 the
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.
(c) Any and all accrued but unpaid dividends or other distributions
with respect to the Series A Preferred Stock and/or the Series B Preferred Stock
which accrued prior to the filing of this Certificate of Amendment are hereby
waived and 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
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 any other class or series of stock ranking on liquidation junior to the
Series B Preferred Stock by reason of their ownership thereof, an amount equal
to the greater of (i) $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 (ii) such amount per share as would have been payable had each such
share (and each share of Series A 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 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 Preferred Stock the full
amount to which they shall be entitled, the holders of shares of Series B
Preferred Stock and any class or series of stock ranking on liquidation on a
parity with the Series B Preferred Stock shall share ratably in any distribution
of the remaining assets and funds of the Corporation in
<PAGE>
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 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 thereon, or (ii) such amount per share as would
have been payable had each such share (and each share of 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 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 if 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 (except one in which the
holders of capital stock of the Corporation immediately prior to such merger or
consolidation 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 a liquidation of the
Corporation for purposes of this Section 2, and the agreement or plan of merger
or consolidation with respect to such merger, consolidation or sale shall
provide that the consideration payable to the stockholders of the Corporation
(in the case of a merger or consolidation), or consideration payable to the
Corporation, together with all other available assets of the Corporation (in the
case of an
<PAGE>
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 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 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 the shares of Series B Preferred Stock,
exclusively and as a separate class, shall be entitled to elect two directors of
the Corporation, and the holders of record of the shares of Common Stock and of
any other class or series of voting stock (including the Series Preferred
Stock), exclusively and as a separate class, 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 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. 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). 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).
(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 as to the right to receive either dividends or amounts
distributable upon liquidation, dissolution or winding up of the Corporation
shall be
<PAGE>
deemed to affect adversely the Series B 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 Section 242(b)(2) of the General
Corporation Law of Delaware.
(d) In addition to any other rights provided by law, so long as at
least 1,375 shares of Series B Preferred Stock (subject to appropriate
adjustment in the event of any dividend, stock split, combination or similar
recapitalization affecting such shares shall be outstanding, the Corporation
shall not, without first obtaining the affirmative vote or written consent of
the holders of not less than 60% of the then outstanding shares of Series B
Preferred Stock:
(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; or
(iii) dissolve, liquidate or wind up it affairs.
4. Optional 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 the 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
and (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. The
"Series A Conversion Price" shall initially be $4.732 and the "Series B
Conversion Price" shall initially be $2.00. Such initial Series A Conversion
Price and Series B Conversion Price, and the rate at which shares of Series A
Preferred Stock and Series B 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
Preferred Stock pursuant to Section 6 hereof, the Conversion Rights of the
shares of Series B 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
<PAGE>
due, in which case the Conversion Rights for such shares of Series B 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 or Series B 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 the 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
certificates 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 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 or Series B Conversion
Price below the then par value of the shares of Common Stock issuable upon
conversion of the Series A Preferred Stock or Series B Preferred Stock,
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 or Series B Conversion Price, as the case may
be.
<PAGE>
(iii) Upon any such conversion, no adjustment to the Series A
Conversion Price or Series B 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 for 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 B Original Issue Date" shall mean October 23,
----------------------------
1998.
(C) "Convertible Securities" shall mean any evidences of
----------------------
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 B Original Issue Date,
other than:
(I) shares of Common Stock issued or issuable
upon conversion of any Convertible
Securities or exercise of
<PAGE>
any warrants outstanding on the
Series B Original Issue Date;
(II) shares of Common Stock issued or issuable as a
dividend or distribution on Series B 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; or
(IV) up to 2,871,100 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);
(V) 250,000 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 95,000 shares, or
shares of Common Stock issuable upon exercise of
such warrants, issued or issuable to
EduVentures; and
(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
<PAGE>
that Contract for Services and Term Sheet dated
September 29, 1998.
(ii) No Adjustment of Series B Conversion Price. No adjustment
------------------------------------------
in the number of shares of Common Stock into which the Series B Preferred Stock
is convertible shall be made, by adjustment in the applicable Series B
Conversion Price thereof: (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 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 Preferred Stock
agreeing 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 B
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
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 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
shall be made upon the subsequent issue 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 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
<PAGE>
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 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 anti-dilution provisions thereof, the Series B Conversion
Price then in effect shall forthwith be readjusted to such Series B Conversion
Price 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 to an
amount which exceeds the lower of (i) the Series B Conversion Price on the
original adjustment date, or (ii) the Series B Conversion Price 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 B Original Issue Date,
amends the terms of any such Options or Convertible Securities (whether such
Options or Convertible Securities were outstanding on the Series B Original
Issue Date or were issued after the Series B Original Issue Date), then such
Options or Convertible Securities, as so amended, shall be deemed to have been
issued after the Series B Original Issue Date and the provisions of this
Subsection 4(d)(iii) shall apply.
(iv) Adjustment of Series B Conversion Price Upon Issuance of
--------------------------------------------------------
Additional Shares of Common Stock.
- ---------------------------------
In the event the Corporation shall at any time after the Series B 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 in effect immediately prior to such issue,
then and in such event, such Series B Conversion Price shall be reduced,
concurrently with such issue, to a price (calculated to the nearest cent)
determined by multiplying such Series B Conversion Price 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; 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
- -------- ----
<PAGE>
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.
(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 (I) 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
<PAGE>
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 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) Adjustment for Stock Splits and Combinations. If the Corporation
--------------------------------------------
shall at any time or from time to time after the Series B Original Issue Date
effect a subdivision of the outstanding Common Stock, the Series A Conversion
Price and Series B 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 B Original Issue Date combine the
outstanding shares of Common Stock, the Series A Conversion Price and Series B
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 B 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 and Series B 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
close of 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;
<PAGE>
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 and Series B Conversion Price shall each
be recomputed accordingly as of the close of business on such record date and
thereafter the Series A Conversion Price and Series B 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 A Preferred Stock or Series B
Preferred Stock, respectively, 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
A Preferred Stock or Series B Preferred Stock, respectively, had been converted
into Common Stock on the date of such event or (ii) a dividend or other
distribution of shares of Series A Preferred Stock or Series B Preferred Stock,
respectively, 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 B 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
A Preferred Stock and Series B 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 A Preferred Stock and Series B Preferred Stock been
converted into Common Stock on the date of such event and had they 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 A Preferred Stock and Series B Preferred Stock; and provided further,
however, that no such adjustment shall be made if the holders of Series A
Preferred Stock and Series B 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
A Preferred Stock and Series B 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 A Preferred Stock
and Series B Preferred Stock shall be changed into the same or a 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 A Preferred Stock and Series
B Preferred Stock shall have the right thereafter to convert such share into the
kind and amount of shares of stock and other securities and property receivable,
<PAGE>
upon such reorganization, reclassification, or other change, by holders of the
number of shares of Common Stock into which such shares of Series A Preferred
Stock and Series B 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 A Preferred Stock and Series B 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 A Preferred Stock
and Series B 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 A Preferred Stock and Series B 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 or Series B 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 A Preferred Stock and Series B 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 provisions of this
Section 4 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of 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 or Series B
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 A Preferred Stock and Series B
Preferred Stock a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based.
The Corporation shall, upon the written request at any time of any holder of
Series A Preferred Stock or Series B 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 and Series B
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 A Preferred Stock and Series B Preferred Stock.
(l) Notice of Record Date. In the event:
---------------------
<PAGE>
(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;
(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
<PAGE>
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 or Series B 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.
(b) All holders of record of 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 Stock (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>
6. Series B Preferred Stock Redemption.
-----------------------------------
(a) The Corporation will, subject to the conditions set forth below,
on October 31, 2003 and on each of the first and second anniversaries thereof
(each such date being referred to hereinafter as a "Series B Mandatory
Redemption Date"), upon receipt not less than 60 nor more than 120 days prior to
the applicable Series B Mandatory Redemption Date of written request(s) for
redemption from holders of at least a majority of the shares of Series B
Preferred Stock then outstanding (an "Initial Redemption Request"), redeem from
each holder of shares of Series B 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 Requesting Holder"), at
a price equal to $2,000.00 per share, plus 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
(the "Mandatory Redemption Price"), the number of shares of Series B Preferred
Stock requested to be redeemed by each Series B Requesting Holder, but not more
than the following respective portions of the number of shares of Series B
Preferred Stock held by such Series B Requesting Holder on the applicable Series
B Mandatory Redemption Date.
Maximum
Series B Mandatory Portion of Shares of Series B
Redemption Date Preferred Stock To Be Redeemed
--------------- ------------------------------
October 31, 2003 33%
October 31, 2004 50%
October 31, 2005 All outstanding shares of
Series B 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 Mandatory Redemption Price (a "Redemption Notice"), by first class or
registered mail, postage prepaid, to each holder of record of Series B 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
Mandatory Redemption Date. Each holder of Series B Preferred Stock (other than a
holder who has made the Initial Redemption Request) may elect to become a Series
B Requesting Holder on such Series B 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 Mandatory
Redemption Date. Except as provided in Section 6(c) below, each Series B
Requesting Holder shall surrender to the Corporation on the applicable Series B
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 Requesting Holder and each certificate
surrendered for redemption shall be cancelled.
<PAGE>
(c) If the funds of the Corporation legally available for redemption
of Series B Preferred Stock on any Series B Mandatory Redemption Date are
insufficient to redeem the number of shares of Series B Preferred Stock required
under this Section 6 to be redeemed on such date from Series B Requesting
Holders, those funds which are legally available will be used to redeem the
maximum possible number of such shares of Series B Preferred Stock ratably on
the basis of the number of shares of Series B Preferred Stock which would be
redeemed on such date if the funds of the Corporation legally available therefor
had been sufficient to redeem all shares of Series B 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 Preferred
Stock, such funds will be used, at the end of the next succeeding fiscal
quarter, to redeem the balance of the shares which the Corporation was
theretofore 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 Mandatory Redemption Date all rights
of the holder of each 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 Mandatory Redemption Date be
deemed to be outstanding.
(e) Any Series B 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 Preferred Stock
accordingly.
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to be signed by its President this 5th day of November, 1998.
SmarterKids.com, Inc.
By: /s/ David Blohm
------------------------
David Blohm, President
<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 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
<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.
(l) 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 4.4
-----------
Incorporated under the laws of the State of Delaware
SMARTERKIDS.COM
SHARES
NUMBER
Common Stock
See Reverse for
Certain Restrictions
CUSIP 83169C 10 6
SmarterKids.com, Inc.
This certifies that [Name of holder]
is the owner of [No. of shares]
FULLY PAID AND NONASSESSABLE SHARES OF THE
PAR VALUE OF $.01 EACH OF THE COMMON STOCK OF
SmarterKids.com, Inc. transferable upon the books of the Corporation in person
or by duly authorized attorney upon surrender of this certificate duly endorsed
or assigned. This certificate and the shares represented hereby are subject to
the laws of the State of Delaware and to the Second Amended and Restated
Certificate of Incorporation and Second Amended and Restated By-laws of the
Corporation as from time to time amended.
This certificate is not valid unless countersigned by the Transfer Agent
and registered by the Registrar.
IN WITNESS WHEREOF, SmarterKids.com, Inc. has caused the facsimile
corporate seal and the facsimile signature of its duly authorized officers to be
hereunto affixed.
Dated:
/s/ Robert J. Cahill /s/ David A. Blohm
Treasurer President
Countersigned and Registered:
Chasemellon Shareholder Services, LLC
Transfer Agent and Registrar
By Authorized Signatory
<PAGE>
SMARTERKIDS.COM, INC.
The corporation is authorized to issue more than one class and series of stock.
The corporation will furnish without charge to each stockholder who so requests,
a full statement of all of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock of series
thereof authorized to be issued by the corporation and the qualifications,
limitations or restrictions of such preferences and/or rights.
The following abbreviations, when used in the Inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT-______ Custodian______
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right under Uniform Gift to Minors
Of survivorship and not as Act__________
(State)
Additional abbreviations may also be used though not in the above list.
For value received, ________________ hereby sell, assign, and transfer unto
[PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE]
[_]
[PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF
ASSIGNEE]
[_]
Shares of the capital stock represented by the within Certificate, and does
hereby irrevocably constitute and appoint_______________ Attorney to transfer
the said stock on the books of the within-named Corporation with full power of
substitution in the premises.
Dated, _____________
__________________________________________________________________________
NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the certificate, in every particular, without
alteration or enlargement or any changes whatever.
SIGNATURE (S) GUARANTEED:
___________________________________________________
The signatures should be guaranteed by an eligible
Guarantor institution (banks, stockbrokers, savings
and loan associations and credit unions with
membership in an approved signature guarantee
medallion program), pursuant to SEC Rule 17Ad-15.
<PAGE>
EXHIBIT 5.1
October 19, 1999
SmarterKids.com, Inc.
200 Highland Avenue
Needham, MA 02494
RE: Registration Statement on Form S-1
(File No. 333-86787)
--------------------
Ladies and Gentlemen:
This opinion relates to an aggregate of 5,175,000 shares of common stock,
par value $.01 per share ("common stock"), of SmarterKids.com, Inc. (the
"Company"), which are the subject matter of a Registration Statement on Form S-1
as filed with the Securities and Exchange Commission (the "Commission") on
September 9, 1999, as amended by Amendment No. 1 to the Registration Statement
on Form S-1 as filed with the Commission on October 19, 1999 (the "Registration
Statement").
The 5,175,000 shares of common stock covered by the Registration Statement
consist of 5,149,500 shares being sold by the Company, of which 649,500 shares
are subject to an over-allotment option granted by the Company to the
underwriters (the "Underwriters") named in the prospectus (the "Prospectus")
incorporated by reference in the Registration Statement, and 25,500 shares
subject to an over-allotment option granted by certain stockholders of the
Company to the Underwriters.
Based upon such investigation as we have deemed necessary, we are of the
opinion that when the 5,149,500 shares of common stock to be sold by the Company
pursuant to the Prospectus have been issued and paid for in accordance with the
terms described in the Prospectus, such shares of common stock will have been
validly issued and will be fully paid and nonassessable. Further, we are of the
opinion that the 25,500 shares of common stock to be sold by the stockholders of
the Company pursuant to the Prospectus have been validly issued and are fully
paid and nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to our firm in the Prospectus under
the caption "Legal Matters."
Very truly yours,
/s/ Testa, Hurwitz & Thibeault, LLP
TESTA, HURWITZ & THIBEAULT, LLP
<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
September 7, 1999
Approved by the stockholders on
October 13, 1999
-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: September 7, 1999
Date Approved by Shareholders of the Company: October 13, 1999
-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 September 7, 1999, and was
approved by the stockholders of the Company on October 13, 1999.
<PAGE>
EXHIBIT 10.7
------------
STANDARD FORM COMMERCIAL LEASE
Member Greater Boston Real Estate Board
1. PARTIES LESSOR, which expression shall include McFarland FLP heirs,
(fill in) successors, and assigns where the context so admits, does
hereby lease to
2. PREMISES LESSEE, which expression shall include Virtual Knowledge,
(fill in and Inc. successors, executors, administrators, and assigns
include, if where the context so admits, and the LESSEE hereby leases
applicable, the following described premises:
suite number,
floor number, 7,715 rentable square feet on the top floor of 200
and square feet) 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 A
(fill in) 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
delete "air the leased promises exclusively. The LESSOR agrees to
conditioning" provide all other utility service and to furnish
if not reasonably hot and cold water and reasonable heat and
applicable air conditioning (except to the extent that the same are
furnished through separately metered utilities or separate
fuel tanks as set 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 the
PREMISES purpose of General Office Use
(fill in)
9. COMPLIANCE WITH The LESSEE acknowledges that no trade or occupation shall
LAWS 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 replace plate glass
A. LESSEE'S and other glass therein, acknowledging that the leased
OBLIGATIONS 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 or
ADDITIONS 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. SUBORDINA- This lease shall be subject and subordinate to any and all
TION 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. INDEMNIFICA- The LESSEE shall save the LESSOR harmless from all loss
TION AND and damage occasioned by the use or escape of water or by
LIABILITY the bursting of pipes, as well as from any claim or damage
(fill in) 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 The LESSEE shall maintain with respect by the leased
LIABILITY premises and the property of which the leased premises are
INSURANCE a part comprehensive public liability insurance in the
(fill in) 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, Should a substantial portion of the leased premises, or of
CASUALTY - the property of which they are a part, be substantially
EMINENT damaged by the fire or other casualty, or be taken by
DOMAIN 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/ Illegible /s/ Illegible
_________________________ __________________________
LESSEE LESSOR
_________________________ __________________________
LESSEE LESSOR
________________________
BROKER(S)
<PAGE>
-7-
STANDARD FORM COMMERCIAL LEASE
1. PARTIES LESSOR, which expression shall include McFarland
(fill in) FLP heirs, successors, and assigns where the
context so admits, does hereby lease to
SmarterKids.com
LESSEE, which expression shall include their
successors, executors, administrators, and assigns
where the context so admits and the LESSEE hereby
leases the following described premises:
2. PREMISES 5,000 rentable square feet on the third floor 200
(fill in and include, if Highland Avenue, Needham, MA
applicable, suite
number, floor
number and square together with the right to use in common, with
feet) others entitled thereto, the hallways, stairways,
and elevators, necessary for access to said leaded
premises, and lavatories nearest thereto.
3. TERM The term of this lease shall be for SEE SECTION
(fill in) 27A commencing on __________________ and ending on
_________________________________.
4. RENT The LESSEE shall pay to the LESSOR fixed rent at
(fill in) the rate of SEE SECTION 27B dollars per year,
payable in advance in monthly installments of
______, subject to proration in the case of any
partial calendar month. All rent shall be payable
without offset or deduction.
5. SECURITY DEPOSIT [Intentionally Omitted]
(fill in)
6. RENT ADJUSTMENT [Intentionally Omitted]
A. TAX [Intentionally Omitted]
ESCALATION
(fill in or delete)
B. OPERATING [Intentionally Omitted]
COST
ESCALATION
(fill in or delete)
C. CONSUMER [Intentionally Omitted]
PRICE
<PAGE>
-8-
ESCALATION
(fill in or delete)
7. UTILITIES The LESSOR shall pay, as they become due, all bills for
electricity and other utilities (where they are used for
(* delete "air furnishing heat or other purposes) that are furnished to
conditioning" if not the lease premises and presently separately metered,
applicable) and all bills for fuel furnished to a separate tank
servicing the leased premises exclusively. The LESSOR
agrees to provide all other utility service and to
furnish reasonably hot and cold water and reasonable
heat and air conditioning* (except to the extent that
the same are furnished through separately metered
utilities or separate fuel tanks as set 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 the lease.
In the event LESSEE requires additional utilities or
equipment, the installation and maintenance thereof
shall be the LESSEE's sole obligation, provided that
such installation shall be subject to the written
consent of the LESSOR.
8. USE OF LEASED The LESSEE shall use the leased premises only for
PREMISES the purpose of General Office Use.
(fill in)
9. COMPLIANCE The LESSEE acknowledges that no trade or occupation
WITH LAWS 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. Without limiting the
generality of the foregoing (a) the LESSEE shall not
bring or permit to be brought or kept in or on the
leased premises or elsewhere on the LESSOR's property
any hazardous, toxic, inflammable, combustible or
explosive fluid, material, chemical or substance,
including without limitation any item defined as
hazardous pursuant to Chapter 21E of the Massachusetts
General Laws; and
<PAGE>
-9-
(b) the LESSEE shall be responsible for compliance
with requirements imposed by the Americans with
Disabilities Act relative to the layout of the leased
premises and any work performed by the LESSEE therein.
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. The LESSEE agrees to maintain the leased premises in
MAINTENANCE good condition, damage by fire and other casualty only
excepted, and whenever necessary, to replace plate glass
A. LESSEE'S and other glass therein, acknowledging that the leased
OBLIGATIONS 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 area 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 or
ADDITIONS 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 present construction.
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 to 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.
<PAGE>
-10-
13. ASSIGNMENT - The LESSEE shall not assign or sublet the whole or any
SUBLEASING part of the leased premises without LESSOR's prior
written consent which consent shall not be unreasonably
withheld or delayed. Lessor has first refusal rights.
Notwithstanding such consent, LESSEE shall remain liable
to LESSOR for the payment of all rent and for the full
performance of the covenants and conditions of this
lease.
14. This lease shall be subject and subordinate to any and
SUBORDINATION all mortgages, deeds of trust and other instruments in
the nature of a mortgage, 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 instrument sin the nature of a
mortgage.
15. LESSOR'S The LESSOR or agents of the LESSOR may, at reasonable
ACCESS 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 so affixed
without hindrance or molestation.
16. The LESSEE shall save the LESSOR harmless from all loss
INDEMNIFICATION and damage occasioned by anything occurring on the
AND LIABILITY leased premises unless caused by the negligence or
(fill in) misconduct of the LESSOR, and from all loss and damage
wherever occurring occasioned by any omission, fault,
neglect or other misconduct of the LESSEE. 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 to the leased
INSURANCE premises and the property of which the leased premises
(fill in) 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
<PAGE>
-11-
without at least ten (10) days prior written notice to
each assured named therein.
18. FIRE, CASUALTY - Should a substantial portion of the leased premises, or
EMINENT DOMAIN of the property of which they are a part, be
substantially damaged by 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 substantially
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 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 grants 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
<PAGE>
-12-
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) per cent 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
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 or other 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. BROKERAGE [Intentionally Omitted]
(fill in or delete)
<PAGE>
-13-
23. CONDITION OF Except as may be otherwise expressly set forth herein,
PREMISES the LESSEE shall accept the leased premises "as is" in
their condition as of the commencement of the term of
this lease, and the LESSOR shall be obligated to perform
no work whatsoever in order to prepare the leased
premises for occupancy by the LESSEE.
24. FORCE MAJEURE In the event that the LESSOR is prevented or delayed
from making any repairs or performing any other covenant
hereunder by reason of any cause reasonably beyond the
control of the LESSOR, the LESSOR shall not be liable to
the LESSEE therefor nor, except as expressly otherwise
provided in case of casualty or taking, shall the LESSEE
be entitled to any abatement or reduction of rent by
reason thereof, nor shall the same give rise to a claim
by the LESSEE that such failure constitutes actual or
constructive eviction from the leased premises or any
part thereof.
25. LATE CHARGE If rent or any other sum payable hereunder remains
outstanding for a period of ten (10) days, the LESSEE
shall pay to the LESSOR a late charge equal to one and
one-half percent (1.5%) of the amount due for each month
of the amount due for each month or portion thereof
during which the arrearage continues.
26. LIABILITY OF N owner of the property of which the leased premises are
OWNER a part shall be liable hereunder except for breaches of
the LESSOR's obligations occurring during the period of
such ownership. The obligations of the LESSOR shall be
binding upon the LESSOR's interest in said property, but
not upon other assets of the LESSOR, and no individual
partner, agent, trustee, stockholder, officer, director,
employee or beneficiary of the LESSOR shall be
personally liable for performance of the LESSOR's
obligations hereunder.
27. OTHER PROVISIONS It is also understood and agreed that:
(a) Term of Lease for Suite 300, 5000 sq. ft. shall
be one year six months with one, one year option
commencing 6/1/99 - 10/31/00.
(b) Rent for 6/1/99 - 6/31/99 = $6,625.00 6/1/99 -
10/31/99 = $53,125.00 or $10,625.00 per month
11/1/99 - 10/31/00 = $130,000.00 or $10,833.33
per month Option year 11/1/00 - 10/31/01 =
$132,500.00 or $11,041.67 per month
(c) LESSOR to buildout three walls, repair or
replace all damaged carpeting, walls, doors,
etc.; remove certain fixed workstations; paint
entire space, clean carpet area,
<PAGE>
-14-
buff floors; rebuild kitchen; replace or add
certain light fixtures; provide 4 parking spaces
per thousand 10 at hotel, 18 new, 24 existing;
have an umber of indoor spots labeled for
Smarterkids; provide parking during construction
of new parking lot; provide well-lit access to
Sheraton garage; maintain walkway from building
to steps of the Sheraton parking garage.
IN WITNESS WHEREOF, the said parties hereunto set their hands and seals this
16th day of April, 1999.
/s/ ILLEGIBLE /s/ JAMES MCFARLAND
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LESSEE LESSOR
________________________________ ________________________________
LESSEE LESSOR
________________________________
BROKER(S)
<PAGE>
EXHIBIT 10.8
------------
Agreement for Product Distribution Services
THIS AGREEMENT (this "Agreement") is made between SmarterKids.com, Inc.
("SmarterKids"), a Delaware corporation with a place of business at 200 Highland
Avenue, Needham, MA 02494, and J.L. Hammett Company ("Hammett"), a Massachusetts
corporation with a place of business at P.O. Box 859057, One Hammett Place,
Braintree, MA 02185-9057. This Agreement supersedes in its entirety the
Contract for Services and Term Sheet executed by SmarterKids and Hammett on
September 29, 1998.
Background
SmarterKids wishes to purchase certain educational product distribution,
logistics, warehouse storage, inventory management, and other order fulfillment
services in support of the retail operations at its SmarterKids.com web site.
Hammett wishes to provide and sell such services to SmarterKids.
Agreement
In consideration of their mutual representations, promises and obligations,
Hammett and SmarterKids agree as follows:
Services to be Performed
1. Services. Hammett agrees to perform product distribution, transportation,
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warehouse storage, inventory management, and return services (collectively, the
"Services") for the benefit of SmarterKids as described in Exhibit A. Hammett
---------
agrees to perform the Services for SmarterKids upon receipt of an order for one
or more Products (as defined below) sent by electronic data interchange ("EDI")
from SmarterKids or its authorized agents. Hammett agrees that the customer
data transmitted is the exclusive property of SmarterKids and such data will
only be used by Hammett to process SmarterKids' customer orders in conformance
with the requirements set forth in Exhibit A.
---------
Hammett agrees that it shall distribute all SmarterKids products ("Products") in
strict conformity with all applicable SmarterKids product specifications and all
applicable laws and regulations. Hammett agrees that it shall make no change in
or deviate in any way from such specifications except pursuant to instructions
from SmarterKids as provided in this Agreement. Hammett agrees to meet or
exceed the performance milestones as set forth in Exhibit A.
---------
2. Additional Services. If Hammett is asked by SmarterKids to perform
-------------------
additional services not described in Exhibit A, then the parties agree to
---------
negotiate the specific scope of services and the fees for such services if
Hammett is willing to provide such services. If the negotiation is successful,
the parties will execute an amendment to this Agreement before the new services
are furnished by Hammett. The amendment will contain a detailed description of
the new services, the fees for the services, and any other information the
parties agree is relevant. Hammett agrees to provide the services in accordance
with the Agreement as amended.
<PAGE>
3. Customers. Hammett agrees that customer data transmitted to Hammett is the
---------
exclusive property of SmarterKids. Hammett shall not use, distribute, publish,
license or transmit any customer data of SmarterKids except to perform the
Services. It is acknowledged that customers of SmarterKids may also be
customers of Hammett and that the fact that a Hammett customer is also a
SmarterKids customer shall not preclude Hammett from distributing, using,
publishing, licensing or transmitting information and data that Hammett has
independently procured from such a customer.
4. Product Specification. The documentation for each Product to be handled by
---------------------
Hammett in conjunction with its provision of the Services is the product
specification ("Product Specification") for such Product. Each Product
Specification shall contain a detailed physical description and the SKU for the
relevant Product and may contain a list designating approved vendors for such
product and instructions relating to the finish packaging, packing and labeling
(including placement of trademark/trade names) for such Product. Product
Specifications for new Products not originally listed in this Agreement shall
become effective when agreed to in writing by SmarterKids and Hammett. Minor
changes in Product Specifications may be effected by delivery to Hammett of a
written notice of such changes executed by an authorized employee of
SmarterKids. Effective upon receipt of such notice, the applicable Product
Specification shall include the changes described in such notice.
5. Transportation. Except as may be otherwise directed, each order will be
--------------
shipped using either United Parcel Service ("UPS"), Federal Express ("FedEx") or
the United States Postal Service (USPS). Hammett shall use the shipping company
and level of delivery service specified by each Customer.
Prices for Services and Payment for Services
6. Payment for Services. For all Services SmarterKids contracts Hammett to
--------------------
perform that are performed by Hammett SmarterKids agrees to pay the amount
described in Exhibit B. Hammett will deliver invoices electronically to
---------
SmarterKids calculated in U.S. Dollars that set out the Products sold and
charges incurred during the preceding day. Hammett's invoice will segregate the
charges for shipping, handling, taxes and duties. SmarterKids will remit all
amounts properly due under such invoices within 15 business days of receipt of
such invoices. SmarterKids has the right to verify independently all amounts
charged by Hammett, should it choose to do so.
