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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 17, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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COMPUTER LITERACY, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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DELAWARE 5995 77-0389480
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
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1308 ORLEANS DRIVE
SUNNYVALE, CALIFORNIA 94089
(408) 541-2020
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL PLACE
OF BUSINESS)
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CHRIS MACASKILL
CHIEF EXECUTIVE OFFICER
COMPUTER LITERACY, INC.
1308 ORLEANS DRIVE
SUNNYVALE, CALIFORNIA 94089
(408) 541-2020
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
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COPIES TO:
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ROBERT V. GUNDERSON, JR., ESQ. NORA L. GIBSON, ESQ.
RALPH L. ARNHEIM III, ESQ. MICHAEL A. ZUERCHER, ESQ.
SUSAN M. GIORDANO, ESQ. PETER S. BUCKLAND, ESQ.
FRANK GRANT, ESQ. BROBECK, PHLEGER & HARRISON LLP
GUNDERSON DETTMER STOUGH SPEAR STREET TOWER
VILLENEUVE FRANKLIN & HACHIGIAN, LLP ONE MARKET
155 CONSTITUTION DRIVE SAN FRANCISCO, CA 94105
MENLO PARK, CALIFORNIA 94025 (415) 442-0900
(650) 321-2400
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
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If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED
MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AGGREGATE AMOUNT OF
TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
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Common Stock, $0.001 par value per share.................... $27,000,000 $7,506
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(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
The information in this prospectus is not complete and may be changed. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. We may not sell these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities and we are
not soliciting an offer to buy these securities in any state where the offer or
sale is not permitted.
SUBJECT TO COMPLETION, DATED NOVEMBER 17, 1998
3,000,000 SHARES
LOGO
COMMON STOCK
This is the initial public offering of Computer Literacy, Inc. ("Computer
Literacy" or the "Company") and we are offering 3,000,000 shares of our common
stock. No public market currently exists for our shares. We anticipate that the
initial public offering price will be between $7.00 and $9.00 per share.
We have applied to list the common stock on the Nasdaq National Market
under the symbol "CMPL."
INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 5.
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Per Share Total
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Public Offering Price.................................... $ $
Underwriting Discounts and Commissions................... $ $
Proceeds to Computer Literacy............................ $ $
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THE DISCLOSURES IN THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
Computer Literacy has granted the Underwriters the right to purchase up to
450,000 additional shares to cover any over-allotments.
------------------------
NationsBanc Montgomery Securities LLC
Piper Jaffray Inc.
Needham & Company, Inc.
, 1998.
<PAGE> 3
ART WORK
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OFFERED HEREBY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF THE
COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and Financial Statements and notes thereto appearing elsewhere in
this Prospectus.
This Prospectus contains forward-looking statements. The outcome of the
events described in these forward-looking statements is subject to risks and the
actual outcome could differ materially. The sections entitled "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Business" as well as those discussed elsewhere in this
Prospectus contain a discussion of some of the factors that could contribute to
these differences. As used in this Prospectus, the "Company" and "Computer
Literacy" refer to Computer Literacy, Inc., a Delaware corporation, and its
California predecessor. Unless otherwise indicated, all information in this
Prospectus (1) reflects the 4-for-1 reverse stock split of the outstanding
shares of Common Stock and Preferred Stock, authorized by the Board of Directors
on August 25, 1998; (2) gives effect to the conversion of all outstanding shares
of Preferred Stock into shares of Common Stock effective upon the closing of the
offering and (3) assumes no exercise of the Underwriters' over-allotment option.
THE COMPANY
We are the leading online retailer of information resources singularly
focused on the technical professional. With over 300,000 information resource
titles from more than 8,000 publishers, we offer our customers online access to
a broad and comprehensive selection of technical books, technology based
training solutions, product manuals, research reports and other information
resources. In addition to our extensive product offering, our online store
features authoritative and compelling content, competitive pricing, an easy-
to-use navigational interface and a variety of value-added services. We also
operate three physical retail stores that complement our online business by
generating increased online traffic, building our brand and creating
cross-promotional opportunities, thereby providing a profitable means of
customer acquisition.
Organizations increasingly seek technology solutions for competitive
advantages and rely upon such solutions for mission-critical business processes.
As a result, the demand for technical professionals (i.e., network managers,
systems administrators, hardware engineers, graphics designers and professional
software programmers) has grown significantly. The need for such professionals
is expected to increase further as technology becomes more sophisticated and
organizations continue to adopt and integrate new technologies. In order to
remain knowledgeable with respect to the latest technical innovations and to
maximize the competitive advantages provided by these new technologies,
technical professionals must have access to an extensive selection of
immediately available information resources that are highly specific and contain
authoritative content. Such information resources, including technical books,
technology based training solutions, product manuals, research reports and other
information resources, traditionally have not been available from a single or
centralized source.
We have quickly become one of the most widely recognized online retailers
of information resources for the technical professional. By offering our
customers an extensive product selection, as well as competitive pricing and
excellent customer service, we believe we have achieved a leading position among
similar retailers. We also believe that the demographics of technical
professionals overlap one-to-one with those of Internet users, providing an
exceptional target market for our product offerings. To enhance our brand
recognition and increase online traffic, we have established a number of
strategic alliances with publishers and other suppliers of information resources
for technical professionals. For example, we have established an alliance with
CBT Group PLC ("CBT") to sell CBT's full library of technology based training
materials, containing over 600 titles. In addition, we have established
co-branded online stores with a number of technology companies, including Apple
Computer ("Apple"), Cisco Systems, Inc. ("Cisco"), Hewlett-Packard Company
("Hewlett-Packard"), Microsoft Corporation ("Microsoft"), SAP America, Inc.
("SAP") and Sun Microsystems, Inc. ("Sun Microsystems"). We believe that these
customized corporate online stores, combined with our commitment to customer
service and readily available product offerings, create valuable long-term
relationships and repeat purchasing patterns.
Since launching our online store in February 1996, we have experienced
rapid online revenue growth. For the two-year period ended July 31, 1998, we
have generated total online revenue of over $7.4 million (over $2.4 million of
which was generated during the three months ended July 31, 1998), representing a
compound average quarterly growth rate of approximately 175%. In addition, the
number of our online customers has grown from approximately 1,600 as of January
31, 1997 to over 44,000 as of July 31, 1998, and repeat purchases have accounted
for approximately 49% of our online revenue from our inception to July 31, 1998.
3
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THE OFFERING
Common Stock offered.................. 3,000,000 shares
Common Stock to be outstanding after
the offering.......................... 10,642,788 shares(1)
Use of proceeds....................... For capital expenditures, working
capital and general corporate
purposes, including expanding direct
sales, telesales and marketing
operations and systems and
infrastructure development
activities. See "Use of Proceeds."
Proposed Nasdaq National Market
symbol................................ CMPL
SUMMARY FINANCIAL AND OPERATING DATA
(IN THOUSANDS EXCEPT FOR SELECTED OPERATING DATA)
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YEAR ENDED
JANUARY 31, THREE MONTHS ENDED
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APRIL 30, JULY 31, OCT. 31, JAN. 31, APRIL 30, JULY 31,
1997 1998 1997 1997 1997 1998 1998 1998
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STATEMENT OF OPERATIONS DATA:
Revenues:
Online................................ $ 180 $ 3,021 $ 176 $ 444 $ 1,089 $ 1,312 $ 1,761 $ 2,464
Retail and other...................... - 7,927 71 2,192 3,124 2,540 2,633 2,351
----- -------- ----- ------ ------- ------- ------- -------
Total revenues.................... 180 10,948 247 2,636 4,213 3,852 4,394 4,815
Gross profit............................ 30 3,543 79 961 1,370 1,133 1,380 1,312
Loss from operations.................... (622) (3,183) (392) (617) (619) (1,555) (1,703) (2,033)
Net loss................................ $(567) $ (3,190) $(361) $ (625) $ (646) $(1,558) $(1,671) $(1,966)
SELECTED OPERATING DATA:
Total number of online customers(2)..... 1,614 19,979 3,445 6,741 12,796 19,979 29,115 44,302
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AS OF JULY 31, 1998
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ACTUAL AS ADJUSTED(3)
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BALANCE SHEET DATA:
Cash and equivalents................................................................................ $ 5,132 $ 26,652
Working capital..................................................................................... 6,881 28,401
Total assets........................................................................................ 15,436 36,956
Total stockholders' equity.......................................................................... 11,901 33,421
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(1) Excludes (i) 1,110,351 shares of Common Stock issuable upon exercise of
options outstanding as of July 31, 1998 under the 1996 Stock Plan with a
weighted average exercise price of $1.39 per share, (ii) 45,595 shares of
Common Stock available for grant under the 1996 Stock Plan as of such date,
(iii) 3,000,000 additional shares of Common Stock reserved for issuance
under the Company's 1998 Omnibus Equity Incentive Plan, (iv) 300,000
additional shares of Common Stock reserved for issuance under the Company's
1998 Employee Stock Purchase Plan and (v) 15,624 additional shares of Common
Stock issuable upon exercise of an outstanding warrant with an exercise
price of $2.40 per share. See "Management -- Stock Plans," "Description of
Capital Stock" and Note 6 of Notes to the Computer Literacy, Inc.
Consolidated Financial Statements (the "Financial Statements").
(2) Reflects the cumulative total number of customers who have purchased
products from the Company's online store as measured by their unique e-mail
addresses as of the end of the period indicated.
(3) As adjusted to give effect to the sale of the 3,000,000 shares of Common
Stock offered hereby at an assumed initial public offering price of $8.00
per share and after deducting estimated underwriting discount and estimated
offering expenses.
RECENT DEVELOPMENTS
Based on preliminary analysis of our operating results for the three months
ended October 31, 1998, we had online revenues of $2.9 million and retail and
other revenues of $2.3 million. The number of online customers has increased to
58,576 as of October 31, 1998. On September 28, 1998, the Company closed its
retail store in Cupertino, California.
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We were incorporated in California in November 1994, and reincorporated in
the State of Delaware in July 1998. Our principal executive offices are located
at 1308 Orleans Drive, Sunnyvale, California 94089 and our telephone number is
(408) 541-2020.
Our fiscal year ends on January 31. For purposes of the following
discussion the fiscal year ended January 31, 1996 is referred to as fiscal 1996,
the fiscal year ended January 31, 1997 is referred to as fiscal 1997, and the
fiscal year ended January 31, 1998 is referred to as fiscal 1998.
Computer Literacy, CL, CBooks and CBooks Express are trademarks of the
Company. This Prospectus also contains the trademarks of other companies which
are the property of their respective owners.
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RISK FACTORS
This offering and an investment in our Common Stock involve a high degree
of risk. In addition to the other information contained in this Prospectus, you
should carefully consider the following risk factors before investing in the
Common Stock. All statements, trend analysis and other information contained in
this Prospectus relative to markets for our products and trends in total
revenues, gross margin and anticipated expense levels, as well as other
statements including words such as "anticipate," "believe," "plan," "estimate,"
"expect" and "intend" and other similar expressions, constitute forward-looking
statements. These forward-looking statements are subject to business and
economic risks, and our actual results of operations may differ materially from
those contained in the forward-looking statements. The cautionary statements
made in this Prospectus should be read as applicable to all forward-looking
statements wherever they appear in this Prospectus.
LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT; ANTICIPATED LOSSES
We were incorporated in November 1994 to develop an online retail strategy
and we began selling information resources, initially consisting of technical
books, through our online store on the World Wide Web (the "Web") in February
1996. We expanded our product offerings to include training materials in January
1998, product manuals in May 1998 and research reports in June 1998.
Accordingly, we have a very limited operating history from which to evaluate our
business and prospects.
Our prospects must be considered in light of the risks, expenses and
uncertainties frequently encountered by companies in the early stages of
development, particularly companies in new and rapidly evolving markets such as
electronic commerce. Such risks for us may include:
- An evolving and unpredictable business model;
- Management of an expanding business;
- Fluctuations in sales;
- Seasonality;
- Entry into new business areas;
- Competition;
- Need for additional personnel and dependence on key personnel;
- Limitations on our ability to establish and expand our brand;
- Capacity constraints;
- Systems failures;
- Announcements by current or potential competitors;
- Changes in the needs of technical professionals; and
- The other Risk Factors discussed herein and elsewhere in this Prospectus.
To address these risks, we must, among other things:
- Implement and successfully execute our business and marketing strategy;
- Maintain and increase our customer base;
- Continue to develop and upgrade our technology and transaction-processing
systems;
- Improve our online store;
- Provide superior customer service and order fulfillment;
- Respond to competitive developments; and
- Attract, retain and motivate qualified personnel.
We may not be successful in addressing such risks, and the failure to do so
would seriously harm our business, financial condition and results of
operations.
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Since inception, we have incurred significant net operating losses and
expect to incur additional net operating losses for the foreseeable future. We
may not achieve profitability and if achieved profitability may not be
sustained. As of July 31, 1998, we had an accumulated deficit of $7.5 million.
We believe that our success will depend in large part on our ability to:
- Enhance our customers' online shopping experience;
- Expand corporate relationships;
- Build brand awareness;
- Encourage customer loyalty;
- Capitalize on the market for information resources;
- Establish and utilize supplier relationships; and
- Maintain our technology focus and expertise.
Accordingly, we intend to invest heavily in marketing and promotion, our
direct sales and telesales organizations, and systems and infrastructure
development. Such expenditures may not result in increased revenues or customer
growth. Additionally, while in recent periods we have experienced significant
growth in revenues, our customer base and repeat customer revenue, such growth
rates are not sustainable. Such growth rates will decrease in the future and are
not indicative of actual growth rates that we may experience. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
UNPREDICTABILITY OF FUTURE REVENUES; POTENTIAL FLUCTUATIONS IN QUARTERLY
OPERATING RESULTS; SEASONALITY
We are unable to accurately forecast our future revenues because of our
limited operating history and the emerging nature of the markets in which we
compete. Revenues and operating results generally depend on the volume of,
timing of and ability to fulfill orders received. These factors have
historically been, and are likely to continue to be, difficult to forecast. Our
current and future expense levels are based largely on our operating plans and
estimates of future revenues and are, to a large extent, fixed. We may be unable
to adjust spending sufficiently quickly to compensate for any unexpected revenue
shortfall. Accordingly, any significant shortfall in revenues in relation to our
planned expenditures would seriously harm our business, financial condition and
results of operations. Further, we may, from time to time, make certain pricing,
product, service or marketing decisions as a strategic response to changes in
the competitive environment. Such changes could seriously harm our business,
financial condition and results of operations. See "-- Competition."
Our future quarterly operating results may vary significantly due to a
variety of factors, many of which are outside our control. Factors that could
affect our quarterly operating results include:
- Our ability to establish and expand brand awareness;
- Our ability to retain existing customers, attract new customers and
continuously improve customer satisfaction;
- Announcements of, and market anticipation for, new technology offerings
for which information resources may be sought;
- Our ability to manage inventory and fulfillment operations;
- Our ability to sustain or improve gross margin levels;
- The announcement or introduction of new online stores, services and
products by us or our competitors;
- Price competition or higher wholesale prices in the industry;
- The level of usage of and commerce on the Internet and online services
generally;
- Increasing customer acceptance of the Internet for the purchase of
information resources such as those offered by us;
- Our ability to upgrade and develop our systems and infrastructure in a
timely and effective manner;
- The level of traffic on our online store;
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- The sales mix of our product offerings;
- Technical difficulties, system downtime or Internet brownouts;
- The amount and timing of operating costs and capital expenditures
relating to expansion of our business, operations and infrastructure;
- The introduction of books, technology based training solutions, product
manuals and research reports;
- The level of merchandise returns we experienced;
- Governmental regulation; and
- General economic conditions and economic conditions specific to the
Internet, electronic commerce and the technical resource industries.
In the past, we have experienced seasonality in our business and we expect
that we will continue to experience such seasonality in the future. Internet
usage and the amount of purchases from individual and corporate consumers tend
to decline during August, November and December. During these times many
technical professionals are either absent from the workplace, on vacation or
experience a holiday closure at their company. Our results in future quarters
may be negatively affected by seasonal trends.
Due to the foregoing factors, we cannot predict with any significant degree
of certainty our quarterly revenue and operating results. Further, we believe
that period-to-period comparisons of our operating results are not necessarily a
meaningful indication of future performance. It is likely that in one or more
future quarters our results may fall below the expectations of securities
analysts and investors. In such event, the trading price of the Common Stock
would likely be seriously harmed. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RISKS ASSOCIATED WITH ENTRY INTO NEW BUSINESS AREAS
For the six months ended July 31, 1998 approximately 90% of our online
revenues were derived from sales of books. We recently expanded our product
offerings to include technology based training materials, product manuals and
research reports and future revenues from these new product offerings are
difficult to forecast.
We may choose to further expand our operations by promoting new or
complementary products and expanding the breadth and depth of products and
services offered. In addition, we may decide to utilize third-party
relationships to extend our brand or establish additional co-branded online
stores. We may pursue the acquisition of new or complementary businesses,
products or technologies. However, we have no present commitments or agreements
for any material acquisitions or investments. We may not be able to expand our
product offerings and related operations in a cost-effective or timely manner.
Such efforts may fail to increase online traffic and purchases from our online
or physical retail stores or to increase our overall market acceptance.
Furthermore, any new business or online store launched by us that is not
favorably received by individuals, corporate customers or their employees or
constituents could damage our reputation or the Computer Literacy brand.
Expansion of our operations in this manner would also require significant
additional expenses and development, operations and editorial resources. Such
efforts may strain our management, financial and operational resources. The lack
of market acceptance of such efforts (including our recent expansion of product
offerings to include technology based training materials, manuals and research
reports) or our inability to generate satisfactory revenues from such expanded
services or products to offset related increased costs could seriously harm our
business, financial condition and results of operations.
COMPETITION
The electronic commerce market is new, rapidly evolving and intensely
competitive. The market for information resources is more mature but also
intensely competitive. We expect competition to continue to intensify in the
future. We currently or potentially compete with a variety of companies. These
competitors include:
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- A significant number of traditional retail and online bookstores,
including Amazon.com, Barnes & Noble, Inc., Borders Group, Inc. and other
vendors of books, training products and product manuals;
- Various computer super-stores that carry related information resources at
retail locations, in catalogs and over the Internet;
- A number of indirect competitors that specialize in electronic commerce
or derive a substantial portion of their revenue from electronic
commerce; and
- Other companies with substantial customer bases in the computer and other
technical fields.
We may not be able to maintain a competitive position against current or
future competitors as they enter the markets in which we compete. This is true
particularly with respect to competitors with greater financial, marketing,
service, support, technical and other resources than the Company. Our failure to
maintain a competitive position within the market could seriously harm our
business, financial condition and results of operations.
We believe that the principal competitive factors on which it competes in
its market include:
- Brand recognition;
- Selection;
- Personalized services;
- Convenience;
- Price;
- Accessibility;
- Customer service;
- Quality of search tools;
- Quality of editorial and other site content; and
- Reliability and speed of fulfillment.
Many of our current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than the Company. In addition,
online retailers may be acquired by, receive investments from or enter into
other commercial relationships with larger, well-established and well-financed
companies as use of the Internet and other online services increases. Certain of
our competitors may be able to secure merchandise from vendors on more favorable
terms, devote greater resources to marketing and promotional campaigns, adopt
more aggressive pricing or inventory availability policies and devote
substantially more resources to Web site and systems development than the
Company.
Increased competition may result in reduced operating margins, loss of
market share and a diminished brand franchise. We may from time to time make
certain pricing, service or marketing decisions or acquisitions as a strategic
response to changes in the competitive environment. Such actions could result in
reduced margins or otherwise seriously harm our business, financial condition
and results of operations.
New technologies and the expansion of existing technologies may increase
the competitive pressures on the Company. For example, applications that select
specific titles from a variety of Web sites may channel customers to online
booksellers that compete with the Company. Companies that control access to
transactions through a network or Web browsers could also promote our
competitors or charge us a substantial fee for inclusion. In addition, vendors
of information resources such as technology based training materials could
provide direct access to training programs online. We may be unable to compete
successfully against current and future competitors, and competitive pressures
faced by us could seriously harm our business, financial condition and results
of operations. See "Business -- Competition."
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MANAGEMENT OF EXPANDING BUSINESS; LIMITED SENIOR MANAGEMENT RESOURCES
We have rapidly expanded our operations, and we anticipate that further
expansion will be required to address potential growth in our customer base and
market opportunities. Specifically, we expect to significantly increase our
direct corporate and telesales organization and marketing initiatives. This
expansion has placed, and future expansion is expected to place, a significant
strain on our management, operational and financial resources. Our new employees
include a number of key managerial, technical and operations personnel who have
not yet been fully integrated into the Company, and we expect to add additional
key personnel in the near future.
To manage the expected growth of its operations and personnel, we will need
to improve existing and implement new transaction-processing, operational and
financial systems, procedures and controls. In addition, we will need to expand,
train and manage an increasing employee base. We will also need to expand our
finance, administrative and operations staff. Our management will be required to
maintain and expand our relationships with:
- Various suppliers;
- Freight companies;
- Other Web sites;
- Other Web service providers;
- Internet and other online service providers; and
- Other third parties necessary to our business.
Our current and planned personnel, systems, procedures and controls may be
inadequate to support our future operations. Further, management may be unable
to attract, retain, motivate and manage required personnel or to successfully
identify, manage and exploit existing and potential market opportunities. If we
are unable to manage growth effectively, our business, financial condition and
results of operations could be seriously harmed. See "-- Need For Additional
Personnel," "-- Dependence on Key Personnel," "Management's Discussion and
Analysis of Financial Condition and Results of Operations,"
"Business -- Technology and Product Development" and "-- Employees."
RISKS ASSOCIATED WITH BRANDING
The Company believes that establishing, maintaining and enhancing the
Computer Literacy brand is critical to attracting online customers. To do so, we
expect to expand our marketing initiatives and build upon our brand by providing
a high-quality online experience supported by a high level of customer service.
To promote and maintain the Computer Literacy brand, we expect to increase
substantially our financial expenditures, including marketing initiatives. If we
fail to promote and maintain our brand, or if we incur excessive expenses in an
attempt to do so, our business, operating results and financial condition would
be seriously harmed. See "Business -- Competition" and "-- Competition."
We are evaluating changing the Computer Literacy brand name. If a name
change is effected it will not necessarily enhance our efforts to attract new
customers or retain existing customers. Further such a change could result in
confusion to current and potential customers, or disrupt our business. Any of
these potential effects could seriously harm our business, financial condition
and results of operations. In addition, any name change effected after this
offering, could result in confusion to investors which could seriously harm the
market price of the Common Stock.
RISK OF CAPACITY CONSTRAINTS; RELIANCE ON INTERNALLY DEVELOPED SYSTEMS; SYSTEM
DEVELOPMENT RISKS
A key element of our strategy is to generate a high volume of traffic on,
and use of, our online store. Accordingly, the satisfactory performance,
reliability and availability of the online store, transaction-processing systems
and network infrastructure are critical to our reputation. These factors are
similarly critical to our ability to attract and retain customers and maintain
adequate service and customer support levels. Our
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revenues depend on the number of visitors who shop at our online store and the
volume of orders we fulfill. Any system interruptions that cause our online
store to be unavailable or impair order fulfillment performance would reduce the
volume of goods sold and the attractiveness of our product and service
offerings. We have experienced periodic system interruptions, which we believe
will continue to occur from time to time. If there is a substantial increase in
the volume of traffic on our online store or the number of orders placed by
customers we will need to expand and further upgrade our technology,
transaction-processing systems and network infrastructure. We may be unable to
accurately project the rate or timing of increases, if any, in the use of our
online store or timely expand and upgrade our systems and infrastructure to
accommodate such increases.
We use an internally developed system, which is supplemented by
commercially available licensed technology, for:
- Our online store;
- Search engine; and
- Substantially all aspects of transaction processing, including order
management, cash and credit card processing, purchasing, inventory
management and shipping.
We intend to upgrade and expand our transaction-processing systems and to
integrate newly developed and purchased modules with our existing systems in
order to improve our accounting, control and reporting methods and support
increased transaction volume. We may be unable to add additional software and
hardware or to develop and further upgrade our existing technology,
transaction-processing systems or network infrastructure to accommodate
increased traffic through our online store or increased sales volume. Any
inability to do so may result in:
- Unanticipated system disruptions;
- Slower response times;
- Degradation in levels of customer service;
- Impaired quality and speed of order fulfillment; and
- Delays in reporting accurate financial information.
We may be unable in a timely manner to effectively upgrade and expand our
transaction-processing system or to smoothly integrate any newly developed or
purchased modules with our existing systems. Any inability to do so could
seriously harm our business, financial condition and results of operations. See
"Business -- Technology and Product Development."
NEED FOR ADDITIONAL PERSONNEL
Our future success depends on our ability to attract, retain and motivate
highly skilled technical, managerial, editorial, merchandising, marketing and
customer service personnel. Competition for such personnel is intense,
particularly in the San Francisco Bay Area, where our headquarters are located.
As a result, we may be unable to successfully attract, assimilate or retain
qualified personnel. We have encountered difficulties in attracting a sufficient
number of qualified software developers for our online store and
transaction-processing systems. Further, we may be unable to retain those
developers we currently employ or attract additional developers. The failure to
retain and attract the necessary personnel could seriously harm our business,
financial condition and results of operations. See "Business -- Employees" and
"Management."
FULFILLMENT CENTER RELOCATION
We currently maintain a temporary warehouse and distribution center in
Fremont, California. We are considering outsourcing the warehousing and
fulfillment of orders to a service provider located in closer proximity to
certain publishers, wholesalers, distributors and delivery services. Outsourcing
such services may not result in operating efficiencies or may cause a
significant disruption in the fulfillment of orders, the distraction of
management and other key personnel and the expenditure of significant financial
and other
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<PAGE> 12
resources. Any such disruption, distraction or expenditure could seriously harm
our business, results of operations and financial condition. See
"Business -- Warehousing and Fulfillment."
SALES AND OTHER TAX COLLECTION
We do not currently collect sales or other similar taxes in respect of
shipments of goods into states other than California and Virginia. However, one
or more states or foreign countries may seek to impose sales tax collection
obligations on out-of-state or foreign companies, such as the Company, which
engage in electronic commerce. In addition, any new operations established by
the Company in states outside California and Virginia could subject shipments
into such states to state sales taxes. A successful assertion by one or more
states or any foreign country that we should collect sales or other similar
taxes on the sale of merchandise could seriously harm our business, financial
condition and results of operations.
RISK OF SYSTEM FAILURE; SINGLE SITE AND ORDER INTERFACE
Our success, in particular our ability to successfully receive and fulfill
online orders and provide high-quality customer service, largely depends on the
efficient and uninterrupted operation of its computer and communications
hardware systems. Substantially all of our computer and communications hardware
is located at a single leased facility in Sunnyvale, California. Our systems and
operations are vulnerable to damage or interruption from a number of sources,
including:
- Fire;
- Flood;
- Power loss;
- Telecommunications failure;
- Break-ins; and
- Earthquake and similar events.
We have experienced minor and infrequent system interruptions in the past.
We do not presently have a formal disaster recovery plan and do not carry
sufficient business interruption insurance to compensate us for losses that may
occur. Despite the implementation of network security measures by the Company,
our servers are vulnerable to computer viruses, physical or electronic break-ins
and similar disruptions. Such disruptions could lead to interruptions, delays,
loss of data or the inability to accept and fulfill customer orders. The
occurrence of any of the foregoing risks could seriously harm our business,
financial condition and results of operations. See "Business -- Technology and
Product Development" and " -- Facilities."
RELIANCE ON CERTAIN SUPPLIERS
For fiscal 1998 and the six months ended July 31, 1998, we purchased
approximately 30% and 36%, respectively, of our books from Ingram Book Company
("Ingram"). We rely to a large extent on rapid fulfillment from Ingram and other
vendors. Barnes and Noble, Inc., one of our competitors, has agreed to purchase
Ingram Book Group, which owns Ingram. We generally have no commitments to or
arrangements with any of our vendors that guarantee the availability of
merchandise, the continuation of particular payment terms or the extension of
credit limits. Our current vendors may not continue to sell merchandise to us on
current terms. In addition, we may be unable to establish new or extend current
vendor relationships to ensure acquisition of merchandise in a timely and
efficient manner and on acceptable commercial terms. If we were unable to
develop and maintain relationships with vendors that would allow us to obtain
sufficient quantities of merchandise on acceptable commercial terms, our
business, financial condition and results of operations would be seriously
harmed.
DEPENDENCE ON KEY PERSONNEL
Our performance is substantially dependent on the continued services and on
the performance of our senior management and other key personnel. Our
performance also depends on our ability to retain and motivate our senior
management and other key employees. The loss of the services of any of our
executive
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<PAGE> 13
officers or other key employees could seriously harm our business, financial
condition and results of operations. See "Business -- Employees" and
"Management."
The Company has entered into employment agreements with several members of
its senior management, including:
- Mr. MacAskill, its President and Chief Executive Officer;
- Mr. Orumchian, its Vice President of Engineering;
- Mr. Alvarez, its Vice President of Finance and Chief Financial Officer;
and
- Mr. Cudd, its Vice President of Marketing.
Each employment agreement sets forth the officer's base salary and general
employee benefits, including acceleration of a portion of such employee's Common
Stock option vesting. We maintain $2.0 million of key person life insurance on
Chris MacAskill, our President and Chief Executive Officer. See "Management --
Employment Agreements and Change in Control Arrangements."
DEPENDENCE ON CONTINUED GROWTH OF ELECTRONIC COMMERCE
Our future revenues and profits, if any, substantially depend upon the
acceptance and use of the Internet and other online services as an effective
medium of commerce by our target customers. Rapid growth in the use of and
interest in the Internet, the Web and online services is a recent phenomenon. As
a result, acceptance and use may not continue to develop at historical rates and
a sufficiently broad base of consumers may not adopt, and continue to use, the
Internet and other online services as a medium of commerce. Demand and market
acceptance for recently introduced services and products over the Internet are
subject to a high level of uncertainty and there exist few proven services and
products. Our target customer has historically used traditional means of
commerce to purchase information resources. For us to be successful, these
customers must accept and utilize our online store to satisfy their information
resource needs.
In addition, the Internet may not be accepted as a viable long-term
commercial marketplace for a number of reasons, including potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and performance improvements. To the extent that the
Internet continues to experience significant expansion in the number of users,
frequency of use or bandwidth requirements, the infrastructure for the Internet
may be unable to support the demands placed upon it. In addition, the Internet
could lose its viability due to delays in the development or adoption of new
standards and protocols required to handle increased levels of Internet
activity, or due to increased governmental regulation. Changes in or
insufficient availability of telecommunications services to support the Internet
also could result in slower response times and adversely affect usage of the
Internet generally and the Company in particular. Our business, financial
condition and results of operations would be seriously harmed if:
- Use of the Internet and other online services does not continue to
increase or increases more slowly than expected;
- The infrastructure for the Internet and other online services does not
effectively support expansion that may occur; or
- The Internet and other online services do not become a viable commercial
marketplace.
RAPID TECHNOLOGICAL CHANGE
To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of our online operations. The
Internet and the electronic commerce industry are characterized by:
- Rapid technological change;
- Changes in user and customer requirements and preferences;
- Frequent new product and service introductions embodying new
technologies; and
- The emergence of new industry standards and practices.
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<PAGE> 14
The evolving nature of the Internet could render our existing online store
and proprietary technology and systems obsolete. Our success will depend, in
part, on our ability to:
- License leading technologies useful in its business;
- Enhance its existing services;
- Develop new services and technology that address the increasingly
sophisticated and varied needs of its current and prospective customers;
and
- Respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
The development of our Web site and other proprietary technology entails
significant technical and business risks. We may not successfully use new
technologies effectively or adapt our online store, proprietary technology and
transaction-processing systems to customer requirements or emerging industry
standards. If we are unable, for technical, legal, financial or other reasons,
to adapt in a timely manner, in response to changing market conditions or
customer requirements, our business, financial condition and results of
operations could be seriously harmed. See "Business -- Technology and Product
Development."
ELECTRONIC COMMERCE SECURITY RISKS
A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. We rely on
encryption and authentication technology licensed from third parties to provide
the security and authentication necessary for secure transmission of
confidential information, such as customer credit card numbers. Advances in
computer capabilities, new discoveries in the field of cryptography, or other
events or developments may result in a compromise or breach of the algorithms
used by us to protect customer transaction data. If any such compromise of our
security were to occur, it could seriously harm our reputation, business,
financial condition and results of operations. A party who is able to circumvent
our security measures could misappropriate proprietary information or cause
interruptions in our operations.
We may be required to expend significant capital and other resources to
protect against such security breaches or to alleviate problems caused by such
breaches. Concerns over the security of the Internet and other online
transactions and the privacy of users may also inhibit the growth of the
Internet and other online services generally, and the Web in particular,
especially as a means of conducting commercial transactions. To the extent that
activities of the Company or third-party contractors involve the storage and
transmission of proprietary information, such as credit card numbers, security
breaches could damage our reputation and expose us to a risk of loss or
litigation and possible liability. Our security measures may not prevent
security breaches and failure to prevent such security breaches may seriously
harm our business, financial condition and results of operations. See
"Business -- Technology and Product Development."
RISKS ASSOCIATED WITH INTERNATIONAL SALES
For fiscal 1998 and the six months ended July 31, 1998, international sales
accounted for approximately 21% and 22%, respectively, of our online revenue. We
expect that our percentage of online revenue from international markets will
continue to represent a significant portion of our total revenue. Our
international business activities are subject to a variety of potential risks,
including the adoption of laws, political and economic conditions and actions by
third parties that would restrict or eliminate our ability to do business in
certain jurisdictions. See "-- Government Regulation and Legal Uncertainties."
Although we currently transact business in U.S. dollars, to the extent that we
determine to transact business in foreign currencies, we will become subject to
the risks attendant to transacting in foreign currencies, including potential
adverse effects of exchange rate fluctuations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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<PAGE> 15
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field and cannot distinguish
21st century dates from 20th century dates. These date code fields will need to
distinguish 21st century dates from 20th century dates. This could result in
system failures or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send invoices
or engage in similar normal business activities. As a result, many companies'
software and computer systems may need to be upgraded or replaced in order to
comply with such "Year 2000" requirements. Although we believe that our products
and internal systems are Year 2000 compliant, we utilize third-party equipment
and software that may not be Year 2000 compliant. Failure of such third-party
equipment or software to operate properly with regard to the Year 2000 and
thereafter could require us to incur unanticipated expenses to remedy any
problems, which could seriously harm our business, operating results and
financial condition.
Any failure by the Company to make its products Year 2000 compliant could
result in:
- A decrease in sales of our products;
- An increase in the allocation of resources to address Year 2000 problems
of our customers without additional revenue commensurate with such
dedication of resources; and
- An increase in litigation costs relating to losses suffered by our
customers due to such Year 2000 problems.
Furthermore, the purchasing patterns of customers or potential customers
may be affected by Year 2000 issues as companies expend significant resources to
correct their current systems for Year 2000 compliance. These expenditures may
result in reduced funds available to purchase products and services such as
those offered by us, which could seriously harm our business, operating results
and financial condition. We have conducted a preliminary review of our internal
computer systems to identify the systems that could be affected by the Year 2000
issue and to develop a plan to resolve the issue. Based on this preliminary
review, we currently have no reason to believe that our internal software
systems are not Year 2000 compliant. However, we will continue to evaluate our
systems and in the event we conclude that our systems are not Year 2000
compliant, we will develop a contingency plan to address these issues.
TRADEMARKS AND PROPRIETARY RIGHTS; UNLICENSED ARRANGEMENTS AND MATERIALS
We regard our copyrights, service marks, trademarks, trade dress, trade
secrets and similar intellectual property as critical to our success. Further,
we rely on trademark and copyright law, trade secret protection and
confidentiality and license agreements with our employees, customers, partners
and others to protect our proprietary rights. We pursue the registration of our
trademarks and service marks in the U.S. and internationally, and have applied
for the registration of certain of our trademarks and service marks. Effective
trademark, service mark, copyright and trade secret protection may not be
available in every country in which our products and services are made available
online. While we attempt to ensure that the quality of our brand is maintained
by such licensees, such licensees may take actions that could seriously harm the
value of our proprietary rights or reputation and in turn our business,
financial condition and results of operations. The steps taken by the Company to
protect our proprietary rights may not be adequate and third parties may
infringe or misappropriate our copyrights, trademarks, trade dress and similar
proprietary rights. In addition, other parties may assert infringement claims
against us. Such claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources. We are not
currently aware of any legal proceedings pending or threatened against it.
In addition, we display reviews and articles on technical subjects in our
online store. Some reviews and articles may be copyrighted and we may not have
explicit permission from the author for use of such intellectual property. The
authors may assert infringement claims against the Company. If a claim is
asserted alleging that we have infringed the proprietary rights of a third
party, we may be required to seek licenses to continue to use such intellectual
property. The failure to obtain the necessary licenses or other rights at a
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<PAGE> 16
reasonable cost could seriously harm our business, financial condition and
results of operations. See "Business - Intellectual Property and Other
Proprietary Rights."
GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES
We are not currently subject to direct regulation by any domestic or
foreign governmental agency, other than regulations applicable to businesses
generally, and laws or regulations directly applicable to access to electronic
commerce. However, due to the increasing popularity and use of the Internet, it
is possible that a number of laws and regulations may be adopted with respect to
the Internet, relating to:
- User privacy;
- Pricing;
- Content;
- Copyrights;
- Distribution; and
- Characteristics and quality of products and services.
Furthermore, the growth and development of the market for electronic
commerce may prompt calls for more stringent consumer protection laws that may
impose additional burdens on those companies conducting business online. The
adoption of any additional laws or regulations may decrease the expansion of the
Internet. A decline in the growth of the Internet could decrease demand for our
products and services and increase our cost of doing business, or otherwise
seriously harm our business, financial condition and results of operations.
Moreover, the applicability to the Internet of existing laws in various
jurisdictions governing issues such as property ownership, sales tax, libel and
personal privacy is uncertain and may take years to resolve. Our business,
financial condition and results of operations could be seriously harmed by:
- Any such new legislation or regulation;
- The application of laws and regulations from jurisdictions whose laws do
not currently apply to our business; or
- The application of existing laws and regulations to the Internet and
other online services.
As our service is offered over the Internet in multiple states and foreign
countries, such jurisdictions may claim that we are required to qualify to do
business as a foreign corporation in each such state and foreign country. The
failure by the Company to qualify as a foreign corporation in a jurisdiction
where it is required to do so could subject us to taxes and penalties for the
failure to qualify. It is possible that the governments of other states and
foreign countries also might attempt to regulate the content of our online store
or prosecute us for violations of their laws. Violations of local laws may be
alleged or charged by state or foreign governments. Further, we might
unintentionally violate such laws and such laws may be modified and new laws may
be enacted in the future.
In addition, several telecommunications carriers are seeking to have
telecommunications over the Internet regulated by the Federal Communications
Commission (the "FCC") in the same manner as other telecommunications services.
The growing popularity and use of the Internet has burdened the existing
telecommunications infrastructure and many areas with high Internet use have
begun to experience interruptions in phone service. As a result, local exchange
carriers have petitioned the FCC to regulate Internet Service Providers ("ISPs")
in a manner similar to long distance telephone carriers and to impose access
fees on the ISPs. If any effort to increase regulation of ISPs is successful,
the expense of communicating on the Internet could increase substantially,
potentially slowing the growth in the use of the Internet. Any such new
legislation or regulation or application or interpretation of existing laws
could seriously harm our business, financial condition and results of
operations.
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<PAGE> 17
CONTROL OF THE COMPANY BY CURRENT STOCKHOLDERS AND VENTURE CAPITAL FIRMS
Upon completion of this offering, our executive officers, directors and
greater than 5% stockholders (and their affiliates) will, in the aggregate,
beneficially own approximately 59.9% of our outstanding Common Stock (57.6% if
the Underwriters' over-allotment option is exercised in full). Of the greater
than 5% stockholders, four venture capital firms ("Venture Stockholders,") will,
in the aggregate, beneficially own approximately 46.6% of our outstanding Common
Stock (44.6% if the Underwriter's over-allotment option is exercised in full).
As a result, such persons, acting together, will have the ability to control all
matters submitted to stockholders of the Company for approval, including the
election and removal of directors and any merger, consolidation or sale of all
or substantially all of the Company's assets. In addition, such persons, acting
together, will have the ability to control the management and affairs of the
Company. Accordingly, such concentration of ownership may seriously harm the
market price of the Company's Common Stock by:
- Delaying, deferring or preventing a change in control of the Company;
- Impeding a merger, consolidation, takeover or other business combination
involving the Company; or
- Discouraging a potential acquirer from making a tender offer or otherwise
attempting to obtain control of the Company.
Upon completion of this offering there will be a public trading market for
our Common Stock, and, subject to restrictions under applicable securities laws
and market stand-off agreements, the Venture Stockholders may seek to sell some,
if not all, of their Common Stock when liquidity is available. Sales of
substantial amounts of our Common Stock in the public market after this offering
could seriously harm the prevailing market prices for the Common Stock. See
"Risk Factors -- Shares Eligible for Future Sale," "Management," "Certain
Transactions" and "Principal Stockholders and Shares Eligible for Future Sale."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock of the Company and an active trading market may not develop or be
sustained upon completion of this offering. The initial public offering price,
which will be established by negotiations between us and the representatives of
the Underwriters based upon a number of factors, may not be indicative of prices
that will prevail in the trading market. See "Underwriting" for a discussion of
the factors considered in determining the initial public offering price.
The trading price of the Common Stock is likely to be highly volatile and
could be subject to wide fluctuations in price in response to such factors as:
- Actual or anticipated variations in quarterly operating results;
- Announcements of technological innovations;
- New sales formats or new products or services by us or our competitors;
- Changes in financial estimates by securities analysts;
- Conditions or trends in the Internet and electronic commerce industries;
- Changes in the market valuations of other Internet, online service or
retail companies;
- Announcements by us of significant acquisitions, strategic partnerships,
joint ventures or capital commitments;
- Additions or departures of key personnel;
- Sales of Common Stock; and
- Other events or factors, many of which are beyond the Company's control.
In addition, the stock market in general, and the Nasdaq National Market
and the market for Internet-related and technology companies in particular, has
experienced extreme price and volume fluctuations that have often been unrelated
or disproportionate to the operating performance of such companies. The trading
prices of many technology companies' stocks are at or near historical highs and
reflect price earnings ratios substantially above historical levels. These
trading prices and price earnings ratios may not be sustained. These
16
<PAGE> 18
broad market and industry factors may seriously harm the market price of the
Common Stock, regardless of our operating performance. In the past, following
periods of volatility in the market price of a company's securities, securities
class-action litigation has often been instituted against such company. Such
litigation, if instituted, could result in substantial costs and a diversion of
management's attention and resources, which would seriously harm our business,
financial condition and results of operations.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our Common Stock in the public market after
this offering could seriously harm prevailing market prices for the Common
Stock. The 3,000,000 shares of Common Stock offered hereby will be freely
tradable without restriction in the public market. The number of additional
shares available for sale in the public market will be effected by restrictions
imposed by:
- The Securities Act of 1933, as amended (the "Securities Act");
- Rules promulgated by the Securities and Exchange Commission (the
"Commission") thereunder;
- Lock-up agreements between certain stockholders and the Company or
NationsBanc Montgomery Securities LLC; and
- In some cases subject to the volume and other restrictions of Rule 144
under the Securities Act.
Approximately 6,785,164 additional shares will be eligible for sale
beginning 181 days after the date of this Prospectus and approximately 857,624
remaining shares will be eligible for sale pursuant to Rule 144 upon the
expiration of one-year holding periods expiring on May 22, 1999. NationsBanc
Montgomery Securities LLC may, in its sole discretion and at any time without
notice, release all or any portion of the shares subject to such lock-up
agreements. Upon the closing of this offering, holders of 6,079,186 shares of
Common Stock are entitled to certain rights with respect to the registration of
such shares under the Securities Act. In addition, the Company intends to file a
registration statement on Form S-8 under the Securities Act approximately 180
days after the date of this Prospectus to register approximately 3,345,595
shares of Common Stock reserved for issuance under the 1996 Stock Plan, the 1998
Omnibus Equity Incentive Plan and the 1998 Employee Stock Purchase Plan. See
"Description of Capital Stock -- Registration Rights" and "Shares Eligible for
Future Sale."
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS AND DELAWARE LAW
Upon the closing of this offering, the Company's Board of Directors will
have the authority to issue up to 5,000,000 shares of Preferred Stock and to
determine the price, rights, preferences, privileges and restrictions, including
voting rights, of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to, and
may be seriously harmed by, the rights of the holders of any Preferred Stock
that may be issued in the future. The issuance of Preferred Stock may have the
effect of delaying, deferring or preventing a change in control of the Company
without further action by the stockholders and may seriously harm the voting and
other rights of the holders of Common Stock. We have no present plans to issue
shares of Preferred Stock. Further, certain provisions of our Second Amended and
Restated Certificate of Incorporation and Delaware law could delay or make more
difficult a merger, tender offer or proxy contest involving the Company. See
"Description of Capital Stock."
BROAD DISCRETION OF USE OF PROCEEDS
We expect to use the net proceeds to expand our:
- Capital expenditures;
- Direct sales;
- Telesales;
- Marketing operations; and
- Systems and infrastructure development activities.
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<PAGE> 19
The balance of the net proceeds will be used for working capital and
general corporate purposes. A portion of net proceeds may also be used to
acquire or invest in complementary businesses, products and technologies. From
time to time, in the ordinary course of business, we expect to evaluate
potential acquisitions of such businesses, products or technologies. However, we
have no present understandings, commitments or agreements with respect to any
material acquisition or investment. Accordingly, management will have
significant flexibility in applying the net proceeds of this offering. The
failure of management to apply such funds effectively could seriously harm our
business, financial condition and results of operations. Pending such uses, the
net proceeds of this offering will be invested in short-term, interest-bearing,
investment grade securities. See "Use of Proceeds."
IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price is substantially higher than the book
value per outstanding share of Common Stock. Accordingly, purchasers in this
offering will suffer immediate and substantial dilution of $5.14 in the net
tangible book value per share based upon an assumed public offering price of
$8.00 per share. Additional dilution will occur upon exercise of outstanding
options and a warrant granted by the Company. See "Dilution."
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<PAGE> 20
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock offered hereby are estimated to be approximately $21.5 million
(approximately $25.1 million if the Underwriters' over-allotment option is
exercised in full), at an assumed initial public offering price of $8.00 per
share and after deducting estimated underwriting discount and estimated offering
expenses payable by the Company.
The primary purposes of this offering are to obtain additional working
capital, create a public market for the Company's Common Stock and facilitate
future access by the Company to public equity markets. The Company expects to
use approximately $6.1 million of the net proceeds for capital expenditures,
with the remaining approximately $15.4 million (approximately $19.0 million if
the Underwriters' over-allotment option is exercised in full) to be used for
working capital and general corporate purposes, including expanding its direct
sales, telesales and marketing operations and systems and infrastructure
development activities.
The foregoing amounts represent estimates and the amounts actually expended
by the Company for such purposes may vary significantly and will depend on a
number of factors, including the amount of the Company's future revenues and
cash generated by operations and the other factors described under "Risk
Factors." Accordingly, the Company's management will retain broad discretion in
the allocation of the net proceeds of this offering. A portion of the net
proceeds may also be used to acquire or invest in complementary businesses. The
Company has no current agreements or commitments with respect to any such
acquisition or investment, and the Company is not currently engaged in any
negotiations with respect to any such transaction. Pending such uses, the net
proceeds of this offering will be invested in short-term, interest bearing,
investment grade securities. See "Risk Factors -- Broad Discretion of Use of
Proceeds."
The Company estimates the net proceeds of this offering, together with
existing capital resources, will be sufficient to fund the Company's
requirements for at least twelve months from the date of this Prospectus.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock and does not expect to do so in the foreseeable future. The Company's line
of credit arrangement prohibits the payment of dividends by the Company without
the lender's prior consent. The Company anticipates that all future earnings, if
any, generated from operations will be retained by the Company to develop and
expand its business.
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<PAGE> 21
CAPITALIZATION
The following table sets forth the capitalization of the Company as of July
31, 1998 (i) on an actual basis and (ii) on an as adjusted basis to give effect
to the conversion of each outstanding share of Preferred Stock into one share of
Common Stock upon the closing of this offering, and the sale of the 3,000,000
shares of Common Stock offered hereby, at an assumed initial public offering
price of $8.00 per share and after deducting estimated underwriting discount and
estimated offering expenses payable by the Company.
<TABLE>
<CAPTION>
AS OF JULY 31, 1998
----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Stockholders' equity:
Preferred Stock, $0.001 par value, 6,275,000 shares
authorized, 6,079,186 shares issued and outstanding,
actual; $0.001 par value, 5,000,000 shares authorized,
no shares issued and outstanding, as adjusted.......... $ 6 $ --
Common Stock, $0.001 par value, 10,000,000 shares
authorized, 1,563,602 shares issued and outstanding,
actual; $0.001 par value, 50,000,000 shares authorized,
10,642,788 shares issued and outstanding, as
adjusted(1)............................................ 2 11
Additional paid-in capital................................ 19,376 40,893
Warrants(2)............................................... 12 12
Accumulated deficit....................................... (7,495) (7,495)
------- --------
Total stockholders' equity............................. 11,901 33,421
------- --------
Total capitalization.............................. $11,901 $ 33,421
======= ========
</TABLE>
- ---------------
(1) Excludes (i) 1,110,351 shares of Common Stock issuable upon exercise of
options outstanding as of July 31, 1998 under the 1996 Stock Plan with a
weighted average exercise price of $1.39 per share, (ii) 45,595 shares of
Common Stock available for grant under the 1996 Stock Plan as of such date,
(iii) 3,000,000 additional shares of Common Stock reserved for issuance
under the Company's 1998 Omnibus Equity Incentive Plan, (iv) 300,000
additional shares of Common Stock reserved for issuance under the Company's
1998 Employee Stock Purchase Plan and (v) 15,624 additional shares of Common
Stock issuable upon exercise of an outstanding warrant with an exercise
price of $2.40 per share. See "Management -- Stock Plans," "Description of
Capital Stock" and Note 6 of Notes to Financial Statements.
(2) Represents an expense relating to the issuance of a warrant to a lender of
the Company. See Note 5 of Notes to Financial Statements.
20
<PAGE> 22
DILUTION
The pro forma net tangible book value of the Company as of July 31, 1998
was approximately $8.9 million or $1.16 per share of Common Stock. Pro forma net
tangible book value per share represents the amount of total tangible assets of
the Company less its total liabilities, divided by the total number of shares of
Common Stock outstanding as of July 31, 1998, after giving effect to the
conversion of the outstanding shares of Preferred Stock into Common Stock. After
giving effect to the sale of 3,000,000 shares of Common Stock offered hereby (at
an assumed initial public offering price of $8.00 per share and after deducting
estimated underwriting discount and estimated offering expenses payable by the
Company), the pro forma net tangible book value of the Company as of July 31,
1998 would have been $30.4 million or $2.86 per share. This represents an
immediate increase in net tangible book value of $1.70 per share to existing
stockholders and an immediate dilution in pro forma net tangible book value of
$5.14 per share to purchasers of Common Stock in the offering. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $ 8.00
Pro forma net tangible book value per share as of July 31,
1998................................................... $ 1.16
Increase in pro forma net tangible book value per share
attributable to new investors.......................... 1.70
--------
Pro forma net tangible book value per share after the
offering.................................................. 2.86
--------
Dilution per share to new investors......................... $ 5.14
========
</TABLE>
The following table summarizes, on a pro forma basis as of July 31, 1998,
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid by
existing stockholders and by new investors purchasing shares in this offering
(at an assumed initial public offering price of $8.00 per share and before
deducting estimated underwriting discount and estimated offering expenses
payable by the Company):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
----------- ------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 7,642,788 71.8% $19,478,892 44.8% $ 2.55
New investors............. 3,000,000 28.2 24,000,000 55.2 $ 8.00
----------- ------- ----------- -----------
Total........... 10,642,788 100.0% $43,478,892 100.0%
=========== ======= =========== ===========
</TABLE>
The foregoing discussion and table excludes (i) 1,110,351 shares of Common
Stock issuable upon exercise of options outstanding as of July 31, 1998 under
the 1996 Stock Plan with a weighted average exercise price of $1.39 per share,
(ii) 45,595 shares of Common Stock available for grant under the 1996 Stock Plan
as of such date, (iii) 3,000,000 additional shares of Common Stock reserved for
issuance under the Company's 1998 Omnibus Equity Incentive Plan, (iv) 300,000
additional shares of Common Stock reserved for issuance under the Company's 1998
Employee Stock Purchase Plan and (v) 15,624 additional shares of Common Stock
issuable upon exercise of an outstanding warrant with an exercise price of $2.40
per share. See "Management -- Stock Plans," "Description of Capital Stock" and
Note 5 of Notes to Financial Statements.
21
<PAGE> 23
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected financial data is qualified by reference to and
should be read in conjunction with the Financial Statements and related Notes
thereto appearing elsewhere in this Prospectus and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The selected
statement of operations data for the years ended January 31, 1997 and 1998 and
the balance sheet data as of January 31, 1998 are derived from the Financial
Statements of the Company which have been audited by Deloitte & Touche LLP,
independent auditors, and included herein. The balance sheet data as of January
31, 1997 is derived from the audited financial statements of the Company and are
not included herein. The selected statement of operations data for the year
ended January 31, 1996 and the balance sheet data as of January 31, 1996 are
derived from unaudited consolidated financial statements not included herein.
The selected statement of operations data for the six months ended July 31, 1997
and 1998 and the selected balance sheet data as of July 31, 1998 are derived
from unaudited financial statements of the Company included elsewhere in this
Prospectus. The unaudited financial statements include all adjustments,
consisting of normal recurring adjustments necessary for a fair presentation of
the Company's financial position and results of operations for these periods.
The financial data for the six months ended July 31, 1998 are not necessarily
indicative of the results that may be expected for the year ending January 31,
1999 or any other future period.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JULY 31,
----------------------------- ------------------
1996 1997 1998 1997 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Online........................................... $ -- $ 180 $ 3,021 $ 620 $ 4,225
Retail and other................................. -- -- 7,927 2,263 4,984
------- ------- ------- ------- -------
Total revenues............................ -- 180 10,948 2,883 9,209
Cost of revenues:
Online........................................... -- 150 2,189 418 3,291
Retail and other................................. -- -- 5,216 1,425 3,226
------- ------- ------- ------- -------
Total cost of revenues.................... -- 150 7,405 1,843 6,517
------- ------- ------- ------- -------
Gross profit....................................... -- 30 3,543 1,040 2,692
Operating expenses:
Sales and marketing.............................. 3 130 4,192 1,240 4,056
Development and engineering...................... 65 110 860 213 1,148
General and administrative....................... 26 412 1,674 596 1,224
------- ------- ------- ------- -------
Total operating expenses.................. 94 652 6,726 2,049 6,428
------- ------- ------- ------- -------
Loss from operations............................... (94) (622) (3,183) (1,009) (3,736)
Interest, net...................................... -- 55 (7) 23 99
------- ------- ------- ------- -------
Net loss........................................... $ (94) $ (567) $(3,190) $ (986) $(3,637)
======= ======= ======= ======= =======
Basic and diluted net loss per share(1)............ $ (0.10) $ (0.38) $ (2.11) $ (0.66) $ (2.37)
======= ======= ======= ======= =======
Shares used in computing net loss per share(1)..... 960 1,504 1,509 1,504 1,533
</TABLE>
<TABLE>
<CAPTION>
AS OF JANUARY 31,
-------------------------------- AS OF JULY 31,
1996 1997 1998 1998
----------- ------ ------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents.............................. $ 29 $3,228 $ 4,974 $ 5,132
Working capital................................... 29 3,242 5,630 6,881
Total assets...................................... 101 3,583 13,598 15,436
Total liabilities................................. 49 182 3,673 3,535
Total stockholders' equity........................ 52 3,401 9,925 11,901
</TABLE>
- ---------------
(1) See Note 1 of Notes to Financial Statements for an explanation of shares
used in computing basic and diluted net loss per share.
22
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations of the Company should be read in conjunction with "Selected Financial
Data" and the Company's Financial Statements and the related Notes thereto
included elsewhere in this Prospectus. This Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from those discussed in the forward-looking statements
as a result of certain factors, including those set forth in "Risk Factors" and
elsewhere in this Prospectus.
OVERVIEW
Computer Literacy is the leading online retailer of information resources
singularly focused on the technical professional. With over 300,000 information
resource titles from more than 8,000 publishers, Computer Literacy offers its
customers online access to a broad and comprehensive selection of technical
books, technology based training solutions, product manuals, research reports
and other information resources. In addition to the Company's extensive product
offering, Computer Literacy's online store features authoritative and compelling
content, competitive pricing, an easy-to-use navigational interface and a
variety of value-added services. The Company also operates four physical retail
stores that complement its online business by generating increased online
traffic, building the Company's brand and creating cross-promotional
opportunities, thereby providing a profitable means of customer acquisition.
Incorporated in November 1994, the Company (formerly CBooks Express, Inc.)
began selling technical books through its online store in February 1996,
technology based training solutions in January 1998, product manuals in May 1998
and research reports in June 1998. From inception through January 1996, the
Company's operating activities consisted primarily of developing the
infrastructure necessary to conduct online sales of information resources,
establishing vendor relationships, recruiting personnel, and purchasing and
leasing operating assets, including warehousing, fulfillment and customer
service capabilities. The Company's four physical retail stores were acquired in
May 1997 in connection with its $5.1 million acquisition of Computer Literacy
Bookshops, Inc. ("CLBI"), which was accounted for as a purchase. Accordingly,
the Company's results of operations include those of CLBI for all periods
subsequent to the acquisition date.
Computer Literacy generates revenues from sales of books, technology based
training materials, product manuals and research reports through its online
store, certain co-branded corporate online stores and in its four retail
locations. The Company recognizes revenue from its online store upon shipment
and, from its physical retail stores, at the time of sale.
Cost of revenues includes costs of products and inbound and outbound
freight. These costs may vary as a percentage of total revenues in any given
period due to a number of factors, including increased price competition, varied
levels of cooperative advertising dollars received from certain publishers of
books and changes in the size and timing of discounts and other promotional
activities. In addition, as sales of higher gross margin products, such as
technology based training materials, manuals and research reports increase as a
percentage of total revenues, gross margins may increase accordingly. For fiscal
1998 and for the six months ended July 31, 1998, the Company purchased
approximately 30% and 36%, respectively, of its books from Ingram, an indirect
reseller. Although the primary advantage associated with purchasing from Ingram
is just in time inventory management, the Company believes it will make a larger
number of its purchases directly from publishers as its sales volume increases,
thereby enabling the Company to take advantage of favorable volume discounts.
Since inception, the Company has incurred significant net operating losses
and expects to incur additional net operating losses for the foreseeable future.
There can be no assurance that the Company will achieve profitability or that,
if profitability is achieved, it will be sustained. As of July 31, 1998, the
Company had an accumulated deficit of $7.5 million. The Company believes that
its success will depend in large part on its ability to enhance its customers'
online shopping experience, expand corporate relationships, build brand
awareness, encourage customer loyalty, capitalize on the market for information
resources, establish and leverage supplier relationships and maintain its
technology focus and expertise. Accordingly, the Company
23
<PAGE> 25
intends to invest heavily in marketing and promotion, its direct sales and
telesales organizations, and systems and infrastructure development. There can
be no assurance that such expenditures will result in increased revenues or
customer growth and, although in recent periods the Company has experienced
significant growth in revenues, its customer base and repeat customer revenue,
such growth rates are not sustainable, will decrease in the future and are not
indicative of actual growth rates that the Company may experience. In view of
the rapidly evolving nature of the Company's business and its limited operating
history, the Company believes that period-to-period comparisons of its operating
results, including the Company's operating expenses as a percentage of total
revenues, are not necessarily meaningful and should not be relied upon as an
indication of future performance. See "Risk Factors -- Limited Operating
History; Accumulated Deficit; Anticipated Losses."
The Company currently maintains a warehouse and distribution center in
Sunnyvale, California. The Company is considering outsourcing the warehousing
and fulfillment of orders to a service provider located in closer proximity to
certain publishers, wholesalers, distributors and delivery services. There can
be no assurance that outsourcing such services will result in operating
efficiencies or will not cause a significant disruption in the fulfillment of
orders, the distraction of management and other key personnel and the
expenditure of significant financial and other resources. Any such disruption,
distraction or expenditure could materially adversely affect the Company's
business, results of operations and financial condition. See "Risk
Factors -- Fulfillment Center Relocation."
RESULTS OF OPERATIONS
The following table presents the Company's results of operations as a
percentage of total revenues for the periods indicated. This table does not
include data for fiscal 1996 as such data is not considered to be meaningful.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JANUARY 31, JULY 31,
---------------- ----------------
1997 1998 1997 1998
------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Online........................................ 100.0% 27.6% 21.5% 45.9%
Retail and other.............................. -- 72.4 78.5 54.1
------ ------ ------ ------
Total revenues........................ 100.0 100.0 100.0 100.0
Cost of revenues(1):
Online........................................ 83.3 72.5 67.4 77.9
Retail and other.............................. -- 65.8 63.0 64.7
------ ------ ------ ------
Total cost of revenues................ 83.3 67.6 63.9 70.8
------ ------ ------ ------
Gross margin.................................... 16.7 32.4 36.1 29.2
Operating expenses:
Sales and marketing........................... 72.2 38.3 43.0 44.0
Development and engineering................... 61.1 7.8 7.4 12.5
General and administrative.................... 228.9 15.3 20.7 13.3
------ ------ ------ ------
Total operating expenses.............. 362.2 61.4 71.1 69.8
------ ------ ------ ------
Loss from operations............................ (345.6) (29.1) (35.0) (40.6)
Interest, net................................... 30.6 (0.1) 0.8 1.1
------ ------ ------ ------
Net loss........................................ (315.0)% (29.1)% (34.2)% (39.5)%
====== ====== ====== ======
</TABLE>
- ---------------
(1) Cost of online revenue and cost of retail and other revenue are shown as a
percentage of related online revenue and retail and other revenue,
respectively.
24
<PAGE> 26
SIX MONTHS ENDED JULY 31, 1997 COMPARED TO SIX MONTHS ENDED JULY 31, 1998
Online Revenue. Online revenue is comprised of revenue from online sales of
information resources and associated outbound shipping charges, net of returns.
Online revenue increased from $620,000, or 21.5% of total revenues, to $4.2
million, or 45.9% of total revenues, for the six months ended July 31, 1997 and
the six months ended July 31, 1998, respectively, as a result of significant
increases in the customer base (from 6,741 to 44,302) and repeat purchases from
the Company's existing customers. The Company expects online revenue to increase
both in absolute dollars and as a percentage of total revenues as the Company
continues to invest significantly in its online store, related operating
infrastructure, corporate and telesales organization, and marketing programs.
There can be no assurance, however, that online revenue will increase as a
result of these investments and any such failure would materially adversely
affect the Company's business, operating results and financial condition. See
"Risk Factors -- Limited Operating History; Accumulated Deficit; Anticipated
Losses" and "-- Unpredictability of Future Revenues; Potential Fluctuations in
Quarterly Operating Results; Seasonality."
International sales represented approximately 26.9% and 22.3% of online
revenue for the six months ended July 31, 1997 and the six months ended July 31,
1998, respectively. The Company believes that the international market for its
products is large and expanding, and that the Internet offers a unique
opportunity for it to expand its international presence quickly and
cost-effectively. The Company expects international sales to increase as the
Company begins to direct corporate sales, telesales and marketing resources
towards international markets.
Retail and Other Revenue. Retail and other revenue is comprised primarily
of revenue generated by the Company's physical retail stores and, to a lesser
extent, by trade shows and book fairs. Retail and other revenue increased from
$2.3 million, or 78.5% of total revenues, to $5.0 million, or 54.1% of total
revenues, for the six months ended July 31, 1997 and the six months ended July
31, 1998, respectively, primarily as a result of the acquisition of CLBI in May
1997. The Company expects retail and other revenue to remain relatively flat in
absolute dollars and decrease as a percentage of total revenues in the
foreseeable future as the Company continues to invest in its online store,
related operating infrastructure, corporate and telesales organization and
marketing programs. In addition, the Company periodically evaluates the location
and productivity of its retail stores and may close, consolidate or relocate
stores as conditions warrant. Any closure, consolidation or relocation of a
retail store is likely to decrease retail and other revenue.
Cost of Online Revenue. Cost of online revenue is comprised primarily of
the cost of merchandise sold through the Company's online store and associated
inbound and outbound shipping costs. Cost of online revenue increased from
$418,000, or 67.4% of online revenue, to $3.3 million, or 77.9% of online
revenue, for the six months ended July 31, 1997 and the six months ended July
31, 1998, respectively. The increase in absolute dollars was attributable to
increased online sales volume.
Cost of Retail and Other Revenue. Cost of retail and other revenue is
comprised of the cost of merchandise sold through the Company's retail stores
and at trade shows and book fairs and includes associated inbound and outbound
shipping costs. Cost of retail and other revenue increased from $1.4 million, or
63.0% of retail and other revenue, to $3.2 million, or 64.7% of retail and other
revenue, in the six months ended July 31, 1997 and the six months ended July 31,
1998, respectively, primarily as a result of sales from the retail stores
acquired.
Gross Margin. Gross margin as a percentage of total revenues decreased from
36.1% to 29.2% for the six months ended July 31, 1997 and the six months ended
July 31, 1998, respectively. The percentage decrease was a result of the
implementation by the Company of an online competitive pricing policy and was
partially offset by the inclusion of higher margin retail sales as a result of
the acquisition of CLBI in May 1997. The Company has offered, and expects to
continue to offer in the foreseeable future, discounts on various product
offerings to encourage new customers and online traffic. Such pricing pressure
is likely to reduce gross margins in the future but may be partially offset by
the change in mix of products sold towards higher margin technology based
training materials, product manuals and research reports.
25
<PAGE> 27
Sales and Marketing Expenses. Sales and marketing expenses consist
primarily of direct expenses associated with the Company's retail stores and
also include advertising, promotional and public relations expenditures, payroll
and related expenses for personnel engaged in corporate sales, marketing and
fulfillment. Sales and marketing expense increased from $1.2 million, or 43.0%
of total revenues, to $4.1 million, or 44.0% of total revenues, for the six
months ended July 31, 1997 and the six months ended July 31, 1998, respectively.
The increase in absolute dollars was primarily attributable to sales and
marketing expenses related to operating the Company's four retail stores
following the acquisition of CLBI in May 1997, the expansion of the Company's
online store and its direct sales force, the increase in advertising, public
relations and other promotional expenditures, and the increased personnel and
related expenses required to implement the Company's marketing strategy and
fulfill customer demand. The Company intends to pursue aggressive branding,
marketing and telesales campaigns to generate increased online traffic and
acquire customers. Accordingly, the Company expects sales and marketing expenses
to increase in absolute dollars for the foreseeable future, but decrease as a
percentage of total revenues as total revenues increase.
Development and Engineering Expenses. Development and engineering expenses
primarily consist of costs associated with systems and telecommunications
infrastructure, editorial operations and content acquisition. Development and
engineering expenses increased from $213,000, or 7.4% of total revenues, to $1.1
million, or 12.5% of total revenues, for the six months ended July 31, 1997 and
the six months ended July 31, 1998, respectively. The increase in absolute
dollars was primarily attributable to increased staffing and associated costs
related to enhancing the features, content and functionality of the Company's
online store and transaction-processing systems, as well as increased
investments in systems and telecommunications infrastructure. To date, all
development and engineering costs have been expensed as incurred. The Company
believes that continued investment in systems and infrastructure development is
critical to attaining its strategic objectives and, as a result, expects
development and engineering expenses to increase significantly in absolute
dollars for the foreseeable future, but decrease as a percentage of total
revenues as total revenues increase.
General and Administrative Expenses. General and administrative expenses
consist of payroll and related costs associated with executive, accounting and
administrative personnel, recruiting, professional service fees and other
general corporate expenses. General and administrative expenses increased from
$596,000, or 20.7% of total revenues, to $1.2 million, or 13.3% of total
revenues, for the six months ended July 31, 1997 and the six months ended July
31, 1998, respectively. This increase in absolute dollars was primarily due to
increased salaries and related expenses associated with the hiring of additional
personnel and increases in professional fees. The decrease in general and
administrative expenses as a percentage of total revenues was primarily the
result of an increased revenue base. The Company expects general and
administrative expenses to increase in absolute dollars as the Company expands
its staff and incurs additional costs related to the expansion of its business
and the costs resulting from being a public company, but decrease as a
percentage of total revenues as total revenues increase.
Interest, Net. Interest, net is comprised primarily of interest income from
the investment of cash proceeds from financing activities, less interest expense
on short-term borrowings. Net interest income was $23,000 as compared with
$99,000 for the six months ended July 31, 1997 and the six months ended July 31,
1998, respectively.
