-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ITGnFLoeyM73Ms2J1dAeOdX4WSk9Ox31NwEMA3mVZzm+a46pW0fJBoVvcO6uDXRb W6ZeI/IMuXtPEK1/xsbUzw== /in/edgar/work/20000811/0000927016-00-002929/0000927016-00-002929.txt : 20000921 0000927016-00-002929.hdr.sgml : 20000921 ACCESSION NUMBER: 0000927016-00-002929 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SMARTERKIDS COM INC CENTRAL INDEX KEY: 0001091893 STANDARD INDUSTRIAL CLASSIFICATION: [7389 ] IRS NUMBER: 043226127 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-27717 FILM NUMBER: 694628 BUSINESS ADDRESS: STREET 1: 200 HIGHLAND AVE CITY: NEEDHAM STATE: MA ZIP: 02194 BUSINESS PHONE: 6174477567 MAIL ADDRESS: STREET 1: 200 HIGHLAND AVE CITY: NEEDHAM STATE: MA ZIP: 02494 10-Q 1 0001.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _______________ FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL QUARTER ENDED JUNE 30, 2000 COMMISSION FILE NUMBER 0-27717 SMARTERKIDS.COM, INC. DELAWARE 04-3226127 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 15 CRAWFORD STREET, NEEDHAM, MA 02494 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (781) 449-7567 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $.01 par value Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [_] No The number of shares outstanding of the registrant's $.01 par value common stock as of August 9, 2000 was 20,592,918. SMARTERKIDS.COM, INC. QUARTERLY REPORT ON FORM 10-Q QUARTER ENDED JUNE 30, 2000 CONTENTS
Item Number Page - ----------- ---- PART I: FINANCIAL INFORMATION.............................................. 3 ITEM 1. FINANCIAL STATEMENTS............................................. 3 BALANCE SHEET (UNAUDITED)........................................ 3 STATEMENT OF OPERATIONS (UNAUDITED).............................. 4 STATEMENT OF CASH FLOWS (UNAUDITED).............................. 5 NOTES TO FINANCIAL STATEMENTS (UNAUDITED)........................ 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................................ 8 CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS................... 12 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....... 20 PART II: OTHER INFORMATION................................................ 21 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS........................ 21 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 21 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................. 22 SIGNATURES................................................................ 23 EXHIBIT INDEX............................................................. 24
2 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SMARTERKIDS.COM, INC. BALANCE SHEET ------------- (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
JUNE 30, DECEMBER 31, -------- ------------ 2000 1999 -------- ------------ ASSETS Current assets: Cash and cash equivalents................................................................ $ 13,100 $ 55,621 Short-term investments.................................................................. 28,400 11,735 Accounts receivable, net of allowance for doubtful accounts of $27 at June 30, 2000 and December 31, 1999................................................ 148 132 Inventories............................................................................. 6,624 8,902 Other current assets.................................................................... 2,206 2,403 -------- -------- Total current assets.......................................................... 50,478 78,793 Property and equipment, net.................................................................. 5,310 2,421 Intangible assets, net....................................................................... 447 621 Restricted cash.............................................................................. 1,000 500 -------- -------- Total assets.................................................................. $ 57,235 $ 82,335 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of capital lease obligations............................................ $ 524 $ 74 Accounts payable........................................................................ 3,722 10,996 Accrued expenses........................................................................ 3,382 6,699 Deferred revenue........................................................................ 812 811 Other current liabilities............................................................... 72 87 -------- -------- Total current liabilities..................................................... 8,512 18,667 Capital lease obligations and borrowings under line of credit................................ 946 34 -------- -------- Total liabilities............................................................. 9,458 18,701 -------- -------- Commitments and contingencies (Note 4) -- -- Stockholders' equity: Common stock, $0.01 par value; 90,000,000 shares authorized; 20,586,450 and 20,301,770 shares issued and outstanding at June 30, 2000 and December 31, 1999, respectively.................................................... 205 203 Additional paid-in capital.............................................................. 111,879 112,907 Deferred stock compensation............................................................. (4,974) (6,286) Accumulated deficit..................................................................... (59,333) (43,190) -------- -------- Total stockholders' equity.................................................... 47,777 63,634 -------- -------- Total liabilities and stockholders' equity.................................... $ 57,235 $ 82,335 ======== ========
The accompanying notes are an integral part of these financial statements. 3 SMARTERKIDS.COM, INC. STATEMENT OF OPERATIONS ----------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
FOR THE FOR THE THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------------------------------------------------- 2000 1999 2000 1999 ------- ------- -------- ------- Net revenues.............................. $ 1,528 $ 293 $ 2,997 $ 387 Cost of revenues.......................... 1,149 210 2,250 279 ------- ------- -------- ------- Gross profit.............................. 379 83 747 108 ------- ------- -------- ------- Operating expenses: Marketing and sales..................... 7,144 3,690 14,444 5,713 Development............................. 821 396 1,764 763 General and administrative.............. 816 244 1,722 399 Stock compensation...................... 336 196 514 580 ------- ------- -------- ------- Total operating expenses.............. 9,117 4,526 18,444 7,455 ------- ------- -------- ------- Loss from operations...................... (8,738) (4,443) (17,697) (7,347) Interest and other income (expense), net.. 654 28 1,482 52 ------- ------- -------- ------- Net loss.................................. $(8,084) $(4,415) $(16,215) $(7,295) ======= ======= ======== ======= Basic and diluted net loss per common share.................................... $(.39) $(2.66) $(.79) $(4.43) Weighted average shares outstanding-basic and diluted............................. 20,504 1,661 20,406 1,646
The accompanying notes are an integral part of these financial statements. 4 SMARTERKIDS.COM, INC. STATEMENT OF CASH FLOWS ----------------------- (IN THOUSANDS) (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, ------------------------------------- 2000 1999 -------- ------- Cash flows from operating activities: Net loss.............................................. $(16,215) $(7,295) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization....................... 759 14 Stock compensation expense.......................... 514 580 Changes in assets and liabilities: Accounts receivable........................... (16) 604 Inventories................................... 2,278 (137) Other assets.................................. 197 (282) Accounts payable.............................. (7,274) 2,808 Accrued expenses.............................. (3,317) 290 Other current liabilities..................... (14) (211) -------- ------- Net cash used in operating activities................... (23,088) (3,629) -------- ------- Cash flows from investing activities: Purchase of short-term investments............... (16,665) -- Purchases of property and equipment.............. (3,474) (40) Deposit of restricted cash (500) -------- ------- Net cash used in investing activities................... (20,639) (40) -------- ------- Cash flows from financing activities: Proceeds from long-term borrowings............... 1,601 -- Repayments of long-term borrowings............... (229) (24) Proceeds from exercise of common stock options... 23 107 Proceeds from exercise of common stock warrants.. 15 -- Increase from estimated IPO costs................ (204) -- -------- ------- Net cash provided by financing activities............... 1,206 83 -------- ------- Net decrease in cash and cash equivalents............... (42,521) (3,586) Cash and cash equivalents at beginning of period........ 55,621 4,273 -------- ------- Cash and cash equivalents at end of period.............. $ 13,100 $ 687 ======== =======
The accompanying notes are an integral part of these financial statements. 5 SMARTERKIDS.COM, INC. NOTES TO FINANCIAL STATEMENTS ----------------------------- (UNAUDITED) 1. BASIS OF PRESENTATION: The interim financial statements as of and for the six months ended June 30, 2000 and 1999 have been prepared by SmarterKids.com, Inc. ("SmarterKids.com" or the "Company") pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC") for interim financial reporting. These statements are unaudited and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments and accruals) necessary to present fairly the balance sheet and the statement of operations and cash flows for the periods presented. Operating results for the six months ended June 30, 2000 may not be indicative of the results for the year ending December 31, 2000. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted in accordance with the rules and regulations of the SEC. These financial statements should be read in conjunction with the audited financial statements, and accompanying notes, included in the Company's Annual Report on Form 10-K for the year ended December 31, 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 disclosures of contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the estimates. Marketing and Sales Expenses Marketing and sales expenses consist primarily of the cost of advertising and promotional activities, fulfillment costs including service fees to J.L. Hammett Co., commissions to online marketing companies, and expenses for personnel engaged in marketing and merchandising. Fulfillment costs include the cost of operating and staffing a distribution center including customer service. Advertising costs are charged to operations as incurred. Advertising expenses were $3,535,000 and $2,530,000 for the quarters ended June 30, 2000 and 1999, respectively, and $7,384,000 and $3,891,000 for the six months ended June 30, 2000 and 1999, respectively. Recent Accounting Pronouncements In March 2000, the Financial Accounting Standard Board ("FASB") issued FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44 clarifies the application of Accounting Policy Bulletin ("APB") Opinion No. 25 and among other issues clarifies the following: the definition of an employee for purposes of applying APB Opinion No. 25, the criteria for determining whether a plan qualifies as a noncompensatory plan, the accounting consequence of various modifications to the terms of previously issued fixed stock options or awards, and the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 1, 2000, but certain conclusions in FIN 44 cover specific events that occurred after either December 15, 1998 or January 12, 2000. The Company does not believe that FIN 44 will have a material impact on the Company's financial position or results of operations. In December 1999, the SEC staff released Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements", which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. Subsequently, SAB 101 A and B have been released which direct the application of the guidance in SAB 101 to be required in the Company's fourth quarter of 2000. The effects of applying this guidance, if any, will be reported as a cumulative effect adjustment resulting from a change in accounting principle. The Company does not expect the adoption of SAB 101 to have a material effect on its financial statements, however, the final evaluation of SAB 101 with respect to the Company is not yet complete. 6 SMARTERKIDS.COM, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 2. PROPERTY AND EQUIPMENT: Property and equipment consist of the following (in thousands):
June 30, December 31, ---------------- --------------- 2000 1999 ------ ------ Software........................................ $1,392 $ 377 Furniture and fixtures.......................... 226 207 Computer and office equipment................... 3,762 1,774 Leasehold improvements.......................... 959 507 ------ ------ 6,339 2,865 Less--Accumulated depreciation and amortization. 1,029 444 ------ ------ $5,310 $2,421 ====== ======
During April 2000, the Company entered into a lease agreement for a new distribution facility. Capital costs incurred during the quarter ended June 30, 2000 relate primarily to software and equipment to be used in this facility. As of June 30, 2000, there was $2,824,000 of such costs held in fixed assets. The five-year lease requires minimum annual payments of approximately $900,000. 3. EQUIPMENT LINE OF CREDIT: During the quarter ended March 31, 2000, the Company secured a $1.5 million, three-year equipment line of credit facility. Equipment collateralized under this agreement approximates $1.3 million at March 30, 2000. During the quarter ended June 30, 2000, the Company drew down an additional amount of $184,000. The interest on the agreement is the three-year U.S. Treasury rate plus 3.5%. In accordance with the agreement, the balance under the line of credit was converted to a 36-month term loan at the time of funding. Accordingly, the Company is making payments of approximately $45,000 per month over the term of the loan. At June 30, 2000 a total balance of $1.3 million remains outstanding. During the quarter ended June 30, 2000, the Company secured an additional $1.0 million under another three-year equipment line of credit facility. Equipment collateralized under this agreement approximates $149,000 at June 30, 2000. The interest on the borrowings is 9% per annum. The Company issued warrants for the purchase of 16,667 shares of common stock with an exercise price of $3.00 per share in connection with the facility. The warrants have been valued and a discount of $8,645 has been recorded on the lease obligation. The discount is being amortized to interest expense over the life of the line of credit. At June 30, 2000 a balance of $141,660 remains outstanding. 4. COMMITMENTS AND CONTINGENCIES: Restricted Time Deposit In connection with a facility lease entered into in 1999, the Company is required to maintain, on behalf of the landlord, a certificate of deposit in the amount of $500,000, which is restricted as to its use. In connection with the warehouse facility lease entered into in the second quarter of 2000, the Company was required to maintain, on behalf of the landlord, $500,000 in an interest- bearing account, which will be restricted as to its use. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the accompanying financial statements for the periods specified and the associated notes. Further reference should be made to the Company's Annual Report on Form 10-K for the period ending December 31, 1999. The following discussion contains forward-looking statements which involve risks and uncertainties. SmarterKids.com makes such forward-looking statements under the provision of the "Safe Harbor" section of the Private Securities Litigation Reform Act of 1995. Any forward-looking statements should be considered in light of the factors described below in this Item 2 under "Certain Factors That May Affect Future Results." Actual results may vary materially from those projected, anticipated or indicated in any forward-looking statements. In this Item 2, the words "anticipates," "believes," "expects," "intends," "future," "could," and similar words or expressions (as well as other words or expressions referencing future events, conditions, or circumstances) identify forward- looking statements. The following discussion and analysis should be read in conjunction with the accompanying financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. OVERVIEW SmarterKids.com is a leading online educational store dedicated to helping parents help their children learn, develop, and grow. The site offers the Internet's most personalized shopping experience, linking teacher-reviewed toys, games, books, software, and hands-on activities through SmarterKids.com's patent-pending evaluation and recommendation process. The Company serves as a resource for parents, offering specialty centers, the Grade Expectations! guide to education standards and thousands of educational products, including both well-known brands and hard-to-find quality offerings, for children aged infant through 15. RECENT EVENTS The Company's recent initiatives include: . SmarterKids.Com launched its next-generation site design. . SmarterKids.Com introduced the Web's first "Early Development Checklists," comprehensive online tools for new parents who wish to gauge their infant's and toddler's early development and find educational products uniquely suited for their child. Checklists cover five developmental areas for children through age 6 years. . SmarterKids.com launched an Infant Store offering hundreds of developmental toys, games and books for children aged 0-18 months. All of these items are evaluated, selected, and reviewed by the Company's early childhood experts to ensure they are developmentally appropriate, stimulating and fun. . SmarterKids.com launched two new product categories: music/video and construction toys. Offerings in these categories include popular brands such as Barney, Disney, Madeline, BRIO, K'Nex, LEGO Dacta, and Lincoln Logs. . SmarterKids.com partnered with ChildU to offer the latter's "Learning Odyssey" distance-learning curriculum to hundreds of thousands of customers, creating a new source of revenue for both partners. Through this partnership, SmarterKids.com will also recommend products to complement the ChildU learning program. . SmarterKids.com opened its own 140,000 sq. ft. fulfillment center in Mansfield, Massachusetts which will enable the Company to fulfill orders faster and more economically. 8 RESULTS OF OPERATIONS Revenues. Revenues in fiscal 2000 and 1999 consist of online sales of third- party educational products and charges to customers for shipping. In the quarters ended June 30, 2000 and 1999, we continued to derive substantially all of our revenues from sales within 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. Revenues were $1.5 million and $293,000 in the quarters ended June 30, 2000 and 1999, respectively, and $3.0 million and $387,000 in the six months ended June 30, 2000 and 1999, respectively. The increase in revenue in the quarter ended June 30, 2000 from the quarter ended June 30, 1999 and in the six months ended June 30, 2000 from the six months ended June 30, 1999, resulted from increased marketing efforts and brand-building during the more recent periods. Cost of revenues. 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. The cost of revenues was $1.1 million and $210,000 in the quarters ended June 30, 2000 and 1999, respectively, and $2.3 million and $279,000 in the six months ended June 30, 2000 and 1999, respectively. The increase in cost of revenues in the quarter ended June 30, 2000 from the quarter ended June 30, 1999 and in the six months ended June 30, 2000 from the six months ended June 30, 1999 was attributable to growth in online sales. Our gross margin decreased to 25% in each of the 2000 periods from 28% in each of the 1999 periods due to a change in product mix and increased freight costs. Marketing and sales. Marketing and sales expenses consist primarily of the cost of advertising and promotional activities, fulfillment costs, commissions to online marketing companies, and expenses for personnel engaged in marketing, merchandising and customer service activities. Fulfillment costs include the cost of operating and staffing the distribution center, as well as fees paid to J.L. Hammett Co., a fulfillment partner. As of June 1, 2000, the Company discontinued using J.L. Hammett Co. as a third party fulfillment partner due to the opening of its own distribution facility. Marketing and sales expenses were $7.1 million and $3.7 million in the quarters ended June 30, 2000 and 1999, respectively, and $14.4 million and $5.7 million in the six months ended June 30, 2000 and 1999, respectively. The increase in the quarter ended June 30, 2000 from the quarter ended June 30, 1999 and in the six months ended June 30, 2000 from the six months ended June 30, 1999 was primarily attributable to increased advertising and promotional activities, fees to our previous fulfillment partner, J.L. Hammett Co., as well as the hiring of 56 additional employees. The SEC and other accounting standard setters are currently reviewing the financial statement classification of distribution and fulfillment costs and other items by a number of e-commerce companies, including SmarterKids.com. We consider distribution and fulfillment costs as recurring costs incurred for the operation of our distribution centers and customer service centers and have classified such costs in marketing and sales expenses. These costs are primarily composed of distribution facility expenses, including equipment and supplies, payroll and travel expenses for personnel engaged in distribution activities, and third-party fulfillment fees. These costs represent the facility costs necessary for warehousing inventory, as well as costs incurred to pick and pack a customer order and the related packaging supplies. The SEC and other accounting standard setters may decide to require that certain distribution center costs be classified as cost of sales. Should this occur, we will reclassify any distribution and fulfillment costs as required and our gross profit will be correspondingly affected. However, such reclassification will not impact our sales, operating profit or loss, net income or loss, or cash flows. Development. Development expenses consist primarily of payroll and related costs for personnel performing website design, development and testing. Development expenses were $821,000 and $396,000 in the quarters ended June 30, 2000 and 1999, respectively, and $1.8 million and $763,000 in the six months ended June 30, 2000 and 1999, respectively. The increase in the quarter ended June 30, 2000 from the quarter ended June 30, 1999 and in the 9 six months ended June 30, 2000 from the six months ended June 30, 1999 was attributable primarily to costs related to enhancing the features, content and functionality of our website, as well as the hiring of ten additional employees. General and administrative. General and administrative expenses consist primarily of payroll and related costs for executive and administrative personnel, professional service expenses and other general corporate expenses. General and administrative expenses