7. Compensation. The compensation to be paid by SmarterKids to Hammett for the
------------
Services, along with a description of reimbursable expenses, is set forth in
Exhibit B. Hammett's compensation is based upon, and presumes that Hammett will
- ---------
satisfactorily accomplish, the Services as required by SmarterKids pursuant to
the performance standards set forth in Exhibit A.
---------
8. Transportation. The prices that apply to the transportation of Products to
--------------
Customers under this Agreement are listed in Exhibit C. Transportation Services
---------
performed by UPS, FedEx and the USPS as part of the Services furnished by
Hammett are subject to the terms and
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<PAGE>
conditions of the respective agreements between Hammett and each of these
delivery entities (each, a "Shipping Agreement" and collectively, the "Shipping
Agreements The terms of this Agreement shall govern any conflicts between it and
the Shipping Agreements.
Export and Import
9. Export Compliance. (a) Each party agrees that it will abide by all export
-----------------
laws and regulations of the United States with respect to the export of Products
and any technical information. Products shall not be supplied to a Customer in
any country if (i) the export of any such Product to such country is prohibited
by the laws of the United States of America, including the Export Regulations of
the Department of Commerce or the International Traffic in Arms Regulation of
the Department of State; (ii) the import of any such Product into such country
is prohibited by the laws of such country; or (iii) the proper import
certificate(s) required by the laws of such country for the lawful importation
of any such Product have not been obtained.
(b) Hammett agrees to execute and deliver in time any and all certifications,
representations, and other documents required under the laws and regulations of
the United States of America or as reasonably requested by SmarterKids.
10. Taxes and Duties. SmarterKids will reimburse all charges paid by Hammett
----------------
on behalf of SmarterKids in performance of storage, repair and shipment services
with respect to SmarterKids Products for customs duties, value-added taxes,
customs brokers' fees and related taxes assessed, excluding taxes based on the
income and property of Hammett. Hammett will include all such charges on its
monthly invoice and SmarterKids will remit such sums properly due consistent
with the procedures set out in Payment for Services above. SmarterKids has the
right to verify independently any and all such charges.
Title; Risk of Loss; Insurance
11. Title, Risk of Loss, Right to Possession. SmarterKids will supply Hammett
----------------------------------------
with certain equipment, parts, materials and Products (collectively, the
"Inventory") to be used solely for the purposes of accomplishing the Services.
Title to and right to immediate possession of the SmarterKids Inventory supplied
by SmarterKids and in the possession of Hammett or its subcontractors shall be
and remain in SmarterKids at all times. Hammett reserves no property rights or
interest in such SmarterKids Inventory. SmarterKids will bear the risk of loss
of such property except for (i) loss due to inventory "shrinkage" greater than
1% in any single year (ii) causes within the control of Hammett. Hammett agrees
to reimburse SmarterKids for the replacement cost of Inventory lost as described
in (i) or (ii) in the previous sentence. SmarterKids agrees not to hold Hammett
responsible for Vendor concealed shortages. SmarterKids reserves the right to
remove the SmarterKids Inventory from Hammett upon reasonable notice.
12. Title to Tools, Equipment and Computer Programs. SmarterKids will provide
-----------------------------------------------
Hammett, or authorize Hammett to purchase on SmarterKids' behalf, such tooling,
equipment and computer programs and services (i.e. a new accounting system) as
SmarterKids may specifically require Hammett to obtain in order to provide the
Services. Any sums expended by Hammett for such
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<PAGE>
items shall be included on the invoice and reimbursed by SmarterKids. All such
tooling, equipment and computer programs and services shall be and remain the
sole property of SmarterKids. Hammett reserves no property rights or interest in
such tooling, equipment and computer programs and services. Hammett agrees that
it will not use any such tooling, equipment and computer programs and services
for any purpose other than the provision of Services for SmarterKids.
SmarterKids may obtain possession of any such tools, equipment and computer
programs and services at any time upon reasonable notice or at such time as
Hammett is no longer using such tooling, equipment or computer programs and
services to provide the Services in accordance with this Agreement, or upon the
termination or expiration of the Agreement. Equipment and computer programs that
have not been provided by SmarterKids and that have not been purchased on
SmarterKids request may be used by Hammett for uses other than the Services and
will at all times remain the property of Hammett.
13. Maintenance of Tools, Equipment and Computer Programs. Hammett agrees to
-----------------------------------------------------
maintain the tools, equipment and computer programs supplied by or procured for
SmarterKids for the stated life of each such item at no additional cost to
SmarterKids. SmarterKids agrees to cover the cost of any maintenance agreements
for the equipment and computer programs supplied or procured solely for the use
of SmarterKids.
14. Insurance. (a) SmarterKids Products stored by Hammett on behalf of
---------
SmarterKids are to be insured by SmarterKids.
(b) The parties shall maintain at their own expense adequate (i) comprehensive
general liability insurance that includes coverage for product liability, bodily
injury and property damage, (ii) worker's compensation insurance, and (iii)
automobile liability insurance policies that shall protect the other party from
claims for damages which may arise from the negligence or misconduct of the
insured party, its employees, agents and subcontractors. In no event shall
either party be insured for less than one million dollars for general liability
or automobile liability.
License to Perform Services; Trademarks; Confidential Information
15. License to Upgrade and Repair Products. SmarterKids grants to Hammett a
--------------------------------------
non-exclusive license to use the Product Specifications and all related
SmarterKids proprietary and Confidential Information and know-how necessary to
perform Services pursuant to this Agreement. This license is non-transferable,
may be used only in connection with the provision of Services for SmarterKids,
and shall expire on the date on which Hammett's obligation to provide Services
expires or terminates under this Agreement.
16. Use of Trademarks. SmarterKids shall provide descriptions of the
-----------------
trademarks, trade names, insignia, symbols, decorative designs or packaging
designs (collectively, the "Trademarks") that are to be affixed to the Products
or to the packaging of such Products. Hammett agrees to affix the Trademarks in
strict conformity with the instructions and standards provided to it as those
instructions and standards are updated in writing by SmarterKids from time to
time. Hammett shall have a license to use the Trademarks only for such
purposes. However, nothing in this Agreement shall operate to confer on Hammett
any right to use any
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<PAGE>
Trademark for any purpose other than in connection with providing Services in
accordance with this Agreement without the prior consent of SmarterKids.
17. Title to Trademarks. All right, title and interest in the Trademarks, and
-------------------
all goodwill associated with their use, shall remain the property and inure to
the benefit of SmarterKids or its licensors.
18. Confidentiality. (a) "Confidential Information" means any product sales,
---------------
pricing, strategy, performance and projection information, plan, design,
configuration, style or concept of any product, drawings, software, data,
prototypes, or other business and/or technical information related to products,
product plans, and service plans, any scientific, technical, merchandising,
production or management design, procedure, formula, discovery, invention, item
of information, concept, or improvement, the name of (and any data concerning)
any customer, supplier or distributor (and any tangible evidence, record or
representation of any of the foregoing) which is maintained in secrecy or
confidence by the disclosing party or by any person or entity affiliated with
the disclosing party, which might permit the disclosing party or its customers
to obtain a competitive advantage over competitors who do not have access
thereto or which is provided to the receiving party by the disclosing party
pursuant to this Agreement in reliance on the receiving party's agreements
contained in this Agreement. Without limiting the generality of the foregoing,
this Agreement, including, all exhibits and addenda, the terms of this
Agreement, and all SmarterKids product specifications and any document marked
SmarterKids "Confidential" or "Proprietary" shall constitute SmarterKids
Confidential Information. Also without limiting the generality of the
foregoing, any document marked Hammett "Confidential" or "Proprietary" shall
constitute Hammett Confidential Information.
Notwithstanding the foregoing, nothing herein shall apply to any information
that is known to the receiving party prior to disclosure by the disclosing
party, or that is lawfully obtained from any third party, that is or becomes
publicly available without restrictions, that is disclosed by the receiving
party with prior written permission of the disclosing party, or that is required
by law to be disclosed by the receiving party. Information shall be deemed
Confidential Information if it is in writing or other tangible form including,
without limitation, machine readable object code, if clearly marked as
proprietary by the disclosing party or, if disclosed orally or visually, such
disclosure is stated as confidential at the time of disclosure and is confirmed
as such in writing within 30 calendar days of any such oral or visual
disclosure.
(b) Each party agrees that it shall at all times hold confidential all
Confidential Information of the other party. Strict compliance of each party and
its respective agents, subcontractors and employees with all of the provisions
regarding Confidential Information is a material provision of this Agreement.
(c) Each party agrees that it shall not use any Confidential Information or any
derivative or variation of Confidential Information except to fulfill its
obligations under this Agreement and shall not disclose any Confidential
Information to any person or entity outside SmarterKids without prior written
permission of an authorized official of SmarterKids or Hammett, as the case may
be. Each party shall give access to Confidential Information only to such of its
employees, agents, subcontractors or other persons as are engaged in fulfilling
its obligations
-5-
<PAGE>
under this Agreement. Each party agrees further that before giving access to
Confidential Information to any of its agents or subcontractors, such agents or
subcontractors shall be under an appropriate confidentiality agreement
prohibiting any use or disclosure of any of the Confidential Information except
in accordance with this Agreement. Each party also agrees that it shall restrict
disclosure of Confidential Information to its employees with a need to know who
are under appropriate binding agreements to maintain confidentiality and inform
all such employees of the obligations assumed here. Neither party shall copy any
document or other material containing or embodying Confidential Information
beyond that reasonably required for the effective and efficient performance of
Services without the prior written consent of the other party. This Agreement
shall not be construed to grant to either party any license or other rights in
Confidential Information other than those specifically provided for herein.
(d) No license to Hammett under any trademark, patent, copyright, or any other
intellectual property right is either granted or implied by the conveying of
SmarterKids Confidential Information to Hammett. None of the Confidential
Information which may be disclosed by SmarterKids shall constitute any
representation, warranty, assurance, guarantee or inducement by SmarterKids of
any kind, and in particular, with respect to the non-infringement of trademarks,
patents, copyrights, or any other intellectual property rights, or other rights
of third persons.
(e) All Confidential Information shall remain the property of the disclosing
party and shall be returned to the disclosing party upon written request, upon
termination of this Agreement, or upon the receiving party's determination that
it no longer has a need for such Confidential Information.
(f) Each party agrees that all of its obligations undertaken regarding
Confidential Information shall survive and continue for a period of ten years
from the last date of receipt of Confidential Information.
(g) Each party acknowledges that money damages alone will not adequately
compensate the other party for the breach by the party or any of its employees,
agents, subcontractors or other persons as are engaged in furnishing Services,
of any of the covenants and agreements relating to the protection of
Confidential Information, and, therefore, agrees that in the event of the breach
or threatened breach of any such covenant or agreement, in addition to all other
remedies available at law, in equity, or otherwise, the other party shall be
entitled to injunctive relief compelling specific performance of, or other
compliance with, the terms of this Agreement.
19. No Other Rights Granted. This Agreement shall not be construed to grant
-----------------------
any license or other rights in any Confidential Information or Trademarks, other
than those specifically provided for herein.
20. Each party agrees that without the consent of the other party, it shall not
directly or indirectly solicit for employment (other than general public
advertisement) any of the current employees of the other party so long as they
are employed by the other party during the term of the Agreement and continuing
for a period of one year after termination of the Agreement.
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<PAGE>
Term and Termination
21. Term. The initial term of this Agreement commenced on October 8, 1999(the
----
"Effective Date") and shall expire on January 31, 2002, unless earlier
terminated in accordance with the provisions of this Agreement. Either party
may terminate this Agreement without cause by providing the other party with at
least six (6) months prior written notice.
22. Termination. (a) Either party may immediately terminate this Agreement
-----------
without cost or liability except as set forth below by notice in writing sent as
set forth below, if the other party enters into liquidation, or makes
assignments for the benefit of creditors or has an administrative receiver
appointed over any or all of its assets or suffers any similar action in
consequence of debt such as being declared bankrupt or otherwise is unable to
pay its debts as they fall due.
(b) Either party may terminate this Agreement immediately without cost or
liability except as set forth below by notice in writing sent as set forth below
if the other party or any of its employees, subcontractors or agents has
breached any of the terms of this Agreement concerning the protection of
Confidential Information.
(c) Either party may terminate this Agreement without cost or liability except
as set forth below if the other party commits any material breach of the terms
of this Agreement if the other party fails to remedy that breach within ten (10)
business days of having received a notice in writing of the breach.
23. Termination Charges. If the Agreement is terminated or expires, SmarterKids
-------------------
shall pay to Hammett:
(a) any unpaid balance due for Services properly performed through the date
expiration or termination is effective; and
(b) all reasonable costs, mutually determined between SmarterKids and Hammett,
associated with relocating SmarterKids property to a location determined by
SmarterKids.
(c) Hammett shall use all reasonable efforts to mitigate SmarterKids' costs
described above.
Warranty, Limitation of Liability, Indemnification
24. Warranty. (a) Hammett warrants that as of the date this Agreement is
--------
entered into: (i) it has the right to enter into this Agreement; (ii) all
necessary actions, corporate and otherwise, have been taken to authorize the
execution and delivery of this Agreement and the same is the valid and binding
obligation of Hammett; (iii) all licenses, assents and approvals necessary to
provide the Services and carry out all of the transactions contemplated in this
Agreement have been obtained by Hammett; (iv) it has the experience, technical
and physical capacity to fulfill its obligations under this Agreement; and (v)
that the Services will be performed in a good and workmanlike manner.
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<PAGE>
(b) Hammett warrants that as of the date this Agreement is entered into: (i) it
has and shall pass to SmarterKids good title to Products free and clear of all
liens and encumbrances; (ii) it shall pass to SmarterKids good title to special
tools and equipment procured for SmarterKids free and clear of all liens and
encumbrances; and (iii) no claim or action is pending or threatened against
Hammett or, to Hammett's knowledge, against any licensor, supplier or
subcontractor of Hammett, that would adversely affect the ability of Hammett to
furnish the Services.
(c) SmarterKids warrants that as of the date this Agreement is entered into: (i)
it has the right to enter into this Agreement; and (ii) all necessary actions,
corporate and otherwise, have been taken to authorize the execution and delivery
of this Agreement and the same is the valid and binding obligation of
SmarterKids.
25. Limitation of Liability. (a) IN NO EVENT SHALL EITHER PARTY BE LIABLE TO
-----------------------
THE OTHER PARTY FOR ANY INCIDENTAL, INDIRECT, CONSEQUENTIAL OR SPECIAL DAMAGES
WHATSOEVER, INCLUDING WITHOUT LIMITATION, DAMAGES RESULTING FROM USE OR
MALFUNCTION OF THE PRODUCTS, LOSS OF DATA, LOSS OF SALES, REVENUES OR PROFITS,
EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, EXCEPT
AS EXPRESSLY PROVIDED IN THIS AGREEMENT.
(b) The liability of Hammett to SmarterKids for any loss of or damage to any
material of SmarterKids howsoever caused while in transit, during handling and
while in storage shall be limited to the actual cost of such material.
26. Indemnification. (a) SmarterKids agrees to indemnify and hold Hammett
---------------
harmless against any claims, demands, costs and liabilities, including all
reasonable attorneys fees, brought by a third party arising out of or resulting
from this Agreement, provided that any such claim (i) is attributable to bodily
injury or death or to injury to or destruction of physical property (other than
the Products) or (ii) is caused by a negligent representation, act or omission
of, or the misconduct of, SmarterKids or its employees, agents or
subcontractors, including without limitation the performance or failure to
perform under this Agreement. Notwithstanding the foregoing, SmarterKids agrees
to indemnify and hold Hammett harmless against any claims, demands, costs and
liabilities, including all reasonable attorneys fees, brought by a third party
arising out of the use of the Products. This obligation of SmarterKids shall
exist only if Hammett (i) gives SmarterKids prompt written notice of any such
claim, (ii) grants SmarterKids control of the defense and settlement of such
claim, and (iii) assists fully in the defense if SmarterKids pays the out-of-
pocket costs of such defense. SmarterKids shall have no liability for any
settlement or compromise made without its prior written consent.
(b) Hammett agrees to indemnify and hold SmarterKids harmless against any
claims, demands, costs and liabilities, including all reasonable attorneys fees,
brought by a third party arising out of or resulting from this Agreement,
provided that any such claim (i) is attributable to bodily injury or death or to
injury to or destruction of physical property (other than the Products) or (ii)
is caused by a negligent representation, act or omission or the misconduct of
Hammett or its employees, agents or subcontractors, including without limitation
the performance or failure to perform under this Agreement. This obligation of
Hammett shall exist only if SmarterKids (i)
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<PAGE>
gives Hammett prompt written notice of any such claim, (ii) grants Hammett
control of the defense and settlement of such claim, and (iii) assists fully in
the defense if Hammett pays the out-of-pocket costs of such defense. Hammett
shall have no liability for any settlement or compromise made without its prior
written consent.
General Provisions
27. Right to Survey. Hammett agrees that upon notice of one (1) business day,
---------------
SmarterKids shall be allowed to review the Hammett facilities, operations, and
procedures. The review shall be for the purpose of determining compliance with
the requirements of this Agreement and shall be restricted to the areas involved
in the performance of Services on behalf of SmarterKids. From time to time
SmarterKids' suppliers and vendors may request the right to inspect such
facilities and operations for the purpose of qualification. Hammett agrees to
permit such SmarterKids surveys with five (5) business days prior notice,
subject to the survey being restricted to the work performed on behalf of
SmarterKids.
28. Location of Operations. Hammett shall distribute all Products from its
----------------------
facility in Braintree, Massachusetts unless SmarterKids authorizes Hammett in
writing to distribute Products from or through another location. In the event
the Braintree facility becomes unable at any time to distribute Products in
accordance with the time schedules and other requirements of this Agreement,
Hammett agrees to have in place the ability to transfer open Product Services
orders on an expedited basis to a facility designated by SmarterKids.
29. Reporting Requirements. Hammett agrees to produce the operations reports
----------------------
described in Exhibit A at the required intervals and to comply with all
---------
reasonable requests by SmarterKids for any other reports with respect to the
Services within a reasonable time period.
30. Notices. All notices shall be by personal delivery, by facsimile or by
-------
another form of recorded communication to the parties as follows:
If to Hammett:
- --------------
J.L. Hammett Company
P.O. Box 859057,
One Hammett Place
Braintree, MA 02185-9057
Attention: President
If to SmarterKids:
- ------------------
SmarterKids.com, Inc.
200 Highland Avenue
Needham, MA 02494
Attention: President
Any notices given shall be deemed to have been received as follows: if sent by
facsimile or other form of recorded communication, when transmitted; if sent by
registered or certified first
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<PAGE>
class mail, on the date of delivery as shown on the return receipt; if sent by
Federal Express overnight delivery services or by personal delivery, on the date
delivered. Either party may change its notice address by written notice to the
other.
31. Independent Contractor. This Agreement shall not constitute Hammett the
----------------------
agent or legal representative of SmarterKids for any purpose and Hammett shall
not hold itself out as an agent of SmarterKids other than as expressly provided.
This Agreement creates no relationship of joint venturers, partners, associates,
employment or principal and agent between the parties, except as expressly
stated, and both parties are acting as independent contractors. Neither party
shall have the right to exercise any control or direction over the operations,
activities, employees or agents of the other party in connection with this
Agreement. Hammett is not granted any right or authority to, and shall not
attempt to, assume or create any obligation or responsibility for or on behalf
of SmarterKids. Hammett shall have no authority to bind SmarterKids to any
contract, whether of employment or otherwise, and Hammett shall bear all of its
own expenses for its operations, including, without limitation, the compensation
of its employees and sales people and the maintenance of its offices, service,
warehouse and transportation facilities. Hammett shall be solely responsible
for its own employees and sales people and for their omissions, acts and the
things done by them.
32. Waiver. The waiver by either party of a breach of, or a default under, any
------
provision of this Agreement by the other party shall not be construed as a
waiver of any succeeding breach of the same or any other provision, nor shall
any delay or omission on the part of either party to exercise or avail itself of
any right, power, or privilege that it has or may have under this Agreement
operate as a waiver or any right, power, or privilege by such party.
33. Applicable Law. This Agreement shall be governed by and should be
--------------
interpreted and construed in accordance with the laws of The Commonwealth of
Massachusetts, exclusive of its conflict of law principles.
34. Publicity. Except as otherwise set forth in this Agreement, neither party
---------
shall use the other party's name, trademark, tradename, service mark or logos
(whether registered or not), in any manner whatsoever without the other party's
prior written consent. The parties agree to cooperate in the joint display of
their respective identifying marks on the SmarterKids.com web site and in the
release of a jointly approved press release if one is to be made after the
signing of this Agreement. Should SmarterKids propose to register its capital
stock pursuant to the Securities Act of 1933, as amended or become a reporting
company under the Securities and Exchange Act of 1934, Hammett agrees that
SmarterKids may file this Agreement with the Securities and Exchange Commission
and describe this Agreement and the relationship between the parties in any
filing required by the Securities and Exchange Commission.
35. Rights Cumulative. The rights and remedies accorded to the parties in this
-----------------
Agreement are cumulative and in addition to those provided by law, and may be
exercised separately, concurrently, or successively.
36. Force Majeure. (a) "Force Majeure" shall include all acts or events
-------------
beyond the control of the parties, such as but not limited to, strikes,
lockouts, labor disturbances, accidents to
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<PAGE>
equipment, policies or restrictions of governments including restrictions on
export, import or other licenses, floods, earthquakes, fire, or other
catastrophes, war (whether declared or not), riots, weather conditions,
communication line failures, or civil disturbances, or any other contingency
whatsoever beyond the control of either party, existing on or after the
Effective Date of this Agreement, which prevents totally or partially the
fulfillment of the obligations of either party.
(b) A party affected by an event of Force Majeure shall be released without any
liability on its part from the performance of its obligations under this
Agreement, but only to the extent and only for the period that its performance
of such obligations is prevented by circumstances of Force Majeure and provided
that such party shall have given notice to the other party. Such notice shall
include a description of the nature of the event of Force Majeure, its cause and
its possible consequences. The party claiming circumstances of Force Majeure
shall promptly notify the other party of the termination of the event. The
period of Force Majeure shall be deemed to commence on the date that the event
of Force Majeure first occurs.
(c) Should the period of Force Majeure continue for more than one month, either
party may terminate this Agreement as provided in this Agreement upon giving
written notice.
(d) During the period that the performance by one of the parties of its
obligations under this Agreement has been suspended by an event of Force
Majeure, the other party may likewise suspend the performance of all or part of
its obligations under this Agreement.
37. Assignment. Neither this Agreement nor any right or obligation created by
----------
it shall be assigned or delegated by either party, voluntarily or by operation
of law, without the prior written consent of the other party, which consent may
not be unreasonably withheld. Any attempted assignment shall be deemed null and
void. An attempted assignment shall be deemed to occur in the event of a sale
or transfer of substantially all of the assets of, or a majority interest in,
the voting shares of that party to, or the merger or consolidation with or into,
any other entity.
38. Severability. If any one or more of the provisions of this Agreement for
------------
any reason shall be held to be invalid, illegal, or unenforceable in any
respect, such provision shall not affect any other provision, and this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had
never existed, except in those instances where removal or elimination of such
invalid, illegal, or unenforceable provisions would result in a failure of
consideration.
39. Survival. Notwithstanding anything else in this Agreement all rights and
--------
obligations of the parties, specifically including but not limited to those set
forth in "Limitation of Liability", "Indemnification", "Warranties" and
"Confidentiality", and any other terms which by the specific language or by
reasonable implication are to continue beyond the term of this Agreement shall
survive the expiration or termination of this Agreement for a period of three
years after SmarterKids' final payment is made under this Agreement, or as
expressly provided in this Agreement.
40. Complete Agreement. This Agreement, including the exhibits hereto,
------------------
constitutes the entire Agreement between the parties pertaining to the subject
matter of this Agreement. This
-11-
<PAGE>
Agreement supersedes and cancels all prior agreements and understandings,
written or oral, between the parties with respect to the subject matter. This
Agreement may not be changed in any way except by an instrument in writing
signed by both parties. No representations or statements of any kind made by any
representative of SmarterKids which are not stated in this Agreement shall be
binding on SmarterKids. No representations or statements of any kind made by any
representative of Hammett which are not stated in this Agreement shall be
binding on Hammett. No course of dealing or course of performance shall be
relevant to explain or supplement any term expressed in this contract.
-12-
<PAGE>
IN WITNESS WHEREOF, the duly authorized representatives of the parties have
executed this Agreement under seal.
SmarterKids.com, Inc. J.L. Hammett Company
By: /s/ David Blohm By: /s/ Richard Holden
----------------------- ------------------------
Name: David Blohm Name: Richard Holden
Title: President & CEO Title: Chief Executive Officer
Date: October 8, 1999 Date: October 8, 1999
-13-
<PAGE>
EXHIBIT A - SCOPE OF SERVICES AND PROCESS FLOW
Hammett agrees to provide the Services to SmarterKids in compliance with the
following:
1. Order Fulfillment. It is agreed that Hammett will make every effort to
-----------------
process, ship and complete each order received before 2:00 P.M. on the same day
such order is received. Hammett will process, ship and complete each order
received after 2:00 PM on the same day the order is received if possible, or on
the following day if necessary. A Product order is considered "completed" when
(i) the Product(s) are shipped to the Customer and (ii) all Product order
transaction records have been received correctly and completely by SmarterKids
according to the following schedule:
- --------------------------------------------------------------------------------
DATABASE FILE INFORMATION SCHEDULE
- --------------------------------------------------------------------------------
Ordering and Shipment: Within 2 hours of Product
order shipment
. UPS Tracking Info Transmittal File
. Order Control Header Transmittal File - all
records through C record types
. Order Detail Line Transmittal File - all
records through C record types
- --------------------------------------------------------------------------------
Customer Billing: Within 36 hours of Product
order shipment
. Billing Transmittal File
. Billing Detail Transmittal File
- --------------------------------------------------------------------------------
Order Fulfillment Standards.
All product orders are to be shipped in a white branded "SmarterKids.com"
corrugated carton. Plain brown boxes may be substituted as necessary, as long
as "SmartKids.com" packing tape is used to secure the cartons.
The carton will contain the products ordered, promotional items, newsletters and
any other item specified by SmarterKids.
-14-
<PAGE>
Hammett will plan to fulfill orders according to the forecasts provided to
Hammett according to paragraph 15 of this Exhibit A.
2. Hammett also agrees to assist SmarterKids in integrating SmarterKids'
information systems with Hammett's such that the following capabilities are in
place and functioning by [October 15, 1999]:
. encryption/decryption of data transmittals;
. a process to validate data transfers and to monitor, discover and
correct failed data transmissions;
. a process to prevent duplicate orders;
. protection of the integrity and security of all data and associated
systems with respect to Y2K and other potential security issues;
. installation of a gateway server on the Hammett network; and
. the capability to remotely access information including, but not
limited to, purchase orders, inventory and Customer order related
information. Accessed through a SK supplied server outside of the
Hammett firewall.
3. Inventory Levels. Hammett agrees to monitor inventory levels and to
-----------------
handle all incoming delivery of inventory items from vendors in a prompt and
professional manner and to have all vendor deliveries processed and on the
warehouse shelves within 24 hours of receipt. All Product replenishment orders
requested by SmarterKids will be placed by Hammett as written within 24 hours of
such request. All new Product item and new vendor requests will be processed by
Hammett within 48 hours of such request. The Product inventory will be owned by
SmarterKids, but processed by Hammett. The costs of all packing materials,
including the proprietary SmarterKids-labeled packing cartons, packing slips,
and shipping labels, warehousing, warehouse labor and all other order
fulfillment costs will be borne by Hammett in conjunction with rendering the
Services and will not be billed to SmarterKids. The only exception is gift wrap
bags. Since there is a direct relationship between front-end promotions and
product demand, SmarterKids will provide Hammett a detailed schedule of, and no
less than two weeks advance notice of, all web site promotions, product
specials, bundling, pricing strategy, timing and features to allow for quality
product service and support.
4. Continuous Process Improvement. Hammett agrees to promptly assist
------------------------------
SmarterKids with modifying data formats and processes to support new process
improvement features, such as gift wrapping, shipping orders to multiple
addresses, processing backorders and providing real-time inventory levels at the
SmarterKids.com Web site.