FISCAL 1997 COMPARED TO FISCAL 1998
Online Revenue. Online revenue increased from $180,000 in fiscal 1997 to
$3.0 million in fiscal 1998. This increase was primarily attributable to
increased awareness of the Company's online product offerings and the resulting
increase in new customers (from 1,614 to 19,979), and repeat purchases. The
decrease in online revenue as a percentage of total revenues from 100% in fiscal
1997 to 27.6% in fiscal 1998 was primarily attributable to the Company's
acquisition of CLBI in May 1997. Online revenue derived from international sales
accounted for approximately 33.4% and 21.4% of online revenue in fiscal 1997 and
fiscal 1998, respectively.
Retail and Other Revenue. Although the Company had no significant retail
and other revenue in fiscal 1997, it generated $7.9 million in retail and other
revenue during fiscal 1998 representing 72.4% of total
26
<PAGE> 28
revenues. Substantially all of fiscal 1998 retail and other revenue was
attributable to the inclusion of CLBI results of operations after the
acquisition of CLBI in May 1997.
Cost of Online Revenue. Cost of online revenue increased from $150,000, or
83.3% of online revenue, in fiscal 1997, to $2.2 million, or 72.5% of online
revenue, in fiscal 1998, primarily as a result of increased online sales.
Cost of Retail and Other Revenue. In fiscal 1997, there was no cost of
retail and other revenue. Cost of retail and other revenue was $5.2 million, or
65.8% of retail and other revenue, in fiscal 1998.
Gross Margin. Gross margin as a percentage of total revenues increased from
16.7% in fiscal 1997 to 32.4% in fiscal 1998 as the Company began to achieve
economies of scale from the operation of its online store and inclusion of
higher margin retail and other revenue resulting from the acquisition of CLBI in
May 1997.
Sales and Marketing Expenses. Sales and marketing expenses increased from
$130,000, or 72.2% of total revenues, in fiscal 1997 to $4.2 million, or 38.3%
of total revenues, in fiscal 1998. The increase in absolute dollars was
primarily attributable to sales and marketing expenses related to operating the
Company's four retail stores following the acquisition of CLBI in May 1997, the
expansion of the Company's online store and its direct sales force, the increase
in advertising, public relations and other promotional expenditures, and the
increased personnel and related expenses required to implement the Company's
marketing strategy and fulfill customer demand. The decrease as a percentage of
total revenues was primarily attributable to an increased revenue base.
Development and Engineering Expenses. Development and engineering expenses
increased from $110,000, or 61.1% of total revenues, in fiscal 1997 to $860,000,
or 7.8% of total revenues, in fiscal 1998. This increase in absolute dollars was
primarily attributable to increased staffing and costs related to enhancing the
features, content and functionality of the Company's online store and
transaction-processing systems, as well as increased investments in systems and
telecommunications infrastructure. Such expenses decreased significantly as a
percentage of total revenues in fiscal 1998 due to the substantial increase in
fiscal 1998 total revenues.
General and Administrative Expenses. General and administrative expenses
increased from $412,000 in fiscal 1997 to $1.7 million, or 15.3% of total
revenues, in fiscal 1998. This increase in absolute dollars was primarily
attributable to increased salaries and related expenses associated with the
hiring of additional personnel, increases in professional fees and travel. Such
expenses decreased as a percentage of total revenues in fiscal 1998 due to the
increase in fiscal 1998 total revenues.
Interest, Net. Net interest income in fiscal 1997 was $55,000 compared to
net interest expense of $7,000 in fiscal 1998. Net interest income in fiscal
1997 resulted from the investment of cash proceeds from financing activities.
Interest expense during fiscal 1998 was primarily attributable to borrowings on
the Company's bank line of credit.
Provision for Income Taxes. The Company recorded no provision for income
taxes in fiscal 1997 and fiscal 1998, as it incurred losses during such periods.
As of September 30, 1997, the Company's year end for tax reporting purposes, the
Company had net operating loss carryforwards of approximately $3.0 million for
federal and state income tax purposes. If not utilized, the net operating loss
carryforwards will expire through 2004 and 2013 for state and federal income tax
purposes, respectively. Under the Tax Reform Act of 1986 and the California
Conformity Act of 1987, the amount of and the benefit from net operating losses
that can be carried forward may be impaired in certain circumstances, including,
for example, a cumulative ownership change of more than 50% over a three-year
period.
RECENT DEVELOPMENTS
Based on preliminary analysis of its operating results for the three months
ended October 31, 1998, the Company had online revenues of $2.9 million and
retail and other revenue of $2.3 million. The number of online customers was
increased to 58,576 as of October 31, 1998. On September 28, 1998, the Company
closed its retail store in Cupertino, California.
27
<PAGE> 29
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited selected quarterly results
of operations data for the six quarters ended July 31, 1998 as well as such data
expressed as a percentage of total revenue. In the opinion of management, this
information has been prepared substantially on the same basis as the audited
Financial Statements appearing elsewhere in this Prospectus, and all necessary
adjustments, consisting only of normal recurring adjustments, have been included
in the amounts stated below to present fairly the unaudited quarterly results
when read in conjunction with the Financial Statements of the Company and
related Notes thereto appearing elsewhere in this Prospectus. The operating
results for any quarter are not necessarily indicative of results for any future
period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------
APRIL 30, JULY 31, OCT. 31, JAN. 31, APRIL 30, JULY 31,
1997 1997 1997 1998 1998 1998
--------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Online............................. $ 176 $ 444 $1,089 $ 1,312 $ 1,761 $ 2,464
Retail and other................... 71 2,192 3,124 2,540 2,633 2,351
----- ------ ------ ------- ------- -------
Total revenues.............. 247 2,636 4,213 3,852 4,394 4,815
Cost of revenues:
Online............................. 115 303 802 969 1,326 1,965
Retail and other................... 53 1,372 2,041 1,750 1,688 1,538
----- ------ ------ ------- ------- -------
Total cost of revenues...... 168 1,675 2,843 2,719 3,014 3,503
----- ------ ------ ------- ------- -------
Gross profit......................... 79 961 1,370 1,133 1,380 1,312
Operating expenses:
Sales and marketing................ 272 968 1,126 1,826 1,986 2,070
Development and engineering........ 76 137 311 336 554 594
General and administrative......... 123 473 552 526 543 681
----- ------ ------ ------- ------- -------
Total operating expenses.... 471 1,578 1,989 2,688 3,083 3,345
----- ------ ------ ------- ------- -------
Loss from operations................. (392) (617) (619) (1,555) (1,703) (2,033)
Interest, net........................ 31 (8) (27) (3) 32 67
----- ------ ------ ------- ------- -------
Net loss............................. $(361) $ (625) $ (646) $(1,558) $(1,671) $(1,966)
===== ====== ====== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------
APRIL 30, JULY 31, OCT. 31, JAN. 31, APRIL 30, JULY 31,
1997 1997 1997 1998 1998 1998
--------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF TOTAL REVENUES:
Revenues:
Online............................... 71.3% 16.8% 25.8% 34.1% 40.1% 51.2%
Retail and other..................... 28.7 83.2 74.2 65.9 59.9 48.8
------ ----- ----- ----- ----- -----
Total revenues................ 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues(1):
Online............................... 65.3 68.2 73.6 73.9 75.3 79.7
Retail and other..................... 74.6 62.6 65.3 68.9 64.1 65.4
------ ----- ----- ----- ----- -----
Total cost of revenues........ 68.0 63.5 67.5 70.6 68.6 72.8
------ ----- ----- ----- ----- -----
Gross profit........................... 32.0 36.5 32.5 29.4 31.4 27.2
Operating expenses:
Sales and marketing.................. 110.1 36.7 26.7 47.4 45.2 43.0
Development and engineering.......... 30.8 5.2 7.4 8.7 12.6 12.3
General and administrative........... 49.8 17.9 13.1 13.7 12.4 14.1
------ ----- ----- ----- ----- -----
Total operating expenses...... 190.7 59.9 47.2 69.8 70.2 69.4
------ ----- ----- ----- ----- -----
Loss from operations................... (158.7) (23.4) (14.7) (40.4) (38.8) (42.2)
Interest, net.......................... 12.6 (0.3) (0.6) (0.1) 0.7 1.4
------ ----- ----- ----- ----- -----
Net loss............................... (146.2)% (23.7)% (15.3)% (40.4)% (38.0)% (40.8)%
====== ===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) Cost of online revenue and cost of retail and other revenue are shown as a
percentage of related online revenue and retail and other revenue,
respectively.
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The Company expects to experience significant fluctuations in its future
quarterly operating results due to a variety of factors, many of which are
outside the Company's control. Factors that could affect the Company's quarterly
operating results include: (i) the Company's ability to establish and expand
brand recognition, (ii) the Company's ability to retain existing customers,
attract new customers and continuously improve customer satisfaction, (iii)
announcements of, and market anticipation for, new technology offerings for
which information resources may be sought, (iv) the Company's ability to manage
inventory and fulfillment operations, (v) the Company's ability to sustain or
improve gross margins, (vi) the announcement or introduction of new online
stores, services and products by the Company or competitors, (vii) price
competition or higher wholesale prices in the industry, (viii) the level of
usage of and commerce on the Internet and online services generally, (ix)
increasing customer acceptance of the Internet for the purchase of information
resources such as those offered by the Company, (x) the Company's ability to
upgrade and develop its systems and infrastructure in a timely and effective
manner, (xi) the level of traffic on the Company's online store, (xii) the sales
mix of the Company's product offerings, (xiii) technical difficulties, system
downtime or Internet brownouts, (xiv) the amount and timing of operating costs
and capital expenditures relating to expansion of the Company's business,
operations and infrastructure, (xv) the introduction of books, technology based
training solutions, product manuals and research reports, (xvi) the level of
merchandise returns experienced by the Company, (xvii) governmental regulation
and (xviii) general economic conditions and economic conditions specific to the
Internet, electronic commerce and the technical resource industries.
In the past, the Company has experienced seasonality in its business and
the Company expects that it will continue to experience such seasonality in the
future. Internet usage and the amount of purchases from individual and corporate
consumers tend to decline during August, November and December, times when many
technical professionals are either absent from the workplace, on vacation or
experience a holiday closure at their company. There can be no assurance that
the Company's results in any future quarter will not be negatively affected by
seasonal trends.
Due to the foregoing factors, the Company's quarterly revenue and operating
results are difficult to forecast, and the Company believes that
period-to-period comparisons of its operating results will not necessarily be
meaningful and should not be relied upon as an indication of future performance.
It is likely that in one or more future quarters the Company's operating results
may fall below the expectations of securities analysts and investors. In such
event, the trading price of the Common Stock would likely be materially
adversely affected. See "Risk Factors -- Unpredictability of Future Revenues;
Potential Fluctuations in Quarterly Operating Results; Seasonality."
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
private sales of Preferred Stock which totaled approximately $19.3 million (net
of issuance costs) through July 1998.
Net cash used in operating activities was $574,000 in fiscal 1997 and $2.7
million in fiscal 1998. Cash used in operating activities in fiscal 1997 was
primarily attributable to a net loss of $567,000 and increases in inventories,
prepaid expenses and other assets, partially offset by an increase in accounts
payable and accrued expenses, as well as depreciation and amortization. For
fiscal 1998, cash used in operating activities primarily resulted from a net
loss of $3.2 million plus increases of $1.1 million in inventories, $173,000 in
prepaid expenses and other assets, offset by net increases of $1.6 million in
accounts payable and accrued expenses and $297,000 in depreciation and
amortization.
Net cash used in operating activities was $343,000 and $4.8 million in the
six months ended July 31, 1997 and the six months ended July 31, 1998,
respectively. Cash used in operating activities in the six months ended July 31,
1997 was primarily attributable to a net loss of $986,000, an increase in
prepaid expenses and other assets of $118,000 and a decrease in accrued expenses
of $132,000 partially offset by an increase in accounts payable of $845,000. For
the six months ended July 31, 1998, cash used in operating activities primarily
resulted from a net loss of $3.6 million, an increase in accounts receivable,
inventories and prepaid and other
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<PAGE> 31
assets of $358,000, $296,000 and $613,000, respectively, and net decreases in
accounts payable and accrued expenses of $129,000, partially offset by
depreciation and amortization.
Net cash used in investing activities was $140,000 and $5.3 million in
fiscal 1997 and fiscal 1998, respectively. Investing activities in fiscal 1998
are related primarily to the acquisition of CLBI in May 1997 for $4.3 million
(net of cash acquired) and purchases of property and equipment of $941,000. Net
cash used in investing activities was $4.5 million and $645,000 for the six
months ended July 31, 1997 and the six months ended July 31, 1998, respectively.
Investing activities in the six months ended July 31, 1997 are related to the
acquisition of CLBI in May 1997 for $4.3 million (net of cash acquired) and
purchases of property and equipment of $176,000. Investing activities in the six
months ended July 31, 1998 are primarily attributable to purchases of property
and equipment.
Cash provided by financing activities was $3.9 million and $9.7 million in
fiscal 1997 and fiscal 1998, respectively, consisted primarily of proceeds from
the issuance of Preferred Stock. Cash provided by financing activities of $3.5
million in the six months ended July 31, 1997 consisted of $2.5 million in
proceeds from the issuance of preferred stock and $1.0 million in borrowings on
a line of credit. Cash provided by financing activities of $5.6 million in the
six months ended July 31, 1998 consisted primarily of proceeds from the issuance
of preferred stock. The Company has a $3.0 million line of credit which expires
on November 30, 1998. As of July 31, 1998, the Company has no borrowings
outstanding under its line of credit.
As of July 31, 1998, the Company had $5.1 million of cash and equivalents.
As of that date, the Company's principal commitments consisted of obligations
outstanding under an agreement with CBT Systems, Ltd. and operating and capital
leases. Although the Company has no material long-term commitments for capital
expenditures, it anticipates a substantial increase in its capital expenditures
and lease commitments consistent with anticipated growth in operations,
infrastructure and personnel.
The Company believes that the net proceeds from this offering, combined
with its current cash and equivalents and its available bank line of credit,
will be sufficient to meet its anticipated cash needs for working capital and
capital expenditures for at least twelve months from the date of this
Prospectus. The Company's future liquidity and capital requirements will depend
upon numerous factors discussed under the section entitled "Risk Factors." The
Company's forecast of the period of time through which its financial resources
will be adequate to support its operations is a forward-looking statement that
involves risks and uncertainties, and actual results could vary. The factors
described in "Risk Factors" will impact the Company's future capital
requirements and the adequacy of its available funds. If cash generated from
operations is insufficient to satisfy the Company's liquidity requirements, the
Company may seek to sell additional equity or debt securities or to increase its
bank line of credit. The sale of additional equity or convertible debt
securities could result in additional dilution to the Company's stockholders.
There can be no assurance that financing will be available in amounts or on
terms acceptable to the Company, if at all.
The Company has entered into employment agreements with Mr. MacAskill, its
President and Chief Executive Officer; Mr. Orumchian, its Vice President of
Engineering; Mr. Alvarez, its Vice President of Finance and Chief Financial
Officer; and Mr. Cudd, its Vice President of Marketing. Each employment
agreement sets forth each officer's base salary and general employee benefits,
including acceleration of a portion of such employees Common Stock option
vesting. The employment agreements with Messrs. MacAskill and Orumchian also
provide that in the event that either is terminated without cause or due to
disability, he will receive a severance payment equal to six months of salary,
payable in equal monthly installments over a six-month period. See
"Management -- Employment Agreements and Change in Control Agreements."
The Company has purchase obligations to CBT Systems, Ltd. under the
agreement with such company dated March 7, 1998, as amended from time to time.
See Note 10 of Notes to Financial Statements.
The Company leases office and warehouse space, retail store space and
equipment under noncancellable operating leases. See Note 8 of Notes to
Financial Statements.
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YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field and cannot distinguish
21st century dates from 20th century dates. These date code fields will need to
distinguish 21st century dates from 20th century dates. This could result in
system failures or miscalculations causing disruptions of operations including,
among other things, a temporary inability to process transactions, send invoices
or engage in similar normal business activities. As a result, many companies'
software and computer systems may need to be upgraded or replaced in order to
comply with such "Year 2000" requirements. Although the Company believes that
its products and internal systems are Year 2000 compliant, the Company utilizes
third-party equipment and software that may not be Year 2000 compliant. Failure
of such third-party equipment or software to operate properly with regard to the
Year 2000 and thereafter could require the Company to incur unanticipated
expenses to remedy any problems, which could have a material adverse effect on
the Company's business, operating results and financial condition. Furthermore,
the purchasing patterns of customers or potential customers may be affected by
Year 2000 issues as companies expend significant resources to correct their
current systems for Year 2000 compliance. Any failure by the Company to make its
products Year 2000 compliant could result in a decrease in sales of the
Company's products, an increase in the allocation of resources to address Year
2000 problems of the Company's customers without additional revenue commensurate
with such dedication of resources, or an increase in litigation costs relating
to losses suffered by the Company's customers due to such Year 2000 problems.
These expenditures may result in reduced funds available to purchase products
and services such as those offered by the Company, which could have a material
adverse effect on the Company's business, operating results and financial
condition. The Company has conducted a preliminary review of its internal
computer systems to identify the systems that could be affected by the Year 2000
issue and to develop a plan to resolve the issue. Based on this preliminary
review, the Company currently has no reason to believe that its internal
software systems are not Year 2000 compliant, however, the Company will continue
to evaluate its systems and in the event the Company concludes that its systems
are not Year 2000 compliant, it will develop a contingency plan to address these
issues. See "Risk Factors -- Year 2000 Compliance."
RECENT ACCOUNTING PRONOUNCEMENT
In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of an
Enterprise and Related Information ("Statement 131"). Statement 131 establishes
standards for the way that public business enterprises report information about
operating segments. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. Statement 131 is
effective for fiscal years beginning after December 15, 1997. In the initial
year of application, comparative information for earlier years must be restated.
The Company has not determined the manner in which it will present the
information required by Statement 131.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which defines derivatives, requires that all
derivatives be carried at fair value, and provides for hedging accounting when
certain conditions are met. This statement is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. Although the Company has not
fully assessed the implications of this new statement, the Company does not
believe adoption of this statement will have a material impact on the Company's
financial statements.
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BUSINESS
OVERVIEW
Computer Literacy is the leading online retailer of information resources
singularly focused on the technical professional. With over 300,000 information
resource titles from more than 8,000 publishers, Computer Literacy offers its
customers online access to a broad and comprehensive selection of technical
books, technology based training solutions, product manuals, research reports
and other information resources. In addition to the Company's extensive product
offering, Computer Literacy's online store features authoritative and compelling
content, competitive pricing, an easy-to-use navigational interface and a
variety of value-added services. The Company also operates four physical retail
stores that complement its online business by generating increased online
traffic, building the Company's brand and creating cross-promotional
opportunities, thereby providing a profitable means of customer acquisition.
Computer Literacy has quickly become one of the most widely recognized
online retailers of information resources for the technical professional. To
enhance brand recognition and increase online traffic, the Company has
established a number of strategic alliances with publishers and other suppliers
of information resources for technical professionals. For example, the Company
has established an alliance with CBT to sell CBT's full library of technology
based training materials, containing over 600 titles. In addition, the Company
has established co-branded online stores with a number of technology companies,
including Apple, Cisco, Hewlett-Packard, Microsoft, SAP and Sun Microsystems.
The Company believes that these customized corporate online stores, combined
with its commitment to customer service and readily available product offerings,
create valuable long-term relationships and repeat purchasing patterns.
Since launching its online store in February 1996, the Company has
experienced rapid online revenue growth. On May 31, 1997, the Company completed
the acquisition of all of the outstanding capital stock of Computer Literacy
Bookshops, Inc., a retailer of computer books, with four stores located in
California and Virginia for a purchase price of approximately $5.1 million. For
the two-year period ended July 31, 1998, Computer Literacy generated total
online revenues of over $7.4 million (over $2.4 million of which was generated
during the three months ended July 31, 1998), representing a compound average
quarterly growth rate of approximately 175%. In addition, the number of online
customers has grown from approximately 1,600 as of January 31, 1997 to over
44,000 as of July 31, 1998, and repeat purchases have accounted for
approximately 49% of the Company's online revenue from inception to July 31,
1998. See "Risk Factors -- Limited Operating History; Accumulated Deficit;
Anticipated Losses."
INDUSTRY BACKGROUND
The Growth of the Internet and Electronic Commerce
The Internet is an increasingly significant global medium for
communications, content and commerce. According to International Data
Corporation ("IDC"), there were an estimated 69 million domestic and
international Web users at the end of 1997, and it is anticipated that there
will be approximately 320 million Web users by the end of 2002. Growth in
Internet usage has been fueled by a number of factors, including: (i) a large
and increasing installed base of personal computers at home and in the
workplace, (ii) advances in the performance of personal computers and modems,
(iii) improvements in network systems and infrastructure, (iv) more readily
available access to the Internet, (v) increased awareness of the Internet among
businesses and consumers, (vi) growing availability of information and services
on the Web and (vii) reduced security risks in conducting transactions online.
The increasing functionality, availability and overall usage of the
Internet enables online retailers to access customers in a manner unprecedented
by traditional retailers or mail-order catalogs. The reduced cost of selling and
marketing on the Web, the ability to serve a large and global group of customers
electronically from a central location and the potential for personalized
low-cost customer interaction provide significant economic benefits for online
retailers. Unlike traditional retailers, online retailers do not have the costs
of managing and maintaining a significant retail store infrastructure or the
printing and mailing costs of catalog marketing. Because of these advantages,
online retailers have the potential to build large, global customer
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bases quickly and to achieve economies of scale over the long term. IDC
estimates that the amount of commerce conducted over the Web will grow from over
$12 billion at the end of 1997 to more than $425 billion by the end of 2002.
Technical Professionals and Their Information Resource Requirements
Organizations increasingly seek technology solutions for competitive
advantages and rely upon such solutions for mission-critical business processes.
As a result, the demand for technical professionals has grown significantly.
According to Dataquest, there were 6.1 million professional programmers
worldwide as of 1995, and based on information derived from the U.S. Bureau of
Labor Statistics, the Company believes that there were over 2 million other
technical professionals in the U.S. as of 1996. In addition, according to the
U.S. Bureau of Labor Statistics, computer scientists, computer engineers, and
systems analysts are expected to be the three fastest growing occupations in the
U.S. through the year 2006. In order to remain knowledgeable with respect to the
latest technical innovations and to maximize the competitive advantages provided
by these new technologies, technical professionals must have access to
immediately available information resources that are highly specific and contain
authoritative content. These information resources, including technical books,
technology based training solutions, product manuals and research reports,
traditionally have been available only from disparate sources.
Technical Books. The market for technical books is large and relatively
fragmented. Based on industry data the Company believes that the wholesale
market for technical books was approximately $1 billion in 1996. Traditionally,
technical books have been sold through small, local and independent technical
bookstores and, to a lesser extent, through computer or book superstores. These
traditional retail channels typically require customers to travel to physical
retail locations and are further limited by their product selection,
inconvenient hours of operation and degree of authoritative content.
Technology Based Training Solutions. To address training requirements for
an increasing number of products and technologies, technical professionals and
their managers are increasingly seeking current technical training covering a
broad range of topics and skill levels that can be delivered on multiple
formats. According to IDC, revenue from all technology based training solutions
in the United States is expected to grow from $1.5 billion in 1997 to $7.7
billion in 2002. Courseware from vendors, including interactive CD-ROMs, network
resident programs and video tapes, allows employees to tailor training to their
work schedules, to begin training at a level that is suitable to their needs, to
integrate training with on-the-job practice, to train in only those topics that
are relevant to their needs and to access training materials on an ongoing basis
as reference tools. Much of the technology based training is interactive,
allowing users to practice and test skills as they learn. To date, the market
for technology based training solutions has been highly fragmented with many
publishers primarily selling directly to end users. As a result, technology
based training solutions are typically difficult to locate and undeliverable
within tight time constraints.
Product Manuals, Research Reports and Other Technical Information. In
addition to technical books and technology based training, the Company believes
there is a sizeable and growing market for product manuals, research reports and
other information resources that technical professionals rely on for maintaining
existing technology or evaluating new technology. Although the market for
product manuals is driven by the increasing sales of hardware and software,
vendors are seeking alternatives to the production of such materials, including
outsourcing, printing and distribution in an effort to focus employee resources
on the core competencies of the organization. Very few product manuals and
research reports are distributed through third party resellers and, when
available from such sources, may be undeliverable within tight time constraints
or in sufficient quantity.
Technical professionals must stay abreast of technology developments and
respond quickly to changes or updates to such technology. Delays or unanswered
questions often result in missed deadlines, lost customer communications,
inaccessibility to mission-critical information and lost business opportunities.
Technical professionals therefore demand an extensive selection of information
resources, authoritative and compelling content to assist purchasing decisions,
customer convenience and value-added service, none of which have traditionally
been available from a single or centralized source.
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THE COMPUTER LITERACY SOLUTION
Since opening its online store in February 1996, Computer Literacy has
become one of the most widely recognized online retailers of information
resources for technical professionals. By offering customers a selection of more
than 300,000 titles, as well as competitive pricing and a strong commitment to
customer service, the Company believes it has achieved a leading position among
retailers in its category. Computer Literacy further believes that the
demographics of technical professionals overlap one-to-one with those of
Internet users, providing an exceptional target market for the Company's product
offerings. The Company's solution consists of the following key attributes:
Extensive Product Selection. Computer Literacy offers the most extensive
selection of information resources for the technical professional, including
technical books, technology based training solutions, product manuals and
research reports from more than 8,000 publishers. The Company believes that its
online platform is particularly suited to offer a comprehensive selection of
information resources that would be impractical for physical retail stores to
provide. This extensive selection enables technical professionals to obtain the
information resources they need in a timely and efficient manner. In March 1998,
the Company entered into an agreement with CBT to sell CBT's full library of
technology based training materials, containing over 600 titles. The agreement
is for an initial term of three years and three months and shall automatically
renew for additional one-year terms unless terminated by either party pursuant
to the terms of the agreement.
Corporate Programs. Computer Literacy has corporate sales personnel whose
focus is to fulfill the information resource needs of organizations and their
employees and constituents. The Company sells primarily to purchasing agents and
corporate librarians as well as to individual employees within these
organizations and to their customers or constituents. The Company has also
established customized co-branded online stores focused on specific product
offerings for certain corporate customers, including Apple, Cisco,
Hewlett-Packard, Microsoft, SAP and Sun Microsystems. These co-branded online
stores minimize time and travel expenditures, simplify payment and reimbursement
processes and improve access to relevant information resources.
Highly Authoritative and Compelling Content. Computer Literacy offers
technical professionals authoritative and compelling content to facilitate
informed purchasing decisions. Computer Literacy's knowledgeable editorial staff
delivers relevant, informative and insightful commentary through synopses,
reviews and recommendations. In addition, reviews and recommendations by
authors, other technical professionals, publishers and recognized industry
experts provide diverse and stimulating points of view. The availability of this
content at the Company's online store allows technical professionals to quickly
identify the resources that specifically address their needs.
Customer Convenience. Purchasing from Computer Literacy's online store is
easy, quick and convenient. Computer Literacy's online store is available 24
hours a day, seven days a week, and customer service may be accessed via e-mail
or through the Company's toll-free helpline. Because the Computer Literacy
online store has a global reach, it can deliver a broad selection of technical
resources to customers in rural, international or other locations who would not
otherwise have access to such resources. Computer Literacy accepts credit cards,
checks, money orders and, for approved corporate customers, extends trade credit
through purchase orders. To maximize the availability of information resources,
Computer Literacy strives to ship 90% of all orders received weekdays by 4:00
p.m. Pacific Time on the same day.
Value-added Services. Computer Literacy has designed its online store to
incorporate certain value-added services that enhance the customer experience
and promote repeat purchasing. Computer Literacy's online store offers several
notification services allowing customers to subscribe to preference lists that
notify them with e-mails of weekly specials, new books and upcoming events. For
books not yet in print, customers can order in advance of the release date
ensuring access to the most current information as soon as it becomes available.
Orders are confirmed by e-mail notifications and customers are able to check the
status of their orders online. In addition to notification services, the Company
obtains certain preference and behavioral information, enabling it to offer
other value-added customized services to its customers. The Company has also
established several special interest group reading rooms covering specific
technical topics. These reading
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<PAGE> 36
rooms provide customized, in-depth technical resources, recommendations and
content to facilitate purchasing decisions.
Substantial Benefits to Publishers. Computer Literacy offers a sales and
marketing channel not previously available for certain publishers and suppliers.
The Company believes that by focusing on technical professionals, it is able to
increase sales of specialized and unique titles not typically available in
physical stores or on other Web sites, while helping publishers target customers
for particular product offerings. With its centralized distribution and online
store, Computer Literacy is able to order more accurately based upon aggregated
customer demand, which the Company believes results in reduced return rates to
publishers and more efficient inventory management.
STRATEGY
Computer Literacy's objective is to maintain and extend its leadership
position as an online retailer of information resources singularly focused on
the technical professional. Key elements of the Company's strategy to achieve
this objective include:
Enhance the Customer Experience. Computer Literacy seeks to provide its
customers with a superior online shopping experience by offering an extensive
selection, authoritative and compelling content, convenience, value-added
service, a strong commitment to customer service, competitive pricing and an
easy-to-use interface. The Company believes that enhancements to its online
product offering will enable it to capture an increasing share of the worldwide
market for information resources. The Company expects to continue investing in
its technology and product development to maintain a state-of-the-art, simple to
use and content-rich online store, while broadening and expanding its product
offerings.
Expand Corporate Relationships. Computer Literacy believes that there is a
significant opportunity to increase its sales by expanding its corporate sales
force and adding telesales capacity to focus on small and midsized businesses,
educational institutions and government agencies. Such corporate relationships
provide a cost-effective means of acquiring a large number of loyal customers
quickly and efficiently. In addition, by building customized co-branded online
stores for many of these corporate customers, the Company is able to secure and
leverage its position with the customer as the preferred provider of information
resources for technical professionals.
Build Brand Awareness. Computer Literacy believes it is the first online
retailer to singularly focus on providing information resources to the technical
professional. To leverage its first-mover advantage, the Company seeks to expand
awareness of its brand with targeted online marketing campaigns, a direct sales
force and other marketing initiatives, thereby reducing customer acquisition
costs. The Company's strategy is to promote, advertise and increase brand equity
through excellent customer service, effective marketing and promotion, and with
strategic alliances and partnerships.
Encourage Customer Loyalty. Computer Literacy believes that its customized
corporate online stores, its commitment to customer service and readily
available product offerings create valuable long-term relationships and repeat
purchasing behavior. The Company intends to further pursue customized online
retail opportunities and devote significant resources to encourage overall
customer loyalty.
Capitalize on Expanding Market. Computer Literacy intends to capitalize on
the growing market for information resources by leveraging its online platform
and brand, and by providing an extensive selection of products and services
previously unavailable through a single or centralized source. In addition, the
Company will consider developing incremental revenue opportunities by promoting
its products through affiliated sites and expanding into related product areas.
The Company believes that the international market for its product offering is
large and expanding and that the Internet offers a unique opportunity for it to
expand its international presence quickly and cost-effectively. Further, the
Company's customer demographics and substantial site traffic creates a
meaningful opportunity for potential ancillary revenues such as banner
advertising, links to related sites and cross promotions.
Establish and Leverage Supplier Relationships. Computer Literacy intends to
capitalize upon the advantages associated with its online platform to create and
sustain strong relationships with publishers and
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other suppliers. The Company also intends to leverage its market leadership
position to expand cooperative marketing campaigns with publishers, pursue
direct supply relationships and improve volume discounts. Computer Literacy
plans to hire additional personnel primarily dedicated to establishing and
maintaining supplier relationships in order to improve availability, delivery,
pricing terms and, in certain circumstances, exclusivity.
Maintain Technology Focus and Expertise. Because speed, scalability and
ease of use are essential to effectively operating online stores, Computer
Literacy's internal engineering group will continue to devote substantial
resources to develop, acquire and implement technological enhancements to its
Web site and transaction-processing systems. Among other technology objectives,
the Company intends to provide increasingly value-added services and make the
user interface as intuitive, engaging and effective as possible, while
continuously improving the efficiency of its transaction-processing and
fulfillment activities.
COMPUTER LITERACY'S ONLINE STORE
Customers enter the Computer Literacy online store through the Company's
Web site and, in addition to ordering technical books, technology based training
solutions, research reports and product manuals, customers can conduct targeted
searches, browse highlighted selections, bestsellers and other features, read
and post reviews, register for value-added services, check order status and
participate in promotions.
Browsing. The Computer Literacy online store offers visitors a variety of
highlighted subject areas and special features. Popular features include
"bestsellers," "whatshot" and "clrecommends," which enable individuals to view
the most popular and best selling items. The "techcenters" area directs
customers to information resources for particular subject categories such as
Java or C++, and "partnershelves" provides the user with titles and selections
specific to products from technology leaders such as Cisco, Hewlett-Packard,
Microsoft and Sun Microsystems. In addition, the Computer Literacy home page
presents a variety of other features of topical or current-event interest, such
as "whatsnew" which allows customers to be notified of recent releases of new
versions and "eventscalendar" which provides the user information on store
events and tradeshows. Further, customers can click on the "suggestions" button,
located at the bottom of each page, and make a suggestion to the Company.
Searching. A primary feature of the Computer Literacy online store is its
interactive, searchable catalog of more than 300,000 titles. The Company
provides a selection of search tools enabling users to quickly find technical
resources based on title, subject, author, publisher or ISBN. Within a
particular search, a customer can choose to sort the selections in various
orders of importance. The Company believes that its focus on technical materials
allows for an efficient search mechanism by delivering search results of
relevant technical materials. After a selection has been located, Computer
Literacy informs customers of related products which provides unique up-selling
and marketing opportunities.
Ordering. To purchase products, customers simply click on an icon to add
books to their online shopping basket and can remove products from their
shopping baskets as they browse. To execute orders, customers click on the
"checkout" icon and are prompted to supply shipping and credit card details,
either online, by e-mail or by telephone. Customer account information is stored
on the Company's secure servers and is automatically recalled for subsequent
purchases. Personal passwords allow repeat customers to automatically access
previously provided information, as well as book notification profiles. The
Company's system automatically confirms each order by e-mail within minutes
after placing the order and advises customers by e-mail shortly after orders are
shipped.
Reviews and Content. The Computer Literacy online store offers numerous
forms of content to entertain, engage and inform readers, and enhance the
customer's shopping experience. For many of its selections, customers are able
to access reviews by Computer Literacy's in-house editorial staff and other
industry leaders. In addition, customers are encouraged to write and post their
own reviews which are also available under "more information available" icons.
Within the "special items" area of the online store, customers can access other
interviews and articles by industry leaders. Due to the customer's need for
credible advice, specific background information about reviewers is posted, such
as the reviewer's profession and level
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<PAGE> 38
of expertise. In addition, the Company's practice of displaying the table of
contents for many of its selections, and often sample chapters, enables the
purchaser to evaluate the content of the item being purchased.
Availability and Fulfillment. Computer Literacy strives to ship 90% of all
orders received weekdays by 4:00 p.m. Pacific Time on the same day. Below each
product offering is a symbol that indicates whether such item is in stock.
Customers select from a variety of delivery options, including overnight and
various international shipping alternatives. The Company seeks to provide rapid
and reliable fulfillment of customer orders, and intends to continue to improve
its record of availability and fulfillment. See "-- Warehousing and
Fulfillment."
Customized Online Stores. The Company's co-branded online stores are
accessible through the Company's home page or from the intranet sites of
corporate customers, and provide the Company with opportunities to be the
preferred provider of information resources to organizations and their employees
and constituents.
The following table depicts the Company's best selling titles in terms of
dollar volume from February 1, 1998 through July 31, 1998:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRODUCT TYPE
(APPROXIMATE NO. OF TITLES AVAILABLE) PRICE RANGE BEST SELLING TITLES
- ------------------------------------------
<S> <C> <C>
Technical Books (300,000) $7.25 - - Samba: Integrating UNIX and Windows
$790.00 - MCSE Core Requirements, Second Edition
- The Cisco CCIE Exam Guide
- Cisco IOS Configuration
- Computer Networks, Third Edition
- ------------------------------------------
Technology Based Training Solutions $21.95 - - Complete Cisco Curriculum
(1,600) $3,700.00 - Complete Microsoft MCSE Curriculum
- Microsoft TechNet
- ------------------------------------------
Product Manuals and Research Reports (72) $23.50 - - Microsoft Visual C+ Run-Time Library Reference
$250.00 - About the AS/400 and Internet
- Getting Started with the SAP R/3 System
</TABLE>
- --------------------------------------------------------------------------------
In addition to its online stores, Computer Literacy maintains three retail
stores, located in San Jose and Sunnyvale, California and Vienna, Virginia. For
the period beginning on the date of the CLBI acquisition through January 31,
1998, revenues attributable to these physical stores were $7.1 million. These
stores supplement the Company's operating results and provide a profitable means
of customer acquisition and branding. Additionally, the existence of the stores
enables the Company to engage in unique cross-promotional efforts and offer
in-store events such as guest lectures. The Company periodically evaluates the
location and productivity of its stores, and may close, consolidate or relocate
stores as conditions warrant. See "Risk Factors -- Unpredictability of Future
Revenues; Potential Fluctuations in Quarterly Operating Results; Seasonality."
CUSTOMERS
The Company's customers consist of both individual technical professionals,
who primarily purchase for business purposes, and corporate customers. Through
its relationships with corporate customers, the Company sells to purchasing
agents, corporate librarians and training departments as well as to individual
employees within these organizations. The Company has also leveraged these
corporate customer relationships into sales to constituents of the corporate
customers. The number of customer accounts has grown from approximately 1,600 as
of January 31, 1997 to over 44,000 as of July 31, 1998 and repeat purchases have
accounted for approximately 49% of online revenue from inception to July 31,
1998. No single customer accounted for more than 10% of total revenues in the
fiscal years ended January 31, 1997 or January 31, 1998 or the six months ended
July 31, 1998. The following table sets forth a representative list of the
Company's corporate accounts
37
<PAGE> 39
who have purchased at least $20,000 of the Company's technical books, technology
based training solutions, product manuals and research reports for the six month
period ended July 31, 1998:
<TABLE>
<S> <C> <C>
Cisco Systems, Inc. Microsoft Corporation Software Quality Engineering
Hewlett-Packard Company Motorola, Inc. Sun Microsystems, Inc.
Intel Corporation Prism Solutions, Inc. University of California, Santa
Lawrence Livermore National Rockwell International Corp. Cruz
Laboratory Extension
</TABLE>
Set forth below are two case studies of a representative corporate customer
relationships.
Microsoft Corporation. Computer Literacy's relationship with Microsoft
began in January 1997 when the Microsoft Corporate Library ("MS Library") began
using Computer Literacy as one of its sources to acquire materials for its
collection. In this manner, the library staff acts as central purchasing agents
to acquire resources on behalf of the entire corporate staff, who turn to the MS
Library as an internal one-stop resource for their own information needs.
Recognizing the importance of this strategic account, the Company assigned a
member of its sales team to actively manage the account, deliver personal
service, and further develop the relationship. The assigned account manager is
in weekly contact to personally resolve issues, expedite important orders, and
suggest products and services. The Company believes that the MS Library chooses
to buy from Computer Literacy because it delivers higher levels of service by
lending personal attention, accepting orders via its corporate credit card, and
offering faster shipping, all at competitive prices. In January 1998, Computer
Literacy extended its relationship with Microsoft to reach external
constituents, specifically with members of the Microsoft development community,
by collaborating with the Microsoft Site Builder Network ("SBN"). Microsoft
chose Computer Literacy as its partner to develop a co-branded store for SBN
members and visitors. This selection was based on Computer Literacy's focus on
the technology professional, its unique ability to provide value-added content,
and its commitment to partnering as demonstrated by previous relationships and
resource commitments to partnership projects. Once the selection was made,
Computer Literacy developed the SBN store site which features books of
particular interest to SBN's audience of Web developers. Together, Microsoft and
Computer Literacy promote the SBN store via vehicles such as e-mailings to over
500,000 registered SBN members, Web site links and other mechanisms.
Sun Microsystems, Inc. Sun Microsystems has a centralized library resource
that serves its entire corporate staff's information needs. Sun Microsystems was
looking for a partner who could provide a secure mechanism to enable employees
to browse and order important technical documents quickly. Sun Microsystems
chose Computer Literacy because of its unique focus on the technical
professional, immediate inventory of over 30,000 technical titles, departmental
billing, centralized purchasing control, and specialized content including
recommended reading lists. The Sun Microsystems library acts as a central
purchasing agent, and Sun Microsystem's employees are able to browse and order
at the co-branded site developed and hosted by Computer Literacy. The Sun
Microsystems library and Computer Literacy work together to help serve the
information needs of the entire employee base, by promoting this new online
channel for information resources that is co-branded with Sun Microsystems
Library and Computer Literacy logos.
SALES AND MARKETING
The Company's sales and marketing strategy is focused on both individual
consumers and organizations, which represent distinct yet complementary customer
segments. This approach is designed to cost-effectively strengthen the Company's
brand name, increase customer traffic to the Computer Literacy online store,
build customer loyalty and develop revenue opportunities through the Company's
distribution channels.
Corporate Sales. The Company has sales personnel primarily focused on
fulfilling the information resource requirements of corporate organizations and
their employees and constituents. The Company's direct sales force is
headquartered in Sunnyvale, California and each member is assigned to specific
strategic accounts. Each member of the direct sales organization, including
telesales personnel, is compensated with base salary and commissions. The
Company intends to expand its corporate sales force and add telesales capacity
to focus on small and midsized businesses, educational institutions and
governmental agencies. See
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<PAGE> 40
"Risk Factors -- Need for Additional Personnel," "-- Dependence on Key
Personnel" and "-- Management of Expanding Business; Limited Senior Management
Resources."
Marketing and Consumer Sales. Computer Literacy utilizes a variety of
programs and promotional activities to increase traffic and purchases on its Web
site and in retail locations. The Company maintains a proprietary customer
database of e-mail addresses that allows for cost-effective personal
notification and other targeted marketing. Computer Literacy continues to build
customer loyalty by delivering customized services, promotions and products to
its customers. The Company targets the individual customer through a mix of
promotional activities and strategic advertising. Over 2,000 Web sites have
links to the Company's online store. These links are located primarily on Web
sites concerning computers or other technical topics, which are considered
complementary to the Company's online store. The Company also places a limited
number of advertisements on strategic Web sites.
The Company advertises in a number of trade journals, newspapers and
magazines targeted to the information technology professionals and information
systems consultants. The Company may also pursue advertisements in other media,
such as radio and television. In addition, the Company has served as the
official bookseller of certain trade shows and conventions, such as the
Microsoft's TechEd and Software Development West. See "Risk Factors -- Risks
Associated with Branding."
International Sales. For fiscal 1998 and the six months ended July 31,
1998, approximately 21% and 22%, respectively, of online revenue was derived
from international sales. The Company believes that the Internet offers a unique
opportunity for it to rapidly expand its international presence on a
cost-effective basis and it intends to pursue this opportunity aggressively.
CUSTOMER SERVICE AND SUPPORT
The Company is committed to providing superior customer service and
support. The Company's customer service and support personnel are trained to
assist customers in purchasing decisions, recommend complementary products and
handle general customer inquiries. The Company answers service and support
questions through e-mail 24 hours a day, seven days a week, and through its
toll-free phone line from 6:00 a.m. to 8:00 p.m., Pacific time on weekdays and
9:00 a.m. to 5:00 p.m., Pacific Time on weekends. The Company has automated
certain portions of its customer service and support operations and intends to
enhance and provide further automation of such service and operations.
WAREHOUSING AND FULFILLMENT
For fiscal 1998 and the six months ended July 31, 1998 the Company
purchased approximately 30% and 36%, respectively, of its books from Ingram. The
Company relies to a large extent on rapid fulfillment from Ingram and other
vendors. The Company generally has no commitments to or arrangements with any of
its vendors that guarantee the availability of merchandise, the continuation of
particular payment terms or the extension of credit limits. There can be no
assurance that the Company's current vendors will continue to sell merchandise
to the Company on current terms or that the Company will be able to establish
new or extend current vendor relationships to ensure acquisition of merchandise
in a timely and efficient manner and on acceptable commercial terms. If the
Company were unable to develop and maintain relationships with vendors that
would allow it to obtain sufficient quantities of merchandise on acceptable
commercial terms, its business, financial condition and results of operations
would be materially adversely affected. See "Risk Factors -- Reliance on Certain
Suppliers."
The Company currently maintains a warehouse and distribution center in
Fremont, California. The Company is considering outsourcing the warehousing and
fulfillment of orders to a service provider located in closer proximity to
certain publishers, wholesalers, distributors and delivery services. There can
be no assurance that outsourcing such services will result in operating
efficiencies or will not cause a significant disruption in the fulfillment of
orders, the distraction of management and other key personnel and the
expenditure of significant financial and other resources. Any such disruption,
distraction or expenditure could materially adversely affect the Company's
business, results of operations and financial condition. See "Risk
Factors -- Fulfillment Center Relocation."
39
<PAGE> 41
TECHNOLOGY AND PRODUCT DEVELOPMENT
Using a combination of its internally developed proprietary technology and
commercially available licensed technology, the Company has implemented an
integrated system of site management, search engine, customer support, inventory
management, network monitoring, quality assurance, transaction processing and
fulfillment services. The Company's technology architecture is based on a
distributed model that is extremely scalable, flexible and modular. See "Risk
Factors -- Trademarks and Proprietary Rights; Unlicensed Arrangements and
Materials."
The Company's current strategy is to focus its development efforts on
creating and enhancing the proprietary software unique to its business,
especially as it relates to interaction with customers. Computer Literacy
licenses commercially available technology in areas where the Company cannot
create unique value. See "Risk Factors -- Dependence on Continued Growth of
Electronic Commerce; and "-- Rapid Technological Change."
The Company's integrated system consists of a dynamic Web site and
transaction processing components. The Company's dynamic Web site allows
customers to search, browse and view product information, monitor product status
and availability, compare different product options, and make purchase decisions
specific to their particular needs. The Company has implemented a transaction
processing system that supports corporate ordering, multiple account profiles
for individual and corporate users, custom integration and co-branding with
partner sites, the application of selective discounting and promotion codes, and
referral tracking and reporting. The system can accommodate large numbers of
products, across different product categories and millions of individual items,
offer users multiple shipping and delivery options, and provides secure credit
card transactions. The Company has implemented a customer service system that
manages order adjustments, credits, returns, refunds, cancellations, and
customer account information. The Company's back-end system is fully integrated
and includes inventory management, accounts payable, accounts receivable,
general ledger, and retail point of sale.
Computer Literacy's engineering staff consisted of 17 individuals as of
July 31, 1998. The Company's engineering strategy includes enhancing the
functionality of its existing features, developing new features, and integrating
off-the-shelf components into its environment. Computer Literacy is currently
investing significant resources in its system development and expects to
continue to do so in the future. The Company believes its future success depends
on its ability to continue developing and enhancing this system.
As of July 31, 1998, the Company's online store operations staff consisted
of four systems administrators and one database administrator who are
responsible for managing, monitoring, and operating the Company's online store
and related systems. The uninterrupted operation of the Company's online store
and related system is essential to its business, and the site operations staff
is responsible for ensuring its reliability. The Company uses three Internet
service providers. The Company anticipates upgrading capacity to allow for
faster telecommunication services in the future. See "Risk Factors -- Management
of Expanding Business; Limited Senior Management Resources," "-- Risk of
Capacity Constraints; Reliance on Internally Developed Systems; System
Development Risks;" and "-- Risk of System Failure; Single Site and Order
Interface."
COMPETITION
The electronic commerce market is new, rapidly evolving and intensely
competitive. The market for information resources is more mature but also
intensely competitive. The Company expects competition to continue to intensify
in the future. The Company currently or potentially competes with a variety of
companies. These competitors include (i) a significant number of retail and
online bookstores, including Amazon.com, Barnes & Noble, Inc., Borders Group,
Inc. and other vendors of books, training products and product manuals, (ii)
various computer super-stores that carry related information resources at retail
locations, in catalogs and over the Internet, (iii) a number of indirect
competitors that specialize in electronic commerce or derive a substantial
portion of their revenue from electronic commerce and (iv) other companies with
substantial customer bases in the computer and other technical fields. There can
be no assurance that the Company can maintain a competitive position against
current or future competitors as they enter the markets in which the Company
competes, particularly those with greater financial, marketing, service,
support, technical and other resources than the Company. The failure by the
Company to maintain a competitive
40
<PAGE> 42
position within the market could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company believes that the principal competitive factors on which it
competes in its market are brand recognition, selection, personalized services,
convenience, price, accessibility, customer service, quality of search tools,
quality of editorial and other site content and reliability and speed of
fulfillment. Many of the Company's current and potential competitors have longer
operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing and other resources than the Company.
In addition, online retailers may be acquired by, receive investments from or
enter into other commercial relationships with larger, well-established and
well-financed companies as use of the Internet and other online services
increases. Certain of the Company's competitors may be able to secure
merchandise from vendors on more favorable terms, devote greater resources to
marketing and promotional campaigns, adopt more aggressive pricing or inventory
availability policies and devote substantially more resources to Web site and
systems development than the Company. Increased competition may result in
reduced operating margins, loss of market share and a diminished brand
franchise. As a strategic response to changes in the competitive environment,
the Company may from time to time make certain pricing, service or marketing
decisions or acquisitions that could result in reduced margins or otherwise have
a material adverse effect on its business, financial condition and results of
operations. New technologies and the expansion of existing technologies may
increase the competitive pressures on the Company. For example, applications
that select specific titles from a variety of Web sites may channel customers to
online booksellers that compete with the Company. Companies that control access
to transactions through a network or Web browsers could also promote the
Company's competitors or charge the Company a substantial fee for inclusion. In
addition, vendors of information resources such as technology based training
could provide direct access to training programs online. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors, and competitive pressures faced by the Company may have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Risk Factors -- Competition."
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company regards its copyrights, service marks, trademarks, trade dress,
trade secrets and similar intellectual property as critical to its success, and
relies on trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with its employees, customers,
partners and others to protect its proprietary rights. The Company pursues the
registration of its trademarks and service marks in the U.S. and
internationally, and has applied for the registration of certain of its
trademarks and service marks. Effective trademark, service mark, copyright and
trade secret protection may not be available in every country in which the
Company's products and services are made available online. While the Company
attempts to ensure that the quality of its brand is maintained by such
licensees, there can be no assurance that such licensees will not take actions
that might materially adversely affect the value of the Company's proprietary
rights or reputation, which could have a material adverse effect on the
Company's business, financial condition and results of operations. There can be
no assurance that the steps taken by the Company to protect its proprietary
rights will be adequate or that third parties will not infringe or
misappropriate the Company's copyrights, trademarks, trade dress and similar
proprietary rights. In addition, there can be no assurance that other parties
will not assert infringement claims against the Company. Such claims, even if
not meritorious, could result in the expenditure of significant financial and
managerial resources. The Company is not currently aware of any legal
proceedings pending or threatened against it.
In addition, the Company displays reviews and articles on technical
subjects in its online store. Some reviews and articles may be copyrighted and
the Company may not have explicit permission from the author for use of such
intellectual property. There can be no assurance that the authors will not
assert infringement claims against the Company. If a claim is asserted alleging
that the Company has infringed the proprietary rights of a third party, the
Company may be required to seek licenses to continue to use such intellectual
property. The failure to obtain the necessary licenses or other rights at a
reasonable cost could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors -- Trademarks
and Proprietary Rights; Unlicensed Arrangements and Materials."
41
<PAGE> 43
EMPLOYEES
As of July 31, 1998, the Company employed 149 full-time employees. In
addition, the Company employed 16 part-time employees, primarily for its
physical retail stores. The Company also employs independent contractors and
other temporary employees in its editorial, operations and finance and
administration departments. None of the Company's employees are represented by a
labor union, and the Company considers its employee relations to be good.
Competition for qualified personnel in the Company's industry is intense,
particularly among software development and other technical staff. The Company
believes that its future success will depend in part on its continued ability to
attract, hire and retain a sufficient number of highly skilled personnel. See
"Risk Factors -- Dependence on Key Personnel;" and "-- Need for Additional
Personnel."
FACILITIES
The Company's principal administrative, engineering, marketing, customer
service and merchandising facility totals approximately 13,635 square feet and
is located in Sunnyvale, California under a master lease that expires on July
31, 1999. In addition, the Company leases a temporary warehousing facility in
Fremont, California. The Company also leases three physical stores located in
San Jose and Sunnyvale, California, and Vienna, Virginia. The Company does not
own any real property. The Company expects that its current facilities will be
sufficient for the foreseeable future. The Company periodically evaluates the
location and productivity of its stores, and may close, consolidate or relocate
stores as conditions warrant.
42
<PAGE> 44
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the executive
officers and directors of the Company as of October 31, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Chris MacAskill........................... 44 Chief Executive Officer, President and
Chairman of the Board
Kim Orumchian............................. 33 Vice President of Engineering,
Secretary and Director
Donald P. Alvarez......................... 34 Vice President of Finance and Chief
Financial Officer
Dennis F. Capovilla....................... 38 Vice President of Sales and Business
Development
Robert M. Cudd............................ 44 Vice President of Marketing
Sean M. Cumbie............................ 38 Vice President of Logistics
Peter G. Bodine(1)........................ 36 Director
Alan S. Fisher(2)......................... 37 Director
Tod H. Francis(1)......................... 39 Director
David C. Schwab........................... 41 Director
Peter C. Wendell(2)....................... 48 Director
</TABLE>
- ---------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Chris MacAskill has been Chief Executive Officer, President and a director
of the Company since co-founding the Company in June 1995. From June 1991 to
June 1993, Mr. MacAskill served as Director of Developer Relations at NeXT Inc.,
a software development company. From June 1993 to June 1995, Mr. MacAskill
served as Director of Developer Relations at General Magic, a software
development company. From September 1983 to May 1991, Mr. MacAskill served as
Vice President of Engineering at Western Atlas International, a geophysics
company. In September 1981, Mr. MacAskill founded PSI, a petroleum engineering
company, which was acquired by Western Atlas International in October 1983. Mr.
MacAskill received his B.S. in Geophysics from the University of Utah and
received his M.S. in Geophysics from Stanford University.
Kim Orumchian has been Vice President of Engineering, Secretary and a
director of the Company since co-founding the Company in June 1995. From May
1994 to June 1996, Mr. Orumchian served as a third party Product Manager for
General Magic, a software development company. From September 1990 to April
1994, Mr. Orumchian served as Manager of Developer Relations for NeXT Inc., a
software development company. Mr. Orumchian received his B.A. in Physics from
Reed College and received his B.S. in Applied Physics from Columbia University
School of Engineering.
Donald P. Alvarez joined the Company as Vice President of Finance and Chief
Financial Officer in September 1997. From January 1994 to August 1997, Mr.
Alvarez served as Controller for West Marine Inc., a retailer of recreational
boating supplies and apparel. From January 1987 to December 1993, Mr. Alvarez
served as an audit manager for Deloitte & Touche LLP, an international public
accounting firm. Mr. Alvarez received his B.S. in Business Administration from
California State University, Hayward.
Dennis F. Capovilla joined the Company as Vice President of Sales and
Business Development in June 1997. From August 1995 to July 1997, Mr. Capovilla
served as Director of the Imaging Division and Worldwide Printer Supplies for
Apple Computer, a computer company. From December 1992 to December 1994, Mr.
Capovilla directed Apple Computer's worldwide marketing efforts for the Imaging
Division. From January 1989 to December 1992, Mr. Capovilla served as a channel
marketing manager for Versatec Inc., an affiliate of Xerox Engineering Systems,
a technology company, where he directed North American distributor
43
<PAGE> 45
and VAR channel activities. Mr. Capovilla received his B.S. in Marketing from
Santa Clara University and did graduate work in business at the Leavey School of
Business at Santa Clara University.
Robert M. Cudd joined the Company as Vice President of Marketing in March
1998. From September 1996 to March 1998, Mr. Cudd served as Vice President of
Marketing for West Marine Inc., a retailer of recreational boating supplies and
apparel. From March 1994 to May 1996, Mr. Cudd served as the Director of
Marketing for the Computer City Division of Tandy Corporation, a computer
company. From November 1989 to January 1994 he served as Vice President of
Marketing at Computerland, a retail company. Mr. Cudd received his B.S. in
Business from Ferris State University.
Sean M. Cumbie joined the Company as Vice President of Logistics in
September 1998. From October 1996 to September 1998, Mr. Cumbie was the owner of
and a consultant for Cumbie & Associates, Inc., a logistics management
consulting firm. From January 1993 to November 1996, Mr. Cumbie served as Vice
President of Logistics at West Marine Inc., a retailer of recreational boating
supplies and apparel. From February 1991 to January 1993, Mr. Cumbie served as
Director of Planning and Inventory Management at National Vision Associates, a
vision service company. Mr. Cumbie received his M.S. in Management and his B.S.
in Mechanical Engineering from the Georgia Institute of Technology.
Peter G. Bodine has been a director of the Company since May 1998. Since
December 1992, Mr. Bodine has served as a partner of APV Technology Partners
("APV"), a venture capital investment firm, and as an Executive Vice President
of Asia Pacific Ventures, a consulting firm affiliated with APV. Before joining
APV in 1992, Mr. Bodine was co-founder of International Business Catalysts, a
consulting firm focused on international trade and investment counsel. Mr.
Bodine received his B.S. in Finance from Brigham Young University and his M.B.A.
from the University of Utah.
Alan S. Fisher has been a director of the Company since July 1998. Mr.
Fisher has been Vice President of Development and Operations, Chief Technical
Officer and a director of ONSALE, Inc. ("ONSALE"), an online retailer, since
co-founding ONSALE in July 1994. He also served as Chief Financial Officer of
ONSALE from July 1994 to July 1996. Mr. Fisher is also President and Chairman of
Software Partners, Inc., a developer and publisher of software products, which
he co-founded in August 1988. From April 1984 to August 1988, Mr. Fisher served
as Technical Marketing Manager and Product Development Manager for Teknowledge,
Inc., a developer of artificial intelligence software products. Mr. Fisher
serves as a director of Infodata Systems, Inc., an internet document publishing
software company. Mr. Fisher received his B.S. in Electrical Engineering from
the University of Missouri and received his M.S. in Electrical Engineering from
Stanford University.
Tod H. Francis has been a director of the Company since September 1996. Mr.
Francis has been general partner of Trinity Ventures since March 1996. Prior to
being named a general partner, Mr. Francis worked at Trinity Ventures as an
associate from March 1993 to March 1995 and as a principal from March 1995 to
March 1996. Prior to joining Trinity Ventures, Mr. Francis was a partner at RAM
Group, a marketing management firm and worked at Johnson & Johnson, in brand
management. Mr. Francis received his B.A. in Economics and his M.B.A from
Northwestern University.
David C. Schwab has been a director of the Company since September 1996.
Mr. Schwab has been a general partner of Sierra Ventures since June 1996. Prior
to joining Sierra Ventures, Mr. Schwab co-founded Scopus Technology, Inc., a
client-server software systems company, and served in various capacities from
August 1991 to June 1996, most recently as Vice President of Sales. Mr. Schwab
also serves as a director of Micromuse, Inc. Mr. Schwab received his B.A. in
Systems Engineering from University of California San Diego, his M.S. and ENG.
in Aerospace Engineering from Stanford University, and his M.B.A from Harvard
Business School.
Peter C. Wendell has been a director of the Company since September 1996.
Mr. Wendell has been a General Partner of Sierra Ventures since 1982, the year
in which he founded that firm. Prior to that time he served in various executive
capacities with IBM Corp. Since 1991 he has also held a faculty appointment at
Stanford University's Graduate School of Business where he teaches
"Entrepreneurship and Venture
44
<PAGE> 46
Capital." Mr. Wendell holds an A.B. degree from Princeton University and an
M.B.A. from Harvard Business School.
All directors hold office until the next annual meeting of the stockholders
and until their successors have been duly elected and qualified. Officers are
elected by and serve at the direction of the Board of Directors. There are no
family relationships among the directors or officers of the Company.
BOARD COMMITTEES
The Board has established an Audit Committee to meet with and consider
suggestions from members of management and the Company's internal audit staff,
as well as the Company's independent accountants, concerning the financial
operations of the Company. The Audit Committee also has the responsibility to
review audited financial statements of the Company and consider and recommend
the employment of, and approve the fee arrangements with, independent
accountants for both audit functions and for advisory and other consulting
services. The Audit Committee is currently comprised of Mssrs. Bodine and
Francis. The Board has also established a Compensation Committee to review and
approve the compensation and benefits for the Company's key executive officers,
administer the Company's stock purchase, equity incentive and stock option plans
and make recommendations to the Board regarding such matters. The Compensation
Committee is currently comprised of Messrs. Wendell and Fisher.
COMPENSATION OF DIRECTORS
Directors receive no cash remuneration for serving on the Board of
Directors or any Board Committee. Non-employee Board members are eligible for
option grants pursuant to the provisions of the Automatic Option Grant Program
under the Company's 1998 Omnibus Equity Incentive Plan. Under the Automatic
Option Grant Program, each individual who first becomes a non-employee Board
member after the date of the Company's initial public offering will be granted
an option to purchase 7,500 shares of the Company's Common Stock on the date
such individual joins the Board ("Initial Grant"). In addition, at each Annual
Meeting of Stockholders, each individual who will continue to serve as a member
of the Board after such meeting will receive an additional option to purchase
1,500 shares of Common Stock ("Annual Grant"). However, a director will not
receive an Annual Grant in the same calendar year that he received an Initial
Grant. The exercise price for each option granted under the Automatic Option
Grant Program will be equal to the fair market value per share of the Common
Stock on the automatic grant date. Each Initial Grant will become vested and
exercisable with respect to 25% of the option shares on the first anniversary of
the date of grant and with respect to an additional 1/48th of the option shares
upon the completion of each month of service thereafter. Each Annual Grant will
become fully vested and exercisable on the first anniversary of the date of
grant. See "-- Stock Plans." In addition, directors are reimbursed for all
reasonable expenses incurred by them in attending Board and Committee meetings.
Directors who are also employees of the Company are eligible to receive
options and be issued shares of Common Stock directly under the 1998 Omnibus
Equity Incentive Plan and are also eligible to participate in the Company's 1998
Employee Stock Purchase Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of Messrs. Wendell and Fisher. None of
these individuals was at any time since the formation of the Company, an
employee of the Company. No executive officer of the Company serves as a member
of the board of directors or compensation committee of any entity that has one
or more executive officers serving as a member of the Company's Board of
Directors or Compensation Committee.
45
<PAGE> 47
EXECUTIVE COMPENSATION
The following summary compensation table sets forth information concerning
cash and non-cash compensation earned during the fiscal year ended January 31,
1998 by the Company's Chief Executive Officer and each of the Company's other
four highest paid executive officers whose total compensation for services in
all capacities to the Company exceeded or would have exceeded $100,000 during
such year had such officers provided services for the Company for the entire
fiscal year (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE FOR FISCAL YEAR 1998
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
----------------------- OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS (#) COMPENSATION ($)(1)
--------------------------- ---------- --------- ---------------- ------------ -------------------
<S> <C> <C> <C> <C> <C>
Chris MacAskill.............. $81,539 -- -- -- $308
Chief Executive Officer and
President
Kim Orumchian................ 81,539 -- -- -- 308
Vice President of
Engineering and
Secretary
Donald P. Alvarez............ 50,000(2) -- -- 75,000 --
Vice President of Finance
and Chief Financial
Officer
Riki M. Tokuno(3)............ 34,904(4) $25,000 $57,987(5) 75,000 --
Chief Operating Officer
Dennis F. Capovilla.......... 76,962(6) -- 52,500(7) --
Vice President of Sales and
Business Development
</TABLE>
- ---------------
(1) Represents matching contributions to each Named Executive Officer's 401(k)
plan account.
(2) Mr. Alvarez commenced employment on September 2, 1997.
(3) Mr. Tokuno resigned from employment to pursue other interests effective as
of July 17, 1998.
(4) Mr. Tokuno commenced employment on November 10, 1997.
(5) Represents moving and related expenses.
(6) Mr. Capovilla commenced employment on July 7, 1997.
(7) Mr. Capovilla received an option grant for 22,500 shares of the Company's
Common Stock on February 27, 1998.
46
<PAGE> 48
STOCK OPTIONS GRANTED IN FISCAL 1998
The following table provides information concerning grants of options to
purchase the Company's Common Stock made during the fiscal year ended January
31, 1998 to the Named Executive Officers. No stock appreciation rights were
granted to these individuals during such year.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
INDIVIDUAL GRANTS ANNUAL
--------------------------------------------------------------------- RATES OF STOCK PRICE
NUMBER OF APPRECIATION FOR
SECURITIES % OF TOTAL OPTIONS OPTION
UNDERLYING GRANTED TO TERM (1)
OPTIONS EMPLOYEES IN EXERCISE PRICE PER EXPIRATION ---------------------
NAME GRANTED(#)(2) FISCAL 1998(3) SHARE ($)(4) DATE 5%($) 10%($)
---- ------------- ------------------ ------------------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Chris MacAskill...... -- -- -- -- -- --
Kim Orumchian........ -- -- -- -- -- --
Donald P. Alvarez.... 75,000 9.4% $0.24 9/1/07 $11,320 $28,687
Riki M. Tokuno....... 75,000 9.4 1.20 11/9/07 56,601 143,437
Dennis F.
Capovilla.......... 52,500(5) 6.6 0.24 8/25/07 7,924 20,081
</TABLE>
- ---------------
(1) The assumed 5% and 10% rates of stock price appreciation are provided in
accordance with rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of the future Common Stock
price. Actual gains, if any, on stock option exercises are dependent on the
future performance of the Common Stock, overall market conditions and the
option holders' continued employment through the vesting period. This table
does not take into account any appreciation in the price of the Common Stock
from the date of grant to the date of this Prospectus. Unless the market
price of the Common Stock appreciates over the option term, no value will be
realized from the option grants made to the Named Executive Officers.
(2) Each of the options listed in the table was granted under the Company's 1996
Stock Plan and is immediately exercisable. The shares purchasable thereunder
are subject to repurchase by the Company at the original exercise price paid
per share upon the optionee's cessation of service prior to vesting in such
shares. Except for Mr. Tokuno's option, the repurchase right lapses as to
25% of the option shares upon the completion of 12 months of service and as
to the balance in equal monthly installments upon the completion of each of
the next 36 months of service. For Mr. Tokuno's option, the repurchase right
lapses as to 7,500 option shares on the option grant date, as to an
additional 25% of the option shares upon the completion of 12 months of
service and as to the balance in equal monthly installments upon the
completion of each of the next 36 months of service thereafter. Mr. Tokuno
resigned from employment to pursue other interests effective as of July 17,
1998. The option shares will fully vest upon an acquisition of the Company
by merger or asset sale, unless the Company's repurchase right with respect
to the unvested option shares is assigned to the acquiring entity. The plan
administrator has the discretionary authority to reprice the options through
the cancellation of those options and the grant of replacement options with
an exercise price based on the fair market value of the option shares on the
regrant date. Each option has a maximum term of 10 years, subject to earlier
termination in the event of the optionee's cessation of employment with the
Company.
(3) The Company granted options to purchase an aggregate of 794,934 shares of
Common Stock during the fiscal year ended January 31, 1998.
(4) All options were granted at an exercise price equal to the fair market value
of the Company's Common Stock as determined by the Board of Directors of the
Company on the date of grant. The exercise price may be paid in cash, check,
promissory note, shares of the Company's Common Stock valued at fair market
value on the exercise date or a cashless exercise procedure involving a
same-day sale of the purchased shares.
(5) Mr. Capovilla received an option grant for 22,500 shares of the Company's
Common Stock on February 27, 1998.
47
<PAGE> 49
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL 1998 YEAR-END OPTION
VALUES
No options were exercised by the Named Executive Officers during the fiscal
year ended January 31, 1998. The following table provides the specified
information concerning unexercised options held as of January 31, 1998 by the
Named Executive Officers. No stock appreciation rights were granted or exercised
by the Named Executive Officers during the fiscal year ended January 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
JANUARY 31, 1998 AT JANUARY 31, 1998
(#)(1) ($)(2)
----------------------- ---------------------
NAME VESTED UNVESTED VESTED UNVESTED
---- --------- ---------- -------- ---------
<S> <C> <C> <C> <C>
Chris MacAskill.......................... 29,105 58,210 $58,792 $117,584
Kim Orumchian............................ 10,894 21,788 22,006 44,012
Donald P. Alvarez........................ 0 75,000 0 147,000
Riki M. Tokuno(3)........................ 7,500 67,500 7,500 67,500
Dennis F. Capovilla...................... 0 52,500 0 102,900
</TABLE>
- ---------------
(1) Each of the options listed in the table is immediately exercisable. The
shares purchasable thereunder are subject to repurchase by the Company at
the original exercise price paid per share upon the optionee's cessation of
service prior to vesting in such shares. Except for Mr. Tokuno's option, the
repurchase right lapses as to 25% of the option shares upon the completion
of 12 months of service and as to the balance in equal monthly installments
upon the completion of each of the next 36 months of service. For Mr.