were $816,000 and $244,000 in the quarters ended June 30, 2000 and 1999, respectively, and $1.7 million and $399,000 in the six months ended June 30, 2000 and 1999, respectively. The increase in the quarter ended June 30, 2000 from the quarter ended June 30, 1999 and in the six months ended June 30, 2000 from the six months ended June 30, 1999 was attributable primarily to the costs related to the expansion of our operations and infrastructure, as well as the hiring of 15 additional employees. Stock compensation. We recorded stock compensation expense of $336,000 and $196,000 in the quarters ended June 30, 2000 and 1999, respectively, and $514,000 and $580,000 in the six months ended June 30, 2000 and 1999, respectively, related to amortization of deferred stock compensation for options and warrants granted to employees and non-employees. Interest and other income (expense), net. Interest and other income (expense), net consists primarily of interest income earned on our short-term investments offset by interest expense related to short-term lease obligations and borrowings under our equipment line of credit. Interest and other income (expense), net increased to $654,000 in the quarter ended June 30, 2000 from $28,000 in the quarter ended June 30, 1999 and to $1.5 million in the six months ended June 30, 2000 from $52,000 in the six months ended June 30, 1999. The increase was primarily attributable to an increase in interest income from higher balances of invested capital generated from our initial public offering. LIQUIDITY AND CAPITAL RESOURCES Since our inception, we have incurred significant losses. We have met our cash requirements primarily through the sale of capital stock and the use of capital leases. We received capital from investors in three private venture capital financings totaling $37.0 million through July 1999. On November 23, 1999, we completed an initial public offering of 4,500,000 shares of common stock resulting in net proceeds of $65.9 million. The primary purposes of the initial public offering were to increase our capitalization and financial flexibility, create a public market for SmarterKids.com's common stock, and facilitate future access to public markets. As of June 30, 2000, we have used $24.4 million of the offering proceeds for working capital. Net cash used in operating activities was $23.1 million and $3.6 million in the six months ended June 30, 2000 and 1999, respectively. The increase in net cash used in operating activities from the six months ended June 30, 1999 to the six months ended June 30, 2000 was primarily attributable to a larger net loss and payments to vendors for inventory and advertising expenses. We expect that operating cash requirements will increase and that a significant portion of our cash used in operating activities will be attributable to investments in inventory and advertising. Net cash used in investing activities has been primarily for purchases of fixed assets and short-term investments. Cash used in investing activities was $20.6 million and $40,000 in the six months ended June 30, 2000 and 1999, respectively. The increase in cash used in investing activities was primarily attributable to increased purchases of equipment for the build-out of our new distribution facility and the purchase of short-term investments of $16.7 million. Net cash provided by financing activities was $1.2 million and $83,000 in the six months ended June 30, 2000 and 1999, respectively. Net cash provided by financing activities in the six months ended June 30, 2000 primarily reflects the net proceeds of $1.6 million from an equipment line of credit. Net cash provided by financing activities in the six months ended June 30, 1999 consisted of proceeds from the exercise of stock options. During the first quarter of 2000, we entered into a $1.5 million three-year equipment line of credit facility. Equipment collateralized under this agreement approximates $1.5 million at June 30, 2000. The interest on the agreement is equal to the three-year U.S. Treasury rate plus 3.5%. We are currently making payments on this credit facility of $45,000 per month. 10 During the second quarter of 2000, we entered into a lease agreement for a 140,000 square foot distribution center in Mansfield, Massachusetts. The distribution center allows us to better manage our fulfillment process. As a result, we discontinued using J.L. Hammett Co. as its fulfillment partner during the second quarter of 2000. The five-year operating lease for the warehouse will require minimum payments of approximately $900,000 per year. As of June 30, 2000, we had $13.1 million of cash and cash equivalents and $28.4 million of short-term investments. As of that date, our principal commitments consisted of obligations outstanding under an equipment line of credit and capital leases in the amount of $1.5 million, commitments for annual facility lease obligations of $2 million, and accounts payable of $3.7 million. 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. We currently anticipate that current cash, cash equivalents and short-term investments will be sufficient to meet our anticipated needs for working capital and capital expenditures through 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. We have transitioned customer order fulfillment to our own distribution facility during the second quarter in 2000. In conjunction with this transaction, we invested capital for the infrastructure to support these fulfillment activities at the new distribution facility. 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. 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 2000, the Financial Accounting Standard Board ("FASB") issued FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44 clarifies the application of Accounting Policy Bulletin ("APB") Opinion No. 25 and among other issues clarifies the following: the definition of an employee for purposes of applying APB Opinion No. 25, the criteria for determining whether a plan qualifies as a noncompensatory plan, the accounting consequence of various modifications to the terms of previously issued fixed stock options or awards, and the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 1, 2000, but certain conclusions in FIN 44 cover specific events that occurred after either December 15, 1998 or January 12, 2000. The Company does not believe that FIN 44 will have a material impact on the Company's financial position or results of operations. In December 1999, the SEC staff released Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements", which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. Subsequently, SAB 101 A and B have been released which direct the application of the guidance in SAB 101 to be required in our fourth quarter of 2000. The effects of applying this guidance, if any, will be reported as a cumulative effect adjustment resulting from a change in accounting principle. We do not expect the adoption of SAB 101 to have a material effect on our financial statements, however, the final evaluation of SAB 101 with respect to the Company is not yet complete. 11 CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE HAVE BEEN OPERATING UNDER OUR NEW BUSINESS MODEL FOR LESS THAN TWO YEARS. 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 two years. 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, ceased the sale of our proprietary CD-ROM products through traditional retail channels and now offer our proprietary CD-ROM products on a limited basis through our online channel. 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, which would result in further substantial losses. 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, 2000, we had an accumulated deficit of $59.3 million. We incurred a net loss of $16.2 million for the six months ended June 30, 2000. We expect operating losses and negative cash flow to continue for the foreseeable future. Our ability to become profitable depends on our ability to generate and sustain higher revenue while maintaining reasonable expense levels. We anticipate sales growth will moderate during the remainder of the year as we reduce our marketing investment and focus on those programs that bring us the most loyal customers. Our focus is on cost-effective top line growth, attracting the most profitable traffic, new customer acquisition, and reaching profitability. 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. In addition, we are obligated to pay commissions based on a percentage of revenue to companies with which we have online marketing relationships. Through May 2000, we paid our fulfillment services provider, J.L. Hammett Co., a fee based on a fixed percentage of the costs of our products to us and will incur operating expenses related to fulfillment activities in our new distribution center that opened in June 2000. Some of these costs will increase as our revenues and orders increase. 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 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. 12 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 Quarterly Report on Form 10-Q 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 and increases significantly during 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 revenue to be realized during any 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. 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 PAY COMMISSIONS TO COMPANIES WITH WHICH WE HAVE ONLINE MARKETING RELATIONSHIPS. OUR PROFITS AS A PERCENTAGE OF REVENUES WILL DECREASE AS THE PROPORTION OF OUR REVENUES FROM THESE ARRANGEMENTS INCREASES. 13 Our relationships with online companies are intended to drive traffic to our website. Approximately 6% of our revenues in the quarter ended June 30, 2000 was derived from these relationships. We pay commissions to these companies based on a percentage of the revenues we derive from these relationships. Although these relationships are intended to increase the number of our customers and, therefore, our revenues, as revenues derived from these relationships increases, our profit as a percentage of revenues will decrease. 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 significantly increased our inventory levels for the prior holiday season. This risk will increase as we enter into 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. THE INABILITY TO PERFORM OUR OWN DISTRIBUTION SERVICES COULD LEAD TO INTERRUPTIONS IN OUR OPERATIONS, LOST REVENUES AND INCREASED EXPENSE. During the second quarter, we moved our order fulfillment from a third party partner, J.L. Hammett Co., to our own distribution facility in Mansfield, Massachusetts. Our inability to manage our distribution center could lead to interruptions in our operations, lost revenues and increased expense. 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 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. 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 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. 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 14 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. 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 and Zany Brainy . online book sellers, toy sellers and computer software sellers, such as Amazon.com, eToys,KBkids.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. Our competitors may be able to secure products from vendors on more favorable terms, fulfill customer orders more efficiently and adopt more aggressive pricing or inventory availability policies than we can. Traditional store-based retailers also enable customers to see and feel products in a manner that is not possible over the Internet. Some of our competitors have significantly greater experience in selling children's educational products. 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 better 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. 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 strain our management, financial 15 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. 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 142 employees at June 30, 2000. We will need additional personnel in the future. We may be unable to hire qualified employees as needed. Our growth has placed, and our anticipated future operations will continue to place, a significant strain on our management, information systems, network and other resources. WE DEPEND UPON UNITED PARCEL SERVICE AND THE UNITED STATES POSTAL SERVICE TO DELIVER OUR PRODUCTS ON A TIMELY AND CONSISTENT BASIS. A DETERIORATION IN OUR RELATIONSHIP WITH EITHER CARRIER 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 and the United States Postal Service. If either relationship is terminated or impaired or if either carrier 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. As of June 2000, all orders are fulfilled at our own distribution center. 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 16 and proprietary technology and systems may become obsolete. Our future success will depend on our ability to do the following: . both license and internally develop leading technologies useful in our business . enhance our existing services . develop new services and technologies that address the increasingly sophisticated and varied needs of our prospective customers . respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis Ongoing development of our website and other proprietary technology entails significant expense and technical risks. We may use new technologies ineffectively or we may fail to adapt our website, transaction-processing systems and network infrastructure to customer requirements or emerging industry standards. If we face material delays in introducing new services, products and enhancements, our customers may forego the use of our services and use those of our competitors. OUR FACILITIES AND SYSTEMS ARE VULNERABLE TO UNEXPECTED PROBLEMS INCLUDING PROBLEMS RELATING TO SYSTEM EXPANSION ACTIVITIES OR LACK OF SYSTEM CAPACITY. 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 smoothly integrate 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 difficult. 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, at our new distribution center in Mansfield, Massachusetts, 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 our new distribution center or at the Exodus Communications 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. 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 electronic commerce market is extremely intense, especially in the Northeastern part of the United States. The loss of service of Mr. Blohm or a significant number of our employees could have a material adverse effect on our business. In particular, the loss of several key programmers could inhibit the development and enhancement of our website and could damage customer relations and our brand. Similarly, the loss of several marketing and sales personnel could inhibit our ability to effectively promote our website. 17 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. 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 electronic 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, popular companies that provide 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 connection to our website. 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. Law and regulations directly applicable to communications or commerce over the Internet are becoming more prevalent. The U.S. Congress recently enacted Internet laws, including laws relating to children's privacy, the transmission of sexually explicit material and taxation of Internet-based enterprises. As directed by Congress in the Children's Online Privacy Protection Act, the Federal Trade Commission (the "FTC") recently adopted regulations that became effective on April 21, 2000, prohibiting unfair and deceptive acts and practices in connection with the collection and use of personal information from children under 13 years old on the Internet. There can be no assurance that we will adopt policies that conform to regulations adopted or policies advocated by the FTC or any other governmental entity. In addition, the FTC has already begun investigations into the privacy practices of companies that collect information on the Internet. One investigation resulted in a consent decree pursuant to which an Internet company agreed to establish programs to implement the principles noted above. We may become subject to a similar investigation, or the FTC's regulatory and enforcement efforts may adversely affect our ability to collect demographic and personal information from users, which could adversely affect our marketing efforts. In addition, the European Union recently enacted its own privacy regulations. The European Union Directive on the Protection of Personal Data (the "EU Directive"), which became effective in October 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. The European Union and the U.S. Department of Commerce are currently negotiating an agreement under which the privacy policies of U.S. businesses may be deemed to be adequate under the EU Directive. Until such time as an agreement is reached, the European Union has voluntarily agreed to a moratorium on enforcement of the EU Directive against U.S. businesses. Although the Company has received less than 2% of revenues from outside of the United States in the six months ended June 30, 2000, the European legislation and its adoption via any agreement 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 and limiting our efforts to collect information from European users. The U.S. 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 to the Internet, resulting in a material adverse effect on our business. 18 The laws governing the use of the Internet, in general, 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. This occurrence 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 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 electronic 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. 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 also suggest that parents provide us with an educational profile on their children, 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 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 19 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 are 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 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. SMARTERKIDS.COM'S STOCK PRICE, LIKE THAT OF OTHER RETAIL E-COMMERCE COMPANIES, IS SUBJECT TO SIGNIFICANT VOLATILITY. Our stock price may be volatile because of factors such as: . speculation in the press or investment community . changes in revenue or earnings estimates by the investment community . announcement of new competitors in a highly competitive marketplace In addition, Smarterkids.com's stock price may be affected by general market conditions and economic factors unrelated to Smarterkids.com's performance. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The following discussion about the Company's market risk includes "forward- looking statements" that involve risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. The Company does not use derivative financial instruments for speculative or trading purposes. Interest Rate Risk. SmarterKids.com is exposed to market risk from changes in interest rates primarily through its investing activities. In addition, our ability to finance future acquisition transactions may be impacted if we are unable to obtain appropriate financing at acceptable rates. Our investment portfolio consists solely of investments in high-grade, commercial bank money market accounts and certificates of deposit. 20 Credit Risk. Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, short-term investments and accounts receivable. The Company does not believe that it is subject to any unusual credit risk beyond the normal credit risk associated with commercial banking relationships. PART II: OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (c) Recent Sales of Unregistered Securities In connection with the equipment line credit facility entered into in April 13, 2000, the Company issued to TLP Leasing Programs, Inc. 16,667 warrants for Company common stock at an exercise price of $3.00 per share and an aggregate exercise price of $50,001. Upon the exercise of the warrants, which may take place at any time before the expiration of warrants of April 13, 2006, each warrant shall convert into one share of the Company's common stock, par value $.01 per share. The Company claims that the offer and sale of the Shares were exempt from registration under the Securities Act of 1933, as amended, pursuant to Rule 506 of Regulation D. The warrants were offered only to TLP Leasing Programs, Inc., an "Accredited Investor" as such term is defined in Rule 501 of Regulation D. (d) Use of Proceeds from Registered Securities We received capital from investors in three private venture capital financings totaling $37.0 million through July 1999. On November 23, 1999, the Company completed an initial public offering of 4,500,000 shares of common stock $0.01 par value per share (5,175,000 shares including 658,500 over-allotment shares and 16,500 shares offered by selling stockholders), resulting in net proceeds to the Company of $65.9 million. The primary purposes of the initial public offering were to increase our capitalization and financial flexibility, create a public market for SmarterKids.com's common stock, and facilitate future access to public markets. As of June 30, 2000, SmarterKids.com used $24.4 million of the offering proceeds for working capital and approximately $41.5 million of the offering proceeds remain in cash and short-term investments. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's annual meeting of stockholders was held on June 16, 2000. Holders of an aggregate of 20,473,012 shares at the close of business on April 21, 2000 were entitled to vote at the meeting. A total of 16,881,325 shares of common stock voted at the annual meeting. At the meeting, the Company's stockholders voted as follows: PROPOSAL I. To re-elect Messrs. Brian Hickey and Michael Kolowich as Class I Directors, each to serve for a three-year term.
Total Votes for Total Votes Abstentions from Broker Director Name Proposal I Withheld for Proposal I Proposal I Non-votes - ---------------------------------------------------------------------------------------------------------------------- Brian Hickey 16,830,918 50,407 - - Michael Kolowich 16,824,448 56,877 - -
Messrs. Jeff A. Pucci, and Michael T. Fitzgerald will continue to hold office until the 2001 annual meeting of stockholders or until their successors have been duly elected or until their earlier resignation or removal. Messrs. David Blohm and Richard A. D'Amore will continue to hold office until the 2002 annual meeting of stockholders or until their successors have been duly elected or until their earlier resignation or removal PROPOSAL II. To approve an amendment to the Company's 1999 Stock Option and Incentive Plan to increase the number of shares of common stock authorized thereunder from 2,000,000 to 3,500,000.
Total Votes for Total Votes Against Abstentions from Broker Non-votes Proposal I Proposal II Proposal II - ---------------------------------------------------------------------------------------------- 12,265,916 723,724 16,535 3,875,150
21 PROPOSAL III. To ratify the selection of the firm of PricewaterhouseCoopers LLP, independent public accountants, as the Company's auditors for the fiscal year ending December 31, 2000.