5. Approved Vendors. (a) Hammett shall purchase all Products for use in
----------------
the provision of Services from a vendor in the list of vendors approved from
time to time by SmarterKids ("Approved Vendor List" or "AVL") and no other
unless otherwise authorized in writing by an authorized employee of SmarterKids.
The Approved Vendor List will be provided in the Product Specification for each
Product and shall update such list as necessary.
-15-
<PAGE>
(b) Although it is SmarterKids' general policy to maintain a consistent Approved
Vendor List for each Product, Hammett may request that substitutions be made.
Any request by Hammett for such a substitution must include:
. one complete, original copy of the manufacturer's specification.
. estimated cost reduction/increase per Product directly attributable to the
change.
SmarterKids reserves the right to accept or reject any such request in its sole
discretion.
6. Advance Notice and Receipt (re: Initial Provisioning and Replenishment
----------------------------------------------------------------------
Stock). SmarterKids will advise Hammett in advance of the impending arrival of
- ------
Products at the Hammett warehouse by facsimile at least one (1) business day
before arrival. Upon arrival of the initial provisioning or replenishment
stocks at the warehouse, the shipment will be inspected by Hammett for exterior
shipping damage and to ensure that the packing lists correspond to the physical
receipt. Any discrepancies will be recorded and SmarterKids will be advised.
Any affected inventory will be held in quarantine for up to five (5) business
days pending receipt of further instructions from SmarterKids as to its
disposition. Unless otherwise agreed, such inventory will be returned to the
Product vendor or distributor after five (5) business days.
7. Inventory Management. Product will be stored on the shelves in SmarterKids'
--------------------
storage bays in the warehouse. Within the Hammett inventory management system,
inventory will be secured by SmarterKids/warehouse code. A physical inventory
control will be maintained by conducting regular cycle counts to cover one
hundred percent (100%) of the inventory twice annually. A weekly status report
will be provided to SmarterKids. SmarterKids may at request that Hammett
perform a complete physical inventory at reasonably convenient times for
Hammett.
8. Physical Pick of Order. The Hammett inventory management system will
----------------------
generate a pick list for the warehouse team to pick/pack and dispatch orders
(refer to "Orders" below). Hammett will record the picked consignments and will
advise SmarterKids accordingly. All picks will be double checked as part of the
warehouse quality control procedure.
9. Documentation. All necessary paperwork (i.e. notes, address labels) will be
-------------
produced for correct delivery. A shipping audit procedure will act as a further
check to insure that the correct Product(s) and correct number of cartons have
been dispatched.
10. Orders. (a) SmarterKids will transmit order data by EDI to Hammett. Each
------
party is responsible to pay its own charges relating to EDI.
(b) All orders will be received into the Hammett information system for
processing and generation of the order pick log. Orders will print in the
Hammett warehouse and the appropriate Product will be picked and shipped along
with a packing slip. At the end of each month, Hammett will provide a report to
SmarterKids summarizing the order fulfillment percentage Hammett achieves in
conjunction with its performance of the Services.
-16-
<PAGE>
(c) Undeliverable Products and Products returned by Customers to Hammett shall
be inspected, repackaged if necessary and then placed in stock in the Hammett
warehouse for use in fulfilling future Customer orders for such Product.
11. Unique Equipment. SmarterKids will furnish and/or authorize Hammett to
----------------
purchase necessary tools, training materials, equipment and technical program
information available in sufficient quantities to meet SmarterKids' unique
demands of Hammett's order fulfillment service personnel. This will include any
unique equipment required to supply Services on behalf of SmarterKids. Hammett
bears the responsibility to ensure that its service personnel have the training
and expertise to effectively use any such unique tools provided by SmarterKids.
SmarterKids will pay for equipment once title has been assigned to SmarterKids.
SmarterKids also agrees to pay for all maintenance contracts, repairs and
supplies.
12. Inventory Levels. SmarterKids will order inventory items, set order levels
----------------
and supply Hammett with a Bill of Materials and periodic updates to same..
Should Product models change, SmarterKids and Hammett will mutually agree to
either exhaust existing inventory prior to ordering the new Product model, or to
purge inventory of outdated Products and return them to vendors, subject to
SmarterKids' reimbursement of restocking charges assessed by such vendor(s).
Payments to vendors for inventory will be made by Hammett and funded by
SmarterKids via a disbursement account to be established in conjunction with the
aforementioned System Automation requirements.
13. Bill of Materials. SmarterKids will provide Hammett with the following
-----------------
information for each Product to be stocked.
. SmarterKids part number
. Description
. Product Name
. Quarterly forecast for every three months
. SmarterKids' standard cost (if such exists)
14. Scrap. Hammett shall be solely responsible for the proper and lawful
-----
handling and disposal of scrap material generated by Hammett during the
performance of Services. Hammett is responsible for complying with all
applicable laws governing the transport, handling, recycling or disposal of any
and all scrap material.
15. Forecasts. Product sales forecasts shall be provided by SmarterKids to
---------
Hammett for all SmarterKids Products with respect to which Hammett is expected
to provide Services as follows:
(a) Order Forecast - At a minimum of once per quarter.
(b) SKU Forecast - At a minimum of once per quarter.
(c) Existing Products - At a minimum of once per quarter.
(d) New or Added Products - Forecasts provided with requests for Services
support.
(e) New Service Delivery Method - Forecast provided with request for
Services support.
SmarterKids will also provide Hammett with revised forecast updates to coincide
with any changes in SmarterKids' service or sales strategy.
-17-
<PAGE>
16. Product Sales Volume Reporting. To assist Hammett in estimating the volume
------------------------------
of work to be performed and to enable it to provide adequate facilities and
personnel for contracted Services, SmarterKids shall provide Hammett with the
historical and projected Product sales volume for each Product.
17. Order Fulfillment. For each order received by Hammett, Hammett shall
-----------------
provide the following set of Services:
Receive EDI data from SmarterKids (i.e. from SmarterKids.com web site). Deduct
order from inventory, produce packing slip, produce picking label. Pick order
from inventory. Pack order. Ship order via customer-selected shipping vendor.
Supply SmarterKids updated inventory information every two hours. Supply
SmarterKids a complete inventory update each weekday at 7:00 am. Supply
SmarterKids shipping records, process records, completed records and invoicing
records as specified in Item 1 of this Exhibit A.
18. Adjustment to Changes. Hammett agrees to maintain the capability to
---------------------
rapidly increase and/or decrease capacity as required to adjust for changes in
Product sales rates consistent with the forecasts provided by SmarterKids.
19. Special Safety Procedures. If either SmarterKids or Hammett identifies an
-------------------------
engineering change that must be implemented for reasons of safety (a "Safety
Change"), the parties agree to cooperate so as to accomplish such Safety Change
as soon as possible after discovery. Once such a Safety Change is discovered,
the parties agree that no affected Product shall be shipped until such Safety
Change has been implemented. The parties further agree to cooperate in the
implementation of such Safety Change with respect to each Product shipped prior
to discovery of the hazard. In this regard, Hammett agrees to implement
retrofitting Service, as appropriate. SmarterKids and Hammett shall agree on a
case by case basis on appropriate charges for the implementation of a Safety
Change.
20. Required Reports:
-----------------
(a) Activity Summaries. Hammett agrees to provide to SmarterKids monthly
-------------------
summaries of activity at the order fulfillment facility. These summaries must
be available in [ASCII format], and they must contain:
. Quantity and type of Products ordered by Customers
. Quantity and type of Products delivered
. Number of returns received
(b) Operational Reports. Hammett will furnish operational reports to
-------------------
SmarterKids each week which track the order fulfillment turn-around time within
the order fulfillment cycle.
(c) Inventory Usage Reports. Hammett will furnish weekly inventory usage
-----------------------
reports. Invoice and shipping logs will be furnished with each invoice
with stock status list(s) and packing list(s).
-18-
<PAGE>
21. Packaging and Labeling. Hammett will furnish all the necessary packaging
----------------------
and labeling. Products and parts shall be packaged and labeled in accordance
with standard commercial practices for domestic or international shipment.
Products sent directly to Customers shall be shipped and documented with the
same packaging and documentation as would be used by SmarterKids in the case of
Products shipped directly by it to its Customers. Hammett shall include with
each shipment a list of contents, to allow for review of contents upon receipt.
Products shipped under this Agreement must be shipped by Hammett in packaging
suitable for reshipment without additional packaging and such packaging shall at
least conform to minimum acceptable industry standards. Products must be
labeled with the SmarterKids part number. Any labeling other than standard
commercial practices required by specific destination countries shall be the
responsibility of Hammett.
22. Quality Goal. Hammett's target is to a achieve a quality goal of zero
------------
defects with respect to all Products it delivers. In pursuit of this goal,
Hammett agrees to subject each unit of Product to the QA Test Procedures
described in the Product Specification applicable to that Product
23. Inventory Management Services. Hammett agrees to provide the following
-----------------------------
Inventory Management Services for SmarterKids:
. The SmarterKids packaging for the affected Product(s) will be received in
bulk and entered into the inventory management system and stored at the Hammett
warehouse.
. The delivery of approximately [5,000] separate Products to SmarterKids'
Customers will be managed by Hammett at its Braintree facility.
. The box shipped to the SmarterKids Customer will include an airbill and
instructions for placing additional orders or returning the ordered Product(s).
. Hammett will provide periodic reports to indicate Product inventory status,
order receipts/confirm, order shipping and stock usage.
-19-
<PAGE>
EXHIBIT B - PAYMENT FOR SERVICES
SmarterKids agrees to compensate Hammett for the Services rendered as follows:
1. Product Percentage. Hammett will receive a [CONFIDENTIAL TREATMENT
------------------
REQUESTED]** percent markup (the "Product Percentage") over cost of each
Product shipped pursuant to Services rendered by Hammett.
--------------------------------------------
--------------------------------------------
--------------------------------------------
Such mark-up is calculated based only upon the cost of the Product sold and
does not include any other costs such as any sales tax and shipping and handling
charges listed on the customer invoice. If the aggregate Product Percentage
received by Hammett in any year is less than the actual documented labor costs
of Hammett required to perform the Services, then SmarterKids agrees to
reimburse Hammett for such shortfall.
Gift wrap Program. Hammett shall receive a fee of [CONFIDENTIAL TREATMENT
REQUESTED]** for every item gift-wrapped.
Promotional Orders. Notwithstanding the above, Hammett will receive
- ------------------
[CONFIDENTIAL TREATMENT REQUESTED]** for each Customer order which consists of
only promotional (free) products and the Product Percentage referenced above
shall not apply to such promotional order.
2. Common Stock Warrants.
---------------------
(a) According to that certain contract for Services on Term Sheet between
SmarterKids and Hammett dated September 29, 1998, the Company granted Hammett
the right to purchase 38,000 shares of the common stock of SmarterKids at a
price of $2.00 per share according to a Vesting Schedule. As of the execution of
this Agreement all such warrants will be fully exercisable.
(b) Hammett is hereby granted a fully-vested and exercisable right to purchase
an additional 72,000 shares of the common stock of SmarterKids at a price of
$2.00 per share.
The above grants shall be evidenced by one or more Warrants issued by
SmarterKids to Hammett upon reasonable and ordinary terms.
**[CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
-20-
<PAGE>
3. Reimbursable Expenses. SmarterKids will reimburse Hammett at cost for the
---------------------
following expenses:
(a) Warehouse Storage Media.
(b) Equipment obtained specifically for SmarterKids with the prior
approval of SmarterKids.
(c) Information Systems (IS) Special Project Expenses approved by
SmarterKids as such expenses relate to new projects not contemplated
by this Agreement. Process maintenance and process improvements will
not be reimbursed directly by SmarterKids, but Special Project
Expenses which are requested by SmarterKids and which extend beyond
the scope of this Agreement shall be eligible for reimbursement.
(d) Miscellaneous Expenses as agreed upon by both parties.
(e) Excess SmarterKids cartons.
(f) Extra warehouse space at Hammett or rented by Hammett.
(g) Specially placed employees outside the distribution area.
(h) Set-up costs for warehouse space.
4. Vendor returns will be billed at $65.00 per pallet with a minimum charge of
$65.00 per order, plus freight costs.
5. Product Returns. Hammett shall cover all Product shipping and restocking
---------------
charges and shall reimburse SmarterKids for all Product orders processed or
fulfilled in error by Hammett, including without limitation overshipments,
undershipments, wrong items and misidentified items. SmarterKids will bear
responsibility for all wrong address issues whose cause is traced to SmarterKids
and the SmarterKids.com web site. SmarterKids may also, on a case-by-case
basis, agree to bear responsibility for the cost of each Product Return
authorized by a designated SmarterKids staff member for an issue other than
those identified above.
-21-
<PAGE>
EXHIBIT C - TRANSPORTATION EXPENSES
Hammett will monthly charge SmarterKids for its costs of shipping Products.
Hammett will at all times pass through to SmarterKids the United Parcel Service
(UPS) residential ground shipment rebates from the published rates in effect
from time to time.
-22-
<PAGE>
EXHIBIT 10.11
-------------
R-09/09/99
FINAL
OFFICE LEASE
OF PREMISES AT 15-19 CRAWFORD STREET,
NEEDHAM, MASSACHUSETTS
FROM
BHX, LLC, AS TRUSTEE OF
CRAWFORD REALTY TRUST
TO
SMARTERKIDS.COM, INC.,
A DELAWARE CORPORATION
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY OF BASIC TERMS
ARTICLE I ............................................................. 10
- ---------
ARTICLE II ............................................................. 17
- ----------
Section 2.1 Lease of The Premises........................................ 17
----------- ---------------------
Section 2.2 Communications Antenna; Backup Generator..................... 17
----------- ---------------------------------------
Section 2.3 Parking...................................................... 18
----------- -------
Section 2.4 Commencement Date: Lease Term: Right to Extend............... 18
----------- ----------------------------------------------
Section 2.5 Security Deposit............................................. 18
----------- ----------------
Section 2.6 Lease Amendment.............................................. 20
---------- ---------------
ARTICLE III ............................................................. 20
- -----------
Section 3.1 Landlord's Work.............................................. 20
----------- ---------------
Section 3.2 Tenant's Work; Pre-Term Occupancy............................ 23
----------- ---------------------------------
Section 3.3 Approval of Plans and Specifications......................... 24
----------- ------------------------------------
Section 3.4 Signs........................................................ 24
----------- -----
ARTICLE IV ............................................................. 25
- ----------
Section 4.1 Base Rent.................................................... 25
----------- ----------
Section 4.2 Certain Additional Rent...................................... 26
----------- ------------------------
Section 4.3 Net Lease.................................................... 27
----------- ----------
Section 4.4 Taxes........................................................ 27
----------- ------
Section 4.5 Insurance Costs.............................................. 28
----------- ----------------
Section 4.6 Operating Costs.............................................. 28
----------- ----------------
Section 4.7 Payment for Electricity...................................... 28
----------- ------------------------
Section 4.8 Annual Statement: Tenant's Audit............................. 28
----------- ---------------------------------
ARTICLE V ............................................................. 29
- ---------
Section 5.1 Permitted Use................................................ 29
----------- -------------
Section 5.2 Restrictions on Use.......................................... 29
----------- -------------------
Section 5.3 Hazardous Materials.......................................... 30
----------- -------------------
ARTICLE VI ............................................................. 30
- ----------
Section 6.1 Landlord's Services.......................................... 30
----------- -------------------
Section 6.2 Extraordinary Use............................................ 31
----------- -----------------
Section 6.3 Interruption; Delay.......................................... 31
----------- -------------------
Section 6.4 Additional Services.......................................... 32
----------- -------------------
Section 6.5 Tenant's Right to Cure....................................... 32
----------- ----------------------
Section 6.6 Exoneration and Indemnification.............................. 32
----------- -------------------------------
ARTICLE VII ............................................................. 33
- -----------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Section 7.1 Rent......................................................... 33
----------- ----
Section 7.2 Utilities.................................................... 33
----------- ---------
Section 7.3 No Waste..................................................... 33
----------- --------
Section 7.4 Maintenance; Repairs, and Yield-Up........................... 33
----------- ----------------------------------
Section 7.5 Alterations by Tenant........................................ 34
----------- ---------------------
Section 7.6 Trade Fixtures and Equipment................................. 35
----------- ----------------------------
Section 7.7 Compliance with Laws......................................... 35
----------- --------------------
Section 7.8 Contents at Tenant's Risk.................................... 35
----------- -------------------------
Section 7.9 Exoneration: Indemnification and Insurance................... 36
----------- ------------------------------------------
Section 7.10 Landlord's Access............................................ 37
------------ -----------------
Section 7.11 No Liens..................................................... 37
------------ --------
Section 7.12 Compliance with Rules and Regulations........................ 37
------------ -------------------------------------
ARTICLE VIII ............................................................. 37
- ------------
Section 8.1 Subletting and Assignment.................................... 37
----------- -------------------------
ARTICLE IX ............................................................. 40
- ----------
Section 9.1 Subordination to Mortgages and Ground Leases................. 40
----------- --------------------------------------------
Section 9.2 Lease Superior at Mortgagee's or Ground Lessor's Election.... 40
----------- ---------------------------------------------------------
Section 9.3 Notice to Mortgagee and Ground Lessor........................ 41
----------- -------------------------------------
Section 9.4 Limitations on Obligations of Mortgagees, around Lessors and
----------- ------------------------------------------------------------
Successors................................................... 41
----------
Section 9.5 Estoppel Certificate By Tenant and Information Concerning
----------- ---------------------------------------------------------
Tenant....................................................... 41
------
ARTICLE X ............................................................. 42
- ---------
Section 10.1 Damage From Casualty......................................... 42
------------ --------------------
Section 10.2 Abatement of Rent............................................ 42
------------ -----------------
Section 10.3 Limitation on Landlord's and Tenant's Obligations............ 43
------------ -------------------------------------------------
Section 10.4 Landlord's Right to Terminate................................ 43
------------ -----------------------------
Section 10.5 Tenant's Right to Terminate.................................. 43
------------ ---------------------------
ARTICLE XI ............................................................. 43
- ----------
Section 11.1 Eminent Domain, Right to Terminate and Abatement in Rent..... 43
------------ --------------------------------------------------------
Section 11.2 Restoration.................................................. 44
------------ -----------
Section 11.3 Landlord to Control Eminent Domain Action.................... 44
------------ -----------------------------------------
ARTICLE XII ............................................................. 44
- -----------
Section 12.1 Event of Default............................................. 44
------------ ----------------
Section 12.2 Landlord's Remedies.......................................... 45
------------ ------------------
Section 12.3 Reimbursement of Landlord.................................... 46
------------ -------------------------
Section 12.4 Landlord's Right to Perform Tenant's Covenants............... 46
------------ ----------------------------------------------
Section 12.5 Cumulative Remedies.......................................... 47
------------ -------------------
Section 12.6 Expenses of Enforcement...................................... 47
------------ -----------------------
Section 12.7 Landlord's Default........................................... 47
------------ ------------------
Section 12.8 Limitation of Landlord's Liability........................... 48
------------ ----------------------------------
Section 12.9 Late Payment and Administrative Expense...................... 48
------------ ---------------------------------------
ARTICLE XIII ............................................................. 48
- ------------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Section 13.1 Brokers............................................................ 49
------------ -------
Section 13.2 Quiet Enjoyment.................................................... 49
------------ ---------------
Section 13.3. [intentionally omitted]............................................ 49
------------- -----------------------
Section 13.4 Notices............................................................ 49
------------ -------
Section 13.5 Waiver of Subrogation.............................................. 49
------------ ---------------------
Section 13.6 Entire Agreement: Execution; Time of the Essence, Headings, Table
------------ -----------------------------------------------------------------
of Contents........................................................ 50
----------
Section 13.7 Partial Invalidity................................................. 50
------------ ------------------
Section 13.8 No Waiver.......................................................... 50
------------ ---------
Section 13.9 Holdover........................................................... 50
------------ -------
Section 13.10 When Lease Becomes Binding........................................ 51
------------- --------------------------
Section 13.11 No Recordation.................................................... 51
------------- --------------
Section 13.12 As Is............................................................. 51
------------- -----
Section 13.13 Tenant's Financial Statements: Certain Representations and
------------- ----------------------------------------------------------
Warranties of Tenant.............................................. 51
--------------------
Section 13.14 Confidentiality................................................... 52
------------- ---------------
Section 13.15 Summary of Basic Terms............................................ 52
------------- ----------------------
Section 13.16 [intentionally omitted]........................................... 52
------------- -----------------------
Section 13.17 Year 2000 Compliance.............................................. 52
------------- --------------------
</TABLE>
Exhibits:
- ---------
A - Property Description
B - Site Plan
C - Building Floor Plan
D - Base Building Work
E - Tenant Improvements Plans and Specifications
F - Tenant's Work
G - Rules and Regulations
H - Clerk's Certificate
I - Form of Letter of Credit
<PAGE>
SUMMARY OF BASIC TERMS
OFFICE LEASE
OF PREMISES AT 15-19 CRAWFORD STREET,
NEEDHAM, MASSACHUSETTS
TO
SMARTERKIDS.COM, INC.
DATED AS OF SEPTEMBER 8, 1999
- --------------------------------------------------------------------------------
The following is a summary of certain basic terms of this Lease which is
intended for the convenience and reference of the parties. Capitalized terms
used, but not defined, in this Summary of Basic Terms, have their defined
meanings in this Lease. In addition, some of the following items or terms are
incorporated into this Lease by reference to the item or term or to this
"Summary of Basic Terms."
1. Landlord: BHX, LLC, a Massachusetts limited liability company, as Trustee
--------
of Crawford Really Trust, under Declaration of Trust dated June 9, 1997,
and filed with the Norfolk Registry District of the Land Court on June 9,
1997 as Document No. 764674.
2. Tenant: SmarterKids.com, Inc., a Delaware corporation.
------
3A. Premises: The Building, as depicted on Exhibit B to this Lease, comprised
-------- ---------
of an agreed upon 37,539 leasable square feet of office space (the "Office
------
Space") and an agreed upon 1,613 leasable square feet of storage space (the
-----
"Storage Space"). The Office Space and Storage Space are depicted on
-------------
Exhibit C.
---------
3B. Landlord's Property: The real property with the Building and any other
-------------------
improvements now or hereafter thereon, now commonly known as 15-19 Crawford
Street, Needham, Massachusetts, as described on Exhibit A to this Lease.
---------
3C. Leasable Square Footage of the Building: An agreed upon 39,152 square
---------------------------------------
feet.
3D. Leasable Square Footage of the Office Space: An agreed upon 37,539 square
-------------------------------------------
feet.
3E. Leasable Square Footage of the Storage Space: An agreed upon 1,613 square
--------------------------------------------
feet.
<PAGE>
4A. Completion Date: November 15, 1999, subject to extension due to Excusable
---------------
Delay as provided in Section 3.1(b).
4B. Landlord's Work: Landlord shall perform Landlord's Work as set forth in
---------------
Section 3.1 and Exhibits D and E.
----------------
4C. Tenant's Work: Tenant shall perform the Tenants Work as set forth in
-------------
Section 3.2 and on Exhibit F.
---------
4D. Tenant Improvements Allowance. Landlord shall provide Tenant an allowance
-----------------------------
for the Tenant Improvements Costs (the "Tenant Improvements Allowance"), in
-----------------------------
an amount equal to the lesser of (i) $17.00 multiplied by the Leasable
Square Footage of the Office Space or (ii) the actual amount of the Tenant
Improvements Costs. In the event that the Tenant Improvements Allowance
exceeds $12.00 multiplied by the Leasable Square Footage of the Office
Space, then the Base Rent for the Office Space shall be increased so as to
amortize such excess over the Initial Term with interest at the rate of 10%
per annum. All Tenant Improvements Costs in excess of the Tenant
Improvements Allowance shall be paid by Tenant as part of Tenant's
Contribution.
4E. Tenant's Contribution: Tenant shall contribute $0.00 toward the cost of
--------------------- ----
the Tenant Improvements Work, payment of which shall be Made at the time of
execution of this Lease. Thereafter, Tenant's Contribution is subject to
increase as provided in Section 3.1.
5A. Lease Term: From the Commencement Date until October 31, 2004.
----------
5B. Commencement Date: The later of (i) the Substantial Completion Date or
-----------------
(ii) November 1, 1999; provided, however, that if Tenant occupies any
portion of the Premises prior thereto, the Commencement Date shall be the
date on which Tenant first occupies a portion of the Premises.
5C. Rights of Extension: Tenant shall have the right to extend the Lease Term
-------------------
for one (1) term of five (5) years in accordance with Section 2.4.
6. Permitted Use: The Office Space shall be used for offices and no other
-------------
use. The Storage Space shall be used for warehouse and storage purposes
and no other use.
7. Tenant's Trade Style (d/b/2): SmarterKids.com.
----------------------------
8. Security Deposit: $500,000.00. The Security Deposit shall be in the form
----------------
of cash or an unconditional, irrevocable letter of credit which meets the
requirements of Section 2.5.
9. Tenant's Parking Allocation: Tenant shall have the right to use the
---------------------------
parking spaces located on the Landlord's Property, subject to the provisions of
Section 2.3.
10. Base Rent: Base Rent for the Lease Term is as follows:
---------
<PAGE>
<TABLE>
<CAPTION>
ANNUAL MONTHLY PSF
PERIOD RATE RATE RATE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
From the Commencement Date Through
October 31, 2004 (inclusive), Tenant will
pay Base Rent, as follows:
Office Space: $ 998,537.40 $83,211.45 $26.60
Storage Space: $ 16,130.00 $ 1,344.17 $10.00
-------------------------------
Total: $1,014,667.40 $84,555.62 N/A
</TABLE>
The Base Rent is subject to increase as provided in Item 4D of the Summary of
Basic Terms.
The Base Rent during any Extension Term will be determined in accordance with
Section 4.1 (b).
11A. Additional Rent: Tenant's Tax Escalation, Tenant's Insurance Escalation,
---------------
Tenant's Electricity Costs, Tenant's Operating Cost Escalation and/or Other
Additional Rent.
11B. Tenant's Tax Escalation: Taxes for any Tax Fiscal Year minus the Tax
-----------------------
Base; payable monthly (when base exceeded) in equal installments. "Tax
---
Base" means Taxes for the Base Tax Fiscal Year.
----
11C. Tenant's Insurance Escalation: Insurance Costs for any calendar year
-----------------------------
minus the Insurance Cost Base; payable (when base exceeded) in equal
monthly installments. "Insurance Cost Base" means Insurance Costs for the
Base Year.
11D. Payment of Tenant's Electricity Cost: Tenant shall pay its actual costs
------------------------------------
for for electricity provided to the Premises ("Tenant's Electricity Cost").
-------------------------
At Landlord's sole option, Landlord may require that Tenant make monthly
estimated payments of the Tenant's Electricity Cost provided to the
Premises based on $1.00 per square foot of the Leasable Square Footage in
the Premises and shall initially equal $39,152.00 per year and $3,262.67
monthly. Landlord may adjust the amount collected from Tenant on account of
Tenant's Electricity Cost from time to time based upon Landlord's estimate
of the actual amount of Tenant's Electricity Cost.
11E. Tenant's Operating Cost Escalation: Operating Costs for any calendar year
----------------------------------
minus the Operating Cost Base; payable monthly (when base exceeded) in
equal installments. "Operating Cost Base" means Operating Costs for the
-------------------
Base Year.
11F. Other Additional Rent: Includes all fees, charges, expenses, fines,
---------------------
assessments, interest, indemnities, or other sums other than Base Rent,
Tenant's Tax Escalation, Tenant's Insurance Escalation and Tenant's
Operating Cost Escalation due under this Lease.
<PAGE>
11G. Base Year: When referring to Taxes, Base Tax Fiscal Year shall mean Tax
---------
Fiscal Year 2001 (which is from July 1, 2000 through June 30, 2001). When
referring to Insurance Costs or Operating Costs, Base Year shall mean
calendar year 2000.
12. Heat and Utilities: To be supplied by Landlord (including water and sewer
------------------
charges) as part of the Operating Costs (except that Tenant's Electricity
Cost shall not be included in Operating Costs and, unless Landlord elects
to collect Tenants Electricity Cost in accordance with the terms of this
Lease, shall be paid directly by Tenant).