Tokuno's option, the repurchase right lapses as to 7,500 option shares on
the option grant date, as to 25% of the option shares upon the completion of
12 months of service and as to the balance in equal monthly installments
upon the completion of each of the next 36 months of service.
(2) Calculated by subtracting the exercise price from the fair market value of
the underlying securities, as determined by the Board of Directors as of
January 31, 1998, of $2.20 per share.
(3) Mr. Tokuno resigned from employment to pursue other interests effective as
of July 17, 1998.
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
Messrs. MacAskill and Orumchian have each entered into employment
agreements with the Company. The employment agreements set forth the base salary
and general employee benefits offered to Messrs. MacAskill and Orumchian. The
annual base salary for each of Mssrs. MacAskill and Orumchian is currently
$110,000. The employment agreements also provide that in the event Mr. MacAskill
or Mr. Orumchian is terminated without cause or due to disability, the
terminated employee will receive a severance payment equal to six months of
salary, payable in equal monthly installments over a six-month period. Each
severance payment is payable in full for the initial three-month period
following the termination and may be offset by any compensation received by the
terminated employee from another employer during the remaining three-month
period. Severance payments will cease in the event of death. In addition, the
employment agreements amended each of Mr. MacAskill's and Mr. Orumchian's stock
purchase agreement with the Company, dated June 12, 1995, such that in the event
of a change in control, an additional number of shares subject to each stock
purchase agreement will become vested, and such additional shares will be equal
to the greater of (i) 50% of the shares then remaining vested or (ii) the number
of shares that would have become vested during the 12-month period following the
change in control.
Mr. Alvarez has entered into an employment agreement with the Company. The
employment agreement sets forth the base salary, bonus potential, stock option
grant and general employee benefits offered to Mr. Alvarez. Mr. Alvarez's annual
base salary will be $125,000. Mr. Alvarez is guaranteed a bonus of $15,000 in
his first year of employment with the Company. Mr. Alvarez was granted an option
to purchase 75,000 shares of the Company's Common Stock.
Mr. Cudd has entered into an employment agreement with the Company. The
employment agreement sets forth the base salary, bonus potential, stock option
grant and general employee benefits offered to
48
<PAGE> 50
Mr. Cudd. Mr. Cudd's annual base salary will be $135,000. Mr. Cudd received a
signing bonus of $10,000 and is guaranteed a bonus of $25,000 in his first year
of employment with the Company. Mr. Cudd was granted an option to purchase
65,000 shares of the Company's Common Stock.
In the event of a change in control, the vesting of the options granted to
Messrs. Alvarez, Capovilla and Cudd will accelerate and an additional number of
option shares will become vested that is equal to the greater of: (i) 50% of any
unvested option shares; or (ii) a number of shares equal to the number each
officer would become vested in had he provided 12 months of additional service
following the change in control.
Mr. Tokuno has entered into an employment agreement with the Company. The
employment agreement sets forth the base salary, bonus potential and general
employee benefits offered to Mr. Tokuno. Mr. Tokuno's annual base salary will be
$165,000. In addition, the employment agreement provides for the Company's
payment of various relocation expenses, including expenses related to moving and
storage, costs associated with the sale of Mr. Tokuno's home and the purchase of
a new home and a tax gross-up payment for the Company's payment of these
relocation expenses. Mr. Tokuno resigned from employment to pursue other
interests effective as of July 17, 1998.
The Board of Directors has the authority under the 1998 Omnibus Equity
Incentive Plan to accelerate the exercisability of outstanding options, or to
accelerate the vesting of the shares of Common Stock subject to outstanding
options, held by all optionees, including the Chief Executive Officer and the
other Named Officers, in the event of a change in control.
STOCK PLANS
1998 Omnibus Equity Incentive Plan
The Company's 1998 Omnibus Equity Incentive Plan (the "Plan") was adopted
by the Board on July 13, 1998, subject to stockholder approval. The Company has
reserved (a) 3,000,000 shares plus (b) the aggregate number of shares remaining
available for issuance under the 1996 Stock Plan (as of July 31, 1998 1,155,946
shares, of which 1,110,351 shares are subject to outstanding options) for
issuance under the Plan. As of July 31, 1998, no options had been granted under
the Plan and 3,045,595 shares are available for option grant. As of February 1
of each year, commencing with the year 2000, the number of shares reserved for
issuance under the Plan will be increased automatically by the lesser of 2% of
the total number of the then outstanding shares of Common Stock or 1,000,000
shares.
Under the Plan, employees, non-employee members of the Board ("Outside
Directors") and consultants may be awarded options to purchase shares of Common
Stock, stock appreciation rights ("SARs"), restricted shares and stock units
(the "Awards").
If restricted shares or shares of Common Stock issued upon the exercise of
options are forfeited, these shares will become available for future issuance
under the Plan. If stock units, options or SARs are forfeited or terminate for
any other reason prior to exercise, the corresponding shares will again become
available for issuance under the Plan. However, if stock units are settled or
SARs are exercised, then the number of shares of Common Stock actually issued in
the settlement will reduce the number of shares reserved for issuance under the
Plan and any balance will again become available for issuance under the Plan.
The Plan will be administered by the Company's Compensation Committee (the
"Committee"). The Committee has the complete discretion to determine which
eligible individuals are to receive any award, determine the type, number,
vesting requirements and other features and conditions of such award, interpret
the Plan and make all other decisions relating to the operation of the Plan. The
Committee has the authority to modify, extend or assume outstanding options and
SARs or may accept the cancellation of outstanding options and SARs in return
for the grant of new options or SARs for the same or a different number of
shares and at the same or a different exercise price.
Options may be incentive stock options designed to satisfy section 422 of
the Internal Revenue Code or nonstatutory stock options not designed to meet
such requirements. Only employees may be granted incentive stock options, and
employees and non-employees may receive the remaining types of available Awards.
The
49
<PAGE> 51
term of an incentive stock option cannot exceed 10 years (except that the term
of an incentive stock option granted to a holder of more than 10% of the
Company's stock cannot exceed 5 years). No optionee may receive in a single
fiscal year options to purchase more than 100,000 shares of Common Stock.
However, a new employee may receive, in the fiscal year in which he or she
commences employment, options to purchase up to 300,000 shares of Common Stock.
The exercise price for incentive stock options granted under the Plan will
in no event be less than 100% of the fair market value of the Common Stock on
the grant date (except that incentive stock options granted to a holder of more
than 10% of the Company's stock will have an exercise price of no less than 110%
of fair market value on the grant date), and the exercise price for
non-statutory stock options will be no less than 85% of the fair market value of
the Common Stock on the grant date. The exercise price for options granted under
the Plan may be paid in cash or in outstanding shares of Common Stock. Options
may also be exercised by using a cashless exercise method, a pledge of shares to
a broker or promissory note. The payment for the award of newly issued
restricted shares will be made in cash, by promissory note or the rendering of
past or future services.
Each Outside Director who first becomes a member of the Board after the
date of this offering will receive a one-time option grant for 7,500 shares of
Common Stock upon taking office. Upon the conclusion of each regular annual
meeting of the Company's stockholders held in the year 1999 and thereafter, each
Outside Director who will continue to serve as a Board member will receive an
option covering 1,500 shares of Common Stock. However, an Outside Director will
not receive the annual 1,500-share option grant in the same calendar year that
he received the initial 7,500-share option grant. The initial 7,500-share option
grant will become exercisable for 25% of the shares upon completion of 12 months
of service and the balance will become exercisable in equal monthly installments
over the next 36 months of service. The annual 1,500-share option grant will
become exercisable in full on the first anniversary of the date of grant. All
automatic option grants to Outside Directors will be non-statutory stock options
with an exercise price equal to 100% of the fair market value of Common Stock on
the date of grant. In the event of an Outside Director's termination as a result
of death, total and permanent disability or retirement at or after age 65, the
options will become fully vested. The Board may decide to implement a program
that allows an Outside Director to elect to receive his or her annual retainer
payments and meeting fees, if any, from the Company in the form of cash,
options, restricted shares, stock units or a combination thereof. The number and
terms of such options, restricted shares or stock units to be granted to Outside
Directors in lieu of annual retainers and meeting fees that would otherwise be
paid in cash will be calculated in a manner determined by the Board. The
Committee may also provide that the non-statutory stock options that otherwise
would be granted to an Outside Director will instead be granted to an affiliate
of such Outside Director, provided that the service-related vesting and
termination provisions pertaining to non-statutory stock options will be applied
with regard to the service of the Outside Director.
SARs may be awarded in combination with options and may provide that the
SARs will not be exercisable unless the related options are forfeited. No
individual may, in a single calendar year, be granted SARs that pertain to more
than 100,000 shares of Common Stock. However, SARs granted to a new employee in
the fiscal year in which his or her service as an employee with the Company
commences may not pertain to more than 300,000 shares of Common Stock.
The Committee may award restricted shares under the Plan. The payment for
the award of restricted shares will be made in cash, cash equivalents,
promissory note or the rendering of past or future services. To the extent that
an award consists of newly issued restricted shares, the recipient must furnish
consideration with a value not less than the par value of those restricted
shares, in the form as the Committee may determine. An award of restricted
shares may be subject to vesting.
The Committee may grant stock units. No cash consideration by the
recipients will be required. A stock unit award may carry with it a right to
dividend equivalents which entitles the holder to be credited with an amount
equal to all cash dividends paid on one share of Common Stock while the stock
unit is outstanding. Stock units may be settled in cash, shares of Common stock
or a combination of both.
50
<PAGE> 52
The Committee may determine that, upon an optionee's or participant's
death, disability or retirement or a change in control, an award of an option,
SAR, stock units or restricted shares will become fully exercisable as to all
shares subject to such award. A change in control includes a merger or
consolidation of the Company, sale of assets, certain changes in the composition
of the Board and acquisition of 50% or more of the combined voting power of the
Company's outstanding stock. In the event of a merger or other reorganization,
outstanding options, SARs, restricted shares and stock units will be subject to
the agreement of merger or reorganization, which may provide for the assumption
of outstanding awards by the surviving corporation or its parent, for their
continuation by the Company (if the Company is a surviving corporation), for
accelerated vesting and accelerated expiration or for settlement in cash.
The Board may amend or terminate the Plan at any time, and the Plan will
continue unless otherwise terminated by the Board. Amendments may be subject to
stockholder approval to the extent required by applicable laws.
1998 Employee Stock Purchase Plan
The Board adopted the Company's 1998 Employee Stock Purchase Plan (the
"Purchase Plan") on July 13, 1998, subject to the approval of the Company's
stockholders. A total of 300,000 shares of Common Stock will be reserved for
issuance under the Purchase Plan. On February 1 of each year, beginning with the
year 2000, the total number of shares of Common Stock reserved for issuance will
automatically increase by the number of shares necessary to cause the number of
shares available for issuance to be restored to 300,000.
The Purchase Plan, which is intended to qualify under Section 423 of the
Internal Revenue Code, will be implemented by 24-month offering periods, each
offering period containing four six-month accumulation periods, with purchases
occurring at the end of each six-month accumulation period. A new offering
period begins every six months. The first accumulation and offering periods are
expected to begin on the effective date of this offering and will end on May 31,
1999 and November 30, 2000, respectively.
The Purchase Plan will be administered by the Committee. Employees will be
eligible to participate if their customary employment with the Company is for
more than 20 hours per week and for more than 5 months per year. The Purchase
Plan permits each eligible employee to purchase Common Stock through payroll
deductions, which may not exceed 15% of an employee's compensation, nor more
than 500 shares on any purchase date. In addition, the value of the Common Stock
(determined at the beginning of the offering period) that may be purchased by
any participant in a calendar year is limited to $25,000.
The price of the Common Stock purchased under the Purchase Plan will be 85%
of the lower of the fair market value of the Common Stock on the date
immediately prior to the first date of the period or the date at the end of the
applicable accumulation period. For the initial offering period, the price of
the Common Stock purchased under the Purchase Plan will be 85% of the lower of
the initial public offering price or the fair market value on the date at the
end of the applicable accumulation period. An offering period continues to apply
to a participant for the full 24 months, unless the market price of the Common
Stock is lower when a subsequent offering period begins. In that event, the
subsequent offering period automatically becomes the applicable period for
purposes of determining the purchase price.
Employees may end their participation in the Purchase Plan at any time
during the accumulation period, and participation ends automatically upon
termination of employment with the Company. In the event of a merger or
consolidation, each offering period and accumulation period will terminate and
each outstanding purchase right will be exercised. The Board may amend or
terminate the Purchase Plan at any time. However, the Board may not, without
stockholder approval, materially increase the number of shares of Common Stock
available for issuance.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
As permitted by the Delaware General Corporation Law (the "Delaware Law"),
the Company's Second Amended and Restated Certificate of Incorporation which,
which will become effective upon the closing of this offering, includes a
provision that directors of the Company shall not be personally liable for
monetary damages to the Company or its stockholders for a breach of fiduciary
duty as a director, except for liability as a result of (i) a breach of the
director's duty of loyalty to the Company or its stockholders; (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) an act related to
51
<PAGE> 53
the unlawful stock repurchase or payment of a dividend under Section 174 of the
Delaware Law; and (iv) transactions from which the director derived an improper
personal benefit. Such limitation of liability does not affect the availability
of equitable remedies such as injunctive relief or rescission.
Upon the closing of this offering, the Company's Second Amended and
Restated Certificate of Incorporation will authorize the Company to indemnify
its officers, directors and other agents, by bylaws, agreements or otherwise, to
the fullest extent permitted under the Delaware Law. Prior to the closing of
this offering, the Company will enter into separate indemnification agreements
with its directors and officers which are, in some cases, broader than the
specific indemnification provisions contained in the Delaware Law. The
indemnification agreements will require the Company, among other things, to
indemnify such officers and directors against certain liabilities that may arise
by reason of their status or service as directors or officers (other than
liabilities arising from willful misconduct of a culpable nature), to advance
their expenses incurred as a result of any proceeding to which they are a party
to or participant in and as to which they could be indemnified, and to obtain
directors' and officers' insurance if available on reasonable terms.
As permitted by the Delaware law, the Company's Amended and Restated
Bylaws, which will become effective upon the closing of this offering, provide
for mandatory indemnification of its directors and permissible indemnification
of officers and employees to the maximum extent allowed by the Delaware Law.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.
52
<PAGE> 54
CERTAIN TRANSACTIONS
Since January 1, 1996, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which the Company or any of
its subsidiaries was or is to be a party in which the amount involved exceeded
or will exceed $60,000 and in which any director, executive officer, holder of
more than 5% of the Common Stock of the Company or any member of the immediate
family of any of the foregoing persons had or will have a direct or indirect
material interest other than (i) compensation agreements and other arrangements,
which are described where required in "Management," and (ii) the transactions
described below.
In June 1995, the Company sold 828,897 shares of Common Stock to Chris
MacAskill, the Chief Executive Officer, President and a director of the Company,
for an aggregate purchase price of $11,051.96. As payment of the purchase price,
Mr. MacAskill transferred the title to certain equipment to the Company and
canceled the obligation of the Company to reimburse him for certain expenses. In
June 1995, the Company also sold 675,000 shares of Common Stock to Kim
Orumchian, the Vice President of Engineering, Secretary and a director of the
Company, for an aggregate purchase price of $9,000. As payment of the purchase
price, Mr. Orumchian transferred the title to certain equipment to the Company
and canceled the obligation of the Company to reimburse him for certain
expenses.
The Company has issued, in private placement transactions (collectively,
the "Private Placement Transactions"), shares of Preferred Stock as follows: an
aggregate of 2,453,701 shares of Series B Preferred Stock at $1.67 per share
(including the conversion of shares of Series A Preferred Stock into an
aggregate of 154,950 shares of Series B Preferred Stock) in September and
December 1996; an aggregate of 1,041,667 shares of Series C Preferred Stock at
$2.40 per share in May 1997; an aggregate of 1,726,194 shares of Series D
Preferred Stock at $4.20 per share in January 1998; and an aggregate of 857,624
shares of Series E Preferred Stock at $6.44 per share in May 1998. Each share of
Preferred Stock is convertible into one share of Common Stock and all such
shares of Preferred Stock shall be converted into shares of Common Stock upon
the closing of this offering.
The following table summarizes the shares of Preferred Stock purchased by
Named Executive Officers, directors and 5% stockholders of the Company and
persons and entities associated with them in the Private Placement Transactions.
<TABLE>
<CAPTION>
SERIES B SERIES C SERIES D SERIES E
INVESTOR(1) PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
----------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
APV Technology Partners, L.P. (Peter
Bodine) (2)........................... 150,000 64,206 59,524 69,877
Needham Capital Partners II, L.P. (3)... -- -- 535,715 69,876
Sierra Ventures V, L.P. (Peter Wendell
and David Schwab)..................... 1,500,000 642,078 476,191 69,876
Trinity Ventures V, LP (Tod
Francis)(4)........................... 600,000 256,831 238,096 23,292
Vulcan Ventures Incorporated............ -- -- -- 543,478
Chris MacAskill......................... 5,144 2,201 -- 219
</TABLE>
- ---------------
(1) Shares held by affiliated persons and entities have been aggregated. See
"Principal Stockholders."
(2) Includes shares held by APV Technology Partners, L.P., APV Technology
Partners II, L.P. and APV Technology Partners U.S., L.P.
(3) Includes shares held by Needham Capital Partners II, L.P., Needham Capital
SBIC, L.P. and Needham Capital Partners II (Bermuda), L.P.
(4) Includes shares held by Trinity Ventures, V, LP and Trinity Ventures,
Side-By-Side Fund V, LP.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans between the
Company and its officers, directors, principal stockholders and their affiliates
will be approved by a majority of the Board of Directors, including a majority
of the independent and disinterested outside directors on the Board of
Directors, and will continue to be on terms no less favorable to the Company
than could be obtained from unaffiliated third parties.
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<PAGE> 55
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of July 31, 1998, and as adjusted to
reflect the sale of the Shares offered hereby, (i) by each person or entity who
is known by the Company to own beneficially more than 5% of the Company's Common
Stock, (ii) by each of the Named Executive Officers and by each of the Company's
directors and (iii) by all executive officers and directors of the Company as a
group.
<TABLE>
<CAPTION>
PERCENT OF TOTAL (1)(2)
-----------------------
NUMBER OF SHARES BEFORE THE AFTER THE
NAME AND ADDRESS OF BENEFICIAL OWNERS BENEFICIALLY OWNED OFFERING OFFERING
------------------------------------- ------------------ ---------- ---------
<S> <C> <C> <C>
Sierra Ventures V, L.P. (3)............................ 2,688,145 35.17% 25.26%
3000 Sand Hill Road, Building 4, Suite 210
Menlo Park, CA 94025
Entities affiliated with Trinity Ventures V, L.P. 1,118,219 14.63% 10.51%
(4)..................................................
3000 Sand Hill Road, Building 1, Suite 240
Menlo Park, CA 94025
Entities affiliated with Needham Capital Partners II, 605,591 7.92% 5.69%
L.P. (5).............................................
445 Park Avenue, 3rd Floor
New York, NY 10022
Vulcan Ventures Incorporated(6)........................ 543,478 7.11% 5.11%
110 100th Avenue N.E., Suite 550
Bellevue, WA 98004
Chris MacAskill (7).................................... 923,776 11.95% 8.61%
Kim Orumchian (8)...................................... 707,682 9.22% 6.63%
Donald P. Alvarez (9).................................. 75,000 * *
Riki M. Tokuno (10).................................... 7,500 * *
Dennis F. Capovilla (11)............................... 75,000 * *
Peter G. Bodine (12)................................... 343,607 4.50% 3.23%
Ralph C. Derrickson (6)................................ 543,478 7.11% 5.11%
Alan S. Fisher (13).................................... 7,500 * *
Tod H. Francis (4)..................................... 1,118,219 14.63% 10.51%
David C. Schwab (3).................................... 2,688,145 35.17% 25.26%
Peter C. Wendell (3)................................... 2,688,145 35.17% 25.26%
All directors and executive officers as a group (12 6,554,907 82.01 59.63%
people)(14)..........................................
</TABLE>
- ---------------
* Represents beneficial ownership of less than 1% of the outstanding shares
of Common Stock.
(1) Percentage ownership is based on 7,642,788 shares outstanding as of July
31, 1998, including 6,079,186 shares of Common Stock issuable upon
conversion of all outstanding preferred stock at the closing of this
offering. Shares of Common Stock subject to options currently exercisable
or exercisable within 60 days of July 31, 1998 are deemed outstanding for
purposes of computing the percentage ownership of the person holding such
options but are not deemed outstanding for computing the percentage
ownership of any other person. Except pursuant to applicable community
property laws or as indicated in the footnotes to this table, each
stockholder identified in the table possesses sole voting and investment
power with respect to all shares of Common Stock shown as beneficially
owned by such stockholder. Unless otherwise indicated, the address of each
of the individuals listed in the table is c/o Computer Literacy, Inc., 1308
Orleans Drive, Sunnyvale, CA 94089.
(2) Assumes the Underwriters' over-allotment option is not exercised.
(3) David C. Schwab, a director of the Company, is a venture partner of SV
Associates V, L.P. Peter C. Wendell, a director of the Company, is a
general partner of SV Associates V, L.P. SV Associates V, L.P. is the
general partner of Sierra Ventures V, L.P. Each of Messrs. Schwab and
Wendell disclaims beneficial ownership of the shares held by Sierra
Ventures V, L.P. except to the extent of his pecuniary interest therein.
54
<PAGE> 56
(4) Includes 1,056,480 shares held by Trinity Ventures V, LP and 61,739 shares
held by Trinity Ventures Side-By-Side Fund V, LP. Tod H. Francis, a
director of the Company, is a general partner of Trinity Ventures. Mr.
Francis disclaims beneficial ownership of such shares except to the extent
of his pecuniary interest therein.
(5) Includes 359,536 shares held by Needham Capital Partners II, L.P., 166,667
shares held by Needham Capital SBIC, L.P. and 79,388 shares held by Needham
Capital Partners II (Bermuda), L.P.
(6) Ralph C. Derrickson, resigned as a director of the Company and from Vulcan
Ventures Incorporated effective September 25, 1998. Mr. Derrickson
disclaims beneficial ownership of such shares.
(7) Includes 87,315 shares of Common Stock issuable upon exercise of
immediately exercisable options, 47,296 shares of which are subject to the
Company's right of repurchase.
(8) Includes 32,682 shares of Common Stock issuable upon exercise of
immediately exercisable options, 17,703 shares of which are subject to the
Company's right of repurchase.
(9) Represents 75,000 shares of Common Stock issuable upon exercise of
immediately exercisable options, 75,000 shares of which are subject to the
Company's right of repurchase.
(10) Represents 7,500 shares of Common Stock issuable upon exercise of
immediately exercisable options. Mr. Tokuno resigned from employment to
pursue other interests effective as of July 17, 1998.
(11) Represents 75,000 shares of Common Stock issuable upon exercise of
immediately exercisable options, 75,000 shares of which are subject to the
Company's right of repurchase.
(12) Includes 232,888 shares held by APV Technology Partners, L.P., 58,222
shares held by APV Technology Partners U.S., L.P. and 52,497 shares held by
APV Technology Partners II, L.P. (collectively, the "APV Funds"). Peter G.
Bodine is a managing member of APV Management Co., L.L.C., the general
partner of the APV Funds. Mr. Bodine disclaims beneficial ownership of such
shares except to the extent of his pecuniary interest therein.
(13) Includes 7,500 shares of Common Stock issuable upon exercise of immediately
exercisable options, all of which are subject to the Company's right of
repurchase.
(14) Includes 349,997 shares of Common Stock issuable upon exercise of
immediately exercisable options, 287,498 shares of which are subject to the
Company's right of repurchase. Excludes 67,125 shares issuable upon
exercise of immediately exercisable options, 58,750 shares of which are
subject to the Company's right of repurchase, held by Sean M. Cumbie who
joined the Company in September 1998. Mr. Derrickson resigned as a director
of the Company, effective September 25, 1998.
55
<PAGE> 57
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, the authorized capital stock of the
Company will consist of 50,000,000 shares of Common Stock, par value $0.001, and
5,000,000 shares of Preferred Stock, par value $0.001.
Prior to the closing of this offering, the Company reincorporated in the
State of Delaware and, upon the closing of this offering, the Company intends to
amend and restate its Certificate of Incorporation. The following summary of
certain provisions of the Common Stock and Preferred Stock does not purport to
be complete and is subject to, and qualified in its entirety by, the provisions
of the forms of the Company's Second Amended and Restated Certificate of
Incorporation and Amended and Restated Bylaws to be effective upon the closing
of this offering, which are included as exhibits to the Registration Statement
of which this Prospectus forms a part, and by the provisions of applicable law.
COMMON STOCK
As of July 31, 1998, there were 7,642,788 shares of Common Stock
outstanding that were held of record by 38 stockholders (assuming conversion of
all shares of Preferred Stock into shares of Common Stock). There will be
10,642,788 shares of Common Stock outstanding (assuming no exercise of the
Underwriters' over-allotment option and assuming no exercise after July 31, 1998
of outstanding options) after giving effect to the sale of the shares of Common
Stock to the public offered hereby.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding Preferred Stock, the holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the Board of Directors out of assets legally available therefor. See
"Dividend Policy." In the event of the liquidation, dissolution, or winding up
of the Company, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior distribution
rights of Preferred Stock, if any, then outstanding. The Common Stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are fully paid and nonassessable, and the
shares of Common Stock to be issued upon completion of this offering will be
fully paid and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of Preferred
Stock will convert into shares of Common Stock. Thereafter, pursuant to the
Company's Second Amended and Restated Certificate of Incorporation, the Board of
Directors will have the authority to issue up to 5,000,000 shares of Preferred
Stock in one or more series and to fix or alter the dividend rights, dividend
rates, conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any series of
Preferred Stock or the designation of such series, without further vote or
action by the stockholders. The issuance of Preferred Stock may have the effect
of delaying, deferring or preventing a change in control of the Company without
further action by the stockholders and may adversely affect the voting and other
rights of the holders of Common Stock. The issuance of Preferred Stock with
voting and conversion rights may adversely affect the voting power of the
holders of Common Stock, including the loss of voting control to others. At
present, the Company has no plans to issue any of the Preferred Stock.
WARRANTS
As of July 31, 1998, a warrant was outstanding to purchase an aggregate of
15,624 shares of Common Stock (assuming the conversion of all shares of
Preferred Stock into shares of Common Stock) at an exercise price of $2.40 per
share. Such warrant will expire on May 28, 2002.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
The Second Amended and Restated Certificate of Incorporation provides that,
effective upon the closing of this offering, all stockholder actions must be
effected at a duly called meeting and not by written consent.
56
<PAGE> 58
This could discourage potential acquisition proposals and could delay or prevent
a change in control of the Company. This provision is intended to enhance the
likelihood of continuity and stability in the composition of the Board of
Directors and in the policies formulated by the Board of Directors and to
discourage certain types of transactions that may involve an actual or
threatened change of control of the Company. This provision is designed to
reduce the vulnerability of the Company to an unsolicited acquisition proposal.
The provision is also intended to discourage certain tactics that may be used in
proxy fights. However, this provision could have the effect of discouraging
others from making tender offers for the Company's shares and, as a consequence,
may inhibit fluctuations in the market price of the Company's shares that could
result from actual or rumored takeover attempts. This provision also may have
the effect of preventing changes in the management of the Company. See "Risk
Factors -- Anti-Takeover Effect of Certain Charter Provisions and Delaware Law."
The Company's Second Amended and Restated Certificate of Incorporation and
Amended and Restated Bylaws will provide that the Company will indemnify
officers and directors against losses that may incur in investigations and legal
proceedings resulting from their services to the Company, which may include
services in connection with takeover defense measures. Such provisions may have
the effect of preventing changes in the management of the Company.
Upon the closing of this offering, the Company will be subject to Section
203 of the Delaware General Corporation Law ("Section 203"), which, subject to
certain exceptions, prohibits a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three years
following the time that such stockholder became an interested stockholder,
unless: (i) prior to such time, the board of directors of the corporation
approved either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder; (ii) upon consummation of the
transaction that resulted in the stockholder becoming an interested stockholder,
the interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced, excluding for
purposes of determining the number of shares outstanding those shares owned (x)
by directors who are also officers of the Company and (y) by employee stock
plans in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer; or (iii) at or subsequent to such time, the business
combination is approved by the board of directors and authorized at an annual or
special meeting of stockholders, and not by written consent, by the affirmative
vote of at least two-thirds of the outstanding voting stock not owned by the
interested stockholder. Section 203 could prohibit or delay mergers or other
takeover or change-in-control attempts with respect to the Company and,
accordingly, may discourage attempts to acquire the Company.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
REGISTRATION RIGHTS
After this offering, the holders of approximately 6,079,186 shares of
Common Stock will be entitled to certain rights with respect to the registration
of such shares under the Securities Act. Under the terms of an Investors' Rights
Agreement between the Company and the holders of such registrable securities, if
the Company proposes to register any of its securities under the Securities Act,
either for its own account or for the account of other security holders
exercising registration rights, such holders are entitled to notice of such
registration and are, subject to certain limitations, entitled to include shares
of Common Stock therein. Additionally, such holders are also entitled to certain
demand registration rights pursuant to which they may require the Company to
file a registration statement under the Securities Act at the Company's expense
57
<PAGE> 59
(other than underwriter's discounts and commissions) with respect to their
shares of Common Stock, and the Company is required to use its best efforts to
effect such registration. Further, holders may require, subject to certain
limitations, the Company to file additional registration statements on Form S-3
at the Company's expense (other than underwriters' discounts and commissions).
All of these registration rights are subject to certain conditions and
limitations, among them the right of the underwriters of an offering to limit
the number of shares included in such registration and the right of the Company
not to effect a requested registration within six months following an offering
of the Company's securities, including the offering made hereby.
Each stockholder's registration rights expire upon the earlier of three (3)
years from the closing of this offering or such time that such stockholder can
sell all of his, her or its stock under Rule 144(k).
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock will be U.S. Stock
Transfer Corporation.
LISTING
The Company has applied to list its Common Stock on the Nasdaq National
Market under the trading symbol "CMPL."
58
<PAGE> 60
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering and based on the shares outstanding as of
July 31, 1998, there will be 10,642,788 shares of Common Stock outstanding,
assuming no exercise of outstanding options. Of these shares, the 3,000,000
shares sold in this offering (assuming no exercise of the underwriters'
over-allotment option) will be freely tradeable without restriction or further
registration unless purchased by "affiliates" of the Company as that term is
defined in Rule 144 under the Securities Act. The remaining shares will be
"restricted securities" as that term is defined under Rule 144 (the "Restricted
Shares"). Sales of Restricted Shares in the public market, or the availability
of such shares for sale, could adversely affect the market price of the Common
Stock.
Of the Restricted Shares, an aggregate of 6,785,164 shares of Common Stock
will be eligible for sale in the public market subject to Rule 144 and Rule 701
under the Securities Act after expiration of a contractual lock-up beginning 180
days after the date of the Prospectus, unless earlier released, in whole or in
part, by NationsBanc Montgomery Securities LLC and thereafter an additional
857,624 shares will be eligible for sale pursuant to Rule 144 upon the
expiration of one-year holding periods on May 22, 1999. A significant portion of
such shares that become eligible for sale in the public market are held by the
Venture Stockholders. See "Risk Factors -- Control of the Company by Current
Stockholders and Venture Capital Firms" and "-- Shares Eligible for Future
Sale."
In general, under Rule 144, beginning 90 days after the date of this
Prospectus, a person (or persons whose shares are aggregated) who has
beneficially owned Restricted Shares for at least one year, including persons
who may be deemed to be "affiliates" of the Company, would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of: (i) one percent of the number of shares of Common Stock then
outstanding (which will equal approximately 106,428 shares immediately after
this offering); or (ii) the average weekly trading volume of the Common Stock as
reported through the Nasdaq National Market during the four calendar weeks
preceding the filing of a Form 144 with respect to such sale. Sales under Rule
144 are also subject to certain manner of sale provisions and notice
requirements and to the availability of current public information about the
Company. Under Rule 144(k), a person who is not deemed to have been an affiliate
of the Company at any time during the 90 days preceding a sale, and who has
beneficially owned the Restricted Shares proposed to be sold for at least two
years (including the holding period of any prior owner except an affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, shares eligible for sale under Rule 144(k) may be
sold immediately upon completion of this offering.
Rule 701 permits resales of shares issued pursuant to certain compensatory
benefit plans and contracts and prior to the date the issuer becomes subject to
the reporting requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), subject to certain limitations on the aggregate offering
price of a transaction and certain other conditions, commencing 90 days after
the issuer becomes subject to the reporting requirements of the Exchange Act, in
reliance upon Rule 144, but without compliance with certain restrictions,
including the holding period requirements, contained in Rule 144. In addition,
the Securities and Exchange Commission has indicated that Rule 701 will apply to
typical stock options granted by an issuer before it becomes subject to the
reporting requirements of the Exchange Act, along with the shares acquired upon
exercise of such options (including exercises after the date of this
Prospectus). Securities issued in reliance on Rule 701 are restricted securities
and, subject to the contractual lock-up restrictions described above, beginning
90 days after the date of this Prospectus, may be sold by persons other than
affiliates subject only to the manner of sale provisions of Rule 144 and by
affiliates under Rule 144 without compliance with its one-year minimum holding
period requirements.
The Company has agreed that it will not sell, offer, contract for or grant
any options to purchase or otherwise dispose of any shares of its Common Stock
or securities convertible into or exchangeable for its Common Stock, except with
respect to options or other rights outstanding on the date of this Prospectus or
pursuant to the Company's stock plans described in this Prospectus, for a period
of 180 days after the date of the Prospectus without the prior written consent
of NationsBanc Montgomery Securities LLC.
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<PAGE> 61
The Company intends to register on a Form S-8 registration statement under
the Securities Act, during the 180-day lockup period, the resale of 3,345,595
shares of Common Stock issuable upon exercise of outstanding options or reserved
for issuance under the 1996 Stock Plan, the 1998 Omnibus Equity Incentive Plan
and the 1998 Employee Stock Purchase Plan. See "Management -- Stock Plans." Such
registration will permit the resale of shares so registered by non-affiliates in
the public market without restriction under the Securities Act, subject to
vesting restrictions or contractual lock-ups.
Upon completion of this offering, the holders of 6,079,186 shares of Common
Stock will be entitled to certain registration rights with respect to such
shares. See "Description of Capital Stock -- Registration Rights." Registration
of such shares would result in such shares becoming freely tradeable without
restriction under the Securities Act (except for share purchases by affiliates)
immediately upon the effectiveness of such registration.
60
<PAGE> 62
UNDERWRITING
The Underwriters named below (the "Underwriters"), represented by
NationsBanc Montgomery Securities LLC, Piper Jaffray Inc. and Needham & Company,
Inc. (the "Representatives"), have severally agreed, subject to the terms and
conditions set forth in the Underwriting Agreement, to purchase from the Company
the number of shares of Common Stock indicated below opposite their respective
names at the initial public offering price less the underwriting discount set
forth on the cover page of this Prospectus. The Underwriting Agreement provides
that the obligations of the Underwriters to pay for and accept delivery of the
shares of Common Stock are subject to certain conditions precedent, and that the
Underwriters are committed to purchase all of such shares, if any are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ----------
<S> <C>
NationsBanc Montgomery Securities LLC.......................
Piper Jaffray Inc...........................................
Needham & Company, Inc......................................
----------
Total............................................. 3,000,000
==========
</TABLE>
The Representatives have advised the Company that the Underwriters
initially propose to offer the shares of Common Stock to the public on the terms
set forth on the cover page of this Prospectus. The Underwriters may allow to
selected dealers a concession of not more than $ per share, and the
Underwriters may allow, and such dealers may reallow, a concession of not more
than $ per share to certain other dealers. After, but not prior to, the
completion of this offering, the offering price and concessions and reallowances
to dealers may be changed by the Representatives. The Common Stock is offered
subject to receipt and acceptance by the Underwriters and to certain other
conditions, including the right to reject orders in whole or in part. The
Company estimates that the total offering expenses, other than underwriting
discounts and commissions, will be $800,000.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a maximum
of 450,000 additional shares of Common Stock to cover over-allotments, if any,
at the same price per share as the initial 3,000,000 shares to be purchased by
the Underwriters. To the extent that the Underwriters exercise this option, each
of the Underwriters will be committed, subject to certain conditions, to
purchase such additional shares in approximately the same proportion as set
forth in the above table. The Underwriters may purchase such shares only to
cover over-allotments made in connection with this offering.
The directors, officers and certain stockholders of the Company, holding in
the aggregate 7,583,083 shares of Common Stock after this offering, have agreed
that, subject to certain exceptions, for a period of 180 days after the date of
this Prospectus, they will not, without the prior written consent of NationsBanc
Montgomery Securities LLC, directly or indirectly sell, offer to sell or
otherwise dispose of any such shares of Common Stock or any right to acquire
such shares. In addition, the Company has agreed that, for a period of 180 days
after the date of this Prospectus, it will not, without the prior written
consent of NationsBanc Montgomery Securities LLC, issue, offer, sell, grant
options to purchase or otherwise dispose of any of the Company's equity
securities or any other securities convertible into or exercisable or
exchangeable for the Common Stock or other equity security, other than the grant
of options to purchase Common Stock or the issuance of shares of Common Stock
under the Company's stock option and stock purchase plans and the issuance of
shares of Common Stock pursuant to the exercise of outstanding options and
warrants.
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<PAGE> 63
In January 1998, Needham Capital Partners II, L.P., Needham Capital SBIC,
L.P. and Needham Capital Partners II (Bermuda), L.P., entities affiliated with
Needham & Company, Inc., purchased an aggregate of 535,715 shares of the
Company's Series D Preferred Stock for an aggregate purchase price of
$2,250,000.90. In May 1998, Needham Capital Partners II, L.P and Needham Capital
Partners II (Bermuda), L.P., entities affiliated with Needham & Company, Inc.,
purchased an aggregate of 69,876 shares of the Company's Series E Preferred
Stock for an aggregate purchase price of $449,999.83. Such shares of Series D
Preferred Stock and Series E Preferred Stock held by the entities affiliated
with Needham & Company, Inc. will convert into 605,591 shares of Common Stock
upon the closing of this offering. In addition, an individual affiliated with
NationsBanc Montgomery Securities LLC purchased 23,810 shares of Series D
Preferred Stock and 3,882 shares of Series E Preferred Stock in January 1998 and
May 1998, respectively, for aggregate purchase prices of $99,999.90 and
$24,998.47, respectively. Such shares of Series D Preferred Stock and Series E
Preferred Stock held by the individual affiliated with NationsBanc Montgomery
Securities LLC will convert into 27,692 shares of Common Stock upon the closing
of this offering.
The Underwriting Agreement provides that the Company will indemnify the
several Underwriters against certain liabilities, including civil liabilities
under the Securities Act, or will contribute to payments the Underwriters may be
required to make in respect thereof.
Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price will be determined by
negotiations between the Company and the Representatives. Among the factors to
be considered in such negotiations will be the history of, and the prospects
for, the Company and the industry in which it competes, an assessment of the
Company's management, the Company's past and present operations, its past and
present financial performance, the prospects for future earnings of the Company,
the present state of the Company's development, the general condition of the
securities markets at the time of the offering and the market prices of and
demand for publicly traded common stock of comparable companies in recent
periods and other factors deemed relevant.
Certain persons participating in this offering may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock
offered hereby. Such transactions may include stabilizing, the purchase of
Common Stock to cover syndicate short positions and the imposition of penalty
bids. A stabilizing bid means the placing of any bid or the effecting of any
purchase for the purpose of pegging, fixing or maintaining the price of the
Common Stock. A syndicate covering transaction means the placing of any bid on
behalf of the underwriting syndicate or the effecting of any purchase to reduce
a short position created in connection with the offering. A penalty bid means an
arrangement that permits the Underwriters to reclaim a selling concession from a
syndicate member in connection with the offering when shares of Common Stock
sold by the syndicate member are purchased in syndicate covering transactions.
Such transactions may stabilize or maintain the market price of the Common Stock
at a level above that which otherwise might prevail in the open market and, if
commenced, may be discontinued at any time.
The Representatives have informed the Company that the Underwriters do not
expect to make sales in excess of 5% of the number of shares of Common Stock
offered hereby to accounts over which they exercise discretionary authority.
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<PAGE> 64
LEGAL MATTERS
The validity of the Shares offered hereby and general corporate legal
matters will be passed upon for the Company by Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP, Menlo Park, California. As of July 31,
1998, an investment partnership comprised of members of that firm beneficially
owned 35,110 shares of the Company's Preferred Stock. Certain legal matters
relating to the sale of the shares of Common Stock in this offering will be
passed upon for the Underwriters by Brobeck, Phleger & Harrison LLP, San
Francisco, California.
EXPERTS
The consolidated financial statements of Computer Literacy, Inc. as of
January 31, 1998, and for each of the two years in the period ended January 31,
1998, and the financial statements of Computer Literacy Bookshops, Inc. for the
eleven months ended May 31, 1997 and the year ended June 30, 1996 included in
this Prospectus and the Registration Statement have been audited by Deloitte &
Touche, LLP, independent auditors, as stated in their reports appearing herein,
and are included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall include any amendments
thereto) on Form SB-2 under the Securities Act with respect to the Common Stock
offered hereby. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement, certain items of which are contained in exhibits to the Registration
Statement as permitted by the rules and regulations of the Commission. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement, including the exhibits
thereto, and the Financial Statements and related Notes filed as a part thereof.
Statements made in this Prospectus concerning the contents of any document
referred to herein are not necessarily complete. With respect to each such
document filed with the Commission as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved.
As a result of this offering, the Company will become subject to the
periodic reporting and other informational requirements of the Securities
Exchange Act of 1934, as amended. As long as the Company is subject to such
periodic reporting and informational requirements, it will file with the
Commission all reports, proxy statements and other information required thereby.
The Registration Statement, as well as such reports and other information filed
by the Company with the Commission, may be inspected at the public reference
facilities maintained by the Commission at its principal office located at 450
Fifth Street, N.W., Washington, D.C. 20549 and at its regional offices located
at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World
Trade Center, 13th Floor New York, New York 10048. Copies of such material may
be obtained by mail from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a World Wide Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of the site is http://www.sec.gov.
63
<PAGE> 65
COMPUTER LITERACY, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED AND PRO FORMA FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
COMPUTER LITERACY, INC. AND SUBSIDIARY
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets at January 31, 1998, July 31,
1998 (unaudited) and Pro forma at July 31, 1998
(unaudited)............................................... F-3
Consolidated Statements of Operations for the years ended
January 31, 1997 and 1998 and the six months ended July
31, 1997 and 1998 (unaudited)............................. F-4
Consolidated Statements of Stockholders' Equity for the
years ended January 31, 1997 and 1998 and the six months
ended July 31, 1998 (unaudited)........................... F-5
Consolidated Statements of Cash Flows for the years ended
January 31, 1997 and 1998 and the six months ended July
31, 1997 and 1998 (unaudited)............................. F-6
Notes to Consolidated Financial Statements.................. F-7
PRO FORMA INFORMATION (UNAUDITED)
Introduction to Pro Forma Combined Condensed Financial
Information (unaudited)................................... F-17
Pro Forma Combined Condensed Statement of Income for the
year ended January 31, 1998 (unaudited)................... F-18
Notes to Pro Forma Combined Condensed Statement of Income
for the year ended January 31, 1998 (unaudited)........... F-19
COMPUTER LITERACY BOOKSHOPS, INC.
Independent Auditors' Report................................ F-20
Statements of Income for the year ended June 30, 1996 and
the eleven months ended May 31, 1997...................... F-21
Statements of Stockholders' Equity for the year ended June
30, 1996 and the eleven months ended May 31, 1997......... F-22
Statements of Cash Flows for the year ended June 30, 1996
and the eleven months ended May 31, 1997.................. F-23
Notes to Financial Statements............................... F-24
</TABLE>
F-1
<PAGE> 66
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Computer Literacy, Inc.
Sunnyvale, California
We have audited the accompanying consolidated balance sheet of Computer
Literacy, Inc. and subsidiary (the "Company") as of January 31, 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the two years in the period then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at January 31,
1998, and the results of its operations and its cash flows for each of the two
years in the period then ended in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
San Jose, California
July 10, 1998
(August 25, 1998 as to the fifth paragraph of
Note 1 and the last two paragraphs of Note 10)
F-2
<PAGE> 67
COMPUTER LITERACY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
JANUARY 31, JULY 31, JULY 31,
1998 1998 1998
----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and equivalents...................................... $ 4,974 $ 5,132
Accounts receivable, net of allowance of $67 and $114..... 153 511
Inventories............................................... 3,683 3,979
Prepaid expenses and other current assets................. 440 750
------- -------
Total current assets.............................. 9,250 10,372
Property and equipment, net................................. 1,182 1,723
Goodwill, net............................................... 2,962 2,855
Other assets................................................ 204 486
------- -------
Total assets...................................... $13,598 $15,436
======= =======
</TABLE>
<TABLE>
<S> <C> <C> <C>
Current liabilities:
Accounts payable.......................................... $ 2,518 $ 2,476
Accrued expenses.......................................... 1,084 997
Current portion of capital lease obligations.............. 18 18
------- -------
Total current liabilities......................... 3,620 3,491
Capital lease obligations................................... 53 44
------- -------
Total liabilities................................. 3,673 3,535
Stockholders' equity:
Preferred stock, $0.001 par value, 5,500 and 6,275 shares
authorized, 5,222 and 6,079 shares issued and
outstanding at January 31, 1998 and July 31, 1998,
respectively; pro forma outstanding, none; (aggregate
liquidation preference of $13,843 and $19,366 at
January 31, 1998 and July 31, 1998, respectively; pro
forma, nil)............................................ 5 6 $ --
Common stock, $0.001 par value, 8,750 and 10,000 shares
authorized, 1,527 and 1,564 shares issued and
outstanding at January 31, 1998 and July 31, 1998,
respectively; pro forma issued and outstanding 7,643
shares................................................. 2 2 8
Additional paid-in capital................................ 13,764 19,376 19,376
Warrants.................................................. 12 12 12
Accumulated deficit....................................... (3,858) (7,495) (7,495)
------- ------- -------
Total stockholders' equity........................ 9,925 11,901 $11,901
------- ------- =======
Total liabilities and stockholders' equity........ $13,598 $15,436
======= =======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 68
COMPUTER LITERACY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, SIX MONTHS ENDED JULY 31,
---------------------- -------------------------
1997 1998 1997 1998
------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Online....................................... $ 180 $ 3,021 $ 620 $ 4,225
Retail and other............................. -- 7,927 2,263 4,984
------ ------- ------- -------
Total revenues.......................... 180 10,948 2,883 9,209
Cost of revenues:
Online....................................... 150 2,189 418 3,291
Retail and other............................. -- 5,216 1,425 3,226
------ ------- ------- -------
Total cost of revenues.................. 150 7,405 1,843 6,517
------ ------- ------- -------
Gross profit................................... 30 3,543 1,040 2,692
Operating expenses:
Sales and marketing.......................... 130 4,192 1,240 4,056
Development and engineering.................. 110 860 213 1,148
General and administrative................... 412 1,674 596 1,224
------ ------- ------- -------
Total operating expenses................ 652 6,726 2,049 6,428
------ ------- ------- -------
Loss from operations........................... (622) (3,183) (1,009) (3,736)
Interest, net.................................. 55 (7) 23 99
------ ------- ------- -------
Net loss....................................... $ (567) $(3,190) $ (986) $(3,637)
====== ======= ======= =======
Basic and diluted net loss per share........... $(0.38) $ (2.11) $ (0.66) $ (2.37)
====== ======= ======= =======
Shares used in calculating basic and diluted
net loss per share........................... 1,504 1,509 1,504 1,533
====== ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 69
COMPUTER LITERACY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON PREFERRED PREFERRED PREFERRED PREFERRED
STOCK SERIES A SERIES B SERIES C SERIES D
--------------- --------------- --------------- --------------- ---------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, February 1, 1996.... 1,504 $ 2 117 $ --
Repayment of stockholder note
receivable.................. --
Issuance of Preferred Series B
(net of issuance costs of
$9)......................... 2,280 $ 2
Conversion of Preferred Series
A into Preferred Series B... (117) (--) 155 --
Net loss......................
----- ---- ---- ----- ----- ------ ----- ------ ------ ------
Balances, January 31, 1997.... 1,504 2 -- -- 2,435 2
----- ---- ---- ----- ----- ------ ----- ------ ------ ------
Issuance of Preferred Series
B........................... 19 --
Issuance of Preferred Series C
(net of issuance costs of
$5)......................... 1,042 $ 1
Issuance of Preferred Series D
(net of issuance costs of
$56)........................ 1,726 $ 2
Issuance of stockholder note
receivable..................
Exercise of stock options..... 23 --
Options granted to
consultants................. --
Warrants granted to
creditor....................
Net loss......................
----- ---- ---- ----- ----- ------ ----- ------ ------ ------
Balances, January 31, 1998.... 1,527 2 -- -- 2,454 2 1,042 1 1,726 2
----- ---- ---- ----- ----- ------ ----- ------ ------ ------
Repayment of stockholder note
receivable (unaudited)......
Options granted to consultants
(unaudited)................. --
Exercise of stock options
(unaudited)................. 37 --
Issuance of Preferred Series E
(net of issuance costs of
$24) (unaudited)............
Net loss (unaudited)..........
----- ---- ---- ----- ----- ------ ----- ------ ------ ------
Balances, July 31, 1998
(unaudited)................. 1,564 $ 2 -- $ -- 2,454 $ 2 1,042 $ 1 1,726 $ 2
===== ==== ==== ===== ===== ====== ===== ====== ====== ======
<CAPTION>
PREFERRED
SERIES E ADDITIONAL TOTAL
--------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL WARRANTS DEFICIT EQUITY
------ ------ ---------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances, February 1, 1996.... $ 151 $ (101) $ 52
Repayment of stockholder note
receivable.................. 125 125
Issuance of Preferred Series B
(net of issuance costs of
$9)......................... 3,789 3,791
Conversion of Preferred Series
A into Preferred Series B... -- --
Net loss...................... (567) (567)
----- ------ ------- ------ ------- --------
Balances, January 31, 1997.... 4,065 (668) 3,401
----- ------ ------- ------ ------- --------
Issuance of Preferred Series
B........................... 31 31
Issuance of Preferred Series C
(net of issuance costs of
$5)......................... 2,494 2,495
Issuance of Preferred Series D
(net of issuance costs of
$56)........................ 7,192 7,194
Issuance of stockholder note
receivable.................. (25) (25)
Exercise of stock options..... 4 4
Options granted to
consultants................. 3 3
Warrants granted to
creditor.................... $ 12 12
Net loss...................... (3,190) (3,190)
----- ------ ------- ------ ------- --------
Balances, January 31, 1998.... 13,764 12 (3,858) 9,925
----- ------ ------- ------ ------- --------
Repayment of stockholder note
receivable (unaudited)...... 25 25
Options granted to consultants
(unaudited)................. 5 5
Exercise of stock options
(unaudited)................. 84 84
Issuance of Preferred Series E
(net of issuance costs of
$24) (unaudited)............ 857 $ 1 5,498 $ 5,499
Net loss (unaudited).......... (3,637) (3,637)
----- ------ ------- ------ ------- --------
Balances, July 31, 1998
(unaudited)................. 857 $ 1 $19,376 $ 12 $(7,495) $ 11,901
===== ====== ======= ====== ======= ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 70
COMPUTER LITERACY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JANUARY 31, JULY 31,
----------------- ------------------
1997 1998 1997 1998
------ ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................... $ (567) $(3,190) $ (986) $(3,637)
Adjustments to reconcile net loss to net cash used
in operations:
Depreciation and amortization................... 13 297 80 232
Options and warrants granted to consultants and
creditor...................................... -- 15 10 5
Changes in operating assets and liabilities:
Accounts receivable............................. -- (35) (4) (358)
Inventories..................................... (96) (1,145) (38) (296)
Prepaid expenses and other assets............... (18) (173) (118) (613)
Accounts payable................................ 89 1,680 845 (42)
Accrued expenses................................ 5 (117) (132) (87)
------ ------- ------- -------
Net cash used in operations..................... (574) (2,668) (343) (4,796)
Cash flows from investing activities:
Purchase of property and equipment................. (140) (941) (176) (645)
Acquisition of CLBI, net of cash acquired.......... -- (4,334) (4,334) --
------ ------- ------- -------
Net cash used in investing activities.............. (140) (5,275) (4,510) (645)
Cash flows from financing activities:
Repayment of capital lease obligation.............. (2) (10) (4) (9)
Borrowings under line of credit.................... -- -- 1,000 --
Issuance of preferred stock, net................... 3,916 9,695 2,522 5,524
Exercise of stock options, net..................... -- 4 -- 84
------ ------- ------- -------
Net cash provided by financing activities.......... 3,914 9,689 3,518 5,599
------ ------- ------- -------
Net increase/(decrease) in cash and equivalents...... 3,200 1,746 (1,335) 158
Cash and equivalents at beginning of period.......... 28 3,228 3,228 4,974
------ ------- ------- -------
Cash and equivalents at end of period................ $3,228 $ 4,974 $ 1,893 $ 5,132
====== ======= ======= =======
Non-cash investing and financing activities:
Equipment acquired through capital lease
transactions.................................... $ 42 $ 42
Sale of preferred stock for note receivable........ $ -- $ 25
Cash paid to acquire CLBI, net of cash acquired:
Assets acquired................................. $ 2,926 $ 2,926
Liabilities assumed............................. (1,897) (1,897)
Excess of purchase price over net assets
acquired...................................... 3,095 3,095
Covenant not to compete......................... 210 210
------- -------
Cash paid to acquire CLBI, net of cash
acquired...................................... $ 4,334 $ 4,334
======= =======
Supplemental disclosure of cash flow information:
Cash paid for interest............................. $ 1 $ 74 $ 27 $ 3
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 71
COMPUTER LITERACY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JULY 31, 1998 AND
FOR THE SIX MONTHS ENDED JULY 31, 1997 AND JULY 31, 1998 IS UNAUDITED)
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Basis of Presentation
Computer Literacy, Inc., formerly CBooks Express, Inc., was incorporated in
California in November 1994 and reincorporated in Delaware in July 1998. The
Company is an online retailer of technical books, technology based training
solutions, product manuals, research reports and other information resources,
all of which are targeted to information technology professionals. Business is
transacted through the Company's online store or through one of its four
physical retail locations.
On May 31, 1997, the Company acquired Computer Literacy Bookshops, Inc.
("CLBI") (see Note 2). The acquisition was accounted for as a purchase. The
accompanying financial statements include the operations of CLBI from the date
of acquisition.
The Company's fiscal year ends on January 31. The accompanying financial
statements include the years ended January 31, 1997 ("fiscal 1997") and January
31, 1998 ("fiscal 1998").
Principles of Consolidation
The consolidated financial statements include the accounts of Computer
Literacy, Inc. and its wholly owned subsidiary, CLBI. All significant
intercompany balances and transactions have been eliminated in the consolidated
financial statements.
Reverse Stock Split
On August 25, 1998, the Board of Directors authorized a four-for-one
reverse stock split and an increase in the authorized number of shares of Common
Stock to 10,000,000 shares, subject to stockholder approval. All share and per
share amounts have been restated to reflect such split.
Cash Equivalents
Cash equivalents are highly liquid debt instruments acquired with an
original maturity of three months or less. The recorded carrying amounts of the
Company's cash equivalents approximate the fair market value.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash equivalents and
receivables. Risks associated with cash equivalents are mitigated by banking
with credit worthy institutions. Risks associated with receivables are mitigated
as the Company performs on-going credit evaluations of its customers and
requires deposits for sales on credit when deemed necessary. The Company
maintains reserves for estimated credit losses. The carrying value of accounts
receivable approximate fair value due to their short-term maturity. No one
customer accounted for more than 10% of accounts receivable at January 31, 1998.
Inventories
Inventories are valued at the lower of average cost (first in, first out
method) or market. The Company's largest vendor accounted for approximately 30%
of the Company's book purchases in fiscal 1998.
F-7
<PAGE> 72
COMPUTER LITERACY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 31, 1998 AND
FOR THE SIX MONTHS ENDED JULY 31, 1997 AND JULY 31, 1998 IS UNAUDITED)
Property and Equipment
Property and equipment is recorded at cost less accumulated depreciation
and amortization. Furniture and equipment are depreciated using the
straight-line method over the estimated useful lives of three to five years.
Leasehold improvements are amortized on a straight-line basis over the lesser of
the lease term or the estimated useful life.
Long-lived Assets
Goodwill arising from the acquisition of Computer Literacy Bookshops, Inc.
is amortized over its estimated life of 15 years. Accumulated amortization was
approximately $133,000 at January 31, 1998. The Company evaluates the
recoverability of its long-lived assets in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121
requires recognition of impairment of long-lived assets in the event the net
book value of such assets exceeds the future undiscounted cash flows
attributable to such assets. No such impairments have been identified to date.
The Company assesses the impairment of long-lived assets when events or changes
in circumstances indicate that the carrying value of an asset may not be
recoverable.
Revenue Recognition
The Company recognizes revenue from product sales, net of any discounts,
when the products are shipped to customers. Outbound shipping charges are
included in net sales. International sales, measured as shipments to addresses
outside the United States, were $60,000 for the year ended January 31, 1997. For
the year ended January 31, 1998, international sales were less than 10% of total
revenues. No foreign country or geographical area accounted for more than 10% of
revenue in any of the periods presented.
Advertising Costs
The cost of advertising is expensed as incurred. For the years ended
January 31, 1997 and 1998, the Company incurred advertising expense of $45,000
and $920,000, respectively, and $240,000 and $1.1 million for the six month
periods ended July 31, 1997 and 1998, respectively.
Product Development
Product development expenses primarily consist of costs associated with
systems and telecommunications infrastructure, editorial operations and content
acquisition. All product development costs have been expensed as incurred.
Income Taxes
Income taxes are accounted for in accordance with SFAS No. 109, "Accounting
for Income Taxes," an approach which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial and tax reporting. In estimating
future tax consequences, management generally considers all expected future
events other than enactments of changes in the tax laws or rates. Under the
provisions of SFAS No. 109, a valuation allowance is provided when it is more
likely than not that some portion or all of the deferred tax assets recorded
will not be recognized.
F-8
<PAGE> 73
COMPUTER LITERACY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 31, 1998 AND
FOR THE SIX MONTHS ENDED JULY 31, 1997 AND JULY 31, 1998 IS UNAUDITED)
Stock-Based Compensation
Stock-based compensation is recognized under Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations, using the intrinsic value method. Therefore, the Company
measures compensation cost for stock options as the difference, if any, between
the quoted market price of the Company's stock, at the date of grant, and the
price the employee must pay to acquire the stock under its stock option plans.
SFAS No. 123 "Accounting for Stock-Based Compensation," establishes financial
accounting and reporting standards for stock-based compensation plans. The
accounting standards prescribed are optional, although certain pro forma
disclosures are required, and allows for a company to account for stock-based
compensation cost under existing accounting rules. Therefore, the Company will
continue to account for its compensation costs under APB No. 25. The Company
adopted the disclosure requirements of SFAS No. 123.
Net Loss Per Share
Net loss per share is computed based on the weighted average number of
common shares outstanding. During the fourth quarter of 1998, the Company
adopted SFAS No. 128, Earnings per Share and, retroactively, restated the 1997
earnings per share (EPS) for the change. SFAS No. 128 requires a dual
presentation of basic and diluted EPS. Basic EPS for all periods presented is
computed by dividing net loss by the weighted average of common shares
outstanding. Diluted EPS for all periods presented was the same as basic EPS
since the effect of all other potential dilutive securities is excluded as they
are anti-dilutive because of the Company's net losses.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130 "Reporting Comprehensive Income," which requires that an entity report,
by major components and as a single total, the change in its net assets during
the period from non-shareholder sources; and SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information," which establishes annual and
interim reporting standards for an entity's business segments and related
disclosures about its products, services, geographic areas, and major customers.
Adoption of these statements will not impact the Company's financial position,
results of operations or cash flows. Both statements are effective for fiscal
years beginning after December 15, 1997, with earlier application permitted.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which defines derivatives, requires that
all derivatives be carried at fair value, and provides for hedging accounting
when certain conditions are met. This statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Although the Company has
not fully assessed the implications of this new statement, the Company does not
believe adoption of this statement will have a material impact on the Company's
financial statements.
The Company adopted SFAS No. 130 in fiscal 1999. For the periods presented,
net loss and comprehensive loss were the same.
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
disclosure of contingent assets and liabilities at the date of the financial
statements and the
F-9
<PAGE> 74
COMPUTER LITERACY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 31, 1998 AND
FOR THE SIX MONTHS ENDED JULY 31, 1997 AND JULY 31, 1998 IS UNAUDITED)
reported amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
Unaudited Interim Financial Information
The financial information as of July 31, 1998 and for the six months ended
July 31, 1997 and 1998 is unaudited, and includes all adjustments (consisting
only of normal recurring adjustments) that the Company considers necessary for a
fair presentation of the financial position at such dates and the operations and
cash flows for the periods then ended. Operating results for the six months
ended July 31, 1997 and 1998 are not necessarily indicative of results that may
be expected for the entire year.
2. ACQUISITION
On May 31, 1997, the Company completed the acquisition of all of the
outstanding capital stock of Computer Literacy Bookshops, Inc., a retailer of
computer books, with four stores located in California and Virginia. The
purchase price was approximately $5.1 million. The acquisition was accounted for
using the purchase method of accounting and accordingly, the assets acquired and
liabilities assumed were recorded at their estimated fair values as of the date
of acquisition. The principal assets acquired and liabilities assumed were cash
($759,000), inventory ($2.4 million), prepaid expenses and other current assets
($272,000), covenant not to compete ($210,000), property and equipment
($142,000), accounts receivable ($119,000), and accounts payable and accrued
expenses ($1.9 million). The excess of the purchase price over the net
identifiable assets acquired of $3.1 million is being amortized over a 15 year
period on a straight-line basis.
The following unaudited pro forma statements of operations summary combines
the results of operations of the Company and Computer Literacy Bookshops, Inc.
as if the acquisition had occurred at the beginning of fiscal 1997. The pro
forma statements of operations summary does not necessarily reflect the results
as they would have been if these combined companies had constituted a single
entity during these periods.
PRO FORMA STATEMENTS OF OPERATIONS SUMMARY
<TABLE>
<CAPTION>
FISCAL FISCAL
1997 1998
-------- --------
(UNAUDITED)
(IN THOUSANDS EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net sales................................................ $15,172 $15,886
------- -------
Gross profit............................................. 5,236 5,238
------- -------
Net income (loss)........................................ $ 138 $(3,050)
======= =======
Net income (loss) per share.............................. $ 0.09 $ (2.02)
======= =======
Shares used to compute per share information............. 1,504 1,509
------- -------
</TABLE>
F-10
<PAGE> 75
COMPUTER LITERACY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 31, 1998 AND
FOR THE SIX MONTHS ENDED JULY 31, 1997 AND JULY 31, 1998 IS UNAUDITED)
3. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following:
<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
1998 1998
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Computer and office equipment........................ $ 901 $1,384
Software............................................. 574 715
Leasehold improvements............................... 252 278
Furniture and fixtures............................... 158 169
------ ------
1,885 2,546
Less accumulated depreciation and amortization....... (703) (823)
------ ------
Property and equipment, net.......................... $1,182 $1,723
====== ======
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
1998 1998
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Accrued compensation and related benefits............ $ 420 $ 444
Accrued sales tax payable............................ 306 95
Store and mail order credits......................... 158 162
Other accrued expenses............................... 200 296
------ ------
Total...................................... $1,084 $ 997
====== ======
</TABLE>
5. LINE OF CREDIT
During fiscal 1997, the Company entered into a loan and security agreement,
under which the Company may borrow up to $2 million. In January 1998, the line
of credit was increased to $3 million. This line of credit expires in November
1998. Borrowings under the agreement bear interest at one-half of a percent
(0.5%) above the bank's prime rate (8.5% at January 31, 1998 and July 31, 1998)
and are collateralized by substantially all of the Company's assets including
certain intellectual property. The line of credit also contains restrictive
covenants, including restriction on payment of dividends, a maximum debt to
tangible effective net worth ratio, minimum cash requirements and limitations on
losses. There were no borrowings under this agreement at January 31, 1998. At
January 31, 1998, the Company was out of compliance with certain of its
reporting requirements and received a waiver concerning such non-compliance as
of that date.
During fiscal 1998, in connection with the Company's bank line of credit
agreement, the Company issued warrants to the bank to purchase up to 20,832
shares of the Company's Series C Preferred Stock at a price of $2.40 per share
(15,624 shares were exercisable at January 31, 1998). The Company recorded
expense of approximately $12,000 related to the warrants. These warrants expire
in May 2002.
F-11
<PAGE> 76
COMPUTER LITERACY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 31, 1998 AND
FOR THE SIX MONTHS ENDED JULY 31, 1997 AND JULY 31, 1998 IS UNAUDITED)
6. STOCKHOLDERS' EQUITY
Preferred Stock
At January 31, 1998, the amounts, terms and liquidation values of Series B,
Series C, and Series D preferred stock are as follows (in thousands):
<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK AGGREGATE
SHARES ISSUED AMOUNT, NET OF RESERVED FOR LIQUIDATION
SERIES DESIGNATED AND OUTSTANDING ISSUANCE COSTS CONVERSION PREFERENCE
- ------ ---------- --------------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
B.. 2,454 2,454 $ 4,080 2,454 $ 4,093
C.. 1,042 1,042 2,495 1,042 2,500
D.. 1,875 1,726 7,169 1,726 7,250
------ ------ ------- ------ -------
5,371 5,222 $13,744 5,222 $13,843
</TABLE>
Significant terms of the outstanding preferred stock are as follows:
- Each share of preferred stock is convertible into shares of common stock
on a one to one basis, subject to adjustment in certain instances, at the
option of the stockholder. Such shares will be converted automatically
following the effectiveness of a registration statement under the
Securities Act of 1933, as amended, meeting certain criteria or the
affirmative vote of the holders of a majority of the shares of preferred
stock outstanding at the time of such vote.
- Each share of preferred stock has voting rights equivalent to the number
of shares of common stock into which it is convertible.
- Stockholders are entitled to receive noncumulative dividends when and if
declared by the Board of Directors out of any assets legally available,
prior to and in preference to any declaration or payment of any dividend
on the common stock. The dividend rate for Series B, Series C and Series
D per share per annum is $0.088, $0.12, and $0.20, respectively. No
dividends have been declared as of July 31, 1998.
- In the event of liquidation, dissolution or winding up of the Company,
stockholders of Series B, Series C and Series D preferred stock are
entitled to receive the original issue price ($1.67, $2.40, and $4.20,
respectively), plus any declared and unpaid dividends with respect to
such shares. If the assets and funds to be distributed are insufficient
to permit full payment, then the funds shall be distributed on a pro rata
basis. Upon completion of the distribution, the holders of the common
stock will receive all remaining assets of the corporation.
Common Stock
At January 31, 1998, the Company had 8,750,000 shares of Common Stock
authorized of which 1,527,085 were issued and outstanding. At January 31, 1998,
the Company had reserved shares of common stock for issuance as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Issuance under stock option plans...................... 1,216
Conversion of warrants................................. 21
Conversion of convertible preferred stock.............. 5,222
------
Total shares reserved........................ 6,459
======
</TABLE>
F-12
<PAGE> 77
COMPUTER LITERACY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 31, 1998 AND
FOR THE SIX MONTHS ENDED JULY 31, 1997 AND JULY 31, 1998 IS UNAUDITED)
Stock Option Plan
Under the 1996 Stock Plan, which provides for the issuance of incentive and
non-qualified stock options, the Company may grant options to purchase up to
1,215,686 shares of common stock to employees, directors and consultants at
prices not less than the fair market value at date of grant for incentive stock
options and not less than 85% of fair value for nonstatutory stock options.
These options generally vest 25% one year from the vest start date and ratably
over the next 36 months and expire 10 years from the date of grant. Shares
issued upon exercise of options that are unvested are subject to repurchase by
the Company upon termination of employment or services. There were no shares
issued under the 1996 Stock Plan and outstanding at January 31, 1998 that were
subject to repurchase.
Option activity under the 1996 Stock Plan is as follows (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES (000'S) EXERCISE PRICE
-------------- ----------------
<S> <C> <C>
Outstanding, February 1, 1996............................... -- --
Options granted (weighted average fair value of $0.03 per
share)................................................. 277 $ 0.18
----- ------
Outstanding, January 31, 1997 (8 vested at a weighted
average price of $0.18)................................... 277 0.18
Options granted (weighted average fair value of $0.09 per
share)................................................. 795 0.57
Options exercised......................................... (23) (0.18)
Options canceled.......................................... (183) (0.26)
----- ------
Outstanding, January 31, 1998 (118 vested at a weighted
average price of $0.28)................................... 866 $ 0.52
===== ======
</TABLE>
At January 31, 1998 there were 326,460 shares available for future grant
under the 1996 Stock Plan.