Total Votes for Total Votes Against Abstentions from Broker Non-votes Proposal III Proposal III Proposal II - ---------------------------------------------------------------------------------------------- 16,775,263 103,055 3,007 -
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS
EXHIBIT NO. Exhibit - ------------- ---------------------------------------------------------------------------------------------------------- 10.10 Lease Agreement dated April 7, 2000 between Smarterkids.com, Inc. and Keep Your Day Job, LLC 27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K. Not applicable. 22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SMARTERKIDS.COM, INC. (Registrant) Date: August 11, 2000 By: /s/ Robert J. Cahill ------------------------- Robert J. Cahill Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer) 23 Exhibit Index 10.10 Lease Agreement dated April 7, 2000 between SmarterKids.com, Inc. and Keep Your Day Job, LLC 27.1 Financial Data Schedule EX-10.10 2 0002.txt LEASE AGREEMENT DATED APRIL 7, 2000 KEEP YOUR DAY JOB, LLC INDUSTRIAL MULTI-TENANT LEASE 1. BASIC PROVISIONS ("Basic Provisions"). 1.1 Parties: This Lease ("Lease") dated _____________, 2000, is made by and between KEEP YOUR DAY JOB, LLC, a Delaware limited liability company, ("Landlord") and SMARTERKIDS.COM, a Delaware corporation ("Tenant") (collectively the "Parties," or individually a "Party"). 1.2 Premises: A portion consisting of 139,500 square feet,, outlined on Exhibit A attached hereto ("Premises"), of the building ("Building") being constructed and located at 145 Plymouth Street, in the City of Mansfield, Commonwealth of Massachusetts. The Building is located in the industrial center commonly known as Cabot Business Park. Tenant shall have non-exclusive rights to the Common Areas (as defined in Paragraph 2.3 below), but shall not have any rights to the roof, exterior walls or utility raceways of the Building or to any other buildings in the Industrial Center. The Premises, the Building, the Common Areas, the land upon which they are located and all other buildings and improvements thereon are herein collectively referred to as the "Industrial Center." 1.3 Term: Five (5) years and zero (0) months ("Term") commencing on the Commencement Date, as set forth in the Commencement Date Addendum annexed hereto and made a part hereof ("Commencement Date"), and ending on the lst day of the month on which the fifth anniversary of the Commencement Date shall occur ("Expiration Date"). 1.4 Base Rent: $5.45 per square foot per annum, $760,275.00 per annum, payable in equal installments of $63,356.25 per month ("Base Rent"). $___________ payable on execution of this Lease for period _______________. 1.5 Tenant's Share of Operating Expenses ("Tenant's Share"): (a) Industrial Center 4% (b) Building 75% 1.6 Tenant's Estimated Monthly Rent Payment: Following is the estimated monthly Rent payment to Landlord pursuant to the provisions of this Lease. This estimate is made at the inception of the Lease and is subject to adjustment pursuant to the provisions of this Lease: (a) Base Rent (Paragraph 4.1) $63,356.25 (b) Operating Expenses (Paragraph 4.2; excluding Real Property Taxes, Landlord Insurance $ 4,650.00 (c) Landlord Insurance (Paragraph 8.3) $ 348.75 (d) Real Property Taxes (Paragraph 10) $ 7,323.75 Estimated Monthly Payment $75,678.75 1.7 Security Deposit: $850,000.00 ("Security Deposit") as of the date hereof and through June 30, 2000, and as of July 1, 2000, $500,000.00, subject to the provisions set forth in Section 5 below. 1.8 Permitted Use ("Permitted Use") Warehouse and distribution use, with office use(not to exceed 10% of the square footage of the Premises), as necessary and incidental to such warehouse and distribution use. 1.9 Guarantor: None 1.10 Addenda and Exhibits: Attached hereto are the following Addenda and Exhibits, all of which constitute a part of this Lease: (a) Addenda: Landlord's Remedies in Event of Tenant Default Option to Extend Early Possession and Inducement Recapture Commencement Date Addendum (b) Exhibits:Exhibit A: Diagram of Premises. Exhibit A-1: Legal Description of Lot Exhibit B: Commencement Date Certificate. Exhibit C: Tenant Move-In and Lease Renewal Environmental Questionnaire for Commercial and Industrial Properties. Exhibit D: Tenant Move-Out and Lease Renewal Environmental Questionnaire for Commercial and Industrial Properties. Exhibit E: Form of Estoppel Certificate. 1.11 Address for Rent Payments: All amounts payable by Tenant to Landlord shall until further notice from Landlord be paid to Landlord at the following address: c/o National Development 2310 Washington Street Newton, Massachusetts 02462 2. PREMISES, PARKING AND COMMON AREAS. 2.1 Letting. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the Premises upon all of the terms, covenants and conditions set forth in this Lease. Any statement of square footage set forth in this Lease or that may have been used in calculating Base Rent and/or Operating Expenses is an approximation which Landlord and Tenant agree is reasonable and the Base Rent and Tenant's Share based thereon is not subject to revision whether or not the actual square footage is more or less, except that Tenant's Share may be adjusted to reflect changes in square footage of the Common Areas pursuant to Section 2.5(d) below. The Premises are on a lot accessible directly from a public way and shall be accessible to Tenant twenty-four hours per day, seven days per week, subject to events beyond Landlord's control and subject to the Rules and Regulations of the Building and Industrial Center, as provided for herein. 2.2 Common Areas - Definition. "Common Areas" are all areas and facilities outside the Premises and within the exterior boundary line of the Industrial Center and interior utility raceways within the Premises that are provided and designated by the Landlord -2- from time to time for the general non-exclusive use of Landlord, Tenant and other tenants of the Industrial Center and their respective employees, suppliers, shippers, tenants, contractors and invitees. 2.3 Common Areas - Tenant's Rights. Landlord hereby grants to Tenant, for the benefit of Tenant and its employees, suppliers, shippers, contractors, customers and invitees, during the term of this Lease, the non-exclusive right to use, in common with others entitled to such use, the Common Areas at the Building and on the lot on which the Building is located, which lot is described on Exhibit A-1 attached hereto and made a part hereof as they exist from time to time, subject to any rights, powers, and privileges reserved by Landlord under the terms hereof or under the terms of any rules and regulations or covenants, conditions and restrictions governing the use of the Industrial Center. 2.4 Common Areas - Rules and Regulations. Landlord shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to establish, modify, amend and enforce reasonable Rules and Regulations with respect thereto in accordance with Paragraph 16.19. 2.5 Common Area Changes. Landlord shall have the right, in Landlord's sole discretion, from time to time: (a) To make changes to the Common Areas, including, without limitation, changes in the locations, size, shape and number of driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas, walkways and utility raceways, provided that Landlord shall use reasonable efforts to minimize any adverse effect upon Tenant's use of and access to and from the Premises, subject to the provisions of Section 2.1; (b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to and use of the Premises remains available; (c) To designate other land outside the boundaries of the Industrial Center to be a part of the Common Areas; (d) To add additional buildings and improvements to the Common Areas, provided that Tenant's Share shall be adjusted if applicable to reflect any additional rentable square footage in the Building and/or Industrial Center; (e) To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Industrial Center, or any portion thereof; and (f) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Industrial Center as Landlord may, in the exercise of sound business judgment, deem to be appropriate. 2.6 Parking. Tenant shall be entitled to use one hundred thirty-nine (139) parking spaces, one hundred and five (105) of which shall be located in parking areas within Common Areas, and the remainder of which shall be created by Landlord within the area within the Common Areas which would otherwise be Tenant's loading area, at no extra cost to Tenant. All parking spaces which Tenant is permitted to use pursuant to this Section shall be on an unreserved, first-come, first-serve basis. Tenant shall, and shall cause its employees to, comply with all reasonable rules and regulations imposed from time to time by Landlord with respect to the such parking in accordance with Paragraph 16.19. Furthermore, Tenant shall -3- indemnify and hold Landlord harmless from and against all loss, cost, damage or expense arising out of the use by Tenant and its employees and invitees arising from the use of such parking spaces, unless any such loss, cost, damage or expense is due to the gross negligence or willful misconduct of Landlord, its agents, employees or contractors. 3. TERM. 3.1 Term. The Commencement Date, Expiration Date and Term of this Lease are as specified in Paragraph 1.3. 3.2 Delay in Possession. If for any reason Landlord cannot deliver possession of the Premises to Tenant by the Commencement Date, Landlord shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease or the obligations of Tenant hereunder. In such case, Tenant shall not, except as otherwise provided herein, be obligated to pay Rent or perform any other obligation of Tenant under the terms of this Lease until Landlord delivers possession of the Premises to Tenant 3.3 Preparation of the Premises. Landlord shall exercise all reasonable efforts to complete the work specified on the plans and specifications prepared by Newbury Design Associates and dated March 21, 2000 Revision 1 (the "Plans") by May 15, 2000, respecting the construction of approximately 4,000 square feet of office space (the "Office Space") within the Premises, and which shall also include warehouse lighting and power distribution (the "Warehouse Space") (such work to be performed by Landlord respecting the Office Space and the Warehouse Space are hereinafter collectively referred to as "Landlord's Work"), but Tenant shall have no claim against Landlord for failure so to complete Landlord's Work except the right to terminate this Lease in accordance with Section 3.2 above. Tenant agrees that Landlord may make any changes in Landlord's Work, upon prior written notice to Tenant for insubstantial changes and with the approval of Tenant (which approval may be withheld in Tenant's sole discretion) for substantial changes. Landlord shall provide Tenant with an allowance ("Landlord's Contribution") of up to a maximum total amount of $230,000 for the performance of Landlord's Work not more than $130,000 of which shall be for construction of the Office Space, and not more than $100,000 of which shall be for work related to the Warehouse Space, and Tenant shall not be liable for any cost of Landlord's Work to the extent that the total cost thereof is less than or equal to Landlord's Contribution. Landlord's contractor shall provide Tenant with an "open book" estimate of the cost of Landlord's Work. To the extent that the cost of Landlord's Work exceeds Landlord's Contribution, or to the extent that work related to the Office Space or the Warehouse Space exceeds the amounts of Landlord's Contribution allocated to the Office Space or Warehouse Space, as the case may be, Tenant shall pay the cost of such excess within thirty (30) days of Landlord's notice to Tenant of such excess cost, which notice shall be accompanied with copies of invoices respecting such additional costs, and a certification from Landlord's architect that the Landlord's Work has been completed substantially in accordance with the Plans. For purposes of this Section, "cost" shall be the actual cost to Landlord of performing Landlord's Work including, without limitation, all architectural and engineering fees and expenses and all contractor charges for the cost of work and materials, profit, general conditions and overhead and supervision and all filing fees and other permitting costs. Tenant shall, if requested by Landlord, execute an agreement (the "Excess Cost Agreement") confirming Landlord's estimate of such excess costs, and Tenant's obligation therefor, prior to the time Landlord shall be required to commence Landlord's Work. In addition to the specifications set forth in the Plans, Landlord -4- shall at its sole cost and expense (and not to be applied against Landlord Contribution) provide one (1) additional coat of curing compound to the floor within the Office Space. Landlord agrees to complete Landlord's Work in compliance with the Americans with Disabilities Act, and to deliver the Warehouse Space and the Office Space with all mechanical systems in good working order. Tenant shall be conclusively deemed to have accepted Landlord's Work unless, within sixty (60) days after the Commencement Date, Tenant gives Landlord written notice setting forth in detail those portions of Landlord's Work which Tenant does not accept, except for any defects which could not have reasonably been observed, despite reasonable investigation, prior to the sixtieth (60th) calendar day after the Commencement Date ("Latent Defects"). With respect to Latent Defects, Tenant may give written notice not later than the date which is six (6) months after the Commencement Date. Landlord shall correct either of the above referenced types of defects of which Landlord received such notice from Tenant, promptly following Landlord's receipt of such notice, except to the extent that shall dispute the accuracy of Tenant's characterization of such work as defective. 3.4 Condition of the Premises.Other than the Office Space and the Warehouse Space as the same are to be altered by Landlord's Work, Tenant accepts the Premises in "as is" condition without representation or warranty by Landlord. 3.5 Commencement Date Certificate. At the request of Landlord, Tenant shall execute and deliver to Landlord a completed certificate ("Commencement Date Certificate") in the form attached hereto as Exhibit B. 3.6 Compliance with Laws. The Building and parking areas shall be constructed to comply with all applicable material laws, codes, rules and ordinances. 4. RENT. 4.1 Base Rent. Tenant shall pay to Landlord Base Rent and other monetary obligations of Tenant to Landlord under the terms of this Lease (such other monetary obligations are herein referred to as "Additional Rent") in lawful money of the United States, without offset or deduction, except as specifically permitted hereunder, in advance on or before the first day of each month. Base Rent and Additional Rent for any period during the term hereof which is for less than one full month shall be prorated based upon the actual number of days of the month involved. Payment of Base Rent and Additional Rent shall be made to Landlord at its address stated herein or to such other persons or at such other addresses as Landlord may from time to time designate in writing to Tenant. Base Rent and Additional Rent are collectively referred to as "Rent". All monetary obligations of Tenant to Landlord under the terms of this Lease are deemed to be Rent. 4.2 Operating Expenses. Tenant shall pay to Landlord on the first day of each month during the term hereof, in addition to the Base Rent, Tenant's Share of all Operating Expenses in accordance with the following provisions: (a) "Operating Expenses" are all costs incurred by Landlord relating to the maintenance, repair and operation of the Industrial Center, Building and Premises including, but not limited to, the following: -5- (i) The operation, repair, maintenance and replacement in neat, clean, good order and condition of the Common Areas, including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways, landscaped areas, striping, bumpers, irrigation systems, drainage systems, lighting facilities, fences and gates, exterior signs and tenant directories. (ii) Water, gas, electricity, telephone and other utilities servicing the Common Areas. (iii) Trash disposal, janitorial services, snow removal, property management and security services. (iv) Real Property Taxes. (v) Premiums for the insurance policies maintained by Landlord under Paragraph 8 hereof. (vi) Environmental monitoring and insurance programs. (vii) Amortization (with interest at a commercially reasonable rate) over the useful life of the applicable item of any capital expenditure which is (a) made to comply with any law, rule, regulation, order, or ordinance with which the Premises had not been required to comply prior to the Commencement Date or with any amendment or change in interpretation by appropriate regulatory authority of any such law, rule, regulation, order or ordinance after the date of this Lease, (b) made to protect the health and safety of the occupants of the Industrial Center or Building, as applicable, (c) made to replace worn out or obsolete items or to keep the Premises in the condition the Premises was in as of the Commencement Date, reasonable wear and tear excepted, or (d) designed to reduce other Operating Expenses over the useful life of the item installed by at least the amount of the expenditure. (viii) Maintenance of the Building including, but not limited to, painting, caulking and repair and replacement of Building components, including, but not limited to, roof, elevators and fire detection and sprinkler systems, subject however to the amortization requirement above, if the expenditure is for a capital item. (ix) Management fees in an amount not to exceed four (4%) percent of the gross receipts from the Building. (b) Tenant's Share of Operating Expenses that are not specifically attributed to the Premises or Building ("Common Area Operating Expenses") shall be that percentage shown in Paragraph 1.5(a). Tenant's Share of Operating Expenses that are attributable to the Building ("Building Operating Expenses") shall be that percentage shown in Paragraph 1.5(b). Landlord in its reasonable discretion, consistently applied, shall determine which Operating Expenses are Common Area Operating Expenses, Building Operating Expenses or expenses to be entirely borne by Tenant. (c) The inclusion of the improvements, facilities and services set forth in Subparagraph 4.2(a) shall not be deemed to impose any obligation upon Landlord to either have said improvements or facilities or to provide those services unless required by this Lease. (d) Tenant shall pay monthly in advance on the same day as the Base Rent is due Tenant's Share of estimated Operating Expenses costs in the amount set forth in Paragraph 1.6. Landlord shall deliver to Tenant within 90 days after the expiration of each calendar year a -6- reasonably detailed statement showing Tenant's Share of the actual Operating Expenses incurred during the preceding year. If Tenant's estimated payments under this Paragraph 4(d) during the preceding year exceed Tenant's Share as indicated on said statement, Tenant shall be credited the amount of such overpayment against Tenant's Share of Operating Expenses next becoming due. If Tenant's estimated payments under this Paragraph 4.2(d) during said preceding year were less than Tenant's Share as indicated on said statement, Tenant shall pay to Landlord the amount of the deficiency within 10 days after delivery by Landlord to tenant of said statement. At any time Landlord may adjust the amount of the estimated Tenant's Share of Operating Expenses to reflect Landlord's estimate of such expenses for the year. (e) The following costs and expenses shall not be included in Operating Expenses: (i) costs of alterations of any tenant's premises for a particular tenant other than Tenant; (ii) the portion of any costs incurred in connection with the making of repairs or replacements which are the lease obligation of another tenant of the Industrial Center; (iii) costs associated with advertising, marketing, promotional and brokerage fees or expenditures; (iv) financing and refinancing costs respecting any mortgage or security interest placed upon the Industrial Center or any portion thereof, including payments of principal, interest, finance or other charges, and any points and commissions in connection therewith; (v) interest or penalties for any late or failed payments by Landlord under any contract or agreement unless resulting from Tenant's failure to pay when and as due Tenant's Share of Operating Expenses; (vi) costs (including, without limitation, attorneys' fees and disbursements) incurred in connection with any judgment, settlement or arbitration award resulting from any tort liability; (vii) rent or other charges payable under any ground lease or underlying lease; (viii) costs of electrical or other utilities services furnished directly to any premises of other tenants of the Industrial Center where such utility is separately metered to the premises of such other tenant, or for which Tenant pays a separate charge therefor; (ix) costs incurred in connection with Landlord's preparation, negotiation, dispute resolution and/or enforcement