13. First Payment: First month's Base Rent in the amount of $84,555.62, plus
-------------
the first month's installment of Tenants Electricity Cost in the amount of
$3,262.67, plus the letter of credit constituting the Security Deposit in
the amount of $500,000.00, have been delivered to Landlord upon execution
of this Lease.
14. Brokers: The Bulfinch Companies, Inc., having an office at First Needham
-------
Place, 250 First Avenue, Suite 200, Needham, Massachusetts 02494 and
Cushman and Wakefield of Massachusetts, Inc., having an office at 101 Arch
Street, 21/st/ Floor, Boston, Massachusetts 02110.
15A. Tenant's Address For Notices, Telephone Number, Fax Number and Taxpayer
-----------------------------------------------------------------------
Identification No.:
------------------
1. Before the Commencement Date:
200 Highland Avenue, #401
Needham, MA 02494
Attn: Robert Cahill, Vice President Finance
Telephone: (781) 449-7567;
Fax: (781) 449-4887
Email: [email protected]
2. After the Commencement Date:
15-19 Crawford Street
Needham, MA 02494
Attn: Robert Cahill, Vice President Finance
Telephone: (781) 449-7567;
Fax: (781) 449-4887
Email: [email protected]
3. Tenant F.I.D.#04-3226127
With a copy to:
Joseph Torpy, Esq.
<PAGE>
Testa, Hurwitz & Thibeault, LLP
125 High Street
Boston, MA 02110
Telephone: (617) 248-7000;
Fax: (617) 248-7100
Email: [email protected]
15B. Landlord's Address for Notices:
------------------------------
BHX, LLC, as Trustee of Crawford Realty Trust
c/o The Bulfinch Companies, Inc.
First Needham Place
250 First Avenue, Suite 200
Needham, MA 02494
Attention: Robert A Schlager
Telephone: (781) 707-4000;
Fax: (781) 707-4001
Email: [email protected]
with a copy to:
Vorys, Sater, Seymour and Pease LLP
Suite 2100, Atrium Two
221 E. Fourth Street
Cincinnati, OH 45202-0236
Attn: Charles C. Bissinger, Jr., Esq.
Telephone: (513) 723-4000;
Fax: (513) 723-4056
Email: [email protected]
15C. Guarantor: Not applicable as of the date of execution of this Lease.
---------
<PAGE>
OFFICE LEASE
------------
THIS LEASE (this "Lease"), made as of the 8th day of September, 1999,
between BHX, LLC, a Massachusetts limited liability company, as Trustee of
Crawford Realty Trust, under Declaration of Trust dated June 9, 1997, and filed
with the Norfolk Registry District of the Land Court on June 9, 1997 as Document
No. 764674, and SmarterKids.com, Inc., a Delaware corporation, is as follows.
W I T N E S S E T H:
- - - - - - - - - -
ARTICLE I
---------
CERTAIN DEFINITIONS
-------------------
In addition to the words and terms defined elsewhere in this Lease, the
following words and terms shall have in this Lease the meanings set forth in
this Article (whether or not underscored):
"Additional Rent" means (a) Tenants Tax Escalation, (b) Tenant's Insurance
---------------
Escalation, (c) Tenant's Operating Cost Escalation, (d) Tenant's Electricity
Costs, and (e) all Other Additional Rent.
"Applicable Interest Rate" means the lesser of (a) a rate per annum equal
------------------------
to five percent (5%) plus the prime rate of Fleet National Bank, Boston,
Massachusetts (or any successor) in effect an the day the payment became due and
subject to change thereafter or (b) the maximum rate permitted by applicable
law.
"Bankruptcy Laws" means any existing or future bankruptcy, insolvency,
---------------
reorganization, dissolution, liquidation or arrangement or readjustment of debt
law or any similar existing or future law of any applicable jurisdiction, or any
laws amendatory thereof or supplemental thereto, including, without limitation,
the United States Bankruptcy Code of 1978, as amended (11 U.S.C. Section 101 et
seq.), as any or all of the foregoing may be amended or supplemented from time
to time.
"Base Building Work" means the work described in Exhibit D hereto.
------------------ ---------
"Base Tax Fiscal Year" means the Tax Fiscal Year beginning July 1, 2000,
--------------------
and ending June 30, 2001.
"Base Rent" has the meaning set forth in Item 10 of the Summary of Basic
---------
Terms.
"Base Year" has the meaning set forth in Item 11G of the Summary of Basic
---------
Terms.
"Brokers" has the meaning set forth in Item 14 of the Summary of Basic
-------
Terms.
<PAGE>
"Building" means the building located on Landlord's Property. The address
--------
of the Building is 15-19 Crawford Street, Needham, Massachusetts.
"Building Floor Plan" means the floor plan of the Building attached hereto
-------------------
as Exhibit C.
"Business Day" means Monday through Friday, except holidays. The term
------------
"holiday" shall mean the federal day of celebration of the following holidays:
New Year's Day, Martin Luther King Day, President's Day, Memorial Day, July 4th,
Labor Day, Columbus Day, Veterans Day, Thanksgiving, Christmas and any other
weekday on which banks in the City of Boston, Massachusetts, are closed or
required to be closed.
"Business Hours" means Monday through Friday, 8:00 a.m. to 6:00 p.m., and
--------------
Saturday, 8:00 a.m. to 1:00 p.m., except holidays. The term `holiday" shall
mean the federal day of celebration of the following holidays: New Year's Day,
Martin Luther King Day, Presidents Day, Memorial Day, July 4th, Labor Day,
Columbus Day, Veterans Day, Thanksgiving, Christmas and any other weekday on
which banks in the City of Boston, Massachusetts, are closed or required to be
closed.
"Commencement Date" has the meaning set forth in Item 5B of the Summary of
-----------------
Basic Terms.
"Completion Date" has the meaning set forth in Item 4A of the Summary of
---------------
Basic Terms.
"Construction Notice" has the meaning set forth in Section 3.1(a).
-------------------
"Environmental Law" means the Comprehensive Environmental Response,
-----------------
Compensation, and Liability Act ("CERCLA"), 42 U.S.C. (S)9601 et seq., the
------ -- ----
Resource Conservation and Recovery Act, 42 U.S.C. (S)6901 et seq., the Hazardous
-- ----
Materials Transportation Act, 49 U.S.C. (S)1802 et seq., the Toxic Substances
-- ----
Control Act, 15 U.S.C. (S)2601 et seq., the Federal Water Pollution Control Act,
-- ----
33 U.S.C. (S)1251 et seq., the Clean Water Act, 33 U.S.C. (S)1321 et seq., the
-- ---- -- ----
Clean Air Act, 42 U.S.C. (S)7401 et seq., the Massachusetts Oil and Hazardous
-- ----
Material Release Prevention and Response Act, Chapter 21E of the Massachusetts
General Laws, all regulations promulgated thereunder, and any other federal,
state, county, municipal, local or other statute, law, ordinance or regulation
(including any state or local board of health rules, regulation, or code), or
any common law (including common law that may impose strict liability or
liability based on negligence), which may relate to or deal with human health,
the environment, natural resources, or Hazardous Materials, all as may be from
time to time amended or modified.
"Event of Default" means the occurrence of any of the events listed in
----------------
Section 12.1 of this Lease and the expiration of any applicable cure periods.
"Excusable Delay" means those matters which are beyond Landlord's
---------------
reasonable control including, without limitation, the following: delays caused
by Tenant (or by Tenant's Invitees), or delays caused by, or resulting from,
acts of God, accidents, breakdowns, war, civil commotion, fire or other
casualty, labor difficulties, shortages of labor, material or equipment,
<PAGE>
governmental regulations or orders, weather conditions or other causes beyond
Landlord's reasonable control.
"Extension Term" means the period of time beginning at the end of the
--------------
Initial Term and ending at 11:59 p.m. on October 31, 2009.
"Final Amounts Due" has the meaning set forth in Section 2.5.
-----------------
"GAAP" means generally accepted accounting principles, consistently
----
applied.
"Guarantor" means any Person now or hereafter guarantying any of Tenant's
---------
obligations under this Lease.
"Hazardous Materials" or "Hazardous Substances" means, at any time, (a) any
------------------- --------------------
"hazardous substance" as defined in (S)101(14) of CERCLA (42 U.S.C. (S)9601(14))
or regulations promulgated thereunder, (b) any "solid waste," "hazardous waste,"
or "infectious waste," as such terms are defined in any Environmental Law at
such time; (c) asbestos, urea-formaldehyde, polychlorinated biphenyls ("PCBs"),
biomedical materials or waste, nuclear fuel or material, chemical waste,
radioactive material, explosives, known carcinogens, petroleum products and by-
products and other dangerous, toxic or hazardous pollutants, contaminants,
chemicals, materials or substances which may be hazardous to human or animal
health or the environment or which are listed or identified in, or regulated by,
any Environmental Law; and (d) any additional substances or materials which at
such time are classified or considered to be hazardous or toxic under any
Environmental Law.
"Initial Term" means the period beginning at 12:01 A.M. on the Commencement
------------
Date and ending at 11:59 P.M. on October 31, 2004.
"Insurance Base" has the meaning set fourth in Item 11C of the Summary of
--------------
Basic Terms.
"Insurance Costs" includes the cost of insuring the entire Landlord's
---------------
Property, including without limitation the buildings and improvements now or
hereafter situated thereon, and all operations conducted in connection
therewith, with such policies, coverages and companies and in such limits as may
be selected by Landlord (and/or which may be required by Landlord's lenders),
including, but not limited to, fire insurance with extended or with all-risk
coverage, comprehensive public liability insurance covering personal injury,
deaths and property damage with a personal injury endorsement covering false
arrest, detention or imprisonment, malicious prosecution, libel and slander, and
wrongful entry or eviction, rent loss or business interruption insurance,
workers compensation insurance, plate glass insurance, contractual liability
insurance, boiler insurance, and fidelity bonds.
"Invitees" means employees, workers, visitors, guests, customers,
--------
suppliers, agents, contractors, representatives, licensees and other invitees.
<PAGE>
"Land" means the land located at 15-19 Crawford Street, Needham,
----
Massachusetts more particularly described in Exhibit A attached hereto and
---------
incorporated by reference herein and which is depicted on the Site Plan.
"Landlord" means BHX, LLC, a Massachusetts limited liability company as
--------
Trustee of Crawford Realty Trust under Declaration of Trust dated June 9, 1997,
and filed with the Norfolk Registry District of the Land Court on June 9, 1997
as Document No. 764674, its successors and assigns.
"Landlord's Architect" means Smits Associates Architects, Inc. or any other
--------------------
architect or architectural firm designated by Landlord.
"Landlord's Property" means the Land, the Building and all present or
-------------------
future appurtenances and/or improvements to the Land and/or the Building.
"Landlord's Work" means the Base Building Work and the Tenant Improvements
---------------
Work.
"Leasable Square Footage of the Building" has the meaning set forth in Item
---------------------------------------
3C of the Summary of Basic Terms.
"Leasable Square Footage of the Office Space" has the meaning set forth in
-------------------------------------------
Item 3D of the Summary of Basic Terms.
"Leasable Square Footage of the Storage Space" has the meaning set forth in
--------------------------------------------
Item 3E of the Summary of Basic Terms.
"Lease Term" means the Initial Term and, if Tenant timely and properly
----------
exercises its right to extend pursuant to Section 2.4 of this Lease, the
Extension Term.
"Lease Year" means the twelve (12) month period beginning an the
----------
Commencement Date and on each anniversary of the Commencement Date throughout
the Lease Term; provided, however, that if the Commencement Date occurs on a
date other than the first day of a month, the first Lease Year shall consist of
the portion of the calendar month in which the Commencement Date occurs and the
next subsequent 12 calendar months, and the first day of each Lease Year
thereafter shall be the first day of the month after the month in which the
Commencement Date occurs.
"Legal Requirements" means all applicable laws, statutes, rules,
------------------
regulations and requirements of governmental authorities, including, but not
limited to, zoning laws and building codes.
"Market Rent" has the meaning set forth in Section 4.1(b).
-----------
"Negotiation Period" has the meaning set forth in Section 4.1(b).
------------------
"Office Space" has the meaning set forth in Item 3A of the Summary of Basic
------------
Terms.
<PAGE>
"Operating Cost Base" has the meaning set forth in Item 11E of the Summary
-------------------
of Basic Terms.
"Operating Costs" means all costs, expenses and disbursements of every kind
---------------
and nature (except Taxes, Tenant's Electricity Costs and Insurance Costs) which
Landlord shall pay or become obligated to pay in connection with owning,
operating, managing, insuring, maintaining, repair or replacing Landlord's
Property, all as determined by Landlord. Operating Costs shall include, by way
of illustration, but not be limited to: all charges payable by Landlord in
connection with the performance of Landlord's maintenance and repair obligations
with respect to Landlord's Property; all charges payable by Landlord to provide
janitorial service to Landlord's Property; all charges payable by Landlord to
provide heating, ventilating and air conditioning services to the Building; all
charges payable by Landlord to provide utility services to Landlord's Property,
all costs related to the operation of any shuttle or other transportation
service between Landlord's Property and public transportation stations (if
required by applicable laws, rules, regulations or requirements of authorities
with jurisdiction over the Landlord's Property); all costs related to any police
details at any entrances to Landlord's Property; all costs related to trash,
debris, and refuse removal, all costs related to removal of snow and ice; all
costs of pest and vermin control; all costs of providing, maintaining, repairing
and replacing of paving, curbs, walkways, landscaping, planters, roofs, walls,
drainage, utility lines, security systems and other equipment; all costs of
painting the exterior and/or interior of the Building; all costs of repaving,
resurfacing, and restriping Parking Areas and drives; all costs of lighting,
cleaning, waterproofing, repairing and maintaining the Building. Parking Areas
and any other portions of Landlord's Property; all surcharges, costs and
expenses that may result from any Environmental Laws provided that such
surcharges, costs and expenses relate to or are directly associated with
Tenant's or Tenant Invitee's use of the Landlord's Property (excluding costs
related to Hazardous Materials which are located on Landlord's Property on the
date hereof or which are placed on the Landlord's Property by a Person other
than Tenant or a Tenant Invitee) or other laws, rules, regulations, guidelines
or orders; all costs of licenses, permits and inspection fees; all legal,
accounting, inspection and consulting fees; all costs of capital improvements to
the Building, Parking Areas, or other portions of Landlord's Property amortized
over their expected useful life based upon and including a market rate of
interest; all costs of wages, salaries and benefits of operating personnel,
including welfare, retirement, vacations and other compensation and fringe
benefits and payroll taxes; management fees equal to five percent (5.0%) of
gross rents (which management fees may be payable to an affiliate of Landlord);
all materials and supplies, including charges for telephone, overnight courier,
postage, stationery, supplies and other materials and expenses required for the
routine operation or management of Landlord's Property. However,
notwithstanding the above, the following specific items shall not be included:
debt service and ground rent payments; any cost or expenditure for which
Landlord has been reimbursed by insurance proceeds; costs which have been
reimbursed under warranties provided to Landlord by contractors who have
warranty obligations; leasing commissions, attorneys' fees and collection costs
related to negotiation of tenant leases; expenses which are billed to, and paid
directly by, the Tenant; advertising, marketing, promotional, public relations
or brokerage fees, commissions or expenditures; financing and refinancing costs
in respect of any mortgage or security interest placed upon the Landlord's
Property or any portion thereof, including payments of principal, interest,
finance or other charges, and any points and
<PAGE>
commissions in connection therewith; interest or penalties for any late or
failed payments by Landlord under any contract or agreement unless resulting
from Tenant's failure to pay any amount due under this Lease on or before the
date when due; rent or other charges payable under any ground or underlying
lease; costs of any additions to or expansions of the Landlord's Property; costs
of repairs, restoration or replacements occasioned by fire or other casualty or
caused by the exercise of the right of eminent domain; the cost to make
improvements, alterations and additions to the Landlord's Property which are
required in order to render the same in compliance with Legal Requirements
existing on the date of this Lease; amounts paid to subsidiaries or affiliates
of Landlord for services rendered to Landlord's Property (except management
fees) to the extent such amounts exceed the competitive costs for delivery of
such services were they not provided by such related parties; and management
fees to the extent in excess of five percent (5.0%) of gross rents.
"Other Additional Rent" has the meaning set forth in Item 11F of the
---------------------
Summary of Basic Terms.
"Parking Areas" means those portions of Landlord's Property which may be
-------------
used for parking as depicted on the Site Plan, as such areas may be changed by
Landlord from time to time.
"Permitted Use" has the meaning set forth in Item 6 of the Summary of Basic
-------------
Terms.
"Person" means any individual, partnership, joint venture, trust, limited
------
liability company, business trust, joint stock company, unincorporated
association, corporation, institution, or entity, including any governmental
authority.
"Premises" has the meaning set forth in Item 3A of the Summary of Basic
--------
Terms.
"Proceedings" has the meaning set forth in Section 4.4(b).
-----------
"Proposed Change Order" has the meaning set forth in Section 3.1 (c).
---------------------
"Refund" has the meaning set forth in Section 4.4(b).
------
"Rules and Regulations" means the rules and regulations promulgated by
---------------------
Landlord with respect to Landlord's Property, a copy of which are attached
hereto as Exhibit G, as the same may be reasonably modified by Landlord from
---------
time to time upon notice to Tenant.
"Security Deposit" has the meaning set forth Item 8 of the Summary of Basic
----------------
Terms.
"Selection Period" has the meaning set forth in Section 4.1 (b).
----------------
"Storage Space" has the meaning set forth in Item 3A of the Summary of
-------------
Basic Terms.
"Substantial Completion Date" means the date, as reasonably determined in
---------------------------
good faith by Landlord's Architect, on which (a) the Landlord's Work is
substantially complete, except for incomplete or unsatisfactory items which do
not unreasonably interfere with Tenant's use of the
<PAGE>
Premises for the Permitted Use or (b) the building inspector for the Town of
Needham gives his final sign-off on the building permit, so that Tenant may
legally occupy the Premises for the Permitted Use, whichever is later.
"Summary of Basic Terms" means the Summary of Basic Terms which is affixed
----------------------
to this Lease immediately after the table of contents of this Lease.
"Tax Base" has the meaning set forth in Item 11B of the Summary of Basic
--------
Terms.
"Tax Fiscal Year" shall mean July 1 through June 30 next following, or such
---------------
other tax period as may be established by law for the payment of Taxes.
"Taxes" shall mean (a) all taxes, assessments, betterments, water or sewer
-----
entrance fees and charges including general, special, ordinary and
extraordinary, environmental, or any other charges (including charges for the
use of municipal services if billed separately from other taxes), levied,
assessed or imposed at any time by any governmental authority upon or against
the Land, the Building, or the fixtures, signs and other improvements thereon
then comprising Landlord's Property and (b) all attorneys' fees, appraisal fees
and other fees, charges, costs and/or expenses incur-red in connection with any
Proceedings or other proceedings related to the amount of the Taxes and/or the
tax classification and/or the assessed value of the Landlord's Property. This
definition of Taxes is based upon the present system of real estate taxation in
the Commonwealth of Massachusetts; if taxes upon rentals or any other basis
shall be substituted, in whole or in part, for the present ad valorem real
estate taxes, the term "Taxes" shall be deemed changed to the extent to which
there is such a substitution for the present ad valorem real estate taxes.
"Tenant" means SmarterKids.com, Inc., a Delaware corporation, its permitted
------
successors and permitted assigns.
"Tenant Improvements Allowance" has the meaning set forth in Item 4D of the
-----------------------------
Summary of Basic Terms.
"Tenant Improvements Costs" means all costs of the Tenant Improvements
-------------------------
Work, including, but not limited to (i) the fees of all architects and engineers
for design and supervision services, the cost of all required permits, (ii) the
charges of all contractors (including, but not limited to, overhead and profit
of all contractors), subcontractors, material suppliers and laborers engaged in
the performance of the Tenant Improvements Work, (iii) five percent (5%) profit
for the contractor on all costs of the Tenant Improvements Work and (iv) a fee
to the Landlord in the amount of two and one-half percent (2.5%) of all costs of
the Tenant Improvements Work.
"Tenant Improvements Plans and Specifications" has the meaning set forth in
--------------------------------------------
Section 3.1.
"Tenant Improvements Work" means the work to be performed by Landlord in
------------------------
accordance with the Tenant Improvements Plans and Specifications.
<PAGE>
"Tenant Invitees" means Tenant, its subtenants and assignees, together with
---------------
their respective Invitees.
"Tenants Contribution" has the meaning set forth in Item 4E of the Summary
--------------------
of Basic Terms.
"Tenant's Electricity Cost" has the meaning set forth in Item 11D of the
-------------------------
Summary of Basic Terms.
"Tenant's Insurance Escalation" means the excess, if any, of (a) the
-----------------------------
Insurance Costs for any calendar year, minus (b) the Insurance Base.
"Tenants Operating Cost Escalation" means the excess, if any, of (a) the
---------------------------------
Operating Costs for any calendar year minus (b) the Operating Cost Base.
"Tenant's Submission" has the meaning set forth in Section 3.1(c).
-------------------
"Tenants Tax Escalation" means the excess, if any, of (a) the Taxes for any
----------------------
Tax Fiscal Year minus (b) the Tax Base.
"Tenant's Work" means the work, if any, to be performed by Tenant with
-------------
respect to the Premises, as set forth in the Tenant's Work Plans and
Specifications.
"Tenant's Work Plans and Specifications" means the plans and specifications
--------------------------------------
for the Tenant's Work, as set forth in Exhibit F attached hereto, as the same
may be modified from time to time in accordance with this Lease.
ARTICLE II
----------
LEASE OF PREMISES
-----------------
Section 2.1 Lease of The Premises. Landlord does hereby lease the
----------------------------------
Premises to Tenant, and Tenant hereby leases the Premises from Landlord, upon
and subject to the terms and provisions of this Lease and all zoning ordinances,
and easements, restrictions, and conditions of record. Subject to the rights of
Landlord and applicable Legal Requirements; (a) Tenant shall have exclusive use
of the Land and the Parking Areas located thereon and (b) Tenant shall have
access to the Premises twenty-four hours a day, seven days a week, 365 days a
year, subject to the terms of this Lease.
Section 2.2 Communications Antenna; Backup Generator. Subject to
-----------------------------------------------------
applicable Legal Requirements and the terms and conditions of this Lease
(including, but not limited to, Section 3.2 and Article VII), Tenant shall have
the right to install (a) a communications antenna on the roof of the Building
(provided, however, that Tenant shall not be permitted to make any penetrations
of the roof) and (b) a backup generator on the Land at a location on the Land to
be agreed upon by Landlord and Tenant. The plans and specifications for the
foregoing shall be subject to Landlord's review and approval, which approval
shall not be unreasonably withheld.
<PAGE>
Section 2.3 Parking. Subject to the Rules and Regulations, Tenant
--------------------
Invitees are authorized to park passenger automobiles in the Parking Areas at no
cost to Tenant (except as otherwise provided in this Lease) in common with
Landlord and Landlord's Invitees. Tenant shall not (a) permit any Tenant
Invitees (other than visitors) to park in spaces designated as "visitor" spaces,
(b) permit any Tenant Invitees to park in spaces designated as `reserved" spaces
(unless reserved for Tenant), (c) permit the total number of passenger
automobiles parked on Landlord's Property by Tenant Invitees, at any time, to
exceed the number of spaces available to Tenant, and (d) except for delivery
trucks using designated loading and unloading facilities, permit any Tenant
Invitee to park any vehicle on Landlord's Property other than passenger
automobiles. Landlord may, from time to time, designate one or more spaces as
reserved for the exclusive use of Landlord and/or for Landlord's Invitees.
Section 2.4 Commencement Date: Lease Term: Right to Extend.
-----------------------------------------------------------
(a) The Lease Term shall commence at 12:01 A.M. on the Commencement
Date and, unless Tenant timely and properly exercises its right to extend
pursuant to Section 2.4(b) hereof, shall end at 11:59 P.M. on the last day of
the Initial Term. At the request of Landlord or Tenant made after the
Commencement Date, Landlord and Tenant will execute a written amendment to, and
restatement of, the Summary of Basic Terms pursuant to Section 2.6, setting
forth the Commencement Date.
(b) Provided there does not then exist an Event of Default or
circumstances which with the giving of notice, the passage of time, or both,
would constitute an Event of Default, Tenant shall have the right to extend the
Lease Term for one (1) period of five (5) years by giving Landlord written
notice specifying such extension, which notice must be received by Landlord not
more than eighteen (18) months nor less than twelve (12) months prior to the
expiration date of the Initial Term. If such extension becomes effective, the
Lease Term shall be automatically extended upon the same terms and conditions
except that (i) Base Rent shall be payable for such Extension Term as set forth
in Section 4.1(b) and (ii) there shall be no further right to extend or renew
beyond the period expressly set forth herein. The right of extension is
personal to SmarterKids.com, Inc. and is not exercisable by any subtenant or
assignee permitted hereunder.
Section 2.5 Security Deposit.
-----------------------------
(a) Simultaneously with the execution and delivery of this Lease,
Tenant shall deliver to Landlord a security deposit in the amount specified in
Item 8 of the Summary of Basic Terms. The Security Deposit is security for the
faithful performance and observance by Tenant of the terms, provisions and
conditions of this Lease and is not an advance payment of rent. It is agreed
that if an Event of Default occurs, Landlord may use, apply or retain the whole
or any part of the Security Deposit to the extent required for payment of any
Base Rent, Additional Rent, or any other sum as to which Tenant is in default or
for any sum which Landlord may expend or may be required to expend by reason of
the occurrence of an Event of Default in respect of any of the terms, covenants
and conditions of this Lease, including, but not limited, to any damage or
deficiency accrued before or after summary proceedings or other re-entry by
Landlord, including
<PAGE>
the costs of such proceeding or re-entry and further including, without
limitation, reasonable attorney's fees. It is agreed that Landlord shall always
have the right to apply the Security Deposit, or any part thereof, as aforesaid,
without notice and without prejudice to any other remedy or remedies which
Landlord may have, or Landlord may pursue any other such remedy or remedies in
lieu of applying the Security Deposit or any part thereof. No interest shall be
payable on the Security Deposit and Landlord shall have the right to commingle
the Security Deposit with other funds of Landlord. If Landlord shall apply the
Security Deposit in whole or in part, Tenant shall immediately upon demand pay
to Landlord the amount so applied to restore the Security Deposit to its
original amount, Because Tenant's Operating Cost Escalation, Tenant's Tax
Escalation, Tenant's Insurance Escalation, Tenant's Electricity Costs and other
Additional Rent are subject to annual reconciliation based on actual amounts
(collectively "Final Amounts Due") determined to be due, in addition to the
-----------------
other rights provided herein to Landlord regarding the Security Deposit,
Landlord shall have the right, in its discretion, upon the end of the Lease and
delivery of the Premises in accordance with the terms hereof, to hold up to
$50,000.00 of the Security Deposit until thirty (30) days after the
determination of Final Amounts Due at which time Landlord has the right to
deduct the Final Amounts Due from the remaining Security Deposit and return any
balance of the Security Deposit to Tenant. Landlord shall determine the Final
Amounts Due within ninety (90) days of expiration of the term or earlier
termination of this Lease. If the remaining Security Deposit, if any, is not
sufficient to pay Tenants obligations hereunder, Tenant shall pay the same
within ten (10) days of billing from Landlord. In the event of a sale or other
transfer of Landlord's Property, or leasing of the entire Landlord's Property
including the Premises subject to Tenant's tenancy hereunder, Landlord shall
transfer the Security Deposit then remaining to the vendee or lessee and,
provided that such vendee or lessee acknowledges receipt of the same in writing,
Landlord shall thereupon be released from all liability for the return of such
Security Deposit to Tenant; and Tenant agrees to look solely to the new landlord
for the return of the Security Deposit then remaining. The holder of any
mortgage upon Landlord's Property shall never be responsible to Tenant for the
Security Deposit or its application or return unless the Security Deposit shall
actually have been received in hand by such holder. Tenant further covenants
that it will not assign or encumber or attempt to assign or encumber the
Security Deposit and that neither Landlord nor its successors or assigns shall
be bound by any such assignment, encumbrance, attempted assignment or attempted
encumbrance. Except as provided above, the Security Deposit or any remaining
balance thereof after deduction for amounts due Landlord, shall be returned to
Tenant within thirty (30) days after the expiration of the Lease Term.