Additional information regarding options outstanding as of January 31, 1998
is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS VESTED
---------------------------------------------------- ----------------------------
WEIGHTED AVERAGE
RANGE OF NUMBER OF REMAINING CONTRACTUAL WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
EXERCISE PRICE SHARES LIFE (YRS) EXERCISE PRICE SHARES EXERCISE PRICE
- -------------- --------- --------------------- ---------------- --------- ----------------
(SHARES IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
$0.18 337 8.9 $ 0.18 97 $ 0.18
$0.24 319 9.5 $ 0.24 10 $ 0.24
$0.72-$1.20 129 9.8 $ 1.08 10 $ 1.18
$2.00-$2.20 81 10.0 $ 2.16 1 $ 2.00
- ------------- ----- ----- ------ --- ------
$0.18-$2.20 866 9.4 $ 0.52 118 $ 0.28
============= ===== ===== ====== === ======
</TABLE>
Additional Stock Plan Information
As discussed in Note 1, the Company continues to account for its
stock-based awards using the intrinsic value method in accordance with APB No.
25, "Accounting for Stock Issued to Employees," and its related interpretations.
Accordingly, no compensation expense has been recognized in the financial
statements for employee stock arrangements granted at fair value.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), requires the disclosure of pro forma net
loss and net loss per share had the Company adopted the fair value method as of
the beginning of fiscal 1997. Under SFAS 123, the fair value of stock-based
awards to employees is calculated through the use of the minimum value method,
and subsequently through the use of
F-13
<PAGE> 78
COMPUTER LITERACY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 31, 1998 AND
FOR THE SIX MONTHS ENDED JULY 31, 1997 AND JULY 31, 1998 IS UNAUDITED)
option pricing models, even though such models were developed to estimate the
fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including future stock price
volatility and the expected time to exercise, which significantly affect the
calculated values. The Company's calculations were made using the minimum value
option pricing model with the following weighted average assumptions: expected
life, 48 months following the grant; risk-free interest rate of 5.5% for 1997
and 1998; and no dividends during the expected term. The Company's calculations
are based on a multiple option valuation approach and forfeitures are recognized
as they occur. If the computed fair values of the 1997 and 1998 awards had been
amortized to expense over the vesting period of the awards, pro forma net loss
would have been $575,000 ($0.38 per share) and $3.3 million ($2.19 per share) in
1997 and 1998, respectively.
During fiscal 1998 and the six months ended July 31, 1998, the Company
granted 29,301 and 8,651 options to consultants at exercise prices ranging from
$0.18 to $2.20 per share, and recorded expense of approximately $3,000 and
$5,000, respectively.
7. INCOME TAXES
The Company's deferred tax balances at January 31, 1997 and 1998 consist of
the following:
<TABLE>
<CAPTION>
1997 1998
----- -------
(IN THOUSANDS)
<S> <C> <C>
Net operating loss carryforwards............................ $ 238 $ 1,043
Expenses not currently deductible........................... -- 246
Other....................................................... (12) 129
----- -------
226 1,418
Valuation allowance......................................... (226) (1,418)
----- -------
Net deferred tax asset...................................... $ -- $ --
===== =======
</TABLE>
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. The Company has
established a valuation allowance of $226,000 and $1,418,000 as of January 31,
1997 and 1998, respectively, due to the uncertainty of realizing future tax
benefits from its net operating loss carryforwards and other deferred tax
assets.
At January 31, 1998, the Company had federal and state net operating loss
carryforwards of approximately $2,962,000, which expire through 2013 and 2004,
respectively.
The extent to which the loss carryforwards can be used to offset future
taxable income may be limited, depending on the extent of ownership changes
within any three-year period as provided in the Tax Reform Act of 1986 and the
California Conformity Act of 1987.
8. LEASE COMMITMENTS
At January 31, 1998, the Company leased equipment with a cost of $84,000
(accumulated amortization of $14,000) under capital leases.
The Company currently leases office and warehouse space, retail store space
and equipment under noncancelable operating leases. Rental expense under
operating lease agreements, net of sublease income, for the years ended January
31, 1997 and 1998 was approximately $18,000, and $390,000, respectively, and
$115,000 and $309,000 for the six months ended July 31, 1997 and 1998,
respectively. Estimated future rents to be recovered under sublease agreements
are approximately $62,000 in fiscal 1999.
F-14
<PAGE> 79
COMPUTER LITERACY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 31, 1998 AND
FOR THE SIX MONTHS ENDED JULY 31, 1997 AND JULY 31, 1998 IS UNAUDITED)
Future minimum lease commitments, net of sublease income, under
noncancelable capital and operating leases and service agreements as of January
31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
FISCAL LEASES LEASES
------ --------- -------
<S> <C> <C>
1999........................................................ $418 $ 25
2000........................................................ 245 25
2001........................................................ 178 25
2002........................................................ 30 11
---- ----
Total............................................. $871 86
====
Less: amount representing interest.......................... (15)
----
Present value of future minimum lease payments.............. 71
Current portion............................................. (18)
----
Long-term portion........................................... $ 53
====
</TABLE>
9. EMPLOYEE BENEFIT PLANS
As a result of the acquisition of CLBI, the Company has a money purchase
pension plan, under which the Company contributes to the plan an amount equal to
10% of the employee's annual compensation through June 30, 1997. The Company has
suspended and is in the process of terminating the money purchase pension plan
effective June 28, 1998. The effect of the termination is not expected to have a
material adverse effect on the Company's financial position or results of
operation. The Company's contribution to such Plan for fiscal 1998 was $10,000.
Effective November 1997, the Company adopted the Computer Literacy, Inc.
401(k) Plan (the "401(k) Plan") that qualifies as a deferred salary arrangement
under Section 401 of the Internal Revenue Code. All full-time equivalent
employees over 21 years of age are eligible and may participate in the 401(k)
Plan one year subsequent to their hire date. Under the 401(k) Plan,
participating employees may defer a portion of their pre-tax earnings not to
exceed 15% of their total compensation. The Company matches 50% of the first 4%
contributed by the employee. The total Company contribution was $7,000 for
fiscal 1998 and $15,000 for the six months ended July 31, 1998.
F-15
<PAGE> 80
COMPUTER LITERACY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 31, 1998 AND
FOR THE SIX MONTHS ENDED JULY 31, 1997 AND JULY 31, 1998 IS UNAUDITED)
10. SUBSEQUENT EVENTS
In May 1998, the Company issued 857,624 shares of Series E Preferred Stock
for $6.44 per share. The terms of the Preferred Stock, which has a dividend rate
of $0.32 per share per annum and a liquidation preference of $6.44 per share,
are substantially the same as those described in Note 6.
In July 1998, the Company reincorporated in Delaware and pursuant to such
reincorporation, each share of Common Stock and Preferred Stock has a par value
of $0.001 per share and an additional paid-in capital account has been created.
In addition, in July 1998, the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission to permit the
Company to sell shares of its common stock to the public and authorized
management to effect such filing. Upon completion of the Company's initial
public offering, each outstanding share of preferred stock will convert into
common stock. Unaudited pro forma stockholders' equity reflects the assumed
conversion of the preferred stock into common stock as of July 31, 1998.
In July 1998, the Board of Directors approved the Company's 1998 Omnibus
Equity Incentive Plan (the "Omnibus Plan") and the Employee Stock Purchase Plan
("ESPP"), subject to stockholder approval. The Plans become effective upon the
closing of the Company's initial public offering. Under the Omnibus Plan,
employees, non-employee members of the Board and consultants may be awarded
options to purchase shares of common stock, stock appreciation rights,
restricted shares and stock units. At July 31, 1998, there were 3,045,595 shares
available for grant. Under the ESPP, eligible employees may purchase common
stock through payroll deductions, which may not exceed 15% of any employee's
compensation, nor more than 500 shares of any purchase date. A total of 300,000
shares of Common Stock will be reserved for issuance under the ESPP.
In July 1998, the Company entered into a revised agreement with CBT
Systems, Ltd. The agreement requires that the Company make a $1,250,000 minimum
purchase commitment, as follows: fiscal 1999: $300,000; fiscal 2000: $375,000;
fiscal 2001: $345,000 and fiscal 2002: $230,000.
F-16
<PAGE> 81
INTRODUCTION TO PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
(UNAUDITED)
The acquisition of Computer Literacy Bookshops, Inc. ("CLBI") on May 31,
1997 was accounted for under the purchase method of accounting. This method
requires the purchase price of approximately $5.1 million be allocated to the
acquired assets and assumed liabilities of CLBI on the basis of their estimated
fair values as of the date of acquisition. Consequently, upon consummation of
the purchase, the combined company has established a new accounting and
reporting basis for the acquired assets and liabilities. The following Pro Forma
Combined Condensed Statement of Income (the "Pro Forma Statement of Income") for
the year ended January 31, 1998 (unaudited) presents the combined historical
financial statements of Computer Literacy, Inc. adjusted to give effect to the
transaction on a pro forma basis as if the acquisition had occurred on February
1, 1997 and includes adjustments directly attributable to the acquisition and
expected to have a continuing impact on the combined company.
The Pro Forma Statement of Income and related notes are provided for
informational purposes only. The Pro Forma Statement of Income presented is not
necessarily indicative of the results of operations of Computer Literacy, Inc.
as they may be in the future or as they might have been had the purchase been
effected on the assumed date. The Pro Forma Statement of Income should be read
in conjunction with the historical consolidated financial statements of Computer
Literacy, Inc., and CLBI and the related notes thereto, which are included
elsewhere in this prospectus.
F-17
<PAGE> 82
COMPUTER LITERACY, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
YEAR ENDED JANUARY 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------- PRO FORMA
COMPUTER -------------------------
LITERACY, INC. CLBI(A) SUBTOTAL ADJUSTMENTS COMBINED
-------------- ------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenues:
Online.......................... $ 3,021 $ -- $ 3,021 $ 3,021
Retail and other................ 7,927 4,938 12,865 12,865
---------- ------ ------- ------ ----------
Total revenues.................... 10,948 4,938 15,886 15,886
Gross profit...................... 3,543 1,695 5,238 5,238
Operating expense................. 6,726 1,764 8,490 $ (225)(b) 8,265
Interest, net..................... (7) 14 7 (30)(c) (23)
---------- ------ ------- ------ ----------
Net loss.......................... $ (3,190) $ (55) $(3,245) $ 195 $ (3,050)
========== ====== ======= ====== ==========
Basic and diluted net loss per
share........................... $ (2.11) $ (2.02)
Shares used in calculating basic
and diluted net loss per
share........................... 1,509 1,509
</TABLE>
See Notes to Pro Forma Combined Condensed Statement of Income.
F-18
<PAGE> 83
COMPUTER LITERACY, INC.
NOTES TO PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
(UNAUDITED)
The following adjustments represent those necessary to show how the
purchase could have affected the historical consolidated statement of income had
the acquisition been consummated at February 1, 1997.
(a) The CLBI Statement of Operations data is for the period from February
1, 1997 through May 31, 1997 (date of acquisition).
(b) Reflects additional amortization of goodwill and the covenant not to
compete ($79,000) offset by acquisition costs paid by CLBI ($292,000)
and reduction of depreciation for assets written-off by Computer
Literacy, Inc. ($12,000) as if the acquisition of CLBI had occurred
February 1, 1997. Goodwill and the covenant not to compete are
amortized on a straight-line basis over fifteen years and five years,
respectively.
(c) Reflects additional interest expense that would have been paid on the
line of credit had the acquisition occurred at February 1, 1997.
F-19
<PAGE> 84
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Computer Literacy, Inc.
Sunnyvale, California
We have audited the accompanying statements of income, stockholders' equity, and
cash flows of Computer Literacy Bookshops, Inc. for the year ended June 30, 1996
and the eleven months ended May 31, 1997. These financial statements are the
responsibility of the management of Computer Literacy Bookshops, Inc. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the results of operations and cash flows of Computer Literacy
Bookshops, Inc. for the year ended June 30, 1996 and the eleven months ended May
31, 1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
July 10, 1998
F-20
<PAGE> 85
COMPUTER LITERACY BOOKSHOPS, INC.
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED ELEVEN MONTHS
JUNE 30, ENDED MAY 31,
1996 1997
---------- -------------
<S> <C> <C>
Net revenues................................................ $13,834 $13,613
Cost of revenues............................................ 8,957 8,761
------- -------
Gross profit................................................ 4,877 4,852
Selling, general and administrative expenses................ 4,142 4,372
------- -------
Income from operations...................................... 735 480
Interest, net............................................... 5 44
------- -------
Income before income taxes.................................. 740 524
Provision for income taxes.................................. 296 320
------- -------
Net income.................................................. $ 444 $ 204
======= =======
</TABLE>
See notes to financial statements.
F-21
<PAGE> 86
COMPUTER LITERACY BOOKSHOPS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------ ------ --------- -------------
<S> <C> <C> <C> <C>
Balances, July 1, 1995.............................. 200 $50 $1,576 $1,626
Net income.......................................... -- -- 444 444
--- --- ------ ------
Balances, June 30, 1996............................. 200 50 2,020 2,070
Net income.......................................... -- -- 204 204
--- --- ------ ------
Balances, May 31, 1997.............................. 200 $50 $2,224 $2,274
=== === ====== ======
</TABLE>
See notes to financial statements.
F-22
<PAGE> 87
COMPUTER LITERACY BOOKSHOPS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED ELEVEN MONTHS
JUNE 30, ENDED MAY 31,
1996 1997
---------- --------------
<S> <C> <C>
Cash flows from operating activities
Net income.................................................. $ 444 $ 204
Adjustments to reconcile net income to net cash provided by
(used in) operations:
Depreciation........................................... 98 96
Gain on sale of property and equipment................. 4 --
Changes in operating assets and liabilities:
Accounts receivable.................................... 207 (68)
Prepaid expenses and other current assets.............. 52 (105)
Inventory.............................................. 234 (167)
Accounts payable....................................... (101) (447)
Accrued expenses....................................... 132 49
Other.................................................. 24 (10)
------ ------
Net cash provided by (used in) operations:.................. 1,094 (448)
Cash flows from investing activities:
Purchases of property and equipment.................... (47) (70)
------ ------
Net increases/(decrease) in cash and equivalents............ 1,047 (518)
Cash and equivalents at beginning of period................. 230 1,277
------ ------
Cash and equivalents at end of period....................... $1,277 $ 759
====== ======
Supplemental disclosure of cash flow information
Income taxes paid...................................... $ 39 $ 566
====== ======
</TABLE>
See notes to financial statements.
F-23
<PAGE> 88
COMPUTER LITERACY BOOKSHOPS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Sale of Company
Computer Literacy Bookshops, Inc., ("CLBI"), was incorporated in July 1986.
CLBI is a retailer of technical and other information-based products, all of
which are targeted to information technology professionals. Business is
transacted through CLBI's four retail locations in California and Virginia.
On May 31, 1997, all of the outstanding shares of the CLBI were acquired by
Computer Literacy, Inc. The purchase price was approximately $5.1 million and
the acquisition was accounted for using the purchase method of accounting. The
accompanying financial statements reflect operations for the fiscal year ended
June 30, 1996 (fiscal 1996) and for the eleven months ended May 31, 1997, the
date of acquisition (fiscal 1997).
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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Concentration of Credit Risk
Financial instruments that potentially subject CLBI to concentrations of
credit risk consist principally of cash equivalents and receivables. Risks
associated with cash equivalents are mitigated by banking with credit worthy
institutions. Risks associated with receivables are mitigated as CLBI performs
on-going credit evaluations of its customers and requires deposits for sales on
credit when deemed necessary. CLBI maintains reserves for estimated credit
losses. The carrying value of accounts receivable approximate fair value due to
their short-term maturity. No one customer accounted for more than 10% of
accounts receivable at June 30, 1996 and May 31, 1997.
Income Taxes
Income taxes are accounted for in accordance with SFAS No. 109, "Accounting
for Income Taxes," an approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in CLBI's financial and tax reporting. In estimating future
tax consequences, management generally considers all expected future events
other than enactments of changes in the tax laws or rates. Under the provisions
of SFAS No. 109, a valuation allowance is provided when it is more likely than
not that some portion or all of the deferred tax assets recorded will not be
recognized.
Revenue Recognition
CLBI recognizes revenue from product sales, net of any discounts, at the
time of sale for retail sales and when the products are shipped to customers for
mail-order sales. Outbound shipping charges are included in net revenues.
Advertising Costs
The cost of advertising is expensed as incurred. CLBI incurred advertising
expense of $214,000 in fiscal 1996 and $177,000 in fiscal 1997.
F-24
<PAGE> 89
COMPUTER LITERACY BOOKSHOPS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. STOCKHOLDERS' EQUITY
Convertible Preferred Stock
At May 31, 1997, CLBI had 2,000,000 authorized shares of preferred stock,
none of which had been issued or was outstanding.
Common Stock
At May 31, 1997, CLBI had 6,000,000 shares of common stock authorized,
200,000 of which were issued and outstanding.
3. INCOME TAXES
The provision for income taxes consists of (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED ELEVEN MONTHS
JUNE 30, ENDED MAY 31,
1996 1997
---------- -------------
<S> <C> <C>
Current:
Federal............................................. $195 $315
State............................................... 59 88
---- ----
Total current income taxes.................. 254 403
---- ----
Deferred:
Federal............................................. 36 (66)
State............................................... 6 (17)
---- ----
Total deferred income taxes................. 42 (83)
---- ----
Provision for income taxes............................ $296 $320
==== ====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
CLBI's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
YEAR ENDED ELEVEN MONTHS
JUNE 30, ENDED MAY 31,
1996 1997
---------- -------------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax asset (liability):
Nondeductible acquisition costs..................... $21 $78
State taxes......................................... (27) (30)
Other............................................... (2) 27
--- ---
Net deferred tax asset (liability):................... ($8) $75
=== ===
</TABLE>
CLBI's effective income tax rate differs from the federal statutory income
tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED ELEVEN MONTHS
JUNE 30, ENDED MAY 31,
1996 1997
---------- -------------
<S> <C> <C>
Federal statutory income tax rate..................... 35.0% 35.0%
State taxes, net of federal benefit................... 5.7 5.7
Nondeductible acquisition expenses.................... -- 19.4
Other................................................. (0.7) 1.0
---- ----
Effective income tax rate........................... 40.0% 61.1%
==== ====
</TABLE>
F-25
<PAGE> 90
COMPUTER LITERACY BOOKSHOPS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. LEASE COMMITMENTS
CLBI leases office and warehouse space, retail store space and equipment
under noncancelable operating leases. Rental expense under operating lease
agreements for fiscal 1996 was $413,000 and $396,000 fiscal 1997.
Future minimum lease commitments under noncancelable leases as of May 31,
1997 are as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDING
JUNE 30, (IN THOUSANDS)
------------------- -------------------
<S> <C>
1998.................................... $388
1999.................................... 247
2000.................................... 178
2001.................................... 149
----
Total.............................. $962
====
</TABLE>
5. EMPLOYEE BENEFIT PLANS
CLBI has a money purchase pension plan under which it agrees to contribute
an amount equal to 10% of the employees annual compensation for eligible
employees who have completed one year of service, as defined in such plan. CLBI
has suspended and is in the process of terminating the money purchase pension
plan effective June 28, 1998. CLBI contributed $110,000 and $113,000 to the plan
for fiscal 1996 and 1997, respectively.
6. RELATED PARTY TRANSACTIONS
During the periods presented, CLBI provided management and administrative
services to an entity under common ownership. Revenue recognized by CLBI during
fiscal 1996 and 1997 was approximately $14,000 and $13,000, respectively. The
related receivables at June 30, 1996 and May 31, 1997 were approximately $53,000
and $22,000, respectively.
F-26
<PAGE> 91
[ART WORK]
<PAGE> 92
- ------------------------------------------------------
- ------------------------------------------------------
You may rely only on the information contained in this Prospectus. We have not
authorized anyone to provide information different from that contained in this
Prospectus. Neither the delivery of this Prospectus nor sale of common stock
means that information contained in this Prospectus is correct after the date of
this Prospectus. This Prospectus is not an offer to sell or solicitation of an
offer to buy these shares of common stock in any circumstances under which the
offer or solicitation is unlawful.
-------------------------------------------
TABLE OF CONTENTS
-------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 5
Use of Proceeds........................ 19
Dividend Policy........................ 19
Capitalization......................... 20
Dilution............................... 21
Selected Financial Data................ 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 23
Business............................... 32
Management............................. 43
Certain Transactions................... 53
Principal Stockholders................. 54
Description of Capital Stock........... 56
Shares Eligible for Future Sale........ 59
Underwriting........................... 61
Legal Matters.......................... 63
Experts................................ 63
Additional Information................. 63
Index to Financial Statements.......... F-1
</TABLE>
------------------------
Dealer Prospectus Delivery Obligation:
Until , 1998 (25 days after the date of this Prospectus), all
dealers that buy, sell or trade these shares of common stock, whether or not
participating in this offering, may be required to deliver a Prospectus. This is
in addition to the dealers' obligation to deliver a Prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
3,000,000 SHARES
LOGO
COMMON STOCK
----------------------------
PROSPECTUS
----------------------------
NationsBanc Montgomery
Securities LLC
Piper Jaffray Inc.
Needham & Company, Inc.
, 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 93
DESCRIPTION OF GRAPHICS
INSIDE FRONT COVER.
- -------------------
Screen Shot of Computer Literacy Web site on Thursday, August 27, 1998:
Computerliteracy.com, Resources for technical minds
<PAGE> 94
DESCRIPTION OF GRAPHICS
BACK COVER.
- -----------
SCREEN SHOT OF SELECTION
Our focused and comprehensive selection means that a search on Oracle
leads to titles on the database application, not Egyptian oracles or the Oracle
of Delphi.
SCREEN SHOT OF UNIQUE CONTENT
In addition to reviews and commentary from our in-house editorial staff,
Computer Literacy features columns from industry leaders in key technology
subject areas.
SCREEN SHOT OF PERSONALIZATION
Computer Literacy's Keep Me Posted e-mail service allows customers to
choose from more than 700 technology subject areas and stay up to date on
specific areas of interest.
SCREEN SHOT OF ADVANCED SEARCH
Three methods of search and a detailed subject browse function with 700
categories allow users to find what they need quickly.
<PAGE> 95
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's Board of Directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article VII, Section 7.6, of the Registrant's
Amended and Restated Bylaws which will be effective upon the closing of the
offering of Common Stock registered hereunder provides for mandatory
indemnification of its directors and permissible indemnification of officers or
employees to the maximum extent permitted by the Delaware General Corporation
Law.
The Registrant's Certificate of Incorporation, which will be effective upon
the closing of the offering of Common Stock registered hereunder, provides that,
pursuant to Delaware law, its directors shall not be liable for monetary damages
for breach of the directors' fiduciary duty as directors to the Company and its
stockholders. This provision in the Certificate of Incorporation does not
eliminate the directors' fiduciary duty, and in appropriate circumstances
equitable remedies such as injunctive or other forms of non-monetary relief will
remain available under Delaware law. In addition, each director will continue to
be subject to liability for breach of the director's duty of loyalty to the
Company for acts or omissions not in good faith or involving intentional
misconduct, for knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are unlawful under Delaware law. The
provision also does not affect a director's responsibilities under any other
law, such as the federal securities laws or state or federal environmental laws.
The Registrant intends to enter into Indemnification Agreements with its
officers and directors, a form of which has been filed as Exhibit 10.1 hereto
and is incorporated herein by reference. The Indemnification Agreements provide
the Registrant's officers and directors with further indemnification, that in
some cases, may be broader than the specific indemnification provisions
contained in the Delaware General Corporation Law.
Reference is made to Section 8 of the Underwriting Agreement contained in
Exhibit 1.1 hereto, indemnifying officers and directors of the Registrant
against certain liabilities.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee, the NASD filing fees and the Nasdaq National Market
listing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 7,506
NASD fee.................................................... 3,605
Nasdaq National Market listing fee.......................... 78,875
Printing and engraving expenses............................. 100,000
Legal fees and expenses..................................... 350,000
Accounting fees and expenses................................ 200,000
Blue sky fees and expenses.................................. 5,000
Transfer agent fees......................................... 15,000
Miscellaneous fees and expenses............................. 40,014
--------
Total............................................. $800,000
========
</TABLE>
II-1
<PAGE> 96
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Since June 30, 1995, the Company issued and sold the following unregistered
securities pursuant to the exemption from the registration requirements of the
Securities Act of 1933, as amended (the "Act"), provided by Section 4(2) of the
Act or Rule 701 of the Act:
(1) In September and December 1996, the Company issued 2,453,701
shares of Series B Preferred Stock to a group of private accredited
investors for aggregate cash consideration of $3,825,000 and the exchange
of shares of Series A Preferred Stock.
(2) In May 1997, the Company issued 1,041,667 shares of Series C
Preferred Stock to a group of private accredited investors for aggregate
cash consideration of $2,500,000.
(3) In May 1997, the Company issued a warrant to purchase up to 20,832
shares of Series C Preferred Stock at an exercise price of $2.40 to a
lender of the Company. At July 31, 1998, such warrant was exercisable to
purchase 15,624 shares of Series C Preferred Stock.
(4) In January 1998, the Company issued 1,726,194 shares of Series D
Preferred Stock to a group of private accredited investors for aggregate
cash consideration of $7,250,000.
(5) In May 1998, the Company issued 857,624 shares of Series E
Preferred Stock to a group of private accredited investors for aggregate
cash consideration of $5,523,071.
(6) Between July 1, 1995 and July 31, 1998, the Company granted
options to employees and consultants of the Company pursuant to its 1996
Stock Option Plan, at exercise prices between $0.18 and $11.20. At July 31,
1998, options to purchase 1,110,351 shares of Common Stock were
outstanding.
(7) Between July 1, 1995 and July 1, 1998, the Company issued and sold
59,705 shares of Common Stock upon the exercise of stock options for an
aggregate consideration of $87,966.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
1.1 Form of Underwriting Agreement.
2.1 Stock Acquisition Agreement by and among the Registrant,
Computer Literacy Bookshops, Inc., Rachel Unkefer and Daniel
A. Doernberg, dated as of May 28, 1997.
3.1 Amended and Restated Certificate of Incorporation of the
Registrant as amended to reflect the 4-for-1 reverse stock
split.
3.2 Form of Second Amended and Restated Certificate of
Incorporation to be filed upon the closing of the offering
made pursuant to this Registration Statement.
3.3 Bylaws of the Registrant.
3.4 Form of Amended and Restated Bylaws of the Registrant to be
filed upon the closing of the offering made pursuant to this
Registration Statement.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.
4.2 Specimen Common Stock certificate.
4.3 Amended and Restated Investors' Rights Agreement, dated May
22, 1998 and as amended on June 30, 1998 among the
Registrant and the parties thereto.
5.1 Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP.
10.1 Form of Indemnification Agreement.
10.2 1996 Stock Plan.
10.3 1998 Omnibus Equity Incentive Plan.
10.4 1998 Employee Stock Purchase Plan.
10.5 Sub-Sublease by and between Miller Freeman, Inc. and the
Registrant, dated November 1, 1996 and adjacent Sublease
Agreement by and between Control Data Systems, Inc., dated
June 25, 1997 for the premises located at 1306 Orleans
Drive, Sunnyvale, California.
</TABLE>
II-2
<PAGE> 97
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
10.6+ CBT Systems, Ltd. and Computer Literacy, Inc. Agreement,
dated as of March 7, 1998, as amended from time to time.
10.7 Employment Agreement dated December 18, 1996, and amendment
thereto, dated May 30, 1997 with Mr. MacAskill.
10.8 Employment Agreement dated December 18, 1996, and amendment
thereto, dated May 30, 1997 with Mr. Orumchian.
10.9 Offer Letter dated October 2, 1997 to Mr. Tokuno.
10.10 Offer Letter dated August 26, 1997 to Mr. Alvarez.
10.11 Offer Letter dated February 27, 1998 to Mr. Cudd.
23.1 Independent Auditors' Consent.
23.2 Consent of Counsel (Reference is made to Exhibit 5.1).
24.1 Power of Attorney. (Contained in signature page hereof)
27.1 Financial Data Schedule (Fiscal 1998).
27.2 Financial Data Schedule (Six months ended July 31, 1998).
</TABLE>
- ---------------
+ Specified portions of this agreement have been omitted and have been filed
separately with the Commission pursuant to a request for confidential
treatment.
(B) FINANCIAL STATEMENT SCHEDULES
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
consolidated financial statements or notes thereto.
ITEM 28. UNDERTAKINGS
The small business issuer hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1993 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act, and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer,
or controlling person of the small business issuer in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered hereunder,
the small business issuer will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The small business issuer hereby undertakes that:
(1) For determining any liability under the Act, treat the information
omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the small business issuer pursuant to Rule 424(b)(1), or (4), or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time the Commission declared it effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement for the securities offered in the
registration statement, and the offering of the securities at that time as
the initial bona fide offering of the securities.
II-3
<PAGE> 98
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Sunnyvale, State of California, on this 17th day
of November 1998.
COMPUTER LITERACY, INC.
By: /s/ CHRIS MACASKILL
------------------------------------
Chris MacAskill
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Chris MacAskill and Donald P. Alvarez and
each of them, his true and lawful attorneys-in-fact and agents with full power
of substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to sign any registration statement for the
same offering covered by this Registration Statement that is to be effective
upon filing pursuant to Rule 462(b) promulgated under the Securities Act of
1933, and all post-effective amendments thereto, and to file the same, with all
exhibits thereto and all documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or his or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed by the following persons in
the capacities and on the dates indicated:
<TABLE>
<C> <S> <C>
/s/ CHRIS MACASKILL President, Chief Executive November 17,1998
- ----------------------------------------------------- Officer (Principal Executive
Chris MacAskill Officer) and Director
/s/ DONALD P. ALVAREZ Vice President of Finance and November 17,1998
- ----------------------------------------------------- Chief Financial Officer
Donald P. Alvarez (Principal Financial and
Accounting Officer)
/s/ PETER G. BODINE Director November 17,1998
- -----------------------------------------------------
Peter G. Bodine
/s/ ALAN S. FISHER Director November 17,1998
- -----------------------------------------------------
Alan S. Fisher
/s/ TOD H. FRANCIS Director November 17,1998
- -----------------------------------------------------
Tod H. Francis
/s/ KIM ORUMCHIAN Director November 17,1998
- -----------------------------------------------------
Kim Orumchian
/s/ DAVID C. SCHWAB Director November 17,1998
- -----------------------------------------------------
David C. Schwab
/s/ PETER C. WENDELL Director November 17,1998
- -----------------------------------------------------
Peter C. Wendell
</TABLE>
II-4
<PAGE> 99
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
1.1 Form of Underwriting Agreement.
2.1 Stock Acquisition Agreement by and among the Registrant,
Computer Literacy Bookshops, Inc., Rachel Unkefer and Daniel
A. Doernberg, dated as of May 28, 1997.
3.1 Amended and Restated Certificate of Incorporation of the
Registrant as amended to reflect the 4-for-1 reverse split.
3.2 Form of Second Amended and Restated Certificate of
Incorporation to be filed upon the closing of the offering
made pursuant to this Registration Statement.
3.3 Bylaws of the Registrant.
3.4 Form of Amended and Restated Bylaws of the Registrant to be
filed upon the closing of the offering made pursuant to this
Registration Statement.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.
4.2 Specimen Common Stock certificate.
4.3 Amended and Restated Investors' Rights Agreement, dated May
22, 1998 and as amended on June 30, 1998 among the
Registrant and the parties thereto.
5.1 Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP.
10.1 Form of Indemnification Agreement.
10.2 1996 Stock Plan.
10.3 1998 Omnibus Equity Incentive Plan.
10.4 1998 Employee Stock Purchase Plan.
10.5 Sub-Sublease by and between Miller Freeman, Inc. and Cbooks
Express, dated November 1, 1996 and adjacent Sublease
Agreement by and between Control Data Systems, Inc., dated
June 25, 1997 for the premises located at 1306 Orleans
Drive, Sunnyvale, California.
10.6+ CBT Systems, Ltd. and Computer Literacy Inc. Agreement,
dated as of March 7, 1998, as amended from time to time.
10.7 Employment Agreement dated December 18, 1996, and amendment
thereto, dated May 30, 1997 with Mr. MacAskill.
10.8 Employment Agreement dated December 18, 1996, and amendment
thereto, dated May 30, 1997 with Mr. Orumchian.
10.9 Offer Letter dated October 2, 1997 to Mr. Tokuno.
10.10 Offer Letter dated August 26, 1997 to Mr. Alvarez.
10.11 Offer Letter dated February 27, 1998 to Mr. Cudd.
23.1 Independent Auditors' Consent.
23.2 Consent of Counsel (Reference is made to Exhibit 5.1).
24.1 Power of Attorney. (Contained in signature page hereof)
27.1 Financial Data Schedule (Fiscal 1998).
27.2 Financial Data Schedule (Six months ended July 31, 1998).
</TABLE>
- ---------------
+ Specified portions of this agreement have been omitted and have been filed
separately with the Commission pursuant to a request for confidential
treatment.
<PAGE> 1
NATIONSBANC MONTGOMERY SECURITIES LLC
FORM UNDERWRITING AGREEMENT
Draft of November 16, 1998
3,000,000 SHARES
COMPUTER LITERACY, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
DATED
NOVEMBER __, 1998
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.............................2
Compliance with Registration Requirements..........................................2
Offering Materials Furnished to Underwriters.......................................2
Distribution of Offering Material By the Company...................................3
The Underwriting Agreement.........................................................3
Authorization of the Common Shares.................................................3
No Applicable Registration or Other Similar Rights.................................3
No Material Adverse Change.........................................................3
Independent Accountants............................................................3
Preparation of the Financial Statements............................................4
Incorporation and Good Standing of the Company.....................................4
Capitalization and Other Capital Stock Matters.....................................4
Nasdaq Listing.....................................................................5
Non-Contravention of Existing Instruments; No Further Authorizations or Approvals
Required.........................................................................5
No Material Actions or Proceedings.................................................5
Intellectual Property Rights.......................................................5
All Necessary Permits, etc.........................................................6
Title to Properties................................................................6
Tax Law Compliance.................................................................6
Company Not an "Investment Company"................................................6
Insurance..........................................................................6
No Price Stabilization or Manipulation.............................................7
Related Party Transactions.........................................................7
Company's Accounting System........................................................7
SECTION 2. PURCHASE, SALE AND DELIVERY OF COMMON SHARES..............................7
The Firm Common Shares.............................................................7
The First Closing Date.............................................................7
The Optional Common Shares; the Second Closing Date................................7
Public Offering of the Common Shares...............................................8
Payment for the Common Shares......................................................8
Delivery of the Common Shares......................................................8
Delivery of Prospectus to the Underwriters.........................................9
SECTION 3. ADDITIONAL COVENANTS OF THE COMPANY.......................................9
Representative's Review of Proposed Amendments and Supplements.....................9
Securities Act Compliance..........................................................9
Amendments and Supplements to the Prospectus and Other Securities Act Matters.....10
Copies of any Amendments and Supplements to the Prospectus........................10
Blue Sky Compliance...............................................................10
Use of Proceeds...................................................................10
Transfer Agent....................................................................10
Earnings Statement................................................................10
Periodic Reporting Obligations....................................................10
Agreement Not To Offer or Sell Additional Securities..............................11
Future Reports to the Representatives.............................................11
SECTION 4. PAYMENT OF EXPENSES......................................................11
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C>
SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS........................12
Accountants' Comfort Letter.......................................................12
Compliance with Registration Requirements; No Stop Order, No Objection from NASD..12
No Material Adverse Change or Ratings Agency Change...............................12
Opinion of Counsel for the Company................................................13
Opinion of Counsel for the Underwriters...........................................13
Officers' Certificate.............................................................13
Bring-down Comfort Letter.........................................................13
Lock-Up Agreement from Certain Stockholders of the Company........................13
Additional Documents..............................................................14
SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES..................................14
SECTION 7. EFFECTIVENESS OF THIS AGREEMENT..........................................14
SECTION 8. INDEMNIFICATION..........................................................14
Indemnification of the Underwriters...............................................14
Indemnification of the Company, its Directors and Officers........................15
Notifications and Other Indemnification Procedures................................16
Settlements.......................................................................17
SECTION 9. CONTRIBUTION.............................................................17
SECTION 10. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS......................18
SECTION 11. TERMINATION OF THIS AGREEMENT...........................................19
SECTION 12. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY.....................19
SECTION 13. NOTICES.................................................................20
SECTION 14. SUCCESSORS..............................................................20
SECTION 15. PARTIAL UNENFORCEABILITY................................................20
SECTION 16. GOVERNING LAW PROVISIONS................................................20
SECTION 17. GENERAL PROVISIONS......................................................21
</TABLE>
ii
<PAGE> 4
UNDERWRITING AGREEMENT
November __, 1998
NATIONSBANC MONTGOMERY SECURITIES LLC
PIPER JAFFRAY INC.
NEEDHAM & COMPANY, INC.
As Representatives of the several Underwriters
c/o NATIONSBANC MONTGOMERY SECURITIES LLC
600 Montgomery Street
San Francisco, California 94111
Ladies and Gentlemen:
INTRODUCTORY. Computer Literacy, Inc., a Delaware corporation
(the "Company"), proposes to issue and sell to the several underwriters named in
Schedule A (the "Underwriters") an aggregate of 3,000,000 shares (the "Firm
Common Shares") of its Common Stock, par value $0.001 per share (the "Common
Stock"). In addition, the Company has granted to the Underwriters an option to
purchase up to an additional 450,000 shares (the "Optional Common Shares") of
Common Stock, as provided in Section 2. The Firm Common Shares and, if and to
the extent such option is exercised, the Optional Common Shares are
collectively called the "Common Shares." NationsBanc Montgomery Securities LLC
("NMS"), Piper Jaffray Inc. and Needham & Company, Inc. have agreed to act as
representatives of the several Underwriters (in such capacity, the
"Representatives") in connection with the offering and sale of the Common
Shares.
The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement on Form SB-2
(File No. _________), which contains a form of prospectus to be used in
connection with the public offering and sale of the Common Shares. The Company
meets all of the requirements for filing on Form SB-2. Such registration
statement, as amended, including the financial statements, exhibits and
schedules thereto, in the form in which it was declared effective by the
Commission under the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder (collectively, the "Securities Act"),
including any information deemed to be a part thereof at the time of
effectiveness pursuant to Rule 430A or Rule 434 under the Securities Act, is
called the "Registration Statement." Any registration statement filed by the
Company pursuant to Rule 462(b) under the Securities Act is called the "Rule
462(b) Registration Statement", and from and after the date and time of filing
of the Rule 462(b) Registration Statement the term "Registration Statement"
shall include the Rule 462(b) Registration Statement. Such prospectus, in the
form first used by the Underwriters to confirm sales of the Common Shares, is
called the "Prospectus;" provided, however, if the Company has, with the consent
of NMS, elected to rely upon Rule 434 under the Securities Act, the term
"Prospectus" shall mean the Company's
<PAGE> 5
prospectus subject to completion (each, a "preliminary prospectus") dated
November __, 1998 (such preliminary prospectus is called the "Rule 434
preliminary prospectus"), together with the applicable term sheet (the "Term
Sheet") prepared and filed by the Company with the Commission under Rules 434
and 424(b) under the Securities Act and all references in this Agreement to the
date of the Prospectus shall mean the date of the Term Sheet. All references in
this Agreement to the Registration Statement, the Rule 462(b) Registration
Statement, a preliminary prospectus, the Prospectus or the Term Sheet, or any
amendments or supplements to any of the foregoing, shall include any copy
thereof filed with the Commission pursuant to its Electronic Data Gathering,
Analysis and Retrieval System ("EDGAR").
The Company hereby confirms its agreements with the Underwriters
as follows:
SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company hereby represents and warrants to each Underwriter as
follows:
(a) Compliance with Registration Requirements. The Registration
Statement and any Rule 462(b) Registration Statement have been declared
effective by the Commission under the Securities Act. The Company has complied
to the Commission's satisfaction with all requests of the Commission for
additional or supplemental information. No stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement is in effect and no proceedings for such purpose have been instituted
or are pending or, to the knowledge of the Company, are threatened by the
Commission.
Each preliminary prospectus and the Prospectus when filed
complied in all material respects with the Securities Act and, if filed by
electronic transmission pursuant to EDGAR (except as may be permitted by
Regulation S-T under the Securities Act), was substantially the same as the copy
thereof delivered to the Underwriters for use in connection with the offer and
sale of the Common Shares. Each of the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendment thereto, at the time it
became effective and at all subsequent times, complied and will comply in all
material respects with the Securities Act and did not and will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading.
The Prospectus, as amended or supplemented, as of its date and at all subsequent
times, did not and will not contain any untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not misleading.
The representations and warranties set forth in the two immediately preceding
sentences do not apply to statements in or omissions from the Registration
Statement, any Rule 462(b) Registration Statement, or any post-effective
amendment thereto, or the Prospectus, or any amendments or supplements thereto,
made in reliance upon and in conformity with information relating to any
Underwriter furnished to the Company in writing by the Representatives expressly
for use therein. There are no contracts or other documents required to be
described in the Prospectus or to be filed as exhibits to the Registration
Statement which have not been described or filed as required.
(b) Offering Materials Furnished to Underwriters. The Company has
delivered to the Representatives three complete manually signed copies of the
Registration Statement and of each consent and certificate of experts filed as a
part thereof, and conformed copies of the Registration Statement (without
exhibits) and preliminary prospectuses and the Prospectus, as amended or
supplemented, in such quantities and at such places as the Representatives have
reasonably requested for each of the Underwriters.
2
<PAGE> 6
(c) Distribution of Offering Material By the Company. The Company
has not distributed and will not distribute, prior to the later of the Second
Closing Date (as defined below) and the completion of the Underwriters'
distribution of the Common Shares, any offering material in connection with the
offering and sale of the Common Shares other than a preliminary prospectus, the
Prospectus or the Registration Statement.
(d) The Underwriting Agreement. This Agreement has been duly
authorized, executed and delivered by, and is a valid and binding agreement of,
the Company, enforceable in accordance with its terms, except as rights to
indemnification hereunder may be limited by applicable law and except as the
enforcement hereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting the rights and
remedies of creditors generally, including without limitation, the effect of
statutory or other laws regarding fraudulent conveyances and preferential
transfers or by general equitable principles.
(e) Authorization of the Common Shares. The Common Shares to be
purchased by the Underwriters from the Company have been duly authorized for
issuance and sale pursuant to this Agreement and, when issued and delivered by
the Company pursuant to this Agreement, will be validly issued, fully paid and
nonassessable.
(f) No Applicable Registration or Other Similar Rights. There are
no persons with registration or other similar rights to have any equity or debt
securities registered for sale under the Registration Statement or included in
the offering contemplated by this Agreement, except for such rights as have been
duly waived.
(g) No Material Adverse Change. Except as otherwise disclosed in
the Prospectus, subsequent to the respective dates as of which information is
given in the Prospectus: (i) there has been no material adverse change, or any
development that could reasonably be expected to result in a material adverse
change, in the condition, financial or otherwise, or in the earnings, business,
operations or prospects, whether or not arising from transactions in the
ordinary course of business, of the Company (any such change is called a
"Material Adverse Change"); (ii) the Company has not incurred any material
liability or obligation, indirect, direct or contingent, not in the ordinary
course of business nor entered into any material transaction or agreement not in
the ordinary course of business; and (iii) there has been no dividend or
distribution of any kind declared, paid or made by the Company, except for the
stock split effected in September 1997 and the stock split effected in August
1998.
(h) Independent Accountants. Deloitte & Touche LLP, who have
expressed their opinion with respect to the financial statements (which term as
used in this Agreement includes the related notes thereto) of the Company and
Computer Literacy Bookshops, Inc. ("CLBI") and supporting schedules filed with
the Commission as a part of the Registration Statement and included in the
Prospectus, are independent public or certified public accountants as required
by the Securities Act.
(i) Preparation of the Financial Statements. The financial
statements filed with the Commission as a part of the Registration Statement and
included in the Prospectus present fairly the consolidated financial position of
the Company as of and at the dates indicated and the results of its operations
and cash flows for the periods specified. Such financial statements have been
prepared in conformity with generally accepted accounting principles applied on
a consistent basis throughout the periods involved, except as may be expressly
stated in the related notes thereto. The financial statements of CLBI filed with
the Commission as a part
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<PAGE> 7
of the Registration Statement and included in the Prospectus present fairly the
consolidated financial position of CLBI as of and at the dates indicated and the
results of its operations and cash flows for the periods specified. Such
financial statements have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved, except as may be expressly stated in the related notes thereto. The
financial data set forth in the Prospectus under the captions "Prospectus
Summary--Summary Financial and Operating Data," "Selected Financial Data" and
"Capitalization" fairly present the information set forth therein on a basis
consistent with that of the audited financial statements contained in the
Registration Statement. The pro forma consolidated financial information of the
Company and CLBI and the related notes thereto filed with the Commission as a
part of the Registration Statement and included in the Prospectus present fairly
the information contained therein, have been prepared in accordance with the
Commission's rules and guidelines with respect to pro forma financial statements
and have been properly presented on the bases described therein, and the
assumptions used in the preparation thereof are reasonable and the adjustments
used therein are appropriate to give effect to the transactions and
circumstances referred to therein. No other financial statements or supporting
schedules are required to be included in the Registration Statement.
(j) Incorporation and Good Standing of the Company. The Company
has been duly incorporated and is validly existing as a corporation in good
standing under the laws of the jurisdiction of its incorporation and has
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Prospectus and to enter into and
perform its obligations under this Agreement. The Company is duly qualified as a
foreign corporation to transact business and is in good standing in the State of
California and each other jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the conduct of
business, except for such jurisdictions (other than the State of California) in
which the failure to so qualify or to be in good standing would not,
individually or in the aggregate, result in a Material Adverse Change The
Company does not own or control, directly or indirectly, any corporation,
association or other entity.
(k) Capitalization and Other Capital Stock Matters. The
authorized, issued and outstanding capital stock of the Company is as set forth
in the Prospectus under the caption "Capitalization" (other than for subsequent
issuances, if any, pursuant to employee benefit plans described in the
Prospectus or upon exercise of outstanding options or warrants described in the
Prospectus). The Common Stock (including the Common Shares) conforms in all
material respects to the description thereof contained in the Prospectus. All of
the issued and outstanding shares of Common Stock have been duly authorized and
validly issued, are fully paid and nonassessable and have been issued in
compliance with federal and state securities laws. None of the outstanding
shares of Common Stock were issued in violation of any preemptive rights, rights
of first refusal or other similar rights to subscribe for or purchase securities
of the Company. There are no authorized or outstanding options, warrants,
preemptive rights, rights of first refusal or other rights to purchase, or
equity or debt securities convertible into or exchangeable or exercisable for,
any capital stock of the Company other than those accurately described in the
Prospectus. The description of the Company's stock option, stock bonus and other
stock plans or arrangements, and the options or other rights granted thereunder,
set forth in the Prospectus accurately and fairly presents the information
required to be shown with respect to such plans, arrangements, options and
rights.
(l) Nasdaq Listing. The Common Shares have been approved for
inclusion on the Nasdaq National Market, subject only to official notice of
issuance.
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(m) Non-Contravention of Existing Instruments; No Further
Authorizations or Approvals Required. The Company is not in violation of its
charter or by-laws or is in default (or, with the giving of notice or lapse of
time, would be in default) ("Default") under any indenture, mortgage, loan or
credit agreement, note, contract, franchise, lease or other instrument to which
the Company is a party or by which it may be bound, or to which any of the
property or assets of the Company is subject (each, an "Existing Instrument"),
except for such Defaults as would not, individually or in the aggregate, result
in a Material Adverse Change. The Company's execution, delivery and performance
of this Agreement and consummation of the transactions contemplated hereby and
by the Prospectus (i) have been duly authorized by all necessary corporate
action and will not result in any violation of the provisions of the charter or
by-laws of the Company, (ii) will not conflict with or constitute a breach of,
or Default under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company pursuant to, or require
the consent of any other party to, any Existing Instrument, except for such
conflicts, breaches, Defaults, liens, charges or encumbrances as would not,
individually or in the aggregate, result in a Material Adverse Change and (iii)
will not result in any violation of any law, administrative regulation or
administrative or court decree applicable to the Company. No consent, approval,
authorization or other order of, or registration or filing with, any court or
other governmental or regulatory authority or agency, is required for the
Company's execution, delivery and performance of this Agreement and consummation
of the transactions contemplated hereby and by the Prospectus, except such as
have been obtained or made by the Company and are in full force and effect under
the Securities Act, applicable state securities or blue sky laws and from the
National Association of Securities Dealers, Inc. (the "NASD").
(n) No Material Actions or Proceedings. Except as otherwise
disclosed in the Prospectus, there are no legal or governmental actions, suits
or proceedings pending or, to the Company's knowledge, threatened (i) against or
affecting the Company, (ii) which has as the subject thereof any officer or
director of, or property owned or leased by, the or (iii) relating to
environmental or discrimination matters, where in any such case (A) there is a
reasonable possibility that such action, suit or proceeding might be determined
adversely to the Company and (B) any such action, suit or proceeding, if so
determined adversely, would reasonably be expected to result in a Material
Adverse Change or adversely affect the consummation of the transactions
contemplated by this Agreement. Except as otherwise disclosed in the Prospectus,
no material labor dispute with the employees of the Company exists or, to
Company's knowledge, is threatened.
(o) Intellectual Property Rights. Except as otherwise disclosed
in the Prospectus, the Company owns or has license rights to use sufficient
trademarks, trade names, patent rights, copyrights, licenses, approvals, trade
secrets and other similar rights (collectively, "Intellectual Property Rights")
reasonably necessary to conduct its business as now conducted; and the expected
expiration of any of such Intellectual Property Rights would not result in a
Material Adverse Change. The Company has not received any notice of infringement
or conflict with asserted Intellectual Property Rights of others, which
infringement or conflict, if the subject of an unfavorable decision, would
result in a Material Adverse Change.
(p) All Necessary Permits, etc. Except as otherwise disclosed in
the Prospectus, the Company possesses such valid and current certificates,
authorizations or permits issued by the appropriate state, federal or foreign
regulatory agencies or bodies necessary to conduct its business, and the Company
has not received any notice of proceedings relating to the revocation or
modification of, or non-compliance with, any such certificate, authorization or
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<PAGE> 9
permit which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, could result in a Material Adverse Change.
(q) Title to Properties. Except as otherwise disclosed in the
Prospectus, the Company has good and marketable title to all the properties and
assets reflected as owned in the financial statements referred to in Section
1(i) above (or elsewhere in the Prospectus), in each case free and clear of any
security interests, mortgages, liens, encumbrances, equities, claims and other
defects, except such as do not materially and adversely affect the value of such
property and do not materially interfere with the use made or proposed to be
made of such property by the Company. The real property, improvements, equipment
and personal property held under lease by the Company are held under valid and
enforceable leases, with such exceptions as do not materially interfere with the
use made or expected to be made of such real property, improvements, equipment
or personal property by the Company.
(r) Tax Law Compliance. The Company and its consolidated
subsidiary have filed all necessary federal, state and foreign income and
franchise tax returns and have paid all taxes required to be paid by any of them
and, if due and payable, any related or similar assessment, fine or penalty
levied against any of them. The Company has made adequate charges, accruals and
reserves in the applicable financial statements referred to in Section 1(i)
above in respect of all federal, state and foreign income and franchise taxes
for all periods as to which the tax liability of the Company or its consolidated
subsidiary has not been finally determined.
(s) Company Not an "Investment Company" The Company has been
advised of the rules and requirements under the Investment Company Act of 1940,
as amended (the "Investment Company Act"). The Company is not, and after receipt
of payment for the Common Shares will not be, an "investment company" within the
meaning of Investment Company Act.
(t) Insurance. Except as otherwise disclosed in the Prospectus,
the Company is insured by recognized, financially sound and reputable
institutions with policies in such amounts and with such deductibles and
covering such risks as are generally deemed adequate and customary for its
business including, but not limited to, policies covering real and personal
property owned or leased by the Company against theft, damage, destruction, acts
of vandalism and earthquakes. The Company has no reason to believe that it will
not be able (i) to renew its existing insurance coverage as and when such
policies expire or (ii) to obtain comparable coverage from similar institutions
as may be necessary or appropriate to conduct its business as now conducted and
at a cost that would not result in a Material Adverse Change. The Company has
not been denied any insurance coverage which it has sought or for which it has
applied.
(u) No Price Stabilization or Manipulation. The Company has not
taken and will not take, directly or indirectly, any action designed to or that
might be reasonably expected to cause or result in stabilization or manipulation
of the price of the Common Stock to facilitate the sale or resale of the Common
Shares.
(v) Related Party Transactions. There are no business
relationships or related-party transactions involving the Company or any other
person required to be described in the Prospectus which have not been described
as required.
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(w) Company's Accounting System. The Company maintains a system
of accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to assets is
permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
Any certificate signed by an officer of the Company and delivered
to the Representatives or to counsel for the Underwriters shall be deemed to be
a representation and warranty by the Company, and not by such officer as an
individual, to each Underwriter as to the matters set forth therein.
SECTION 2. PURCHASE, SALE AND DELIVERY OF THE COMMON SHARES.
The Firm Common Shares. The Company agrees to issue and sell to
the several Underwriters the Firm Common Shares upon the terms herein set forth.
On the basis of the representations, warranties and agreements herein contained,
and upon the terms but subject to the conditions herein set forth, the
Underwriters agree, severally and not jointly, to purchase from the Company the
respective number of Firm Common Shares set forth opposite their names on
Schedule A. The purchase price per Firm Common Share to be paid by the several
Underwriters to the Company shall be $[___] per share.
The First Closing Date. Delivery of certificates for the Firm
Common Shares to be purchased by the Underwriters and payment therefor shall be
made at the offices of NMS, 600 Montgomery Street, San Francisco, California (or
such other place as may be agreed to by the Company and the Representatives) at
6:00 a.m. San Francisco time, on [___],or such other time and date not later
than 10:30 a.m. San Francisco time, on [___]as the Representatives shall
designate by notice to the Company (the time and date of such closing are called
the "First Closing Date").
The Optional Common Shares; the Second Closing Date. In addition,
on the basis of the representations, warranties and agreements herein contained,
and upon the terms but subject to the conditions herein set forth, the Company
hereby grants an option to the several Underwriters to purchase, severally and
not jointly, up to an aggregate of [___] Optional Common Shares from the Company
at the purchase price per share to be paid by the Underwriters for the Firm
Common Shares. The option granted hereunder is for use by the Underwriters
solely in covering any over-allotments in connection with the sale and
distribution of the Firm Common Shares. The option granted hereunder may be
exercised at any time (but not more than once) upon notice by the
Representatives to the Company, which notice may be given at any time within 30
days from the date of this Agreement. Such notice shall set forth (i) the
aggregate number of Optional Common Shares as to which the Underwriters are
exercising the option, (ii) the names and denominations in which the
certificates for the Optional Common Shares are to be registered and (iii) the
time, date and place at which such certificates will be delivered (which time
and date may be simultaneous with, but not earlier than, the First Closing Date;
and in such case the term "First Closing Date" shall refer to the time and date
of delivery of certificates for the Firm Common Shares and the Optional Common
Shares). Such time and date of delivery, if subsequent to the First Closing
Date, is called the "Second Closing Date" and shall be determined by the
Representatives and shall not be earlier than three nor later than five full
business days after delivery of such notice of exercise. If any Optional Common
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<PAGE> 11
Shares are to be purchased, each Underwriter agrees, severally and not jointly,
to purchase the number of Optional Common Shares (subject to such adjustments to
eliminate fractional shares as the Representatives may determine) that bears the
same proportion to the total number of Optional Common Shares to be purchased as
the number of Firm Common Shares set forth on Schedule A opposite the name of
such Underwriter bears to the total number of Firm Common Shares.
Public Offering of the Common Shares. The Representatives hereby
advise the Company that the Underwriters intend to offer for sale to the public,
as described in the Prospectus, their respective portions of the Common Shares
as soon after this Agreement has been executed and the Registration Statement
has been declared effective as the Representatives, in their sole judgment, has
determined is advisable and practicable.
Payment for the Common Shares. Payment for the Common Shares
shall be made at the First Closing Date (and, if applicable, at the Second
Closing Date) by wire transfer of immediately available funds to the order of
the Company.
It is understood that the Representatives have been authorized,
for their own account and the accounts of the several Underwriters, to accept
delivery of and receipt for, and make payment of the purchase price for, the
Firm Common Shares and any Optional Common Shares the Underwriters have agreed
to purchase. NMS, individually and not as a Representative of the Underwriters,
may (but shall not be obligated to) make payment for any Common Shares to be
purchased by any Underwriter whose funds shall not have been received by the
Representatives by the First Closing Date or the Second Closing Date, as the
case may be, for the account of such Underwriter, but any such payment shall not
relieve such Underwriter from any of its obligations under this Agreement.
Delivery of the Common Shares. The Company shall deliver, or
cause to be delivered, to the Representatives for the accounts of the several
Underwriters certificates for the Firm Common Shares at the First Closing Date,
against the irrevocable release of a wire transfer of immediately available
funds for the amount of the purchase price therefor. The Company shall also
deliver, or cause to be delivered, to the Representatives for the accounts of
the several Underwriters, certificates for the Optional Common Shares the
Underwriters have agreed to purchase at the First Closing Date or the Second
Closing Date, as the case may be, against the irrevocable release of a wire
transfer of immediately available funds for the amount of the purchase price
therefor. The certificates for the Common Shares shall be in definitive form and
registered in such names and denominations as the Representatives shall have
requested at least two full business days prior to the First Closing Date (or
the Second Closing Date, as the case may be) and shall be made available for
inspection on the business day preceding the First Closing Date (or the Second
Closing Date, as the case may be) at a location in New York City as the
Representatives may designate. If the Representatives so elect, delivery of the
Firm Common Shares and the Optional Common Shares, if applicable, may be made by
credit through full fast transfer to the accounts at the Depository Trust
Company designated by the Representatives. Time shall be of the essence, and
delivery at the time and place specified in this Agreement is a further
condition to the obligations of the Underwriters.
Delivery of Prospectus to the Underwriters. Not later than 12:00
p.m. on the second business day following the date the Common Shares are
released by the Underwriters for sale to the public, the Company shall deliver
or cause to be delivered copies of the Prospectus in such quantities and at such
places as the Representatives shall reasonably request.
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SECTION 3. ADDITIONAL COVENANTS OF THE COMPANY.
The Company further covenants and agrees with each Underwriter as
follows:
(a) Representatives' Review of Proposed Amendments and
Supplements. During such period beginning on the date hereof and ending on the
later of the First Closing Date or such date, as in the opinion of counsel for
the Underwriters, the Prospectus is no longer required by law to be delivered in
connection with sales by an Underwriter or dealer (the "Prospectus Delivery
Period"), prior to amending or supplementing the Registration Statement
(including any registration statement filed under Rule 462(b) under the
Securities Act) or the Prospectus, the Company shall furnish to the
Representatives for review a copy of each such proposed amendment or supplement,
and the Company shall not file any such proposed amendment or supplement to
which the Representatives reasonably object.
(b) Securities Act Compliance. After the date of this Agreement,
the Company shall promptly advise the Representatives in writing (i) of the
receipt of any comments of, or requests for additional or supplemental
information from, the Commission, (ii) of the time and date of any filing of any
post-effective amendment to the Registration Statement or any amendment or
supplement to any preliminary prospectus or the Prospectus, (iii) of the time
and date that any post-effective amendment to the Registration Statement becomes
effective and (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or any post-effective
amendment thereto or of any order preventing or suspending the use of any
preliminary prospectus or the Prospectus, or of any proceedings to remove,
suspend or terminate from listing or quotation the Common Stock from any
securities exchange upon which the Common Stock is listed for trading or
included or designated for quotation, or of the threatening or initiation of any
proceedings for any of such purposes. If the Commission shall enter any such
stop order at any time, the Company will use its best efforts to obtain the
lifting of such order at the earliest possible moment. Additionally, the Company
agrees that it shall comply with the provisions of Rules 424(b), 430A and 434,
as applicable, under the Securities Act and will use its reasonable efforts to
confirm that any filings made by the Company under such Rule 424(b) were
received in a timely manner by the Commission.
(c) Amendments and Supplements to the Prospectus and Other
Securities Act Matters. If, during the Prospectus Delivery Period, any event
shall occur or condition exist as a result of which it is necessary to amend or
supplement the Prospectus in order to make the statements therein, in the light
of the circumstances when the Prospectus is delivered to a purchaser, not
misleading, or if in the opinion of the Representatives or counsel for the
Underwriters it is otherwise necessary to amend or supplement the Prospectus to
comply with law, the Company agrees to promptly prepare (subject to Section 3(a)
hereof), file with the Commission and furnish at its own expense to the
Underwriters and to dealers, amendments or supplements to the Prospectus so that
the statements in the Prospectus as so amended or supplemented will not, in the
light of the circumstances when the Prospectus is delivered to a purchaser, be
misleading or so that the Prospectus, as amended or supplemented, will comply
with law.
(d) Copies of any Amendments and Supplements to the Prospectus.
The Company agrees to furnish the Representatives, without charge, during the
Prospectus Delivery Period, as many copies of the Prospectus and any amendments
and supplements thereto as the Representatives may reasonably request.
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(e) Blue Sky Compliance. The Company shall cooperate with the
Representatives and counsel for the Underwriters to qualify or register the
Common Shares for sale under (or obtain exemptions from the application of)
state securities or blue sky laws or Canadian provincial Securities laws of
those jurisdictions designated by the Representatives, and shall comply with
such laws and shall continue such qualifications, registrations and exemptions
in effect so long as required for the distribution of the Common Shares. The
Company shall not be required to qualify as a foreign corporation or to take any
action that would subject it to general service of process in any such
jurisdiction where it is not presently qualified or where it would be subject to
taxation as a foreign corporation. The Company will advise the Representatives
promptly of the suspension of the qualification or registration of (or any such
exemption relating to) the Common Shares for offering, sale or trading in any
jurisdiction or any initiation or threat of any proceeding for any such purpose,
and in the event of the issuance of any order suspending such qualification,
registration or exemption, the Company shall use its best efforts to obtain the
withdrawal thereof at the earliest possible moment.
(f) Use of Proceeds. The Company shall apply the net proceeds
from the sale of the Common Shares sold by it in the manner described under the
caption "Use of Proceeds" in the Prospectus.
(g) Transfer Agent. The Company shall engage and maintain, at its
expense, a registrar and transfer agent for the Common Stock.
(h) Earnings Statement. As soon as practicable, the Company will
make generally available to its security holders and to the Representatives an
earnings statement (which need not be audited) covering the twelve-month period
ending [___] that satisfies the provisions of Section 11(a) of the Securities
Act.
(j) Periodic Reporting Obligations. During the Prospectus
Delivery Period the Company shall file, on a timely basis, with the Commission
and the Nasdaq National Market all reports and documents required to be filed
under the Exchange Act.
(l) Agreement Not To Offer or Sell Additional Securities During
the period of 180 days following the date of the Prospectus, the Company will
not, without the prior written consent of NMS (which consent may be withheld at
the sole discretion of NMS), directly or indirectly, sell, offer, contract or
grant any option to sell, pledge, transfer or establish an open "put equivalent
position" within the meaning of Rule 16a-1(h) under the Exchange Act, or
otherwise dispose of or transfer, or announce the offering of, or file any
registration statement under the Securities Act in respect of, any shares of
Common Stock, options or warrants to acquire shares of the Common Stock or
securities exchangeable or exercisable for or convertible into shares of Common
Stock (other than as contemplated by this Agreement with respect to the Common
Shares); provided, however, that the Company may issue shares of its Common
Stock or options to purchase its Common Stock, or Common Stock upon exercise of
options, pursuant to any stock option, stock bonus or other stock plan or
arrangement described in the Prospectus.
(m) Future Reports to the Representatives. During the period of
five years hereafter the Company will make available to the Representatives: (i)
as soon as practicable after the end of each fiscal year, copies of the Annual
Report of the Company containing the balance sheet of the Company as of the
close of such fiscal year and statements of income, stockholders' equity and
cash flows for the year then ended and the opinion thereon of the Company's
independent public or certified public accountants; (ii) as soon as practicable
after the filing thereof, copies of each proxy statement, Annual Report on Form
10-K, Quarterly Report on
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Form 10-Q, Current Report on Form 8-K or other report filed by the Company with
the Commission, the NASD or any securities exchange; and (iii) as soon as
available, copies of any report or communication of the Company mailed generally
to holders of its capital stock.
SECTION 4. PAYMENT OF EXPENSES. The Company agrees to pay all
costs, fees and expenses incurred in connection with the performance of its
obligations hereunder and in connection with the transactions contemplated
hereby, including without limitation (i) all expenses incident to the issuance
and delivery of the Common Shares (including all printing and engraving costs),
(ii) all fees and expenses of the registrar and transfer agent of the Common
Stock, (iii) all necessary issue, transfer and other stamp taxes in connection
with the issuance and sale of the Common Shares to the Underwriters, (iv) all
fees and expenses of the Company's counsel, independent public or certified
public accountants and other advisors, (v) all costs and expenses incurred in
connection with the preparation, printing, filing, shipping and distribution of
the Registration Statement (including financial statements, exhibits, schedules,
consents and certificates of experts), each preliminary prospectus and the
Prospectus, and all amendments and supplements thereto, and this Agreement, (vi)
all filing fees, attorneys' fees and expenses incurred by the Company or the
Underwriters in connection with qualifying or registering (or obtaining
exemptions from the qualification or registration of) all or any part of the
Common Shares for offer and sale under the state securities or blue sky laws or
the provincial securities laws of Canada, and, if requested by the
Representatives, preparing and printing a "Blue Sky Survey" or memorandum, and
any supplements thereto, advising the Underwriters of such qualifications,
registrations and exemptions, (vii) the filing fees incident to the NASD's
review and approval of the Underwriters' participation in the offering and
distribution of the Common Shares, (viii) the fees and expenses associated with
including the Common Stock on the Nasdaq National Market, and (ix) all other
fees, costs and expenses referred to in Item 25 of Part II of the Registration
Statement. Except as provided in this Section 4, Section 6, Section 8 and
Section 9 hereof, the Underwriters shall pay their own expenses, including the
fees and disbursements of their counsel.
SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the several Underwriters to purchase and pay for the Common
Shares as provided herein on the First Closing Date and, with respect to the
Optional Common Shares, the Second Closing Date, shall be subject to the
accuracy of the representations and warranties on the part of the Company set
forth in Section 1 hereof as of the date hereof and as of the First Closing Date
as though then made and, with respect to the Optional Common Shares, as of the
Second Closing Date as though then made, to the timely performance by the
Company of its covenants and other obligations hereunder, and to each of the
following additional conditions:
(a) Accountants' Comfort Letter. On the date hereof, the
Representatives shall have received from Deloitte & Touche LLP, independent
public or certified public accountants for the Company and CLBI, a letter dated
the date hereof addressed to the Company and the Underwriters, in form and
substance reasonably satisfactory to the Representatives, containing statements
and information of the type ordinarily included in accountant's "comfort
letters" to underwriters, delivered according to Statement of Auditing Standards
No. 72 (or any successor bulletin), with respect to the audited and unaudited
financial statements and certain financial information contained in the
Registration Statement and the Prospectus (and the Representatives shall have
received an additional six (6) conformed copies of such accountants' letter for
each of the several Underwriters).
(b) Compliance with Registration Requirements; No Stop Order; No
Objection from NASD. For the period from and after effectiveness of this
Agreement and prior
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to the First Closing Date and, with respect to the Optional Common Shares, the
Second Closing Date:
(i) the Company shall have filed the Prospectus with the
Commission (including the information required by Rule 430A under the
Securities Act) in the manner and within the time period required by
Rule 424(b) under the Securities Act; or the Company shall have filed a
post-effective amendment to the Registration Statement containing the
information required by such Rule 430A, and such post-effective
amendment shall have become effective; or, if the Company elected to
rely upon Rule 434 under the Securities Act and obtained the
Representatives' consent thereto, the Company shall have filed a Term
Sheet with the Commission in the manner and within the time period
required by such Rule 424(b);
(ii) no stop order suspending the effectiveness of the
Registration Statement, any Rule 462(b) Registration Statement, or any
post-effective amendment to the Registration Statement, shall be in
effect and no proceedings for such purpose shall have been instituted or
threatened by the Commission; and
(iii) the NASD shall have raised no objection as to the
fairness and reasonableness of the underwriting terms and arrangements.
(c) No Material Adverse Change. For the period from and after the
date of this Agreement and prior to the First Closing Date and, with respect to
the Optional Common Shares, the Second Closing Date in the judgment of the
Representatives there shall not have occurred any Material Adverse Change.
(d) Opinion of Counsel for the Company. On each of the First
Closing Date and the Second Closing Date, the Representatives shall have
received the favorable opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP, counsel for the Company, dated as of such Closing Date, the form
of which is attached as Exhibit A (and the Representatives shall have received
an additional six (6) conformed copies of such counsel's legal opinion for each
of the several Underwriters).