of leases, including court costs and attorneys' fees and disbursements in connection with any summary proceeding to dispossess any tenant, or incurred in connection with disputes with prospective tenants, employees, consultants, management agents, leasing agents, purchasers or mortgagees; (x) costs of any expansions of the Industrial Center; -7- (xi) costs of repairs, restoration or replacements occasioned by fire or other casualty or caused by the exercise of the right of eminent domain, provided, however, that the deductible proportion of any insurance carried for such losses shall be included in Operating Expenses; (xii) amounts paid to subsidiaries or affiliates of Landlord for services rendered to the Industrial Center to the extent such amounts exceed the competitive costs for delivery of such services had such services not been provided by such related parties; (xiii) depreciation; and (xiv) management fees to the extent in excess of four (4%) percent of gross receipts from the Building. (f) Landlord shall permit Tenant, at Tenant's sole expense and during normal business hours, to review Landlord's invoices and statements relating to Operating Expenses for the applicable period for the purpose of verifying the statement delivered by Landlord pursuant to Section 4.2(b) above, provided that notice of Tenant's desire to so review is given to Landlord not later than three (3) months after delivery of such statement by Landlord, and provided that such review is thereafter commenced and prosecuted by Tenant (and not by any third party compensated by Tenant on a contingency fee arrangement) with due diligence. Any such statement delivered to Tenant by Landlord shall be binding and conclusive upon Tenant unless within four (4) months after the giving by Landlord of such statement Tenant shall notify Landlord that Tenant disputes the correctness of such statement, specifying the particular respect in which the statement is claimed to be incorrect. If such dispute has not been settled by agreement within two (2) months after the expiration of the aforementioned four-month period, either party may submit the dispute to arbitration in accordance with the commercial arbitration rules of the American Arbitration Association within thirty (30) days after the expiration of the aforementioned two-month period. The decision of the arbitrators shall be final and binding on Landlord and Tenant and judgment thereon may be entered in any court of competent jurisdiction. All of the information obtained through Tenant's review of Operating Expenses as well as compromise, settlement or adjustment reached between Landlord and Tenant relative to the result thereof shall be held in strict confidence by Tenant. Tenant shall indemnify, defend upon request and hold Landlord harmless from and against all loss, cost, damage and expense suffered by Landlord based in whole or in part upon the breach of the covenants of Tenant contained in the preceding sentence. The obligations of Tenant hereunder shall survive the expiration or earlier termination of this Lease. If it should be agreed or decided that Operating Expenses were overstated by ten percent (10%) or more, then Landlord shall promptly reimburse Tenant for the reasonable costs incurred by Tenant in reviewing Landlord's invoices and statements, Tenant's reasonable arbitration costs plus any excess amount paid by Tenant on account of overstated Operating. If it should be agreed or decided that Operating Expenses were not overstated at all, then Tenant shall, as Additional Rent, promptly reimburse Landlord for its costs incurred in the arbitration plus the lesser of $500 or the costs incurred by Landlord in preparing for Tenant's review of invoices and statements; and if Operating Expenses shall have been understated or Tenant shall not have paid the Operating Expenses in full, Tenant shall, as Additional Rent, promptly pay any deficiency in -8- the payments theretofore made. In the event of an overstatement which is less than ten percent (10%), Landlord shall promptly reimburse Tenant any excess amount paid by Tenant on account of overstated Operating Expenses, and each party shall be responsible for its own costs incurred in connection with such dispute. Tenant keep confidential (and shall cause any third party assisting Tenant with any such audit to keep confidential) all information obtained during the audit process including any settlements or arbitration awards made. Landlord may require Tenant to execute and deliver a separate confidentiality agreement further specifying Tenant's obligations and Landlord's remedies for breach, as a condition to commencement of the audit. 5. SECURITY DEPOSIT. Tenant shall deposit with Landlord upon Tenant's execution hereof the Security Deposit set forth in Paragraph 1.7 as security for Tenant's faithful performance of Tenants obligations under this Lease. If Tenant fails to pay Base Rent or Additional Rent or otherwise defaults under this Lease (as defined in Paragraph 13.1), Landlord may use the Security Deposit for the payment of any amount due Landlord or to reimburse or compensate Landlord for any liability, cost, expense, loss or damage (including attorney's fees) which Landlord may suffer or incur by reason thereof. Tenant shall on demand pay Landlord the amount so used or applied so as to restore the Security Deposit to the amount set forth in Paragraph 1.7. Landlord shall not be required to keep all or any part of the Security Deposit separate from its general accounts. Landlord shall, at the expiration or earlier termination of the term hereof and after Tenant has vacated the Premises, return to Tenant that portion of the Security Deposit not used or applied by Landlord. No part of the Security Deposit shall be considered to be held in trust, to bear interest, or to be prepayment for any monies to be paid by Tenant under this Lease. Tenant shall have the right to post the Security Deposit (as the same may have been reduced in accordance with this Section 5) in the form of a letter of credit (the "Letter of Credit"), which shall (a) be unconditional and irrevocable and otherwise in form and substance reasonably satisfactory to Landlord; (b) be at all times in the amount of the Security Deposit, and shall permit multiple draws; (c) be issued by a commercial bank reasonably acceptable to Landlord; (d) be made payable to, and expressly transferable and assignable at no charge by, Landlord; (e) be payable at sight upon presentment to a branch of the issuer in the Route 495 area (a "495 Office") of a simple sight draft accompanied by a certificate of Landlord stating either that Tenant is in default under this Lease or that Landlord is otherwise permitted to draw upon such Letter of Credit under the express terms of this Lease, and the amount that Landlord is owed (or permitted to draw) in connection therewith; and (f) shall either expire thirty (30) days following the expiration of the term of this Lease, or be replaced not less than thirty (30) days prior to the expiration of the then current Letter of Credit so that the original Letter of Credit or a replacement thereof shall be in full force and effect throughout the term of this Lease and for a period of thirty (30) days thereafter. Tenant shall deliver to Landlord any replacement Letter of Credit not less than thirty (30) days prior to the expiration of the then current Letter of Credit. Notwithstanding anything in this Lease to the contrary, any grace period or cure periods which are otherwise applicable under Section 13.1 hereof, shall not apply if Tenant fails to comply with the requirements of subsection (f) above, in which event, Landlord shall have the immediate right to draw upon the Letter of Credit in full and hold the proceeds thereof as a cash security -9- deposit, provided, however, that Tenant shall have the right at any time during the Term to deliver a replacement Letter of Credit to Landlord meeting the requirements of this paragraph, and upon receipt of such replacement Letter of Credit, Landlord shall return promptly to Tenant the amount of cash security deposit then being held by Landlord. Each Letter of Credit shall be issued by a commercial bank that (i) has a credit rating with respect to certificates of deposit, short term deposits or commercial paper of at least P-2 (or equivalent) by Moody's Investor Service, Inc., or at least A-2 (or equivalent) by Standard & Poor's Corporation and (ii) maintains a 495 Office at which such Letter of Credit may be presented for payment. If the issuer's credit rating is reduced below P-2 (or equivalent) by Moody's Investor Service, Inc., or below A-2 (or equivalent) by Standard and Poor's Corporation, or if the financial condition of the issuer changes in any other materially adverse way or if the issuer ceases to maintain a 495 Office, then Landlord shall have the right to require that Tenant obtain from a different issuer a substitute Letter of Credit that complies in all respect with the requirements of this Section, and Tenant's failure to obtain such substitute Letter of Credit within ten (10) days after Landlord's written demand therefor (with no other notice, grace or cure period being applicable thereto) shall entitle Landlord immediately to draw upon the existing Letter of Credit in full, without any further notice to Tenant. As of July 1, 2000, the Security Deposit shall be reduced to $500,000.00, and as of second anniversary of the Commencement Date, the Security Deposit shall be reduced to $380,000.00, provided, however, that no reduction in the Security Deposit shall occur if (i) there shall have existed a Default of Tenant at any time prior to the date that such reduction would otherwise have occurred, or (ii) no reduction to $380,000 shall occur if Tenant does not have or does not give Landlord reasonably satisfactory evidence that Tenant has cash or cash equivalents in the amount of at least $50,000,000 at such time. Tenant may either deliver an amendment to the Letter of Credit or a new Letter of Credit in the amount of the applicable Security Deposit. 6. USE. 6.1 Permitted Use. Tenant shall use and occupy the Premises only for the Permitted Use set forth in Paragraph 1.8. Tenant shall not commit any nuisance, permit the emission of any objectionable noise or odor, suffer any waste, make any use of the Premises which is contrary to any law or ordinance or which will invalidate or increase the premiums for any of Landlord's insurance. Tenant shall not service, maintain or repair vehicles other than forklifts and other warehouse equipment on the Premises, Building or Common Areas. Tenant shall not store foods, pallets, drums or any other materials outside the Premises; but may keep pallets in front of one of Tenant's loading docks provided there shall be no interference with any other tenant and such pallets are kept neat, clean and orderly. 6.2 Hazardous Substances. (a) Reportable Uses Require Consent. The term "Hazardous Substance" as used in this Lease shall mean any product, substance, chemical, material or waste whose presence, nature, quantity and/or intensity of existence, use, manufacture, disposal, transportation, spill, release or effect, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment, or the Premises; (ii) regulated or monitored by any governmental authority; or (iii) a basis for potential liability to any governmental agency or third party under any applicable -10- statute or common law theory. Hazardous Substance shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products or by- products thereof. Tenant shall not engage in any activity in or about the Premises which constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances without the express prior written consent of Landlord and compliance in a timely manner (at Tenant's sole cost and expense) with all Applicable Requirements (as defined in Paragraph 6.3). "Reportable Use" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and (iii) the presence in, on or about the Premises of a Hazardous Substance with respect to which any Applicable Requirements require that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Tenant may, without Landlord's prior consent, but upon notice to Landlord and in compliance with all Applicable Requirements, use any ordinary and customary materials reasonably required to be used by Tenant in the normal course of the Permitted Use, so long as such use is not a Reportable Use and does not expose the Premises, or neighboring properties to any meaningful risk of contamination or damage or expose Landlord to any liability therefor. In addition, Landlord may (but without any obligation to do so) condition its consent to any Reportable Use of any Hazardous Substance by Tenant upon Tenant's giving Landlord such additional assurances as Landlord, in its reasonable discretion, deems necessary to protect itself, the public, the Premises and the environment against damage, contamination or injury and/or liability therefor, including but not limited to the installation (and, at Landlord's option, removal on or before Lease expiration or earlier termination) of reasonably necessary protective modifications to the Premises (such as concrete encasements) and/or the deposit of an additional Security Deposit. (b) Duty to Inform Landlord. If Tenant knows, or has reasonable cause to believe, that a Hazardous Substance is located in, under or about the Premises or the Building, Tenant shall immediately give Landlord written notice thereof, together with a copy of any statement, report, notice, registration, application, permit, business plan, license, claim, action, or proceeding given to, or received from, any governmental authority or private party concerning the presence, spill, release, discharge of, or exposure to, such Hazardous Substance. Tenant shall not cause or permit any Hazardous Substance to be spilled or released in, on, under or about the Premises (including, without limitation, through the plumbing or sanitary sewer system). (c) Indemnification. Tenant shall indemnify, protect, defend and hold Landlord, Landlord's affiliates, Lenders, and the officers, directors, shareholders, partners, employees, managers, independent contractors, attorneys and agents of the foregoing ("Landlord Entities") and the Premises, harmless from and against any and all damages, liabilities, judgments, costs, claims, liens, expenses, penalties, loss of permits and attorneys' and consultants' fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Tenant or by any of Tenant's employees, agents, contractors or invitees. Tenant's obligations under this Paragraph 6.2(c) shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Tenant, and the cost of investigation (including consultants' and attorneys' fees and testing), removal, remediation, restoration and/or abatement thereof, or of any contamination therein involved. Tenant's obligations under this Paragraph 6.2(c) shall survive the expiration or earlier termination of this Lease. -11- 6.3 Tenant's Compliance with Requirements. Tenant shall, at Tenant's sole cost and expense, fully, diligently and in a timely manner, comply with all "Applicable Requirements," which term is used in this Lease to mean all laws, rules, regulations, ordinances, directives, covenants, easements and restrictions of record (so long as not unreasonably interfering with the use of the Premises for storage), permits, and the requirements of any applicable fire insurance underwriter or rating bureau, now in effect or which may hereafter come into effect relating in any manner to the Premises (including but not limited to matters pertaining to (i) environmental conditions on, in, under or about the Premises, including soil and groundwater conditions, and (ii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill or release of any Hazardous Substance), but with respect to (i) and (ii) only to the extent the need for compliance shall be due to the acts or failure to act of Tenant or any subtenant or assignee or any of its or their agents, employees, contractors or invitees (collectively each a "Tenant Entity"), Tenant shall, within 5 days after receipt of Landlord's written request, provide Landlord with copies of all documents and information evidencing Tenant's compliance with any Applicable Requirements and shall promptly upon receipt, notify Landlord in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving failure by Tenant or the Premises to comply with any Applicable Requirements. Tenant shall execute and deliver to Landlord a completed questionnaire, in the form attached hereto as Exhibit C, immediately prior to the Commencement Date and, if applicable, immediately prior to the commencement of any Option Period; and Tenant shall execute and deliver to Landlord a completed questionnaire, in the form attached hereto as Exhibit D, immediately prior to the expiration of the term or Tenant's surrender of possession of the Premises, whichever is earlier. 6.4 Inspection; Compliance with Law. In addition to Landlord's environmental monitoring and insurance program, the cost of which is included in Operating Expenses, Landlord and the holders of any mortgages, deeds of trust or ground leases on the Premises ("Lenders") shall have the right to enter the Premises at any time in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Tenant with this Lease and all Applicable Requirements. Landlord shall be entitled to employ experts and/or consultants in connection therewith to advise Landlord with respect to Tenant's installation, operation, use, monitoring, maintenance, or removal of any Hazardous Substance on or from the Premises. The cost and expenses of any such inspections shall be paid by the party requesting same unless a violation of Applicable Requirements exists or is imminent or the inspection is requested or ordered by a governmental authority. In such case, Tenant shall upon request reimburse Landlord or Landlord's Lender, as the case may be, for the costs and expenses of such inspections. 7. MAINTENANCE, REPAIRS, TRADE FIXTURES AND ALTERATIONS. 7.1 Tenant's Obligations. Subject to the provisions of Paragraph 7.2 (Landlord's Obligations), Paragraph 9 (Damage or Destruction) and Paragraph 14 (Condemnation), Tenant shall, at Tenant's sole cost and expense and at all times, keep the Premises and every part thereof in good order, condition and repair including, without limiting the generality of the foregoing, all equipment or facilities specifically and exclusively serving the Premises, such as plumbing, heating, air conditioning, ventilating, electrical, lighting facilities, boilers, fired or unfired pressure vessels, fire hose connectors if within the Premises, fixtures, interior walls, interior surfaces of exterior walls, ceilings, floors, windows, doors, plate glass, and skylights, but -12- excluding any items which are the responsibility of Landlord pursuant to Paragraph 7.2 below. Tenant shall through the term maintain at Tenant's expense HVAC maintenance contracts reasonably acceptable to Landlord. Except as hereinafter provided, Tenant's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair, reasonable wear and tear and (in the case of the Premises) damage by casualty or taking by eminent domain excepted . Notwithstanding the foregoing, Tenant's obligations hereunder shall not apply to any capital expenditure (including any replacement of a capital item) the need for which shall not have arisen due to (i) the failure by Tenant to perform ordinary repairs and maintenance (ii) the negligence or other wrongful acts of any Tenant Entity or (iii) any alterations or installations made by Tenant. 7.2 Landlord's Obligations. Subject to the provisions of Paragraph 6 (Use), Paragraph 7.1 (Tenant's Obligations), Paragraph 9 (Damage or Destruction) and Paragraph 14 (Condemnation), Landlord at its expense and not subject to reimbursement pursuant to Paragraph 4.2, shall keep in good order, condition and repair the foundations and structural supports and exterior walls of the Building and utility systems outside the Building. Landlord, subject to reimbursement pursuant to Paragraph 4.2, shall keep in good order, condition and repair the Building roof and Common Areas. 7.3 Alterations. Tenant shall not make nor cause to be made any alterations, installations in, on, under or about the Premises without on each occasion obtaining the prior consent of Landlord. Landlord's consent shall not be unreasonably withheld or delayed with respect to the installation of a mezzanine or to other alterations, additions or improvements which Tenant proposes to make at its sole cost provided such mezzanine and any other such alterations or installation are consistent with Building standards, do not adversely affect the plumbing, heating ventilating, air-conditioning, life safety, mechanical or electrical systems of the Building, do not adversely affect the structural elements of the Building, are not visible from the outside of the Premises, and shall not materially increases Real Estate Taxes or Operating Expenses, nor require Landlord to perform any work to the Premises, Building or Industrial Center. So long as any request by Tenant for comment hereunder shall expressly so state, the failure by Landlord to respond to any such request within five (5) business days of receipt of such request shall constitute deemed consent. 