(b) If all or any portion of the Security Deposit is in the form of a
letter of credit, such letter of credit must satisfy all of the following
conditions: (i) the letter of credit must be in the exact form attached hereto
as Exhibit I with an expiration date not less than one (1) year after the date
the letter of credit is delivered to Landlord; (ii) the beneficiary of the
letter of credit must be Landlord or Landlord's designee; (iii) the letter of
credit must be irrevocable, unconditional and transferable one or more times
without charge; (iv) the letter of credit must by issued by a U.S. bank with
assets in excess of $10 billion, which bank is otherwise satisfactory to
Landlord in its sole and absolute discretion; and (v) the letter of credit must
provide that it may be drawn at a location in Boston, Massachusetts. If, at any
time, the issuer of the letter of credit gives notice of its election not to
renew, extend and/or reissue the letter of credit, then Tenant shall, on or
before forty-five (45) days prior to the expiration of the term of the letter of
credit,
<PAGE>
deliver to Landlord (1) a replacement letter of credit satisfying all of the
above conditions or (2) cash in the full amount of the expiring letter of
credit; and if Tenant fails to timely deliver to Landlord a replacement letter
of credit as provided above or cash in the full amount of the expiring letter of
credit, such failure shall constitute an Event of Default and, in addition to
any other rights which Landlord might have by reason of such Event of Default,
Landlord may draw on the letter of credit and hold the proceeds of such drawing
as part of the Security Deposit. If (x) Landlord shall reasonably feel insecure
with the creditworthiness of the bank issuing the letter of credit and Tenant
shall fail, within ten (10) days after notice, to either provide a replacement
letter of credit as provided above or cash in the full amount of the existing
letter of credit, or (y) Tenant fails to provide Landlord with cash in the full
amount of the letter of credit within ten (10) days after (I) any proceedings
under the Bankruptcy Code or any insolvency law are instituted with the bank as
debtor or (II) the bank issuing the letter of credit is taken over by the
Federal Deposit Insurance Corporation, the Resolution Trust Corporation or a
similar entity, then such failure by Tenant under clauses (x) or (y) of this
sentence shall constitute an Event of Default and, in addition to any other
rights which Landlord might have by reason of such Event of Default, Landlord
may draw on the letter of credit and hold the proceeds of such drawing as part
of the Security Deposit.
Section 2.6 Lease Amendment. If, pursuant to any provision of this Lease,
----------------------------
there results a change in (or, in the case of the Commencement Date, the
confirmation of any of the terms or amounts in the Summary of Basic Terms
(including, without limitation, the Base Rent) then in effect, Landlord and
Tenant will promptly execute a written amendment to, and restatement of, the
Summary of Basic Terms, substituting the changed (or confirmed) terms and
recomputed amounts in lieu of each of the applicable terms and amounts then in
effect which have been changed. As of the effective date of the amendment to
the Summary of Basic Terms, the changed terms (and recomputed amounts) will be
effective for all purposes of this Lease, and the amended and restated Summary
of Basic Terms will be a part of, and incorporated into, this Lease.
ARTICLE III
-----------
LANDLORD'S WORK; TENANT'S WORK
------------------------------
Section 3.1 Landlord's Work.
----------------------------
(a) Tenant Improvements Plan and Specifications.
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(i) Landlord has retained Landlord's Architect to prepare the
final, detailed working plans and specifications for the build-out of the Office
Space (the "Tenant Improvements Plans and Specifications"), which Tenant
--------------------------------------------
Improvements Plans and Specifications are identified in Exhibit E attached
---------
hereto. On or before September 13, 1999, Landlord will give Tenant written
notice (a "Construction Notice") specifying the amount of the Tenant
-------------------
Improvements Costs on the basis of the Tenant Improvements Plans and
Specifications. If a Construction Notice does not specify Tenant Improvements
Costs which exceed the Tenant Improvements Allowance, then Tenant shall not
respond to the Construction Notice and Tenant shall be deemed to have approved
the Construction Notice upon delivery. However, if a
<PAGE>
Construction Notice specifies Tenant Improvements Costs which exceed the Tenant
Improvements Allowance, then Tenant shall, within two (2) Business Days after
receipt of the Construction Notice, give written notice to Landlord either
approving or disapproving the Construction Notice, and the failure of Tenant to
disapprove the Construction Notice within such time shall be deemed to
constitute approval. If Tenant has the right to and does disapprove a
Construction Notice, then Tenant shall, within two (2) Business Days after
giving notice of disapproval, prepare, at its expense, and submit to Landlord
revised Tenant Improvements Plans and Specifications. Tenant shall submit such
revised Tenant Improvements Plans and Specifications to Landlord for Landlord's
review and approval. Within two (2) Business Days after receipt of such revised
Tenant Improvements Plans and Specifications, Landlord shall, by written notice
to Tenant, approve or disapprove the revised Tenant Improvements Plans and
Specifications. In any disapproval of revised Tenant Improvements Plans and
Specifications, Landlord shall specify in reasonable detail the respects in
which the revised Tenant Improvements Plans and Specifications are not
satisfactory to Landlord and the changes which Landlord desires in order that
such revised Tenant Improvements Plans and Specifications will be satisfactory
to Landlord. Within two (2) Business Days after receiving any notice of
disapproval from Landlord with respect to the revised Tenant Improvements Plans
and Specifications, Tenant, at its expense, will further revise the revised
Tenant Improvements Plans and Specifications as reasonably requested by Landlord
and will resubmit the revised Tenant Improvements Plans and Specifications to
Landlord for review and approval in accordance with the procedures set forth in
this Section. If the Tenant Improvements Costs as specified in an approved
Construction Notice exceed the Tenant Improvements Allowance, then Tenant shall
pay to Landlord, within three (3) Business Days after receipt of the
Construction Notice, the amount of such excess, as part of Tenant's
Contribution. Tenant shall have the right to review all of Landlord's books and
records with respect to the Tenant Improvements Costs and Landlord agrees that
the Tenant Improvements Costs shall not exceed the actual costs of the Tenant
Improvements Work plus the contractors fee of five percent (5%) and the
Landlord's fee of two and one-half percent (2.5%) of all costs of the Tenant
Improvements Work as provided in this Lease.
(ii) The Completion Date specified in this Lease is based upon
the assumption that the Construction Notice will be approved not later than
September 16, 1999. If the approval of the Construction Notice is delayed beyond
September 16, 1999, then, except to the extent that such delay is attributable
to delay by Landlord beyond the period provided in Section 3.1(a)(i) in giving a
Construction Notice, the Completion Date shall be extended by the period of such
delay, and Tenant shall pay, as and when the same would have become due and
payable but for such delay, an amount equal to the Base Rent for the period of
such delay.
(b) Landlord shall perform Landlord's Work in a good and workmanlike
manner using materials of a quality consistent with the Tenant Improvements
Plans and Specifications. Subject always to Excusable Delay, the Landlord's
Work shall be substantially completed (as determined by Landlord's Architect) by
the Completion Date. If any of Landlord's Work is not competed as a result of
an Excusable Delay, the Completion Date shall be extended upon notice from
Landlord to Tenant for a reasonable period of time under all of the
circumstances. Landlord reserves the right to make changes in Landlord's Work
from time to time as Landlord deems necessary and/or appropriate in order to
complete the performance of
<PAGE>
Landlord's Work. Without limiting the generality of the foregoing, Landlord may
substitute materials to minimize delays and Landlord may make such changes to
the Tenant Improvements Plans and Specifications as Landlord deems necessary or
appropriate in light of actual conditions, provided that no such changes shall
materially and adversely affect the function or appearance of the Premises.
Landlord shall obtain a certificate of occupancy for the Office Space.
(c) In the event that Tenant requests any changes in Landlord's Work,
the following procedures shall apply:
(i) Tenant shall give Landlord written notice of the proposed
change(s) with such details, plans and specifications as may be required by
Landlord ("Tenant's Submission").
-------------------
(ii) Landlord shall review Tenant's Submission and, Landlord
shall, within fifteen (15) days after receipt of Tenant's Submission,
reject it, approve it or approve it with conditions. If Landlord rejects
Tenant's Submission or fails to respond within the specified period,
Landlord's Work shall not be changed. If Landlord approves Tenant's
Submission, Landlord shall provide Tenant with a proposed change order (a
"Proposed Change Order") setting forth (A) the increase in the Tenants
---------------------
Contribution, if any, which will be required due to the work included in
Tenant's Submission, (B) the expected delay, if any, in achieving
substantial completion of Landlord's Work in connection therewith and (C)
any conditions imposed by Landlord on the grant of its approval.
(iii) If Landlord provides Tenant with a Proposed Change Order,
Tenant shall, within five (5) days after receipt of such Proposed Change
Order, either reject or accept it. If Tenant rejects such Proposed Change
Order (or fails to respond within the specified period), Landlord's Work
shall not be changed. If Tenant approves such Proposed Change Order, then
(A) Tenant shall execute the Proposed Change Order and deliver a signed
original thereof to Landlord within the specified five (5) day period,
together with payment of (1) the full amount of the specified increases, if
any, in the Tenants Contribution and (2) an amount equal to the Base Rent
for the period of time set forth in clause (ii)(B) above, and (B) the
Completion Date shall be extended for the time period specified in clause
(ii)(B) above.
(d) Tenant's taking possession of the Premises on or after the
Commencement Date shall be conclusive evidence, as against Tenant, that the
Premises were in good order and satisfactory condition in substantial accordance
with the Tenant Improvements Plans and Specifications when Tenant took
possession, except for punch list items on a list signed by both parties within
thirty (30) days after the date on which Tenant takes possession of the
Premises.
(e) Warranties. For any construction or installation, Tenant shall
----------
receive, to the extent possible, the benefit of any and all warranties from
contractors, subcontractors, material suppliers, equipment suppliers,
architects, engineers or others in connection with the Premises; however,
Landlord will not have any obligation to bring any action to enforce any
<PAGE>
warranty claim. Landlord shall be deemed to have warranted to Tenant, at the
time of delivery to Tenant of the Premises upon Substantial Completion: (i) that
Landlord's Work has been Substantially Completed in accordance with the Tenant
Improvements Plans and Specifications, with such modifications as are permitted
under the terms of this Lease or approved by Tenant; (ii) that the electrical,
plumbing, HVAC and other mechanical systems in the Building and serving the
Premises are in good working order and condition and conform to the requirements
(where applicable to the Premises) contained in this Lease; (iii) that the
Premises are served by water, electricity and other utilities; (iv) that the
Premises are served by sewer, and such sewer system, as installed, is of
sufficient capacity to serve the Building when fully occupied; and (v) the
Landlord's Work is free of material defects in materials or workmanship.
Notwithstanding the foregoing, Landlord's warranties shall exclude, and Landlord
shall not be responsible for (1) any damage or defects arising out of (or
aggravated by) the acts or omissions of Tenant, and/or any other Tenant Invitee,
(2) ordinary wear and tear, and (3) except to the extent provided in Article VI,
routine maintenance, repairs and/or replacements and/or any damage or defects
due to neglect or failure to provide proper maintenance and repairs. Landlord's
warranties as set forth herein shall be limited to items as to which Tenant
gives Landlord written notice within twelve (12) months of the Substantial
Completion Date and in any event with respect to the Building's HVAC system
shall extend for not less than a full cooling and heating season following
Substantial Completion of the Premises. Except for the express warranties set
forth in this Section 3.1(e), Landlord disclaims all warranties (express or
implied) with respect to the Landlord's Work, and Tenant hereby releases all
warranties not expressly stated in this Section 3.1(e).
Section 3.2 Tenant's Work; Pre-Term Occupancy. Tenant agrees to perform
----------------------------------------------
all of Tenant's Work as specified herein and on Exhibit F and to complete same
---------
by the Completion Date, as the same may be extended as provided herein. The
Tenant's Work Plans and Specifications and all modifications thereto shall be
subject to Landlord's prior written approval, which approval shall not be
unreasonably withheld. Except as hereinafter set forth, Tenant's Work shall
commence as soon as the Tenant Improvements Work has progressed to the point at
which Tenant's Work may reasonably begin. All of Tenant's Work shall be done in
a good and workmanlike manner using new and high quality materials, in
accordance with the provisions of all laws, rules, regulations and insurance
requirements applicable thereto and in accordance with the requirements of
Section 7.5 hereof. In the event that Tenant enters Landlord's Property prior
to the Commencement Date, such entry shall be at Tenants own risk solely for the
purpose of preparing for occupancy by Tenant and installing fixtures and
equipment; provided, however, that in so entering Landlord's Property prior to
the Commencement Date, Tenant shall not interfere with Landlord's construction
activities: and provided, further, that Tenant may not so enter Landlord's
Property prior to October 1, 1999 without the prior written approval of
Landlord, which approval Landlord shall have no obligation to give. During the
period of any entry by Tenant prior to the Commencement Date pursuant to the
above provisions of this Section, Tenant shall be subject to the insurance
obligations set forth in Sections 7.8 and 7.9 and to all other obligations of
Tenant under this Lease, other than the obligations to pay Base Rent, Tenant's
Tax Escalation, Tenant's Insurance Cost Escalation and Tenants Operating Cost
Escalation, and, prior to any such entry by Tenant prior to the Commencement
Date, Tenant shall furnish Landlord with a certificate of insurance confirming
its procurement of the insurance required by Sections 7.8 and 7.9. In the event
of any delay in the performance of Landlord's
<PAGE>
Work and/or increase in the cost thereof due to any entry by Tenant or any
Tenant Invitee prior to the Commencement Date, Tenant shall pay to Landlord,
within ten (10) days after demand, an amount equal to the Base Rent for the
period of such delay plus any and all such cost increases.
Section 3.3 Approval of Plans and Specifications. If Tenant's Work as set
-------------------------------------------------
forth on Exhibit F does not refer to complete plans and specifications approved
----------
by Landlord, then Tenant shall promptly, following execution of this Lease,
cause such plans and specifications to be prepared at Tenant's cost and
submitted to Landlord for Landlord's prior written approval before Tenant's Work
is commenced. Landlord shall not unreasonably withhold or delay such approval.
Landlord's approval of any Plans and specifications pursuant to this Section or
any other provisions of this Lease shall not, and shall not be deemed to, be a
certification, representation, or warranty by Landlord that the plans and
specifications are adequate, complete, or in compliance with applicable codes
and legal requirements.
Section 3.4 Signs. Tenant shall have the right, at Tenant's sole cost, to
-----------------
erect one (1) sign on the exterior of the Building provided that such sign
complies with the provisions of this Section 3.4 and other applicable provisions
of this Lease. The sign's location, design, shape, size, materials, color and
type and all other matters related to such sign (other than Tenant's right to
erect a sign) shall be subject to Landlord's prior written approval (which
approval shall be in Landlord's sole discretion), following submission by Tenant
to Landlord of detailed plans and specifications therefor. Tenant shall provide
such plans and specifications to Landlord within twenty (20) days after the date
hereof. Except for the one sign permitted pursuant to this Section 3.4, Tenant
shall not erect any signs which are visible from the exterior of the Building.
Tenant shall not erect signs except in compliance with all applicable
requirements of the Town of Needham and all other applicable Legal Requirements.
Tenant shall be solely responsible for confirming that any proposed sign is in
compliance with all such requirements. All costs of obtaining permits and
approvals, creating, installing, illuminating, maintaining, repairing, and/or
replacing such sign shall be paid by Tenant. Any signs located in the interior
of the Building (i) shall comply with all applicable Legal Requirements and the
sign criteria included in the Rules and Regulations, and (ii) and shall have
been approved of in writing and in advance by Landlord following submission of
detailed plans and specifications by Tenant to Landlord. Tenant shall maintain
its signs, if any, in good repair and condition. Immediately upon the
expiration of the Lease Term or other termination of this Lease, Tenant shall
remove all signs from the exterior of the Building and shall make all repairs
necessary to restore the exterior surfaces to the condition of the surrounding
exterior surfaces of the Building.
ARTICLE IV
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BASE RENT; ADDITIONAL RENT
--------------------------
Section 4.1 Base Rent.
---------------------
(a) In consideration of the lease of the Premises pursuant to this
Lease, Tenant shall pay therefor Base Rent in the amounts set forth in Item 10
of the Summary of Basic Terms.
(b) (i) The Base Rent during the Extension Term will be the greater
of (A) the Base Rent in effect during the last Lease Year prior to the Extension
Term or (B) ninety-
<PAGE>
five percent (95%) of the Market Rent, as determined by this Section 4.1(b).
Within thirty (30) days after Tenant gives to Landlord written notice of
exercise of the extension option pursuant to Section 2.4 hereof, Landlord and
Tenant shall simultaneously exchange proposals setting forth their opinions as
to the market rent for the Premises for the Extension Term "Market Rent").
-----------
Landlord and Tenant shall negotiate in good faith until the later of: (X)
fifteen (15) days after the exchange of proposals or (Y) the date which is ten
(10) months prior to the expiration of the Initial Term (such period being
herein called the "Negotiation Period") to attempt to agree upon the Market
------------------
Rent, and, in the course of such negotiations, each party may from time to time
submit modified proposals to the other. If the parties agree upon the Market
Rent prior to the determination of the arbitrator pursuant to Section 4.1(b)(ii)
hereof, whether such agreement is reached during or after the Negotiation
Period, the Market Rent shall be so agreed.
(ii) If the parties are unable to agree upon the Market Rent for the
Extension Term within the Negotiation Period then each party shall, upon
selection of an arbitrator pursuant to Section 4.1 (b)(iii) hereof,
simultaneously exchange and submit to the arbitrator for binding arbitration a
proposal as to Market Rent for the Extension Term. "Market Rent" shall be
determined as of the commencement of the Extension Period at the then current
arms-length negotiated rentals being charged to new (or renewal tenants for
renewals and extensions which do not have pre-negotiated contract rents) for
comparable space in comparable buildings located in the Needham area, taking
into account and giving effect to, in determining comparability, without
limitation, such considerations as lease term, Base Years and the age, size,
location, condition, and amenities of the Building. For purposes of such
determination, the Premises shall be considered to be vacant and to be rented as
a whole for its highest and best use with the degree of finishes and level of
leasehold improvements then generally afforded as "building standard" by
landlords in the Needham area. The arbitrator shall also consider and
incorporate into the computation, the existing improvements to the Premises.
Neither party shall be deemed under any compulsion to rent or lease space. The
arbitrator shall not have the right to modify any other provision of the Lease
except Base Rent. Within thirty (30) days after both parties have submitted such
proposals to the arbitrator, the arbitrator shall select one of the proposals as
more closely approximating the Market Rent appropriate for the applicable
Extension Term, and, unless the parties have then agreed upon the Market Rent,
the proposed Market Rent set forth in such proposal selected by the arbitrator
shall be deemed to be the Market Rent for the Extension Term.
(iii) If the parties are unable to agree upon the Market Rent within
the Negotiation Period, then the parties shall, within fifteen (15) days after
the end of the Negotiation Period (such fifteen (15) day period being herein
called the "Selection Period"), attempt to agree upon an arbitrator to whom to
----------------
submit the determination of Market Rent for binding arbitration pursuant to
Section 4.1(b)(ii) hereof. If the parties are unable to agree upon an
arbitrator within the Selection Period, then, at the end of the Selection
Period, each party shall select an arbitrator and, within fifteen (15) days
after the end of the Selection Period, the arbitrators shall agree upon an
arbitrator to whom the determination of Market Rent shall be submitted for
binding arbitration pursuant to Section 4.1(b)(ii) hereof. If such arbitrators
are unable to agree promptly upon an arbitrator, an arbitrator shall be selected
by the American Arbitration Association. Any arbitrator selected by either
party, by the arbitrators selected by the parties or by the American Arbitration
Association shall be independent of both parties and shall have such experience,
either as a
<PAGE>
licensed real estate broker or salesperson or as an appraiser, as would qualify
such arbitrator as an expert with respect to office leasing terms in Needham,
Massachusetts. Such arbitrator shall make the determination required pursuant to
Section 4.1(b)(ii) within thirty (30) days of selection. The parties shall share
equally the fees and expenses of the arbitrator to whom the determination of
Market Rent is submitted. Landlord and Tenant shall each pay the fee of the
arbitrator selected by it. In making its determination of Market Rent, the
arbitrator shall not make any downward adjustment to account for any savings to
be realized by Landlord with respect to leasing commissions or tenant
improvements.
(c) Base Rent for each Lease Year shall be payable in equal monthly
installments of one-twelfth of the annual Base Rent for such Lease Year and
shall be paid without offset for any reason, in advance, on the first day
of each calendar month during the Lease Term following the Commencement
Date. If the Commencement Date is not on the first day of a calendar
month, Tenant shall pay, on or before the Commencement Date, a
proportionate part of the Base Rent for the month in which the Commencement
Date occurs based upon the annual Base Rent applicable to the first Lease
Year, divided by 360 and then multiplied by the number of days in such
month (including the Commencement Date) included in the Lease Term. Base
Rent and Additional Rent shall be paid at Landlord's option, by either (i)
an "electronic funds transfer" system arranged by and among Tenant,
Tenant's bank and Landlord, or (ii) a check sent to Landlord's office, c/o
Robert A. Schlager, or at such other place as Landlord shall from time to
time designate in writing. If Tenant is using checks, rent checks shall be
made payable to BHX, LLC, as Trustee of Crawford Realty Trust or to such
other entity or trade-style as Landlord may designate from time to time in
writing. The parties hereto acknowledge and agree that the obligations
owing by Tenant under this Section 4.1 are rent reserved under this Lease,
for all purposes hereunder, and are rent reserved within the meaning of
Section 502(b)(6) of the Bankruptcy Code or any successor provision
thereto.
Section 4.2 Certain Additional Rent. Tenant shall pay, without offset for
-----------------------------------
any reason, all payments of Additional Rent payable by Tenant to Landlord
hereunder. If Tenant fails to pay any Additional Rent, Landlord shall have all
the rights and remedies for failure to pay Base Rent. The parties hereto
acknowledge and agree that the obligations owing by Tenant under this Section
4.2 are rent reserved under this Lease, for all purposes hereunder, and are rent
reserved within the meaning of Section 502(b)(6) of the Bankruptcy Code or any
successor provision thereto.
Section 4.3 Net Lease. Landlord and Tenant intend that the rent payable
---------------------
under this Lease shall be net Base Rent and Additional Rent to Landlord as
described herein during the Lease Term. Tenant shall pay all costs, expenses
and obligations of every kind and nature whatsoever relating to the Premises and
all expenses and obligations of every kind and nature whatsoever relating to the
operation, maintenance, upkeep, replacement or repair of Landlord's Property in
excess of the Operating Cost Base, Insurance Cost Base and Tax Base to the
extent property includable in Operating Costs, Insurance Costs and Taxes as
provided in this Lease, without any deduction or offset unless expressly
provided otherwise herein.
Section 4.4 Taxes.
-----------------
<PAGE>
(a) Tenant shall pay to Landlord, as Additional Rent, an amount equal
to Tenant's Tax Escalation as provided in the following sentence. Tenant's Tax
Escalation shall be estimated in good faith by Landlord at the end of each Tax
Fiscal Year, and thereafter be payable to Landlord in equal estimated monthly
installments together with the payment of Base Rent, subject to readjustment
when the actual amount of Taxes is determined. After readjustment, any shortage
shall be due and payable by Tenant within 30 days of demand by Landlord and any
excess shall, unless an Event of Default has occurred, be credited against
future Additional Rent obligations, or refunded if the Lease Term has ended and
Tenant has no further obligations to Landlord. If the taxing authority provides
an estimated tax bill, then monthly installments of Taxes shall be based thereon
until the final tax bill is ascertained. Landlord shall furnish to Tenant, upon
Tenant's request, but not more than once in any year, a copy of the tax bill or
any estimated tax bill.
(b) If, after Tenant shall have made any payment under this Section
4.4, Landlord shall receive a refund (the "Refund") of any portion of the Taxes
---------
paid on account of any Tax Fiscal Year in which such payments shall have been
made as a result of an abatement of such Taxes, by final determination of legal
proceedings, settlement or otherwise ("Proceedings"), Landlord shall, within
-----------
thirty (30) days after receiving the Refund, pay to Tenant (unless an Event of
Default has occurred) an amount equal to (i) the lesser of (A) Tenant's Tax
Escalation payments for such Tax Fiscal Year or (B) the Refund, which payment to
Tenant shall be appropriately adjusted if Tenant's Tax Escalation covered a
shorter period than covered by the Refund, less (ii) all expenses incurred by
Landlord in connection with such Proceedings (including, but not limited to,
attorneys' fees, costs and appraisers' fees). Landlord shall have sole control
of all tax abatement proceedings. Tenant shall not receive any credit or refund
in the event that the Taxes for any Tax Fiscal Year is less than the Tax Base.
(c) If the Commencement Date of this Lease is not on July 1, or the
expiration or termination of this Lease is not on June 30, Tenant's obligation
in respect of Taxes shall be prorated. If the final tax bill for the Tax Fiscal
Year in which such expiration or termination of this Lease occurs shall not have
been received by Landlord, then within thirty (30) days after the receipt of the
tax bill for such Tax Fiscal Year, Landlord and Tenant shall make appropriate
adjustments of estimated payments.
(d) Without limiting the generality of the foregoing, Tenant shall
pay all rent and personal property taxes attributable to its signs or any other
personal property including but not limited to its trade fixtures, the existing
or any future floor coverings, wall treatments and light fixtures in the
Premises.
Section 4.5 Insurance Costs. Tenant shall pay to Landlord, as Additional
---------------------------
Rent, an amount equal to Tenant's Insurance Cost Escalation. Tenant's Insurance
Cost Escalation shall be estimated in good faith by Landlord at the end of each
calendar year, and thereafter be payable in equal estimated monthly
installments, together with the Base Rent, subject to readjustment from time to
time as determined by Landlord and also when actual Insurance Costs are
determined. After a readjustment, any shortage shall be due and payable by
Tenant within 30 days of demand by Landlord and any excess shall, unless an
Event of Default has occurred, be credited against
<PAGE>
future Additional Rent obligations, or refunded if the Lease Term has ended and
Tenant has no further obligations to Landlord. Landlord shall provide Tenant
upon request with reasonable supporting documentation for the Insurance Costs
for the prior calendar year, provided that such request is received by Landlord
within six (6) months after the end of the calendar year to which such Insurance
Costs relate.
Section 4.6 Operating Costs. Tenant shall pay to Landlord, as Additional
---------------------------
Rent, an amount equal to Tenant's Operating Cost Escalation. Tenant's Operating
Cost Escalation shall be estimated in good faith by Landlord at the end of each
calendar year, and thereafter be payable in equal estimated monthly
installments, together with the Base Rent, subject to readjustment from time to
time as determined by Landlord and also when actual Operating Costs are
determined. After a readjustment, any shortage shall be due and payable by
Tenant within 30 days of demand by Landlord and any excess shall, unless an
Event of Default has occurred, be credited against future Additional Rent
obligations, or refunded if the Lease Term has ended and Tenant has no further
obligations to Landlord. Landlord shall provide Tenant upon request with
reasonable supporting documentation for the Operating Costs for the prior
calendar year; provided that such request is received by Landlord within six (6)
months after the end of the calendar year to which such Operating Costs relate.
Section 4.7 Payment for Electricity. Landlord shall cause the Premises to
-----------------------------------
be separately metered or submetered for electrical use including, without
limitation, with respect to all variable air volume ("VAV") boxes and pre-
---
heaters, lighting and outlets serving the Premises. Except to the extent of
amounts collected by Landlord from Tenant on account of Tenant's Electricity
Costs, Tenant shall promptly pay all charges related to its use of electricity
to the appropriate public utility.
Section 4.8 Annual Statement: Tenant's Audit. Subsequent to the Base Year
---------------------------------------------
and Base Tax Fiscal Year, Landlord shall provide one or more statements to
Tenant setting forth the Operating Cost Base, Insurance Cost Base, and/or the
Tax Base (each such statement being referred to hereinafter as a "Base
----
Statement"). Thereafter, with respect to each year during the Lease Term,
Landlord-shall provide an annual statement of Operating Costs, Insurance Costs,
and Taxes. Tenant shall have the right to audit each annual statement and the
books and records relating thereto, by delivering a notice of its intention to
perform such audit to Landlord within sixty (60) gays after receipt of such
statement. Such audit may be performed at any time prior to the sixtieth (60")
day following the date that Tenant gives such notice of audit (the "Audit
-----
Deadline"). If Tenant wishes to receive a refund of any of Tenant's Operating
- -----------
Cost Escalation, Insurance Cost Escalation, and/or Tenants Tax Escalation as a
result of such audit, Tenant shall deliver to Landlord, no later than forty-five
(45) days after the Audit Deadline, a notice demanding such a refund, together
with a statement of the grounds for each such demand and the amount of each
proposed refund. The cost of any such audit shall be paid by Tenant, except
that, if it is determined on the basis of any such audit that the amount of the
Operating Costs, Insurance Costs, and Taxes was overstated in any such annual
statement by more than five percent (5.0%), the reasonable cost of such audit,
but in no event more than the amount by which Tenant was overcharged due to such
overstatement, shall be paid or reimbursed to Tenant by Landlord. An
overstatement shall not be deemed to exist due to a Refund. Any audit shall be
performed by either (a) Tenant's regular employees or (b) a nationally
recognized accounting
<PAGE>
firm whose compensation is not, directly or indirectly, contingent in whole or
in part on the results of the audit.