(e) Opinion of Counsel for the Underwriters. On each of the First
Closing Date and the Second Closing Date, the Representatives shall have
received the favorable opinion of Brobeck, Phleger & Harrison LLP, counsel for
the Underwriters, dated as of such Closing Date, with respect to the matters set
forth in paragraphs (viii), (ix), (x) and the next-to-last paragraph of Exhibit
A (and the Representatives shall have received an additional six (6) conformed
copies of such counsel's legal opinion for each of the several Underwriters).
(f) Officers' Certificate. On each of the First Closing Date and
the Second Closing Date the Representatives shall have received a written
certificate executed by the Chairman of the Board, Chief Executive Officer or
President of the Company and the Chief Financial Officer or Chief Accounting
Officer of the Company, dated as of such Closing Date, to the effect set forth
in subsections (b)(ii) and (c) of this Section 5, and further to the effect
that:
(i) for the period from and after the date of this
Agreement and prior to such Closing Date, there has not occurred any
Material Adverse Change;
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<PAGE> 16
(ii) the representations and warranties of the Company set forth
in Section 1 of this Agreement are true and correct in all material
respects with the same force and effect as though expressly made on and
as of such Closing Date; and
(iii) the Company has complied in all material respects with all
the agreements and satisfied all the conditions on its part to be
performed or satisfied at or prior to such Closing Date.
(g) Bring-down Comfort Letter. On each of the First Closing Date and the
Second Closing Date the Representatives shall have received from Deloitte &
Touche LLP, independent public or certified public accountants for the Company,
a letter dated such date, in form and substance reasonably satisfactory to the
Representatives, to the effect that they reaffirm the statements made in the
letter furnished by them pursuant to subsection (a) of this Section 5, except
that the specified date referred to therein for the carrying out of procedures
shall be no more than three business days prior to the First Closing Date or
Second Closing Date, as the case may be (and the Representatives shall have
received an additional six (6) conformed copies of such accountants' letter for
each of the several Underwriters).
(h) Lock-Up Agreements from Certain Stockholders of the Company. On the
date hereof, the Company shall have furnished to the Representatives an
agreement in the form of Exhibit B hereto from each director, officer and each
beneficial owner of Common Stock (as defined and determined according to Rule
13d-3 under the Exchange Act, except that a one hundred eighty day period shall
be used rather than the sixty day period set forth therein) named on Schedule B
hereto, and such agreement shall be in full force and effect on each of the
First Closing Date and the Second Closing Date.
(i) Additional Documents. On or before each of the First Closing Date
and the Second Closing Date, the Representatives and counsel for the
Underwriters shall have received such information, documents and opinions as
they may reasonably require for the purposes of enabling them to pass upon the
issuance and sale of the Common Shares as contemplated herein, or in order to
evidence the accuracy of any of the representations and warranties, or the
satisfaction of any of the conditions or agreements, herein contained.
If any condition specified in this Section 5 is not satisfied when and
as required to be satisfied, this Agreement may be terminated by the
Representatives by notice to the Company at any time on or prior to the First
Closing Date and, with respect to the Optional Common Shares, at any time prior
to the Second Closing Date, which termination shall be without liability on the
part of any party to any other party, except that Section 4, Section 6, Section
8 and Section 9 shall at all times be effective and shall survive such
termination.
SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If this Agreement is
terminated by the Representatives pursuant to Section 5, Section 7 or
subsections (iv) or (v) of Section 11, or if the sale to the Underwriters of the
Common Shares on the First Closing Date is not consummated because of any
refusal, inability or failure on the part of the Company to perform any
agreement herein or to comply with any provision hereof, the Company agrees to
reimburse the Representatives and the other Underwriters (or such Underwriters
as have terminated this Agreement with respect to themselves), severally, upon
demand for all out-of-pocket expenses that shall have been reasonably incurred
by the Representatives and the Underwriters in connection with the proposed
purchase and the offering and sale of the Common Shares, including but not
limited to fees and disbursements of counsel, printing expenses, travel
expenses, postage, facsimile and telephone charges.
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<PAGE> 17
SECTION 7. EFFECTIVENESS OF THIS AGREEMENT.
This Agreement shall not become effective until the later of (i) the
execution of this Agreement by the parties hereto and (ii) notification by the
Commission to the Company and the Representatives of the effectiveness of the
Registration Statement under the Securities Act.
Prior to such effectiveness, this Agreement may be terminated by any
party by notice to each of the other parties hereto, and any such termination
shall be without liability on the part of (a) the Company to any Underwriter,
except that the Company shall be obligated to reimburse the expenses of the
Representatives and the Underwriters pursuant to Sections 4 and 6 hereof, (b)
any Underwriter to the Company, or (c) any party hereto to any other party
except that the provisions of Section 8 and Section 9 shall at all times be
effective and shall survive such termination.
SECTION 8. INDEMNIFICATION.
(a) Indemnification of the Underwriters. The Company agrees to indemnify
and hold harmless each Underwriter, its officers and employees, and each person,
if any, who controls any Underwriter within the meaning of the Securities Act
and the Exchange Act against any loss, claim, damage, liability or expense, as
incurred, to which such Underwriter or such controlling person may become
subject, under the Securities Act, the Exchange Act or other federal or state
statutory law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the written
consent of the Company), insofar as such loss, claim, damage, liability or
expense (or actions in respect thereof as contemplated below) arises out of or
is based (i) upon any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement, or any amendment thereto,
including any information deemed to be a part thereof pursuant to Rule 430A or
Rule 434 under the Securities Act, or the omission or alleged omission therefrom
of a material fact required to be stated therein or necessary to make the
statements therein not misleading; or (ii) upon any untrue statement or alleged
untrue statement of a material fact contained in any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto), or the omission or
alleged omission therefrom of a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; or (iii) in whole or in part upon any inaccuracy in the
representations and warranties of the Company contained herein; or (iv) in whole
or in part upon any failure of the Company to perform its obligations hereunder
or under law; or (v) any act or failure to act or any alleged act or failure to
act by any Underwriter in connection with, or relating in any manner to, the
Common Stock or the offering contemplated hereby, and which is included as part
of or referred to in any loss, claim, damage, liability or action arising out of
or based upon any matter covered by clause (i) or (ii) above, provided that the
Company shall not be liable under this clause (v) to the extent that a court of
competent jurisdiction shall have determined by a final judgment that such loss,
claim, damage, liability or action resulted directly from any such acts or
failures to act undertaken or omitted to be taken by such Underwriter through
its bad faith, gross negligence or willful misconduct; and to reimburse each
Underwriter and each such controlling person for any and all expenses (including
the fees and disbursements of counsel chosen by NMS) as such expenses are
reasonably incurred by such Underwriter or such controlling person in connection
with investigating, defending, settling, compromising or paying any such loss,
claim, damage, liability, expense or action; provided, however, that the
foregoing indemnity agreement shall not apply to any loss, claim, damage,
liability or expense to the extent, but only to the extent, arising out of or
based upon any untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon and in conformity with written
information furnished to the Company by the Representatives
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<PAGE> 18
expressly for use in the Registration Statement, any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto); and provided, further,
that with respect to any preliminary prospectus, the foregoing indemnity
agreement shall not inure to the benefit of any Underwriter from whom the person
asserting any loss, claim, damage, liability or expense purchased Common Shares,
or any person controlling such Underwriter, if copies of the Prospectus were
timely delivered to the Underwriter pursuant to Section 2 and a copy of the
Prospectus (as then amended or supplemented if the Company shall have furnished
any amendments or supplements thereto) was not sent or given by or on behalf of
such Underwriter to such person, if required by law so to have been delivered,
at or prior to the written confirmation of the sale of the Common Shares to such
person, and if the Prospectus (as so amended or supplemented) would have cured
the defect giving rise to such loss, claim, damage, liability or expense. The
indemnity agreement set forth in this Section 8(a) shall be in addition to any
liabilities that the Company may otherwise have.
(b) Indemnification of the Company, its Directors and Officers. Each
Underwriter agrees, severally and not jointly, to indemnify and hold harmless
the Company, each of its directors, each of its officers who signed the
Registration Statement and each person, if any, who controls the Company within
the meaning of the Securities Act or the Exchange Act, against any loss, claim,
damage, liability or expense, as incurred, to which the Company, or any such
director, officer or controlling person may become subject, under the Securities
Act, the Exchange Act, or other federal or state statutory law or regulation, or
at common law or otherwise (including in settlement of any litigation, if such
settlement is effected with the written consent of such Underwriter), insofar as
such loss, claim, damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based upon any untrue or alleged untrue
statement of a material fact contained in the Registration Statement, any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto), or arises out of or is based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in the Registration Statement, any preliminary
prospectus, the Prospectus (or any amendment or supplement thereto), in reliance
upon and in conformity with written information furnished to the Company by the
Representatives expressly for use therein; and to reimburse the Company, or any
such director, officer or controlling person for any legal and other expense
reasonably incurred by the Company, or any such director, officer or controlling
person in connection with investigating, defending, settling, compromising or
paying any such loss, claim, damage, liability, expense or action. The Company
hereby acknowledges that the only information that the Underwriters have
furnished to the Company expressly for use in the Registration Statement, any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto) are the statements set forth (A) as the last paragraph on the inside
front cover page of the Prospectus concerning stabilization by the Underwriters
and (B) in the table in the first paragraph and as the second paragraph under
the caption "Underwriting" in the Prospectus; and the Underwriters confirm that
such statements are correct. The indemnity agreement set forth in this Section
8(b) shall be in addition to any liabilities that each Underwriter may otherwise
have.
(c) Notifications and Other Indemnification Procedures. Promptly after
receipt by an indemnified party under this Section 8 of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party under this Section 8, notify
the indemnifying party in writing of the commencement thereof, but the omission
so to notify the indemnifying party will not relieve it from any liability which
it may have to any indemnified party for contribution or otherwise than
15
<PAGE> 19
under the indemnity agreement contained in this Section 8 or to the extent it is
not prejudiced as a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will be entitled to participate in, and, to the extent that it shall elect,
jointly with all other indemnifying parties similarly notified, by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party; provided, however, if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that a conflict may arise between the positions of the indemnifying party and
the indemnified party in conducting the defense of any such action or that there
may be legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of such indemnifying
party's election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to such
indemnified party under this Section 8 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it being understood,
however, that the indemnifying party shall not be liable for the expenses of
more than one separate counsel (together with local counsel), approved by the
indemnifying party (NMS in the case of Section 8(b) and Section 9), representing
the indemnified parties who are parties to such action) or (ii) the indemnifying
party shall not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of the action, in each of which cases the fees and expenses of
counsel shall be at the expense of the indemnifying party.
(d) Settlements. The indemnifying party under this Section 8 shall not
be liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
against any loss, claim, damage, liability or expense by reason of such
settlement or judgment. Notwithstanding the foregoing sentence, if at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel as contemplated by Section
8(c) hereof, the indemnifying party agrees that it shall be liable for any
settlement of any proceeding effected without its written consent if (i) such
settlement is entered into more than 30 days after receipt by such indemnifying
party of the aforesaid request and (ii) such indemnifying party shall not have
reimbursed the indemnified party in accordance with such request prior to the
date of such settlement. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement, compromise or consent
to the entry of judgment in any pending or threatened action, suit or proceeding
in respect of which any indemnified party is or could have been a party and
indemnity was or could have been sought hereunder by such indemnified party,
unless such settlement, compromise or consent includes an unconditional release
of such indemnified party from all liability on claims that are the subject
matter of such action, suit or proceeding.
SECTION 9. CONTRIBUTION.
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<PAGE> 20
If the indemnification provided for in Section 8 is for any reason held
to be unavailable to or otherwise insufficient to hold harmless an indemnified
party in respect of any losses, claims, damages, liabilities or expenses
referred to therein, then each indemnifying party shall contribute to the
aggregate amount paid or payable by such indemnified party, as incurred, as a
result of any losses, claims, damages, liabilities or expenses referred to
therein (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company, on the one hand, and the Underwriters, on the
other hand, from the offering of the Common Shares pursuant to this Agreement or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company, on the one hand, and the Underwriters, on the other hand, in
connection with the statements or omissions or inaccuracies in the
representations and warranties herein which resulted in such losses, claims,
damages, liabilities or expenses, as well as any other relevant equitable
considerations. The relative benefits received by the Company, on the one hand,
and the Underwriters, on the other hand, in connection with the offering of the
Common Shares pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the Common
Shares pursuant to this Agreement (before deducting expenses) received by the
Company, and the total underwriting discount received by the Underwriters, in
each case as set forth on the front cover page of the Prospectus (or, if Rule
434 under the Securities Act is used, the corresponding location on the Term
Sheet) bear to the aggregate initial public offering price of the Common Shares
as set forth on such cover. The relative fault of the Company, on the one hand,
and the Underwriters, on the other hand, shall be determined by reference to,
among other things, whether any such untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact or any
such inaccurate or alleged inaccurate representation or warranty relates to
information supplied by the Company, on the one hand, or the Underwriters, on
the other hand, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the losses, claims,
damages, liabilities and expenses referred to above shall be deemed to include,
subject to the limitations set forth in Section 8(c), any legal or other fees or
expenses reasonably incurred by such party in connection with investigating or
defending any action or claim. The provisions set forth in Section 8(c) with
respect to notice of commencement of any action shall apply if a claim for
contribution is to be made under this Section 9; provided, however, that no
additional notice shall be required with respect to any action for which notice
has been given under Section 8(c) for purposes of indemnification.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 9 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in this Section 9.
Notwithstanding the provisions of this Section 9, no Underwriter shall
be required to contribute any amount in excess of the underwriting commissions
received by such Underwriter in connection with the Common Shares underwritten
by it and distributed to the public. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 9 are several, and not joint, in proportion to their
respective underwriting commitments as set forth opposite their names in
Schedule A. For purposes of this Section 9, each officer and employee of an
Underwriter and each person, if any, who controls an Underwriter within the
17
<PAGE> 21
meaning of the Securities Act and the Exchange Act shall have the same rights to
contribution as such Underwriter, and each director of the Company, each officer
of the Company who signed the Registration Statement, and each person, if any,
who controls the Company with the meaning of the Securities Act and the Exchange
Act shall have the same rights to contribution as the Company.
SECTION 10. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS. If, on
the First Closing Date or the Second Closing Date, as the case may be, any one
or more of the several Underwriters shall fail or refuse to purchase Common
Shares that it or they have agreed to purchase hereunder on such date, and the
aggregate number of Common Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase does not exceed 10% of the
aggregate number of the Common Shares to be purchased on such date, the other
Underwriters shall be obligated, severally, in the proportions that the number
of Firm Common Shares set forth opposite their respective names on Schedule A
bears to the aggregate number of Firm Common Shares set forth opposite the names
of all such non-defaulting Underwriters, or in such other proportions as may be
specified by the Representatives with the consent of the non-defaulting
Underwriters, to purchase the Common Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase on such date. If, on the
First Closing Date or the Second Closing Date, as the case may be, any one or
more of the Underwriters shall fail or refuse to purchase Common Shares and the
aggregate number of Common Shares with respect to which such default occurs
exceeds 10% of the aggregate number of Common Shares to be purchased on such
date, and arrangements satisfactory to the Representatives and the Company for
the purchase of such Common Shares are not made within 48 hours after such
default, this Agreement shall terminate without liability of any party to any
other party except that the provisions of Section 4, Section 8 and Section 9
shall at all times be effective and shall survive such termination. In any such
case either the Representatives or the Company shall have the right to postpone
the First Closing Date or the Second Closing Date, as the case may be, but in no
event for longer than seven days in order that the required changes, if any, to
the Registration Statement and the Prospectus or any other documents or
arrangements may be effected.
As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
10. Any action taken under this Section 10 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
SECTION 11. TERMINATION OF THIS AGREEMENT. Prior to the First Closing
Date this Agreement may be terminated by the Representatives by notice given to
the Company if at any time (i) trading or quotation in any of the Company's
securities shall have been suspended or limited by the Commission or by the
Nasdaq Stock Market, or trading in securities generally on either the Nasdaq
Stock Market or the New York Stock Exchange shall have been suspended or
limited, or minimum or maximum prices shall have been generally established on
any of such stock exchanges by the Commission or the NASD; (ii) a general
banking moratorium shall have been declared by any of federal, New York ,
Delaware or California authorities; (iii) there shall have occurred any outbreak
or escalation of national or international hostilities or any crisis or
calamity, or any change in the United States or international financial markets,
or any substantial change or development involving a prospective substantial
change in United States' or international political, financial or economic
conditions, which in the judgment of the Representatives is material and adverse
and makes it impracticable to market the Common Shares in the manner and on the
terms described in the Prospectus or to enforce contracts for the sale of
securities; (iv) in the judgment of the Representatives there shall have
occurred any Material Adverse Change; or (v) the Company shall have sustained a
loss by strike, fire, flood,
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<PAGE> 22
earthquake, accident or other calamity of such character as in the judgment of
the Representatives may interfere materially with the conduct of the business
and operations of the Company regardless of whether or not such loss shall have
been insured. Any termination pursuant to this Section 11 shall be without
liability on the part of (a) the Company to any Underwriter, except that the
Company shall be obligated to reimburse the expenses of the Representatives and
the Underwriters pursuant to Sections 4 and 6 hereof, (b) any Underwriter to the
Company, or (c) of any party hereto to any other party except that the
provisions of Section 8 and Section 9 shall at all times be effective and shall
survive such termination.
SECTION 12. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers and of the several Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter
or the Company or any of its or their partners, officers or directors or any
controlling person, as the case may be, and will survive delivery of and payment
for the Common Shares sold hereunder and any termination of this Agreement.
SECTION 13. NOTICES. All communications hereunder shall be in writing
and shall be mailed, hand delivered or telecopied and confirmed to the parties
hereto as follows:
If to the Representatives:
NationsBanc Montgomery Securities LLC
600 Montgomery Street
San Francisco, California 94111
Facsimile: 415-249-5558
Attention: Richard A. Smith
with a copy to:
NationsBanc Montgomery Securities LLC
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 249-5553
Attention: David A. Baylor, Esq.
If to the Company:
Computer Literacy, Inc.
1308 Orleans Drive
Sunnyvale, California 94089
Facsimile: (408) 752-9919
Attention: Chris MacAskill
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
SECTION 14. SUCCESSORS. This Agreement will inure to the benefit of and
be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 10 hereof, and to the benefit of the employees, officers and
directors and controlling persons referred to in Section 8 and Section 9, and in
each case their respective successors, and no other
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<PAGE> 23
person will have any right or obligation hereunder. The term "successors" shall
not include any purchaser of the Common Shares as such from any of the
Underwriters merely by reason of such purchase.
SECTION 15. PARTIAL UNENFORCEABILITY. The invalidity or unenforceability
of any Section, paragraph or provision of this Agreement shall not affect the
validity or enforceability of any other Section, paragraph or provision hereof.
If any Section, paragraph or provision of this Agreement is for any reason
determined to be invalid or unenforceable, there shall be deemed to be made such
minor changes (and only such minor changes) as are necessary to make it valid
and enforceable.
SECTION 16. GOVERNING LAW PROVISIONS. THIS AGREEMENT SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK
APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SUCH STATE.
SECTION 17. GENERAL PROVISIONS. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may be executed in two
or more counterparts, each one of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement may not be amended or modified unless in writing by all of the
parties hereto, and no condition herein (express or implied) may be waived
unless waived in writing by each party whom the condition is meant to benefit.
The Table of Contents and the Section headings herein are for the convenience of
the parties only and shall not affect the construction or interpretation of this
Agreement.
Each of the parties hereto acknowledges that it is a sophisticated
business person who was adequately represented by counsel during negotiations
regarding the provisions hereof, including, without limitation, the
indemnification provisions of Section 8 and the contribution provisions of
Section 9, and is fully informed regarding said provisions. Each of the parties
hereto further acknowledges that the provisions of Sections 8 and 9 hereto
fairly allocate the risks in light of the ability of the parties to investigate
the Company, its affairs and its business in order to assure that adequate
disclosure has been made in the Registration Statement, any preliminary
prospectus and the Prospectus (and any amendments and supplements thereto), as
required by the Securities Act and the Exchange Act.
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<PAGE> 24
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to the Company the enclosed copies hereof, whereupon this
instrument, along with all counterparts hereof, shall become a binding agreement
in accordance with its terms.
Very truly yours,
COMPUTER LITERACY, INC.
By:
-------------------------------
Chris MacAskill
Chief Executive Officer
The foregoing Underwriting Agreement is hereby confirmed and accepted by
the Representatives in San Francisco, California as of the date first above
written.
NATIONSBANC MONTGOMERY SECURITIES LLC
PIPER JAFFRAY INC.
NEEDHAM & COMPANY, INC.
Acting as Representatives of the
several Underwriters named in
the attached Schedule A.
By NATIONSBANC MONTGOMERY SECURITIES LLC
By:
------------------------------------
Authorized Signatory
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<PAGE> 25
SCHEDULE A
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF FIRM
COMMON SHARES TO
BE PURCHASED
<S> <C>
NationsBanc Montgomery Securities LLC ...... [___]
Piper Jaffray Inc. ......................... [___]
Needham & Company, Inc...................... [___]
[___] ...................................... [___]
[___] ...................................... [___]
Total................................ 3,000,000
</TABLE>
<PAGE> 26
SCHEDULE B
Sierra Ventures V, L.P.
Trinity Ventures V
Trinity Side-by-Side Fund V, L.P.
APV Technology Partners, L.P.
APV Technology Partners U.S., L.P.
APV Technology Partner II, L.P.
Stanford University
G&H Partners
Chris MacAskill
Kim Orumchian
Amos Nur
Huret Family Partners, L.P.
J. Richard Fredericks
Joseph M. Petri
Needham Capital SBIC, L.P.
Needham Capital Partners II, L.P.
Needham Capital Partners II, (Bermuda) L.P.
WAH Investment, L.L.C.
Andrew Blum
Paine Webber, as Custodian for Andrew Blum IRA
C.E. Unterberg, Towbin LLC
Unterberg Harris Private Equity Partners, L.P.
Unterberg Harris Private Equity Partners, C.V.
Thomas Unterberg
C.E. Unterberg, Towbin 401K Profit Sharing Plan FBO Andrew Arno
Alexander Bernstein
C.E. Unterberg, Towbin 401K Profit Sharing Plan FBO Alexander Bernstein
Brett Wallace
C.E. Unterberg, Towbin 401K Profit Sharing Plan FBO Brett Wallace
Vulcan Ventures Incorporated
Donald Alvarez
Dennis Capovilla
Robert Cudd
Riki Tokuno
Sean Cumbie
<PAGE> 27
EXHIBIT A
The final opinion in draft form should be attached as Exhibit A at the time this
Agreement is executed.
Opinion of counsel for the Company to be delivered pursuant to Section
5(e) of the Underwriting Agreement.
References to the Prospectus in this Exhibit A include any supplements
thereto at the Closing Date.
(i) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware.
(ii) The Company has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus.
(iii) The Company is duly qualified as a foreign corporation to transact
business and is in good standing in the States of California, Virginia, Texas
and Washington.
(iv) The authorized, issued and outstanding capital stock of the Company
(including the Common Stock) conform in all material respects to the
descriptions thereof set forth in the Prospectus. The form of certificate used
to evidence the Common Stock is in due and proper form and complies with all
applicable requirements of the charter and by-laws of the Company and the
General Corporation Law of the State of Delaware.
(v) Except as described in the Registration Statement or the Prospectus,
to the knowledge of such counsel, no stockholder of the Company or any other
person has any preemptive right, right of first refusal or other similar right
to subscribe for or purchase securities of the Company arising (i) by operation
of the charter or by-laws of the Company or the General Corporation Law of the
State of Delaware or (ii) to the knowledge of such counsel, from any contractual
preemptive right, right of first refusal or other similar right.
(vi) The Company has the corporate power and authority to enter into and
perform its obligations under the Underwriting Agreement. The Underwriting
Agreement has been duly authorized, executed and delivered by the Company.
(vii) The Common Shares to be purchased by the Underwriters from the
Company have been duly authorized for issuance and sale pursuant to the
Underwriting Agreement and, when issued and delivered by the Company pursuant to
the Underwriting Agreement against payment of the consideration set forth
therein, will be validly issued, and to such counsel's knowledge fully paid and
nonassessable.
(viii) We hereby confirm to you that we have been advised by the
Commission that the Registration Statement has become effective under the Act
and that no order suspending the effectiveness of the Registration Statement has
been issued and no proceeding for that purpose has been initiated, or is pending
or threatened, by the Commission. Any required filing of the Prospectus and any
supplement thereto pursuant to Rule 424(b) under
A-1
<PAGE> 28
the Securities Act has been made in the manner and within the time period
required by such Rule 424(b).
(ix) The Registration Statement, including any Rule 462(b) Registration
Statement, the Prospectus, and each amendment or supplement to the Registration
Statement and the Prospectus, as of their respective effective or issue dates
(other than the financial statements and supporting schedules included therein
or in exhibits to or excluded from the Registration Statement, as to which no
opinion need be rendered) comply as to form in all material respects with the
applicable requirements of the Securities Act.
(x) The Common Shares issued and sold by the Company have been approved
for listing on the Nasdaq National Market upon official notice of issuance.
(xii) The statements (i) in the Prospectus under the captions "Risk
Factors--Shares Eligible for Future Sale," "Description of Capital Stock" and
"Shares Eligible for Future Sale" and (ii) in Item 24 and Item 26 of the
Registration Statement, insofar as such statements constitute matters of law,
summaries of legal matters, the Company's charter or by-law provisions,
documents or legal proceedings, or legal conclusions, has been reviewed by such
counsel and fairly present and summarize, in all material respects, the matters
referred to therein.
(xiii) To the knowledge of such counsel, there are no legal or
governmental actions, suits or proceedings pending or threatened against the
Company which are required to be disclosed in the Registration Statement, other
than those disclosed therein.
(xiv) No consent, approval, authorization or other order of, or
registration or filing with, any court or other governmental agency or body, is
required for the consummation of the transactions contemplated in the
Underwriting Agreement, except as required under the Securities Act, applicable
state securities or blue sky laws and from the NASD in connection with the
purchase and distribution of the Common Shares by the Underwriters.
(xv) The execution and delivery of the Underwriting Agreement by the
Company and the performance by the Company of its obligations thereunder (other
than performance by the Company of its obligations under the indemnification
section of the Underwriting Agreement, as to which no opinion need be rendered)
(i) have been duly authorized by all necessary corporate action on the part of
the Company; (ii) will not result in any violation of the provisions of the
charter or by-laws of the Company; (iii) will not constitute a breach of, or
Default under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company pursuant to any material
Existing Instrument filed as an exhibit with the Registration Statement; or (iv)
to the knowledge of such counsel, will not contravene any provision of any law
or court decree applicable to the Company.
(xvi) The Company is not, and after receipt of payment for the Common
Shares will not be, an "investment company" or an "affiliated person" of, or
"promoter" or "principal underwriter" for, an "investment company" as such terms
are defined in the Investment Company Act of 1940, as amended.
(xvii) Except as disclosed in the Prospectus, to the knowledge of such
counsel, there are no persons with registration or other similar rights to have
any equity or debt securities
A-2
<PAGE> 29
registered for sale under the Registration Statement or included in the offering
contemplated by the Underwriting Agreement, except for such rights as have been
duly waived.
(xviii) To the knowledge of such counsel, the Company is not in
violation of its charter or by-laws or any law, administrative regulation or
administrative or court decree applicable to the Company or is in Default in the
performance or observance of any obligation, agreement, covenant or condition
contained in any material Existing Instrument filed as an exhibit with the
Registration Statement, except in each such case for such violations or Defaults
as would not, individually or in the aggregate, result in a Material Adverse
Change.
In addition, such counsel shall state that they have participated in
conferences with officers and other Representatives of the Company,
Representatives of the independent public or certified public accountants for
the Company and with Representatives of the Underwriters at which the contents
of the Registration Statement and the Prospectus, and any supplements or
amendments thereto, and related matters were discussed and, although such
counsel is not passing upon and does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus (other than as specified above), and
any supplements or amendments thereto, on the basis of the foregoing, nothing
has come to their attention which would lead them to believe that either the
Registration Statement or any amendments thereto, at the time the Registration
Statement or such amendments became effective, contained an untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or that the
Prospectus, as of its date or at the First Closing Date or the Second Closing
Date, as the case may be, contained an untrue statement of a material fact or
omitted to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading (it being understood that such counsel need express no belief as to
the financial statements or schedules or other financial or statistical data
derived therefrom, included in the Registration Statement or the Prospectus or
any amendments or supplements thereto).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the General
Corporation Law of the State of Delaware, the General Corporation Law of the
State of California or the federal law of the United States, to the extent they
deem proper and specified in such opinion, upon the opinion (which shall be
dated the First Closing Date or the Second Closing Date, as the case may be,
shall be satisfactory in form and substance to the Underwriters, shall expressly
state that the Underwriters may rely on such opinion as if it were addressed to
them and shall be furnished to the Representatives) of other counsel of good
standing whom they believe to be reliable and who are satisfactory to counsel
for the Underwriters; provided, however, that such counsel shall further state
that they believe that they and the Underwriters are justified in relying upon
such opinion of other counsel, and (B) as to matters of fact, to the extent they
deem proper, on certificates of responsible officers of the Company and public
officials.
A-3
<PAGE> 30
EXHIBIT B
[Date]
NationsBanc Montgomery Securities LLC
Piper Jaffray Inc.
Needham & Company, Inc.
As Representatives of the Several Underwriters
c/o NationsBanc Montgomery Securities LLC
600 Montgomery Street
San Francisco, California 94111
RE: Computer Literacy, Inc. (the "Company")
Ladies & Gentlemen:
The undersigned is an owner of record or beneficially of certain shares of
Common Stock of the Company ("Common Stock") or securities convertible into or
exchangeable or exercisable for Common Stock. The Company proposes to carry out
a public offering of Common Stock (the "Offering") for which you will act as the
representatives (the "Representatives") of the underwriters. The undersigned
recognizes that the Offering will be of benefit to the undersigned and will
benefit the Company by, among other things, raising additional capital for its
operations. The undersigned acknowledges that you and the other underwriters are
relying on the representations and agreements of the undersigned contained in
this letter in carrying out the Offering and in entering into underwriting
arrangements with the Company with respect to the Offering.
In consideration of the foregoing, the undersigned hereby agrees that the
undersigned will not, without the prior written consent of NationsBanc
Montgomery Securities LLC (which consent may be withheld in its sole
discretion), directly or indirectly, sell, offer, contract or grant any option
to sell (including without limitation any short sale) pledge, transfer,
establish an open "put equivalent position" within the meaning of Rule 16a-1(h)
under the Securities Exchange Act of 1934, as amended, or otherwise dispose of
any shares of Common Stock, options or warrants to acquire shares of Common
Stock, or securities exchangeable or exercisable for or convertible into shares
of Common Stock currently or hereafter owned either of record or beneficially
(as defined in Rule 13d-3 under Securities Exchange Act of 1934, as amended) by
the undersigned, or publicly announce the undersigned's intention to do any of
the foregoing, for a period of 180 days subsequent to the date of the final
prospectus for the Offering. The undersigned also agrees and consents to the
entry of stop transfer instructions with the Company's transfer agent and
registrar against the transfer of shares of Common Stock or securities
convertible into or exchangeable or exercisable for Common Stock held by the
undersigned except in compliance with the foregoing restrictions.
The foregoing restrictions shall not apply to (i) a bona fide gift or gifts,
provided the donee or donees thereof agree in writing to be bound by this Lock
Up Agreement, (ii) a distribution to partners, members or shareholders of the
undersigned, provided that the distributees thereof agree in writing to be bound
by the terms of this Lock Up Agreement or (iii) shares purchased by the
undersigned in the Offering or in the open market after the Offering.
B-1
<PAGE> 31
This agreement is irrevocable and will be binding on the undersigned and the
respective successors, heirs, personal representatives, and assigns of the
undersigned.
Dated: , 1998
-----------------------
----------------------------------
Printed Name of Holder
By:
-------------------------------
Signature
----------------------------------
Printed Name of Person Signing
(and indicate capacity of person signing if
signing as custodian, trustee, or on behalf
of an entity
2
<PAGE> 1
EXHIBIT 2.1
STOCK ACQUISITION AGREEMENT
BY AND AMONG
CBOOKS EXPRESS, INC.,
COMPUTER LITERACY BOOKSHOPS, INC.,
RACHEL UNKEFER AND
DANIEL A. DOERNBERG,
DATED AS OF
MAY 28, 1997
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
ARTICLE I PURCHASE AND SALE OF STOCK.........................................................1
1.1 Purchase and Sale of Stock.......................................................1
1.2 Purchase Price...................................................................1
1.3 Purchase Price Adjustments.......................................................2
ARTICLE II REPRESENTATIONS AND WARRANTIES OF CBOOKS..........................................3
2.1 Organization....................................................................3
2.2 Authorization...................................................................3
2.3 Compliance with other Instruments...............................................3
2.4 Litigation......................................................................3
2.5 Consents........................................................................4
2.7 Investment Representation.......................................................4
2.8 Financial Capability............................................................4
ARTICLE III REPRESENTATIONS AND WARRANTIES OF CLBI AND THE SHAREHOLDERS......................4
3.1 Organization, Good Standing and Qualification of CLBI...........................4
3.2 Capital Structure of CLBI.......................................................5
3.3 Authorization...................................................................5
3.4 Financial Information...........................................................5
3.5 Absence of Certain Changes and Events...........................................6
3.6 Receivables.....................................................................8
3.7 Taxes...........................................................................8
3.8 Compliance With Law............................................................10
3.10 Governmental Consents.........................................................10
3.10 Proprietary Rights............................................................10
3.11 Restrictive Documents or Orders...............................................11
3.12 Contracts and Commitments.....................................................11
3.13 Title to the Property.........................................................13
3.14 Insurance.....................................................................13
3.15 Litigation....................................................................14
3.16 No Conflict or Default........................................................14
3.17 Party Consents................................................................15
3.18 Certain Agreements............................................................15
3.19 Labor Relations...............................................................15
3.20 Employees and Employee Benefit Plans..........................................15
3.21 Interested Party Relationships................................................17
3.22 Environmental and Safety Matters..............................................17
3.23 Certain Payments..............................................................17
i
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
3.24 Product Warranties............................................................18
3.25 Customers.....................................................................18
3.26 Suppliers.....................................................................18
3.27 Books and Records.............................................................18
3.28 Bank Account..................................................................18
3.29 Complete Disclosure...........................................................18
3.30 No Other Agreements...........................................................19
ARTICLE IV COVENANTS OF CLBI AND THE SHAREHOLDERS...........................................19
4.1 Maintenance of Business........................................................19
4.2 Restricted Activities and Transactions.........................................19
4.3 Tax Forms......................................................................21
4.4 Negotiation With Others........................................................21
4.5 Consents, Approvals and Filings................................................21
4.6 Access to Records and Properties...............................................21
ARTICLE V MUTUAL COVENANTS..................................................................22
5.1 Confidentiality................................................................22
5.2 Public Announcements...........................................................22
5.3 Brokers and Finders............................................................23
5.4 Notice of Breach...............................................................23
5.5 Agreements to Cooperate........................................................23
5.6 Additional Agreements..........................................................23
5.7 Consulting Arrangements........................................................23
ARTICLE VI CLOSING..........................................................................23
6.1 Closing........................................................................23
6.2 Deliveries by the Shareholders and CLBI........................................24
6.3 Deliveries by CBooks...........................................................24
6.4 Related Agreements.............................................................25
ARTICLE VII CONDITIONS PRECEDENT TO OBLIGATIONS.............................................25
7.1 Conditions to Obligations of CBooks............................................25
7.2 Conditions to Obligations of CLBI and the Shareholders.........................26
ARTICLE VIII INDEMNIFICATION................................................................27
8.1 Survival of Representations, Warranties, and Agreements........................27
8.2 Indemnification of CBooks......................................................27
8.3 Indemnification of the Shareholders............................................28
8.4 Procedure for Indemnification with Respect to Third-Party Claims...............28
8.5 Procedure For Indemnification with Respect to Non-Third Party Claims...........29
ARTICLE IX NONCOMPETITION AGREEMENT.........................................................29
9.1 Noncompete.....................................................................29
9.2 Nonsolicit.....................................................................30
9.3 No hire........................................................................30
ii
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
9.4 Extension of Restricted Period.................................................30
9.5 Irreparable Harm...............................................................30
9.6 Condition to Acquisition.......................................................30
9.7 Acknowledgment of Consideration................................................31
ARTICLE X TERMINATION AND AMENDMENT.........................................................31
10.1 Termination...................................................................31
10.2 Effect of Termination.........................................................32
ARTICLE XI MISCELLANEOUS PROVISIONS.........................................................32
11.1 Notice........................................................................32
11.2 Entire Agreement..............................................................32
11.3 Binding Effect; Assignment....................................................33
11.4 Captions......................................................................33
11.5 Expenses of Acquisition.......................................................33
11.6 Waiver; Consent...............................................................33
11.7 Third-Party Beneficiaries.....................................................33
11.8 Counterparts..................................................................34
11.9 Gender........................................................................34
11.10 Severability.................................................................34
11.11 Remedies of CBooks...........................................................34
11.12 Governing Law................................................................34
11.13 Arbitration, Attorneys' Fees.................................................34
</TABLE>
EXHIBIT 1.2(a) Form of Escrow Agreement
EXHIBIT 3.4(a) February Financials
EXHIBIT 3.4(b) March Financials
EXHIBIT 3.4(c) April Financials
EXHIBIT 3.21 Peer-to-Peer Agreement
EXHIBIT 5.7 Consulting Agreement
EXHIBIT 6.2(a) Form of Stock Power and Assignment Separate from Certificate
EXHIBIT 6.3(d) Form of Opinion of Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP
iii
<PAGE> 5
STOCK ACQUISITION AGREEMENT
THIS AGREEMENT is dated as of May 28, 1997, by and among CBooks
Express, Inc., a California corporation ("CBOOKS" or the "COMPANY"), Computer
Literacy Bookshops, Inc., a California corporation ("CLBI"), Rachel Unkefer, an
individual residing at 3105 Edgewater Drive, Charlottesville, Virginia 22911
("MS. UNKEFER"), and Daniel A. Doernberg, an individual residing at 3105
Edgewater Drive, Charlottesville, Virginia 22911 ("MR. DOERNBERG"),
(collectively, Ms. Unkefer and Mr. Doernberg are referred to herein as the
"SHAREHOLDERS").
WHEREAS, CLBI is principally engaged in the operation of four
retail bookstores that primarily sell computer-related and other technical books
and written materials; and
WHEREAS, the Shareholders desire to sell to CBooks, and CBooks
desires to purchase from the Shareholders, all of the issued and outstanding
capital stock of CLBI subject to certain terms and conditions set forth herein,
including an agreement by the Shareholders not to compete with CBooks or CLBI
(collectively, the "ACQUISITION").
NOW, THEREFORE, in consideration of the mutual promises,
covenants and representations and warranties set forth herein, the parties
hereby agree as follows:
ARTICLE I
PURCHASE AND SALE OF STOCK
1.1 Purchase and Sale of Stock. Upon the terms and subject to the
conditions of this Agreement, the Shareholders shall sell to CBooks, and CBooks
shall purchase from the Shareholders, all of the CLBI Shares (as defined below)
from the Shareholders at the Time of Closing (as defined below).
1.2 Purchase Price. Subject to the Adjustment Amount (defined below),
CBooks shall pay to the Shareholders an aggregate of Four Million Seven Hundred
Ninety Thousand Dollars ($4,790,000) as consideration for the CLBI Shares (as
defined below) and Two Hundred Ten Thousand Dollars ($210,000) as consideration
for the covenants and agreements set forth in Article IV hereof (together such
payments are herein referred to as the "CASH CONSIDERATION"), which Cash
Consideration shall be distributed at the Closing as follows:
(a) Two Million One Hundred Eighty Seven Thousand Nine Hundred
($2,187,900) shall be paid and delivered to Ms. Unkefer in immediately available
funds by wire transfer of funds to an account designated by her as consideration
for the CLBI Shares owned by Ms. Unkefer and One Hundred Fifty Thousand Dollars
($150,000) shall be paid and delivered to Ms. Unkefer in immediately available
funds by wire transfer of funds to an account designated by her as consideration
for the covenants and agreements made by Ms. Unkefer in Article IV hereof;
<PAGE> 6
(b) Two Million One Hundred Two Thousand One Hundred Dollars
($2,102,100) shall be paid and delivered to Mr. Doernberg in immediately
available funds by wire transfer of funds to an account designated by him as
consideration for the CLBI Shares owned by Mr. Doernberg and Sixty Thousand
Dollars ($60,000) shall be paid and delivered to Mr. Doernberg in immediately
available funds by wire transfer of funds to an account designated by him as
consideration for the covenants and agreements made by Mr. Doernberg in Article
IV hereof; and
(c) Five Hundred Thousand Dollars ($500,000) (the "ESCROW
FUNDS") shall be delivered into escrow pursuant to the terms and conditions of
the Escrow Agreement attached as Exhibit 1.2(a) hereto (the "ESCROW AGREEMENT"),
and shall be held by the Escrow Agent (as defined in the Escrow Agreement) and
disbursed pursuant to the Escrow Agreement and Section 1.3(b) hereof. To the
extent that all or a portion of the Escrow Funds are available for delivery to
the Shareholders in accordance with the Escrow Agreement, first, the Escrow
Agent shall pay such professional fees and expenses of CLBI as are directed to
be paid by the Shareholders and thereafter, fifty-one percent (51%) of such
Escrow Funds shall be delivered to Ms. Unkefer and forty-nine percent (49%) of
such Escrow Funds shall be delivered to Mr. Doernberg.
1.3 Purchase Price Adjustments. Notwithstanding the provisions of
Section 1.2 above, the Cash Consideration shall be reduced or increased in
accordance with this Section 1.3 on a dollar for dollar basis as a result of any
decrease or increase in the Net Working Capital (as defined below) as reflected
on the Closing Date balance sheet ("CLOSING DATE BALANCE SHEET"), as compared to
that reflected on the February Financials (as defined in Section 3.4 hereof).
The parties agree that Net Working Capital as reflected on the February
Financials is Two Million Three Hundred Eighty One Thousand One Hundred Seven
Dollars and Twenty-Three Cents ($2,381,107.23). Such adjustment shall be made as
follows:
(a) If a decrease in the Cash Consideration, such decrease shall
be made by prompt return payment of such amount by the Shareholders to CBooks in
immediately available funds by bank cashier's check or by wire transfer of funds
to an account designated by CBooks; or
(b) If an increase in the Cash Consideration, (i) ten percent
(10%) of such increase shall be promptly delivered into escrow pursuant to the
terms and conditions of the Escrow Agreement, and shall be deemed to be included
in the definition of Escrow Funds (as set forth in Section 1.2 hereof), and as
such shall be held by the Escrow Agent and dispersed pursuant to the Escrow
Agreement and this Section 1.3 and (ii) ninety percent (90%) of such increase
shall be promptly paid by CBooks to the Shareholders in immediately available
funds by cashier's check or by wire transfer of funds to an account designated
by the Shareholders.
(c) "Net Working Capital" shall mean the total current assets of
CLBI minus the total current liabilities of CLBI. Net Working Capital on the
Closing Date (as reflected on the Closing Balance Sheet) shall be determined
based on the same accounting methodology and practices as Net Working Capital
was determined in the February Financials
2
<PAGE> 7
and in a manner consistent with past practices of CLBI. The parties hereto
acknowledge that such Closing Balance Sheet will not be prepared in accordance
with GAAP. No later than June 20, 1997 (or as soon as available thereafter),
CBooks shall deliver to the Shareholders the Closing Balance Sheet. The
preparation of the Closing Balance Sheet shall be overseen and reviewed by Lisa
Chan. If the Shareholders have not objected in writing to the Closing Balance
Sheet within twenty (20) business days of the receipt thereof by the
Shareholders, the Closing Balance Sheet shall be deemed accepted by the
Shareholders in the form in which it was delivered by CBooks. If the
Shareholders object in writing to the Closing Balance Sheet within twenty (20)
business days of the receipt thereof by the Shareholders, the Shareholders and
the CBooks agree to utilize all good faith efforts to attempt to resolve their
dispute during the next twenty (20) business days. If at the end of such forty
(40) business day period, CBooks and the Shareholders are unable to agree on the
Closing Balance Sheet, then the outstanding unresolved issues shall be submitted
to an arbitrator in accordance with Section 11.13 hereof.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF CBOOKS
As of the date hereof and as of the Time of Closing, CBooks represents
and warrants to CLBI and the Shareholders as follows:
2.1 Organization. CBooks hereby represents and warrants to the
Shareholders that it is a corporation duly organized, validly existing and in
good standing under the laws of California.
2.2 Authorization. CBooks has full corporate power and authority to
enter into this Agreement and the Related Agreements (defined below) to which it
is a party, to perform its obligations hereunder and thereunder, and to
consummate the transactions contemplated hereby and thereby, including, without
limitation, the execution and delivery of this Agreement and the Related
Agreements to which it is a party. CBooks has taken all necessary and
appropriate corporate action with respect to the execution and delivery of this
Agreement and the Related Agreements, and this Agreement and each of the Related
Agreements (to the extent to which it is a party) constitute valid and binding
obligations of CBooks enforceable in accordance with their terms, except as
limited by applicable bankruptcy, insolvency, moratorium, reorganization or
other laws affecting creditors' rights and remedies generally.
2.3 Compliance with Other Instruments. The Company's execution and
delivery of this Agreement and the Related Agreements, the consummation of the
transactions contemplated hereby and thereby, and the Company's compliance with
the terms hereof and thereof do not, or as of the Closing will not, conflict
with or result in a breach of any terms of, or constitute a default under, its
Articles of Incorporation or Bylaws, or any material agreement, obligation, or
instrument to which it is a party or by which it is bound.
2.4 Litigation. Other than the claim asserted against CBooks by CLBI
concerning the use of the mark "CBooks.com," there is no claim, litigation,
investigation,
3
<PAGE> 8
inquiry, action, suit, or proceeding, administrative or judicial, pending or, to
its best knowledge, threatened against it, at law or in equity, before any
federal, state, or local court or regulatory agency, or other governmental
authority, that might have a material adverse effect on its ability to perform
any of its obligations under this Agreement or the Related Agreements.
2.5 Consents. No consent, approval, order, or authorization or
registration, qualification, designation, declaration, or filing with any
federal, state, local, or provincial governmental authority or any third party
on the part of CBooks is required in connection with the consummation of the
transactions contemplated hereunder.
2.6 Investment Representation. CBooks is acquiring the CLBI Shares from
the Shareholders for its own account for investment and not with a view to, or
for sale in connection with, any distribution thereof, nor with any present
intention of distributing or selling the same; and, except as contemplated by
this Agreement and the Related Agreements, CBooks has no present or contemplated
agreement, undertaking, arrangement, or contract providing for the disposition
thereof.
2.7 Financial Capability. CBooks has cash on hand or financing
commitments sufficient to satisfy all of its obligations under this Agreement
including, without limitation, the payment of the Cash Consideration.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF CLBI AND THE SHAREHOLDERS
As of the date hereof and as of the Time of Closing, CLBI and the
Shareholders, jointly and severally, represent and warrant to CBooks as follows:
3.1 Organization, Good Standing and Qualification of CLBI. CLBI is a
corporation duly organized, validly existing and in good standing under the laws
of its state of incorporation and has all requisite corporate power and
authority and all necessary governmental authorizations to own, lease and
operate its properties and to conduct its business as it is now being conducted.
CLBI has no subsidiaries. CLBI is duly qualified or licensed to do business and
is in good standing as a foreign corporation in each state or other jurisdiction
in which the nature of its business or operations or ownership of its property
requires such qualification or licensing, except where the failure to be so
qualified or licensed would not, individually or in the aggregate, have a
material adverse effect on the condition (financial or otherwise), business,
properties, prospects, assets or results of operations of CLBI (collectively,
"CLBI'S BUSINESS") (such material adverse effect on CLBI's Business is referred
to herein as a "MATERIAL ADVERSE EFFECT"). Section 3.1 of the disclosure
schedule delivered by CLBI and the Shareholders to CBooks prior to execution of
this Agreement (the "CLBI DISCLOSURE SCHEDULE") sets forth a true, correct and
complete list of each such state and jurisdiction. The minute books of CLBI, as
made available to CBooks, contain complete and accurate records of any and all
corporate action material to CLBI's Business taken by CLBI since its date of
incorporation; provided, however, that the failure of such minute books to
contain a complete and accurate record of any corporate action that is disclosed
in this Agreement or the CLBI Disclosure Schedule shall not be deemed a
4
<PAGE> 9
breach of the foregoing representation. CLBI does not own, directly or
indirectly, any outstanding capital stock or equity interest in any corporation,
partnership, joint venture, business association or other entity and has no
direct or indirect interest in or loans to any corporation, partnership, joint
venture, business association or other entity. CLBI has delivered or made
available to CBooks complete and correct copies of the Articles of Incorporation
and Bylaws of CLBI as amended to the date hereof.
3.2 Capital Structure of CLBI.
(a) The authorized capital stock of CLBI consists of 6,000,000
shares of common stock, no par value per share, 200,000 of which are issued and
are outstanding and held of record by the Shareholders (the "CLBI SHARES"); and
2,000,000 shares of preferred stock, none of which has been issued or are
outstanding. No other shares of capital stock of CLBI have been issued or are
outstanding.
(b) All of CLBI Shares have been validly issued, fully paid and
nonassessable, are not subject to preemptive rights created by statute, CLBI's
Articles of Incorporation or Bylaws or any agreement to which CLBI or the
Shareholders is a party or by which CLBI or the Shareholders may be bound, and
are owned free and clear of all voting trust arrangements, liens, options,
rights of first refusal, encumbrances, and claims whatsoever. There are no
agreements or understandings to which CLBI or the Shareholders are a party or
any other agreements or understandings with respect to the transfer or voting of
shares of CLBI capital stock.
(c) There are no options, warrants, calls, conversion rights,
commitments or agreement of any character to which CLBI or either of the
Shareholders are a party, or by which any of them may be bound, that do or may
obligate CLBI or either of the Shareholders to issue, deliver or sell, or cause
to be issued, delivered or sold, shares of the capital stock or other securities
of CLBI, or that do or may obligate CLBI or either of the Shareholders to grant,
extend or enter into any such option, warrant, call, conversion right,
commitment or agreement.
3.3 Authorization. Each of CLBI, Ms. Unkefer and Mr. Doernberg have full
power and authority to enter into this Agreement and Related Agreements, to
perform their obligations hereunder and thereunder, and to consummate the
transactions contemplated hereby and thereby, including, without limitation, the
execution and delivery of this Agreement and the Related Agreements. CLBI has
taken all necessary and appropriate corporate action with respect to the
execution and delivery of this Agreement, the Closing Documents and the Related
Agreements. This Agreement and the Related Agreements constitute valid and
binding obligations of each of CLBI, Ms. Unkefer and Mr. Doernberg,
respectively, enforceable in accordance with their terms, except as limited by
applicable bankruptcy, insolvency, moratorium, reorganization or other laws
affecting creditors' rights and remedies generally.
3.4 Financial Information. CLBI and the Shareholders have delivered to
CBooks (a) unaudited financial statements (balance sheet, profit and loss
statement and shareholders' equity statement) for CLBI at and for the eight (8)
month period ended
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February 28, 1997, copies of which are attached hereto as Exhibit 3.4(a) (the
balance sheet, profit and loss statement and shareholders' equity statement of
CLBI included in Exhibit 3.4(a) is hereinafter referred to as the "FEBRUARY
FINANCIALS") and (b) unaudited financial statements (balance sheet, profit and
loss statement and shareholders' equity statement) for CLBI at and for the nine
(9) month period ended March 31, 1997, copies of which are attached hereto as
Exhibit 3.4(b) (the balance sheet, profit and loss statement and shareholders'
equity statement of CLBI included in Exhibit 3.4(b) is hereinafter referred to
as the "MARCH FINANCIALS"), and will deliver on or prior to the Closing
unaudited financial statements (balance sheet, profit and loss statement and
shareholders' equity statement) for CLBI at and for the ten (10) month period
ended April 30, 1997, copies of which will be delivered on or before the Time of
Closing and will be attached hereto as Exhibit 3.4(c) (the balance sheet, profit
and loss statement and shareholders' equity statement of CLBI included in
Exhibit 3.4(c) is hereinafter referred to as the "APRIL FINANCIALS"), and (d)
unaudited financial statements (balance sheets, profit and loss statements and
shareholders equity) for CLBI at and for the years ended June 30, 1994, 1995 and
1996, (collectively, the "FINANCIAL STATEMENTS"). The Financial Statements are
complete and were prepared consistent with past practice. The Financial
Statements present fairly, in all material respects, the financial condition and
operating results of the CLBI Business as of the dates, and for the periods,
indicated therein. CLBI and the Shareholders have delivered, or in the case of
the April Financials, will deliver, to CBooks true, correct and complete copies
of the Financial Statements. There are no debts, liabilities or obligations with
respect to CLBI or to which any of its assets are subject, liquidated,
unliquidated, accrued, absolute, contingent, or otherwise, in excess of $5,000
individually, or in excess of $10,000 in the aggregate, except those expressly
set forth on the Financial Statements or disclosed in this Agreement or Section
3.4 of the CLBI Disclosure Schedule.
3.5 Absence of Certain Changes and Events. Except as contemplated herein
and as set forth in Section 3.5 of the CLBI Disclosure Schedule, since February
28, 1997 there has not been:
(a) Any change in the CLBI Business, and no event has occurred
and no action has been taken by CLBI or the Shareholders or, to the knowledge of
CLBI and the Shareholders, any other person, nor is any such event or action
contemplated or to the knowledge of CLBI and the Shareholders after due inquiry
of the officers, directors and management of CLBI, threatened, that might
reasonably be expected to have a Material Adverse Effect, except that no
representation is made as to general economic conditions, competition or matters
affecting CLBI's industry generally.
(b) Any event, including, without limitation, shortage of
materials or supplies, fire, explosion, accident, requisition or taking of
property by any governmental agency, flood, drought, earthquake, or other
natural event, riot, act of God or a public enemy, or damage, destruction, or
other casualty, whether covered by insurance or not, that has had or could
reasonably be expected to have a Material Adverse Effect;
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(c) Any transaction relating to or involving the CLBI Business
(other than the transactions contemplated herein) that was entered into or
carried out by CLBI other than in the ordinary and usual course of business;
(d) Any change made by CLBI in its method of operating the CLBI
Business or its accounting practices relating thereto;
(e) Any mortgage, pledge, lien, security interest,
hypothecation, charge, or other encumbrance imposed or agreed to be imposed on
or with respect to the CLBI Business or its assets other than liens arising with
respect to taxes not yet due and payable, and such minor liens and encumbrances,
if any, that arise in the ordinary course of business and are not material in
nature or amount either individually or in the aggregate, and that do not
detract from the value of the CLBI Business or its assets or impair the
operations conducted thereon or any discharge or satisfaction thereof;
(f) Any sale, lease, or disposition of, or any agreement to
sell, lease, or dispose of any assets, other than sales, leases, or dispositions
in the usual and ordinary course of business and consistent with prior practice;
(g) Any modification, waiver, change, amendment, release,
rescission, accord and satisfaction, or termination of, or with respect to, any
term, condition, or provision of any contract, agreement, license, or other
instrument to which CLBI is a party and relating to or affecting the CLBI
Business or its Assets (as defined in Section 3.13 below), other than any
satisfaction by performance in accordance with the terms thereof in the usual
and ordinary course of business and consistent with prior practice;
(h) Any labor disputes or disturbances having a Material Adverse
Effect, and there has not been the filing of any petition or charge of unfair
labor practices regarding the CLBI Business or CLBI with the National Labor
Relations Board;
(i) Any increase in or modification of the compensation or
benefits payable or to become payable by CLBI to any director or any employee,
consultant or advisor of CLBI or the CLBI Business, including, but not limited
to the payment or commitment to pay a bonus, other than as required by existing
contracts or consistent with current practices;
(j) Any increase in or modification of any bonus, pension,
insurance, or other employee benefit plan, payment, or arrangement made to, for,
or with any of its employees;
(k) Any adverse relationships or conditions with vendors or
customers (except any condition arising only from the internal financial
condition of any such vendor or customer) of which CLBI has knowledge and could
reasonably be expected to have a Material Adverse Effect;
(l) Any waivers of any rights of substantial value by CLBI;
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(m) Any dispositions or abandonment of any of CLBI's trademark,
tradename, patent, copyright, or other intellectual property rights (including,
without limitation, of any of CLBI's proprietary trade secrets or processes) or
any application therefore necessary or incidental to the conduct of the CLBI
Business;
(n) Any purchase or lease of or any agreements to purchase or
lease capital assets by CLBI in excess of $5,000 individually, or in excess of
$10,000 in the aggregate;
(o) Any issuance, redemption, repurchase, or other acquisition
of shares of capital stock of CLBI, or any declaration, setting aside, or
payment of any dividend or other distribution (whether in cash, stock, or
property) with respect to the capital stock of CLBI or any other payments,
transfers, assignments by CLBI of any rights, property or assets to its
shareholders; or
(p) Any other event or condition of any character that has a
Material Adverse Effects, or could reasonably be expected to have a Material
Adverse Effect.
3.6 Receivables. The accounts receivable shown on the February
Financials arose in the ordinary course of business, have been collected or are
collectible in the book amounts thereof. The accounts receivable of CLBI arising
after February 28, 1997 and before the Time of Closing (collectively, the
"ACCOUNTS RECEIVABLE") arose or will arise in the ordinary course of business
and have been collected or are collectible in the book amounts thereof, less
allowances for doubtful accounts equal to $21,535 as of April 30, 1997. None of
such Accounts Receivable are subject to any material claim of offset,
recoupment, setoff, or counter-claim and neither CLBI nor the Shareholders have
any knowledge of any specific facts or circumstances (whether asserted or
unasserted) that would give rise to any such claim. No amount of the Accounts
Receivable are contingent upon the performance by CLBI of any obligation or
contract. Except as set forth in Section 3.6 of the CLBI Disclosure Schedule, no
person has any lien on any of such Accounts Receivable and no agreement for
deduction or discount has been made with respect to such Accounts Receivables.
Section 3.6 of the CLBI Disclosure Schedule sets forth an aging of accounts
receivable of CLBI as of the date set forth thereon in the aggregate (0-30 days,
30-90 days and greater than 90 days).
3.7 Taxes.
(a) All Taxes (as hereinafter defined) due or payable by CLBI, and all interest
and penalties thereon, except for Taxes that are the subject of a good faith
dispute as disclosed in the Financial Statements or Section 3.7 of the CLBI
Disclosure Schedule and other than Taxes that have accrued but are not yet due
and payable and for which adequate reserves have been made, have been paid in
full. Except as disclosed in Section 3.7 of the CLBI Disclosure Schedule, each
of the Financial Statements, the February Financials, the March Financials and
the April Financials accrues all actual and contingent liabilities for current
and deferred Taxes. Except as disclosed in Section 3.7 of the CLBI Disclosure
Schedule, all Tax returns, statements, reports, forms and other documents
(including estimated Tax returns and reports and information returns with
reports) required to be filed in connection therewith have been accurately
prepared and duly and timely filed (and no extension of any filing date
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applicable thereto has been requested or granted), and all deposits, or payments
required by law to be made by CLBI with respect to employees' or other
withholding taxes have been duly made. CLBI is not delinquent in the payment of
any Tax, assessment or governmental charge or deposit and CLBI did not have a
tax deficiency or claim outstanding or assessed against it; nor, to the best
knowledge of CLBI, is there any basis for such deficiency or claim. No tax is
required to be withheld pursuant to Section 1445 of the Internal Revenue Code of
1986, as amended (the "Code") as a result of the acquisition contemplated by
this Agreement, and CLBI is not a person other than a United States person
within the meaning of the Code. No recording or filing fees or sales, use,
transfer or documentary taxes are payable by CBooks in connection with, or as a
result of, the transactions provided for by this Agreement and the Related
Agreements under the laws of the State of California or any political
subdivision thereof. There are no liens for Taxes upon the Assets except liens
for current Taxes not yet due for which adequate reserves have been established.
There is no claim, audit, action, suit, proceeding, or investigation, now
pending (to the best knowledge of CLBI and the Shareholders) threatened against
or with respect to CLBI and no extensions or waivers of statutes of limitations
with respect to Tax matters have been given by or requested from CLBI. CLBI has
not entered into, nor will it enter into, any agreement or consent pursuant to
Section 341(f) of the Code. Except as set forth in Section 3.7 of the CLBI
Disclosure Schedule, CLBI is not a party to or bound by (nor will CLBI become a
party to or bound by) any Tax indemnity, Tax sharing or Tax allocation
agreement. CLBI has not been, nor to its best knowledge will it be, required to
include any material adjustment in taxable income for any period pursuant to
Sections 481, 482, or 263A of the Code or any comparable provision of state or
foreign Tax laws as a result of transactions, events or accounting methods
employed prior to the Time of Closing. There is no contract, agreement, plan or
arrangement, including but not limited to the provisions of this Agreement,
covering any employee or independent contractor or former employee or
independent contractor of CLBI that, individually or collectively, could give
rise to the payment by CLBI of any amount that would not be deductible pursuant
to Section 280G or Section 162 of the Code. None of the Assets (i) is property
that is required to be treated as owned by any other person pursuant to the
so-called "safe harbor lease" provisions of former Section 168(f)(8) of the
Code, (ii) directly or indirectly secures any debt the interest on which is tax
exempt under Section 103(a) of the Code or (iii) is "tax exempt use property"
within the meaning of Section 168(h) of the Code. The transactions contemplated
herein are not subject to the tax withholding provisions of Code Section 3406,
or of Subchapter A of Chapter 3 of the Code or of any other provision of law in
any jurisdiction. CLBI has never been a member of an affiliated group of
corporations, within the meaning of Section 1504 of the Code.
(b) For purposes of this Agreement, "Tax" (and, with correlative
meaning, "Taxes" and "Taxable") means (i) any net income, alternative or add-on
minimum tax, gross income, gross receipts, sales, use, ad valorem, transfer,
franchise, profits, license, withholding, payroll, employment, excise,
severance, stamp, occupation, premium, property, environmental or windfall
profit tax, custom, duty or other tax, governmental fee or other like assessment
or charge of any kind whatsoever, together with any interest or any penalty,
addition to tax or additional amount imposed by any governmental entity (a
"Taxing Authority") responsible for the imposition of any such tax (domestic or
foreign), (ii) any liability for the payment of any amounts of the type
described in (i) as a result of being a member of an
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affiliated, consolidated, combined or unitary group for any Taxable period and
(iii) any liability for the payment of any amounts of the type described in (i)
or (ii) as a result of any express or implied obligation to indemnify any other
person.
3.8 Compliance With Law. CLBI has complied and is in compliance in all
material respects with all judicial or administrative decisions applicable to
the CLBI Business, and all applicable federal, state and local laws, statutes,
licensing requirements, rules and regulations. CLBI has been granted all
licenses, permits, authorizations and approvals ("PERMITS") from federal, state,
local, and foreign government regulatory bodies necessary to carry on the CLBI
Business as currently conducted, all of which are currently valid and in full
force and effect, and all of which are disclosed in Section 3.8 of the CLBI
Disclosure Schedule except where the failure to do so does not have a Material
Adverse Effect. All Permits (with the exception of the Permits identified in
Section 3.8 of the CLBI Disclosure Schedule as nontransferable governmental
permits) shall be effective as of the Closing, and shall be valid and in full
force and effect immediately following the Closing. Except as set forth in
Section 3.8 of the Disclosure Schedule, there is no order issued, investigation,
or proceeding pending or, to the knowledge of CLBI or the Shareholders after due
inquiry of the officers, directors and management of CLBI, threatened, or notice
served with respect to any violation of any law, ordinance, order, writ, decree,
rule, or regulation issued by any federal, state, local, or foreign court or
governmental agency or instrumentality with respect to the CLBI Business.
3.9 Governmental Consents. No consent, approval, order, or authorization
of, or registration, qualification, designation, declaration, or filing with any
federal, state, local, or provincial governmental authority on the part of CLBI
is required in connection with the consummation of the transactions contemplated
hereunder.
3.10 Proprietary Rights.
(a) Any of the Proprietary Rights (as defined in the following
sentence) that require the execution and filing with an appropriate governmental
agency, including, without limitation, the Patent and Trademark Office, have
been so indicated in Section 3.10 of the CLBI Disclosure Schedule. The
"PROPRIETARY RIGHTS" include all corporate names, trade names, trademarks,
service marks, patents, patent applications, copyrights, trade secrets,
information, proprietary rights and processes necessary for the CLBI Business as
now conducted and as proposed to be conducted in substantially the same manner
as conducted immediately prior to the date hereof without any conflict with or
infringement upon the rights of others. Section 3.10 of the CLBI Disclosure
Schedule sets out an accurate and complete list of the Proprietary Rights.
Except as set forth in Section 3.10 of the CLBI Disclosure Schedule, CLBI is the
sole owner of all right, title, and interest in and to all the Proprietary
Rights free and clear of all liens, encumbrances, claims, rights of use and
restrictions whatsoever. Except as set forth in Section 3.10 of the CLBI
Disclosure Schedule, there are no outstanding options, licenses, or agreements
of any kind relating to the Proprietary Rights nor is CLBI a party to any
options, licenses, or agreements of any kind with respect to the logos,
trademark and tradename rights, software, databases, source code, patents,
patent rights, copyrights, trade secrets, processes and
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proprietary licenses, information, proprietary rights and processes of any other
person or entity which relates to the CLBI Business.
(b) Neither the Proprietary Rights nor any other processes,
methods, or operations employed by the CLBI Business, CLBI, now or in the past,
infringes upon any proprietary rights, or intellectual property of any other
person, firm, corporation, or other entity. There is not pending or threatened
any claim or litigation contesting the right of CLBI to engage in or employ any
such processes, methods, operations, or the Proprietary Rights. To the knowledge
of CLBI or the Shareholders, no employee of CLBI is in violation of any term of
any employment contract, proprietary information or inventions agreement, or any
other contract or agreement relating to the relationship of any such employee
with the CLBI Business or, to the knowledge of CLBI and the Shareholders, any
previous employer. To CLBI's and the Shareholders' knowledge, the employees of
CLBI are not obligated under any contract (including licenses, covenants, or
commitments of any nature) or other agreement, or subject to any judgment,
decree or order of any court or administrative agency that would conflict with
their obligation to use their best efforts to promote the interests of the CLBI
Business or that would conflict with the CLBI Business as conducted or as
proposed to be conducted in substantially the same manner as conducted
immediately prior to the date hereof.
3.11 Restrictive Documents or Orders. CLBI is not a party to or bound
under any agreement, contract, order, judgment, injunction or decree, or any
similar restriction not of general application that materially adversely
affects, or reasonably could be expected to materially adversely affect (a) the
continued operation by CBooks of the CLBI Business in substantially the same
manner as conducted immediately prior to the date hereof, (b) any acquisition of
property by CLBI or (c) the consummation of the transactions contemplated by
this Agreement.
3.12 Contracts and Commitments.
(a) Except as set forth in Section 3.12 of the CLBI Disclosure
Schedule, CLBI is not a party or subject to:
(i) Any collective bargaining agreement or other labor
union contract relating to the CLBI Business and applicable to the Employees,
any employment contract or arrangement, written or oral, providing for future
compensation with any officer, consultant, director or employee that is not
terminable by it at-will without penalty or obligation to make payments related
to such termination, other than such agreements as may be imposed or implied by
law;
(ii) Any plans, contracts or arrangements, written or
oral, that collectively require aggregate payments by CLBI in excess of $5,000
for bonuses, pensions, deferred compensation, severance pay or benefits,
retirement payments, profit-sharing, or the like;
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(iii) Any joint marketing, joint development or joint
venture contract or arrangement or any other agreement which has involved or is
expected to involve a sharing of profits with other persons;
(iv) Any existing OEM agreement, distribution agreement,
volume purchase agreement, or other similar agreement pursuant to which CLBI has
granted or received most favored customer provisions or exclusive marketing
rights related to any product, group of products or territory;
(v) Any lease for real or personal property;
(vi) Any agreement, contract, mortgage, indenture,
lease, instrument, license, franchise, permit, concession, arrangement,
commitment or authorization that may be, by its terms, terminated or breached by
reason of the execution of this Agreement, the Related Agreements, or the
consummation of the transactions contemplated hereby or thereby;
(vii) Except for trade indebtedness incurred in the
ordinary course of business, any instrument evidencing or related in any way to
indebtedness in excess of $5,000 incurred in the acquisition of companies or
other entities or indebtedness in excess of $5,000 for borrowed money by way of
direct loan, sale of debt securities, purchase money obligation, conditional
sale, guarantee, indemnification or otherwise;
(viii) Any license agreement, either as licensor or
licensee;
(ix) Any contract containing covenants purporting to
limit CLBI's freedom to compete in any line of business or in any geographic
area or with any third party;
(x) Any agreement, contract or commitment relating to
capital expenditures and involving future obligations in excess of $5,000; or
(xi) Any other agreement, contract or commitment that is
material to CLBI.