7.4 Surrender/Restoration. Tenant shall surrender the Premises by the end of the last day of the Lease term or any earlier termination date, clean and free of debris and in good operating order, condition and state of repair ordinary wear and tear excepted. Without limiting the generality of the above, Tenant shall remove all personal property, trade fixtures and floor bolts, patch all floors and cause all lights to be in good operating condition. Landlord may condition any consent on Tenant agreeing to remove any alteration or installation and to restore any damage caused by installation or removal, on or before the expiration or sooner termination of the term of this Lease. 8. INSURANCE; INDEMNITY. 8.1 Payment of Premiums. The cost of the premiums for the insurance policies maintained by Landlord under this Paragraph 8 shall be a Common Area Operating Expense pursuant to Paragraph 4.2 hereof. Premiums for policy periods commencing prior to, -13- or extending beyond, the term of this Lease shall be prorated to coincide with the corresponding Commencement Date or Expiration Date. 8.2 Tenant's Insurance. (i) At its sole cost and expense, Tenant shall maintain in full force and effect during the Term of the lease the following insurance coverages insuring against claims which may arise from or in connection with the Tenant's operation and use of the leased premises. (a) Commercial General Liability with minimum limits of $1,000,000 per occurrence; $3,000,000 general aggregate for bodily injury, personal injury and property damage. (b) Workers' Compensation insurance with statutory limits and Employers Liability with a $1,000,000 per accident limit for bodily injury or disease. (c) Automobile Liability covering all owned, non- owned and hired vehicles with a $1,000,000 per accident limit for bodily injury and property damage. (d) Property insurance against all risks of loss to any tenant improvements or betterments and business personal property on a full replacement cost basis with no coinsurance penalty provision; and Business Interruption Insurance with a limit of liability representing loss of at least approximately six months of income. (ii) Tenant shall deliver to Landlord certificates of all insurance reflecting evidence of required coverages prior to initial occupancy; and annually thereafter. (iii) If, in the opinion of Landlord's insurance advisor, the amount of scope of such coverage is deemed inadequate at any time during the Term, Tenant shall increase such coverage to such reasonable amounts or scope as Landlord's advisor deems adequate. (iv) All insurance required under Paragraph 8.2 (i) shall be primary and non-contributory (ii) shall provide for severability of interests, (iii) shall be issued by insurers, licensed to do business in the state in which the Premises are located and which are rated A:VII or better by Best's Key Rating Guide, (iv) shall be endorsed to include Landlord and such other persons or entities as Landlord may from time to time designate, as additional insureds (Commercial General Liability only), and (v) shall be endorsed to provide at least 30-days prior notification of cancellation or material change in coverage to said additional insureds. 8.3 Landlord's Insurance. Landlord may, but shall not be obligated to, maintain all risk, including earthquake and flood, insurance covering the buildings within the Industrial Center, Commercial General Liability and such other insurance in such amounts and covering such other liability or hazards as deemed appropriate by Landlord. The amount and scope of coverage of Landlord's insurance shall be determined by Landlord from time to time in its sole discretion and shall be subject to such deductible amounts as Landlord may elect. Landlord shall have the right to reduce or terminate any insurance or coverage. Premiums for any such insurance shall be a Common Area Operating Expense. 8.4 Waiver of Subrogation. To the extent permitted by law and without affecting the coverage provided by insurance required to be maintained hereunder, Landlord and Tenant each waive any right to recover against the other on account of any and all claims Landlord or Tenant may have against the other with respect to property insurance actually carried, or required to be carried hereunder, to the extent of the proceeds realized from such insurance coverage. -14- In addition, to the extent Landlord shall not have maintained at the time of damage all-risk, full replacement cost insurance on the Building subject to commercially reasonably deductibles, Landlord shall be deemed to have waived any claim against Tenant for property loss which would have been made available to Landlord had it maintained such insurance. 8.5 Indemnity. Except to the extent caused by or arising out of the gross negligence or willful misconduct of any of the Landlord Entities, Tenant shall protect, indemnify and hold the Landlord Entities harmless from and against any and all loss, claims, liability or costs (including court costs and attorney's fees) incurred by reason of: (i) any damage to any property (including but not limited to property of any Landlord Entity) or death or injury to any person occurring in or about the Premises, the Building or the Industrial Center to the extent that such injury or damage shall be caused by or arise from any actual or alleged act, neglect, fault or omission by or of Tenant, its agents, servants, employees, invitees, or visitors; (ii) the conduct or management of any work or anything whatsoever done by the Tenant on or about the Premises or from transactions of the Tenant concerning the Premises; (iii) Tenant's failure to comply with any and all governmental laws, ordinances and regulations applicable to the particular use of the Premises or its occupancy; or (iv) any breach or default of the part of Tenant in the performance of any covenant or agreement on the part of the Tenant to be performed pursuant to this Lease. The provisions of this Paragraph 8.5 shall survive the termination of this Lease with respect to any claims or liability accruing prior to such termination. 8.6 Exemption of Landlord from Liability. Except to the extent caused by the gross negligence or willful misconduct of Landlord, Landlord Entities shall not be liable for and Tenant waives any claims against Landlord Entities for injury or damage to the person or the property of Tenant, Tenant's employees, contractors, invitees, customers from any cause whatsoever, including, but not limited to, damage or injury which is caused by or results from (i) fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures or (ii) from the condition of the Premises, other portions of the Building or Industrial Center. Landlord shall not be liable for any damages arising from any act or neglect of any other tenant of Landlord nor from the failure by Landlord to enforce the provisions of any other lease in the Industrial Center. Notwithstanding Landlord's negligence or breach of this Lease, Landlord shall under no circumstances be liable for injury to Tenant's business, for any loss of income or profit therefrom or any indirect, consequential or punitive damages. 8.7 Landlord Indemnity. Subject to all limitations, waivers, exclusions and conditions contained in this Lease (each of which shall control in the event of any conflict or inconsistent with this Section 8.7), Landlord shall indemnify Tenant from and against any and all claims asserted by or on behalf of any third party on account of personal injury or death arising out of the negligence or other wrongful conduct of Landlord or its agents, contractors or employees during the term of this Lease. In respect of the foregoing, Landlord shall indemnify Tenant from and against all costs, expenses (including reasonable attorneys' fees), and liabilities incurred in or in connection with any such claim, action or proceeding brought thereon; and, in case of any action or proceeding brought against Tenant by reason of any such claim, Landlord, -15- upon notice from Tenant and at Landlord's expense, shall resist or defend such action or proceeding and employ counsel therefor reasonably satisfactory to Tenant. 9. DAMAGE OR DESTRUCTION. 9.1 Termination Right. To the extent that Landlord is not aware of any damage to the Premises, Tenant shall give Landlord immediate written notice of any damage to the Premises. Subject to the provisions of Paragraph 9.2, if the Premises or the Building shall be damaged to such an extent that in the good faith determination of Landlord's architect, the time needed to make restoration as required by Section 9.2 shall exceed 180 days from the date of casualty, Landlord shall give prompt notice thereof to Tenant. Tenant, at any time following such notice but prior to commencement of repair of the Premises and following 10 days written notice to Landlord, may terminate this Lease effective 30 days after delivery of such notice to Landlord. Such termination shall not excuse the performance by Tenant of those covenants which under the terms hereof survive termination. Rent shall be abated in proportion to the degree of interference during the period that there is such substantial interference with the conduct of Tenant's business at the Premises. Abatement of rent and Tenant's right of termination pursuant to this provision shall be Tenant's sole remedy for failure of Landlord to keep in good order, condition and repair the foundations structural supports and exterior walls of the Building, Building roof, utility systems outside the Building, the Common Areas. In the event that the Premises or the Building, or any material part thereof, shall be destroyed or damaged by fire or other casualty, to such an extent that the time needed to repair is likely to exceed 180 days from the date of casualty then this Lease may be terminated at the election of Landlord. Any such election shall be made by the giving of notice by Landlord to Tenant within sixty (60) days following Landlord's receipt of Tenant's notice of such fire or casualty. 9.2 Restoration. If neither Landlord nor Tenant shall elect to so terminate, this Lease shall continue in force and (so long as the damage is not caused by the negligence or other wrongful act of Tenant or its employees, agents, contractors or invitees) a just proportion of the Base Rent reserved, according to the nature and extent of the damages sustained by the Premises, shall be suspended or abated until the Premises (excluding any improvements to the Premises made at Tenant's expense but including Landlord's Work), or what may remain thereof, shall be restored substantially to their pre-existing condition, to the extent practical, which Landlord covenants to do with reasonable diligence to the extent permitted by the net proceeds of insurance recovered for such destruction and subject to zoning and building laws or ordinances then in existence. 9.3 Damage Caused by Tenant. Tenant's termination rights under Paragraph 9.1 shall not apply if the damage to the Premises or Building is the result of any act or omission of Tenant or of any of Tenant's agents, employees, customers, invitees or contractors ("Tenant Acts"). Any damage resulting from a Tenant Act shall be promptly repaired by Tenant. Landlord at its option may at Tenant's expense repair any damage caused by Tenant Acts. Tenant shall continue to pay all rent and other sums due hereunder and shall be liable to Landlord for all damages that Landlord may sustain resulting from a Tenant Act. -16- 10. REAL PROPERTY TAXES. 10.1 Payment of Real Property Taxes. Landlord shall pay prior to delinquency the Real Property Taxes due and payable during the term of this Lease and, except as otherwise provided in Paragraph 10.3, any such amounts shall be included in the calculation of Operating Expenses in accordance with the provisions of Paragraph 4.2. 10.2 Real Property Tax Definition. As used herein, the term "Real Property Taxes" is any form of tax or assessment, general, special, ordinary or extraordinary, imposed or levied upon the Building and/or the land upon which the Building is located (the "Land") and/or any interest of Landlord in the Building and/or the Land. Real Property Taxes include (i) any license fee, commercial rental tax, excise tax, improvement bond or bonds, levy or tax; (ii) any tax or charge which replaces or is in addition to any of such above-described "Real Property Taxes" and (iii) any fees, expenses or costs (including attorney's fees, expert fees and the like) incurred by Landlord in protesting or contesting any assessments levied or any tax rate. The term "Real Property Taxes" shall also include any increase resulting from a change in the ownership of the Land or Building, the execution of this Lease or any modification, amendment or transfer thereof. Real Property Taxes for tax years commencing prior to, or extending beyond, the term of this Lease shall be prorated to coincide with the corresponding Commencement Date or Expiration Date. 10.3 Additional Improvements. Operating Expenses shall not include Real Property Taxes attributable to improvements placed upon the Industrial Center by other tenants or by Landlord for the exclusive enjoyment of such other tenants. Notwithstanding Paragraph 10.1 hereof, Tenant shall, however, pay to Landlord at the time Operating Expenses are payable under Paragraph 4.2, the entirety of any increase in Real Property Taxes if assessed by reason of improvements placed upon the Premises by Tenant or at Tenant's request (other than Landlord's Work). 10.4 Joint Assessment. If the Building is at any time in the future no longer separately assessed, Real Property Taxes allocated to the Building shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed. 10.5 Tenant's Property Taxes. Tenant shall pay prior to delinquency all taxes assessed against and levied upon Tenant's improvements, fixtures, furnishings, equipment and all personal property of Tenant contained in the Premises or stored within the Industrial Center. 11. UTILITIES. Tenant shall pay directly for all utilities and services supplied and separately metered to the Premises, including but not limited to electricity, telephone, security, gas and cleaning of the Premises, together with any taxes thereon. Landlord shall as part of Landlord's Work separately meter the utilities serving the Premises, other than water and sewer services, as part of Landlord's Work. The electrical systems shall be designed to provide 2000 amps at 277/480 Volts. 12. ASSIGNMENT AND SUBLETTING. (a) Tenant shall not assign, mortgage or otherwise transfer or encumber (collectively, "assign") or sublet all or any part of Tenant's interest in this Lease or in the Premises without Landlord's prior written consent which consent shall not be unreasonably withheld, conditioned or delayed. Relevant criteria in determining reasonability of consent include, but are not limited to, credit history of a proposed assignee or sublessee, references from prior landlords, -17- any change or intensification of use of the Premises or the Common Areas and any limitations imposed by the Internal Revenue Code and the Regulations promulgated thereunder relating to Real Estate Investment Trusts. Assignment or sublet shall not release Tenant from its obligations hereunder. Tenant shall not (i) sublet or assign or enter into other arrangements such that the amounts to be paid by the sublessee or assignee thereunder would be based, in whole or in part, on the income or profits derived by the business activities of the sublessee or assignee; (ii) sublet the Premises or assign this Lease to any person in which Landlord owns an interest, directly or indirectly (by applying constructive ownership rules set forth in Section 856(d)(5) of the Internal Revenue Code (the "Code"); or (iii) sublet the Premises or assign this Lease in any other manner which could cause any portion of the amounts received by Landlord pursuant to this Lease or any sublease to fail to qualify as "rents from real property" within the meaning of Section 856(d) of the Code, or which could cause any other income received by Landlord to fail to qualify as income described in Section 856(c)(2) of the Code. The requirements of this Section 12.1 shall apply to any further subleasing by any subtenant. (b) A change in the control of Tenant shall constitute an assignment requiring Landlord's consent. The transfer, on a cumulative basis, of 25% or more of the voting or management control of Tenant shall constitute a change in control for this purpose provided, however this subsection (b) shall not be applicable for so long as Tenant's stock is listed for trading or quotation on the New York Stock Exchange or Nasdaq, or other nationally recognized domestic securities exchange; and any transaction pursuant to which Tenant is merged or consolidated with another entity or pursuant to which all or substantially all of Tenant's assets are transferred shall not be deemed a prohibited assignment, if (w) after any such transaction or transfer, the successor to Tenant or the transferee of or successor to any of Tenant's rights hereunder has a tangible net worth computed in accordance with generally accepted accounting principles at least equal to the net worth of Tenant on the date of this Lease, (x) proof satisfactory to Landlord of such net worth shall have been delivered to Landlord (subject to any reasonable confidentiality obligation to be honored by Landlord) at least ten (10) days prior to the effective date of any such transaction, (y) in the case of a sale of assets, proof satisfactory to Landlord shall have been delivered to Landlord (subject to any reasonable confidentiality obligation to be honored by Landlord) at least ten (10) days prior to the effective date of any such transaction that substantially all of Tenant's assets shall be sold to such transferee, and (z) the assignee, transferee or successor agrees directly with Landlord, by written instrument in form satisfactory to Landlord, to be bound by all the terms of this Lease including, without limitation, the covenants contained herein. In addition, Tenant may, upon not less than ten (10) days prior notice to Landlord, sublease all or any portion of the Premises to any entity which controls, is controlled by or is under common control with the Tenant identified in Section 1.1 (such entity being an "Affiliate"). Any sublease to an Affiliate shall, at Landlord's election, be terminated if the subtenant shall cease to be an Affiliate, and any sublease shall so provide. The term "control" for this purpose shall mean the ownership, directly or indirectly, of more than seventy-five percent (75%) of the outstanding voting stock of a corporation or other equity interest if Tenant is not a corporation. (c) If the rent and other sums (including, without limitation, all monetary payments plus the reasonable value of any services performed or any other thing of value given by any assignee or subtenant in consideration of such assignment or sublease), either initially or over the term of any assignment or sublease, payable by any assignee or subtenant (other than an Affiliate or an assignee permitted pursuant to (b) above) to Tenant on account of an assignment -18- or sublease of all or any portion of the Premises exceed the sum of (i) Base Rent plus Additional Rent called for hereunder with respect to the space assigned or sublet plus (ii) all brokerage fees and legal fees paid by Tenant with respect to such assignment or sublease and any demising costs and any cost of alterations which are performed solely for the benefit of the assignee or subtenant (all such costs to be amortized over the term of such sublease or assignment), Tenant shall pay to Landlord as Additional Rent fifty percent (50%) of such excess payable monthly at the time for payment of Base Rent. (d) In the event that Tenant intends enter into any assignment or sublease other than to an Affiliate or an assignee permitted pursuant to (b) above, then Tenant shall, not sooner than one hundred twenty (120) days and not later than forty-five (45) days, prior to the proposed effective date of such sublease or assignment, give notice to Landlord of such intent, identifying the proposed subtenant or assignee, all of the terms and conditions of the proposed sublease or assignment, and such other information as Landlord may reasonably request. Landlord may elect (i) to terminate the term of this Lease in the case of an assignment or a sublease of more than fifty percent (50%) of the Premises or (ii) to exclude from the Premises, for the term of the proposed sublease, the portion thereof to be sublet by giving notice to Tenant of either such election not later than thirty (30) days after receiving notice of such intent from Tenant. If Landlord shall give such notice within such thirty (30) day period, upon the later to occur of (a) the proposed date of commencement of such proposed sublease or assignment, or (b) the date which is fifteen (15) days after Landlord's notice, the term of this Lease shall terminate or (as applicable), for the period expiring on the expiration date of such proposed sublease (if applicable), the Premises shall be reduced to exclude the portion of the Premises intended for subletting, in which case the Base Rent and Tenant's Share of Operating Expenses shall be correspondingly reduced. If Landlord shall give its consent, Tenant may enter into such sublease or assignment on the terms and conditions set forth in such notice from Tenant within the following thirty (30) days. If Tenant shall not enter into such sublease or assignment within such following thirty (30) day period and shall still desire to enter into any sublease, or if Tenant shall change the terms and conditions thereof following the date of Tenant's notice to Landlord, the first sentence of this paragraph shall again become applicable. 