ARTICLE V
---------
USE OF PREMISES
---------------
Section 5.1 Permitted Use. Tenant shall use and occupy the Premises only
-------------------------
for the Permitted Use.
Section 5.2 Restrictions on Use. Tenant shall use the Premises in a
---------------------------
careful, safe and proper manner, shall not commit or suffer any waste on or
about Landlord's Property, and shall not make any use of Landlord's Property
which is prohibited by or contrary to any laws, rules, regulations, orders or
requirements of public authorities, or which would cause a public or private
nuisance. Tenant shall comply with and obey all laws, rules, regulations,
orders and requirements of public authorities which in any way affect the use of
Landlord's Property. Tenant, at its own expense, shall obtain any and all
permits, approvals and licenses necessary for use of the Premises, except that
Landlord shall obtain all building permits, approvals and certificates of
occupancy required for Landlord's Work. Tenant shall not overload the floors or
other structural parts of the Building; and shall not commit or suffer any act
or thing an Landlord's Property which is illegal, offensive, dangerous, or which
unreasonably disturbs other tenants. Tenant shall not do or permit to be done
any act or thing on Landlord's Property which will invalidate or be in conflict
with any insurance policies, or which will increase the rate of any insurance,
covering the Building. If, because of Tenants failure to comply with the
provisions of this Section or due to any use of the Premises or activity of
Tenant in or about Landlord's Property, the Insurance Costs are increased,
Tenant shall pay Landlord the amount of such increase caused by the failure of
Tenant to comply with the provisions of this Section. Tenant shall cause any
fire lanes in the front, sides and rear of the Building to be kept free of all
parking associated with its business or occupancy and in compliance with all
applicable regulations. Tenant shall conduct its business at all times so as
not to annoy or be offensive to other tenants and occupants in Landlord's
Property. Tenant shall not permit the emission of any objectionable noise or
odor from the Premises and shall at its own cost install such extra sound-
proofing or noise control systems and odor control systems, as may be needed to
eliminate noise, vibrations and odors, if any, emanating from the Premises being
heard, felt or smelled outside the Premises. Tenant shall not place any file
cabinets bookcases, partitions, shelves or other furnishings or equipment in a
location which abuts or blocks any windows.
Section 5.3 Hazardous Materials. Tenant in its use of the Premises will
-------------------------------
not use, store, discharge, release, or permit the presence of any Hazardous
Materials on Landlord's Property, except in minor quantities typically found in
similar office buildings for typical office use in and in compliance with all
applicable Environmental Laws.
ARTICLE VI
----------
LANDLORD'S SERVICES
-------------------
<PAGE>
Section 6.1 Landlord's Services. Landlord shall furnish to the Building
-------------------------------
the services set forth below in this Section 6.1. subject to the conditions
stated in this Lease. The cost of certain of these services are to be (i) paid
by Tenant, as provided in this Lease, or (ii) included in Operating Costs,
Insurance Costs or Taxes, as applicable and to the extent permitted under this
Lease.
(a) Exterior of Building and Structure. Landlord shall keep in good
----------------------------------
condition and repair the exterior and structural elements of the Building,
including the roof, the utility lines and systems outside the Building (except
to the extent those utility lines or systems are the property or responsibility
of the applicable utility company) and the Parking Areas, landscaping and
sidewalks on the Land.
(b) Systems. Subject to Tenant's obligations under Section 7.9,
-------
Landlord shall operate, maintain and repair the heating, ventilating and air
conditioning system, the plumbing system and the electrical system (excluding
lamps and ballasts) of the Building so that the same are in good and operational
condition. Landlord shall provide heating and air conditioning services to the
Premises to heat and cool the Premises at temperatures in accordance with ASHRAE
standards in effect as of the date of the Lease during Business Hours. If
Tenant desires heating or air conditioning services at the Premises at any time
other than Business Hours, Landlord shall use reasonable efforts to arrange for
such "after hours" heating or air conditioning service, and Tenant shall pay for
such service as Additional Rent at an hourly rate of $50.00 (such payments shall
constitute Other Additional Rent and shall be due and payable within 30 days
after Landlord bills Tenant therefor).
(c) Water and Sewer. Cold and hot water at standard Building
---------------
temperatures will be available for ordinary drinking, cleaning, sanitary and
lavatory purposes.
(d) Elevator. Landlord will provide one (1) automatic operatorless
--------
elevator in the Building. Landlord shall operate, maintain and repair the
elevator so that the same is in good and operational condition.
(e) Waste Removal. Landlord shall provide or arrange for ordinary and
-------------
reasonable waste removal services for the Building. In the event that Landlord
reasonably determines that Tenant's quantity of waste is excessive, or, in the
event that Landlord deter-mines that Tenant's waste is other than waste
generated by typical office use, Landlord may require that Tenant be responsible
for disposing of its own waste.
(f) Janitorial Services and Window Cleaning. Landlord shall supply
----------------------------------------
routine janitorial services for the Office Space and window cleaning for the
Building comparable to that provided by the owners of comparable buildings in
the Greater Boston area. Such services may be revised from time to time by
Landlord in its sole discretion, but janitorial services shall in all events be
provided five days a week except for Building holidays.
(g) Taxes. Landlord shall pay all Taxes levied upon or with respect
-----
to Landlord's Property.
<PAGE>
(h) Snow Plowing and Ice Sanding. Landlord shall provide snow plowing
----------------------------
and ice sanding services with respect to the Parking Areas and sidewalks
comparable to that provided by the owners of comparable buildings in the Greater
Boston area.
(i) Insurance. Landlord shall procure and maintain in full force and
---------
effect fire, casualty and extended coverage insurance with respect to the
Building, with vandalism and malicious mischief endorsements in an amount not
less than the replacement value of the Building (excluding foundations and
underground utilities), liability insurance with limits of not less than One
Million Dollars per occurrence for bodily injury and property damage and Two
Million Dollars annual aggregate, rent loss insurance and such other insurance
upon or with respect to Landlord's Property as Landlord determines to be
necessary, appropriate and/or desirable or is required by Landlord's lender, all
with such limits of coverage as Landlord or Landlord's lender may deem
necessary. appropriate and/or desirable.
Section 6.2 Extraordinary Use. Tenant acknowledges that the services to be
-----------------------------
supplied by Landlord will be sufficient only for general office purposes. Any
additional capacity or structural support, as determined by Landlord, needed for
uses beyond ordinary office uses, shall be subject to Landlord's prior written
approval, which approval shall be in Landlord's sole discretion, and all
necessary equipment shall be installed and maintained at Tenant's sole expense.
Section 6.3 Interruption; Delay. Landlord shall have no responsibility or
-------------------------------
liability for failure or interruption of any such repairs or services referred
to in this Article VI, or for any interruption in utility services, caused by
breakage, accident, strikes, repairs, inability after exercise of reasonable
diligence to obtain supplies or otherwise furnish services, or for any cause or
causes beyond the reasonable control of Landlord (but Landlord, in respect of
those matters for which Landlord is responsible, will use reasonable efforts to
restore such services or make such repairs as soon as possible), nor in any
event for any indirect or consequential damages; and failure or omission on the
part of Landlord to furnish such service or make such repair shall not be
construed as an eviction of Tenant, nor, provided that Landlord is using
reasonable efforts to restore such services or make such repairs in those
circumstances where Landlord is obligated to do so, render Landlord liable in
damages, nor entitle Tenant to an abatement of Base Rent or Additional Rent, nor
release Tenant from the obligation to fulfill any of its covenants under this
Lease, except as provided in Articles X and XI hereof with respect to eminent
domain and damage by fire or other casualty.
Section 6.4 Additional Services. Should Tenant request any additional
-------------------------------
services, or services beyond the noted hours for such services (other than
"after hours" HVAC which is covered in Section 6.1(b)), Tenant agrees to pay to
Landlord as Additional Rent therefor Landlord's costs for providing such
service, plus an additional fifteen (15%) percent as an administrative fee,
within thirty (30) days of Landlord's billing Tenant therefor.
Section 6.5 Tenant's Right to Cure. If Landlord shall be in material
----------------------------------
default under this Article VI, which default shall continue for thirty (30) days
after the written notice thereof from Tenant to Landlord, then Tenant shall have
the right, but not the obligation, to cure such default, in which event Landlord
shall pay to Tenant within thirty (30) days after receipt of Tenant's
<PAGE>
demand therefor (accompanied by invoices and other information reasonably
acceptable to Landlord documenting such costs), the reasonable out-of-pocket
third party costs incurred by Tenant to cure such default, provided, however, if
such fault is not reasonably susceptible of being cured within such thirty (30)
day period, then, as long as Landlord shall commence the curing thereof within
such thirty (30) day time period and is proceeding with due diligence to cure
the same, Tenant shall not have the aforesaid right and provided further, that,
in the event of an emergency, then the cure period shall be shortened to such
time period after notice from Tenant to Landlord as may be reasonable under the
circumstances. Notwithstanding anything to the contrary in this Lease. Tenant
shall not be entitled to cure a default under Sections 9.5 and 12.1 (j).
Section 6.6 Exoneration and Indemnification. Landlord will exonerate,
-------------------------------------------
indemnify, defend, save and hold harmless Tenant (and any and all Persons
claiming by, through or under Tenant, from and against all claims, damages,
proceedings, defenses thereof, liabilities, costs, and expenses of any kind and
nature, including reasonable legal fees, arising from: (a) any breach of this
Lease by Landlord (but not any breach by a prior landlord) and/or (b) any act,
wrongful omission or negligence of Landlord (but not any act, omission or
negligence of any prior landlord). Under no circumstances shall Landlord be
responsible to Tenant or any other Person for the acts or omissions of any
tenant of Landlord's Property or any Invitee of any tenant. This exoneration,
indemnification and hold harmless agreement shall survive the termination of
this Lease. Under no circumstances shall any landlord have any liability or
obligation under this Section for (i) any breach of this Lease by any
predecessor or (ii) any act, omission or negligence of any predecessor.
ARTICLE VII
-----------
CERTAIN OBLIGATIONS OF TENANT
-----------------------------
Section 7.1 Rent. Tenant will promptly pay the Base Rent and Additional
----------------
Rent, including without limitation any and all fees, charges, expenses, fines,
assessments or other sums payable by Tenant to Landlord (or to the applicable
provider of utilities) at the time and in the manner provided for in this Lease,
all of which shall be deemed to be obligations to pay Base Rent or Additional
Rent.
Section 7.2 Utilities. Except for Tenant's Electricity Costs, Tenant shall
---------------------
pay for all utility usage as a part of Tenant's Operating Cost Escalation.
Tenant agrees that its use of electric current shall never exceed the capacity
of existing feeders, risers and wiring installations in the Building. Without
limiting the foregoing, Tenant shall not connect to the electrical distribution
system anything other than normal office equipment (which includes computers,
fax machines, printers and copiers). Tenant shall not make or perform any
alterations to wiring, installations, lighting fixtures or other electrical
facilities in any manner without the prior written consent of Landlord, which
consent shall be in Landlord's sole discretion. Any risers or wiring to meet
Tenant's excess electrical requirements, if requested by Tenant and approved by
Landlord, will be installed by Landlord at Tenants expense.
<PAGE>
Section 7.3 No Waste. Tenant shall not overload, damage or deface the
--------------------
Premises nor shall it suffer or permit the same to be done, nor shall it commit
any waste. Tenant shall initiate and carry out a program of regular maintenance
and repair of the Premises so as to impede, to the extent possible,
deterioration by ordinary wear and tear.
Section 7.4 Maintenance; Repairs, and Yield-Up. Subject to Landlord's
----------------------------------------------
obligations under Section 6.1, Tenant agrees that from the Commencement Date
until the end of the Lease Term and during any holdover, it will keep the
Premises and any improvements placed an Landlord's Property by Tenant neat and
clean and maintain the same in substantially the same repair and condition as
such were in on the Commencement Date (or the date on which installation of same
was completed, as applicable), except for reasonable wear and tear, damage by
fire or other casualty or taking by eminent domain. Tenants obligation to so
maintain and repair the Premises and any improvements placed on Landlord's
Property by Tenant shall apply to all interior areas of the Premises, including,
without limitation, all doors, interior glass, fixtures, interior walls, floors
and ceilings. Nothing contained in this Section 7.4 shall place any obligation
an Tenant to maintain or repair the exterior of the Building, the systems
serving the Building or the structure of the Building; provided, however, that
Tenant may be responsible for the costs incurred by Landlord in connection
therewith to the extent that such costs are properly included in Operating
Costs. At the end of the Lease Term or sooner termination of this Lease, Tenant
shall peaceably surrender and deliver up the Premises to Landlord (and (i)
having first removed, at Tenant's sole cost and expense, any or all erections,
alterations and additions made to or upon the Premises as may be designated by
Landlord and restoring the Premises to the condition required above, and (ii)
leaving all erections, alterations and additions to the Premises which Landlord
designates to remain in good repair and condition, except for reasonable wear
and tear, damage by fire or other casualty and taking by eminent domain), broom
clean, with all utilities safely capped, and in good repair and condition, and
removing all signs and lettering and all personal property, goods and effects
belonging to Tenant or anyone claiming through or under Tenant. Nothing
contained herein shall be deemed to require Tenant to remove Landlord's Work at
the end of the Lease Term, it being agreed that Tenant shall have no right nor
obligation to remove the same. Without limiting the generality of the
foregoing, Tenant shall be responsible for the replacement of lamps and ballasts
in the Building at Tenant's cost. Tenant shall cause all maintenance and repair
work to conform to applicable governmental laws, rules, regulations, orders and
requirements of public authorities. Subject to Landlord's performance of its
obligations under Section 6.1(f), Tenant shall keep the Premises clear of all
filth, trash and refuse. If Tenant fails to perform Tenant's obligations under
the above provisions of this Section, then Landlord will have the right (but not
the obligation), without waiving any default by Tenant, to cause such
obligations to be performed upon not less than ten (10) days prior written
notice to Tenant (or a shorter period of prior written notice, or a
contemporaneous written notice, if appropriate in Landlord's judgment in light
of the nature of Tenant's obligations to be performed), and if Landlord causes
any of such obligations to be performed, the costs and expenses reasonably
incurred by Landlord in connection therewith shall be due and payable by Tenant
to Landlord as Additional Rent upon demand.
Section 7.5 Alterations by Tenant. Tenant will not make any alteration in,
---------------------------------
or addition to, the Premises without first obtaining, on each occasion,
Landlord's consent in writing, which consent shall not be unreasonably withheld
or delayed, and then only at Tenants expense and in a
<PAGE>
lawful manner and upon such terms and conditions as Landlord, by such writing,
shall reasonably approve, which shall include, without limitation, (a)
maintenance of insurance in form and substance reasonably satisfactory to
Landlord and (b) compliance with Sections 7.9 and 7.11. Any such alteration or
addition shall be consistent in appearance with the rest of the Building and
Landlord's Property and shall be made only after duly obtaining (and providing
to Landlord copies of) all required permits and licenses from all governmental
authorities. Tenant will deliver to Landlord in writing a schedule setting forth
the details and location of all such proposed alterations or additions and
detailed plans and specifications. The contractor(s) performing the work shall
be subject to Landlord's approval, which approval shall not be unreasonably
withheld or delayed. If required by Landlord, Tenant shall provide a statutory
lien bond with respect to such work. All approved repairs, installations,
alterations, additions or other improvements made by Tenant shall be made in a
good and workmanlike manner. Tenant Invitees shall be given such reasonable
access to other portions of the Building and the mechanical systems as may be
necessary or appropriate to perform such work. Both during and after the
performance of any such work, Landlord shall have free access to any and all
mechanical installations in the Premises, including, but not limited to, air
conditioning, fans, ventilating systems, machine rooms and electrical closets;
and Tenant agrees not to construct or permit the installation of partitions
and/or other obstructions in the Premises which might interfere with Landlord's
free access to the Premises or Building, or impede the free flow of air to and
from air vents and other portions of the heating, ventilating and air
conditioning systems in the Building. Unless Landlord elects otherwise, all
installations, alterations, additions or improvements in or to the Premises
shall be the property of Landlord and shall remain upon, and be surrendered
with, the Premises at the end of the Lease Term or sooner termination of this
Lease.
Section 7.6 Trade Fixtures and Equipment. Any trade fixtures and equipment
----------------------------------------
installed in, or attached to, the Premises by, and at the expense of, Tenant,
shall remain the property of Tenant. Tenant shall have the right, at any time
and from time to time during the Lease Term, to remove any and all of its trade
fixtures, which it may have installed in, or attached to, the Premises, during
the Lease Term. In addition, at the end of the Lease Term or sooner termination
of this Lease, Tenant shall remove all of Tenant's trade fixtures and all floor
coverings and wait treatments installed by Tenant unless Landlord gives Tenant a
written waiver for same. At any time that Tenant removes its trade fixtures,
Tenant shall promptly repair Landlord's Property as a result of any damage to,
or destruction of, Landlord's Property caused by the removal of its trade
fixtures.
Section 7.7 Compliance with Laws. Tenant, in its use of the Premises and
--------------------------------
at its sole expense, shall comply with all laws, orders and regulations of
Federal, State, County and Town authorities, and with any direction of any
public officer or officers, pursuant to law, including, without limitation, all
Legal Requirements related to the use, storage, discharge, release, removal or
existence of Hazardous Materials. Tenant agrees that the Premises shall be kept
in a sanitary and safe condition in accordance with all applicable Federal and
State laws and the by-laws, rules, regulations and ordinances of the Town of
Needham, and in accordance with all directions, rules and regulations of the
Health Officer, Fire Marshall, Building Inspector and other proper officers of
the governmental agencies having jurisdiction thereover. Notwithstanding the
foregoing, Landlord shall be responsible for delivering Landlord's Property in
compliance with
<PAGE>
applicable laws, orders and regulations and for maintaining Landlord's Property
in compliance therewith, the cost of maintaining such compliance to be included
as part of Operating Costs in accordance with the provisions of this Lease,
including without limitation, Section 4.6.
Section 7.8 Contents at Tenant's Risk. All inventory, equipment, goods,
-------------------------------------
merchandise, furniture, fixtures and property of every kind which may be on or
about the Premises shall be at the sole risk and hazard of Tenant, and if the
whole or any part thereof shall be destroyed or damaged by fire, water or
otherwise, or by the use or abuse of water or by the leaking or bursting of
water pipes, or by rising water, or by roof or other structural leak, or in any
other way or manner, no part of such loss or damage shall be charged to or borne
by Landlord in any case whatsoever, except that to the extent required by
applicable Massachusetts law, the foregoing shall not exculpate the Landlord
from its own negligent acts or omissions or willful misconduct. Tenant agrees
to maintain full and adequate insurance coverage on all of its property at the
Premises and in the remainder of Landlord's Property, including physical damage,
theft and business interruption insurance, or Tenant shall be a self-insurer
thereof, in which case Tenant shall so advise Landlord in writing and shall be
fully responsible for all such damage, and shall indemnify and save harmless
Landlord from any loss, cost, expense, damage or liability resulting from
Tenant's failure to have such insurance as required in this Lease. Such
insurance an Tenant's property shall contain a waiver of subrogation cause in
favor of Landlord, or shall name Landlord as an additional insured for the sole
purpose of preventing a subrogation claim against Landlord. If Tenant is a
self-insurer, in whole or in part, Landlord shall be entitled to the same
benefits it would have enjoyed had insurance covering the loss in full with a
waiver of subrogation clause been in effect, or as if the Landlord has been
named on insurance covering the loss in full as an additional insured for the
purpose of preventing a subrogation claim.
Section 7.9 Exoneration: Indemnification and Insurance. Tenant will
------------------------------------------------------
exonerate, indemnify, defend, save and hold harmless Landlord (and any and all
Persons claiming by, through or under Landlord) from and against all claims,
proceedings, defenses thereof, liabilities, costs, and expenses of any kind and
nature, including legal fees, arising from: (i) any breach of this Lease by
Tenant or any Tenant invitee or other Person claiming by, through or under
Tenant; and/or (ii) any act, omission or negligence of any Tenant invitee, or
arising from any accident, injury or damage occurring in, on or about Landlord's
Property, which such accident, damage or injury results or is claimed to have
resulted from the negligence or misconduct on the part of any Tenant invitee.
This exoneration, indemnification and hold harmless agreement shall survive the
termination of this Lease.
From and after any pre-term occupancy by Tenant, if any allowed by
Landlord, and thereafter during the Lease Term and any period of holding over,
Tenant shall maintain in full force and effect a policy of commercial general
liability insurance under which Landlord (and its designees) and Landlord's
mortgagee(s) (whose names are provided to Tenant) are named as additional
insureds. Each such policy shall be non-cancelable with respect to Landlord
without thirty (30) days prior written notice to Landlord (except for
cancellation for non-payment of premiums, in which case notice shall be ten (10)
days) and Tenant shall deliver to Landlord prior to any pre-term occupancy,
prior to the Commencement Date and thereafter at least thirty (30) days prior to
the expiration of any then effective coverage a satisfactory written certificate
of insurance coverages or the renewal or replacement of such coverages. The
minimum limits of
<PAGE>
liability of such insurance shall be One Million Dollars ($1,000,000.00)
combined single limits for bodily injury and property damage, each occurrence,
and One Million Dollars ($1,000,000.00) limits for personal injury, together
with an overall umbrella coverage of an additional One Million Dollars
($1,000.000.00). Tenant shall not permit any contractor to do any work at or
furnish any materials to be incorporated into the Premises without first
delivering to Landlord satisfactory evidence of the Contractors commercial
general liability insurance, worker's compensation insurance, automobile
insurance and statutory lien bonds each reasonably acceptable to Landlord and
complying with any insurance specifications provided by Landlord. All insurance
requirements imposed upon Tenant or its contractors under this Lease shall be
subject to the further requirement that the forms of coverage and the insurers
providing the insurance be licensed in the Commonwealth of Massachusetts, be in
sound financial condition, carry an A+ or better Best's rating, and be
reasonably acceptable to Landlord. Tenant agrees that Landlord shall not be
responsible or liable to Tenant, or to those Persons claiming by, through or
under Tenant, for any loss or damage that may be occasioned by or through the
acts or omissions of Persons occupying or using adjoining premises or any part
of Landlord's Property, or otherwise, or for any loss or damage resulting to
Tenant or those Persons claiming by, through or under Tenant, or its or their
property, except that to the extent required by applicable Massachusetts law,
the foregoing shall not exculpate the Landlord from acts of its own negligence
or willful misconduct.
Section 7.10 Landlord's Access. Upon reasonable advance notice (except in
------------------------------
case of emergency), Landlord and its representatives shall have the right
without charge to it and without reduction in Base Rent or Additional Rent, at
reasonable times and in such manner as shall not unreasonably interfere with
Tenant's business, to enter the Premises for any reasonable purpose (including,
without limitation, showing the Premises to prospective purchasers, tenants and
lenders) and, if Landlord so elects, to make entry for the purpose of
investigating repair or maintenance problems and to make such repairs or changes
as Landlord deems advisable, and to maintain, use, repair, replace, relocate or
introduce pipes, ducts, wires, meters and any other Landlord's fixtures serving
or to serve the Premises or other parts of Landlord's Property, or to maintain
or repair any portion of Landlord's Property, and, in case of an emergency,
whether resulting from circumstances in the Premises or elsewhere in Landlord's
Property, Landlord or its representatives may enter the Premises (forcibly, if
necessary) at any time to take such measures as may be needed to cope with such
emergency. Such access shall include, but not be limited to, the right to open
floors, walls, ceilings, and building systems for the foregoing purposes.
Landlord may place "For Lease", "For Rent" and/or "For Sale" signs on Landlord's
Property. Any exercise of Landlord's rights under this Section 7.10 shall be
conducted at such times and in such manner as to minimize, to the extent
reasonable, any interference with Tenant's operations and shall be diligently
pursued to completion. Any relocation or introduction of pipes, ducts, wires,
meters and/or other fixtures shall, to the extent reasonably practical, be
undertaken so as to minimize any loss of usable area in the Premises.
Section 7.11 No Liens. Tenant shall not permit any mechanics', laborers'
---------------------
or materialmen's liens to stand against Landlord's Property or Tenant's interest
in the Premises, this Lease, or the estate created hereby for any labor or
materials furnished to Tenant or claimed to have been furnished to Tenant in
connection with work of any character performed or claimed to have been
performed in or on the Premises by or at the direction or sufferance of Tenant.
<PAGE>
Landlord may condition the right of Tenant to do Tenant's work or to do any
other work which could result in a lien upon Landlord's Property or Tenant's
interests in the Premises, this Lease, or the estate created hereby on the
delivery and recording of statutory lien bonds or indemnities satisfactory to
Landlord.
Section 7.12 Compliance with Rules and Regulations. Tenant covenants that
--------------------------------------------------
all Tenant Invitees will comply with the Rules and Regulations and all other
reasonable rules and regulations as Landlord may from time to time hereafter
promulgate to regulate the conduct Generally of all the tenants of Landlord's
Property. Landlord, however, shall have the reasonable right to change said
rules and regulations and to waive any one or more of them in the case of any
one or more tenants.
ARTICLE VIII
------------
SUBLETTING AND ASSIGNMENT
-------------------------
Section 8.1 Subletting and Assignment.
-------------------------------------
(a) Except as hereinafter set forth, Tenant shall not assign,
mortgage, pledge or encumber this Lease nor sublet all or any part of the
Premises, nor permit or allow the use of all or any part of the Premises by
third party users, such as concessionaires, without, on each occasion, obtaining
Landlord's written consent thereto, which consent may be granted, conditionally
granted or withheld at Landlord's discretion for any reason or no reason. As
used herein, the term "assign' or `assignment' shall be deemed to include,
without limitation: (i) any transfer of Tenants interest in this Lease by
operation of law and/or the merger or consolidation of Tenant with or into any
other firm or corporation; or (ii) the transfer or sale of a controlling
interest in Tenant (whether in a single transaction or series of transactions)
whether by sale of its capital stock or otherwise.
(b) (i) Notwithstanding anything to the contrary in Section 8.1 (a),
Landlord will not unreasonably withhold, condition or delay its consent to any
sublease of all or any part of the Premises, so long as (A) the sublease will
not violate the terms of (1) any lease affecting the Landlord's Property or (2)
any agreement, instrument, law, rule, regulation or requirement which is binding
upon Landlord and/or the Landlord's Property; (B) the subtenant and its proposed
use is of a character consistent with the operation of a first class office
building; (C) the subtenant's proposed use is as offices and is permitted under
the terms of this Lease; (D) the subtenant is qualified to do business in the
Commonwealth of Massachusetts and has all applicable permits and licenses to do
business; (E) Tenant pays to Landlord all of Landlord's reasonable expenses
arising out of such sublease: (F) there does not then exist an Event of Default
and no Event of Default will be created as a result of the proposed sublease or,
the proposed use by the subtenant,, (G) there are not more than a total of two
(2) subtenants, including the proposed subtenant under the proposed sublease, in
occupancy of the Premises or portions thereof; (H) the proposed sublease
prohibits any assignment of the sublease or any sub-sublease of any portion of
the Premises without the prior written consent of Landlord, which consent may be
granted or denied in Landlord's sole discretion; and (1) each of Landlord's
mortgagees has consented to such sublease if such mortgagee's consent is
required pursuant to the terms of the applicable financing documents.