(b) Each agreement, contract, mortgage, indenture, plan, lease,
instrument, permit, concession, franchise, arrangement, license and commitment
listed in Section 3.12 of the CLBI Disclosure Schedule is valid and binding on
CLBI and is in full force and effect. CLBI and the Shareholders have delivered
or made available to CBooks true, correct and complete copies of each such
agreement, contract, mortgage, indenture, plan, lease, instrument, permit,
concession, franchise, arrangement, license and commitment. Neither CLBI or the
Shareholders, nor to the knowledge of CLBI or the Shareholders, any other party
thereto, has breached in any material respect any provision of, or is in default
in any material respect under the terms of, any such agreement, contract,
mortgage, indenture, plan, lease, instrument, permit, concession, franchise,
arrangement, license or commitment.
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(c) Section 3.12 of the CLBI Disclosure Schedule sets forth a
list of all agreements and other instruments under which CLBI is indebted for
borrowed money. CLBI and the Shareholders have delivered or made available to
CBooks true, correct and complete copies of each such agreement or other
instrument under or pursuant to which it has outstanding indebtedness for
borrowed money. Except as set forth in Section 3.12 of the CLBI Disclosure
Schedule, CLBI is not in default in any material respect under any of such
agreements or other instruments, nor is CLBI or the Shareholders aware of any
event that, with the passage of time, or notice, or both, would result in an
event of default thereunder. No employee, advisor or consultant of CLBI or the
CLBI Business is indebted to CLBI.
3.13 Title to the Property. CLBI has good and marketable title to all of
the assets necessary or incidental to the conduct of the CLBI Business in the
same manner as the CLBI Business was operated by CLBI prior to the Time of
Closing (the "ASSETS"), free and clear of all mortgages, pledges, liens,
encumbrances, security interests, equities, charges, and restrictions of any
nature whatsoever, except, with respect to tangible personal property, liens
arising from Taxes not yet due and payable, statutory mechanics and
materialman's liens incurred in the ordinary course of business to secure
obligations that are not past due and liens and encumbrances disclosed in
Section 3.13 of the CLBI Disclosure Schedule. The Assets include all assets,
including without limitation, all real property leased or owned by CLBI, all
intellectual property and all other property in which CLBI has any right, title
and interest necessary to operate the CLBI Business in the same manner as the
CLBI Business was operated by CLBI prior to the Time of Closing. Except as set
forth in Section 3.13 of the CLBI Disclosure Schedule, all of the Assets used in
the operation of the CLBI Business are suitable for the purposes for which they
are used, are in good operating condition (normal wear and tear excepted) and in
reasonable repair, free from any known defects, except such minor defects as do
not interfere with the continued use thereof. Section 3.13 of the CLBI
Disclosure Schedule contains a description of all real property owned by or
leased to CLBI together with a description of all buildings, fixtures and
improvements located on such real properties. CLBI does not own or lease any
other real property. CLBI has delivered or made available to CBooks true and
correct copies of all leases of real property to which CLBI is a party either as
lessee or lessor. In addition, Section 3.13 of the CLBI Disclosure Schedule
contains an accurate itemization of all tangible personal property, other than
inventory, owned or leased by CLBI with individual valuations of not less than
Five Hundred Dollars ($500).
3.14 Insurance. CLBI has not been refused any insurance by an insurance
carrier during the past three years nor has any insurance policy been canceled
with respect to CLBI, the CLBI Business or the Assets. Section 3.14 of the CLBI
Disclosure Schedule lists all insurance policies and fidelity bonds covering the
Assets, the CLBI Business, the employees, officers and directors of CLBI,
specifying the type of coverage, the amounts of coverage, the carrier and the
expiration date under each such policy and bond. CLBI and the Shareholders have
delivered or made available to CBooks true, correct and complete copies of all
such policies and bonds. There is no claim by CLBI pending under any of such
policies or bonds with respect to the CLBI Business, the Assets or the
employees, officers and directors. All premiums payable under all such policies
and bonds have been paid, and CLBI is otherwise in full compliance with the
material terms of such policies and bonds. Such policies of insurance and bonds
are of the
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type and in amounts customarily carried by entities conducting business similar
to that of the CLBI Business. Neither CLBI nor the Shareholders knows of any
threatened termination of or premium increase with respect to any of such
policies.
3.15 Litigation. Except as set forth in Section 3.15 of the CLBI
Disclosure Schedule, none of CLBI's officers, directors or management, including
the Shareholders, is engaged in, or has received any threat of, any litigation,
arbitration, investigation, or other proceeding, at law or in equity, before any
federal, state, local or foreign court, or regulatory agency, or other
governmental authority, involving CLBI, the CLBI Business, the Assets or the
Employees (as defined below), or against or affecting the transactions
contemplated by the Agreement and the Related Agreements. Except as set forth in
Section 3.15 of the CLBI Disclosure Schedule, there is no action, suit,
proceeding or investigation pending or, to the knowledge of CLBI and the
Shareholders after due inquiry of the officers, directors and management of
CLBI, threatened against CLBI, the Shareholders or CLBI's officers, directors or
management that questions the validity of this Agreement, the Related
Agreements, or the right of CLBI, to enter into this Agreement, the Related
Agreements, or to consummate the transactions contemplated hereby or thereby, or
that might result in any Material Adverse Effect. Except as set forth in Section
3.15 of the CLBI Disclosure Schedule, there is no action, suit, proceeding, or
investigation by CLBI currently pending or that it currently intends to
initiate. None of CLBI nor CLBI's officers, directors or management is bound by
any judgment, decree, injunction, ruling, or order of any court, governmental,
regulatory or administrative department, commission, agency or instrumentality,
arbitrator, or any other person that has or could reasonably be expected to have
a Material Adverse Effect. Except for documentation relating to the dispute
between CLBI and CBooks, CLBI and the Shareholders have delivered or made
available to CBooks true, correct and complete copies of all material
documentation, pleadings, correspondence, memoranda and notes relating to any
action, suit, proceeding or investigation, at law or at equity, pending or, to
the knowledge of CLBI and the Shareholders after due inquiry of the officers,
directors and management of CLBI, threatened, of which CLBI, the Shareholders or
the officers, directors or management of CLBI is a party.
3.16 No Conflict or Default. Neither the execution and delivery of this
Agreement by CLBI and the Shareholders, nor compliance by each of CLBI and the
Shareholders with the terms and provisions hereof, including without limitation,
the consummation of the transactions contemplated hereby, will violate any
applicable statute, regulation, or ordinance of any governmental authority, or
conflict with or result in the breach of any term, condition, or provision of
the Articles of Incorporation, or the Bylaws of CLBI or of any agreement, deed,
contract, mortgage, indenture, writ, order, decree, legal obligation, or
instrument to which CLBI and the Shareholders are a party or by which they or
any of the Assets are or may be bound, or constitute a default (or an event
which, with the lapse of time or the giving of notice, or both, would constitute
a default) thereunder, where such violation, conflict and/or default could have
a material adverse effect on (a) the continued operation by CBooks of the CLBI
Business after the Time of Closing on substantially the same basis as
theretofore operated by CLBI, (b) the consummation of the transactions
contemplated by this Agreement, or (c) the Assets, or result in the creation or
imposition of any material lien, charge, or encumbrance, or other restriction of
any nature whatsoever with respect to any of such Assets, or
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give to others any interest or rights, including rights of termination,
acceleration, or cancellation in or with respect to the Assets.
3.17 Third Party Consents. Except as set forth in Section 3.17 of the
CLBI Disclosure Schedule, no consent, approval, or authorization of any third
party on the part of CLBI is required in connection with the consummation of the
transactions contemplated hereunder, except where the failure to obtain such
consent, approval, and/or authorization could have a material adverse effect on
(a) the continued operation by CBooks of the CLBI Business after the Time of
Closing on substantially the same basis as theretofore operated, (b) the
consummation of the transactions contemplated by this Agreement or (c) the
Assets.
3.18 Certain Agreements. Neither the execution and delivery of this
Agreement or the Related Agreements (except as explicitly provided therein) nor
the consummation of the transactions contemplated hereby or thereby will (a)
result in any payment (including without limitation, severance, unemployment
compensation, golden parachute, bonus or otherwise) becoming due to any officer,
director or employee of or consultant to CLBI, (b) increase any benefits
otherwise payable under any employee benefit plan or (c) result in the
acceleration of the time of payment or vesting of any such benefits.
3.19 Labor Relations. Except as set forth in Section 3.19 of the
Disclosure Schedule, there are no labor controversies pending or, to the
knowledge of CLBI and the Shareholders after due inquiry of the officers,
directors and management, threatened between, CLBI and any of its past or
current temporary or regular employees (the "EMPLOYEES") or any labor union or
other collective bargaining unit representing any of the Employees.
3.20 Employees and Employee Benefit Plans.
(a) Section 3.20 of the CLBI Disclosure Schedule sets forth a
full and complete list of all directors, officers, Employees, advisors,
consultants, professionals (including attorneys and accountants) and any other
service providers (such service providers who CLBI has paid or expects to pay an
aggregate of at least $5,000) of CLBI and the CLBI Business (collectively,
"SERVICE PROVIDERS") as of May 15, 1997, and their respective job titles, and
their total compensation (including, without limitation, the total amount of
base salary, whether fixed or commission or a combination thereof); provided,
the total compensation paid to professionals shall not be required. None of the
Service Providers is subject to any contracts, written or unwritten, that
specify a particular employment or service term, or limit CLBI's right to
terminate the employment or service relationship of such Service Provider with
CLBI. CLBI does not have any contractual obligation (i) to provide any
particular form or period of notice prior to termination, or (ii) to pay any of
such Service Providers any severance benefits in connection with their
termination of employment or service. In addition, no severance pay will become
due to any Service Providers in connection with the transactions contemplated by
this Agreement, as a result of any CLBI agreement, plan, or program. Following
the consummation of the transactions contemplated by this Agreement, neither
CBooks nor CLBI will have any obligations towards any Service Provider, nor any
former Service Provider. To the knowledge of CLBI and the Shareholders, none of
the Service Providers is or will be in violation of any
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judgment, decree, or order, or any term of any employment contract, or other
contract or agreement relating to the relationship of any such Service Provider
with CLBI, CBooks or any other party because of the nature of the CLBI Business
conducted by CLBI or the use by the Service Provider of such Service Provider's
best efforts with respect to such business. Neither CLBI nor the Shareholders is
aware that any Employee, or that any group of Employees, intends to terminate
their employment with it, nor does it have a present intention to terminate the
employment of any of the foregoing.
(b) With respect to the CLBI Business, CLBI has not failed to
comply in any material respect with Title VII of the Civil Rights Act of 1964,
as amended, the Fair Labor Standards Act, as amended, the Occupational Safety
and Health Act of 1970, as amended, the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), the Age Discrimination in Employment Act of 1967,
as amended, the Older Workers Benefit Protection Act, as amended, the Safe
Drinking Water and Toxic Enforcement Act of 1986, as amended, all applicable
federal, state, and local laws, rules, and regulations relating to employment,
and all applicable laws, rules, and regulations governing payment of minimum
wages and overtime rates, and the withholding and payment of or from
compensation of employees, where the failure to so comply could reasonably be
expected to have a Material Adverse Effect.
(c) Section 3.20 of the CLBI Disclosure Schedule sets forth a
full and complete list of CLBI's pension, profit sharing, savings, retirement,
or other deferred compensation plan, or any bonus (whether payable in cash or
stock) or incentive program, or any group health plan (whether insured or
self-funded), or cafeteria plan or severance plan, or any disability, accident
or group life insurance plan, or any stock option or stock purchase plan, or
other employee welfare benefit plan or employee pension benefit plan (the
"EMPLOYEE BENEFIT PLANS"). CLBI is not a party to, nor has made any contribution
to or otherwise incurred any obligation under, any "multiemployer plan" as
defined in Section 3(37) of ERISA. If any Employee Benefit Plan exists, CLBI has
furnished to CBooks or their counsel complete and accurate copies of such plans
and related plan documents, including but not limited to the most recent version
of trust documents, insurance policies or contracts, employee booklets, summary
plan descriptions, Form 5500s, IRS determination letters and other authorizing
documents. CLBI has prepared and timely filed all requisite governmental
reports, including but not limited to Form 5500 reports. In addition, CLBI has
prepared and timely filed any other IRS-required filings and has properly and
timely posted, or distributed all notices and reports to employees required to
be filed, posted, or distributed with respect to each of such plans (except as
would not have a Material Adverse Effect). Each Employee Benefit Plan which is
intended to be qualified under Section 401(a) of the Code has received a
favorable determination from the IRS covering the provisions of the Tax Reform
Act of 1986 stating that such Employee Benefit Plan is so qualified and nothing
has occurred since the date of such letter that could reasonably be expected to
affect the qualified status of such plan (except as would not have a Material
Adverse Effect). Each Employee Benefit Plan, if any, has at all times been
operated and administered in all material respects in accordance with its terms
and all applicable laws currently in effect, including ERISA and the Code, and
including but not limited to, amendments to Section 401(a) of the Code enacted
by the Tax Reform Act of 1986, the Omnibus Budget Reconciliation Act of 1986,
the Omnibus Budget Reconciliation Act of 1987, the Technical and Miscellaneous
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Revenue Act of 1988 and the Omnibus Budget Reconciliation Act of 1989 (except as
would not have a Material Adverse Effect).
(d) To CLBI's and the Shareholders' best knowledge, CLBI has not
violated any of the health care continuation coverage requirements of the
Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") applicable to
its employees prior to the Time of Closing.
(e) Neither CLBI nor, to the Shareholders knowledge after due
inquiry, any trustee or administrator of any employee welfare plan within the
meaning of Section 3(1) of ERISA or any employee pension benefit plan within the
meaning of Section 3(2) of ERISA ("ERISA PLANS") covering any Employee nor any
party in interest (as defined in Section 3(14) of ERISA) or disqualified person
(as defined in Section 4975(e)(2) of the Code) with respect to any ERISA Plan
has engaged in any transaction that would subject CLBI, such plan, or any
trustee or administrator thereof, or any party dealing with any ERISA Plan or
any such trust to either a civil penalty assessed pursuant to Section 409 or
502(i) of ERISA or a tax imposed pursuant to Section 4975, 4976 or 4979 of the
Code (except as would not have a Material Adverse Effect).
(f) There are no material pending claims by or on behalf of any
ERISA Plan by any Employee or beneficiary covered under any such plan or
otherwise involving any such plan (other than routine claims for benefits).
(g) CLBI has no "defined benefit plans" as defined in Section
3(35) of ERISA.
3.21 Interested Party Relationships. Except as set forth in Section 3.21
of the CLBI Disclosure Schedule, neither CLBI, nor any officer or director of
CLBI (nor any family member of such officer or director of CLBI, nor any
corporation, partnership, or other entity which, directly or indirectly, alone
or together with others, controls, is controlled by, or is in common control
with CLBI, any officer director of CLBI, or any such family member), has any
financial interest, direct or indirect, in any supplier or customer of or to the
CLBI Business, or other party to any contract that is material to the CLBI
Business. CLBI and the Shareholders have delivered to CBooks true, correct and
complete copies of any and all agreements among CLBI, the officers, directors
and management of CLBI, including the agreement between CLBI and Peer-to-Peer
Communications, Inc., a California corporation ("PEER-TO-PEER"), a copy of which
is attached hereto as Exhibit 3.21.
3.22 Environmental and Safety Matters. To CLBI's and the Shareholder's
knowledge without independent investigation or inquiry, CLBI is not in violation
of in any material respect of any applicable statute, law, or regulation
relating to the environment or occupational health and safety, and to CLBI's and
the Shareholder's knowledge, no expenditures are or will be required in order to
comply with any such existing statute, law, or regulation.
3.23 Certain Payments. Neither CLBI nor any person directly or
indirectly on behalf of CLBI has made or received any payment that was not legal
to make or receive.
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3.24 Product Warranties. CLBI does not have any warranty policies or
outstanding warranties or guarantees relating to any of CLBI's products or
services.
3.25 Customers. CLBI has compiled a customer mailing list (consisting of
individuals who received the February 1997 mailing by CLBI) (the "CUSTOMER
LIST") and a corporate account list (consisting of companies that had made
purchases from CLBI on account during the twelve month period ended March 31,
1997) (the "CORPORATE ACCOUNT LIST"). Neither CLBI nor the Shareholders is aware
of any event, happening, or fact that would lead them to believe that any of
said customers and corporate accounts will not continue substantially the same
level of purchases after the Closing. The Customer List consists of no less than
Ninety Thousand (90,000) separate names and addresses, and the Corporate Account
List consists of the names and addresses of not less than Two Hundred Fifty
(250) separate business entities or separate buying divisions of related
entities. True, correct and complete copies of the Customer List and Corporate
Account List will be made available to CBooks at or before the Closing in
accordance with Section 6.2 hereof.
3.26 Suppliers. Neither CLBI nor the Shareholders is aware of any event,
happening, or fact that would lead them to believe that any suppliers or vendors
will not continue to supply substantially the same level and type of products
purchased by CLBI under industry standard terms and conditions.
3.27 Books and Records. The books and records of CLBI to which CBooks
has been given access are the true books and records of CLBI and truly and
accurately reflect the underlying facts and transactions in all material
respects. No actions by the Shareholders or the Board of Directors of CLBI, or
any committee thereof, have been taken that are not therein reflected. CLBI and
the Shareholders have delivered or made available to CBooks true, correct and
complete copies of the books and records of CLBI; provided, however, that the
failure of such minute books to contain a complete and accurate record of any
corporate action that is disclosed in this Agreement or the CLBI Disclosure
Schedule shall not be deemed a breach of the foregoing representation.
3.28 Bank Account. Section 3.28 of the CLBI Disclosure Schedule contains
an accurate and complete list of bank accounts and/or safe deposit boxes
maintained by CLBI indicating the name and branch of the bank, the account
number, the type of account and the names of all persons authorized to draw
thereon or who have access thereto.
3.29 Complete Disclosure. No representation or warranty made by CLBI or
the Shareholders in this Agreement, the Related Agreements, the CLBI Disclosure
Schedule, nor any statement, certificate, schedule or exhibit delivered to
CBooks in accordance with Sections 6.2 and 7.1 hereof, contains or will contain
any untrue statement of a material fact, or omits or will omit to state a
material fact necessary to make the statements or facts contained herein or
therein not misleading in light of the circumstances under which they were
furnished. To the Shareholders' knowledge, after due inquiry, there is no event,
fact or condition that has resulted in, or could reasonably be expected to
result in, a Material Adverse Effect that has not been set forth in this
Agreement or in the CLBI Disclosure Schedule.
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3.30 No Other Agreements. Except as provided in this Agreement, neither
CLBI nor the Shareholders have any legal obligation, absolute or contingent, to
any person or firm to sell any of its assets other than in the ordinary course
of business or to effect any merger, consolidation or reorganization of CLBI or
to enter into any agreement with respect thereto.
ARTICLE IV
COVENANTS OF CLBI AND THE SHAREHOLDERS
4.1 Maintenance of Business. During the period from the date of this Agreement
and continuing until the earlier of the termination of this Agreement or the
Time of Closing, and except as otherwise consented to in writing by CBooks, CLBI
shall conduct the CLBI Business in the ordinary and usual course consistent with
past practice and shall use reasonable efforts to maintain and preserve intact
its business organizations, keep available the services of its officers and
employees and maintain relations with licensors, licensees, suppliers,
contractors, distributors, customers and others having business relationships
with them consistent with past practices. CLBI shall promptly notify CBooks of
any event or occurrence not in the ordinary course of business and will not
enter into or amend any agreement or take any action that reasonably could be
expected to have a Material Adverse Effect.
4.2 Restricted Activities and Transactions. Except as expressly provided
in this Agreement, or as otherwise consented to in writing by CBooks, prior to
the Time of Closing, neither CLBI nor the Shareholders shall:
(a) Propose, adopt or permit an amendment of CLBI's Articles of
Incorporation or Bylaws;
(b) Issue, sell, encumber or deliver, or agree to issue, sell,
encumber or deliver, any shares of any class of capital stock of CLBI or any
securities convertible into any such shares or convertible into securities in
turn so convertible, or any options, warrants, or other rights calling for the
issuance, sale or delivery of any such shares or convertible securities; or
authorize or propose any change in its equity capitalization;
(c) Split, combine or reclassify any of its capital stock or
issue or authorize or propose the issuance or authorization of any other
securities in respect of, in lieu of or in substitution for shares of its
capital stock or repurchase, redeem or otherwise acquire any shares of its
capital stock;
(d) Declare or pay any dividend on its capital stock in cash,
stock or property, and will not redeem, repurchase or otherwise acquire any
shares, or rights to acquire shares, of its capital stock;
(e) Mortgage or pledge any of its assets, tangible or
intangible;
(f) (i) borrow, or agree to borrow, any funds or voluntarily
incur, assume or become subject to, whether directly or by way of guarantee or
otherwise, any obligation or liability (absolute or contingent), (ii) cancel or
agree to cancel any debts or claims,
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(iii) lease, sell or transfer, agree to lease, sell or transfer, or grant or
agree to grant any preferential rights to lease or acquire, any of its assets,
property or rights (except for (A) dispositions of obsolete or worthless assets,
(B) sales of immaterial assets not in excess of $5,000 in the aggregate, (C)
sales in the ordinary course of business and (D) leases of equipment in the
ordinary course of business pursuant to previous commitments as set forth in the
CLBI Disclosure Schedule), or (iv) make or permit any amendments or termination
of any contracts, agreements, licenses or other rights to which it is a party
(except for termination resulting solely from expiration of nonrenewable terms
of duration);
(g) Grant any increase in, or otherwise amend the compensation
to any Service Provider (except as required by existing contracts or in the
ordinary course of business consistent with past practice which increases have
been identified to by CBooks in writing and have been listed in the CLBI
Disclosure Schedule), or amend in any respect the terms of any Plan or adopt any
new Plan or similar arrangements or agreements (except in each case as
specifically provided in this Agreement or as required by law), or enter into or
amend any employment, severance or similar arrangement;
(h) Hire any Service Provider except that CLBI may hire an
Employee to fill a vacancy resulting from the departure of a previous Employee
provided the terms of such new hire are the same as those applicable to the
departing employee, or terminate any Service Provider except for cause;
(i) Acquire control or ownership of any other corporation,
association, joint venture, partnership, business trust or other business
entity, or acquire control or ownership of all or a substantial portion of the
assets of any of the foregoing, or incorporate or form, or cause to be
incorporated or formed, any corporation, association, joint venture,
partnership, business trust or other business entity, or merge, consolidate or
otherwise combine with any other corporation (except as provided for in this
Agreement), or otherwise acquire or agree to acquire any assets that are
material, individually or in the aggregate, to the CLBI Business; or enter into
any agreement providing for any of the foregoing;
(j) Pay, discharge or satisfy any claims, liabilities or
obligations (whether absolute, accrued, contingent or otherwise), other than the
payment, discharge or satisfaction of liabilities in the ordinary course of
business consistent with past practice;
(k) Except in the ordinary course of business, negotiate, enter
into or agree to enter into any transaction;
(l) Transfer or license to any person or entity, or otherwise
extend, amend or modify, any rights to the Proprietary Rights;
(m) Enter into or amend any agreements pursuant to which any
other party is granted most favored customer status or exclusive marketing,
distribution or other similar rights with respect to any products of CLBI;
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(n) Violate, amend or otherwise modify the terms of any of the
contracts set forth on the CLBI Disclosure Schedule;
(o) Commence a lawsuit other than for the routine collection of
bills, or settle a lawsuit;
(p) Take any action that would result in any of the
representations and warranties of CLBI set forth in this Agreement becoming
untrue; or
(q) Authorize or propose any of the foregoing, or enter into any
contract, agreement, commitment or arrangement to do any of the foregoing.
4.3 Tax Forms. CLBI shall prepare and timely file all returns and
amendments thereto required to be filed by it on or before the Closing Date.
CBooks shall have a reasonable opportunity to review all returns and amendments
thereto and to approve such returns (which approval shall not be unreasonably
withheld). CLBI shall pay and discharge all Taxes, assessments and governmental
charges upon or against it or any of its properties or assets, and all
liabilities relating to the period before the Closing and due prior to the
Closing, before the same shall become delinquent and before penalties accrue
thereon, except to the extent and as long as: (a) the same are being contested
in good faith and by appropriate proceedings pursued diligently and in such a
manner as not to a Material Adverse Effect; and (b) CLBI shall have set aside on
its books adequate reserves for such Taxes.
4.4 Negotiation With Others. From and after the date of this Agreement
until the earlier of the Time of Closing or the termination of this Agreement in
accordance with its terms, CLBI shall not: (a) directly or indirectly, solicit,
initiate discussions or engage in negotiations with any person (whether such
negotiations are initiated by CLBI or otherwise) or take any other action
intended or designed to facilitate the efforts of any person, other than CBooks,
relating to the possible acquisition of all or a material portion of CLBI
(whether by way of merger, purchase of capital stock, purchase of assets or
otherwise); or (b) enter into an agreement with any person, other than CBooks,
providing for any of the above.
4.5 Consents, Approvals and Filings. CLBI and the Shareholders will use
their respective best efforts to comply as promptly as practicable with all
applicable governmental requirements and to obtain on or before the Closing all
necessary approvals, authorizations, consents, waivers, licenses, clearances or
orders of Governmental Entities or of other persons referred to herein or in the
CLBI Disclosure Schedule. CLBI and the Shareholders shall each also use their
respective best efforts to obtain all necessary consents, waivers and approvals
under its contracts in connection with the transaction contemplated by this
Agreement.
4.6 Access to Records and Properties. CBooks may, prior to the Time of
Closing, through the Shareholders, Lisa Chan, Chris MacIntosh, Cherrie Chiu,
Georgia Ditzler and Monica Zimmerman, and CLBI's agents and representatives,
continue to conduct or cause to be conducted a review of the CLBI Business and
the financial condition, properties, assets, books and records of CLBI solely
for the purpose of facilitating the transition of the CLBI Business to CBooks.
Upon reasonable notice, CLBI and the Shareholders agree to provide CBooks
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reasonable access to all its properties, books, contracts, commitments, and
computer systems (subject to the restrictions set forth below) and all other
information concerning its business, properties and personnel as CBooks may
reasonably request, and Lisa Chan, Cherrie Chiu, Chris MacIntosh Georgia Ditzler
and Monica Zimmerman, all for the purpose of facilitating the integration of the
CLBI Business with and into CBooks. The only computer access CLBI will provide
is a limited access account on the World Wide Web development computer, to be
accessed on-site at CLBI's Zanker Road location, which will be sufficient for
CLBI to create one or more HTML pages. No copies of any pages so created may be
made onto removable media. CLBI will be given copies of a few current CLBI
HTML-code pages which they can modify for use in advertising and/or linking to
their current site assuming the anticipated transaction is concluded; these
pages, or pages derived from them, may at no time be connected to the World Wide
Web until after the Closing.
ARTICLE V
MUTUAL COVENANTS
5.1 Confidentiality. CLBI, the Shareholders and CBooks each agree to continue to
comply with the terms of the Mutual Confidentiality Agreement dated as of April
28, 1997 after the Time of Closing. All information obtained by CBooks in the
course of its due diligence review of CLBI shall be subject to the terms of such
Mutual Confidentiality Agreement.
5.2 Public Announcements. Except as provided for herein, CBooks, CLBI
and the Shareholders shall not from and after the date hereof make, issue or
release any public announcement, press release, statement or acknowledgment of
the existence of, or reveal publicly the terms, (including without limitation,
the amount of the Cash Consideration) conditions and status of, the transactions
provided for herein (including any written communication to employees, customers
or the trade) without the prior written consent of the other parties as to the
content and time of release of and the media in which such statement or
announcement is to be made; provided, however, that in the case of
announcements, statements, acknowledgments or revelations that any party is in
the opinion of its counsel required by law to make, issue or release, the
making, issuing or releasing of any such announcement, statement, acknowledgment
or revelation by the party so required to do so by law shall not constitute a
breach of this Agreement if such party shall have given, to the extent
reasonably possible, not less than one calendar day prior notice to the other
party, and shall have attempted, to the extent reasonably possible, to clear
such announcement, statement, acknowledgment or revelation with the other party.
Each party hereto agrees that it will not unreasonably withhold any such consent
or clearance. CLBI and the Shareholders acknowledge that CBooks intends to issue
press release at or shortly after the Time of Closing and CLBI and the
Shareholders agree that they will promptly review such release and consent to
its release within a reasonable time period provided that content is reasonable.
Notwithstanding the foregoing, the limitations, restrictions and covenants of
this Section 5.2 shall apply following the Closing solely to public
announcements, press releases, statements or acknowledgments concerning the
material economic terms and provisions of this Agreement.
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5.3 Brokers and Finders. The Shareholders agree, jointly and severally,
to indemnify and to hold harmless CBooks and CLBI from any liability for any
commission or compensation in the nature of a broker's or finders' fee (and the
costs and expenses of defending against such liability or asserted liability)
for which the Shareholders or CLBI, or any of its officers, partners, employees
or representatives is responsible. CBooks agrees to indemnify and to hold
harmless the Shareholders from any liability for any commission or compensation
in the nature of a broker's or finders' fee (and the costs and expenses of
defending against such liability or asserted liability) for which CBooks or any
of its officers, partners, employees, or representatives is responsible.
5.4 Notice of Breach. Each party shall promptly give written notice to
the other party upon becoming aware of the occurrence or, to its knowledge,
impending or threatened occurrence, of any event which would cause any of its
representations or warranties to be untrue at the Time of Closing or cause a
breach of any covenant contained or referenced in this Agreement and will use
all reasonable commercial efforts to prevent or promptly remedy the same. The
party receiving such notification shall have the right to terminate this
Agreement in accordance with Section 10.1(e) hereof. In the event such party
elects not to so terminate this Agreement, such notification shall require a
mutually satisfactory amendment hereto.
5.5 Agreements to Cooperate. Each party hereto will take all reasonable
actions necessary to comply promptly with all legal requirements that may be
imposed on it with respect to the transactions contemplated in this Agreement
and the Related Agreements (including obtaining any and all necessary third
party and governmental consents) and shall take all reasonable actions necessary
to cooperate promptly with and furnish information to the other party in
connection with any such requirements imposed upon the party in connection with
the transactions contemplated in this Agreement and the Related Agreements.
5.6 Additional Agreements. In case at any time after the Time of Closing
any further action is reasonably necessary to carry out the purposes, terms and
provisions of this Agreement or to vest CBooks with full title to all
properties, assets, rights, approvals, immunities and franchises of CLBI, the
proper officers and directors of each party to this Agreement shall take all
such necessary action.
5.7 Consulting Arrangements. Ms. Unkefer agrees to provide consulting
services to CBooks commencing as of the Closing in accordance with the terms set
forth on Exhibit 5.7.
ARTICLE VI
CLOSING
6.1 Closing. The transactions contemplated by this Agreement shall be completed
on the first business day after the day on which the last of the conditions
contained in Article VII hereof is fulfilled or waived (the "TIME OF CLOSING");
provided, that in no event shall the Closing occur later than May 30, 1997
unless otherwise mutually agreed to by the parties ("TERMINATION DATE"). The
Closing shall take place at the offices of Gunderson Dettmer Stough Villeneuve
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Franklin & Hachigian, LLP, 155 Constitution Drive, Menlo Park, California, or at
such other place or date as may be agreed upon from time to time in writing by
the parties. The "CLOSING" shall mean the deliveries to be made by CBooks, and
CLBI at the Time of Closing in accordance with this Agreement.
6.2 Deliveries by the Shareholders and CLBI. At the Closing, CLBI and
the Shareholders shall deliver to CBooks, all duly and properly executed, the
following:
(a) Valid stock certificates evidencing all of the CLBI Shares
(the "CERTIFICATES"), duly and validly endorsed for transfer to CBooks, or
accompanied by a Stock Power and Assignment Separate from Certificate, the form
of which is attached hereto as Exhibit 6.2(a), duly executed in such form as is
acceptable for transfer on the books of CLBI.
(b) An Officer's Certificate executed by the President of CLBI
certifying that the conditions specified in subsections (a)-(f) of Section 7.1
have been satisfied.
(c) Opinions of Epstein Becker & Green P.C. and Rosenblum Parish
& Issacs, dated the date of the Closing, in form and substance mutually agreed
upon by Epstein Becker & Green P.C. and Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP.
(d) A Certificate of the Secretary of CLBI attesting to the
incumbency of CLBI's officers, the authenticity of resolutions authorizing the
transactions contemplated by this Agreement, and the authenticity and continuing
validity of the Articles of Incorporation and Bylaws of CLBI.
(e) Executed copies of the Related Agreements to the extent to
which CLBI and the Shareholders are a party.
(f) A Certificate executed by each of the Shareholders certifying
that the conditions specified in subsections (a) - (f) of Section 7.1 have been
satisfied.
(g) True, correct and complete copies of the Customer List and
the Corporate Account List.
(h) Such other documents as are customary in transactions of this
type.
6.3 Deliveries by CBooks. At the Closing, CBooks shall deliver, or cause
to be delivered, to CLBI, the Shareholders, and the Escrow Agent as applicable,
all duly and properly executed, the following:
(a) The consideration as set forth in Article I.
(b) An Officer's Certificate executed by the President of CBooks certifying that
the conditions specified in subsections (a)-(f) of Section 7.2 have been
satisfied.
(c) A Certificate of the Secretary of CBooks attesting to the
incumbency of CBooks' officers, the authenticity of resolutions authorizing the
transactions
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contemplated by this Agreement, and the authenticity and continuing validity of
the Articles of Incorporation and Bylaws of CBooks.
(d) An opinion of Gunderson Dettmer, dated the date of the
Closing, in substantially the form attached hereto as Exhibit 6.3(d).
(e) Executed copies of the Related Agreements.
(f) Such other documents as are customary in transactions of this
type.
6.4 Related Agreements. For the purposes of this Agreement, the term
"RELATED Agreements" shall mean the Escrow Agreement.
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS
7.1 Conditions to Obligations of CBooks. Each and every obligation of CBooks to
be performed at the Closing shall be subject to the satisfaction as of or before
the Time of Closing of the following conditions (unless waived in writing by
CBooks):
(a) Representations and Warranties. The representations and
warranties of CLBI and the Shareholders set forth in Article III of this
Agreement shall have been true and correct in all material respects when made
and shall be true and correct in all material respects at and as of the Time of
Closing, as if such representations and warranties were made as of such date and
time and reflecting any mutually agreed amendments to the Disclosure Schedule,
reflected pursuant to Section 5.4 hereof.
(b) Consents. CLBI and the Shareholders shall have obtained and
delivered to CBooks all consents set forth on the CLBI Disclosure Schedule.
(c) Performance of Agreement. All covenants, conditions, and
other obligations under this Agreement that are to be performed or complied with
by CLBI and the Shareholders shall have been fully performed and complied with
at or prior to the Time of Closing.
(d) No Material Adverse Change. There shall have been no Material
Adverse Effect since February 28, 1997.
(e) Absence of Governmental or Other Objection. There shall be no
pending or threatened lawsuit challenging the transaction by any body or agency
of the federal, state, or local government or by any third party, and the
consummation of the transaction shall not have been enjoined by a court of
competent jurisdiction as of the Time of Closing.
(f) Approval of Documentation. The form and substance of all
certificates, instruments, opinions, and other documents delivered or to be
delivered to CBooks under this Agreement shall be satisfactory to CBooks and its
counsel in all reasonable respects.
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<PAGE> 30
(g) Shareholder Approval. The Shareholders of CLBI shall have
unanimously approved this Agreement, the applicable Related Agreements, and the
transactions contemplated thereby, all in accordance with applicable laws and
regulatory requirements.
(h) Foreign Status Representation Letter. CLBI shall furnish
CBooks with an affidavit stating under penalty of perjury that, CLBI is not a
United States real property interest within the meaning of Sections 897 of the
Code and will provide in such affidavit its taxpayer identification number and
shall have executed a representation letter substantially in the form provided
before Closing to CLBI and its counsel and make such filings with such tax
authorities as are reasonably requested by CBooks in connection with such
representations.
(i) Tax Forms. The Shareholders shall have delivered to CBooks
properly completed and executed Internal Revenue Service Forms W-8 or W-9, as
applicable.
(j) Resignation of Officers and Directors. The officers and
directors of CLBI shall have resigned their respective officer positions and
directorships effective as of the Closing.
(k) Regulatory Compliance and Approval. All permits, consents,
approvals and waivers from governmental authorities necessary to the
consummation of this Agreement and the transactions contemplated hereby and for
the operations of the CLBI Business of CLBI after the consummation of such
transactions and the ownership of the Proprietary Information after the
consummation of such transactions shall have been obtained.
7.2 Conditions to Obligations of CLBI and the Shareholders. Each and
every obligation of the Shareholders and CLBI to be performed at the Time of
Closing shall be subject to the satisfaction as of or before such time of the
following conditions (unless waived in writing by CLBI):
(a) Representations and Warranties. CBooks's representations and
warranties set forth in Article II of this Agreement shall have been in all
material respects true and correct when made and shall be true and correct at
and as of the Time of Closing as if such representations and warranties were
made as of such time and date.
(b) Performance of Agreement. All conditions and other
obligations under this Agreement that are to be performed or complied with by
CBooks shall have been fully performed and complied with at or prior to the Time
of Closing.
(c) Absence of Governmental or Other Objection. There shall be no
pending or threatened lawsuit challenging the transaction by any body or agency
of the federal, state, or local government or by any third party, and the
consummation of the transaction shall not have been enjoined by a court of
competent jurisdiction as of the Time of Closing.
(d) Approval of Documentation. The form and substance of all
certificates, instruments, opinions, and other documents delivered or to be
delivered to CLBI and
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<PAGE> 31
the Shareholders under this Agreement shall be satisfactory to CLBI and its
counsel in all reasonable respects.
ARTICLE VIII
INDEMNIFICATION
8.1 Survival of Representations, Warranties, and Agreements.
(a) Subject to this Article VIII, all representations,
warranties, covenants and agreements of each party in this Agreement shall
survive the execution, delivery, and performance of this Agreement and shall in
no way be affected by any investigation of the subject matter thereof made by or
on behalf of the parties to this Agreement. All representations and warranties
of each party set forth in this Agreement shall be deemed to have been made
again by such party at and as of the Time of Closing. The obligations of
indemnity provided in Sections 8.2 and 8.3 below shall terminate six (6) months
after the Closing; provided, however, that the representations and warranties
made by CLBI and the Shareholders with respect to discrepancies made on tax
returns filed by CLBI and the Shareholders concerning CLBI's inventory
accounting methodology and the representations, warranties, covenants and
agreements set forth in Section 5.3 and Article IX and the obligations of
indemnity therefor (the "CARVE OUTS") shall survive until the expiration of the
period specified therein, if applicable, or the applicable statutes of
limitation; and provided further that the foregoing shall in no way limit any
right CBooks may have in equity or under law for Damages (as defined below)
resulting from the gross negligence or willful misconduct of CLBI or the
Shareholders.
(b) As used in this Article, any reference to a representation,
warranty, or covenant contained in any Section of this Agreement shall include
the CLBI Disclosure Schedule relating to such Section.
8.2 Indemnification of CBooks. The Shareholders hereby agree to
indemnify and hold harmless CBooks, and its respective officers, directors and
affiliates against any and all losses, liabilities, damages, demands, claims,
suits, actions, judgments or causes of action, assessments, costs and expenses,
including, without limitation, interest, penalties, attorneys' fees, any and all
expenses incurred in investigating, preparing, or defending against any
litigation, commenced or threatened, or any claim whatsoever, and any and all
amounts paid in settlement of any claim or litigation (collectively, "DAMAGES"),
asserted against, resulting from, imposed upon, or incurred or suffered by
CBooks as a result of or arising from any inaccuracy in or breach or
nonfulfillment of any of the representations, warranties, covenants, or
agreements made by CLBI or the Shareholders in this Agreement, the Related
Agreements, Disclosure Schedule or any statement, schedule, exhibit, or
certificate delivered to CBooks in accordance with Sections 6.2 and 7.1 hereof,
(all of which shall be referred to as "INDEMNIFIABLE CLAIMS"). CLBI's and the
Shareholder's indemnification obligations under this Section 8.2 shall not arise
if the aggregate amount of indemnity obligations otherwise payable does not
exceed Twenty-Five Thousand Dollars ($25,000) and shall not in the aggregate
exceed Five Hundred Thousand Dollars ($500,000) and repayment of indemnification
obligations shall be governed by the terms of the Escrow Agreement; provided,
however, such limitations shall neither apply nor limit any
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<PAGE> 32
indemnification obligations relating to Damages resulting from the gross
negligence, willful misconduct or fraud of CLBI or the Shareholders; and
provided further that such limitations shall neither apply nor limit any
indemnification obligations for Indemnifiable Claims involving the Carve Outs.
8.3 Indemnification of the Shareholders. CBooks hereby agrees to
indemnify and hold harmless the Shareholders against any and all losses,
liabilities, damages, demands, claims, suits, actions, judgments or causes of
action, assessments, costs and expenses, including, without limitation,
interest, penalties, attorneys' fees, any and all expenses incurred in
investigating, preparing, or defending against any litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in settlement
of any claim or litigation (collectively, "Damages"), asserted against,
resulting from, imposed upon, or incurred or suffered by the Shareholders
directly or indirectly, as a result of or arising from any inaccuracy in or
breach or nonfulfillment of any of the representations, warranties, covenants,
or agreements made by CBooks in this Agreement, all of which shall be referred
to as "INDEMNIFIABLE CLAIMS." CBooks' indemnification obligations under this
Section 8.3 shall not arise if the aggregate amount of indemnity obligations
otherwise payable does not exceed Twenty-Five Thousand Dollars ($25,000) and
shall not in the aggregate exceed Five Hundred Thousand Dollars ($500,000).
8.4 Procedure for Indemnification with Respect to Third-Party Claims.
(a) If CBooks or the Shareholders determine to seek
indemnification under this Article VIII with respect to Indemnifiable Claims
(the party when seeking such indemnification shall hereinafter be referred to as
the "INDEMNIFIED PARTY," and the party against whom such indemnification is
sought shall hereinafter be referred to as the "INDEMNIFYING PARTY") resulting
from the assertion of liability by third parties, the Indemnified Party shall
give written notice to the Indemnifying Party within thirty (30) days of the
Indemnified Party becoming aware of any such Indemnifiable Claim or of facts
upon which any such Indemnifiable Claim will be based; the notice shall set
forth such material information with respect thereto as is then reasonably
available to the Indemnified Party. In case any such liability is asserted
against the Indemnified Party, and the Indemnified Party notifies the
Indemnifying Party thereof, the Indemnifying Party will be entitled, if it so
elects by written notice delivered to the Indemnified Party within thirty (30)
days after receiving the Indemnified Party's notice, to assume the defense
thereof with counsel reasonably satisfactory to the Indemnified Party provided
that Epstein Becker & Green, P.C. shall be deemed satisfactory. Notwithstanding
the foregoing, (i) the Indemnified Party shall also have the right to employ its
own counsel in any such case, but the fees and expenses of such counsel shall be
at the expense of the Indemnified Party unless counsel to the Indemnified Party
advises the Indemnified Party that there is a conflict of interest between the
Shareholders and CBooks with respect to such Indemnifiable Claim, in which case
the fees and expenses of such counsel will be borne by the Indemnifying Party,
and (ii) the rights of the Indemnified Party to be indemnified hereunder in
respect of Indemnifiable Claims resulting from the assertion of liability by
third parties shall not be adversely affected by its failure to give notice
pursuant to the foregoing unless, and, if so, only to the extent that, the
Indemnifying Party is materially prejudiced thereby. With respect to any
assertion of liability by
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<PAGE> 33
a third party that results in an Indemnifiable Claim, the parties hereto shall
make available to each other all relevant information in their possession
material to any such assertion.
(b) In the event that the Indemnifying Party, within thirty (30)
days after receipt of the aforesaid notice of an Indemnifiable Claim, fails to
assume the defense of the Indemnified Party against such Indemnifiable Claim,
the Indemnified Party shall have the right to undertake the defense, compromise,
or settlement of such action on behalf of and for the account and risk of the
Indemnifying Party.
(c) Notwithstanding anything in this Section to the contrary, if
there is a reasonable probability that an Indemnifiable Claim may materially and
adversely affect the Indemnified Party, the Indemnified Party shall have the
right to participate, at its own cost and expense, in such defense, compromise,
or settlement and the Indemnifying Party shall not, without the Indemnified
Party's written consent (which consent shall not be unreasonably withheld),
settle or compromise any Indemnifiable Claim or consent to entry of any judgment
in respect thereof unless such settlement, compromise, or consent includes as an
unconditional term thereof the giving by the claimant or the plaintiff to the
Indemnified Party a release from all liability in respect of such Indemnifiable
Claim.
8.5 Procedure For Indemnification with Respect to Non-Third Party
Claims. In the event that the Indemnified Party asserts the existence of a claim
giving rise to Damages (but excluding claims resulting from the assertion of
liability by third parties), it shall give written notice to the Indemnifying
Party. Such written notice shall state that it is being given pursuant to this
Section 8.5, specify with particularity the nature and amount of the claim
asserted, accompanied by any written materials supporting such claim, and
indicate the date on which such assertion shall be deemed accepted and the
amount of the claim deemed a valid claim (such date to be established in
accordance with the next sentence). If the Indemnifying Party, within fifteen
(15) days after the mailing of notice by the Indemnified Party, shall not give
written notice to the Indemnified Party announcing its intent to contest such
assertion of the Indemnified Party, such assertion shall be deemed accepted and
the amount of claim shall be deemed a valid claim. In the event, however, that
the Indemnifying Party contests the assertion of a claim by giving such written
notice to the Indemnified Party within said period, then the parties shall act
in good faith to reach agreement regarding such claim. If the parties hereto,
acting in good faith, cannot reach agreement with respect to such claim within
fifteen days after such notice, then the claim shall be finally settled by
arbitration as set forth in Section 11.13 hereof.
ARTICLE IX
NONCOMPETITION AGREEMENT
9.1 Noncompete. From the date of this Agreement until the earlier of its
termination or the fifth anniversary of the Time of Closing (the "RESTRICTED
PERIOD"), without the prior written consent of CBooks, each of the Shareholders
agree not to engage as an employee, director, officer, consultant advisor or
greater than five percent shareholder in any entity ("RESTRICTED ENTITY")
anywhere in the world that is in the business of selling books and other printed
materials
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<PAGE> 34
in the technical computer and electronics content categories such as currently
inventoried by CLBI through any distribution channel, including retail,
electronic (including the Internet and intranets), trade shows and conventions,
and direct mail (the "RESTRICTED FIELD") in the geographic area comprising the
entire world (the "PROTECTED TERRITORY"). Activities pertaining to the
publishing and/or exclusive wholesale distribution of technical book products,
and products authored or co-authored by one or both of the Shareholders, are
specifically excluded from the provisions of this section and Section 9.2.
9.2 Nonsolicit. As a separate and independent covenant, during the
Restricted Period, without the prior written consent of CBooks, each of the
Shareholders hereby agrees not to, in any way, directly or indirectly, for the
purpose of conducting or engaging in any business that is operating in the
Restricted Field, call upon, solicit, advise or otherwise do, or attempt to do,
business with any then existing customer of the Company or CLBI or their
respective affiliates, or take away or interfere with or attempt to interfere
with any custom, trade, business or patronage of the Company of CLBI or their
respective affiliates, in the Restricted Field.
9.3 No hire. As a separate and independent covenant, during the
Restricted Period, without the prior written consent of the Company, each of the
Shareholders hereby agrees not to, in any way, directly or indirectly,
irrespective of the Restricted Field, hire any employee or consultant of the
Company or CLBI or any of their respective affiliates, or attempt to induce any
employee or consultant of the Company or CLBI or any of their respective
affiliates, to leave the employ of the Company or CLBI or any of their
respective affiliates or to violate the terms of their contracts. CBooks hereby
acknowledges that Lisa Chan and Chris MacIntosh are the beneficial record owners
of approximately 12% each of Peer-to-Peer and as such have each, on occasion,
provided consulting services to Peer-to-Peer for no consideration and to an
extent that has not interfered with the performance of either of their
responsibilities as full time employees of CLBI. CBooks acknowledges and agrees
that Ms. Chan and Ms. MacIntosh may continue to provide similar consulting
services to Peer-to-Peer for no consideration provided such consulting in no way
impairs or hampers their ability to perform their responsibilities as full-time
employees of CLBI.
9.4 Extension of Restricted Period. The Restricted Period shall be
extended by the length of any period during which either of the Shareholders are
in breach of the terms of this Agreement.
9.5 Irreparable Harm. Each of the Shareholders acknowledge that upon the
breach of any of the provisions of this Article, CBooks would sustain
irreparable harm, and, therefore, you agree that in addition to any other
remedies that CBooks may have under this Agreement or otherwise, CBooks shall be
entitled to obtain equitable relief, including specific performance and
injunctions restraining you from committing or continuing any such violation of
this Agreement.
9.6 Condition to Acquisition. Each of the Shareholders represent that
they are familiar with the covenants contained in this Article IX, and are fully
aware of their respective obligations hereunder. Each of the Shareholders hereby
acknowledges that the covenants and
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<PAGE> 35
agreements set forth in this Article IX are an essential element of the purchase
of their Shares by CBooks as contemplated herein and that, but for their
agreement to comply with these covenants, CBooks would not have entered into
this Agreement or the other agreements contemplated hereby. Each of the
Shareholders acknowledges that the period of restrictions and the geographic
area to which the restrictions imposed in this Article hereof shall apply are
fair and reasonable and are reasonably required for the protection of the
Company. If any provision of this Agreement is held to be invalid or
unenforceable by judicial order for any reason, such action shall not affect the
enforceability of the remaining provisions hereof and, without limiting the
foregoing, any such holdings shall in no event preclude the Company from
enforcing the provisions hereof for such term, in such territory and to such
extent not inconsistent with or prohibited by said judicial order. If the
provisions of this Agreement should ever be deemed to exceed the time, scope or
geographic limitations permitted by applicable law, then such provisions shall
be reformed to the maximum time, scope or geographic limitations, as the case
may be, permitted by applicable laws.
9.7 Acknowledgment of Consideration. CBooks and the Shareholders hereby
acknowledge that $150,000 and $60,000 of the Cash Consideration is being paid to
Ms. Unkefer and Mr. Doernberg, respectively, as consideration for the covenants
and agreements of each set forth in this Article IX.
ARTICLE X
TERMINATION AND AMENDMENT
10.1 Termination. This Agreement may be terminated at any time prior to the
Closing, whether before or after approval of the matters presented in connection
with the transactions contemplated hereby:
(a) by written consent of CBooks and the Shareholders; or
(b) by either CBooks or the Shareholders if the transactions
contemplated hereby shall not have been consummated by May 30, 1997; provided
that such failure results despite each parties good faith efforts to finalize
and consummate the transactions contemplated herein, and provided further that
the right to terminate this Agreement under this subsection shall not be
available to any party whose failure to fulfill any material obligation under
this Agreement has been the cause of or resulted in the failure of the
transactions contemplated hereby to occur on or before such date; or
(c) by either CBooks or the Shareholders, if a court of competent
jurisdiction or other governmental entity shall have issued a nonappealable
final order, decree or ruling or taken any other action, in each case having the
effect of permanently restraining, enjoining or otherwise prohibiting the
transactions contemplated hereby, except, if the party relying on such order,
decree or ruling or other action has not materially complied with its
obligations under this Agreement; or
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<PAGE> 36
(d) by CBooks if any of the conditions to CBooks' obligations to
effect the transactions contemplated hereby that are specified herein have not
been met or waived by CBooks at such time as such condition is no longer
reasonably capable of satisfaction; provided CBooks is not otherwise in material
breach of its representations, warranties, covenants or agreements under this
Agreement; or
(e) by CBooks or CLBI, if there has been a material breach of any
representation, warranty, covenant or agreement on the part of either party,
which breach shall not have been cured, in the case of a representation or
warranty, prior to the Closing or, in the case of a covenant or agreement within
ten (10) business days following receipt by the breaching party of written
notice of such breach from the other party.
10.2 Effect of Termination. In the event of termination of this
Agreement as provided in Section 10.1, this Agreement shall immediately become
void and there shall be no liability or obligation on the part of CBooks, CLBI,
or their respective officers, directors or shareholders, as the case may be, and
further except to the extent that such termination results from the intentional
breach by a party of any of its representations, warranties or covenants set
forth in this Agreement.
ARTICLE XI
MISCELLANEOUS PROVISIONS
11.1 Notice. All notices and other communications required or permitted
under this Agreement shall be in writing and shall be delivered to the parties
at the address set forth below their respective signature blocks, or at such
other address that they designate by notice to all other parties in accordance
with this Section 11.1. Any party delivering notice to CLBI or the Shareholders,
shall also deliver a copy to: Epstein, Becker & Green, P.C., 75 State Street,
Boston, MA 02109, facsimile (617) 342-4001, Attn: Susan E. Pravda, Esq. Any
party delivering notice to CBooks shall also deliver a copy to: Gunderson
Dettmer Stough Villeneuve Franklin & Hachigian, 155 Constitution Drive, Menlo
Park, California 94025, facsimile (415) 321-2800, Attn: Ralph L. Arnheim III,
Esq. All notices and communications shall be deemed to have been received: (a)
in the case of personal delivery, on the date of such delivery; (b) in the case
of telex or facsimile transmission, on the date on which the sender receives
confirmation by telex or facsimile transmission that such notice was received by
the addressee, provided that a copy of such transmission is additionally sent by
mail as set forth in (d) below; (c) in the case of overnight air courier, on the
second business day following the day sent, with receipt confirmed by the
courier; and (d) in the case of mailing by first class certified or registered
mail, postage prepaid, return receipt requested, on the fifth business day
following such mailing.
11.2 Entire Agreement. This Agreement, the exhibits and schedules
hereto, and the documents referred to herein embody the entire agreement and
understanding of the parties hereto with respect to the subject matter hereof,
and supersede all prior and contemporaneous agreements and understandings, oral
or written, relative to said subject matter including the letter of intent dated
April 28, 1997 except that the obligations of the Mutual Confidentiality
Agreement dated April 28, 1997 shall continue in full force and effect against
CBooks until the
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Closing if the Closing occurs, and, if the Closing does not occur, for the term
specified therein, and against the Shareholders for the term specified therein.
11.3 Binding Effect; Assignment. This Agreement and the various rights
and obligations arising hereunder shall inure to the benefit of and be binding
upon CLBI, its successors and permitted assigns, and CBooks and its successors
and permitted assigns. Neither this Agreement nor any of the rights, interests,
or obligations hereunder shall be transferred or assigned (by operation of law
or otherwise) by either of the parties hereto without the prior written consent
of the other party; provided, however, that CBooks may, without such written
consent, assign its rights in connection with a merger of CBooks with or into
another entity, a sale of all or substantially all of CBooks's assets, or a
reorganization involving CBooks.
11.4 Captions. The Article and Section headings of this Agreement are
inserted for convenience only and shall not constitute a part of this Agreement
in construing or interpreting any provision hereof.
11.5 Expenses of Acquisition. The Shareholders shall pay in full all
fees and expenses incurred by CLBI and the Shareholders in connection with this
Agreement, and the transactions contemplated hereby, and all expenses associated
with establishing the escrow account contemplated by the Escrow Agreement;
provided, however, CLBI shall have the right to pay all fees and expenses
incurred by the Shareholders together with the payment of bonuses to certain
employees specified by the Shareholders (subject to standard withholdings), up
to an aggregate of $245,000, if the Net Working Capital of CLBI as of the
Closing minus such fees, expenses and bonuses is at least equal to the Net
Working Capital of CLBI as of February 28, 1997. CBooks shall pay all fees and
expenses incurred by CBooks in connection with this Agreement, and the
transactions contemplated hereby.
11.6 Waiver; Consent. This Agreement may not be changed, amended,
terminated, augmented, rescinded, or discharged (other than by performance), in
whole or in part, except by a writing executed by the parties hereto, and no
waiver of any of the provisions or conditions of this Agreement or any of the
rights of a party hereto shall be effective or binding unless such waiver shall
be in writing and signed by the party claimed to have given or consented
thereto. Except to the extent that a party hereto may have otherwise agreed in
writing, no waiver by that party of any condition of this Agreement or breach by
the other party of any of its obligations or representations hereunder or
thereunder shall be deemed to be a waiver of any other condition or subsequent
or prior breach of the same or any other obligation or representation by the
other party, nor shall any forbearance by the first party to seek a remedy for
any noncompliance or breach by the other party be deemed to be a waiver by the
first party of its rights and remedies with respect to such noncompliance or
breach.
11.7 Third-Party Beneficiaries. Except as otherwise expressly provided
for in this Agreement, nothing herein, expressed or implied, is intended or
shall be construed to confer upon or give to any person, firm, corporation, or
legal entity, other than the parties hereto, any rights, remedies, or other
benefits under or by reason of this Agreement.
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11.8 Counterparts. This Agreement may be executed simultaneously in
multiple counterparts, each of which shall be deemed an original, but all of
which taken together shall constitute one and the same instrument.
11.9 Gender. Whenever the context requires, words used in the singular
shall be construed to mean or include the plural and vice versa, and pronouns of
any gender shall be deemed to include and designate the masculine, feminine, or
neuter gender.
11.10 Severability. If one or more provisions of this Agreement are held
to be unenforceable under applicable law, such provision shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
11.11 Remedies of CBooks. CLBI and the Shareholders agree that the CLBI
Business and the Assets are unique and not otherwise readily available to
CBooks. Accordingly, CLBI and the Shareholders acknowledge that, in addition to
all other remedies to which CBooks is entitled, CBooks shall have the right to
enforce the terms of this Agreement by a decree of specific performance,
provided CBooks is not in material default hereunder.
11.12 Governing Law. This Agreement shall in all respects be construed
in accordance with and governed by the laws of the State of California without
regard to conflicts of law provisions.
11.13 Arbitration, Attorneys' Fees. Any dispute arising out of this
Agreement shall be finally settled by arbitration in Palo Alto, California, in
accordance with the then current Commercial Arbitration Rules of the American
Arbitration Association (the "AAA"), and judgment upon the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof. Such
arbitration shall be conducted by an arbitrator chosen by mutual agreement of
CBooks and the Shareholders, or failing such agreement, an arbitrator appointed
by the AAA. There shall be limited discovery prior to the arbitration hearing as
follows: (a) exchange of witness lists and copies of documentary evidence and
documents related to or arising out of the issues to be arbitrated, (b)
depositions of all party witnesses, and (c) such other depositions as may be
allowed by the arbitrators upon a showing of good cause. Depositions shall be
conducted in accordance with the California Code of Civil Procedure, the
arbitrator(s) shall be required to provide in writing to the parties the basis
for the award or order of such arbitrator(s), and a court reporter shall record
all hearings, with such record constituting the official transcript of such
proceedings. If any arbitration or action at law or in equity is necessary to
enforce or interpret the terms of this Agreement or to protect the rights
obtained hereunder the prevailing party shall be entitled to its reasonable
attorneys' fees, costs, and disbursements in addition to any other relief to
which it may be entitled.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
CLBI: COMPUTER LITERACY BOOKSHOPS, INC.
By: /s/ Rachel Unkefer
---------------------------------------------
Rachel Unkefer, President and Chief
Executive Officer
Address: 3105 Edgewater Drive
Charlottesville, Virginia 22911
THE SHAREHOLDERS:
/s/ Daniel A. Doernberg
---------------------------------------------
Daniel A. Doernberg
Address: 3105 Edgewater Drive
Charlottesville, Virginia 22911
/s/ Rachel Unkefer
---------------------------------------------
Rachel Unkefer
Address: 3105 Edgewater Drive,
Charlottesville, Virginia 22911
-- Signature Page to Stock Acquisition Agreement --
<PAGE> 40
CBOOKS: CBOOKS EXPRESS, INC.
By: /s/ Chris MacAskill
----------------------------------------
Chris MacAskill, President and Chief
Executive Officer
Address: 1308 Orleans Drive
Sunnyvale, CA 94089
-- Signature Page to Stock Acquisition Agreement --
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF COMPUTER LITERACY, INC.,
A DELAWARE CORPORATION
(PURSUANT TO SECTIONS 228, 242 AND 245
OF THE DELAWARE GENERAL CORPORATION LAW)
Computer Literacy, Inc. (the "Corporation"), a corporation organized and
existing under the General Corporation Law of the State of Delaware (the
"General Corporation Law") originally incorporated on May 4, 1998.
DOES HEREBY CERTIFY:
FIRST: The name of the corporation is Computer Literacy, Inc.
SECOND: That the Board of Directors of the Corporation adopted
resolutions proposing to amend and restate the Certificate of Incorporation of
the Corporation (the "Certificate"), declaring said amendment and restatement to
be advisable and in the best interests of the Corporation and its stockholders
and authorizing the appropriate officer of the Corporation to solicit the
consent of the stockholders therefor, which resolution setting forth the
proposed amendment and restatement is as follows:
"RESOLVED, that the Certificate of Incorporation of the Corporation (the
"Certificate") be amended and restated in its entirety as follows:
ARTICLE I
The name of this corporation is Computer Literacy, Inc.
ARTICLE II
The address of the registered officer of the corporation in the State of
Delaware is 15 East North Street, in the City of Dover, 19901, County of Kent.
The name of the corporation's registered agent is Incorporating Services, Inc.
ARTICLE III
The nature of the business or purposes to be conducted or promoted by
this corporation are to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of Delaware.
<PAGE> 2
ARTICLE IV
A. Classes of Stock. This corporation is authorized to issue two classes
of stock, $0.001 par value, to be designated, respectively, "Common Stock" and
"Preferred Stock." The total number of shares which the corporation is
authorized to issue is Sixteen Million Two Hundred Fifty Thousand (16,250,000)
shares. Ten Million (10,000,000) shares shall be Common Stock and Six Million
Two Hundred Fifty Thousand (6,250,000) shares shall be Preferred Stock, Two
Million Four Hundred Fifty-Three Thousand Seven Hundred One (2,453,701) shares
of which shall be designated Series B Preferred Stock, One Million Sixty-Six
Thousand Six Hundred Sixty-Seven (1,066,667) shares of which shall be
designated Series C Preferred Stock, One Million Seven Hundred Twenty-Six
Thousand One Hundred Ninety-Four (1,726,194) shares of which shall be
designated Series D Preferred Stock and Eight Hundred Seventy-Five Thousand
(875,000) shares shall be designated Series E Preferred Stock. There shall be
no Series A Preferred Stock. Upon filing of this Certificate of Amendment, each
four (4) outstanding shares of Common Stock shall be converted into one (1)
share of Common Stock and each four (4) outstanding shares of Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series
E Preferred Stock shall be converted into one (1) share of Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock, respectively.
B. Rights, Preferences and Restrictions of Preferred Stock. The
Preferred Stock authorized by these Amended and Restated Certificate of
Incorporation may be issued from time to time in one or more series. The rights,
preferences, privileges, and restrictions granted to and imposed on the
Preferred Stock are as set forth below in this Article IV(B). The Board of
Directors is hereby authorized to fix or alter the rights, preferences,
privileges and restrictions granted to or imposed upon additional series of
Preferred Stock, and the number of shares constituting any such series and the
designation thereof, or of any of them. Subject to compliance with applicable
protective voting rights that have been or may be granted to the Preferred Stock
or series thereof in Certificates of Determination or the corporation's
Certificate of Incorporation ("Protective Provisions"), but notwithstanding any
other rights of the Preferred Stock or any series thereof, the rights,
privileges, preferences and restrictions of any such additional series may be
subordinated to, pari passu with (including, without limitation, inclusion in
provisions with respect to liquidation and acquisition preferences, redemption
and/or approval of matters by vote or written consent) or senior to any of those
of any present or future class or series of Preferred or Common Stock. Subject
to compliance with applicable Protective Provisions, the Board of Directors is
also authorized to increase or decrease the number of shares of any series prior
or subsequent to the issue of that series, but not below the number of shares of
such series then outstanding. In case the number of shares of any series shall
be so decreased, the shares constituting such decrease shall resume the status
that they had prior to the adoption of the resolution originally fixing the
number of shares of such series.
1. Dividend Provisions. Subject to the rights of series of
Preferred Stock that may from time to time come into existence, the holders of
shares of Preferred Stock shall be entitled to receive dividends, out of any
assets legally available therefor, prior and in preference to any declaration or
payment of any dividend (payable other than in Common Stock or other securities
and rights convertible into or entitling the holder thereof to receive, directly
or indirectly, additional shares of Common Stock of this corporation) on the
Common Stock of this corporation, at the rate (i) in the case of the Series B
Preferred Stock $.088 per share per annum (as adjusted for any stock splits,
stock dividends, recapitalizations or the like), (ii) in the case of the Series
C Preferred Stock $0.12 per share per annum (as adjusted for any stock splits,
stock dividends, recapitalizations or the like), (iii) in the case of the Series
D Preferred Stock $0.20 per
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share per annum (as adjusted for any stock splits, stock dividends,
recapitalizations or the like), and (iv) in the case of the Series E Preferred
Stock $0.32 per share per annum (as adjusted for any stock splits, stock
dividends, recapitalizations or the like) payable quarterly when, as and if
declared by the Board of Directors. Such dividends shall not be cumulative.
Subject to the rights of any other series of Preferred Stock that may from time
to time be designated by the Board of Directors, dividends, if declared, must be
declared and paid with respect to the Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, and all
other series of Preferred Stock contemporaneously, and if less than full
dividends are declared, the same percentage of the dividend rate will be payable
to each such series of Preferred Stock.
2. Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up
of this corporation, either voluntary or involuntary, subject to the rights of
series of Preferred Stock that may from time to time come into existence, the
holders of Preferred Stock shall be entitled to receive, prior and in preference
to any distribution of any of the assets of this corporation to the holders of
Common Stock by reason of their ownership thereof, (A) in the case of the Series
B Preferred Stock, an amount per share equal to the sum of (i) $1.67 for each
outstanding share of Series B Preferred Stock (the "Original Series B Issue
Price") and (ii) an amount equal to declared but unpaid dividends on such share;
(B) in the case of the Series C Preferred Stock, an amount per share equal to
the sum of (i) $2.40 for each outstanding share of Series C Preferred Stock (the
"Original Series C Issue Price") and (ii) an amount equal to declared but unpaid
dividends on such share; (C) in the case of the Series D Preferred Stock, an
amount per share equal to the sum of (i) $4.20 for each outstanding share of
Series D Preferred Stock (the "Original Series D Issue Price") and (ii) an
amount equal to declared but unpaid dividends on such share and (D) in the case
of the Series E Preferred Stock, an amount equal to the sum of (i) $6.44 for
each outstanding share; of Series E Preferred Stock (the "Original Series E
Issue Price") and (ii) an amount equal to declared but unpaid dividends on such
share. If upon the occurrence of such event, the assets and funds thus
distributed among the holders of the Preferred Stock shall be insufficient to
permit the payment to such holders of the full aforesaid preferential amounts,
then, subject to the rights of series of Preferred Stock that may from time to
time come into existence, the entire assets and funds of the corporation legally
available for distribution shall be distributed ratably among the holders of the
Preferred Stock so that each holder receives the same percentage of the
applicable preferential amount set forth above that each such holder is entitled
to receive. All Original Issue Prices set forth above shall be appropriately
adjusted for any stock splits, stock splits, stock dividends, recapitalizations
or the like.
(b) Upon the completion of the distribution required by
subparagraph (a) of this Section 2 and any other distribution that may be
required with respect to series of Preferred Stock that may from time to time
come into existence, if assets remain in this corporation, the holders of the
Common Stock of this corporation, shall receive all of the remaining assets of
this corporation.
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(c) (i) For purposes of this Section 2, a liquidation,
dissolution or winding up of this corporation shall be deemed to be occasioned
by, or to include, (A) the acquisition of the corporation by another entity by
means of any transaction or series of related transactions (including, without
limitation, any reorganization, merger or consolidation but, excluding any
merger effected exclusively for the purpose of changing the domicile of the
corporation) or (B) a sale of all or substantially all of the assets of the
corporation; unless, in the case of either (A) or (B) the corporation's
shareholders of record as constituted immediately prior to such acquisition or
sale will, immediately after such acquisition or sale (by virtue of securities
issued as consideration for the corporation's acquisition or sale or otherwise)
hold at least 50% of the voting power of the surviving or acquiring entity.
(ii) In any of such events, if the consideration received
by the corporation is other than cash, its value will be deemed its fair market
value as determined in good faith by the Board of Directors. Any securities
shall be valued as follows:
(A) Securities not subject to investment letter or
other similar restrictions on free marketability:
(1) If traded on a securities exchange or through
The Nasdaq Stock Market, the value shall be deemed to be the average of the
closing prices of the securities on such exchange over the thirty-day period
ending three (3) days prior to the closing;
(2) If actively traded over-the-counter, the
value shall be deemed to be the average of the closing bid or sale prices
(whichever is applicable) over the thirty-day period ending three (3) days prior
to the closing; and
(3) If there is no active public market, the
value shall be the fair market value thereof, as mutually determined by the
corporation and the holders of at least a majority of the voting power of all
then outstanding shares of Preferred Stock.