13. DEFAULT; REMEDIES. 13.1 Default. The occurrence of any one of the following events shall constitute an event of default on the part of Tenant ("Default"): (a) Failure to pay any installment of Base Rent, Additional Rent or any other monies due and payable hereunder, said failure continuing for a period of 7 days after notice from Landlord; (b) A general assignment by Tenant or any guarantor for the benefit of creditors; (c) The filing of a voluntary petition in bankruptcy by Tenant or any guarantor, the filing of a voluntary petition for an arrangement, the filing of a petition, voluntary or involuntary, for reorganization, or the filing of an involuntary petition by Tenant's creditors or guarantors, but with respect to involuntary petitions filed against Tenant, a Default shall not -19- occur unless such involuntary petition is not dismissed or stayed within ninety (90) days after the filing of such involuntary petition; (d) Receivership, attachment, of other judicial seizure of the Premises or all or substantially all of Tenant's assets on the Premises; (e) Failure of Tenant to maintain insurance as required by Paragraph 8.2; and (f) Failure in the performance of any of Tenant's covenants, agreements or obligations hereunder (except those failures specified as events of Default in other Paragraphs of this Paragraph 13.1 which shall be governed by such other Paragraphs), which failure continues for 30 days after written notice thereof from Landlord to Tenant provided that, if Tenant has exercised reasonable diligence to cure such failure and such failure cannot be cured within such 30 day period despite reasonable diligence, Tenant shall not be in default under this subparagraph unless Tenant fails thereafter diligently and continuously to prosecute the cure to completion; 13.2 Remedies. In the event of any Default by Tenant, Landlord shall have the remedies set forth in the Addendum attached hereto entitled "Landlord's Remedies in Event of Tenant Default". 13.3 Late Charges. Tenant hereby acknowledges that late payment by Tenant to Landlord of rent and other sums due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges. Accordingly, if any installment of rent or other sum due from Tenant shall not be received by Landlord or Landlord's designee within 10 days after such amount shall be due, then, without any requirement for notice to Tenant, Tenant shall pay to Landlord a late charge equal to 54% of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of late payment by Tenant. Acceptance of such late charge by Landlord shall in no event constitute a waiver of Tenant's Default with respect to such overdue amount, nor prevent Landlord from exercising any of the other rights and remedies granted hereunder. 14. CONDEMNATION. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs, and as of such date the Base Rent and Tenant's Share shall be reduced in the same proportion as the rentable floor area of the Premises taken bears to the total rentable floor area of the Premises. Landlord's notice shall indicate whether the net severance damages will be expected to be sufficient to repair the damage to the Premises resulting from such condemnation. If more than 10% of the floor area of the Premises, or more than 25% of the portion of the Common Areas designated for Tenant's parking, is taken by condemnation, Tenant may, at Tenant's option, to be exercised in writing within 10 days after Landlord shall have given Tenant written notice of such taking (or in the absence of such notice, within 10 days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Tenant does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in the same proportion as the rentable floor area of the Premises taken bears to the total rentable floor area of -20- the Premises. No reduction of Base Rent shall occur if the condemnation does not apply to any portion of the Premises. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Landlord, provided, however, that Tenant shall be entitled to any compensation, separately awarded to Tenant for Tenant's relocation expenses and/or loss of Tenants trade fixtures. In the event that this Lease is not terminated by reason of such condemnation, Landlord shall to the extent of its net severance damages in the condemnation matter, repair any damage to the Premises caused by such condemnation authority. 15. ESTOPPEL CERTIFICATE AND FINANCIAL STATEMENTS. 15.1 Estoppel Certificate. Each party (herein referred to as "Responding Party") shall within 10 days after written notice from the other Party (the "Requesting Party") execute, acknowledge and deliver to the Requesting Party, to the extent it can truthfully do so, an estoppel certificate in the form attached hereto as Exhibit E, plus such additional information, confirmation and/or statements as shall be reasonably requested by the Requesting Party. 15.2 Financial Statement. If Landlord desires to finance, refinance, or sell the Building, Industrial Center or any part thereof, Tenant and any Guarantors shall deliver to any potential lender or purchaser designated by Landlord such financial statements of Tenant as are publicly available, if and to the extent that Tenant is required to file reports with the Securities Exchange Commission pursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934, as amended, and has complied with such filing requirements, and, if Tenant is not required to file such reports or has not complied with such filing requirements, Tenant and such Guarantors shall deliver such financial statements of Tenant and any Guarantors and other financial information as may be reasonably required by such lender or purchaser, including but not limited to Tenant's financial statements for the past 3 years. All such financial statements shall be received by Landlord and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 16. ADDITIONAL COVENANTS AND PROVISIONS. 16.1 Severability. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall not affect the validity of any other provision hereof. 16.2 Interest on Past-Due Obligations. Any monetary payment due Landlord hereunder not received by Landlord within 10 days following the date on which it was due shall bear interest from the date due at 12% per annum, but not exceeding the maximum rate allowed by law in addition to the late charge provided for in Paragraph 13.3. 16.3 Time of Essence. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 16.4 Landlord Liability. Tenant, its successors and assigns, shall not assert nor seek to enforce any claim for breach of this Lease against any of Landlord's assets other than Landlord's interest in the Industrial Center and the proceeds of any insurance policies carried by Landlord. Tenant agrees to look solely to such interest for the satisfaction of any liability or claim against Landlord under this Lease. In no event whatsoever shall Landlord (which term shall include, without limitation, any general or limited partner, trustees, beneficiaries, officers, directors, or stockholders of Landlord) ever be personally liable for any such liability. -21- 16.5 No Prior or Other Agreements. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and supersedes all oral, written prior or contemporaneous agreements or understandings. 16.6 Notice Requirements. All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by messenger or courier service) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission during normal business hours, and shall be deemed sufficiently given if served in a manner specified in the Paragraph 16.6. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notice purposes and with respect to notices to Tenant, a copy shall be concurrently delivered to Testa, Hurwitz & Thibeault, LLP, 125 High Street, Boston, Massachusetts 02110, attention: Real Estate Department. Either Party may by written notice to the other specify a different address for notice purposes, except that upon Tenant's taking possessing of the Premises, the Premises shall constitute Tenant's address for the purpose of mailing or delivering notices to Tenant. A copy of all notices required or permitted to be given to Landlord hereunder shall be concurrently transmitted to such party or parties at such addresses as Landlord may from time to time hereafter designate by written notice to Tenant. 16.7 Date of Notice. Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, 48 hours after the postmark thereon. If sent by regular mail, the notice shall be deemed given 48 hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantees next day delivery shall be deemed given 24 hours after delivery of the same to the United States Postal Service or courier. If any notice is transmitted by facsimile transmission or similar means, the same shall be deemed served or delivered upon telephone or facsimile confirmation of receipt of the transmission thereof, provided a copy is also delivered via hand or overnight delivery or certified mail. If notice is received on a Saturday or a Sunday or a legal holiday, it shall be deemed received on the next business day. 16.8 Waivers. No waiver by Landlord of a Default by Tenant shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default by Tenant of the same or any other term, covenant or condition hereof. 16.9 Holdover. Tenant has no right to retain possession of the Premises or any part thereof beyond the expiration or earlier termination of this Lease. If Tenant holds over with the consent of Landlord: (i) the Base Rent payable shall be increased to 175% of the Base Rent applicable during the month immediately preceding such expiration or earlier termination; (ii) Tenant's right to possession shall terminate on 30 days notice from Landlord and (iii) all other terms and conditions of this Lease shall continue to apply. Nothing contained herein shall be construed as a consent by Landlord to any holding over by Tenant. Tenant shall indemnify, defend and hold Landlord harmless from and against any and all claims, demands, actions, losses, damages, obligations, costs and expenses, including, without limitation, attorneys' fees incurred or suffered by Landlord by reason of Tenant's failure to surrender the Premises on the expiration or earlier termination of this Lease in accordance with the provisions of this Lease. 16.10 Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies in law or in equity. -22- 16.11 Binding Effect: Choice of Law. This Lease shall be binding upon the Parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 16.12 Landlord. The covenants and obligations contained in this Lease on the part of Landlord are binding on Landlord, its successors and assigns, only during and in respect of their respective period of ownership of such interest in the Industrial Center. In the event of any transfer or transfers of such title to the Industrial Center, Landlord (and in case of any subsequent transfers or conveyances, the then grantor) shall be concurrently freed and relieved from and after the date of such transfer or conveyance, without any further instrument or agreement, of all liability with respect to the performance of any covenants or obligations on the part of Landlord contained in this Lease thereafter to be performed which obligations shall, subject to the terms of this Lease, be assumed by the transferee by virtue of its ownership of the Industrial Center or portion thereof. 16.13 Attorneys' Fees and Other Costs. If any Party brings an action or proceeding to enforce the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding shall be entitled to reasonable attorneys' fees. The term "Prevailing Party" shall include, without limitation, a Party who substantially obtains or defeats the relief sought. Landlord shall be entitled to attorneys' fees, costs and expenses incurred in preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting breach. Tenant shall reimburse Landlord on demand for all reasonable legal, engineering and other professional services expenses incurred by Landlord in connection with all requests by Tenant for consent or approval hereunder. 16.14 Landlord's Access; Showing Premises; Repairs. Landlord and Landlord's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times upon reasonable notice for the purpose of showing the same to prospective purchasers, lenders, or tenants (but if such parties are prospective tenants, only during the last twelve (12) months of the Term), and making such alterations, repairs, improvements or additions to the Premises or to the Building, as Landlord may reasonably deem necessary. Landlord may at any time place on or about the Premises or Building any ordinary "For Sale" signs and Landlord may at any time during the last 180 days of the term hereof place on or about the Premises any ordinary "For Lease" signs. All such activities of Landlord shall be without abatement of rent or liability to Tenant. Except in instances posing an imminent threat to life or property, Landlord shall endeavor to comply with Tenant's reasonable security requirements of which Tenant shall have given Landlord prior notice and to give Tenant reasonable notice (not less than twenty-four hours in advance) prior to making entry onto the Premises, provided, however, notwithstanding anything to the contrary contained in this Lease, such notice may be made orally to any supervisor of Tenant; and Landlord shall, to the extent practical, use reasonable efforts to minimize interference with the conduct of Tenant's business in the Premises as a result of any entry. 16.15 Signs. Tenant shall not place any signs at or upon the exterior of the Premises or the Building, except that Tenant may, with Landlord's prior written consent, install (but not on -23- the roof) such signs as are reasonably required to advertise Tenant's own business so long as such signs are in a location designated by Landlord and comply with sign ordinances and the signage criteria established for the Industrial Center by Landlord. Notwithstanding the foregoing, Tenant shall have the right to install, at a location acceptable to Landlord and at Tenant's sole cost and expense, one (1) Building-mounted sign, subject to Landlord's approval, which approval shall not be unreasonably withheld, which shall be located on the side of the Building which is visible from Route 495. Landlord shall add Tenant's name to the Industrial Park and Building directories, the cost of which shall be borne by Landlord. Tenant shall be required to obtain at its expense all permits and approvals required for the installation of the Building-mounted sign (but shall not be permitted to seek any zoning or other similar relief for such signs without Landlord's consent) and shall at its expense keep all such permits and approvals in full force and effect. Tenant shall keep such signs in good condition through the term of this Lease and shall, if Landlord so requests, remove such exterior signs at the end of the term of this Lease and repair any damage caused by such removal. 16.16 Termination: Merger. Unless specifically stated otherwise in writing by Landlord, the voluntary or other surrender of this Lease by Tenant, the mutual termination or cancellation hereof, or a termination hereof by Landlord for Default by Tenant, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, Landlord shall, in the event of any such surrender, termination or cancellation, have the option to continue any one or all of any existing subtenancies. Landlord's failure within 10 days following any such event to make a written election to the contrary by written notice to the holder of any such lesser interest, shall constitute Landlord's election to have such event constitute the termination of such interest. 16.17 Quiet Possession. Upon payment by Tenant of the Base Rent and Additional Rent for the Premises and the performance of all of the covenants, conditions and provisions on Tenant's part to be observed and performed under this Lease, Tenant shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. 16.18 Subordination; Attornment; Non-Disturbance. (a) Subordination. This Lease shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or mortgage (collectively, "Mortgage") now or hereafter placed by Landlord upon the real property of which the Premises are a part, to any and all advances made on the security thereof and to all renewals, modifications, consolidations, replacements and extensions thereof. Tenant agrees that any person holding any Mortgage shall have no duty, liability or obligation to perform any of the obligations of Landlord under this Lease. In the event of Landlord's default with respect to any such obligation, Tenant will give any Lender, whose name and address have previously in writing been furnished Tenant, notice of a default by Landlord. Tenant may not exercise any remedies for default by Landlord unless and until Landlord and the Lender shall have received written notice of such default and a reasonable time (not less than 30 days) shall thereafter have elapsed without the default having been cured. If any Lender shall elect to have this Lease superior to the lien of its Mortgage and shall give written notice thereof to Tenant, this Lease shall be deemed prior to such Mortgage. The provisions of a Mortgage relating to the disposition of condemnation and insurance proceeds shall prevail over any contrary provisions contained in this Lease. Landlord represents that as of -24- the date of this Lease there are no ground leases, superior leases, deeds of trusts or mortgages encumbering the Premises or the Building, or the lot on which the Building is located. (b) Attornment. Subject to the non-disturbance provisions of of this Paragraph 16.18, Tenant agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Mortgage or deed in lieu of foreclosure. In the event of such foreclosure, such owner shall perform Landlord's obligations hereunder but shall not: (i) be liable for any act or omission of any prior landlord or with respect to events occurring prior to acquisition of ownership, unless such act or omission is of a continuing nature, (ii) be subject to any offsets or defenses which Tenant might have against any prior Landlord, or (iii) be liable for security deposits (unless such security deposit is received by such party) or be bound by prepayment of more than one month's rent. (c) Non-Disturbance. With respect to any Mortgage entered into by Landlord after the execution of this Lease, Tenant's subordination of this Lease shall be subject to receiving assurance (a "non- disturbance agreement") from the Mortgage holder that Tenant's possession and this Lease will not be disturbed in the event of foreclosure or deed in lieu of foreclosure, so long as Tenant is not in Default and attorns to the record owner of the Premises. (d) Self-Executing. The agreements contained in this Paragraph 16.18 shall be effective without the execution of any further documents; provided, however, that upon written request from Landlord or a Lender in connection with a sale, financing or refinancing of Premises, Tenant and Landlord shall execute such further writings as may be reasonably required to separately document any such subordination or non-subordination, attornment and/or non-disturbance agreement as is provided for herein. 16.19 Rules and Regulations. Tenant agrees that it will abide by, and to cause its employees, suppliers, shippers, customers, tenants, contractors and invitees to abide by all reasonable rules and regulations ("Rules and Regulations") which Landlord may make from time to time for the management, safety, care, and cleanliness of the Common Areas, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of the Building and the Industrial Center and their invitees, provided such rules and regulations are applicable generally to all tenants of the Industrial Center. Landlord shall not be responsible to Tenant for the non-compliance with said Rules and Regulations by other tenants of the Industrial Center, however, Landlord shall, to the extent permitted by applicable law and by the respective leases with such other tenants, use reasonable efforts to enforce the Rules and Regulations of general applicability against all tenants in a uniform fashion. 16.20 Security Measures. Tenant acknowledges that the rental payable to Landlord hereunder does not include the cost of guard service or other security measures. Landlord has no obligations to provide same. Tenant assumes all responsibility for the protection of the Premises, Tenant, its agents and invitees and their property from the acts of third parties. 16.21 Reservations. Landlord reserves the right to grant such easements that Landlord deems necessary and to cause the recordation of parcel maps, so long as such easements and maps do not unreasonably interfere with the use of the Premises by Tenant, or Tenant's use of such areas within the Common Areas on the lot on which the Building is located. Tenant agrees to sign any documents reasonable requested by Landlord to effectuate any such easements or maps. -25- 16.22 Conflict. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 16.23 Offer. Preparation of this Lease by either Landlord or Tenant or Landlord's agent or Tenant's agent and submission of same to Tenant or Landlord shall not be deemed an offer to lease. This Lease is not intended to be binding until executed and delivered by all Parties hereto. 16.24 Brokerage. Tenant warrants and represents that it has dealt with no broker in connection with the execution of this Lease other than Cushman & Wakefield and Insignia/ESG, and agrees to indemnify and hold Landlord harmless from and against any and all brokerage claims, other than by Cushman & Wakefield and Insignia/ESG arising therefrom. Landlord shall be responsible for the payment of all fees and commissions due to Insignia/ESG pursuant to the terms of a separate agreement between such parties. Insignia/ESG shall be responsible for the payment of all fees and commissions due to Cushman & Wakefield, pursuant to a separate agreement between such parties. 16.25 Amendments. This Lease may be modified only in writing, signed by the parties in interest at the time of the modification. 16.26 Multiple Parties. Except as otherwise expressly provided herein, if more than one person or entity is named herein as Tenant, the obligations of such persons shall be the joint and several responsibility of all persons or entities named herein as such Tenant. 16.27 Authority. Each person signing on behalf of Landlord or Tenant warrants and represents that she or is authorized to execute and deliver this Lease and to make it a binding obligation of Landlord or Tenant. 16.28 Right of First Offer. So long as (i) there then exists no Default of Tenant, (ii) the initially named Tenant pursuant to Section 1.1 hereof (and any successor of Tenant by merger or any other entity which controls, is controlled by or is under common control with the Tenant set forth in Section 1.1 above) shall occupy the entire Premises, and (iii) this Lease is still in full force and effect, then if Landlord shall desire to lease all or any space within the Building for a period commencing on or after the Commencement Date, Landlord shall so notify Tenant, and shall identify the space available (the "Offered Space") together with the rental rate and other terms and conditions (collectively, the "Terms") under which in good faith it intends to offer such space to third parties and the date on which such Offered Space is expected to be available. Tenant may irrevocable elect to lease the Offered Space on the Terms by giving notice thereof to Landlord within five (5) days after Tenant's receipt of notice from Landlord of the Terms. If Tenant shall have so elected to lease the Offered Space, it shall enter into an amendment to this Lease within ten (10) days after it shall have received the same from Landlord, confirming the lease of such Offered Space to Tenant on the Terms, Tenant acknowledging, however, that the term applicable to such Offered Space may not coincide with the term applicable to the Premises initially demised hereunder. If Tenant shall fail to give notice of its election to lease the Offered Space within the aforesaid 5-day period, then Tenant shall have no further rights under this Section and Landlord shall thereafter be free to lease any or all of such Offered Space or any other space in the Building to a third party or parties from time to time on such terms and conditions as it may deem appropriate, it being agreed that time is of the essence with respect to the exercise of Tenant's rights under this Section. For purposes of the first sentence of this Section, the term "lease" shall not include (a) the leasing of any space then leased to or occupied -26- by, or the extension or renewal of a lease with, any then existing tenant or occupant, (b) the exercise of any expansion option, right of first offer, or right of first refusal by any tenant of the Industrial Center pursuant to a lease in effect prior to the date of this Lease, or (c) the lease of any space to any entity controlling, controlled by or under common control with, or otherwise affiliated with Landlord. The parties hereto have executed this Lease at the place and on the dates specified above their respective signatures. LANDLORD: TENANT: KEEP YOUR DAY JOB, LLC SMARTERKIDS.COM, a Delaware corporation a Delaware limited liability company Name: By: MANSFIELD LAND LLC Title: a Massachusetts limited liability company Its: Manager By: NDNE REALTY, INC. a Massachusetts corporation Its: Manager By:_____________________________ Name: Its: AMB PROPERTY, L.P. a Delaware limited partnership By: AMB PROPERTY CORPORATION a Maryland corporation By: ________________________ Name: Cynthia J. Sarver Its: Vice President Attention: Robert Cahill, CFO 15-19 Crawford Street Needham, MA 02192 Telephone: ( ) Telephone: ( ) Facsimile: ( ) Facsimile: ( ) Executed at: Executed at: -27- LANDLORD'S REMEDIES IN EVENT OF TENANT DEFAULT ADDENDUM This Remedies Addendum is part of the Lease dated ______________________ by and between KEEP YOUR DAY JOB LLC and SMARTERKIDS.COM for the premises known as 145 Plymouth Street, Mansfield, MA. (a) TERMINATION. In the event of any Default by Tenant, Landlord and the agents and servants of Landlord may, in addition to and not in derogation of any remedies for any preceding breach of covenant, immediately or at any time thereafter give notice to Tenant terminating this Lease and the term hereof, which notice shall specify the date of termination, whereupon on the date so specified the term of this Lease and all of Tenant's rights and privileges under this Lease shall expire and terminate, but Tenant shall remain liable as hereinafter provided. (b) REMEDIES. In the event of any termination due to a Default by Tenant, Tenant shall pay the Base Rent, Additional Rent and other charges payable hereunder up to the time of such termination, and thereafter, Tenant, until the end of what would have been the term of this Lease in the absence of such termination and whether or not the Premises shall have been relet, shall be liable to Landlord for, and shall pay to Landlord, as current damages, the Base Rent, Additional Rent and other charges which would be payable hereunder for the remainder of this Lease if such termination had not occurred, less the proceeds, if any, of any reletting of the Premises, after deducting all expenses in connection with such reletting, including, without limitation, all repossession costs, brokerage commissions, legal expenses, attorneys' fees, advertising, expenses of employees, alteration costs and expenses of preparation for such reletting. Tenant shall pay such current damages to Landlord monthly on the days on which the Base Rent would have been payable hereunder if this Lease had not been terminated. At any time after such termination, in lieu of all such current damages beyond the date of such demand, at Landlord's election Tenant shall pay to Landlord either (i) an amount equal to the excess, if any, of the Base Rent, Additional Rent and other charges as hereinbefore provided which would be payable hereunder from the date of such demand for what would be the then unexpired term of this Lease if the same remained in effect, over the then fair net rental value of the Premises for the same period or (ii) an amount equal to the lesser of (x) the Base Rent, Additional Rent and other charges that would have been payable for the balance of the term of this Lease had it not been terminated or (y) the aggregate of the Base Rent, Additional Rent and other charges accrued in the twelve (12) months ended next prior to such termination (without reduction for any free rent or other concession or abatement) except that in the event the term of this Lease is so terminated prior to the expiration of the first full year of the term of this Lease, the liquidated damages which Landlord may elect to recover pursuant to clause (ii) (y) of this paragraph shall be calculated as if such termination had occurred on the first anniversary of the Commencement Date and there had been no so-called free rent or other rental concession or any rental abatement. Nothing contained in this Lease shall, however, limit or prejudice the right of Landlord to prove for and obtain in proceedings for bankruptcy or insolvency by reason of the termination of this Lease, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, the damages are to be proved, whether or not the amount be greater than, equal to, or less than the amount of the loss or damages referred to above. In case of any Default of Tenant, re-entry, expiration and dispossession by summary proceedings or otherwise, Landlord may (i) relet 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 equal to or less than or exceed the period which would otherwise have constituted the balance of the term of this Lease and may grant concessions or free rent to the extent that Landlord considers advisable and necessary to relet the same and (ii) may make such reasonable alterations, repairs and decorations in the Premises as Landlord in its sole judgment considers advisable and necessary for the purpose of reletting the Premises; and the making of such alterations, repairs and decorations shall not operate or be construed to release Tenant from liability hereunder as aforesaid. Landlord shall in no event be liable in any way whatsoever for failure to relet the Premises, or, in the event that the Premises are relet, for failure to collect the rent under such reletting. To the fullest extent permitted by law, Tenant hereby expressly waives any and all rights of redemption granted under any present or future laws in the event of Tenant being evicted or dispossessed, or in the event of Landlord obtaining possession of the Premises, by reason of the violation by Tenant of any of the covenants and conditions of this Lease. (c) REMEDIES CUMULATIVE. Except as expressly provided above, any and all rights and remedies which Landlord may have under this Lease, and at law and equity (including without limitation actions at law for direct, indirect, special and consequential (foreseeable and unforeseeable) damages, for Tenant's failure to comply with its obligations under this Lease shall be cumulative and shall not be deemed inconsistent with each other, and any two or more of all such rights and remedies may be exercised at the same time insofar as permitted by law. (d) NO SURRENDER. No act or conduct of Landlord, whether consisting of the acceptance of the keys to the Premises, or otherwise, shall be deemed to be or constitute an acceptance of the surrender of the Premises by Tenant prior to the expiration of the Term, and such acceptance by Landlord of surrender by Tenant shall only flow from and must be evidenced by a written acknowledgment of acceptance of surrender signed by Landlord. The surrender of this Lease by Tenant, voluntarily or otherwise, shall not work a merger unless Landlord elects in writing that such merger take place, but shall operate as an assignment to Landlord of any and all existing subleases, or Landlord may, at its option, elect in writing to treat such surrender as a merger terminating Tenant's estate under this Lease, and thereupon Landlord may terminate any or all such subleases by notifying the sublessee of its election so to do within five (5) days after such surrender. (e) LANDLORD'S CURE RIGHTS. Landlord shall have the right, but shall not be required, to pay such sums or do any act which requires the expenditure of monies which may be necessary or appropriate by reason of the failure or neglect of Tenant to comply with any of its obligations under this Lease, and in the event of the exercise of such right by Landlord, Tenant agrees to pay to Landlord forthwith upon demand all such sums including reasonable attorneys fees, together with interest thereon at a rate equal to the lesser of 6% over the Prime Rate or the maximum rate allowed by law. Landlord shall not exercise such right unless either a Default (as defined in Section 13) has occurred or the breach by Tenant has resulted in an imminent threat to life or property or exposure of Landlord to actual or potential liability. "Prime Rate" shall mean the annual floating rate of interest, determined daily and expressed as a percentage from time to time announced by the largest national or state-chartered banking institution in the state or district in which the Building is located as its "prime" or "base" rate. -2- TENANT INITIALS LANDLORD INITIALS - ---------------------- --------------------- -3- KEEP YOUR DAY JOB, LLC, A DELAWARE LIMITED LIABILITY COMPANY INDUSTRIAL MULTI-TENANT LEASE OPTION TO EXTEND This Option to Extend is a part of the Lease dated ______________________, by and between KEEP YOUR DAY JOB, LLC ("Landlord") and ____________________________ ("Tenant") for the premises commonly known as ________________________________. 1. OPTION TO EXTEND. Landlord hereby grants to Tenant the option to extend the term of this Lease for the one (1) additional period of five (5) years, commencing on the date immediately following the Expiration Date. 2. Exercise Dates: For purposes of Paragraph 5 of this Addendum, the Last Exercise Date is twelve (12) months prior to the date that the Option Period would commence. 3. Monthly Base Rent. The monthly Base Rent for each month of the Option Period shall be the amount calculated in accordance with the alternative selected below ("Rent Adjustment Alternative"), but in no event shall the monthly Base Rent for the Option Period be less than the highest monthly Base Rent payable during the term immediately preceding the Option Period. [ ] Fixed rent adjustment ("Fixed Rent Adjustment") $ shall be the monthly Base Rent for Period One. $ shall be the monthly Base Rent for Period Two. $ shall be the monthly Base Rent for Period Three. $ shall be the monthly Base Rent for Period Four. $ shall be the monthly Base Rent for Period Five. [ ] Cost of living adjustment ("CPI Adjustment") Monthly Base Rent shall be calculated using the following CPI index ("Index") [ ] Urban Wage Earners and Clerical Workers [ ] All Urban Consumers [ ] The Comparison Month is: [ ] the first month of the term of this Lease; or [ ] [X] Market rent ("Market Rent Adjustment") 4. Conditions to Exercise of Option. Tenant's right to extend is conditioned upon and subject to each of the following: A. In order to exercise the option to extend, Tenant must give written notice of such election to Landlord and Landlord must receive the same by the Last Exercise Date and not sooner than three (3) months prior thereto. If proper notification of the exercise of the option is not given and/or received, such option shall automatically expire. Tenant acknowledges that because of the importance to Landlord of knowing no later than the Last Exercise Date whether or not Tenant will exercise the option, the failure of Tenant to notify Landlord by the Last Exercise Date will conclusively be presumed an election by Tenant not to exercise the option. B. Landlord may elect to revoke Landlord's rights hereunder (i) if Tenant is in Default at the time of the exercise of the option or (ii) in the event that Landlord has given to Tenant 3 or more notices of separate Defaults during the 12 month period immediately preceding the exercise of the option, whether or not the Defaults are cured. The period of time within which the option may be exercised shall not be extended or enlarged by reason of Tenant's inability to exercise the option because of the provisions of this paragraph. C. All of the terms and conditions of this Lease except where specifically modified by this Addendum shall apply, except that there shall be no further right to extend the term hereof. D. The option is personal to the named Tenant as set forth in Section 1.1 above (or any successor of the Tenant named in Section 1.1 hereof by merger or consolidation or any assignee permitted by Section 12(b), and cannot be assigned or exercised by anyone other than the Tenant named in Section 1.1 or any successor by merger or consolidation, and only while the Tenant or such successor, Section 12(b) permitted assignee or any Affiliate is in full possession of the Premises and without the intention of thereafter assigning or subletting. 5 3. CALCULATION OF RENT ADJUSTMENT A. Market Rent Adjustment. Four months prior to the commencement of the Option Period, if the selected Rent Adjustment Alternative is the Market Rent Adjustment, the Parties shall negotiate in good faith to determine the Base Rent for the Option Period. If agreement cannot be reached within thirty days, then Landlord and Tenant shall each, no later then 90 days prior to the commencement of the Option Period, make a reasonable determination of the fair market rental for the Premises for the Option Period and submit such determination, in writing, to arbitration in accordance with the following provisions: (i) No later then 90 days prior to the commencement of the Option Period, Landlord and Tenant shall each select an industrial leasing broker to act as an arbitrator. The two arbitrators so appointed shall, no later then 75 days prior to the commencement of the Option Period, select a third mutually acceptable industrial leasing broker to act as a third arbitrator. (ii) The three arbitrators, acting by a majority, shall no later then 75 days prior to the commencement of the Option Period, determine the actual fair market rental for the Premises for the Option Period. The decision of a majority of the arbitrators shall be binding on the Parties. The fair market rental determination of Landlord or Tenant which is closest to the fair market rental as determined by the arbitrators shall be the Base Rent for the Option Period. (iii) If either of the Parties fails to appoint an arbitrator within the period required by this Addendum, the arbitrator timely appointed shall determine the Base Rent for the Option Period. -5- (iv) The entire cost of such arbitration shall be paid by the party whose fair market rental submission is not selected. LANDLORD: TENANT: KEEP YOUR DAY JOB, LLC SMARTERKIDS.COM By: MANSFIELD LAND LLC Name: a Massachusetts limited liability company Title: Its: Manager By: NDNE REALTY, INC. a Massachusetts corporation Its: Manager By: ___________________ Name: Its: AMB PROPERTY, L.P. a Delaware limited partnership By: AMB PROPERTY CORPORATION a Maryland corporation By: _________________________ Name: Cynthia J. Sarver Its: Vice President -6- KEEP YOUR DAY JOB, LLC, A DELAWARE LIMITED LIABILITY COMPANY INDUSTRIAL MULTI-TENANT LEASE EARLY POSSESSION AND INDUCEMENT RECAPTURE ADDENDUM This Early Possession and Inducement Recapture Addendum is a part of the Lease dated _______________________________, by and between KEEP YOUR DAY JOB, LLC ("Landlord") and SMARTERKIDS.COM ("Tenant") for the premises commonly known as - ------------------------------. EARLY POSSESSION. For the purpose of installation of Tenant's office furniture, equipment and warehouse equipment, Tenant may enter the Premises from and after April 3,2000 ("Early Possession Date") even though the Early Possession Date is prior to the Commencement Date of the Lease ("Early Possession"), but only to the extent that such Early Possession does not interfere with Landlord's construction at the Industrial Center. The obligation to pay Base Rent and Tenant's Share of Operating Expenses shall be abated for the Early Possession Period. All other terms of this Lease, however, including but not limited to the obligations to carry the insurance required by Paragraph 8 shall be in effect during the Early Possession period. Such Early Possession shall not change the Expiration Date of the Original Term. If possession is not tendered to Tenant on the Early Possession Date, the Early Possession period shall run from the date of delivery of possession and continue for a period equal to the period during which the Tenant would have otherwise enjoyed under the terms hereof possession of the Premises with abated Base Rent, but minus any days of delay caused by the acts, failure to act, or omissions of Tenant. LANDLORD: TENANT: KEEP YOUR DAY JOB, LLC SMARTERKIDS.COM By:___________________________ a Delaware limited liability company Name: By: MANSFIELD LAND LLC Title: a Massachusetts limited liability company Its: Manager By: NDNE REALTY, INC. a Massachusetts corporation Its: Manager By: _________________________ Name: Its: AMB PROPERTY, L.P. a Delaware limited partnership By: AMB PROPERTY CORPORATION a Maryland corporation By: _______________________ Name: Cynthia J. Sarver Its: Vice President -8- EXHIBIT A [Diagram of Premises] EXHIBIT B COMMENCEMENT DATE MEMORANDUM LANDLORD: KEEP YOUR DAY JOB, LLC TENANT: ___________________________________ LEASE DATE: _________________, ____ PREMISES: ___________________________________ ___________________________________ Tenant hereby accepts the Premises as being in the condition required under the Lease. The Commencement Date of the Lease is _______________________, ____. The Expiration Date of the Lease is _______________________, ____. LANDLORD: TENANT: KEEP YOUR DAY JOB, LLC SMARTERKIDS.COM, a Delaware corporation a Delaware limited liability company By: MANSFIELD LAND LLC a Massachusetts limited liability company Its: Manager By: NDNE REALTY, INC. a Massachusetts corporation Its: Manager By: _____________________________ Name: Its: AMB PROPERTY, L.P. a Delaware limited partnership By: AMB PROPERTY CORPORATION a Maryland corporation By: __________________________ Name: Cynthia J. Sarver Its: Vice President By:______________________________ Name: Title: Telephone: ( ) Telephone: ( ) Facsimile: ( ) Facsimile: ( ) Executed at: Executed at: on: on: -11- EXHIBIT C TENANT MOVE-IN AND LEASE RENEWAL ENVIRONMENTAL QUESTIONNAIRE FOR COMMERCIAL AND INDUSTRIAL PROPERTIES PROPERTY NAME: ______________________________________________________________ PROPERTY ADDRESS: ___________________________________________________________ EXHIBIT ________ TO THE LEASE DATED __________________ BETWEEN --------------------------------------- ("LESSEE") AND --------------------------------------- ("LESSOR") Instructions: The following questionnaire is to be completed by the Tenant Representative with knowledge of the planned/existing operations for the specified building/location. A copy of the completed form must be attached to all new leases and renewals, and forwarded to the Owner's Risk Management Department. Please print clearly and attach additional sheets as necessary. 