<PAGE>
(ii) Notwithstanding anything to the contrary in Section
8.1(a), but subject to the requirements set forth below in this paragraph,
Landlord's consent shall not be required to an assignment of this Lease to (A)
any entity which controls the legal and beneficial ownership of Tenant, (B) any
entity controlled by, or under common control with, Tenant, (C) any corporation
resulting from a merger or consolidation with Tenant, or (D) an entity acquiring
all or substantially all of Tenant's assets, so long as, in each instance under
any of clauses (A) through (D) above: (1) Tenant shall give Landlord at least
thirty (30) days prior written notice of such proposed assignment together with
the name and address of the proposed assignee, information concerning the terms
and provisions upon which the proposed assignment is to be made, copies of all
documents evidencing or setting forth the terms of the transaction and all other
information as reasonably requested by Landlord, (2) there is no change in the
use of the Premises; (3) Tenant is the surviving corporation in any merger or
consolidation, or, if Tenant is not the surviving corporation, the surviving
corporation assumes all of the obligations of Tenant under this Lease by
executing an assignment and assumption agreement with respect to this Lease in
form and substance satisfactory to Landlord; (4) the assignee has a tangible net
worth (i.e., book value, determined in accordance with generally accepted
accounting principles, consistently applied, less all intangible assets) on the
date of such assignment not less than $5,000,000.00; (5) the assignee is
qualified to do business in the Commonwealth of Massachusetts and has all
applicable permits and licenses to do business from the Premises: (6) Tenant
pays to Landlord all of Landlord's reasonable expenses arising out of such
assignment-, and (7) there does not then exist an Event of Default and no Event
of Default will be created as a result of the proposed assignment or the
proposed use by the assignee.
(c) In the event of an assignment of this Lease or sublease of all or
any part of the Premises by Tenant, Tenant and any Guarantor shall remain
primarily liable jointly and severally with the assignee or subtenant for the
payment of any and all Base Rent and Additional Rent which may become due by the
terms of this Lease and for the performance of all covenants, agreements and
conditions on the part of Tenant to be performed hereunder and, if required by
Landlord, Tenant and any Guarantor shall execute an instrument confirming the
foregoing. No assignment of this Lease shall be effective unless and until the
assignee (x) executes and delivers to Landlord an agreement, in form and
substance satisfactory to Landlord, pursuant to which such assignee assumes all
of the obligations of Tenant under this Lease and (y) delivers to Landlord
evidence, in form and substance satisfactory to Landlord, of the insurance
coverages required to be maintained by Tenant under this Lease. No sublease of
all or any portion of the Premises shall be effective unless and until (i) the
sublessee and the Tenant execute and deliver to Landlord an agreement, in
Landlord's standard form, pursuant to which, inter alia, such sublessee (A)
----- ----
assumes all of the obligations of the Tenant under this Lease, (B) agrees to
execute and deliver such estoppel certificates and subordination agreements as
may be required by Landlord, (C) acknowledges that Landlord has no obligations
to sublessee under this Lease, the sublease or otherwise and (D) agrees to
maintain the same insurance coverages as the insurance coverages which Tenant is
required to maintain under this Lease and to provide evidence thereof
satisfactory to Landlord when requested,, and (ii) the sublessee delivers to
Landlord evidence, in form and substance, satisfactory to Landlord, of the
insurance coverages required to be maintained by such sublessee under the
agreement referenced in clause (i) above. No modification of the terms of this
Lease or any course of dealing between Landlord and any
<PAGE>
assignee or sublessee of Tenant's interest herein shall operate to release or
impair Tenant's obligations under this Lease or the obligations of any
Guarantor.
(d) Tenant shall pay to Landlord fifty percent (50%) of any rent
received as a result of any assignment or sublease which exceeds the rental
payable hereunder for the same time period on a per square foot basis after
deducting the actual direct out-of-pocket, third-party costs which are incurred
by Tenant for leasing commissions and additional tenant improvements paid in
connection with such assignment or sublease, and (ii) documented to Landlord's
reasonable satisfaction by invoices, contracts, canceled checks and the like.
(e) Notwithstanding anything to the contrary contained in this
Section 8.1 or other provisions of this Lease, in the event that Tenant seeks
Landlord's consent to an assignment of this Lease or a sublease of all or any
part of the Premises other than pursuant to Section 8.1(b)(i), then, in any such
event, Landlord, at its option, may, upon not less than ten (10) days notice
from Tenant's request, terminate this Lease (or if the request is for a sublease
of less than all of the Premises, at Landlord's option, Landlord may terminate
this Lease as to the portion requested to be sublet and Landlord and Tenant
shall execute an appropriate amendment to this Lease to modify the Premises and
to adjust the Base Rent and other Lease terms) (the "Landlord's Termination
Notice"). In such event, Landlord may enter into a new lease with the proposed
assignee or sublessee or any other party an any terms and provisions acceptable
to Landlord in Landlord's sole discretion for the Premises, and (provided that
Tenant vacates the Premises or applicable portion thereof and leaves the
Premises or said portion thereof in the condition required under this Lease),
Tenant shall have no further liability under this Lease for the portion of the
Premises released from this Lease except for any liability arising prior to such
termination and those obligations which expressly survive termination
(including, but not limited to, Tenant's obligations under Section 7.9).
Notwithstanding the foregoing, if Landlord exercised its right to terminate with
respect to all or a portion of the Premises, Tenant shall have the right to
rescind its request for consent to an assignment of this Lease or a sublease of
all or any part of the Premises by giving written notice to Landlord within ten
(10) days of the date of Landlord's Termination Notice and such Landlord's
Termination Notice shall be deemed void and this Lease shall remain in full
force and effect in accordance with its terms.
(f) Tenant shall not enter into any arrangements with any subtenant
or assignee to circumvent, or which has the effect of circumventing, (i) its
obligation to share rents received from a sublease or assignment, or (ii) any of
the other provisions of this Section 8.1.
ARTICLE IX
----------
RIGHTS OF MORTGAGEES AND GROUND LESSORS; ESTOPPEL CERTIFICATES
--------------------------------------------------------------
Section 9.1 Subordination to Mortgages and Ground Leases. Tenant agrees
--------------------------------------------------------
that this Lease is and shall be and remain subordinate to the lien of any
present or future mortgage or mortgages, or ground lease, upon Landlord's
Property, irrespective of the time of execution or time of recording of any such
mortgage or mortgages, or ground lease, and to all renewals, extensions, and
modifications therefor or amendments thereto, provided that the holder of such
mortgage or ground lease enters into a non-disturbance agreement consistent with
this Article IX. Tenant agrees that it will, upon ten (10) days' advance
written request from Landlord or any
<PAGE>
holder of a mortgage on all or a portion of Landlord's Property or the ground
lessor thereof, execute, acknowledge, and deliver any and all instruments
reasonably deemed necessary or desirable by Landlord, or such holder to give
effect to, or notice of, such subordination and non-disturbance agreement. Upon
ten (10) days' written request from Landlord, any holder of a mortgage or ground
lease an Landlord's Property or any successor in interest to Landlord, whether
by purchase, foreclosure, deed in lieu of foreclosure or otherwise, Tenant and
such holder shall enter into an attornment and non-disturbance agreement, in the
form requested by such party, with such party.
Section 9.2 Lease Superior at Mortgagee's or Ground Lessor's Election.
---------------------------------------------------------------------
At the request in writing of any mortgagee, or ground lessor, of Landlord's
Property, this Lease shall be deemed superior to such mortgage, or ground lease,
whether this Lease was executed before or after such mortgage, or ground lease,
and Tenant shall execute such documents to effect the foregoing in recordable
form as such mortgagee, or ground lessor, shall reasonably request.
Section 9.3 Notice to Mortgagee and Ground Lessor. Upon receipt of a
-------------------------------------------------
written request from Landlord or any holder of a mortgage, on all or any part of
Landlord's Property, or the ground lessor thereof, Tenant will thereafter send
any such holder copies of all notices (including, but not limited to, notices of
default or termination) given by Tenant to Landlord in accordance with any
provision of this Lease. In the event of any failure by Landlord to perform,
fulfill or observe any agreement by Landlord herein or any breach by Landlord of
any representation or warranty of Landlord herein. any such holder may at its
election cure such failure or breach for and on behalf of Landlord within twenty
(20) business days after the time provided herein for Landlord to cure the same
or such longer period as may be reasonably necessary to cure the default.
Section 9.4 Limitations on Obligations of Mortgagees, around Lessors and
------------------------------------------------------------------------
Successors. Tenant agrees that the holder of a mortgage or ground lease or any
- ----------
successor-in-interest to any of them or to Landlord shall not be: (a) bound by
any payment of an installment of Base Rent or Additional Rent which may have
been made more than 30 days before the due date of such installment; (b) bound
by any amendment or modification to this Lease made without the consent of the
holder of a mortgage or ground lease or such successor in interest, (c) liable
for any previous act or omission of Landlord (or its predecessors in interest),
(d) responsible for any monies owing by Landlord to the credit of Tenant or
subject to any credits, offsets, claims, counterclaims, demands or defenses
which Tenant may have against Landlord (or any of its predecessors in interest);
(e) bound by any covenant to undertake or complete any construction of the
Premises or any portion thereof; or (f) obligated to make any payment to Tenant
other than any security deposit actually delivered to holder of a mortgage or
ground lease or such successor in interest. Further, Tenant agrees that it will
not seek to terminate this Lease by reason of any act or omission of Landlord
until Tenant shall have given written notice of such act or omission to the
holder of such mortgage or ground lease (at such holder's last address furnished
to Tenant) and following the giving of such notice such holder shall have the
right, but shall not be obligated, to remedy such act or omission within twenty
(20) business days after the time period provided for in this Lease for Landlord
to cure the same or such longer period as may be reasonably necessary to cure
the same. Tenant shall enter into a written agreement confirming
<PAGE>
the foregoing from time to time upon written request from Landlord and/or the
holder of a mortgage or ground lease on Landlord's Property.
Section 9.5 Estoppel Certificate By Tenant and Information Concerning
---------------------------------------------------------------------
Tenant. Tenant agrees, at any time and from time to time, within ten (10) days
- ------
after written request by Landlord or any holder of a mortgage on all or a
portion of Landlord's Property or the ground lessor thereof, (a) to execute,
acknowledge and deliver to Landlord a statement in writing certifying that
(except may be otherwise specified by Tenant): (i) this Lease is presently in
full force and effect and unmodified; (ii) Tenant has accepted possession of the
Premises; (iii) any improvements required by the terms of this Lease to be made
by Landlord have been completed to the satisfaction of Tenant; (iv) no rent
under this Lease has been paid more than 30 days in advance of its due date; (v)
the addresses for notices to be sent to Tenant is as set forth in this Lease or
as specified in such certificates (vi) Tenant as of the date of executing the
certificate has no charge, lien or claim of offset under this Lease, or
otherwise, against rents or other charges due or to become due hereunder, (vii)
Tenant is not in default under this Lease; (viii) to the best of Tenant's
knowledge, Landlord is not in default of this Lease; and (ix) such other
information as Landlord may reasonably request about this Lease or Tenant's
occupancy; and (b) to deliver information in form satisfactory to Landlord and
such holder or ground lessor concerning Tenants operations, including but not
limited to historic and current financial statements of Tenant, provided that,
(i) at any time during which the shares of Tenants stock are publicly traded on
a recognized stock exchange, such information shall be limited to information
Tenant makes publicly available (including, without limitation, filings with the
Securities and Exchange Commission); and (ii) during the pendency of any public
offering of the shares of Tenant's stock, Tenant shall only be required to
deliver information that can be made available by Tenant in accordance with
applicable law.
ARTICLE X
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CASUALTY
--------
Section 10.1 Damage From Casualty. In the event that the Premises are
---------------------------------
damaged in whole or in part by fire or other casualty, Tenant shall promptly
notify Landlord thereof. If following the execution hereof and prior to the
expiration of the Lease Term the Premises shall be damaged or destroyed in whole
or in part by fire or other casualty, this Lease shall, except as hereinafter
provided in this Article X, remain in full force and effect and Landlord shall,
upon notice of such damage from Tenant and proceeding with reasonable dispatch,
repair or rebuild the Premises (exclusive of Tenants Work and any alterations or
improvements, other than Landlord's Work, made by or on behalf of Tenant) to
substantially their condition immediately prior to the time of such damage or
destruction (subject, however, to zoning laws and building codes then in
existence), but Landlord shall not be responsible for any Excusable Delay.
including any delay which may result by reason of adjustment of insurance claims
or collection of insurance proceeds, nor shall Landlord be obligated to commence
repair or restoration work prior to receipt of sufficient insurance proceeds,
nor shall Landlord be required to expend sums in excess of "net recovered
insurance proceeds. The term "net recovered insurance proceeds" shall mean the
----------------------------
amount of any insurance proceeds actually recovered by Landlord, less the cost
of obtaining the same (including attorneys' fees and appraisal fees) and less
the amount thereof
<PAGE>
required to be paid to a mortgagee or ground lessor, plus the amount of any
insurance deductible. Subject to the terms of this Lease, Tenant shall
concurrently repair or restore so much of the Premises (a) as were constructed
by Tenant or (b) are the responsibility of Tenant under this Lease and shall
repair and restore its fixtures and personal property.
Section 10.2 Abatement of Rent. In the event that the provisions of
------------------------------
Section 10.1 shall become applicable, the Base Rent, Tenant's Tax Escalation,
Tenant's Insurance, Escalation and Tenant's Operating Cost Escalation shall be
abated or reduced proportionately during any period in which, by reason of any
such damage or destruction, there is interference, as reasonably determined by
Landlord, with the operation of the business of Tenant in the Premises, having
regard to the extent to which Tenant may be required to discontinue its business
in the Premises, and such abatement or reduction shall continue (but may be
adjusted from time to time based on the extent of the interference with Tenant's
operations as reasonably determined by Landlord) for the period commencing with
such destruction or damage and ending with the substantial completion by
Landlord of such work, repair and/or reconstruction as Landlord may do.
Section 10.3 Limitation on Landlord's and Tenant's Obligations. Landlord
--------------------------------------------------------------
and Tenant shall not be obligated to do any repair or restoration work if
Landlord or Tenant elects to terminate this Lease as provided for in this
Article X.
Section 10.4 Landlord's Right to Terminate. Notwithstanding the
------------------------------------------
foregoing, Landlord may terminate this Lease following: (a) damage or
destruction to the Premises to the extent of thirty percent (30%) or more of the
cost of replacement thereof; or (b) the refusal of the applicable insurance
carrier to pay funds sufficient for the cost to repair or replace or the refusal
of any applicable mortgagee or ground lessor to release the insurance proceeds
for such purposes. Landlord may exercise the right to so terminate this Lease
by written notice to Tenant given within sixty (60) days after the date of the
damage or sixty (60) days after the date Landlord receives written notice of
such damage, whichever is later. Such notice of termination shall be effective
on the date thereof.
Section 10.5 Tenant's Right to Terminate. If the Premises are damaged by
----------------------------------------
fire or other casualty and (a) Landlord does not elect, by notice to Tenant
given within sixty (60) days after Tenant's written notice of such damage or
destruction is received by Landlord, to substantially repair or restore the same
to their former condition (excluding those portions which consist of the
Tenant's Work or other alterations or improvements, other than Landlord's Work,
made by or on behalf of Tenant), (b) the damage or destruction is such that
restoration of the Premises cannot, in the opinion of Landlord upon consultation
with Landlord's Architect, be completed within nine (9) months of the date of
such damage or destruction or (c) Landlord, having elected to restore, fails to
do so within said nine (9) month period, as the same may be extended due to
Excusable Delay, then, in any of such events, Tenant may thereafter terminate
this Lease upon sixty (60) days prior written notice to Landlord unless such
repair or restoration is substantially completed within such 60-day period.
<PAGE>
ARTICLE XI
----------
EMINENT DOMAIN
--------------
Section 11.1 Eminent Domain, Right to Terminate and Abatement in Rent. If
---------------------------------------------------------------------
the Premises or any part thereof, or the whole or any substantial part of
Landlord's Property, shall be taken, or if a conveyance shall be made in
anticipation thereof, for any street or other public use, by action of the
municipal, state, federal or other authorities, or shall receive any substantial
direct or consequential damage for which Landlord or Tenant shall be entitled to
compensation by reason of anything lawfully done in pursuance of any public
authority, after the execution hereof and before the expiration of the Lease
Term, then this Lease and the Lease Term shall terminate at the election of
Landlord (such termination to be effective upon the date of taking), and such
election may be made in case of any such taking notwithstanding the entire
interest of Landlord may have been divested by such taking; and if Landlord does
not so elect, then in case of any such taking or destruction of, or damage to,
the Premises, rendering the same or any part thereof unfit for use and
occupation, a just proportion of the Base Rent hereinbefore reserved according
to the nature and extent of the injury sustained by the Premises as determined
by Landlord, shall be suspended or abated until the Premises or, in case of such
taking, what may remain thereof, shall have been put in proper condition for use
and occupation. To the extent that the Premises, upon having been put in proper
condition for use and occupation are smaller, the Base Rent hereinbefore
reserved shall be reduced for the balance of the Lease Term in the same
proportion which the reduction in space bears to the original Leasable Square
Footage of the Premises.
Section 11.2 Restoration. If this Lease is not terminated as provided in
------------------------
Section 11.1, Landlord shall apply so much of the available proceeds of the
eminent domain award as are required to restore Landlord's Property and the
Premises to a condition, to the extent practical, substantially the same as that
immediately preceding the taking, but subject to zoning laws and building codes
then in existence. If the available proceeds of the eminent domain award are
insufficient, in Landlord's judgment, for that purpose, Landlord shall have no
obligation to expend funds in excess of said proceeds and Landlord shall have
the right to select which portions of Landlord's Property, if any, shall be
restored. The term "available proceeds" shall mean the amount of the award paid
------------------
to Landlord, less cost of obtaining the same (including attorneys' fees and
appraisal fees) and less the amount thereof required to be paid to a mortgagee
or ground lessor.
Section 11.3 Landlord to Control Eminent Domain Action. Landlord reserves
------------------------------------------------------
all rights to compensation for damage to the Premises or any part thereof, or
the leasehold hereby created, heretofore accrued or hereafter to accrue, by
reason of any taking for public use of said Premises or any portion thereof, or
right appurtenant thereto, or privilege or easement in, through, under or over
the same, and by way of confirmation of the foregoing Tenant hereby assigns all
rights to such damages heretofore accrued or hereafter accruing during the Lease
Term to Landlord. Provided, however, nothing herein contained shall limit
Tenant's right to any separate award for the taking of personal property, moving
expenses, or other items the payment of which shall not reduce the award payable
to Landlord.
ARTICLE XII
-----------
<PAGE>
DEFAULT AND REMEDIES
--------------------
Section 12.1 Event of Default. As used herein, `Event of Default' shall
-----------------------------
mean the occurrence and/or existence Of any one or more of the following: (a)
Tenant shall neglect or fail to pay when first due Base Rent or any installment
thereof, or Additional Rent or, as applicable, any installment thereof (and such
failure is not solely due to an error by Landlord or Landlord's bank in
collecting such installment by an electronic funds transfer when Tenant has
adequate available funds in its account to pay such installment), or (b) Tenant
shall neglect or fail to perform or observe any of the other covenants or
undertakings herein on its part to be performed or observed and such neglect or
failure shall continue for thirty (30) days after notice to Tenant; provided,
however, that if the default is other than a default under clause (a) above, or
clauses (c) through (j) below, and is such that it cannot be cured within thirty
(30) days, but is capable of being cured, such thirty (30) day period shall be
extended by up to thirty (30) additional days provided that Tenant commences to
cure such default within said initial thirty (30) day period, continues to do so
diligently, and thereafter completes such cure within not more than sixty (60)
days following the notice of default; or (c) there is filed by Tenant or any
Guarantor any case, petition, proceeding or other action under any Bankruptcy
Law; or (d) any other proceedings shall be instituted against Tenant or any
Guarantor under any Bankruptcy Law and not be dismissed within ninety (90) days;
or (e) Tenant or any Guarantor shall execute an assignment of its property for
the benefit of its creditors; or (f) a receiver, custodian or other similar
officer for Tenant or any Guarantor shall be appointed and not be discharged
within ninety (90) days; or (g) the estate hereby created shall be taken by
execution or by other process of law and is not redeemed by Tenant within thirty
(30) days thereafter, or (h) an assignment or sublease in violation of the terms
of this Lease; or in an Event of Default shall occur under Section 2.5(b); or
(j) Tenant shall fail to deliver any agreement, document or certificate required
pursuant to Article IX within the time period provided therein and such failure
is not cured within ten (10) days after notice to Tenant.
Section 12.2 Landlord's Remedies.
--------------------------------
(a) Upon the occurrence of an Event of Default and after the lapse of
any applicable period of cure, Landlord may, provided such is done in accordance
with applicable laws, immediately or at any time thereafter (notwithstanding any
license or waiver of any former breach or waiver of the benefit hereof, or
consent in a former instance), and without demand or notice, in person or by
agent or attorney, enter the Premises or any part thereof and repossess the same
as of its former estate, or terminate this Lease by written notice to Tenant,
and in either event expel Tenant and those claiming through or under it and
remove their effects (forcibly, if necessary) without being deemed guilty of any
manner of trespass and without prejudice to any remedy which might otherwise be
used for arrears of Base Rent or Additional Rent or breach of covenant, and upon
entry or written notice of termination, or automatic termination, both as
aforesaid, this Lease shall terminate and Landlord, in addition to all other
remedies which it may have at law or equity, and not in limitation thereof,
shall have the remedies provided in this Article XII.
(b) If this Lease shall be terminated as provided in Section 12.2(a)
hereof, Tenant shall forthwith pay to Landlord as damages, in addition to all
sums which were due prior
<PAGE>
to the date of such termination, a sum equal to the amount by which the Base
Rent and Additional Rent for the remainder of the Lease Term exceeds the fair
rental value of the Premises for the remainder of the Lease Term. For the
purposes of computing damages payable pursuant to this Section 12.2, it is
agreed that there shall be payable to Landlord as part of such damages at the
time of such termination the product of the Additional Rent due with respect to
Taxes, Insurance Costs and Operating Costs for the most recently ended fiscal,
calendar or lease year, as the case may be, times the number of years remaining
of the Lease Term, it being assumed that the amount of such Additional Rent
payments so payable for the most recently ended fiscal, calendar year or lease
year would have remained constant for each subsequent year of the Lease Term.
Tenant also (i) will indemnify and save Landlord harmless from and against all
reasonable expenses which Landlord may incur, including, without limitation,
legal expenses, reasonable attorneys' fees, brokerage fees, and the cost of
putting the Premises in the condition required to be maintained hereunder or
preparing the same for rental; and (ii) agrees that Landlord may re-let the
Premises or any part or parts thereof, either in the name of Landlord or
otherwise for a term or terms which may, at Landlord's option, be less than or
exceed the period which would otherwise have constituted the balance of the
Lease Term and may grant concessions or free rent. The good faith failure of
Landlord to re-let the Premises or any part or parts thereof, or, if the
Premises are re-let, for the good faith failure to collect the rents due under
such re-letting, shall not release or affect Tenants liability for damage so
long as Landlord does not act arbitrarily or capriciously. Any suit brought to
collect the amount of deficiency for any month or other period shall not
prejudice in any way the tight of Landlord to collect the deficiency for any
subsequent month or period by a similar proceeding. Landlord, at Landlord's
option, may make such alterations, repairs, replacements and decorations on the
Premises as Landlord in Landlord's reasonable judgment considers advisable and
necessary for the purpose of re-letting the Premises, and the making of such
alterations or decorations shall not operate or be construed to release Tenant
from liability hereunder. Landlord shall in no event be liable in any way for
the good faith failure to re-let the Premises, or. if the Premises are re-let,
for the good faith failure to collect the rents due under such re-letting,
provided always that Landlord does not act arbitrarily or capriciously.
Section 12.3 Reimbursement of Landlord. In the event of any default by
--------------------------------------
Tenant in the payment of any Base Rent or Additional Rent, Tenant will, in
addition to paying Landlord all amounts due under the terms and provisions of
this Lease, including, without limitation, Section 12.9, reimburse Landlord for
all reasonable expenses incurred by Landlord in collecting such rent or in
obtaining possession of, or in re-letting the Premises, or in defending any
action, including expenses for reasonable counsel fees and commissions. Tenant
further agrees that, if on termination of this Lease by expiration or otherwise,
Tenant shall fail to remove any of its property from the Premises as provided
for herein, Landlord shall be authorized, in its sole option, and in Tenant's
name and an its behalf, either (a) to cause such property to be removed and
placed in storage for the account and at the expense of Tenant; or (b) to sell
such property at public or private sale, with or without notice, and to apply
the proceeds thereof, after the payment of all expenses of removal, storage and
sale, to the indebtedness, if any, of Tenant to Landlord, the surplus, if any,
to be paid to Tenant; prior to the removal of such property Landlord may charge
Tenant a fair rental amount for the storage of such property. All sums payable
by Tenant under this Article XII shall be deemed Additional Rent.
<PAGE>
Section 12.4 Landlord's Right to Perform Tenant's Covenants. Tenant
-----------------------------------------------------------
covenants and agrees that, if it shall at any time fail to make any payment or
perform any other act on its part to be made or performed as in this Lease
provided beyond the cure period set forth below in this Section 12.4, Landlord,
in its sole discretion may after due notice to, or demand upon, Tenant, make any
payment or perform any other act on the part of Tenant to be made and performed
as in this Lease provided, in such manner and to such extent as Landlord may
reasonably deem desirable, and in exercising any such rights, Landlord may pay
necessary and incidental costs and expenses, employ counsel, and incur and pay
reasonable attorneys' fees. The making of any such payment or the performing of
any other act by Landlord pursuant to this Article shall not waive, or release
Tenant from, any obligations of Tenant in this Lease contained. All sums so paid
by Landlord and all reasonably necessary and incidental costs and expenses in
connection with the performance of any such act by Landlord shall, except as
otherwise in this Lease expressly provided, be payable to Landlord on demand,
and Tenant covenants to pay any such sum or sums promptly, and Landlord shall
have (in addition to any other right or remedy of Landlord) the same rights and
remedies in the event of the non-payment thereof by Tenant as in the case of
default by Tenant in the payment of the Base Rent. Whenever practicable,
Landlord, before proceeding as provided in this Section 12.4, shall give Tenant
notice in writing of the failure of Tenant which Landlord proposes to remedy,
and shall allow Tenant such length of time as may be reasonable in the
circumstances, consistent with any grace periods contained herein, but not
exceeding thirty (30) days from the giving of notice, to remedy the failure
itself and, if Tenant shall not remedy the failure in the time so allowed,
Landlord shall be deemed to have given "due notice" and may proceed as provided
in this Section 12.4; provided, however, that nothing in this Section shall
prevent Landlord from acting without notice to Tenant in case of any emergency
wherein there is danger to property or person or where there may exist any
violation of legal requirements including but not limited to the presence of
Hazardous Materials, in which event no notice shall be required.
Section 12.5 Cumulative Remedies. The specified remedies to which Landlord
--------------------------------
may resort under the terms of this Lease, or under the provisions of applicable
law, are cumulative and not intended to be exclusive of any other remedies or
means of redress to which Landlord may be lawfully entitled in case of any
breach or threatened breach by Tenant of any provisions of this Lease. The
failure of Landlord to insist in any one or more cases upon the strict
performance of any of the covenants of this Lease or to exercise any option
contained herein shall not be construed as a waiver or a relinquishment for the
future of such covenant or option. Receipt by Landlord of any Base Rent or
Additional Rent payment with knowledge of the breach of any covenants hereof
shall not be deemed a waiver of such breach. No waiver by either party of any
provision of this Lease shall be deemed to have been made unless expressed in
writing and signed by it. In addition to the other remedies provided in this
Lease, Landlord shall be entitled to restraint by injunction of any violation or
attempted or threatened violation of any of the covenants, conditions or
provisions of this Lease.
Section 12.6 Expenses of Enforcement. Tenant agrees to pay all reasonable
------------------------------------
expenses and reasonable attorneys' fees incurred by Landlord in enforcing any
obligation or any remedies hereunder including, without limitation, in
connection with collection of Base Rent or Additional Rent, recovery by Landlord
of the Premises, or in any litigation in which Landlord shall become
<PAGE>
involved by reason of any act or negligence of Tenant Invitees or any breach of
this Lease by Tenant.
Section 12.7 Landlord's Default. Landlord shall not be deemed to be in
--------------------------------
default hereunder unless such default shall remain uncured for more than thirty
(30) days following written notice from Tenant to Landlord specifying the nature
of such default, or such longer period as may be reasonably required to correct
such default provided that Landlord is diligently pursuing cure of same.