(B) The method of valuation of securities subject to
investment letter or other restrictions on free marketability (other than
restrictions arising solely by virtue of a shareholder's status as an affiliate
or former affiliate) shall be to make an appropriate discount from the market
value determined as above in (A) (1), (2) or (3) to reflect the approximate fair
market value thereof, as mutually determined by the corporation and the holders
of at least a majority of the voting power of all then outstanding shares of
such Preferred Stock.
(iii) In the event the requirements of this subsection
2(c) are not complied with, this corporation shall forthwith either:
(A) cause such closing to be postponed until such
time as the requirements of this Section 2 have been complied with; or
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(B) cancel such transaction, in which event the
rights, preferences and privileges of the holders of the Preferred Stock shall
revert to and be the same as such rights, preferences and privileges existing
immediately prior to the date of the first notice referred to in subsection
2(c)(iv) hereof.
(iv) The corporation shall give each holder of record of
Preferred Stock written notice of such impending transaction not later than
twenty (20) days prior to the shareholders' meeting called to approve such
transaction, or twenty (20) days prior to the closing of such transaction,
whichever is earlier, and shall also notify such holders in writing of the final
approval of such transaction. The first of such notices shall describe the
material terms and conditions of the impending transaction and the provisions of
this Section 2, and the corporation shall thereafter give such holders prompt
notice of any material changes. The transaction shall in no event take place
sooner than twenty (20) days after the corporation has given the first notice
provided for herein or sooner than ten (10) days after the corporation has given
notice of any material changes provided for herein; provided, however, that such
periods may be shortened upon the written consent of the holders of Preferred
Stock that are entitled to such notice rights or similar notice rights and that
represent at least a majority of the voting power of all then outstanding shares
of such Preferred Stock.
3. Redemption. The Preferred Stock is not redeemable.
4. Conversion. The holders of the Preferred Stock shall have
conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Preferred Stock shall be
convertible, at the option of the holder thereof, at any time after the date of
issuance of such share at the office of this corporation or any transfer agent
for such stock, into such number of fully paid and nonassessable shares of
Common Stock as is determined by dividing the Original Issue Price for such
series by the Conversion Price applicable to such share, determined as hereafter
provided, in effect on the date the certificate is surrendered for conversion.
The initial Conversion Price per share for shares of Preferred Stock shall be
the Original Issue Price for each such series; provided, however, that the
Conversion Price for the Preferred Stock shall be subject to adjustment as set
forth in subsection 4(d).
(b) Automatic Conversion. Each share of Preferred Stock shall
automatically be converted into shares of Common Stock at the Conversion Price
at the time in effect for such series immediately upon the earlier of (i) the
corporation's sale of its Common Stock in a firm commitment underwritten public
offering pursuant to a registration statement under the Securities Act of 1933,
as amended, the public offering price of which was not less than $8.40 per share
for a public offering consummated on or before June 30, 1999, and $12.60 per
share thereafter (in each case, such per share price shall be adjusted to
reflect subsequent stock dividends, stock splits or recapitalization) and
$7,500,000 in the aggregate net of underwriting discounts and commissions or
(ii) the date specified by written consent or agreement of the holders of a
majority of the then outstanding shares of Preferred Stock (voting together as a
single class and not separate series, and on an as converted basis).
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(c) Mechanics of Conversion. Before any holder of Preferred
Stock shall be entitled to convert the same into shares of Common Stock, the
holder shall surrender the certificate or certificates therefor, duly endorsed,
at the office of this corporation or of any transfer agent for the Preferred
Stock, and shall give written notice to this corporation at its principal
corporate office, of the election to convert the same and shall state therein
the name or names in which the certificate or certificates for shares of Common
Stock are to be issued. This corporation shall, as soon as practicable
thereafter, issue and deliver at such office to such holder of Preferred Stock,
or to the nominee or nominees of such holder, a certificate or certificates for
the number of shares of Common Stock to which such holder shall be entitled as
aforesaid. Such conversion shall be deemed to have been made immediately prior
to the close of business on the date of such surrender of the shares of
Preferred Stock to be converted, and the person or persons entitled to receive
the shares of Common Stock issuable upon such conversion shall be treated for
all purposes as the record holder or holders of such shares of Common Stock as
of such date. If the conversion is in connection with an underwritten offering
of securities registered pursuant to the Securities Act of 1933, the conversion
may, at the option of any holder tendering Preferred Stock for conversion, be
conditioned upon the closing with the underwriters of the sale of securities
pursuant to such offering, in which event the person(s) entitled to receive the
Common Stock upon conversion of the Preferred Stock shall not be deemed to have
converted such Preferred Stock until immediately prior to the closing of such
sale of securities.
(d) Conversion Price Adjustments of Preferred Stock for
Certain Dilutive Issuances, Splits and Combinations. The Conversion Price of the
Preferred Stock shall be subject to adjustment from time to time as follows:
(i) (A) If the corporation shall issue, after the date of
the filing of this Amended and Restated Certificate of Incorporation (the
"Purchase Date"), any Additional Stock (as defined below) without consideration
or for a consideration per share less than the Conversion Price for the Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series E
Preferred Stock in effect immediately prior to the issuance of such Additional
Stock, the Conversion Price for such series in effect immediately prior to each
such issuance shall forthwith (except as otherwise provided in this clause (i))
be adjusted to a price determined by multiplying such Conversion Price by a
fraction, the numerator of which shall be the number of shares of Common Stock
outstanding immediately prior to such issuance plus the number of shares of
Common Stock that the aggregate consideration received by the corporation for
such issuance would purchase at such Conversion Price; and the denominator of
which shall be the number of shares of Common Stock outstanding immediately
prior to such issuance plus the number of shares of such Additional Stock.
(B) No adjustment of the Conversion Price for the
Preferred Stock shall be made in an amount less than one cent per share,
provided that any adjustments which are not required to be made by reason of
this sentence shall be carried forward and shall be either taken into account in
any subsequent adjustment made prior to 3 years from the date of the event
giving rise to the adjustment being carried forward, or shall be made at the end
of 3 years from the date of the event giving rise to the adjustment being
carried forward. Except to the limited extent provided for in subsections (E)(3)
and (E)(4), no adjustment of such
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Conversion Price pursuant to this subsection 4(d)(i) shall have the effect of
increasing the Conversion Price above the Conversion Price in effect immediately
prior to such adjustment.
(C) In the case of the issuance of Common Stock for
cash, the consideration shall be deemed to be the amount of cash paid therefor
before deducting any reasonable discounts, commissions or other expenses
allowed, paid or incurred by this corporation for any underwriting or otherwise
in connection with the issuance and sale thereof.
(D) In the case of the issuance of the Common Stock
for a consideration in whole or in part other than cash, the consideration other
than cash shall be deemed to be the fair value thereof as determined in good
faith by the Board of Directors irrespective of any accounting treatment.
(E) In the case of the issuance (whether before, on
or after the Purchase Date) of options to purchase or rights to subscribe for
Common Stock, securities by their terms convertible into or exchangeable for
Common Stock or options to purchase or rights to subscribe for such convertible
or exchangeable securities, the following provisions shall apply for all
purposes of this subsection 4(d)(i) and subsection 4(d)(ii):
(1) The aggregate maximum number of shares of
Common Stock deliverable upon exercise (assuming the satisfaction of any
conditions to exercisability, including without limitation, the passage of time,
but without taking into account potential antidilution adjustments) of such
options to purchase or rights to subscribe for Common Stock shall be deemed to
have been issued at the time such options or rights were issued and for a
consideration equal to the consideration (determined in the manner provided in
subsections 4(d)(i)(C) and (d)(i)(D)), if any, received by the corporation upon
the issuance of such options or rights plus the minimum exercise price provided
in such options or rights (without taking into account potential antidilution
adjustments) for the Common Stock covered thereby.
(2) The aggregate maximum number of shares of
Common Stock deliverable upon conversion of or in exchange (assuming the
satisfaction of any conditions to convertibility or exchangeability, including,
without limitation, the passage of time, but without taking into account
potential antidilution adjustments) for any such convertible or exchangeable
securities or upon the exercise of options to purchase or rights to subscribe
for such convertible or exchangeable securities and subsequent conversion or
exchange thereof shall be deemed to have been issued at the time such securities
were issued or such options or rights were issued and for a consideration equal
to the consideration, if any, received by the corporation for any such
securities and related options or rights (excluding any cash received on account
of accrued interest or accrued dividends), plus the minimum additional
consideration, if any, to be received by the corporation (without taking into
account potential antidilution adjustments) upon the conversion or exchange of
such securities or the exercise of
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any related options or rights (the consideration in each case to be determined
in the manner provided in subsections 4(d)(i)(C) and (d)(i)(D)).
(3) In the event of any change in the number of
shares of Common Stock deliverable or in the consideration payable to this
corporation upon exercise of such options or rights or upon conversion of or in
exchange for such convertible or exchangeable securities, including, but not
limited to, a change resulting from the antidilution provisions thereof, the
Conversion Price of the Preferred Stock, to the extent in any way affected by or
computed using such options, rights or securities, shall be recomputed to
reflect such change, but no further adjustment shall be made for the actual
issuance of Common Stock or any payment of such consideration upon the exercise
of any such options or rights or the conversion or exchange of such securities.
(4) Upon the expiration of any such options or
rights, the termination of any such rights to convert or exchange or the
expiration of any options or rights related to such convertible or exchangeable
securities, the Conversion Price of the Preferred Stock, to the extent in any
way affected by or computed using such options, rights or securities or options
or rights related to such securities, shall be recomputed to reflect the
issuance of only the number of shares of Common Stock (and convertible or
exchangeable securities which remain in effect) actually issued upon the
exercise of such options or rights, upon the conversion or exchange of such
securities or upon the exercise of the options or rights related to such
securities.
(5) The number of shares of Common Stock deemed
issued and the consideration deemed paid therefor pursuant to subsections
4(d)(i)(E)(1) and (2) shall be appropriately adjusted to reflect any change,
termination or expiration of the type described in either subsection
4(d)(i)(E)(3) or (4).
(ii) "Additional Stock" shall mean any shares of Common
Stock issued (or deemed to have been issued pursuant to subsection 4(d)(i)(E))
by this corporation after the Purchase Date other than
(F) shares of Common Stock issued pursuant to a
transaction described in subsection 4(d)(iii) hereof,
(G) shares of Common Stock issuable or issued to
employees, consultants, directors or vendors (if in transactions with primarily
non-financing purposes) of this corporation directly or pursuant to a stock
option plan or restricted stock plan approved by the stockholders and approved
unanimously by the Board of Directors of this corporation,
(H) shares of Common Stock issued upon conversion of
shares of Preferred Stock,
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(I) the issuance of securities in connection with a
bona fide business acquisition of or by the Company, whether by merger,
consolidation, sale of assets, sale or exchange of stock or otherwise, or
(J) the issuance of stock warrants or other
securities or rights to persons or entities with which the Company has service
relationships, provided such issuances are for other than primarily equity
financing purposes.
(iii) In the event the corporation should at any time or
from time to time after the Purchase Date fix a record date for the effectuation
of a split or subdivision of the outstanding shares of Common Stock or the
determination of holders of Common Stock entitled to receive a dividend or other
distribution payable in additional shares of Common Stock or other securities or
rights convertible into, or entitling the holder thereof to receive directly or
indirectly, additional shares of Common Stock (hereinafter referred to as
"Common Stock Equivalents") without payment of any consideration by such holder
for the additional shares of Common Stock or the Common Stock Equivalents
(including the additional shares of Common Stock issuable upon conversion or
exercise thereof), then, as of such record date (or the date of such dividend
distribution, split or subdivision if no record date is fixed), the Conversion
Price of each of the Series B Preferred Stock, Series C Preferred Stock, Series
D Preferred Stock and Series E Preferred Stock shall be appropriately decreased
so that the number of shares of Common Stock issuable on conversion of each
share of such series shall be increased in proportion to such increase of the
aggregate of shares of Common Stock outstanding and those issuable with respect
to such Common Stock Equivalents with the number of shares issuable with respect
to Common Stock Equivalents determined from time to time in the manner provided
for deemed issuances in subsection 4(d)(i)(E).
(iv) If the number of shares of Common Stock outstanding
at any time after the Purchase Date is decreased by a combination of the
outstanding shares of Common Stock, then, following the record date of such
combination, the Conversion Price for each of the Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock
shall be appropriately increased so that the number of shares of Common Stock
issuable on conversion of each share of such series shall be decreased in
proportion to such decrease in outstanding shares.
(e) Other Distributions. In the event this
corporation shall declare a distribution payable in securities of other persons,
evidences of indebtedness issued by this corporation or other persons, assets
(excluding cash dividends) or options or rights not referred to in subsection
4(d)(iii), then, in each such case for the purpose of this subsection 4(e), the
holders of the Preferred Stock shall be entitled to a proportionate share of any
such distribution as though they were the holders of the number of shares of
Common Stock of the corporation into which their shares of Preferred Stock are
convertible as of the record date fixed for the determination of the holders of
Common Stock of the corporation entitled to receive such distribution.
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(f) Recapitalizations. If at any time or from time to
time there shall be a recapitalization of the Common Stock (other than a
subdivision, combination or merger or sale of assets transaction provided for
elsewhere in this Section 4 or Section 2) provision shall be made so that the
holders of the Preferred Stock shall thereafter be entitled to receive upon
conversion of their respective Preferred Stock, the number of shares of stock or
other securities or property of the Company or otherwise, to which a holder of
Common Stock deliverable upon conversion would have been entitled on such
recapitalization. In any such case, appropriate adjustment shall be made in the
application of the provisions of this Section 4 with respect to the rights of
the holders of the Preferred Stock after the recapitalization to the end that
the provisions of this Section 4 (including adjustment of the Conversion Price
then in effect and the number of shares purchasable upon conversion of the
Preferred Stock) shall be applicable after that event as nearly equivalent as
may be practicable.
(g) No Impairment. This corporation will not, by
amendment of its Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by this corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 4 and in the taking of all
such action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of Preferred Stock against impairment.
(h) No Fractional Shares and Certificate as to
Adjustments.
(i) No fractional shares shall be issued upon the
conversion of any share or shares of Preferred Stock, and the number of shares
of Common Stock to be issued shall be rounded to the nearest whole share.
Whether or not fractional shares are issuable upon the conversion of Preferred
Stock shall be determined on the basis of the total number of shares of
Preferred Stock the holder is at the time converting into Common Stock and the
number of shares of Common Stock issuable upon such aggregate conversion.
(ii) Upon the occurrence of each adjustment or
readjustment of the Conversion Price of the Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock or Series E Preferred Stock pursuant
to this Section 4, this corporation, at its expense, shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and prepare and
furnish to each holder of Preferred Stock a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. This corporation shall, upon the written
request at any time of any holder of Preferred Stock, furnish or cause to be
furnished to such holder a like certificate setting forth (A) such adjustment
and readjustment, (B) the Conversion Price for such series of Preferred Stock at
the time in effect and (C) the number of shares of Common Stock and the amount,
if any, of other property which at the time would be received upon the
conversion of a share of such series of Preferred Stock.
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(i) Notices of Record Date. In the event of any
taking by this corporation of a record of the holders of any class of securities
for the purpose of determining the holders thereof who are entitled to receive
any dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, this
corporation shall mail to each holder of Preferred Stock, at least 20 days prior
to the date specified therein, a notice specifying the date on which any such
record is to be taken for the purpose of such dividend, distribution or right,
and the amount and character of such dividend, distribution or right.
(j) Reservation of Stock Issuable Upon
Conversion. This corporation shall at all times reserve and keep available out
of its authorized but unissued shares of Common Stock, solely for the purpose of
effecting the conversion of the shares of Preferred Stock, such number of its
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of Preferred Stock; and if at any time the
number of authorized but unissued shares of Common Stock shall not be sufficient
to effect the conversion of all then outstanding shares of Preferred Stock, in
addition to such other remedies as shall be available to the holder of such
Preferred Stock, this corporation will take such corporate action as may, in the
opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purposes, including, without limitation, engaging in best efforts to obtain the
requisite shareholder approval of any necessary amendment to this Certificate.
(k) Notices. Any notice required by the
provisions of this Section 4 to be given to the holders of shares of Preferred
Stock shall be deemed given if deposited in the United States mail, postage
prepaid, and addressed to each holder of record at his address appearing on the
books of this corporation.
5. Voting Rights. The holder of each share of Series B Preferred
Stock, the holder of each share of Series C Preferred Stock, the holder of each
share of Series D Preferred Stock and the holder of each share of Series E
Preferred Stock shall have the right to one vote for each share of Common Stock
into which such share of Preferred Stock could then be converted, and with
respect to such vote, such holder shall have full voting rights and powers equal
to the voting rights and powers of the holders of Common Stock, and shall be
entitled, notwithstanding any provision hereof, to notice of any stockholders'
meeting in accordance with the bylaws of this corporation, and shall be entitled
to vote, together with holders of Common Stock, with respect to any question
upon which holders of Common Stock have the right to vote. Fractional votes
shall not, however, be permitted and any fractional voting rights available on
an as-converted basis (after aggregating all shares into which shares of such
Preferred Stock held by each holder could be converted) shall be rounded to the
nearest whole number (with one-half being rounded upward).
6. Protective Provisions.
(a) Subject to the rights of series of Preferred Stock that
may from time to time come into existence, so long as any shares of Preferred
Stock are outstanding,
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this corporation shall not without first obtaining the approval (by vote or
written consent, as provided by law) of the holders of at least a majority of
the then outstanding shares of Preferred Stock, voting together as a single
class and not separate series, and on an as converted basis:
(i) sell, convey, or otherwise dispose of or encumber all
or substantially all of its property or business or merge into or consolidate
with any other corporation (other than a wholly-owned subsidiary corporation) or
effect any transaction or series of related transactions in which more than
fifty percent (50%) of the then outstanding voting power of the corporation is
disposed of; or
(ii) alter or change the rights, preferences or privileges
of the shares of Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock or Series E Preferred Stock so as to affect adversely such
shares; or
(iii) increase or decrease (other than by conversion) the
total number of authorized shares of Preferred Stock; or
(iv) authorize or issue, or obligate itself to authorize
or issue, any other equity security, including any other security convertible
into or exercisable for any equity security having a preference over, or being
on a parity with, the Series B Preferred Stock, Series C Preferred Stock, Series
D Preferred Stock or Series E Preferred Stock with respect to voting, dividends
or upon liquidation; or
(v) amend the Corporation's Certificate of Incorporation
or bylaws.
(b) Notwithstanding the foregoing, so long as at least
375,000 shares of Series D Preferred Stock are outstanding, this corporation
shall not without first obtaining the approval (by vote or written consent, as
provided by law) 60% of the holders of the then outstanding shares of Series D
Preferred Stock, voting together as a separate series and on an as-converted
basis:
(i) sell, convey, or otherwise dispose of or encumber all
or substantially all of its property or business or merge into or consolidate
with any other corporation (other than a wholly-owned subsidiary corporation) or
effect any transaction or series of related transactions in which more than
fifty percent (50%) of the then outstanding voting power of the corporation is
disposed of; or
(ii) alter or change the rights, preferences or privileges
of the shares of Series D Preferred Stock so as to adversely affect such shares
in a manner different from shares of Series B Preferred Stock and Series C
Preferred Stock.
7. Status of Converted Stock. In the event any shares of Series B
Preferred Stock, any shares of Series C Preferred Stock, any shares of Series D
Preferred Stock or any shares of Series E Preferred Stock shall be converted
pursuant to Section 3 or Section 4 hereof, the shares so converted shall be
canceled and shall not be issuable by the corporation.
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<PAGE> 13
The Certificate of Incorporation of this corporation shall be appropriately
amended to effect the corresponding reduction in the corporation's authorized
capital stock.
C. Common Stock.
1. Dividend Rights. Subject to the prior rights of holders
of all classes of stock at the time outstanding having prior rights as to
dividends, the holders of the Common Stock shall be entitled to receive, when
and as declared by the Board of Directors, out of any assets of the corporation
legally available therefor, such dividends as may be declared from time to time
by the Board of Directors.
2. Liquidation Rights. Upon the liquidation, dissolution
or winding up of the corporation, the assets of the corporation shall be
distributed as provided in Section 2 of Division (B) of this Article IV hereof.
3. Redemption. The Common Stock is not redeemable.
4. Voting Rights. The holder of each share of Common Stock
shall have the right to one vote, and shall be entitled to notice of any
shareholders' meeting in accordance with the bylaws of this corporation, and
shall be entitled to vote upon such matters and in such manner as may be
provided by law.
ARTICLE V
Except as otherwise provided in this Amended and Restated
Certificate of Incorporation, in furtherance and not in limitation of the powers
conferred by statute, the Board of Directors is expressly authorized to make,
repeal, alter, amend and rescind any or all of the Bylaws of the corporation.
ARTICLE VI
The number of directors of the corporation shall be fixed from
time to time by a Bylaw or amendment thereof duly adopted by the Board of
Directors or by the stockholders. A director appointed by the Board of Directors
to fill a vacancy shall serve for the remainder of the term of the vacated
directorship he or she is filling.
ARTICLE VII
Elections of directors need not be by written ballot unless
the Bylaws of the corporation shall so provide. At all elections of directors,
the stockholders of this corporation shall be entitled to cumulative voting in
such election of directors in accordance with Section 214 of the General
Corporation Law and the Bylaws of this corporation.
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<PAGE> 14
ARTICLE VIII
Meetings of stockholders may be held within or without the
State of Delaware, as the Bylaws may provide. The books of the corporation may
be kept (subject to any provision contained in the statutes) outside the State
of Delaware at such place or places as may be designated from time to time by
the Board of Directors or in the Bylaws of the corporation.
ARTICLE IX
Any action required to be taken or that may be taken at any
annual or special meeting of the stockholders of this corporation may be taken
without a meeting.
ARTICLE X
A director of the corporation shall not be personally liable
to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the director derived any
improper personal benefit. If the Delaware General Corporation Law is amended
after approval by the stockholders of this Certificate to authorize corporation
action further eliminating or limiting the personal liability of directors then
liability of a director of the corporation shall be eliminated or limited to the
fullest extent permitted by the Delaware General Corporation Law as so amended.
Any repeal or modification of the foregoing provisions of this
Article X by the stockholders of the corporation shall not adversely affect any
right or protection of a director of the corporation existing at the time of
such repeal or modification.
ARTICLE XI
To the fullest extent permitted by applicable law, this
corporation is also authorized to provide indemnification of (and advancement of
expenses to) such agents (and any other persons to which Delaware law permits
this corporation to provide indemnification) through Bylaw provisions,
agreements with such agents or other persons, vote of stockholders or
disinterested directors or otherwise, in excess of the indemnification and
advancement otherwise permitted by Section 145 of the General Corporation Law of
the State of Delaware, subject only to limits created by applicable Delaware law
(statutory or non-statutory), with respect to actions for breach of duty to this
corporation, its stockholders, and others.
Any repeal or modification of any foregoing provisions of this
Article XI shall not adversely affect any right or protection of a director,
officer, agent or other person existing at the time of, or increase the
liability of any director of this corporation with respect to any acts or
omissions of such director, officer or agent occurring prior to such repeal or
modification.
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ARTICLE XII
This corporation reserves the right to amend, alter, change or
repeal any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation."
* * *
THIRD: That thereafter said amendment and restatement was duly
adopted in accordance with the provisions of Section 242 and Section 245 of the
General Corporation Law by obtaining a majority vote of the Common Stock, in
favor of said amendment and restatement.
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<PAGE> 16
IN WITNESS WHEREOF, the undersigned have executed this
Certificate this 17th day of September, 1998.
/s/ Chris MacAskill
-------------------------------
Chris MacAskill
President
ATTEST:
/s/ Ralph L. Arnheim III
- -------------------------------
Ralph L. Arnheim III
Assistant Secretary
<PAGE> 1
EXHIBIT 3.2
SECOND AMENDED AND
RESTATED CERTIFICATE OF INCORPORATION OF
COMPUTER LITERACY, INC.
a Delaware corporation
(PURSUANT TO SECTIONS 228, 242 AND 245
OF THE DELAWARE GENERAL CORPORATION LAW)
Computer Literacy, Inc. (the "Corporation"), a corporation organized and
existing under the General Corporation Law of the State of Delaware (the
"General Corporation Law")
DOES HEREBY CERTIFY:
FIRST: That the Corporation was originally incorporated on May 4, 1998,
pursuant to the General Corporation Law.
SECOND: That the Board of Directors duly adopted resolutions proposing
to amend and restate the Amended and Restated Certificate of Incorporation of
the Corporation, declaring said amendment and restatement to be advisable and in
the best interests of the Corporation and its stockholders, and authorizing the
appropriate officers of the Corporation to solicit the consent of the
stockholders therefor, which resolution setting forth the proposed amendment and
restatement is as follows:
"RESOLVED, that the Amended and Restated Certificate of Incorporation of
the Corporation be amended and restated in its entirety as follows:
ARTICLE I
The name of the corporation is Computer Literacy, Inc..
ARTICLE II
The address of the registered office of the Corporation in the
State of Delaware is 15 East North Street, in the City of Dover, County of Kent.
The name of its registered agent at such address is Incorporating Services, Ltd.
ARTICLE III
The nature of the business or purposes to be conducted or promoted is to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware.
<PAGE> 2
ARTICLE IV
The Corporation is authorized to issue two classes of stock to be
designated common stock ("Common Stock") and preferred stock ("Preferred
Stock"). The number of shares of Common Stock authorized to be issued is Fifty
Million (50,000,000), par value $0.001 per share, and the number of Preferred
Stock authorized to be issued is Five Million (5,000,000), par value $0.001 per
share.
The Preferred Stock may be issued from time to time in one or more
series, without further stockholder approval. The Board of Directors is hereby
authorized, in the resolution or resolutions adopted by the Board of Directors
providing for the issue of any wholly unissued series of Preferred Stock, within
the limitations and restrictions stated in this Second Amended and Restated
Certificate of Incorporation (the "Restated Certificate"), to fix or alter the
dividend rights, dividend rate, conversion rights, voting rights, rights and
terms of redemption (including sinking fund provisions), the redemption price or
prices, and the liquidation preferences of any wholly unissued series of
Preferred Stock, and the number of shares constituting any such series and the
designation thereof, or any of them, and to increase or decrease the number of
shares of any series subsequent to the issue of shares of that series, but not
below the number of shares of such series then outstanding. In case the number
of shares of any series shall be so decreased, the shares constituting such
decrease shall resume the status that they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
ARTICLE V
Except as otherwise provided in this Restated Certificate, in
furtherance and not in limitation of the powers conferred by statute, the Board
of Directors is expressly authorized to make, repeal, alter, amend and rescind
any or all of the Bylaws of the Corporation.
ARTICLE VI
The number of directors shall be fixed from time to time exclusively by
the Board of Directors pursuant to a resolution adopted by a majority of the
total number of authorized directors (regardless of any existing vacancies in
previously authorized directorships at the time any such resolution is presented
to the Board for adoption).
Vacancies and newly created directorships resulting from any increase in
the authorized number of directors may be filled by a majority of the directors
then in office, though less than a quorum, or by a sole remaining director, and
not by stockholders, and the directors so chosen shall hold office until the
next annual election and until their successors are duly elected and shall
qualify, unless sooner displaced. If there are no directors in office, then an
election of directors may be held in the manner provided by the bylaws and by
statute.
The business of the corporation shall be managed by or under the
direction of its board of directors, which may exercise all such powers of the
corporation and do all such lawful
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<PAGE> 3
acts and things as are not by statute or by the certificate of incorporation or
by these bylaws directed or required to be exercised or done by the
stockholders.
ARTICLE VII
Elections of directors need not be by written ballot unless the Bylaws
of the Corporation shall so provide.
ARTICLE VIII
Except as otherwise provided in this Restated Certificate, any action
required or permitted to be taken by the stockholders of the Corporation must be
effected at an annual or special meeting of the stockholders of the Corporation,
and may not be effected by any consent in writing of such stockholders.
ARTICLE IX
A director of the Corporation shall, to the fullest extent permitted by
the General Corporation Law as it now exists or as it may hereafter be amended,
not be personally liable to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i) for
any breach of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the General Corporation Law, or (iv) for any transaction from which the director
derived any improper personal benefit. If the General Corporation Law is
amended, after approval by the stockholders of this Article, to authorize
corporation action further eliminating or limiting the personal liability of
directors, then the liability of a director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the General Corporation
Law, as so amended.
Any amendment, repeal or modification of this Article IX, or the
adoption of any provision of this Amended and Restated Certificate of
Incorporation inconsistent with this Article IX, by the stockholders of the
Corporation shall not apply to or adversely affect any right or protection of a
director of the Corporation existing at the time of such amendment, repeal,
modification or adoption.
ARTICLE X
In addition to any vote of the holders of any class or series of the
stock of the Corporation required by law or by this Restated Certificate, the
affirmative vote of the holders of a majority of the voting power of all of the
then outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors, voting together as a single class, shall
be required to amend or repeal the provisions of this Restated Certificate.
No action required to be taken or that may be taken at any annual or
special meeting of the stockholders of this corporation may be taken without a
meeting, and the power of
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<PAGE> 4
stockholders to consent in writing, without a meeting, to the taking of any
action is specifically denied.
ARTICLE XI
To the fullest extent permitted by applicable law, the Corporation is
authorized to provide indemnification of (and advancement of expenses to) agents
of the Corporation (and any other persons to which General Corporation Law
permits the Corporation to provide indemnification) through bylaw provisions,
agreements with such agents or other persons, vote of stockholders or
disinterested directors or otherwise, in excess of the indemnification and
advancement otherwise permitted by Section 145 of the General Corporation Law,
subject only to limits created by applicable General Corporation Law (statutory
or non-statutory), with respect to actions for breach of duty to the
Corporation, its stockholders, and others.
Any amendment, repeal or modification of the foregoing provisions of
this Article XI shall not adversely affect any right or protection of a
director, officer, agent, or other person existing at the time of, or increase
the liability of any director of the Corporation with respect to any acts or
omissions of such director, officer or agent occurring prior to, such amendment,
repeal or modification.
* * * *
THIRD: The foregoing amendment and restatement was approved by the
holders of the requisite number of shares of said corporation in accordance with
Section 228 of the General Corporation Law.
FOURTH: That said amendment and restatement was duly adopted in
accordance with the provisions of Section 242 and 245 of the General Corporation
Law.
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<PAGE> 5
IN WITNESS WHEREOF, the undersigned has signed this Second Amended and
Restated Certificate of Incorporation on _______________________________, 1998.
-----------------------------------
Chris MacAskill
President
ATTEST:
- -----------------------------------
Ralph L. Arnheim III
Assistant Secretary
<PAGE> 1
EXHIBIT 3.3
BYLAWS OF
COMPUTER LITERACY, INC.
A DELAWARE CORPORATION
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I. OFFICES ..................................................1
ARTICLE II. MEETINGS OF STOCKHOLDERS..................................1
ARTICLE III. DIRECTORS.................................................3
ARTICLE IV. NOTICES ..................................................5
ARTICLE V. OFFICERS .................................................6
ARTICLE VI. CERTIFICATE OF STOCK......................................8
ARTICLE VII. GENERAL PROVISIONS.......................................10
ARTICLE VIII. AMENDMENTS...............................................12
ARTICLE IX. LOANS TO OFFICERS........................................12
</TABLE>
<PAGE> 3
BYLAWS
OF
COMPUTER LITERACY, INC.
ARTICLE I
OFFICES
1.1 The registered office shall be in the City of Dover, County of Kent,
State of Delaware.
1.2 The corporation may also have offices at such other places both
within and without the State of Delaware as the Board of Directors may from time
to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 All meetings of the stockholders for the election of directors shall
be held at such time and place, within or without the State of Delaware, as
shall be designated from time to time by the Board of Directors and stated in
the notice of the meeting. Meetings of stockholders for any other purpose may be
held at such time and place, within or without the State of Delaware, as shall
be stated in the notice of the meeting or in a duly executed waiver of notice
thereof.
2.2 Annual meetings of stockholders, commencing with the year 1998,
shall be held at such date and time as shall be designated from time to time by
the Board of Directors and stated in the notice of the meeting, at which they
shall elect by a plurality vote a Board of Directors, and transact such other
business as may properly be brought before the meeting.
2.3 Written notice of the annual meeting stating the place, date and
hour of the meeting shall be given to each stockholder entitled to vote at such
meeting not fewer than ten (10) nor more than sixty (60) days before the date of
the meeting.
2.4 The officer who has charge of the stock ledger of the corporation
shall prepare and make, at least ten (10) days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten (10) days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
<PAGE> 4
2.5 Special meetings of the stockholders, for any purpose or purposes,
unless otherwise prescribed by statute or by the certificate of incorporation,
may be called by the president and shall be called by the president or secretary
at the request in writing of a majority of the Board of Directors, or at the
request in writing of stockholders owning at least ten percent (10%) in amount
of the entire capital stock of the corporation issued and outstanding and
entitled to vote. Such request shall state the purpose or purposes of the
proposed meeting.
2.6 Written notice of a special meeting stating the place, date and hour
of the meeting and the purpose or purposes for which the meeting is called,
shall be given not fewer than ten (10) nor more than sixty (60) days before the
date of the meeting, to each stockholder entitled to vote at such meeting.
2.7 Business transacted at any special meeting of stockholders shall be
limited to the purposes stated in the notice.
2.8 The holders of a majority of the stock issued and outstanding and
entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the certificate of
incorporation. If, however, such quorum shall not be present or represented at
any meeting of the stockholders, the stockholders entitled to vote thereat,
present in person or represented by proxy, shall have power to adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted that might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty (30) days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
2.9 When a quorum is present at any meeting, the vote of the holders of
a majority of the stock having voting power present in person or represented by
proxy shall decide any question brought before such meeting, unless the question
is one upon which by express provision of the statutes or of the certificate of
incorporation, a different vote is required, in which case such express
provision shall govern and control the decision of such question.
2.10 Unless otherwise provided in the certificate of incorporation, each
stockholder shall at every meeting of the stockholders be entitled to one vote
in person or by proxy for each share of the capital stock having voting power
held by such stockholder, but no proxy shall be voted on after three years from
its date, unless the proxy provides for a longer period.
2.11 Unless otherwise provided in the certificate of incorporation, any
action required to be taken at any annual or special meeting of stockholders of
the corporation, or any action which may be taken at any annual or special
meeting of such stockholders, may be taken without a meeting, without prior
notice and without a vote, if a consent in writing, setting forth the action so
taken, shall be signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting
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at which all shares entitled to vote thereon were present and voted. Prompt
notice of the taking of the corporate action without a meeting by less than
unanimous written consent shall be given to those stockholders who have not
consented in writing.
ARTICLE III
DIRECTORS
3.1 The number of directors that shall constitute the whole Board of
Directors shall be determined by resolution of the Board of Directors or by the
stockholders at the annual meeting of the stockholders, except as provided in
Section 3.2 of this Article, and each director elected shall hold office until
his successor is elected and qualified. Directors need not be stockholders.
3.2 Vacancies and newly created directorships resulting from any
increase in the authorized number of directors may be filled by a majority of
the directors then in office, though less than a quorum, or by a sole remaining
director, and the directors so chosen shall hold office until the next annual
election and until their successors are duly elected and shall qualify, unless
sooner displaced. If there are no directors in office, then an election of
directors may be held in the manner provided by statute. If, at the time of
filling any vacancy or any newly created directorship, the directors then in
office shall constitute less than a majority of the whole Board of Directors (as
constituted immediately prior to any such increase), the Court of Chancery may,
upon application of any stockholder or stockholders holding at least ten percent
(10%) of the total number of the shares at the time outstanding having the right
to vote for such directors, summarily order an election to be held to fill any
such vacancies or newly created directorships, or to replace the directors
chosen by the directors then in office.
3.3 The business of the corporation shall be managed by or under the
direction of its Board of Directors, which may exercise all such powers of the
corporation and do all such lawful acts and things as are not by statute or by
the certificate of incorporation or by these bylaws directed or required to be
exercised or done by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
3.4 The Board of Directors of the corporation may hold meetings, both
regular and special, either within or without the State of Delaware.
3.5 The first meeting of each newly elected Board of Directors shall be
held at such time and place as shall be fixed by the vote of the stockholders at
the annual meeting and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting, provided a quorum
shall be present. In the event of the failure of the stockholders to fix the
time or place of such first meeting of the newly elected Board of Directors, or
in the event such meeting is not held at the time and place so fixed by the
stockholders, the meeting may be held at such time and place as shall be
specified in a notice given as hereinafter provided for special meetings of the
Board of Directors, or as shall be specified in a written waiver signed by all
of the directors.
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<PAGE> 6
3.6 Regular meetings of the Board of Directors may be held without
notice at such time and at such place as shall from time to time be determined
by the Board of Directors.
3.7 Special meetings of the Board of Directors may be called by the
president on two (2) days' notice to each director by mail or forty-eight (48)
hours' notice to each director either personally or by telegram; special
meetings shall be called by the president or secretary in like manner and on
like notice on the written request of two (2) directors unless the Board of
Directors consists of only one director, in which case special meetings shall be
called by the president or secretary in like manner and on like notice on the
written request of the sole director.
3.8 At all meetings of the Board of Directors a majority of the
directors shall constitute a quorum for the transaction of business and the act
of a majority of the directors present at any meeting at which there is a quorum
shall be the act of the Board of Directors, except as may be otherwise
specifically provided by statute or by the certificate of incorporation. If a
quorum shall not be present at any meeting of the Board of Directors, the
directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
3.9 Unless otherwise restricted by the certificate of incorporation or
these bylaws, any action required or permitted to be taken at any meeting of the
Board of Directors or of any committee thereof may be taken without a meeting,
if all members of the Board of Directors or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board of Directors or committee.
3.10 Unless otherwise restricted by the certificate of incorporation or
these bylaws, members of the Board of Directors, or any committee designated by
the Board of Directors, may participate in a meeting of the Board of Directors,
or any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
COMMITTEES OF DIRECTORS
3.11 The Board of Directors may designate one or more committees, each
committee to consist of one or more of the directors of the corporation. The
Board of Directors may designate one or more directors as alternate members of
any committee, who may replace any absent or disqualified member at any meeting
of the committee.
In the absence or disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member.
Any such committee, to the extent provided in the resolution of the
Board of Directors, shall have and may exercise all the powers and authority of
the Board of Directors in the management of the business and affairs of the
corporation, and may authorize the seal of the
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<PAGE> 7
corporation to be affixed to all papers which may require it; but no such
committee shall have the power or authority in reference to the following
matters: (i) approving or adopting, or recommending to the stockholders, any
action or matter expressly required by the General Corporation Law of Delaware
to be submitted to stockholders for approval, or (ii) adopting, amending or
repealing any provision of these bylaws.
3.12 Each committee shall keep regular minutes of its meetings and
report the same to the Board of Directors when required.
COMPENSATION OF DIRECTORS
3.13 Unless otherwise restricted by the certificate of incorporation or
these bylaws, the Board of Directors shall have the authority to fix the
compensation of directors. The directors may be paid their expenses, if any, of
attendance at each meeting of the Board of Directors and may be paid a fixed sum
for attendance at each meeting of the Board of Directors or a stated salary as
director. No such payment shall preclude any director from serving the
corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
REMOVAL OF DIRECTORS
3.14 Unless otherwise restricted by the certificate of incorporation or
these bylaws, any director or the entire Board of Directors may be removed, with
or without cause, by the holders of a majority of shares entitled to vote at an
election of directors.
ARTICLE IV
NOTICES
4.1 Whenever, under the provisions of the statutes or of the certificate
of incorporation or of these bylaws, notice is required to be given to any
director or stockholder, it shall not be construed to mean personal notice, but
such notice may be given in writing, by mail, addressed to such director or
stockholder, at his address as it appears on the records of the corporation,
with postage thereon prepaid, and such notice shall be deemed to be given at the
time when the same shall be deposited in the United States mail. Notice to
directors may also be given by telegram.
4.2 Whenever any notice is required to be given under the provisions of
the statutes or of the certificate of incorporation or of these bylaws, a waiver
thereof in writing, signed by the person or persons entitled to said notice,
whether before or after the time stated therein, shall be deemed equivalent
thereto.
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ARTICLE V
OFFICERS
5.1 The officers of the corporation shall be chosen by the Board of
Directors and shall be a president, treasurer and a secretary. The Board of
Directors may elect from among its members a Chairman of the Board and a Vice
Chairman of the Board. The Board of Directors may also choose one or more
vice-presidents, assistant secretaries and assistant treasurers. Any number of
offices may be held by the same person, unless the certificate of incorporation
or these bylaws otherwise provide.
5.2 The Board of Directors at its first meeting after each annual
meeting of stockholders shall choose a president, a treasurer, and a secretary
and may choose vice-presidents.
5.3 The Board of Directors may appoint such other officers and agents as
it shall deem necessary who shall hold their offices for such terms and shall
exercise such powers and perform such duties as shall be determined from time to
time by the Board of Directors.
5.4 The salaries of all officers and agents of the corporation shall be
fixed by the Board of Directors.
5.5 The officers of the corporation shall hold office until their
successors are chosen and qualify. Any officer elected or appointed by the Board
of Directors may be removed at any time by the affirmative vote of a majority of
the Board of Directors. Any vacancy occurring in any office of the corporation
shall be filled by the Board of Directors. THE CHAIRMAN OF THE BOARD
5.6 The Chairman of the Board, if any, shall preside at all meetings of
the Board of Directors and of the stockholders at which he shall be present. He
shall have and may exercise such powers as are, from time to time, assigned to
him by the Board of Directors and as may be provided by law.
5.7 In the absence of the Chairman of the Board, the Vice Chairman of
the Board, if any, shall preside at all meetings of the Board of Directors and
of the stockholders at which he shall be present. He shall have and may exercise
such powers as are, from time to time, assigned to him by the Board of Directors
and as may be provided by law.
THE PRESIDENT AND VICE-PRESIDENTS
5.8 The president shall be the chief executive officer of the
corporation; and in the absence of the Chairman and Vice Chairman of the Board
he shall preside at all meetings of the stockholders and the Board of Directors;
he shall have general and active management of the business of the corporation
and shall see that all orders and resolutions of the Board of Directors are
carried into effect.
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5.9 He shall execute bonds, mortgages and other contracts requiring a
seal, under the seal of the corporation, except where required or permitted by
law to be otherwise signed and executed and except where the signing and
execution thereof shall be expressly delegated by the Board of Directors to some
other officer or agent of the corporation.
5.10 In the absence of the president or in the event of his inability or
refusal to act, the vice-president, if any, (or in the event there be more than
one vice-president, the vice-presidents in the order designated by the
directors, or in the absence of any designation, then in the order of their
election) shall perform the duties of the president, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
president. The vice-presidents shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe.
THE SECRETARY AND ASSISTANT SECRETARY
5.11 The secretary shall attend all meetings of the Board of Directors
and all meetings of the stockholders and record all the proceedings of the
meetings of the corporation and of the Board of Directors in a book to be kept
for that purpose and shall perform like duties for the standing committees when
required. He shall give, or cause to be given, notice of all meetings of the
stockholders and special meetings of the Board of Directors, and shall perform
such other duties as may be prescribed by the Board of Directors or president,
under whose supervision he shall be. He shall have custody of the corporate seal
of the corporation and he, or an assistant secretary, shall have authority to
affix the same to any instrument requiring it and when so affixed, it may be
attested by his signature or by the signature of such assistant secretary. The
Board of Directors may give general authority to any other officer to affix the
seal of the corporation and to attest the affixing by his signature.
5.12 The assistant secretary, or if there be more than one, the
assistant secretaries in the order determined by the Board of Directors (or if
there be no such determination, then in the order of their election) shall, in
the absence of the secretary or in the event of his inability or refusal to act,
perform the duties and exercise the powers of the secretary and shall perform
such other duties and have such other powers as the Board of Directors may from
time to time prescribe.
THE TREASURER AND ASSISTANT TREASURERS
5.13 The treasurer shall have the custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the Board of Directors.
5.14 He shall disburse the funds of the corporation as may be ordered by
the Board of Directors, taking proper vouchers for such disbursements, and shall
render to the president and the Board of Directors, at its regular meetings, or
when the Board of Directors so requires, an account of all his transactions as
treasurer and of the financial condition of the corporation.
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5.15 If required by the Board of Directors, he shall give the
corporation a bond (which shall be renewed every six years) in such sum and with
such surety or sureties as shall be satisfactory to the Board of Directors for
the faithful performance of the duties of his office and for the restoration to
the corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the corporation.
5.16 The assistant treasurer, or if there shall be more than one, the
assistant treasurers in the order determined by the Board of Directors (or if
there be no such determination, then in the order of their election) shall, in
the absence of the treasurer or in the event of his inability or refusal to act,
perform the duties and exercise the powers of the treasurer and shall perform
such other duties and have such other powers as the Board of Directors may from
time to time prescribe.
ARTICLE VI
CERTIFICATE OF STOCK
6.1 Every holder of stock in the corporation shall be entitled to have a
certificate, signed by, or in the name of the corporation by, the Chairman or
Vice Chairman of the Board of Directors, or the president or a vice-president
and the treasurer or an assistant treasurer, or the secretary or an assistant
secretary of the corporation, certifying the number of shares owned by him in
the corporation.
Certificates may be issued for partly paid shares and in such case upon
the face or back of the certificates issued to represent any such partly paid
shares, the total amount of the consideration to be paid therefor, and the
amount paid thereon shall be specified.
If the corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate which the corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in Section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements, there may be set forth on the face or back
of the certificate which the corporation shall issue to represent such class or
series of stock, a statement that the corporation will furnish without charge to
each stockholder who so requests the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
6.2 Any of or all the signatures on the certificate may be facsimile. In
case any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the corporation with the same effect as if he were such officer,
transfer agent or registrar at the date of issue.
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LOST CERTIFICATES
6.3 The Board of Directors may direct a new certificate or certificates
to be issued in place of any certificate or certificates theretofore issued by
the corporation alleged to have been lost, stolen or destroyed, upon the making
of an affidavit of that fact by the person claiming the certificate of stock to
be lost, stolen or destroyed. When authorizing such issue of a new certificate
or certificates, the Board of Directors may, in its discretion and as a
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed certificate or certificates, or his legal representative, to
advertise the same in such manner as it shall require and/or to give the
corporation a bond in such sum as it may direct as indemnity against any claim
that may be made against the corporation with respect to the certificate alleged
to have been lost, stolen or destroyed.
TRANSFER OF STOCK
6.4 Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
FIXING RECORD DATE
6.5 In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholder or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty (60) nor less than ten (10) days before the
date of such meeting, nor more than sixty (60) days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
REGISTERED STOCKHOLDERS
6.6 The corporation shall be entitled to recognize the exclusive right
of a person registered on its books as the owner of shares to receive dividends,
and to vote as such owner, and to hold liable for calls and assessments a person
registered on its books as the owner of shares and shall not be bound to
recognize any equitable or other claim to or interest in such share or shares on
the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of Delaware.
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ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
7.1 Dividends upon the capital stock of the corporation, subject to the
provisions of the certificate of incorporation, if any, may be declared by the
Board of Directors at any regular or special meeting, pursuant to law. Dividends
may be paid in cash, in property, or in shares of the capital stock, subject to
the provisions of the certificate of incorporation.
7.2 Before payment of any dividend, there may be set aside out of any
funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purposes as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created. CHECKS
7.3 All checks or demands for money and notes of the corporation shall
be signed by such officer or officers or such other person or persons as the
Board of Directors may from time to time designate.
FISCAL YEAR
7.4 The fiscal year of the corporation shall be fixed by resolution of
the Board of Directors.
SEAL
7.5 The Board of Directors may adopt a corporate seal having inscribed
thereon the name of the corporation, the year of its organization and the words
"Corporate Seal, Delaware." The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
INDEMNIFICATION
7.6 The corporation shall, to the fullest extent authorized under the
laws of the State of Delaware, as those laws may be amended and supplemented
from time to time, indemnify any director made, or threatened to be made, a
party to an action or proceeding, whether criminal, civil, administrative or
investigative, by reason of being a director of the corporation or a predecessor
corporation or, at the corporation's request, a director or officer of another
corporation; provided, however, that the corporation shall indemnify any such
agent in connection with a proceeding initiated by such agent only if such
proceeding was authorized by the Board of Directors of the corporation. The
indemnification provided for in this Section 7.6 shall: (i) not be deemed
exclusive of any other rights to which those indemnified may be entitled
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under any bylaw, agreement or vote of stockholders or disinterested directors or
otherwise, both as to action in their official capacities and as to action in
another capacity while holding such office, (ii) continue as to a person who has
ceased to be a director, and (iii) inure to the benefit of the heirs, executors
and administrators of such a person. The corporation's obligation to provide
indemnification under this Section 7.6 shall be offset to the extent of any
other source of indemnification or any otherwise applicable insurance coverage
under a policy maintained by the corporation or any other person.
Expenses incurred by a director of the corporation in defending a civil
or criminal action, suit or proceeding by reason of the fact that he is or was a
director of the corporation (or was serving at the corporation's request as a
director or officer of another corporation) shall be paid by the corporation in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of such director to repay such amount if it
shall ultimately be determined that he is not entitled to be indemnified by the
corporation as authorized by relevant sections of the General Corporation Law of
Delaware. Notwithstanding the foregoing, the corporation shall not be required
to advance such expenses to an agent who is a party to an action, suit or
proceeding brought by the corporation and approved by a majority of the Board of
Directors of the corporation that alleges willful misappropriation of corporate
assets by such agent, disclosure of confidential information in violation of
such agent's fiduciary or contractual obligations to the corporation or any
other willful and deliberate breach in bad faith of such agent's duty to the
corporation or its stockholders.
The foregoing provisions of this Section 7.6 shall be deemed to be a
contract between the corporation and each director who serves in such capacity
at any time while this bylaw is in effect, and any repeal or modification
thereof shall not affect any rights or obligations then existing with respect to
any state of facts then or theretofore existing or any action, suit or
proceeding theretofore or thereafter brought based in whole or in part upon any
such state of facts.
The Board of Directors in its discretion shall have power on behalf of
the corporation to indemnify any person, other than a director, made a party to
any action, suit or proceeding by reason of the fact that he, his testator or
intestate, is or was an officer or employee of the corporation.
To assure indemnification under this Section 7.6 of all directors,
officers and employees who are determined by the corporation or otherwise to be
or to have been "fiduciaries" of any employee benefit plan of the corporation
that may exist from time to time, Section 145 of the General Corporation Law of
Delaware shall, for the purposes of this Section 7.6, be interpreted as follows:
an "other enterprise" shall be deemed to include such an employee benefit plan,
including without limitation, any plan of the corporation that is governed by
the Act of Congress entitled "Employee Retirement Income Security Act of 1974,"
as amended from time to time; the corporation shall be deemed to have requested
a person to serve an employee benefit plan where the performance by such person
of his duties to the corporation also imposes duties on, or otherwise involves
services by, such person to the plan or participants
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or beneficiaries of the plan; excise taxes assessed on a person with respect to
an employee benefit plan pursuant to such Act of Congress shall be deemed
"fines."
ARTICLE VIII
AMENDMENTS
8.1 These bylaws may be altered, amended or repealed or new bylaws may
be adopted by the stockholders or by the Board of Directors, when such power is
conferred upon the Board of Directors by the certificate of incorporation at any
regular meeting of the stockholders or of the Board of Directors or at any
special meeting of the stockholders or of the Board of Directors if notice of
such alteration, amendment, repeal or adoption of new bylaws be contained in the
notice of such special meeting. If the power to adopt, amend or repeal bylaws is
conferred upon the Board of Directors by the certificate or incorporation it
shall not divest or limit the power of the stockholders to adopt, amend or
repeal bylaws.
ARTICLE IX
LOANS TO OFFICERS
9.1 The corporation may lend money to, or guarantee any obligation of,
or otherwise assist any officer or other employee of the corporation or of its
subsidiaries, including any officer or employee who is a Director of the
corporation or its subsidiaries, whenever, in the judgment of the Board of
Directors, such loan, guarantee or assistance may reasonably be expected to
benefit the corporation. The loan, guarantee or other assistance may be with or
without interest and may be unsecured, or secured in such manner as the Board of
Directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in these bylaws shall be deemed to deny, limit
or restrict the powers of guaranty or warranty of the corporation at common law
or under any statute.
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CERTIFICATE OF ASSISTANT SECRETARY OF
COMPUTER LITERACY, INC.
The undersigned, Ralph L. Arnheim, III, hereby certifies that he is the
duly elected and acting Assistant Secretary of Computer Literacy, Inc., a
Delaware corporation (the "Corporation"), and that the Bylaws attached hereto
constitute the Bylaws of said Corporation as duly adopted by Action by Written
Consent in Lieu of Organizational Meeting by the Sole Director on June 2, 1998.
IN WITNESS WHEREOF, the undersigned has hereunto subscribed his name
this 2nd day of June, 1998.
/s/ Ralph L. Arnheim III
-------------------------------------
Ralph L. Arnheim III
Assistant Secretary
<PAGE> 1
EXHIBIT 3.4
AMENDED AND RESTATED BYLAWS OF
COMPUTER LITERACY, INC.
A DELAWARE CORPORATION
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I. OFFICES ......................................................1
ARTICLE II. MEETINGS OF STOCKHOLDERS......................................1
ARTICLE III. DIRECTORS.....................................................3
ARTICLE IV. NOTICES ......................................................5
ARTICLE V. OFFICERS .....................................................6
ARTICLE VI. CERTIFICATE OF STOCK..........................................8
ARTICLE VII. GENERAL PROVISIONS...........................................10
ARTICLE VIII. AMENDMENTS...................................................12
ARTICLE IX. LOANS TO OFFICERS............................................12
</TABLE>
<PAGE> 3
AMENDED AND RESTATED BYLAWS
OF
COMPUTER LITERACY, INC.
ARTICLE I
OFFICES
1.1 The registered office shall be in the City of Dover, County of Kent,
State of Delaware.
1.2 The corporation may also have offices at such other places both
within and without the State of Delaware as the Board of Directors may from time
to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 All meetings of the stockholders for the election of directors shall
be held at such time and place, within or without the State of Delaware, as may
be fixed from time to time by the Board of Directors, and stated in the notice
of the meeting. Meetings of stockholders for any other purpose may be held at
such time and place, within or without the State of Delaware, as shall be stated
in the notice of the meeting or in a duly executed waiver of notice thereof.
2.2 Annual meetings of stockholders, shall be held at such date and time
as shall be designated from time to time by the Board of Directors and stated in
the notice of the meeting, at which they shall elect by a plurality vote a board
of directors, and transact such other business as may properly be brought before
the meeting.
2.3 Written notice of the annual meeting stating the place, date and
hour of the meeting shall be given to each stockholder entitled to vote at such
meeting not fewer than ten (10) nor more than sixty (60) days before the date of
the meeting.
2.4 The officer who has charge of the stock ledger of the corporation
shall prepare and make, at least ten (10) days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten (10) days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
<PAGE> 4
2.5 Special meetings of the stockholders, for any purpose or purposes,
unless otherwise prescribed by statute or by the certificate of incorporation,
may be called by the president and shall be called by the president or secretary
at the request in writing of a majority of the Board of Directors or by one or
more stockholders holding not less than 50% of the voting power of the
corporation. Such request shall state the purpose or purposes of the proposed
meeting.
Notwithstanding the above provisions of this Section 2.5, effective upon
a closing of an initial public offering of the corporation's securities pursuant
to a registration statement filed under the Securities Act of 1933, as amended,
stockholders of the corporation may not call a special meeting of the
stockholders.
2.6 Written notice of a special meeting stating the place, date and hour
of the meeting and the purpose or purposes for which the meeting is called,
shall be given not fewer than ten (10) nor more than sixty (60) days before the
date of the meeting, to each stockholder entitled to vote at such meeting.
2.7 Business transacted at any special meeting of stockholders shall be
limited to the purposes stated in the notice.
2.8 The holders of fifty percent (50%) of the stock issued and
outstanding and entitled to vote there at, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted that might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty (30) days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
2.9 When a quorum is present at any meeting, the vote of the holders of
a majority of the stock having voting power present in person or represented by
proxy shall decide any question brought before such meeting, unless the question
is one upon which by express provision of the statutes or of the certificate of
incorporation, a different vote is required, in which case such express
provision shall govern and control the decision of such question.
2.10 Unless otherwise provided in the certificate of incorporation, each
stockholder shall at every meeting of the stockholders be entitled to one vote
in person or by proxy for each share of the capital stock having voting power
held by such stockholder, but no proxy shall be voted on after three years from
its date, unless the proxy provides for a longer period.
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2.11 Unless otherwise provided in the certificate of incorporation, any
action required to be taken at any annual or special meeting of stockholders of
the corporation, or any action which may be taken at any annual or special
meeting of such stockholders, may be taken without a meeting, without prior
notice and without a vote, if a consent in writing, setting forth the action so
taken, shall be signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted. Prompt notice of the taking of the corporate action without a meeting
by less than unanimous written consent shall be given to those stockholders who
have not consented in writing. Any written consent may be revoked by a writing
received by the Secretary of the Corporation prior to the time that written
consents of the number of shares required to authorize the proposed action have
been filed with the Secretary.
Notwithstanding the above provisions of this Section 2.11, effective
upon a closing of an initial public offering of the corporation's securities
pursuant to a registration statement filed under the Securities Act of 1933, as
amended, the stockholders of the corporation may not take action by written
consent without a meeting but must take any such actions at a duly called annual
or special meeting.
ARTICLE III
DIRECTORS
3.1 The number of directors shall be fixed from time to time exclusively
by the Board of Directors pursuant to a resolution adopted by a majority of the
total number of authorized directors (whether or not there exist any vacancies
in previously authorized directorships at the time any such resolution is
presented to the Board for adoption). Directors need not be stockholders.
3.2 Vacancies and newly created directorships resulting from any
increase in the authorized number of directors may be filled by a majority of
the directors then in office, though less than a quorum, or by a sole remaining
director, and the directors so chosen shall hold office until the next annual
election and until their successors are duly elected and shall qualify, unless
sooner displaced. If there are no directors in office, then an election of
directors may be held in the manner provided by statute.
3.3 The business of the corporation shall be managed by or under the
direction of its board of directors which may exercise all such powers of the
corporation and do all such lawful acts and things as are not by statute or by
the certificate of incorporation or by these bylaws directed or required to be
exercised or done by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
3.4 The Board of Directors of the corporation may hold meetings, both
regular and special, either within or without the State of Delaware.
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3.5 The first meeting of each newly elected Board of Directors shall be
held at such time and place as shall be fixed by the vote of the stockholders at
the annual meeting and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting, provided a quorum
shall be present. In the event of the failure of the stockholders to fix the
time or place of such first meeting of the newly elected Board of Directors, or
in the event such meeting is not held at the time and place so fixed by the
stockholders, the meeting may be held at such time and place as shall be
specified in a notice given as hereinafter provided for special meetings of the
Board of Directors, or as shall be specified in a written waiver signed by all
of the directors.
3.6 Regular meetings of the Board of Directors may be held without
notice at such time and at such place as shall from time to time be determined
by the board.
3.7 Special meetings of the Board of Directors may be called by the
president on ten (10) days' notice to each director by mail or forty-eight (48)
hours notice to each director either personally or by telephone, telegram or
facsimile; special meetings shall be called by the president or secretary in
like manner and on like notice on the written request of two (2) directors
unless the board consists of only one director, in which case special meetings
shall be called by the president or secretary in like manner and on like notice
on the written request of the sole director.
3.8 At all meetings of the board a majority of the directors shall
constitute a quorum for the transaction of business and the act of a majority of
the directors present at any meeting at which there is a quorum shall be the act
of the Board of Directors, except as may be otherwise specifically provided by
statute or by the certificate of incorporation. If a quorum shall not be present
at any meeting of the Board of Directors, the directors present thereat may
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present.
3.9 Unless otherwise restricted by the certificate of incorporation or
these bylaws, any action required or permitted to be taken at any meeting of the
Board of Directors or of any committee thereof may be taken without a meeting,
if all members of the board or committee, as the case may be, consent thereto in
writing, and the writing or writings are filed with the minutes of proceedings
of the board or committee.
3.10 Unless otherwise restricted by the certificate of incorporation or
these bylaws, members of the Board of Directors, or any committee designated by
the Board of Directors, may participate in a meeting of the Board of Directors,
or any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
COMMITTEES OF DIRECTORS
3.11 The Board of Directors may designate one or more committees, each
committee to consist of one or more of the directors of the corporation. The
board may designate
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one or more directors as alternate members of any committee, who may replace any
absent or disqualified member at any meeting of the committee.
In the absence or disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member.
Any such committee, to the extent provided in the resolution of the
Board of Directors, shall have and may exercise all the powers and authority of
the Board of Directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers which may require it; but no such committee shall have the power or
authority in reference to the following matters: (i) approving or adopting, or
recommending to the stockholders, any action or matter expressly required by the
General Corporation Law of Delaware to be submitted to stockholders for approval
or (ii) adopting, amending or repealing any provision of these bylaws.
3.12 Each committee shall keep regular minutes of its meetings and
report the same to the Board of Directors when required.
COMPENSATION OF DIRECTORS
3.13 Unless otherwise restricted by the certificate of incorporation or
these bylaws, the Board of Directors shall have the authority to fix the
compensation of directors. The directors may be paid their expenses, if any, of
attendance at each meeting of the Board of Directors and may be paid a fixed sum
for attendance at each meeting of the Board of Directors or a stated salary as
director. No such payment shall preclude any director from serving the
corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
REMOVAL OF DIRECTORS
3.14 Unless otherwise restricted by the certificate of incorporation or
these bylaws, any director or the entire Board of Directors may be removed, with
or without cause, by the holders of a majority of shares entitled to vote at an
election of directors.
ARTICLE IV
NOTICES
4.1 Whenever, under the provisions of the statutes or of the certificate
of incorporation or of these bylaws, notice is required to be given to any
director or stockholder, it shall not be construed to mean personal notice, but
such notice may be given in writing, by mail, addressed to such director or
stockholder, at his address as it appears on the records of the corporation,
with postage thereon prepaid, and such notice shall be deemed to be given at the
time when the same shall be deposited in the United States mail. Notice to
directors may also be given by telephone, telegram or facsimile.
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4.2 Whenever any notice is required to be given under the provisions of
the statutes or of the certificate of incorporation or of these bylaws, a waiver
thereof in writing, signed by the person or persons entitled to said notice,
whether before or after the time stated therein, shall be deemed equivalent
thereto.
ARTICLE V
OFFICERS
5.1 The officers of the corporation shall be chosen by the Board of
Directors and shall be a president, treasurer and a secretary. The Board of
Directors may elect from among its members a Chairman of the Board and a Vice
Chairman of the Board. The Board of Directors may also choose one or more
vice-presidents, assistant secretaries and assistant treasurers. Any number of
offices may be held by the same person, unless the certificate of incorporation
or these bylaws otherwise provide.
5.2 The Board of Directors at its first meeting after each annual
meeting of stockholders shall choose a president, a treasurer, and a secretary
and may choose vice-presidents, assistant secretaries and assistant treasurers.
5.3 The Board of Directors may appoint such other officers and agents as
it shall deem necessary who shall hold their offices for such terms and shall
exercise such powers and perform such duties as shall be determined from time to
time by the board.
5.4 The salaries of all officers and agents of the corporation shall be
fixed by the Board of Directors.
5.5 The officers of the corporation shall hold office until their
successors are chosen and qualify. Any officer elected or appointed by the Board
of Directors may be removed at any time by the affirmative vote of a majority of
the Board of Directors. Any vacancy occurring in any office of the corporation
shall be filled by the Board of Directors.
THE CHAIRMAN OF THE BOARD
5.6 The Chairman of the Board, if any, shall preside at all meetings of
the Board of Directors and of the stockholders at which he or she shall be
present. He or she shall have and may exercise such powers as are, from time to
time, assigned to him or her by the board and as may be provided by law.
5.7 In the absence of the Chairman of the Board, the Vice Chairman of
the Board, if any, shall preside at all meetings of the Board of Directors and
of the stockholders at which he or she shall be present. He or she shall have
and may exercise such powers as are, from time to time, assigned to him or her
by the board and as may be provided by law.
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<PAGE> 9
THE PRESIDENT AND VICE-PRESIDENTS
5.8 The president shall be the chief executive officer of the
corporation; and in the absence of the Chairman and Vice Chairman of the Board
the president shall preside at all meetings of the stockholders and the Board of
Directors; the president shall have general and active management of the
business of the corporation and shall see that all orders and resolutions of the
Board of Directors are carried into effect.
5.9 The president shall execute bonds, mortgages and other contracts
requiring a seal, under the seal of the corporation, except where required or
permitted by law to be otherwise signed and executed and except where the
signing and execution thereof shall be expressly delegated by the Board of
Directors to some other officer or agent of the corporation.
5.10 In the absence of the president or in the event of his inability or
refusal to act, the vice-president, if any, (or in the event there be more than
one vice-president, the vice-presidents in the order designated by the
directors, or in the absence of any designation, then in the order of their
election) shall perform the duties of the president, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
president. The vice-presidents shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe.
THE SECRETARY AND ASSISTANT SECRETARY
5.11 The secretary shall attend all meetings of the Board of Directors
and all meetings of the stockholders and record all the proceedings of the
meetings of the corporation and of the Board of Directors in a book to be kept
for that purpose and shall perform like duties for the standing committees when
required. The secretary shall give, or cause to be given, notice of all meetings
of the stockholders and special meetings of the Board of Directors, and shall
perform such other duties as may be prescribed by the Board of Directors or
president, under whose supervision he or she shall be. The secretary shall have
custody of the corporate seal of the corporation and he, or an assistant
secretary, shall have authority to affix the same to any instrument requiring it
and when so affixed, it may be attested by his signature or by the signature of
such assistant secretary. The Board of Directors may give general authority to
any other officer to affix the seal of the corporation and to attest the
affixing by his or her signature.
5.12 The assistant secretary, or if there be more than one, the
assistant secretaries in the order determined by the Board of Directors (or if
there be no such determination, then in the order of their election) shall, in
the absence of the secretary or in the event of his inability or refusal to act,
perform the duties and exercise the powers of the secretary and shall perform
such other duties and have such other powers as the Board of Directors may from
time to time prescribe.
THE TREASURER AND ASSISTANT TREASURERS
5.13 The treasurer shall have the custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the
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<PAGE> 10
corporation and shall deposit all moneys and other valuable effects in the name
and to the credit of the corporation in such depositories as may be designated
by the Board of Directors.
5.14 He shall disburse the funds of the corporation as may be ordered by
the Board of Directors, taking proper vouchers for such disbursements, and shall
render to the president and the Board of Directors, at its regular meetings, or
when the Board of Directors so requires, an account of all his transactions as
treasurer and of the financial condition of the corporation.
5.15 If required by the Board of Directors, he shall give the
corporation a bond (which shall be renewed every six years) in such sum and with
such surety or sureties as shall be satisfactory to the Board of Directors for
the faithful performance of the duties of his office and for the restoration to
the corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the corporation.
5.16 The assistant treasurer, or if there shall be more than one, the
assistant treasurers in the order determined by the Board of Directors (or if
there be no such determination, then in the order of their election) shall, in
the absence of the treasurer or in the event of his inability or refusal to act,
perform the duties and exercise the powers of the treasurer and shall perform
such other duties and have such other powers as the Board of Directors may from
time to time prescribe.
ARTICLE VI
CERTIFICATE OF STOCK
6.1 Every holder of stock in the corporation shall be entitled to have a
certificate, signed by, or in the name of the corporation by, the chairman or
vice-chairman of the Board of Directors, or the president or a vice-president
and the treasurer or an assistant treasurer, or the secretary or an assistant
secretary of the corporation, certifying the number of shares owned by such
stockholder in the corporation.
Certificates may be issued for partly paid shares and in such case upon
the face or back of the certificates issued to represent any such partly paid
shares, the total amount of the consideration to be paid therefor, and the
amount paid thereon shall be specified.
If the corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate which the corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in Section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements, there may be set forth on the face or back
of the certificate which the corporation shall issue to represent such class or
series of stock, a statement that the corporation will furnish without charge to
each stockholder who so requests the powers, designations, preferences and
relative, participating,
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<PAGE> 11
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights.
6.2 Any of or all the signatures on the certificate may be facsimile. In
case any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the corporation with the same effect as if he or she were such
officer, transfer agent or registrar at the date of issue.
LOST CERTIFICATES
6.3 The Board of Directors may direct a new certificate or certificates
to be issued in place of any certificate or certificates theretofore issued by
the corporation alleged to have been lost, stolen or destroyed, upon the making
of an affidavit of that fact by the person claiming the certificate of stock to
be lost, stolen or destroyed. When authorizing such issue of a new certificate
or certificates, the Board of Directors may, in its discretion and as a
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed certificate or certificates, or his legal representative, to
advertise the same in such manner as it shall require and/or to give the
corporation a bond in such sum as it may direct as indemnity against any claim
that may be made against the corporation with respect to the certificate alleged
to have been lost, stolen or destroyed.