1.0 PROCESS INFORMATION Describe planned use (new Lease) or existing operations (lease renewal), and include brief description of manufacturing processes employed. 2.0 HAZARDOUS MATERIALS Are hazardous materials used or stored? If so, continue with the next question. If not, go to Section 3.0. 2.1 Are any of the following materials handled on the property? Yes____ No____ (A material is handled if it is used, generated, processed, produced, packaged, treated, stored, emitted, discharged, or disposed.) If so, complete this section. If this question is not applicable, skip this section and go on to Section 5.0. : Explosives : Fuels : Oils : Solvents : Oxidizers : Organics/Inorganics : Acids : Bases : Pesticides : Gases : PCBs : Radioactive Materials : Other (please specify) 2-2. If any of the groups of materials checked in Section 2.1, please list the specific material(s), use(s), and quantity of each chemical used or stored on the site in the Table below. If convenient, you may substitute a chemical inventory and list the uses of each of the chemicals in each category separately. - ------------------------------------------------------------------------------- MATERIAL PHYSICAL STATE USAGE CONTAINER SIZE NUMBER OF TOTAL QUANTITY (SOLID, LIQUID, CONTAINERS OR GAS) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- MATERIAL PHYSICAL STATE USAGE CONTAINER SIZE NUMBER OF TOTAL QUANTITY (SOLID, LIQUID, CONTAINERS OR GAS) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 2-3. Describe the planned storage area location(s) for these materials. Please include site maps and drawings as appropriate. 3.0 HAZARDOUS WASTES Are hazardous wastes generated? Yes____ No____ If yes, continue with the next question. If not, skip this section and go to section 4.0. -2- TENANT MOVE-IN AND LEASE RENEWAL QUESTIONNAIRE 3.1 Are any of the following wastes generated, handled, or disposed of (where applicable) on the property? : Hazardous Wastes : Industrial Wastewater : Waste Oils : PCBs : Air Emissions : Sludges : Regulated Wastes : Other (please specify) 3-2. List and quantify the materials identified in Question 3-1 of this section. - ------------------------------------------------------------------------------- WASTE RCRA SOURCE APPROXIMATE WASTE DISPOSITION GENERATED LISTED MONTHLY CHARACTERIZATION WASTE? QUANTITY - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 3-3. Please include name, location, and permit number (e.g., EPA ID No.) for transporter and disposal facility, if applicable). Attach separate pages as necessary. - ------------------------------------------------------------------------------- TRANSPORTER/DISPOSAL FACILITY LOCATION TRANSPORTER (T) OR PERMIT NUMBER FACILITY NAME DISPOSAL (D) FACILITY - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 3-4. Are pollution controls or monitoring employed in the process to prevent or minimize the release of wastes into the environment? Yes ____ No____ If so, please describe. 4.0 USTS/ASTS 4.1 Are underground storage tanks (USTs), aboveground storage tanks (ASTs), or associated pipelines used for the storage of petroleum products, chemicals, or liquid wastes present on site (lease renewals) or required for planned operations (new tenants)? Yes____ No____ If not, continue with section 5.0. If yes, please describe capacity, contents, age, type of the USTs or ASTs, as well any associated leak detection/spill prevention measures. Please attach additional pages if necessary. - ------------------------------------------------------------------------------- CAPACITY CONTENTS YEAR TYPE (STEEL, ASSOCIATED LEAK DETECTION INSTALLED FIBERGLASS, ETC.) /SPILL PREVENTION MEASURES* - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- *Note: The following are examples of leak detection/spill prevention measures: Integrity testing Inventory reconciliation Leak detection system Overfill spill protection Secondary containment Cathodic protection - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 4-2. Please provide copies of written tank integrity test results and/or monitoring documentation, if available. 4-3. Is the UST/AST registered and permitted with the appropriate regulatory agencies? Yes____ No____ If so, please attach a copy of the required permits. -3- 4-4. If this Questionnaire is being completed for a lease renewal, and if any of the USTs/ASTs have leaked, please state the substance released, the media(s) impacted (e.g., soil, water, asphalt, etc.), the actions taken, and al remedial responses to the incident. -4- TENANT MOVE-IN AND LEASE RENEWAL QUESTIONNAIRE 4-4. If this Questionnaire is being completed for a lease renewal, have USTs/ASTs been removed from the property? Yes____ No____ If yes, please provide any official closure letters or reports and supporting documentation (e.g., analytical test results, remediation report results, etc.). 4-6. For Lease renewals, are there any above or below ground pipelines on site used to transfer chemicals or wastes? Yes____ No____ For new tenants, are installations of this type required for the planned operations? Yes____ No____ If yes to either question, please describe. 5.0 ASBESTOS CONTAINING BUILDING MATERIALS Please be advised that this property participates in an Asbestos Operations and Maintenance Program, and that an asbestos survey may have been performed at the Property. If provided, please review the information that identifies the locations of known asbestos containing material or presumed asbestos containing material. All personnel and appropriate subcontractors should be notified of the presence of these materials, and informed not to disturb these materials. Any activity that involves the disturbance or removal of these materials must be done by an appropriately trained individual/contractor. 6.0 REGULATORY 6-1. For Lease Renewals, are there any past, current, or pending regulatory actions by federal, state, or local environmental agencies alleging noncompliance with regulations? Yes____ No____ If so, please describe. 6-2. For lease renewals, are there any past, current, or pending lawsuits or administrative proceedings for alleged environmental damages involving the property, you, or any owner or tenant of the property? Yes____ No____ If so, please describe. 6-3. Does the operation have or require a National Pollutant Discharge Elimination System (NPDES) or equivalent permit? Yes____ No____ If so, please attach a copy of this permit. 6-4. For Lease renewals, have there been any complaints from the surrounding community regarding facility operations? Yes____ No____ Have there been any worker complaints or regulatory investigations regarding hazardous material exposure at the facility? Yes____ No____ If so, please describe status and any corrective actions taken. Please attach additional pages as necessary. 6-5. Has a Hazardous Materials Business Plan been developed for the site? Yes____ No____ If so, please attach a copy. CERTIFICATION I am familiar with the real property described in this questionnaire. By signing below, I represent and warrant that the answers to the above questions are complete and accurate to the best of my knowledge. I also understand that the Owner -5- will rely on the completeness and accuracy of my answers in assessing any environmental liability risks associated with the property. Signature: Name:_______________________________ Title:______________________________ Date:_______________________________ Telephone:__________________________ PLEASE PROVIDE A COPY OF THE COMPLETED QUESTIONNAIRE TO: Mr. Steve Campbell KEEP YOUR DAY JOB, LLC 505 Montgomery Street, Fifth Floor San Francisco, CA 94111 -6- EXHIBIT D TENANT MOVE-OUT ENVIRONMENTAL QUESTIONNAIRE FOR COMMERCIAL AND INDUSTRIAL PROPERTIES PROPERTY NAME: _______________________________________________________ PROPERTY ADDRESS: ____________________________________________________ BUILDING / SUITE NUMBER(S): __________________________________________ Instructions: The following questionnaire is to be completed by the Property Manager prior to/after the Tenant vacates a building/suite or location. A copy of the completed form must be forwarded to the Owner's Risk Management Department. Please print clearly and attach additional sheets as necessary. 1.0 GENERAL INFORMATION Property Manager: Property Management Company: Regional Manager: 2.0 TENANT INFORMATION Name of Former Tenant: Lease Date: ___________________ Move-out Date: ________________ 3.0 INDOOR INSPECTION The Property Manager is expected to inspect the vacant building/suite of the tenant. A pre-vacate "inspection" should be performed in advance of the tenant moving out to ensure that potential environmental issues requiring tenant response are addressed. Areas that are inaccessible should be noted. The Property Manager should check the interior of all closets and storage cabinets for items left by the vacated tenant. 3.1 Upon entering the vacated building(s)/suite(s), did you note any unusual odors? Yes____ No____ If yes, please provide a brief description of the odor (rotten eggs, chemical, etc.), and note possible sources of the odor: ---------------------------------------------------------------------- ---------------------------------------------------------------------- ---------------------------------------------------------------------- 3.2 Were any chemicals, including janitorial supplies left in the building/suite(s)? Yes____ No____ If yes, please provide a list of the items, note their location and note whether any leakage or staining is apparent (please attach additional sheets as necessary): ---------------------------------------------------------------------- ---------------------------------------------------------------------- ---------------------------------------------------------------------- 3.3 Are there any known or suspect environmental conditions associated with the tenant's former activities at the building/suite? If yes, please identify the location and nature of the environmental conditions: ---------------------------------------------------------------------- ---------------------------------------------------------------------- ---------------------------------------------------------------------- 4.0 OUTDOOR INSPECTION The Property Manager is expected to inspect the exterior and perimeter of the vacant building/suite of the former tenant. 4.1 Please check each of the applicable items, if observed outside the former tenant's building/suite: : Drums or Other Containers : Leakage from Transformers : Dumping of Trash/Debris/Wastes : Leakage from Trash Compactor Oil Reservoir : Stained Soils/Pavement : Other (Specify):__________________________ : Stressed or Stained Vegetation
For each item checked above, please describe the location, provide a brief description and estimate the approximate quantity or amount (Attach additional sheets as necessary.): - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 4.2 Are underground storage tanks (USTs), aboveground storage tanks (ASTs), or associated pipelines used for the storage of--either petroleum products, chemicals, or liquid wastes present at the vacating tenant's building/suite? Yes____ No____ If yes, please describe capacity, contents, age, type of the USTs or ASTs, as well any associated leak detection/spill prevention measures. Please attach additional pages if necessary. -2- TENANT MOVE-OUT ENVIRONMENTAL QUESTIONNAIRE - ------------------------------------------------------------------------------- CAPACITY CONTENTS YEAR TYPE (STEEL, ASSOCIATED LEAK DETECTION INSTALLED FIBERGLASS, ETC.) /SPILL PREVENTION MEASURES* - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- *Note: The following are examples of leak detection/spill prevention measures: Integrity testing Inventory reconciliation Leak detection system Overfill spill protection Secondary containment Cathodic protection
4.2.1 Please provide copies of the most recent written tank integrity test results and/or monitoring documentation, if available. 4.2.2 Are there any documented releases associated with the USTs/ASTs? Yes____ No____ If so, please state the substance released, the media(s) impacted (e.g., soil, water, asphalt, etc.), the actions taken, and all remedial responses to the incident (Please attach additional sheets as necessary.): ------------------------------------------------------------- ------------------------------------------------------------- ------------------------------------------------------------- ------------------------------------------------------------- 4.3 Have USTs/ASTs been removed from the vacated tenant's building/suite? Yes____ No____ If yes, please provide any official closure letters or reports and supporting documentation (e.g., analytical test results, remediation report results, etc.) unless previously provided. 5.0 ASBESTOS CONTAINING BUILDING MATERIALS If an asbestos survey is available for the property, please review the information that identifies the locations of known asbestos containing material or presumed asbestos containing material. Please note that any tenant activity that may have involved the disturbance or removal of these materials must be done by an appropriately trained individual/contractor. If the available asbestos survey results indicate that asbestos containing materials (ACMs), and/or presumed asbestos containing materials (PACMs) have been identified in the building/suite, please inspect those materials and note those that are damaged in the space below: ---------------------------------------------------------------------- ---------------------------------------------------------------------- ---------------------------------------------------------------------- 6.0 REGULATORY 6.1 Are there any past, current, or pending regulatory actions by federal, state, or local environmental agencies alleging that the vacated tenant is in noncompliance with regulations? Yes____ No____ If so, please describe. ---------------------------------------------------------------------- ---------------------------------------------------------------------- ---------------------------------------------------------------------- PREPARED BY: PLEASE FORWARD THE COMPLETED QUESTIONNAIRE TO: Signature: ____________________________ Mr. Steve Campbell KEEP YOUR DAY JOB, LLC Name: ____________________________ 505 Montgomery Street, Fifth Floor San Francisco, CA 94111 Date: ____________________________ -3- Title: ____________________________ Company: ____________________________ Telephone: ____________________________ Fax: ____________________________ -4- EXHIBIT E Form of Estoppel Certificate TO: DATE: Reference is made to that certain Commercial Multi-Tenant Lease (the "Lease") dated ___________________- by and between ___________________________, as Landlord, ______________________________________, as Tenant, covering certain premises known as ___________________________________________________, as further described in the Lease. Tenant hereby certifies to and agrees with ____________________________ that: 1. The Lease is in full force and effect, and has not been modified, amended, terminated or superseded in any manner, except as follows: ___________________________; 2. The Lease was executed on __________________ and will expire ______ years from the Commencement Date, to wit, on or about __________________ (not including ____ option periods of ____ years each which, if all exercised, would extend the Term until - -------------------); 3. Tenant has no offsets or defenses to its performance of the terms and conditions of the Lease, including the payment of Rent, and there are no modifications or agreements with regard to the Rent set forth in the Lease except (insert "NONE" if there are no modifications or other agreements): _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________ 4. Tenant has accepted possession of the Premises subject to the terms of the Lease; 5. Tenant has not and will not pay Rent more than one (1) month in advance to Landlord; 6. Tenant will not look to __________________________________________ for any security deposits paid to Landlord under the Lease unless such deposits have been received in cash by _______________________________________________; 7. Tenant agrees that, without the written consent of ________________________, Tenant will not modify or alter the terms of the Lease; 8. None of the following events have occurred: (a) the filing by or against Tenant of a petition in bankruptcy, insolvency, reorganization, or an action for the appointment of a receiver or trustee; or (b) the making of an assignment for the benefit of creditors. KEEP YOUR DAY JOB, LLC, A DELAWARE LIMITED LIABILITY COMPANY INDUSTRIAL MULTI-TENANT LEASE COMMENCEMENT DATE ADDENDUM The "Commencement Date" shall be the date upon which Landlord receives a temporary certificate of occupancy the Premises (excluding, to the extent applicable, the Office Space) and all of Landlord's Work except that relating to the Office Space (if applicable) has been substantially completed, i.e., completed except for items of work (and, if applicable, adjustment of equipment and fixtures), which can be completed after occupancy has been taken without causing undue interference with Tenant's use (i.e., so-called "punch list" items). Landlord agrees to complete as soon as conditions permit all "punch list" items and Tenant agrees to afford Landlord access to the Premises for such purposes. In the event that a temporary certificate of occupancy (as opposed to a permanent certificate of occupancy) is issued for the Premises, then Landlord shall diligently pursue to completion all conditions precedent to the issuance of a permanent certificate of occupancy imposed by the Town of Mansfield for the issuance of the same. If Landlord fails to diligently pursue and obtain a permanent certificate of occupancy for the Premises and, as a result thereof, Tenant is ordered to cease and desist its use and occupancy of the Premises, then the Base Rent, Additional Rent and all other charges due under the Lease shall abate until a permanent certificate of occupancy is issued or Tenant is permitted to occupy the Premises. The provisions of this paragraph shall not apply if and to the extent the failure of Landlord to obtain any occupancy permit is due to the acts of Tenant or any Tenant Entity. Landlord: Tenant: KEEP YOUR DAY JOB, LLC SMARTERKIDS.COM, a Delaware corporation a Delaware limited liability company ________________________________________ By:______________________________ By: MANSFIELD LAND LLC Name: a Massachusetts limited Title: liability company Its: Manager By: NDNE REALTY, INC. a Massachusetts corporation Its: Manager By: ________________________ Name: Its: AMB PROPERTY, L.P. a Delaware limited partnership By: AMB PROPERTY CORPORATION a Maryland corporation By: _________________________ Name: Cynthia J. Sarver Its: Vice President -2- GLOSSARY The following terms in the Lease are defined in the paragraphs opposite the terms. TERM DEFINED IN PARAGRAPH Additional Rent 4.1 Applicable Requirements 6.3 Assign 12.1 Base Rent 1.4 Basic Provisions 1.1 Building 1.2 Building Operating Expenses 4.2(b) Code 12.1 Commencement Date 1.3 Commencement Date Certified 3.3 Common Areas 2.2 Common Area Operating Expenses 4.2(b) Condemnation 14 Default 13.1 Expiration Date 1.3 Hazardous Substance 6.2 Indemnity 8.5 Industrial Center 1.2 Landlord 1.1 Landlord Entities 6.2(c) Lease 1.1 Lenders 6.4 Mortgage 16.18 Operating Expenses 4.2 Party/Parties 1.1 Permitted Use 1.8 Premises 1.2 Prevailing Party 16.13 Real Property Taxes 10.2 Rent 4.1 Reportable Use 6.2 Requesting Party 15 Responding Party 15 Rules and Regulations 2.4 Security Deposit 1.7, 5 Taxes 10.2 Tenant 1.1 Tenant Acts 9.2 Tenant's Share 1.5 Term 1.3 Use 6.1 EX-27.1 3 0003.txt FINANCIAL DATA SCHEDULE
5 1,000 6-MOS 6-MOS DEC-31-2000 DEC-31-1999 JAN-01-2000 JAN-01-1999 JUN-30-2000 JUN-30-1999 13,100 687 28,400 0 148 311 27 27 6,624 241 2,206 398 5,310 70 589 14 57,235 1,759 8,512 5,242 0 0 0 0 0 10,287 205 12 47,572 (13,782) 57,235 1,759 2,997 387 2,997 387 2,250 279 2,250 279 18,444 7,455 0 0 58 2 (16,215) (7,295) 0 0 (16,215) (7,295) 0 0 0 0 0 0 (16,215) (7,295) (0.79) (4.43) (0.79) (4.43)
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