Landlord's liability to keep, maintain, and repair shall always be limited to
the cost of making such repair or accomplishing such maintenance or repair. In
no event whatsoever shall Landlord be liable for consequential or any indirect
damages. The provisions of this Section 12.7 are further subject to the
provisions of Articles X and XI dealing with eminent domain and fire and other
casualty.
Section 12.8 Limitation of Landlord's Liability. The obligations of
-----------------------------------------------
Landlord hereunder shall be binding upon Landlord and each succeeding owner of
Landlord's interest hereunder only during the period of such ownership, and
Landlord and each succeeding owner shall have no liability whatsoever except for
its obligations during each such respective period. Tenant hereby agrees for
itself and each succeeding holder of Tenant's interest, or any portion thereof,
hereunder, that any judgment, decree or award obtained against Landlord or any
succeeding owner of Landlord's interest, which is in any manner related to this
Lease, the Premises or Tenant's use and occupancy of the Premises or other
portions of Landlord's Property, whether at law or in equity, shall be satisfied
out of Landlord's equity in the land and buildings then comprising Landlord's
Property owned by Landlord to the extent then owned by Landlord and such
succeeding owner and available insurance proceeds, and further agrees to look
only to such assets and to no other assets of Landlord, or such succeeding
owner, for satisfaction. Neither Landlord nor any Person executing this Lease on
behalf of Landlord, nor any partner, limited or general, or any officer,
director, employee, member, trustee, beneficiary, or owner of Landlord, nor any
subsequent Landlord, or any partner, limited or general, or any officer,
director, employee, member, trustee, beneficiary, or owner of any subsequent
Landlord shall have any personal liability hereunder. The remedies provided to
Tenant in this Lease are exclusive, and Landlord will not be liable under any
theory of recovery, whether based on contract, tort or otherwise.
Section 12.9 Late Payment and Administrative Expense. If Tenant shall fail
----------------------------------------------------
to pay Base Rent, Additional Rent or other charges after the same become due and
payable under this Lease, such unpaid amounts shall bear interest from the due
date thereof to the date of payment at the Applicable Interest Rate ("Interest
--------
Payment"). In addition, if Landlord is required to redeposit any check which is
- -------
returned for insufficient funds or if Tenant shall fail to pay Base Rent,
Additional Rent or other charges on or before the date on which the same become
due and payable, then Tenant shall also pay to Landlord an administrative
expense charge ("Administrative Expense") of five percent (5.0%) of the amount
----------------------
thereof for each calendar month or part thereof after the due date of such
payment until such payment is received by Landlord. The provisions herein for
Interest Payment and Administrative Expense shall not be construed to relieve
Tenant of the obligation to pay Base Rent, Additional Rent and all other charges
when due under this Lease and shall be in addition to and not in limitation of
Landlord's other remedies as provided for in this Lease.
<PAGE>
ARTICLE XIII
------------
MISCELLANEOUS PROVISIONS
------------------------
Section 13.1 Brokers. Tenant and Landlord each represents to the other
--------------------
that it has not dealt with any Person in connection with the Premises or the
negotiation or execution of this Lease other than officers, employees and
attorneys of Landlord and the Brokers. Each of Tenant and Landlord shall
indemnify and save harmless the other from and against all claims, liabilities,
costs and expenses incurred as a result of any breach of the foregoing
representation by it. The broker's fees payable to Brokers for this Lease shall
be payable by Landlord subject to and in accordance with the terms of separate
agreements between Landlord and Brokers.
Section 13.2 Quiet Enjoyment. Tenant shall, upon paying all Base Rent and
----------------------------
Additional Rent due hereunder and observing and performing all of the terms,
covenants and conditions on Tenant's part to be observed and performed,
peaceably and quietly have and hold the Premises without hindrance or
molestation by any Person or Persons lawfully claiming by, through or under,
Landlord, subject, however, to the terms of this Lease.
Section 13.3. [intentionally omitted].
------------
Section 13.4 Notices. Any notice, demand, request or statement required or
--------------------
intended to be given or delivered under the terms of this Lease shall be in
writing, shall be addressed to the party to be notified at the address or
addresses set forth in the Summary of Basic Terms or at such other address in
the continental United States as each party may designate for itself from time
to time by notice hereunder, and shall be deemed to have been given, delivered
or served upon the earliest of (a) three (3) days following deposit in the U.S.
Mail, with proper postage prepaid, certified or registered, return receipt
requested, (b) the next business day after delivery to a regularly scheduled
overnight delivery carrier with delivery fees either prepaid or an arrangement,
satisfactory with such carrier, made for the payment of such fees, or (c)
receipt of notice given by telecopy or personal delivery.
Section 13.5 Waiver of Subrogation. Landlord and Tenant hereby release
----------------------------------
each other, to the extent of their respective insurance coverages, from any and
all liability for any loss or damage caused by fire, any of the extended
coverage casualties, or other casualties insured against, even if such fire or
other casualty shall be brought about by the fault or negligence of the party
benefited by the release or its agents, provided, however, this release shall be
in force and effect only with respect to loss or damage occurring during such
time as the policies of fire, extended coverage and other insurance, maintained
by the releasing party shall contain a clause, or be subject to a statutory
provision to the effect that such release shall not affect said policies or the
right of the releasing party to recover thereunder. Landlord and Tenant agree
that their respective fire, extended coverage, and other insurance policies will
include such a clause. To the extent that Tenant is a self-insurer with respect
to personal property, the provisions of Section 7.8 hereof shall be applicable.
The provisions in favor of Landlord under this Section 13.6 are in addition to,
and not in lieu of, the other terms of this Lease. In the event that either
party fails to maintain the insurance coverage required under this Lease, it
shall be deemed, for purposes of
<PAGE>
this Section 13.5, to have received the amount which it would have received had
such insurance coverage been in place.
Section 13.6 Entire Agreement: Execution; Time of the Essence and Headings
----------------------------------------- --------------------------------
and Table of Contents. This Lease together with all Exhibits referred to herein
- ---------------------
and the Summary of Basic Terms, sets forth the entire agreement between the
parties hereto and cannot be modified or amended, except in a writing duly
executed by the respective parties. This Lease, together with all Exhibits
referred to herein and the Summary of Basic Terms, supersedes all previous
written and oral negotiations, understandings. and agreements regarding the
subject matter of this Lease. Neither Landlord nor any Person acting on behalf
of Landlord has made any representations to Tenant on which Tenant has relied in
entering into this Lease except any representations expressly stated in this
Lease. This Lease is executed as a sealed instrument and in multiple
counterparts, all copies of which are identical, and any one of which is to be
deemed to be complete in itself and may be introduced in evidence or used for
any purpose without the production of any other copy. Time is of the essence of
the obligations of each party to be performed within a specific time frame in
this Lease. The headings throughout this Lease and the Table of Contents are
for convenience of reference only, and shall in no way be held or deemed to
define, limit, explain, describe, modify or add to the interpretation,
construction or meaning of any provision of this Lease.
Section 13.7 Partial Invalidity. If any term or condition of this Lease or
-------------------------------
its application to any Person or circumstance shall to any extent be in
violation of or unenforceable under any law, rule, regulation or order
(including any court order) now existing or hereafter enacted or entered by any
court or other governmental entity having competent jurisdiction (including
after all appeals therefrom), the remainder of this Lease, or the application of
such term or condition to Persons or circumstances other than those as to which
it is invalid or unenforceable, shall not be affected thereby and shall be
enforceable to the fullest extent not prohibited by law.
Section 13.8 No Waiver. No assent, express or implied, by either party to
----------------------
any breach of any agreement or condition herein contained on the part of the
other party to be performed or observed, and no waiver, express or implied, of
any such agreement or condition shall be deemed to be a waiver of or an assent
to any succeeding breach of the same or any other agreement or condition; the
acceptance by Landlord of Base Rent or Additional Rent due hereunder (whether
such payment is made by Tenant or another Person), or silence by either party as
to any breach, shall not be construed as waiving any of its fights hereunder
unless such waiver shall be in writing. No payment by Tenant or acceptance by
Landlord of a lesser amount than shall be due Landlord from Tenant shall be
deemed to be anything but payment on account, and the acceptance by Landlord of
a check for a lesser amount with an endorsement or statement thereon, or upon a
letter accompanying said check, that said lesser amount is payment in full shall
not be deemed an accord and satisfaction, and Landlord may accept said check
without prejudice to recover the balance due or pursue any other remedy.
Section 13.9 Holdover. If Tenant remains in the Premises beyond the
---------------------
expiration of this Lease at the end of the Lease Term, or sooner following an
early termination as provided for herein, such holding over shall not be deemed
to create any tenancy, but Tenant shall be a daily Tenant at sufferance only
subject to all of Tenant's obligations set forth herein, but at a daily rate
<PAGE>
equal to one and one-half (1 1/2) times the Base Rent, then in effect, and
Additional Rent and other charges provided for under this Lease. The acceptance
of a purported rent check following termination shall not constitute the
creation of a tenancy at will, it being agreed that Tenant's status shall remain
that of a daily Tenant at sufferance, at the aforesaid daily rate. Tenant shall
also pay to Landlord all damages, if any, sustained by reason of any such
holding over. Otherwise. such holding over shall be on the terms and conditions
set forth in this Lease as far as applicable.
Section 13.10 When Lease Becomes Binding. The submission of this document
----------------------------------------
for examination and negotiation does not constitute an offer to lease or a
reservation or an option for the Premises, and this document shall become
effective and binding only upon the execution and delivery hereof by both
Landlord and Tenant and the receipt by Landlord of the first month's
installments of Tenant's Electricity Costs and Base Rent, along with the
Security Deposit. All negotiations, considerations, representations and
understandings between Landlord and Tenant are incorporated herein and may be
modified or altered only by agreement in writing between Landlord and Tenant,
and no act or omission of any employee or agent of Landlord shall alter, change
or modify any of the provisions hereof.
Section 13.11 No Recordation. Tenant shall not record this Lease with any
----------------------------
registry of deeds or land court, and any recordation of this Lease or any
memorandum, short form or notice of this Lease will be void and constitute an
Event of Default under this Lease.
Section 13.12 As Is. Except for Landlord's Work, the Tenant represents to
--------------------
Landlord that it has leased the Premises after a full and complete examination
of the same, and by its execution and delivery of this Lease, Tenant hereby
acknowledges that neither Landlord, nor Landlord's agents, has made any
representation or promises with respect to the Premises, the Building, or the
land upon which it stands, and no rights, easements or licenses are acquired by
Tenant, by implication or otherwise, except as may be set forth expressly in
this Lease. The execution and delivery of this Lease by Tenant shall be
conclusive evidence, as against the Tenant, that Tenant accepts the Premises "AS
IS", with all faults.
Section 13.13 Financial Statements: Certain Representations and Warranties
--------------------------------------------------------------------------
of Tenant. Subject to the restrictions set forth in Section 9.5 (b), from time
- ---------
to time as requested by Landlord, Tenant shall provide to Landlord, any actual
or potential mortgagee and any actual or potential ground lessor or any
representative of any of the foregoing, copies of Tenant's (and any Guarantor's)
annual financial statements (audited or reviewed, if available) and quarterly
financial statements, all certified as true and correct by the president or
chief financial officer of Tenant (or any Guarantor, as applicable) and such
other information regarding Tenant's (and, any Guarantors) financial condition
as Landlord may reasonable request. Tenant represents and warrants to Landlord,
its successors and assigns that: (a) all financial statements of Tenant and/or
any Guarantor previously provided to Landlord have been prepared in accordance
with GAAP, were true, complete and correct as of their respective dates and
fairly and accurately reflect the financial condition of Tenant and any
Guarantor, (b) there has been no material adverse change in the financial
condition of Tenant and/or any Guarantor subsequent to the date(s) of such
financial statements; (c) all financial statements of Tenant and/or any
Guarantor provided to Landlord after the date hereof will be prepared in
accordance with GAAP, will be true, complete
<PAGE>
and correct as of their respective dates and will fairly and accurately reflect
the financial conditions of the Tenant and any Guarantor, (d) Tenant is a
corporation duly organized, validly existing and in good standing under the laws
of Delaware; (e) Tenant is qualified to do business in the Commonwealth of
Massachusetts; (f) the execution, delivery and performance of this Lease by
Tenant has been duly authorized by the shareholders and directors of Tenant; and
(g) this Lease is valid and binding upon the Tenant and is enforceable against
Tenant in accordance with the terms hereof.
Section 13.14 Confidentiality. Tenant acknowledges that the terms under
-----------------------------
which Landlord has leased the Premises to Tenant, (including, without
limitation, the rental rate(s), term and other financial and business terms,
constitute confidential information of Landlord "Confidential Information").
------------------------
Tenant covenants and agrees to keep the Confidential Information completely
confidential; provided, however, that (a) such Confidential Information may be
disclosed by Tenant to those of its officers, employees, attorneys, accountants,
lenders and financial advisors (collectively, "representatives") who need to
know such information in connection with Tenant's use and occupancy of the
Premises and for financial reporting and credit related activities (it being
understood that Tenant shall inform its representatives of the confidential
nature of such Confidential Information and that such representatives shall be
directed by Tenant, and shall each expressly agree, to treat such Confidential
Information confidentially in accordance with the terms of this Section), and
(b) unless required by applicable law, any other disclosure of such information
may only be made if Landlord consents in writing prior to any such disclosure.
Section 13.15 Summary of Basic Terms. The Summary of Basic Terms which is
------------------------------------
affixed to this Lease sets forth certain basic terms and information which is
thereafter referred to in the main text of this Lease. Every reference to the
Summary of Basic Terms, or to a particular item thereon, shall have the effect
of incorporating the Summary, or the particular item thereof, into the main text
of this Lease.
Section 13.16 [intentionally omitted].
-------------------------------------
Section 13.17 Year 2000 Compliance. The Building will be delivered with
----------------------------------
all systems compliant with Year 2000.
[SIGNATURE PAGE FOLLOWS]
<PAGE>
Tenant and Landlord, each by its duly authorized officer, has signed this
Lease as of the date first set forth above.
TENANT:
SmarterKids.com, Inc.
By: /s/ David A. Blohm
-----------------------------
Name: DAVID A. BLOHM
----------------------------
Title: PRES/CEO
---------------------------
Duly authorized
LANDLORD:
BHX, LLC, as Trustee of Crawford Realty Trust
By: /s/ Robert A. Schlager
-----------------------------
Name: ROBERT A. SCHLAGER
----------------------------
Title: Illegible
---------------------------
Duly authorized
<PAGE>
EXHIBIT A
---------
PROPERTY DESCRIPTION
--------------------
[To be attached]
<PAGE>
SCHEDULE A
All that certain parcel of land situated in Needham, Norfolk County,
Massachusetts, bounded and described as follows:
Westerly by Hampton Avenue, two hundred forth eight and 44/100 (248.44)
feet;
Northwesterly by the junction of said Hampton Avenue, and Crawford Street,
ninety five and 06/100 (95.06) feet;
Northerly by said Crawford Street, two hundred nine and 41/100 (209.41)
feet;
Northeasterly by Parcel No. 42TB, shown on plan filed with Certificate No.
81403, five and 88/100 (5.88) feet;
Northeasterly by the junction of said Crawford Street and Town Way, shown on
plan filed with Certificate No. 49606, fifty nine and 90/100
(59.09) fee;
Easterly by the Westerly line of said Town Way, one hundred eighty one and
28/100 (181.28) feet; and
Southeasterly by lot numbered 7, shown on said plan filed with Certificate No.
49606, two hundred ninety nine and 51.100(299.51) feet.
Said parcel comprises lots numbered 5 and 6 on a plan drawn by Frank L. Cheney,
Civil Engineer, dated November 7, 1953, as approved by the Land Court, filed in
the Land Registration Office as No. 21023C, a copy of a portion of which is
filed in Norfolk Registry District with Certificate No. 49606, Book 249; and lot
numbered 9 on a plan drawn by Mass. Dept. of Public Works, E.F. Sawyer, Officer
Engineer, dated September 1, 1953, as approved by the said Court, filed in the
Land Registration Office as No. 21023D, a copy of a portion of which is filed in
Norfolk Registry District with Certificate No. 81403, Book 408.
<PAGE>
EXHIBIT B
---------
SITE PLAN
---------
[To be attached]
<PAGE>
[COPY OF SITE PLAN]
<PAGE>
EXHIBIT C
---------
BUILDING FLOOR PLAN
-------------------
[To be attached]
<PAGE>
[COPY OF BUILDING FLOOR PLAN]
<PAGE>
EXHIBIT D
---------
BASE BUILDING WORK
------------------
I. Work per plans and specifications determined by Landlord's Architect (to
be attached).
II. Landlord shall perform the following work at Landlord's sole cost and
expense and without charge against he Tenant Improvements Allowance.
1. Landlord shall make at least one set of restrooms on each floor of the
building handicap accessible and ADA-compliant and install new finishes in
all restrooms.
2. Remove all remaining plant material and clean the walls, windows and
structural elements of the atrium. Clean vestibule lobby and rear garage
area. Install new floor tiles in lobby. Garage area should be in good
operational condition (lighting, HVAC, etc.).
3. Remove directory from wall and install sheetrock with wood panel wainscoat.
4. Replace those pieces of plan material in the lobby planter which are in
poor condition with new plantings or remove completely at Tenant's
election.
5. New lighting fixtures for lobby overhead, sidewalls and second floor
balcony area.
6. Replace lobby-ceiling tiles (under balcony area) with new tiles. Convert
acrylic fixture to downlights.
7. Landlord will remove "steel monuments" from the front of the Building and
reconfigure front entrance of building to be ADA compliant.
8. Replace garage door (facing the parking lot) to a standard, which is
mutually agreeable between Landlord and Tenant.
<PAGE>
EXHIBIT E
---------
TENANT IMPROVEMENTS PLANS AND SPECIFICATIONS
--------------------------------------------
[To be attached]
<PAGE>
[COPY OF TENANT IMPROVEMENT PLANS AND SPECIFICATIONS]
<PAGE>
EXHIBIT F
---------
TENANT'S WORK
-------------
1. Tenant will perform any work necessary to equip and open its office in
accordance with all applicable building codes and other laws. Work shall
be performed as provided in Section 3.2 of this Lease. Work shall include
but not be limited to any computer or telephone cables, wiring, jack
locations and the like, and supplying and installation of such furnishings,
trade fixtures and equipment as Tenant may elect which are necessary or
desirable for the conduct by Tenant of its business in the Premises
consistent with the terms and conditions of this Lease.
2. Tenant shall only use contractors approved by Landlord (such approval not
to be unreasonably withheld or delayed) to perform Tenant's Work. In the
event Tenant uses Landlord's contractors, Tenant shall pay Landlord, as
Additional Rent, an administrative fee for such contractors in the amount
of 15% of the estimated cost of Tenant's Work, payable within 30 days of
Landlord's billing to Tenant therefor.
[To be attached]
<PAGE>
EXHIBIT G
---------
RULES AND REGULATIONS
---------------------
BHX, LLC, a Massachusetts limited liability company, as Trustee of Crawford
Realty Trust, under Declaration of Trust dated June 9, 1997 and filed with the
Norfolk Registry District of the Land Court on June 9, 1997 as Document No.
764674 ("Landlord"), hereby promulgates the rules and regulations (the "Rules
-------- -----
and Regulations") set forth below with respect to the use of the office building
- ---------------
(the "Building"), parking areas and related amenities located at and known as
--------
15-19 Crawford Street, Needham, Massachusetts (the "Property") by
--------
SmarterKids,.com, a Delaware corporation (the "Tenant") of the Building. All
------
space within the Building leased by Tenant is called the "Premises." The Rules
--------
and Regulations are as follows:
1. Sidewalks, doorways, vestibules, stairways, elevators, corridors,
halls and other similar areas within the Property shall not be obstructed by
Tenant or used for any purpose other than ingress and egress to and from the
Premises and for going from one part of the Property to another part of the
Property.
2. No sign, advertisement, notice or other lettering shall be exhibited,
inscribed, painted or affixed by Tenant on or to any window, door, corridor or
other part of the Building which is visible from outside of the Building without
the prior written consent of Landlord.
3. Tenant shall be entitled to maintain a director in the lobby of the
Building, the design and location of which is subject to Landlord's approval,
identifying the names and locations of its employees.
4. Movement of furniture, office equipment or any bulky material shall be
subject to such restrictions as Landlord may reasonably impose.
5. Landlord shall have the authority to limit the weight of, and to
prescribe and restrict the positioning and manner of installation of, safes,
file cabinets and other heavy equipment.
6. Tenant shall not use, or permit any person making or receiving any
delivery to the Premises to use, any hand trucks except those equipped with
rubber tires and side guards.
7. All locks for doors in the Premises shall be building standard and
Tenant shall not place any additional lock or locks on any door without
Landlord's prior written consent. All requests for duplicate keys shall be made
through Landlord and charged to Tenant. Upon termination of Tenant's tenancy,
the Tenant shall deliver to Landlord all keys to the Premises, to interior doors
within the Premises and to exterior Building doors which have been furnished to
or obtained by the Tenant.
8. Tenant shall lock all doors at the close of its working day.
<PAGE>
9. No curtains, blinds, draperies or other window treatments shall be
attached to or hung in any window of the Premises, on an exterior wall of the
Building without the prior written consent of Landlord, which consent shall not
be unreasonably withheld.
10. Plumbing fixtures and appliances shall be used only for the purposes
for which they were designed and constructed, and no sweepings rubbish, rages or
other material shall be thrown or placed therein. The cost of repairing any
damage resulting from misuse of the plumbing fixtures or appliances by Tenant or
its employees, agents or invitees shall be borne by Tenant.
11. Tenant shall not use or permit the use of Premises, or any part
thereof, for lodging, for manufacturing, for any immoral, "adult" or illegal
purpose, or for any other purpose which is not permitted by the terms of its
lease.
12. Tenant shall, at its expense, provide artificial light and electric
current for the employees of Landlord and/or Landlord's contractors while
performing janitorial or other cleaning, maintenance or repair services in the
Premises.
13. Tenant shall not cause any unnecessary janitorial labor or services by
reason of the Tenant's willful misconduct or carelessness or indifference in the
preservation of good order and cleanliness.
14. With the exception of so-called "seeing-eye" dogs necessary for the
assistance of the visually-impaired, no animals of any kind shall be brought
onto or kept on the Property.
15. Without the prior written consent of Landlord, Tenant shall not use
the name of the Building or any picture of the Building in any materials
promoting or advertising the business of the Tenant, except that each Tenant may
use the address of the Building as the address of its business.
16. Tenant shall cooperate with Landlord to assure the effective operation
of the heating and air conditioning systems serving the Building. Without
limiting the generality of the immediately preceding sentence, Tenant will, at
the request of Landlord, close its window treatments when the sun's rays fall
directly on windows of the Premises.
17. Neither Landlord nor the Property manager will be responsible for lost
or stolen money, jewelry or other personal property from any areas of the
Property, regardless of whether the loss or theft occurs when the area in
question is locked.
18. Landlord may, in its discretion, institute security measures in the
operation of the Property, and Tenant will comply with all such security
measures. Such security measures may include, but are not limited to, requiring
persons entering the Building or the Property to identify themselves to a
watchman or other person designated by Landlord and to sign in and sign out of
the Property, denying access to persons who are not properly identified or
appear suspicious, and conducting fire or other emergency drills. The exercise
of such security measures by Landlord and any resulting interruption of Tenant's
business shall not constitute an eviction or disturbance
<PAGE>
of Tenant's use and possession of the Premises, render Landlord liable to Tenant
for damages, or relive Tenant from its obligations under its lease.
19. No bicycles or vehicles shall be brought into or kept in the Building
(except bicycles and vehicles may be brought into the Storage Space). All
bicycles and vehicles brought onto the Property shall be driven and parked only
in designated, paved areas.
20. Parking on the Property shall be subject to the restrictions set forth
in this paragraph and to any additional restrictions on parking set forth in
Tenant's lease. Tenant, its employees, agents and invitees shall have the right,
in connection with the conduct of Tenant's business at the Property, to park
passenger automobiles on portions of the Property which have been striped for
parking; provided, however that (a) Tenant, its employees or agents may not park
in any space marked "visitor," and (b) Tenant, its employees, agents or invitees
may not park in any space marked "reserved," unless reserved for such Tenant,
and (c) persons parking their vehicles will do so exclusively within the marked
parking space lines. Tenant, its employees, agents or invitees shall not have a
right to park vehicles on the Property overnight or for purposes other than in
connection with Tenant's business at the Property. Landlord shall have no
responsibility to Tenant, its employees, agents or invitees for any theft, loss
of or damage to any vehicle or its contents on the Property.
21. All vehicles brought onto the Property by Tenant, its employees,
agents, customers and invitees shall be in good condition and appearance and
shall be drivable. No such vehicles shall be leaking oil or other fluids.
22. Tenant will deposit its garbage, trash and refuse only in approved
trash containers within the Premises and in designated trash receptacles placed
on the Property by Landlord. Tenant shall not deposit any hazardous, flammable
or explosive substances in any trash receptacle on the Property.
23. Landlord reserves the right to rescind, alter or waive any of the
Rules and Regulations, and to adopt such additional rules and regulations as
part of the Rules and Regulations, from time to time as Landlord reasonably
deems it appropriate for the safety, protection, care and cleanliness of the
Property, the operation thereof, the preservation of good order therein or the
protection and comfort of Tenant, its employees, agents and invitees. In the
event that during the tenancy of Tenant, the Building becomes a multi-tenant
building, these Rules ad Regulations will be altered to provide for the
protection and comfort of other tenants, their employees, agents and invitees.
<PAGE>
EXHIBIT H
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SECRETARY'S CERTIFICATE
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[To be provided by Tenant's Counsel]
<PAGE>
EXHIBIT I
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FORM OF LETTER OF CREDIT
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BANKBOSTON
Irrevocable Letter of Credit Form
Date: September 7, 1999
Amount: $500,000 USD
Letter of Credit No. ________________
Beneficiary: BHX, LLC, as Trustee of Crawford Realty Trust
c/o The Bulfinch Companies, Inc.
First Needham Place
250 First Avenue, Suite 200
Needham, MA 02494
Attn: Robert A. Schlager
Gentlemen:
We hereby establish our unconditional, irrevocable Letter of Credit
No. __________ in your favor and for the account of ____________________ whereby
we irrevocably authorize you to draw on us from time to time at sight prior to
the expiration hereof, and in the manner provided herein, up to
__________________ and Five Hundred Thousand Dollars ($500,000 USD). Such
drawing(s) will be unconditionally available to you upon your presentation of
your draft(s) (which draft(s) shall have been signed by one purporting to be a
duly authorized representative of the Beneficiary) on which shall be indicated
"Drawn under(Name of Financial Institution) Letter of Credit No. _______,"
together with your certification to us that either (i) an "Event of Default" has
occurred under a certain Lease between BHX, LLC, as Trustee of Crawford Realty
Trust and _________________ or (ii) you are otherwise entitled to draw upon this
Letter of Credit under the terms of said Lease. Multiple partial drawings are
permitted.
Each draft is to be accompanied by a copy of this Letter of Credit and
shall be honored when presented between 9:00 a.m. and 5:00 p.m. on any Business
Day (by which is meant any day other than Saturday, Sunday or any day (Name of
Financial Institution) is prohibited from conducting commercial banking
transactions) at (Name of Financial Institution) office at (Address of Financial
Institution).
This Letter of Credit sets forth in full the terms of our undertaking
and such undertaking shall not in any way be modified, amended, or amplified by
reference to any documents, instruments, or agreements referred to herein, or in
which this Letter of Credit is referred, or to which this Letter of Credit
relates. Any such reference shall not be deemed to incorporate herein the terms
of any such referenced documents, instruments, or agreements.
<PAGE>
If a drawing by Beneficiary hereunder does not, in any instance,
conform to the terms and conditions of this Letter of Credit, we shall give
Beneficiary immediate notice that the attempted negotiation was not effected in
accordance with the terms and conditions of this Letter of Credit, sating the
reasons therefor, and that we are holding any documents at Beneficiary's
disposal or are returning same to Beneficiary, as we may elect. Upon being
notified that the attempted negotiation was not effected in accordance with this
Letter of Credit, Beneficiary may attempt to correct any such non-conforming
demand for payment if, and to the extent that, Beneficiary is entitled (without
regard to the provisions of this sentence) and able to do so within the terms of
this Letter of Credit.
This Letter of Credit may be transferred, in whole, but not in part,
without charge one or more times upon receipt of Beneficiary's written
instructions.
<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
October 19, 1999