TRANSFER OF STOCK
6.4 Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
FIXING RECORD DATE
6.5 In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholder or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty (60) nor less than ten (10) days before the
date of such meeting, nor more than sixty (60) days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
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<PAGE> 12
REGISTERED STOCKHOLDERS
6.6 The corporation shall be entitled to recognize the exclusive right
of a person registered on its books as the owner of shares to receive dividends,
and to vote as such owner, and to hold liable for calls and assessments a person
registered on its books as the owner of shares and shall not be bound to
recognize any equitable or other claim to or interest in such share or shares on
the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of Delaware.
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
7.1 Dividends upon the capital stock of the corporation, subject to the
provisions of the certificate of incorporation, if any, may be declared by the
Board of Directors at any regular or special meeting, pursuant to law. Dividends
may be paid in cash, in property, or in shares of the capital stock, subject to
the provisions of the certificate of incorporation.
7.2 Before payment of any dividend, there may be set aside out of any
funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purposes as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
CHECKS
7.3 All checks or demands for money and notes of the corporation shall
be signed by such officer or officers or such other person or persons as the
Board of Directors may from time to time designate.
FISCAL YEAR
7.4 The fiscal year of the corporation shall be fixed by resolution of
the Board of Directors.
SEAL
7.5 The Board of Directors may adopt a corporate seal having inscribed
thereon the name of the corporation, the year of its organization and the words
"Corporate Seal, Delaware." The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
INDEMNIFICATION
7.6 The corporation shall, to the fullest extent authorized under the
laws of the State of Delaware, as those laws may be amended and supplemented
from time to time,
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indemnify any director made, or threatened to be made, a party to an action or
proceeding, whether criminal, civil, administrative or investigative, by reason
of being a director of the corporation or a predecessor corporation or, at the
corporation's request, a director or officer of another corporation, provided,
however, that the corporation shall indemnify any such agent in connection with
a proceeding initiated by such agent only if such proceeding was authorized by
the Board of Directors of the corporation. The indemnification provided for in
this Section 7.6 shall: (i) not be deemed exclusive of any other rights to which
those indemnified may be entitled under any bylaw, agreement or vote of
stockholders or disinterested directors or otherwise, both as to action in their
official capacities and as to action in another capacity while holding such
office, (ii) continue as to a person who has ceased to be a director, and (iii)
inure to the benefit of the heirs, executors and administrators of such a
person. The corporation's obligation to provide indemnification under this
Section 7.6 shall be offset to the extent of any other source of indemnification
or any otherwise applicable insurance coverage under a policy maintained by the
corporation or any other person.
Expenses incurred by a director of the corporation in defending a civil
or criminal action, suit or proceeding by reason of the fact that he or she is
or was a director of the corporation (or was serving at the corporation's
request as a director or officer of another corporation) shall be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director to
repay such amount if it shall ultimately be determined that he or she is not
entitled to be indemnified by the corporation as authorized by relevant sections
of the General Corporation Law of Delaware. Notwithstanding the foregoing, the
corporation shall not be required to advance such expenses to an agent who is a
party to an action, suit or proceeding brought by the corporation and approved
by a majority of the Board of Directors of the corporation that alleges willful
misappropriation of corporate assets by such agent, disclosure of confidential
information in violation of such agent's fiduciary or contractual obligations to
the corporation or any other willful and deliberate breach in bad faith of such
agent's duty to the corporation or its stockholders.
The foregoing provisions of this Section 7.6 shall be deemed to be a
contract between the corporation and each director who serves in such capacity
at any time while this bylaw is in effect, and any repeal or modification
thereof shall not affect any rights or obligations then existing with respect to
any state of facts then or theretofore existing or any action, suit or
proceeding theretofore or thereafter brought based in whole or in part upon any
such state of facts.
The Board of Directors in its discretion shall have power on behalf of
the corporation to indemnify any person, other than a director, made a party to
any action, suit or proceeding by reason of the fact that such person, their
testator or intestate, is or was an officer or employee of the corporation.
To assure indemnification under this Section 7.6 of all directors,
officers and employees who are determined by the corporation or otherwise to be
or to have been "fiduciaries" of any employee benefit plan of the corporation
that may exist from time to time, Section 145 of the General Corporation Law of
Delaware shall, for the purposes of this
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Section 7.6, be interpreted as follows: an "other enterprise" shall be deemed to
include such an employee benefit plan, including without limitation, any plan of
the corporation that is governed by the Act of Congress entitled "Employee
Retirement Income Security Act of 1974," as amended from time to time; the
corporation shall be deemed to have requested a person to serve an employee
benefit plan where the performance by such person of his duties to the
corporation also imposes duties on, or otherwise involves services by, such
person to the plan or participants or beneficiaries of the plan; excise taxes
assessed on a person with respect to an employee benefit plan pursuant to such
Act of Congress shall be deemed "fines."
ARTICLE VIII
AMENDMENTS
8.1 These bylaws may be altered, amended or repealed or new bylaws may
be adopted by stockholders holding at least sixty six and two-thirds percent (66
2/3%) of the Company's outstanding capital stock ("Amending Stockholders") or by
the Board of Directors, when such power is conferred upon the Board of Directors
by the certificate of incorporation at any regular meeting of the stockholders
or of the Board of Directors or by the Amending Stockholders at any special
meeting of the stockholders or by the Board of Directors at any special meeting
of the Board of Directors if notice of such alteration, amendment, repeal or
adoption of new bylaws be contained in the notice of such special meeting. If
the power to adopt, amend or repeal bylaws is conferred upon the Board of
Directors by the certificate or incorporation it shall not divest or limit the
power of the stockholders to adopt, amend or repeal bylaws.
Notwithstanding the above provisions of this Section 8.1, effective
upon a closing of an initial public offering of the corporation's securities
pursuant to a registration statement filed under the Securities Act of 1933, as
amended, the term "Amending Stockholders" shall be defined as stockholders
holding at least seventy-five percent (75%) of the Company's outstanding capital
stock.
ARTICLE IX
LOANS TO OFFICERS
9.1 The corporation may lend money to, or guarantee any obligation of,
or otherwise assist any officer or other employee of the corporation or of its
subsidiaries, including any officer or employee who is a Director of the
corporation or its subsidiaries, whenever, in the judgment of the Board of
Directors, such loan, guarantee or assistance may reasonably be expected to
benefit the corporation. The loan, guarantee or other assistance may be with or
without interest and may be unsecured, or secured in such manner as the Board of
Directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in these Bylaws shall be deemed to deny, limit
or restrict the powers of guaranty or warranty of the corporation at common law
or under any statute.
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CERTIFICATE OF ASSISTANT SECRETARY OF
COMPUTER LITERACY, INC.
The undersigned, Ralph L. Arnheim III, hereby certifies that
he is the duly elected and acting Assistant Secretary of Computer Literacy,
Inc., a Delaware corporation (the "Corporation"), and that the Amended and
Restated Bylaws attached hereto constitute the Bylaws of said Corporation as
duly adopted by the Board of Directors on _______________, 1998.
IN WITNESS WHEREOF, the undersigned has hereunto subscribed
his name on _____________________, 1998.
-----------------------------------
Ralph L. Arnheim III
Assistant Secretary
<PAGE> 1
EXHIBIT 4.2
COMPUTERLITERACY.COM
Resources for technical minds -
COMPUTER LITERACY, INC.
COMMON STOCK COMMON STOCK
INCORPORATED UNDER THE LAWS OF SEE REVERSE FOR
THE STATE OF DELAWARE CERTAIN DEFINITIONS AND
RESTRICTIONS ON TRANSFER
CUSIP 20520N 10 8
THIS CERTIFIES THAT
is the record holder of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $0.001 PER
SHARE, OF
COMPUTER LITERACY, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed.
This Certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar. WITNESS the facsimile seal of the Corporation and
the facsimile signatures of its duly authorized officers.
Dated:
[SEAL]
[SIG] [SIG]
- --------------------------- -------------------------------------
SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE> 1
Exhibit 4.3
COMPUTER LITERACY, INC.
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
MAY 22, 1998 AND AS AMENDED ON JUNE 30, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
1. Registration Rights.......................................................1
1.1 Definitions.....................................................1
1.2 Request for Registration........................................2
1.3 Company Registration............................................3
1.4 Obligations of the Company......................................4
1.5 Furnish Information.............................................5
1.6 Expenses of Demand Registration.................................6
1.7 Expenses of Company Registration................................6
1.8 Underwriting Requirements.......................................6
1.9 Delay of Registration...........................................7
1.10 Indemnification................................................7
1.11 Reports Under Securities Exchange Act of 1934..................9
1.12 Form S-3 Registration.........................................10
1.13 Assignment of Registration Rights.............................11
1.14 Limitations on Subsequent Registration Rights.................11
1.15 "Market Stand-Off" Agreement..................................11
1.16 Termination of Registration Rights............................12
2. Covenants of the Company.................................................12
2.1 Delivery of Financial Statements...............................12
2.2 Inspection.....................................................13
2.3 Termination of Information and Inspection Covenants............13
2.4 Right of First Offer...........................................13
2.5 Key Insurance..................................................15
3. Miscellaneous............................................................15
3.1 Successors and Assigns.........................................15
3.2 Governing Law..................................................15
3.3 Counterparts...................................................15
3.4 Titles and Subtitles...........................................15
3.5 Notices........................................................15
3.6 Expenses.......................................................15
3.7 Amendments and Waivers.........................................16
3.8 Severability...................................................16
3.9 Aggregation of Stock...........................................16
3.10 Entire Agreement; Amendment; Waiver...........................16
Schedule A Schedule of Investors
Schedule B Schedule of Management Holders
</TABLE>
i
<PAGE> 3
AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
THIS AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT is made as of May
22, 1998 and amended on June 30, 1998, by and between Computer Literacy, Inc.
(formerly Cbooks Express, Inc.), a California corporation (the "Company"), the
investors listed on Schedule A hereto, each of which is herein referred to as an
"Investor" and the management holders set forth in Schedule B hereto (the
"Management Holders").
RECITALS
WHEREAS, certain of the Investors and the Management Holders are parties
to that certain Amended and Restated Investors' Rights Agreement dated January
15, 1998 among such Investors, Management Holders and the Company (the "Prior
Agreement"), and
WHEREAS, certain of the Investors and the Company are parties to the
Series E Preferred Stock Purchase Agreement of even date herewith (the "Series E
Agreement"), and certain of the Company's and such Investors' obligations under
which are conditioned upon the execution and delivery of this Agreement by such
Investors, the Management Holders and the Company.
NOW, THEREFORE, in consideration of the mutual promises and covenants
set forth herein, the Investors hereby agree that the Prior Agreement shall be
superseded and replaced in its entirety by this Agreement, and the parties
hereto further agree as follows:
1. Registration Rights. The Company covenants and agrees as follows:
1.1 Definitions. For purposes of this Section 1:
(a) The term "Act" means the Securities Act of 1933, as amended.
(b) The term "Form S-3" means such form under the Act as in effect on
the date hereof or any registration form under the Act subsequently adopted by
the SEC which permits inclusion or incorporation of substantial information by
reference to other documents filed by the Company with the SEC.
(c) The term "Holder" means any person owning or having the right to
acquire Registrable Securities or any assignee thereof in accordance with
Section 1.13 hereof.
(d) The term "1934 Act" shall mean the Securities Exchange Act of 1934,
as amended.
(e) The terms "register," "registered," and "registration" refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the Act, and the declaration or ordering of
effectiveness of such registration statement or document.
<PAGE> 4
(f) The term "Registrable Securities" means (i) the Common Stock
issuable or issued upon conversion of the Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock; (ii) the
shares of Common Stock issued to the Management Holders; provided, however, that
such shares of Common Stock shall not be deemed Registrable Securities and the
aforementioned individuals shall not be deemed Holders for the purposes of
Sections 1.2, 1.12, 1.14 and 3.7; and (iii) any Common Stock of the Company
issued as (or issuable upon the conversion or exercise of any warrant, right or
other security which is issued as) a dividend or other distribution with respect
to, or in exchange for or in replacement of the shares referenced in (i), and
(ii) above, excluding in all cases, however, any Registrable Securities sold by
a person in a transaction in which his rights under this Section 1 are not
assigned.
(g) The number of shares of "Registrable Securities then outstanding"
shall be determined by the number of shares of Common Stock outstanding and the
number of shares of Common Stock issuable pursuant to then exercisable or
convertible securities, both of which are Registrable Securities.
(h) The term "SEC" shall mean the Securities and Exchange Commission.
1.2 Request for Registration.
(a) If the Company shall receive at any time after the earlier of (i)
September 26, 2001, or (ii) three (3) months after the effective date of the
first registration statement for a public offering of securities of the Company
(other than a registration statement relating either to the sale of securities
to employees of the Company pursuant to a stock option, stock purchase or
similar plan or a SEC Rule 145 transaction), a written request from the Holders
of at least thirty percent (30%) of the Registrable Securities then outstanding
that the Company file a registration statement under the Act covering the
registration of that number of the Registrable Securities then outstanding that
would result in an anticipated aggregate offering price, net of underwriting
discounts and commissions, of at least $7,500,000, then the Company shall:
(i) within ten (10) days of the receipt thereof, give written
notice of such request to all Holders; and
(ii) effect as soon as practicable and as expeditiously as
reasonably possible, the registration under the Act of all Registrable
Securities which the Holders request to be registered, subject to the
limitations of subsection 1.2(b).
(b) If the Holders initiating the registration request hereunder
("Initiating Holders") intend to distribute the Registrable Securities covered
by their request by means of an underwriting, they shall so advise the Company
as a part of their request made pursuant to subsection 1.2(a) and the Company
shall include such information in the written notice referred to in subsection
1.2(a). The underwriter will be selected by the Company and shall be reasonably
acceptable to a majority in interest of the Initiating Holders. In such event,
the right of any Holder to include his Registrable Securities in such
registration shall be conditioned upon such
2
<PAGE> 5
other Holder's participation in such underwriting and the inclusion of such
Holder's Registrable Securities in the underwriting (unless otherwise mutually
agreed by a majority in interest of the Initiating Holders and such Holder) to
the extent provided herein. All Holders proposing to distribute their securities
through such underwriting shall (together with the Company as provided in
subsection 1.4(e)) enter into an underwriting agreement in customary form with
the underwriter or underwriters selected for such underwriting. Notwithstanding
any other provision of this Section 1.2, if the underwriter advises the
Initiating Holders in writing that marketing factors require a limitation of the
number of shares to be underwritten, then the Initiating Holders shall so advise
all Holders of Registrable Securities which would otherwise be underwritten
pursuant hereto, and the number of shares of Registrable Securities that may be
included in the underwriting shall be allocated among all Holders thereof,
including the Initiating Holders, in proportion (as nearly as practicable) to
the amount of Registrable Securities of the Company owned by each Holder;
provided, however, that the number of shares of Registrable Securities to be
included in such underwriting shall not be reduced unless all other securities
are first entirely excluded from the underwriting.
(c) Notwithstanding the foregoing, if the Company shall furnish to
Holders requesting a registration statement pursuant to this Section 1.2, a
certificate signed by the Chief Executive Officer of the Company stating that in
the good faith judgment of the Board of Directors of the Company, it would be
seriously detrimental to the Company and its shareholders for such registration
statement to be filed and it is therefore essential to defer the filing of such
registration statement, the Company shall have the right to defer taking action
with respect to such filing for a period of not more than 180 days after receipt
of the request of the Initiating Holders; provided, however, that the Company
may not utilize this right more than once in any twelve-month period.
(d) In addition, the Company shall not be obligated to effect, or to
take any action to effect, any registration pursuant to this Section 1.2:
(i) After the Company has effected two (2) registrations pursuant
to this Section 1.2 and such registrations have been declared or ordered
effective;
(ii) During the period starting with the date thirty (30) days
prior to the Company's good faith estimate of the date of filing of, and ending
on a date one hundred eighty (180) days after the effective date of, a
registration subject to Section 1.3 hereof; provided that the Company is
actively employing in good faith all reasonable efforts to cause such
registration statement to become effective; or
(iii) If the Initiating Holders propose to dispose of shares of
Registrable Securities that may be immediately registered on Form S-3 pursuant
to a request made pursuant to Section 1.12 below.
1.3 Company Registration. If (but without any obligation to do so) the
Company proposes to register (including for this purpose a registration effected
by the Company for shareholders other than the Holders) any of its stock or
other securities under the Act in connection with the public offering of such
securities solely for cash (other than a registration
3
<PAGE> 6
relating solely to the sale of securities to participants in a Company stock
plan, a registration on any form which does not include substantially the same
information as would be required to be included in a registration statement
covering the sale of the Registrable Securities or a registration in which the
only Common Stock being registered is Common Stock issuable upon conversion of
debt securities which are also being registered), the Company shall, at such
time, promptly give each Holder written notice of such registration. Upon the
written request of each Holder given within twenty (20) days after mailing of
such notice by the Company in accordance with Section 3.5, the Company shall,
subject to the provisions of Section 1.8, cause to be registered under the Act
all of the Registrable Securities that each such Holder has requested to be
registered.
1.4 Obligations of the Company. Whenever required under this Section 1
to effect the registration of any Registrable Securities, the Company shall, as
expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement with respect
to such Registrable Securities and use its best efforts to cause such
registration statement to become effective, and, upon the request of the Holders
of a majority of the Registrable Securities registered thereunder, keep such
registration statement effective for a period of up to one hundred twenty (120)
days or until the distribution contemplated in the Registration Statement has
been completed; provided, however, that (i) such 120-day period shall be
extended for a period of time equal to the period the Holder refrains from
selling any securities included in such registration at the request of an
underwriter of Common Stock (or other securities) of the Company; and (ii) in
the case of any registration of Registrable Securities on Form S-3 which are
intended to be offered on a continuous or delayed basis, such 120-day period
shall be extended, if necessary, to keep the registration statement effective
until all such Registrable Securities are sold, provided that Rule 415, or any
successor rule under the Act, permits an offering on a continuous or delayed
basis, and provided further that applicable rules under the Act governing the
obligation to file a post-effective amendment permit, in lieu of filing a
post-effective amendment which (I) includes any prospectus required by Section
10(a)(3) of the Act or (II) reflects facts or events representing a material or
fundamental change in the information set forth in the registration statement,
the incorporation by reference of information required to be included in (I) and
(II) above to be contained in periodic reports filed pursuant to Section 13 or
15(d) of the 1934 Act in the registration statement.
(b) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Act with respect to the disposition of all securities covered by such
registration statement.
(c) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Act, and such other documents as they may reasonably request in order to
facilitate the disposition of Registrable Securities owned by them.
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(d) Use its best efforts to register and qualify the securities covered
by such registration statement under such other securities or Blue Sky laws of
such jurisdictions as shall be reasonably requested by the Holders; provided
that the Company shall not be required in connection therewith or as a condition
thereto to qualify to do business or to file a general consent to service of
process in any such states or jurisdictions.
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter of such offering. Each Holder participating
in such underwriting shall also enter into and perform its obligations under
such an agreement.
(f) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act of the happening of any event as a result
of which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing.
(g) Cause all such Registrable Securities registered pursuant hereunder
to be listed on each securities exchange on which similar securities issued by
the Company are then listed.
(h) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant hereunder and a CUSIP number for all such
Registrable Securities, in each case not later than the effective date of such
registration.
(i) Furnish, at the request of any Holder requesting registration of
Registrable Securities pursuant to this Section 1, on the date that such
Registrable Securities are delivered to the underwriters for sale in connection
with a registration pursuant to this Section 1, if such securities are being
sold through underwriters, or, if such securities are not being sold through
underwriters, on the date that the registration statement with respect to such
securities becomes effective, (i) an opinion, dated such date, of the counsel
representing the Company for the purposes of such registration, in form and
substance as is customarily given to underwriters in an underwritten public
offering, addressed to the underwriters, if any, and to the Holders requesting
registration of Registrable Securities and (ii) a letter dated such date, from
the independent certified public accountants of the Company, in form and
substance as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering, addressed to the underwriters,
if any, and to the Holders requesting registration of Registrable Securities.
1.5 Furnish Information.
(a) It shall be a condition precedent to the obligations of the Company
to take any action pursuant to this Section 1 with respect to the Registrable
Securities of any selling Holder that such Holder shall furnish to the Company
such information regarding itself, the
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Registrable Securities held by it, and the intended method of disposition of
such securities as shall be required to effect the registration of such Holder's
Registrable Securities.
(b) The Company shall have no obligation with respect to any
registration requested pursuant to Section 1.2 or Section 1.12 if, due to the
operation of subsection 1.5(a), the anticipated aggregate offering price of the
Registrable Securities to be included in the registration does not equal or
exceed the anticipated aggregate offering price required to originally trigger
the Company's obligation to initiate such registration as specified in
subsection 1.2(a) or subsection 1.12(b)(2), whichever is applicable.
1.6 Expenses of Demand Registration. All expenses other than
underwriting discounts and commissions incurred in connection with
registrations, filings or qualifications pursuant to Section 1.2, including
(without limitation) all registration, filing and qualification fees, printers'
and accounting fees, fees and disbursements of counsel for the Company
(including fees and disbursements of counsel for the Company in its capacity as
counsel to the selling Holders hereunder; if Company counsel does not make
itself available for this purpose, the Company will pay the reasonable fees and
disbursements of one counsel for the selling Holders) shall be borne by the
Company; provided, however, that the Company shall not be required to pay for
any expenses of any registration proceeding begun pursuant to Section 1.2 if the
registration request is subsequently withdrawn at the request of the Holders of
a majority of the Registrable Securities to be registered (in which case all
Participating Holders shall bear such expenses); provided further, however, that
if at the time of such withdrawal, the Holders have learned of a material
adverse change in the condition, business or prospects of the Company from that
known to the Holders at the time of their request and have withdrawn the request
with reasonable promptness following disclosure by the Company of such material
adverse change, then the Holders shall not be required to pay any of such
expenses and shall retain their rights pursuant to Section 1.2.
1.7 Expenses of Company Registration. The Company shall bear and pay all
expenses incurred in connection with any registration, filing or qualification
of Registrable Securities with respect to the registrations pursuant to Section
1.3 for each Holder (which right may be assigned as provided in Section 1.13),
including (without limitation) all registration, filing, and qualification fees,
printers and accounting fees relating or apportionable thereto and the fees and
disbursements of counsel for the Company in its capacity as counsel to the
selling Holders hereunder; if Company counsel does not make itself available for
this purpose, the Company will pay the reasonable fees and disbursements of one
counsel for the selling Holders selected by them, but excluding underwriting
discounts and commissions relating to Registrable Securities.
1.8 Underwriting Requirements. In connection with any offering involving
an underwriting of shares of the Company's capital stock, the Company shall not
be required under Section 1.3 to include any of the Holders' securities in such
underwriting unless they accept the terms of the underwriting as agreed upon
between the Company and the underwriters selected by it (or by other persons
entitled to select the underwriters), and then only in such quantity as the
underwriters determine in their sole discretion will not jeopardize the success
of the offering by
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the Company. If the total amount of securities, including Registrable
Securities, requested by shareholders to be included in such offering exceeds
the amount of securities sold other than by the Company that the underwriters
determine in their sole discretion is compatible with the success of the
offering, then the Company shall be required to include in the offering only
that number of such securities, including Registrable Securities, which the
underwriters determine in their sole discretion will not jeopardize the success
of the offering (the securities so included to be apportioned pro rata among the
selling shareholders according to the total amount of securities entitled to be
included therein owned by each selling Shareholder or in such other proportions
as shall mutually be agreed to by such selling shareholders) but in no event
shall (i) the amount of securities of the selling Holders included in the
offering be reduced below thirty percent (30%) of the total amount of securities
included in such offering, unless such offering is the initial public offering
of the Company's securities in which case the selling shareholders may be
excluded if the underwriters make the determination described above and no other
shareholder's securities are included or (ii) notwithstanding (i) above, any
shares being sold by a shareholder exercising a demand registration right
similar to that granted in Section 1.2 be excluded from such offering. For
purposes of the preceding parenthetical concerning apportionment, for any
selling shareholder which is a holder of Registrable Securities and which is a
partnership or corporation, the partners, retired partners and shareholders of
such holder, or the estates and family members of any such partners and retired
partners and any trusts for the benefit of any of the foregoing persons shall be
deemed to be a single "selling shareholder", and any pro-rata reduction with
respect to such "selling shareholder" shall be based upon the aggregate amount
of shares carrying registration rights owned by all entities and individuals
included in such "selling shareholder", as defined in this sentence.
1.9 Delay of Registration. No Holder shall have any right to obtain or
seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Section 1.
1.10 Indemnification. In the event any Registrable Securities are
included in a registration statement under this Section 1:
(a) To the extent permitted by law, the Company will indemnify and hold
harmless each Holder, the officers and directors of each Holder, any underwriter
(as defined in the Act) for such Holder and each person, if any, who controls
such Holder or underwriter within the meaning of the Act or the 1934 Act,
against any losses, claims, damages, or liabilities (joint or several) to which
they may become subject under the Act, the 1934 Act or other federal or state
law, insofar as such losses, claims, damages, or liabilities (or actions in
respect thereof) arise out of or are based upon any of the following statements,
omissions or violations (collectively a "Violation"): (i) any untrue statement
or alleged untrue statement of a material fact contained in such registration
statement, including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto, (ii) the omission or alleged
omission to state therein a material fact required to be stated therein, or
necessary to make the statements therein not misleading, or (iii) any violation
or alleged violation by the Company of the Act, the 1934 Act, any state
securities law or any rule or regulation promulgated under the Act, the 1934 Act
or any state securities law; and the Company will pay to each such
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Holder, officer, director, underwriter or controlling person, as incurred, any
legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability, or action;
provided, however, that the indemnity agreement contained in this subsection
1.10(a) shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability, or action if such settlement is effected without the consent
of the Company (which consent shall not be unreasonably withheld), nor shall the
Company be liable in any such case for any such loss, claim, damage, liability,
or action to the extent that it arises out of or is based upon a Violation which
occurs in reliance upon and in conformity with written information furnished
expressly for use in connection with such registration by any such Holder,
officer, director, underwriter or controlling person.
(b) To the extent permitted by law, each selling Holder will indemnify
and hold harmless the Company, each of its directors, each of its officers who
has signed the registration statement, each person, if any, who controls the
Company within the meaning of the Act, any underwriter, any other Holder selling
securities in such registration statement, any of such Holder's officers and
directors and any controlling person of any such underwriter or other Holder,
against any losses, claims, damages, or liabilities (joint or several) to which
any of the foregoing persons may become subject, under the Act, the 1934 Act or
other federal or state law, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereto) arise out of or are based upon any
Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished by such Holder expressly for use in connection with such registration;
and each such Holder will pay any legal or other expenses reasonably incurred by
any person intended to be indemnified pursuant to this subsection 1.10(b), in
connection with investigating or defending any such loss, claim, damage,
liability, or action; provided, however, that the indemnity agreement contained
in this subsection 1.10(b) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability or action if such settlement is effected
without the consent of the Holder, which consent shall not be unreasonably
withheld; provided, that, in no event shall any indemnity under this subsection
1.10(b) exceed the gross proceeds from the offering received by such Holder.
(c) Promptly after receipt by an indemnified party under this Section
1.10 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this Section 1.10, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties which may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party
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under this Section 1.10, but the omission so to deliver written notice to the
indemnifying party will not relieve it of any liability that it may have to any
indemnified party otherwise than under this Section 1.10.
(d) If the indemnification provided for in this Section 1.10 is held by
a court of competent jurisdiction to be unavailable to an indemnified party with
respect to any loss, liability, claim, damage, or expense referred to therein,
then the indemnifying party, in lieu of indemnifying such indemnified party
hereunder, shall contribute to the amount paid or payable by such indemnified
party as a result of such loss, liability, claim, damage, or expense in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party on the one hand and of the indemnified party on the other in connection
with the statements or omissions that resulted in such loss, liability, claim,
damage, or expense as well as any other relevant equitable considerations. The
relative fault of the indemnifying party and of the indemnified party shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission to state a material fact
relates to information supplied by the indemnifying party or by the indemnified
party and the parties' relative intent, knowledge, access to information, and
opportunity to correct or prevent such statement or omission.
(e) Notwithstanding the foregoing, to the extent that the provisions on
indemnification and contribution contained in the underwriting agreement entered
into in connection with the underwritten public offering are in conflict with
the foregoing provisions, the provisions in the underwriting agreement shall
control.
(f) The obligations of the Company and Holders under this Section 1.10
shall survive the completion of any offering of Registrable Securities in a
registration statement under this Section 1, and otherwise.
1.11 Reports Under Securities Exchange Act of 1934. With a view to
making available to the Holders the benefits of Rule 144 promulgated under the
Act and any other rule or regulation of the SEC that may at any time permit a
Holder to sell securities of the Company to the public without registration or
pursuant to a registration on Form S-3, the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in SEC Rule 144, at all times after ninety (90) days
after the effective date of the first registration statement filed by the
Company for the offering of its securities to the general public;
(b) file with the SEC in a timely manner all reports and other documents
required of the Company under the Act and the 1934 Act; and
(c) furnish to any Holder, so long as the Holder owns any Registrable
Securities, forthwith upon request (i) a written statement by the Company that
it has complied with the reporting requirements of SEC Rule 144 (at any time
after ninety (90) days after the effective date of the first registration
statement filed by the Company), the Act and the 1934 Act (at any time after it
has become subject to such reporting requirements), or that it qualifies as a
registrant whose securities may be resold pursuant to Form S-3 (at any time
after it so qualifies), (ii) a copy of the most recent annual or quarterly
report of the Company and such other reports
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and documents so filed by the Company, and (iii) such other information as may
be reasonably requested in availing any Holder of any rule or regulation of the
SEC which permits the selling of any such securities without registration or
pursuant to such form.
1.12 Form S-3 Registration. In case the Company shall receive from
Holders of at least twenty percent (20%) of the then outstanding Registrable
Securities a written request or requests that the Company effect a registration
on Form S-3 and any related qualification or compliance with respect to all or a
part of the Registrable Securities owned by such Holder or Holders, the Company
will:
(a) promptly give written notice of the proposed registration, and any
related qualification or compliance, to all other Holders; and
(b) as soon as practicable, effect such registration and all such
qualifications and compliances as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of such Holder's or
Holders' Registrable Securities as are specified in such request, together with
all or such portion of the Registrable Securities of any other Holder or Holders
joining in such request as are specified in a written request given within 15
days after receipt of such written notice from the Company; provided, however,
that the Company shall not be obligated to effect any such registration,
qualification or compliance, pursuant to this section 1.12: (1) if Form S-3 is
not available for such offering by the Holders; (2) if the Holders, together
with the holders of any other securities of the Company entitled to inclusion in
such registration, propose to sell Registrable Securities and such other
securities (if any) at an aggregate price to the public (net of any
underwriters' discounts or commissions) of less than $500,000; (3) if the
Company shall furnish to the Holders a certificate signed by the President of
the Company stating that in the good faith judgment of the Board of Directors of
the Company, it would be seriously detrimental to the Company and its
shareholders for such Form S-3 Registration to be effected at such time, in
which event the Company shall have the right to defer the filing of the Form S-3
registration statement for a period of not more than 60 days after receipt of
the request of the Holder or Holders under this Section 1.12; provided, however,
that the Company shall not utilize this right more than once in any twelve month
period; or (4) in any particular jurisdiction in which the Company would be
required to qualify to do business or to execute a general consent to service of
process in effecting such registration, qualification or compliance.
(c) Subject to the foregoing, the Company shall file a registration
statement covering the Registrable Securities and other securities so requested
to be registered as soon as practicable after receipt of the request or requests
of the Holders. All expenses incurred in connection with a registration
requested pursuant to Section 1.12, including (without limitation) all
registration, filing, qualification, printer's and accounting fees and the
reasonable fees and disbursements of counsel for the selling Holder or Holders
and counsel for the Company, but excluding any underwriters' discounts or
commissions associated with Registrable Securities, shall be borne by the
Company. Registrations effected pursuant to this Section 1.12 shall not be
counted as demands for registration or registrations effected pursuant to
Sections 1.2 or 1.3, respectively.
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1.13 Assignment of Registration Rights. The rights to cause the Company
to register Registrable Securities pursuant to this Section 1 may be assigned
(but only with all related obligations) by a Holder to a transferee or assignee
of such securities, provided: (a) the Company is, within a reasonable time after
such transfer, furnished with written notice of the name and address of such
transferee or assignee and the securities with respect to which such
registration rights are being assigned; (b) such transferee or assignee agrees
in writing to be bound by and subject to the terms and conditions of this
Agreement, including without limitation the provisions of Section 1.15 below;
and (c) such assignment shall be effective only if immediately following such
transfer the further disposition of such securities by the transferee or
assignee is restricted under the Act.
1.14 Limitations on Subsequent Registration Rights. From and after the
date of this Agreement, the Company shall not, without the prior written consent
of the Holders of a majority of the outstanding Registrable Securities, enter
into any agreement with any holder or prospective holder of any securities of
the Company which would allow such holder or prospective holder (a) to include
such securities in any registration filed under this Article 1 hereof, unless
under the terms of such agreement, such holder or prospective holder may include
such securities in any such registration only to the extent that the inclusion
of his securities will not reduce the amount of the Registrable Securities of
the Holders which is included or (b) to make a demand registration.
1.15 "Market Stand-Off" Agreement. Each Investor hereby agrees that,
during the period of duration specified by the Company and an underwriter of
common stock or other securities of the Company, following the effective date of
a registration statement of the Company filed under the Act, it shall not, to
the extent requested by the Company and such underwriter, directly or indirectly
(1) offer pledge, sell, contract to sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, lend, or otherwise transfer or dispose of, directly or indirectly,
other than by (i) bona fide gifts or (ii) a distribution to limited partners,
provided that the donees or distributees agree to be bound by the term of this
Section 1.15, any securities of the Company, or (2) enter into any swap or
similar agreement that transfers, in whole or in part, the economic risk of
ownership of the Company's securities, whether any such transaction described in
clause (1) or (2) above is to be settled by delivery of Common Stock or other
securities, in cash or otherwise; provided, however, that:
(a) all officers and directors of the Company and all other persons with
registration rights (whether or not pursuant to this Agreement) enter into
similar agreements; and
(b) such market stand-off time period shall not exceed (i) one hundred
eighty (180) days for the initial underwritten public offering of the Company's
Common Stock and (ii) ninety (90) days for subsequent offerings.
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Registrable Securities of each
Investor (and the
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shares or securities of every other person subject to the foregoing restriction)
until the end of such period.
1.16 Termination of Registration Rights.
(a) No Holder shall be entitled to exercise any right provided for in
this Section 1 after three (3) years following the consummation of the sale of
securities pursuant to a registration statement filed by the Company under the
Act in connection with the initial firm commitment underwritten offering of its
securities to the general public or, as to any Holder, such earlier time at
which all Registrable Securities held by such Holder may immediately be sold
without registration in compliance with Rule 144 under the Act.
2. Covenants of the Company.
2.1 Delivery of Financial Statements. The Company shall deliver to each
Investor:
(a) as soon as practicable, but in any event within ninety (90) days
after the end of each fiscal year of the Company, an income statement for such
fiscal year, a balance sheet of the Company and statement of shareholders'
equity as of the end of such year, and a schedule as to the sources and
applications of funds for such year, such year-end financial reports to be in
reasonable detail, prepared in accordance with generally accepted accounting
principles ("GAAP"), and audited and certified by independent public accountants
of nationally recognized standing selected by the Company;
(b) as soon as practicable, but in any event within forty-five (45) days
after the end of each of the first three (3) quarters of each fiscal year of the
Company, an unaudited profit or loss statement, schedule as to the sources and
application of funds for such fiscal quarter and an unaudited balance sheet as
of the end of such fiscal quarter and a statement showing the number of shares
of each class and series of capital stock and securities convertible into or
exercisable for shares of capital stock outstanding at the end of the period,
the number of common shares issuable upon conversion or exercise of any
outstanding securities convertible or exercisable for common shares and the
exchange ratio or exercise price applicable thereto, all in sufficient detail as
to permit the Investor to calculate its percentage equity ownership in the
Company.
(c) within thirty (30) days of the end of each month, an unaudited
income statement and schedule as to the sources and application of funds and
balance sheet for and as of the end of such month, in reasonable detail;
(d) as soon as practicable, but in any event thirty (30) days prior to
the end of each fiscal year, a budget and business plan for the next fiscal
year, prepared on a monthly basis, including balance sheets and sources and
applications of funds statements for such months and, as soon as prepared, any
other budgets or revised budgets prepared by the Company;
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(e) with respect to the financial statements called for in subsections
(b) and (c) of this Section 2.1, an instrument executed by the Chief Financial
Officer or President of the Company and certifying that such financials were
prepared in accordance with GAAP consistently applied with prior practice for
earlier periods (with the exception of footnotes that may be required by GAAP)
and fairly present the financial condition of the Company and its results of
operation for the period specified, subject to year-end audit adjustment; and
(f) such other information relating to the financial condition,
business, prospects or corporate affairs of the Company as the Investor or any
assignee of the Investor may from time to time request, provided, however, that
the Company shall not be obligated under this subsection (f) or any other
subsection of Section 2.1 to provide information which it deems in good faith to
be a trade secret or similar confidential information.
(g) Notwithstanding the foregoing, the Company covenants, on or before
May 30, 1998, to deliver to each Investor consolidated balance sheets,
consolidated statements of and consolidated statements of cash flows of the
Company and its subsidiaries for the fiscal year ended September 30, 1997, all
prepared in accordance with generally accepted accounting principles, audited by
independent public accountants of national standing selected by the Company.
Following the Closing, the Company covenants to use its best efforts to maintain
a standard system of accounting established and administered in accordance with
generally accepted accounting principles.
2.2 Inspection. The Company shall permit each Investor, at such
Investor's expense, to visit and inspect the Company's properties, to examine
its books of account and records and to discuss the Company's affairs, finances
and accounts with its officers, all at such reasonable times as may be requested
by the Investor; provided, however, that the Company shall not be obligated
pursuant to this Section 2.2 to provide access to any information which it
reasonably considers to be a trade secret or similar confidential information.
2.3 Termination of Information and Inspection Covenants. The covenants
set forth in subsections 2.1(c), (d) and (f) and Section 2.2 shall terminate as
to Investors and be of no further force or effect when the sale of securities
pursuant to a registration statement filed by the Company under the Act in
connection with the firm commitment underwritten offering of its securities to
the general public is consummated or when the Company first becomes subject to
the periodic reporting requirements of Sections 12(g) or 15(d) of the 1934 Act,
whichever event shall first occur.
2.4 Right of First Offer. Subject to the terms and conditions specified
in this paragraph 2.4, the Company hereby grants to each Investor a right of
first offer with respect to future sales by the Company of its Shares (as
hereinafter defined). For purposes of this Section 2.4, Investor includes any
general partners and affiliates of an Investor. An Investor shall be entitled to
apportion the right of first offer hereby granted it among itself and its
partners and affiliates in such proportions as it deems appropriate.
Each time the Company proposes to offer any shares of, or securities
convertible into or exercisable for any shares of, any class of its capital
stock ("Shares"), the Company shall
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first make an offering of such Shares to each Investor in accordance with the
following provisions:
(a) The Company shall deliver a notice by facsimile, courier, certified
mail or other reasonable means ("Notice") to the Investors stating (i) its bona
fide intention to offer such Shares, (ii) the number of such Shares to be
offered, and (iii) the price and terms, if any, upon which it proposes to offer
such Shares.
(b) By written notification received by the Company, within 20 calendar
days after receipt of the Notice, the Investor may elect to purchase or obtain,
at the price and on the terms specified in the Notice, up to that portion of
such Shares which equals the proportion that the number of shares of common
stock issued and held, or issuable upon conversion of the Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock or Series E Preferred
Stock (the "Preferred Stock") then held, by such Investor bears to the total
number of shares of common stock of the Company then outstanding (assuming full
conversion and exercise of all convertible or exercisable securities). The
Company shall promptly, in writing, inform each Investor which purchases all the
shares available to it ("Fully-Exercising Investor") of any other Investor's
failure to do likewise. During the ten-day period commencing after receipt of
such information, each Fully-Exercising Investor shall be entitled to obtain
that portion of the Shares which Investors were entitled to subscribe but which
were not subscribed for by the Investors which is equal to the proportion that
the number of shares of common stock issued and held, or issuable upon
conversion of the Preferred Stock then held, by such Fully-Exercising Investor
bears to the total number of shares of common stock issued and held, or issuable
upon conversion of the Preferred Stock then held, by all Fully-Exercising
Investors who wish to purchase some of the unsubscribed shares.
(c) If all Shares referred to in the Notice which Investors are entitled
to obtain pursuant to subsection 2.4(b) are not elected to be obtained as
provided in subsection 2.4(b) hereof, the Company may, during the 30-day period
following the expiration of the period provided in subsection 2.4(b) hereof,
offer the remaining unsubscribed portion of such Shares to any person or persons
at a price not less than, and upon terms no more favorable to the offeree than
those specified in the Notice. If the Company does not enter into an agreement
for the sale of the Shares within such period, or if such agreement is not
consummated within 30 days of the execution thereof, the right provided
hereunder shall be deemed to be revived and such Shares shall not be offered
unless first reoffered to the Investors in accordance herewith.
(d) The right of first offer in this paragraph 2.4 shall not be
applicable (i) to the issuance or sale of common stock (or options or warrants
therefor) of the Company to employees, directors, consultants or vendors for
primarily non-equity financing purposes, (ii) to or after consummation of a bona
fide, firmly underwritten public offering of shares of common stock, registered
under the Act pursuant to a registration statement on Form S-1 or Form SB-2 with
aggregate proceeds of not less than $7,500,000, net of underwriting discounts
and commissions, (iii) the issuance of securities pursuant to the conversion or
exercise of convertible or exercisable securities, (iv) the issuance of
securities in connection with a bona fide business acquisition of or by the
Company, whether by merger, consolidation, sale of assets, sale or
14
<PAGE> 17
exchange of stock or otherwise, (v) the issuance of stock, warrants or other
securities or rights to persons or entities with which the Company has service
relationships, provided such issuances are for other than primarily equity
financing purposes, or (vi) the issuance of the Series E Preferred Stock or
common stock issuable upon the conversion thereof.
2.5 Key Insurance. Provided such can be maintained at reasonable prices,
the Company shall maintain at customary commercial prices in full force and
effect term life insurance in the amount of $2,000,000 on the life of Chris
MacAskill, with proceeds payable to the Company until such time as the Board of
Directors determines that such insurance should be discontinued.
3. Miscellaneous.
3.1 Successors and Assigns. Except as otherwise provided herein, the
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any shares of Registrable Securities). Nothing in this Agreement,
express or implied, is intended to confer upon any party other than the parties
hereto or their respective successors and assigns any rights, remedies,
obligations, or liabilities under or by reason of this Agreement, except as
expressly provided in this Agreement.
3.2 Governing Law. This Agreement shall be governed by and construed
under the laws of the State of California as applied to agreements among
California residents entered into and to be performed entirely within
California.
3.3 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
3.4 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
3.5 Notices. Unless otherwise provided, any notice required or permitted
under this Agreement shall be given in writing and shall be deemed effectively
given upon personal delivery to the party to be notified, upon confirmed
facsimile transmission to the party to be notified, or upon deposit with the
United States Post Office, by registered or certified mail, postage prepaid and
addressed to the party to be notified at the address indicated for such party on
the signature page hereof, or at such other address as such party may designate
by ten (10) days' advance written notice to the other parties.
3.6 Expenses. If any action at law or in equity is necessary to enforce
or interpret the terms of this Agreement, the prevailing party shall be entitled
to reasonable attorneys' fees, costs and necessary disbursements in addition to
any other relief to which such party may be entitled.
15
<PAGE> 18
3.7 Amendments and Waivers. Any term of this Agreement may be amended
and the observance of any term of this Agreement may be waived (either generally
or in a particular instance and either retroactively or prospectively), only
with the written consent of the Company and the holders of a majority of the
Registrable Securities then outstanding. Any amendment or waiver effected in
accordance with this paragraph shall be binding upon each holder of any
Registrable Securities then outstanding, each future holder of all such
Registrable Securities and the Company.
3.8 Severability. If one or more provisions of this Agreement are held
to be unenforceable under applicable law, such provision shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
3.9 Aggregation of Stock. All shares of Registrable Securities held or
acquired by affiliated entities or persons shall be aggregated together for the
purpose of determining the availability of any rights under this Agreement.
3.10 Entire Agreement; Amendment; Waiver. This Agreement (including the
Schedules hereto) constitutes the full and entire understanding and agreement
between the parties with regard to the subjects hereof and thereof. The Prior
Agreement is hereby superseded in its entirety and shall be of no further force
or effect.
16
<PAGE> 19
IN WITNESS WHEREOF, the parties have executed this Amended and Restated
Investor's Rights Agreement as of the date first above written.
COMPANY:
COMPUTER LITERACY, INC.
By: /s/ Chris MacAskill
------------------------------
Chris MacAskill, President
Address: 1308 Orleans Drive
Sunnyvale, CA 94089
[SIGNATURE PAGE TO SERIES E AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT]
<PAGE> 20
INVESTORS:
SIERRA VENTURES V, LP
By:
-----------------------------------
Its:
----------------------------
By: /s/ Peter Wendell
-----------------------------------
Its:
----------------------------
Address: 3000 Sand Hill Road
Building 4, Suite 210
Menlo Park, CA 94025
[SIGNATURE PAGE TO SERIES E AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT]
<PAGE> 21
INVESTORS:
TRINITY VENTURES V, LP
By:
-----------------------------------
Its:
----------------------------
By: /s/ Tod Francis
-----------------------------------
Its:
----------------------------
Address: 3000 Sand Hill Road
Building 1, Suite 240
Menlo Park, CA 94025
TRINITY VENTURES SIDE-BY-SIDE
FUND V, LP
By:
-----------------------------------
Its:
----------------------------
By: /s/ Tod Francis
-----------------------------------
Its:
----------------------------
Address: 3000 Sand Hill Road
Building 1, Suite 240
Menlo Park, CA 94025
[SIGNATURE PAGE TO SERIES E AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT]
<PAGE> 22
INVESTORS:
APV TECHNOLOGY PARTNERS, L.P.
By: APV Management Co., LLC
Its: Managing General Partner
By: /s/ Peter G. Bodine
----------------------------------------
Peter G. Bodine, Managing Member
Address: 535 Middlefield Road
Menlo Park, CA 94025
APV TECHNOLOGY PARTNERS U.S., L.P.
By: APV Management Co., LLC
Its: Managing General Partner
By: /s/ Peter G. Bodine
----------------------------------------
Peter G. Bodine, Managing Member
Address: 535 Middlefield Road
Menlo Park, CA 94025
APV TECHNOLOGY PARTNERS II, L.P.
By: APV Management Co., LLC
Its: Managing General Partner
By: /s/ Peter G. Bodine
----------------------------------------
Peter G. Bodine, Managing Member
Address: 535 Middlefield Road
Menlo Park, CA 94025
[SIGNATURE PAGE TO SERIES E AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT]
<PAGE> 23
INVESTORS:
AMOS NUR
By: /s/ Amos Nur
----------------------------------------
Address: c/o Stanford University
Geophysics Department
Mitchell 317
Stanford, CA 94305-2215
[SIGNATURE PAGE TO SERIES E AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT]
<PAGE> 24
INVESTORS:
NEEDHAM CAPITAL SBIC, L.P.
By: /s/ John Michaelson
----------------------------------------
Its
------------------------------------
By:
----------------------------------------
Its
------------------------------------
Address: 445 Park Avenue, 3rd Floor
New York, NY 10022
NEEDHAM CAPITAL PARTNERS II
(BERMUDA), L.P.
By: /s/ John Michaelson
----------------------------------------
Its
------------------------------------
By:
----------------------------------------
Its
------------------------------------
Address: 445 Park Avenue, 3rd Floor
New York, NY 10022
NEEDHAM CAPITAL PARTNERS II, L.P.
By: /s/ John Michaelson
----------------------------------------
Its
------------------------------------
By:
----------------------------------------
Its
------------------------------------
Address: 445 Park Avenue, 3rd Floor
New York, NY 10022
[SIGNATURE PAGE TO SERIES E AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT]
<PAGE> 25
INVESTORS:
VULCAN VENTURES INCORPORATED
By: /s/ William D. Savoy
---------------------------------------
Name: William D. Savoy
---------------------------------------
Title: Vice President
---------------------------------------
Address: 110 110th Avenue N.E.
Suite 550
Bellevue, WA 98004
[SIGNATURE PAGE TO SERIES E AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT]
<PAGE> 26
UNTERBERG HARRIS PRIVATE EQUITY
PARTNERS, LP
By: /s/ Brett Wallace
----------------------------------------
Its
------------------------------------
Address: 10 E. 50th Street
New York, NY 10022
UNTERBERG HARRIS PRIVATE EQUITY
PARTNERS, CV
By: /s/ Brett Wallace
----------------------------------------
Its
------------------------------------
Address: 10 E. 50th Street
New York, NY 10022
C.E. UNTERBERG, TOWBIN 401K PROFIT
SHARING PLAN FBO ANDREW ARNO
By: /s/ Brett Wallace
----------------------------------------
Its
------------------------------------
Address: 10 E. 50th Street
New York, NY 10022
C.E. UNTERBERG, TOWBIN 401K PROFIT
SHARING PLAN FBO BRETT WALLACE
By: /s/ Brett Wallace
----------------------------------------
Its
------------------------------------
Address: 10 E. 50th Street
New York, NY 10022
[SIGNATURE PAGE TO SERIES E AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT]
<PAGE> 27
ALEX BERNSTEIN
By: /s/ Alex Bernstein
----------------------------------------
Address: 10 E. 50th Street
New York, NY 10022
ANDREW BLUM
By: /s/ Andrew Blum
----------------------------------------
Address: 10 E. 50th Street
New York, NY 10022
THOMAS I. UNTERBERG
By: /s/ Brett Wallace
----------------------------------------
Address: 10 E. 50th Street
New York, NY 10022
[SIGNATURE PAGE TO SERIES E AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT]
<PAGE> 28
J. Richard Fredericks
----------------------------------------
[Type or Print Name of Investor]
By: /s/ J. Richard Fredericks
----------------------------------------
Its
------------------------------------
Address: 2395 Vallejo St.
----------------------------------------
San Francisco, CA 94123
----------------------------------------
----------------------------------------
[Type or Print Name of Investor]
By:
----------------------------------------
Its
------------------------------------
Address:
----------------------------------------
----------------------------------------
----------------------------------------
[Type or Print Name of Investor]
By:
----------------------------------------
Its
------------------------------------
Address:
----------------------------------------
----------------------------------------
[SIGNATURE PAGE TO SERIES E AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT]
<PAGE> 29
MANAGEMENT HOLDERS:
CHRIS MACASKILL
By: /s/ Chris MacAskill
----------------------------------------
Address: c/o Computer Literacy, Inc.
1308 Orleans Drive
Sunnyvale, CA 94089
KIM ORUMCHIAN
By: /s/ Kim Orumchian
----------------------------------------
Address: c/o Computer Literacy, Inc.
1308 Orleans Drive
Sunnyvale, CA 94089
[SIGNATURE PAGE TO SERIES E AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT]
<PAGE> 30
SCHEDULE A
Schedule of Investors
<TABLE>
<S> <C> <C>
Vulcan Ventures
Attn: Ralph Derrickson Amos Nur C.E. Unterberg, Towbin LLC
110 110th Avenue N.E. Stanford University Attn: Brett Wallace
Bellevue, WA 98004 Geophysics Department 275 Battery Street, 29th Floor
Mitchell 317 San Francisco, CA 94111
Stanford, CA 94305
Sierra Ventures V, LP Huret Family Partners, L.P. Unterberg Harris Private Equity Partners,
Attn: Peter Wendell Attn: Bob Huret L.P.
3000 Sand Hill Road 601 California Street, Suite 2225 Attn: Brett Wallace
Building 4, Suite 210 San Francisco, CA 94108 275 Battery Street, 29th Floor
Menlo Park, CA 94025 San Francisco, CA 94111
Trinity Ventures V, LP J. Richard Fredericks Unterberg Harris Private Equity Partners,
Attn: Tod Francis c/o NationsBanc Montgomery Securities C.V.
3000 Sand Hill Road 600 Montgomery Street, 24th Floor Attn: Brett Wallace
Building 1, Suite 240 San Francisco, CA 94111 275 Battery Street, 29th Floor
Menlo Park, CA 94025 San Francisco, CA 94111
Trinity Side-By-Side Fund V, LP Joseph M. Petri Thomas Unterberg
Attn: Tod Francis c/o Summit Capital Advisors Attn: Brett Wallace
3000 Sand Hill Road 150 JFK Parkway 275 Battery Street, 29th Floor
Building 1, Suite 240 Short Hills, NJ 07078 San Francisco, CA 94111
Menlo Park, CA 94025
APV Technology Partners, L.P. Needham Capital SBIC, L.P. C.E. Unterberg, Towbin 401K Profit Sharing
Attn: Peter G. Bodine Attn: John Michaelson Plan FBO Andrew Arno:
535 Middlefield Road 445 Park Avenue, 3rd Floor Attn: Brett Wallace
Menlo Park, Ca 94025 New York, NY 10022 275 Battery Street, 29th Floor
San Francisco, CA 94111
APV Technology Partners U.S., L.P. Needham Capital Partners II, L.P. Brett William Wallace
Attn: Peter G. Bodine Attn: John Michaelson c/o C.E. Unterberg, Towbin
535 Middlefield Road 445 Park Avenue, 3rd Floor 275 Battery Street, 29th Floor
Menlo Park, Ca 94025 New York, NY 10022 San Francisco, CA 94111
APV Technology Partners II, L.P. Needham Capital Partners II, (Bermuda) C.E. Unterberg, Towbin 401K Profit Sharing
Attn: Peter G. Bodine L.P. Plan FBO Alexander Bernstein:
535 Middlefield Road Attn: John Michaelson Attn: Brett Wallace
Menlo Park, Ca 94025 445 Park Avenue, 3rd Floor 275 Battery Street, 29th Floor
New York, NY 10022 San Francisco, CA 94111
Stanford University WAH Investment, L.L.C. Andrew Blum
Attn: Carol Gilmer Attn: Eric Hansen 10 E. 50th Street
2770 Sand Hill Road 601 2nd Avenue South, Suite 3100 New York, NY 10022
Menlo Park, CA 94025 Minneapolis, MN 55402
G & H Partners Paine Webber, as Custodian for Andrew
155 Constitution Drive Blum IRA
Menlo Park, California 94025 Attn: Ellen Dejewski
Attn: Robert V. Gunderson, Jr. C/o C.E. Unterberg, Towbin
Swiss Bank Tower
10 East 50th Street, 22nd Floor
New York, NY 10022
</TABLE>
<PAGE> 31
SCHEDULE B
Schedule of Management Holders
CHRIS MACASKILL
c/o Computer Literacy, Inc.
1308 Orleans Drive
Sunnyvale, CA 94089
KIM ORUMCHIAN
c/o Computer Literacy, Inc.
1308 Orleans Drive
Sunnyvale, CA 94089
<PAGE> 1
EXHIBIT 5.1
Computer Literacy
1308 Orleans Drive
Sunnyvale, CA 94089
Re: Registration Statement on Form SB-2
Ladies and Gentlemen:
We have examined the Registration Statement on Form SB-2 (File No.
__________) originally filed by Computer Literacy, Inc. (the "Company") with the
Securities and Exchange Commission (the "Commission") on November 17, 1998, as
thereafter amended or supplemented (the "Registration Statement"), in connection
with the registration under the Securities Act of 1933, as amended, of up to
3,000,000 shares of the Company's Common Stock (the "Shares"). The Shares, which
include an over-allotment option to the Underwriters to purchase up to 450,000
additional shares of the Company's Common Stock, are to be sold to the
Underwriters by the Company as described in the Registration Statement. As your
counsel in connection with this transaction, we have examined the proceedings
taken and are familiar with the proceedings proposed to be taken by you in
connection with the sale and issuance of the Shares.
It is our opinion that, upon completion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares being sold by the Company and upon completion of the proceedings being
taken in order to permit such transactions to be carried out in accordance with
the securities laws of the various states where required, the Shares being sold
by the Company, when issued and sold in the manner described in the Registration
Statement and in accordance with the resolutions adopted by the Board of
Directors of the Company, will be legally and validly issued, fully paid and
non-assessable.
We consent to the use of this opinion as an exhibit to said Registration
Statement and further consent to the use of our name wherever appearing in said
Registration Statement, including the prospectus constituting a part thereof,
and in any amendment or supplement thereto.
Very truly yours,
/s/ Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP
----------------------------------------
Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP
<PAGE> 1
INDEMNIFICATION AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into as of
___________, ____ between Computer Literacy, Inc., a Delaware corporation ("the
Company"), and _____________________.
WITNESSETH THAT:
WHEREAS, the individual signatory hereto performs a valuable
service for the Company; and
WHEREAS, the Board of Directors of the Company has adopted Bylaws
(the "Bylaws") providing for the indemnification of the officers and directors
of the Company to the maximum extent authorized by Section 145 of the Delaware
General Corporation Law, as amended ("Law"); and
WHEREAS, the Bylaws and the Law, by their nonexclusive nature,
permit contracts between the Company and the officers or directors of the
Company with respect to indemnification of such officers or directors; and
WHEREAS, in accordance with the authorization as provided by the
Law, the Company may purchase and maintain a policy or policies of directors'
and officers' liability insurance ("D & O Insurance"), covering certain
liabilities which may be incurred by its officers or directors in the
performance of their obligations to the Company; and
WHEREAS, in recognition of past services and in order to induce
the individual signatory hereto to continue to serve as an officer or director
of the Company, the Company has determined and agreed to enter into this
contract with such individual;
NOW, THEREFORE, in consideration of such individual's service as
an officer or director after the date hereof, the parties hereto agree as
follows:
1. Indemnity of Indemnitee. The Company hereby agrees to hold
harmless and indemnify Indemnitee (as defined in Section 13(e) below) to the
full extent authorized or permitted by the provisions of the Law, as such may be
amended from time to time, and Article VII, Section 7.6 of the Bylaws, as such
may be amended. In furtherance of the foregoing indemnification, and without
limiting the generality thereof:
(a) Proceedings Other Than Proceedings by or in the Right of the
Company. Indemnitee shall be entitled to the rights of indemnification provided
in this Section l(a) if, by reason of his Corporate Status (as defined in
Section 13(a) below), he is, or is threatened to be made, a party to or
participant in any Proceeding (as defined in Section 13(g) below) other than a
Proceeding by or in the right of the Company. Pursuant to this Section 1(a),
Indemnitee shall be indemnified against all Expenses (as defined in Section
13(d) below), judgments, penalties, fines and amounts paid in settlement
actually and reasonably incurred by him or on his behalf in connection with such
Proceeding or any claim, issue or matter therein, if
<PAGE> 2
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company and, with respect to any criminal
Proceeding, had no reasonable cause to believe his conduct was unlawful.
(b) Proceedings by or in the Right of the Company. Indemnitee
shall be entitled to the rights of indemnification provided in this Section 1(b)
if, by reason of his Corporate Status, he is, or is threatened to be made, a
party to or participant in any Proceeding brought by or in the right of the
Company. Pursuant to this Section 1(b), Indemnitee shall be indemnified against
all Expenses actually and reasonably incurred by him or on his behalf in
connection with such Proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Company; provided, however, that, if applicable law so provides, no
indemnification against such Expenses shall be made in respect of any claim,
issue or matter in such Proceeding as to which Indemnitee shall have been
adjudged to be liable to the Company unless and to the extent that the Court of
Chancery of the State of Delaware shall determine that such indemnification may
be made.
(c) Indemnification for Expenses of a Party Who is Wholly or
Partly Successful. Notwithstanding any other provision of this Agreement, to the
extent that Indemnitee is, by reason of his Corporate Status, a party to and is
successful, on the merits or otherwise, in any Proceeding, he shall be
indemnified to the maximum extent permitted by law against all Expenses actually
and reasonably incurred by him or on his behalf in connection therewith. If
Indemnitee is not wholly successful in such Proceeding but is successful, on the
merits or otherwise, as to one or more but less than all claims, issues or
matters in such Proceeding, the Company shall indemnify Indemnitee against all
Expenses actually and reasonably incurred by him or on his behalf in connection
with each successfully resolved claim, issue or matter. For purposes of this
Section and without limitation, the termination of any claim, issue or matter in
such a Proceeding by dismissal, with or without prejudice, shall be deemed to be
a successful result as to such claim, issue or matter.
2. Additional Indemnity. In addition to, and without regard to
any limitations on, the indemnification provided for in Section 1, the Company
shall and hereby does indemnify and hold harmless Indemnitee against all
Expenses, judgments, penalties, fines and amounts paid in settlement actually
and reasonably incurred by him or on his behalf if, by reason of his Corporate
Status, he is, or is threatened to be made, a party to or participant in any
Proceeding (including a Proceeding by or in the right of the Company),
including, without limitation, all liability arising out of the negligence or
active or passive wrongdoing of Indemnitee. The only limitation that shall exist
upon the Company's obligations pursuant to this Agreement shall be that the
Company shall not be obligated to make any payment to Indemnitee that is finally
determined (under the procedures, and subject to the presumptions, set forth in
Sections 6 and 7 hereof) to be unlawful to be made to the individual signatory
hereto under Delaware law.
3. Contribution in the Event of Joint Liability.
(a) Whether or not the indemnification provided in
Sections 1 and 2 hereof is available, in respect of any threatened, pending or
completed action, suit or proceeding in which Company is jointly liable with
Indemnitee (or would be if joined in such action, suit or
2
<PAGE> 3
proceeding), Company shall pay, in the first instance, the entire amount of any
judgment or settlement of such action, suit or proceeding without requiring
Indemnitee to contribute to such payment and Company hereby waives and
relinquishes any right of contribution it may have against Indemnitee. Company
shall not enter into any settlement of any action, suit or proceeding in which
Company is jointly liable with Indemnitee (or would be if joined in such action,
suit or proceeding) unless such settlement provides for a full and final release
of all claims asserted against Indemnitee.
(b) Without diminishing or impairing the obligations of
the Company set forth in the preceding subparagraph, if, for any reason,
Indemnitee shall elect or be required to pay all or any portion of any judgment
or settlement in any threatened, pending or completed action, suit or proceeding
in which Company is jointly liable with Indemnitee (or would be if joined in
such action, suit or proceeding), Company shall contribute to the amount of
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred and paid or payable by Indemnitee in
proportion to the relative benefits received by the Company and all officers,
directors or employees of the Company other than Indemnitee who are jointly
liable with Indemnitee (or would be if joined in such action, suit or
proceeding), on the one hand, and Indemnitee, on the other hand, from the
transaction from which such action, suit or proceeding arose; provided, however,
that the proportion determined on the basis of relative benefit may, to the
extent necessary to conform to law, be further adjusted by reference to the
relative fault of Company and all officers, directors or employees of the
Company other than Indemnitee who are jointly liable with Indemnitee (or would
be if joined in such action, suit or proceeding), on the one hand, and
Indemnitee, on the other hand, in connection with the events that resulted in
such expenses, judgments, fines or settlement amounts, as well as any other
equitable considerations which the law may require to be considered. The
relative fault of Company and all officers, directors or employees of the
Company other than Indemnitee who are jointly liable with Indemnitee (or would
be if joined in such action, suit or proceeding), on the one hand, and
Indemnitee, on the other hand, shall be determined by reference to, among other
things, the degree to which their actions were motivated by intent to gain
personal profit or advantage, the degree to which their liability is primary or
secondary, and the degree to which their conduct is active or passive.
(c) Company hereby agrees to fully indemnify and hold
Indemnitee harmless from any claims of contribution which may be brought by
officers, directors or employees of the Company other than Indemnitee who may be
jointly liable with Indemnitee.
4. Indemnification for Expenses of a Witness. Notwithstanding any
other provision of this Agreement, to the extent that Indemnitee is, by reason
of his Corporate Status, a witness in any Proceeding to which Indemnitee is not
a party, he shall be indemnified against all Expenses actually and reasonably
incurred by him or on his behalf in connection therewith.
5. Advancement of Expenses. Notwithstanding any other provision
of this Agreement, the Company shall advance all Expenses incurred by or on
behalf of Indemnitee in connection with any Proceeding by reason of Indemnitee's
Corporate Status within ten (10) days after the receipt by the Company of a
statement or statements from Indemnitee requesting such advance or advances from
time to time, whether prior to or after final disposition of such Proceeding.
Such statement or statements shall reasonably evidence the Expenses incurred by
3
<PAGE> 4
Indemnitee and shall include or be preceded or accompanied by an undertaking by
or on behalf of Indemnitee to repay any Expenses advanced if it shall ultimately
be determined that Indemnitee is not entitled to be indemnified against such
Expenses. Any advances and undertakings to repay pursuant to this Section 5
shall be unsecured and interest free. Notwithstanding the foregoing, the
obligation of the Company to advance Expenses pursuant to this Section 5 shall
be subject to the condition that, if, when and to the extent that the Company
determines that Indemnitee would not be permitted to be indemnified under
applicable law, the Company shall be entitled to be reimbursed, within thirty
(30) days of such determination, by Indemnitee (who hereby agrees to reimburse
the Company) for all such amounts theretofore paid; provided, however, that if
Indemnitee has commenced or thereafter commences legal proceedings in a court of
competent jurisdiction to secure a determination that Indemnitee should be
indemnified under applicable law, any determination made by the Company that
Indemnitee would not be permitted to be indemnified under applicable law shall
not be binding and Indemnitee shall not be required to reimburse the Company for
any advance of Expenses until a final judicial determination is made with
respect thereto (as to which all rights of appeal therefrom have been exhausted
or lapsed).
6. Procedures and Presumptions for Determination of Entitlement
to Indemnification. It is the intent of this Agreement to secure for Indemnitee
rights of indemnity that are as favorable as may be permitted under the law and
public policy of the State of Delaware. Accordingly, the parties agree that the
following procedures and presumptions shall apply in the event of any question
as to whether Indemnitee is entitled to indemnification under this Agreement:
(a) To obtain indemnification (including, but not
limited to, the advancement of Expenses and contribution by the Company) under
this Agreement, Indemnitee shall submit to the Company a written request,
including therein or therewith such documentation and information as is
reasonably available to Indemnitee and is reasonably necessary to determine
whether and to what extent Indemnitee is entitled to indemnification. The
Secretary of the Company shall, promptly upon receipt of such a request for
indemnification, advise the Board of Directors in writing that Indemnitee has
requested indemnification.
(b) Upon written request by Indemnitee for indemnification
pursuant to the first sentence of Section 6(a) hereof, a determination, if
required by applicable law, with respect to Indemnitee's entitlement thereto
shall be made in the specific case by one of the following three methods, which
shall be at the election of Indemnitee: (1) by a majority vote of the
disinterested directors, even though less than a quorum, or (2) by independent
legal counsel in a written opinion, or (3) by the stockholders.
(c) If the determination of entitlement to
indemnification is to be made by Independent Counsel pursuant to Section 6(b)
hereof, the Independent Counsel shall be selected as provided in this Section
6(c). The Independent Counsel shall be selected by Indemnitee (unless Indemnitee
shall request that such selection be made by the Board of Directors). Indemnitee
or the Company, as the case may be, may, within 10 days after such written
notice of selection shall have been given, deliver to the Company or to
Indemnitee, as the case may be, a written objection to such selection; provided,
however, that such objection may be asserted only on the ground that the
Independent Counsel so selected does not meet the
4
<PAGE> 5
requirements of "Independent Counsel" as defined in Section 13 of this
Agreement, and the objection shall set forth with particularity the factual
basis of such assertion. Absent a proper and timely objection, the person so
selected shall act as Independent Counsel. If a written objection is made and
substantiated, the Independent Counsel selected may not serve as Independent
Counsel unless and until such objection is withdrawn or a court has determined
that such objection is without merit. If, within 20 days after submission by
Indemnitee of a written request for indemnification pursuant to Section 6(a)
hereof, no Independent Counsel shall have been selected and not objected to,
either the Company or Indemnitee may petition the Court of Chancery of the State
of Delaware or other court of competent jurisdiction for resolution of any
objection which shall have been made by the Company or Indemnitee to the other's
selection of Independent Counsel and/or for the appointment as Independent
Counsel of a person selected by the court or by such other person as the court
shall designate, and the person with respect to whom all objections are so
resolved or the person so appointed shall act as Independent Counsel under
Section 6(b) hereof. The Company shall pay any and all reasonable fees and
expenses of Independent Counsel incurred by such Independent Counsel in
connection with acting pursuant to Section 6(b) hereof, and the Company shall
pay all reasonable fees and expenses incident to the procedures of this Section
6(c), regardless of the manner in which such Independent Counsel was selected or
appointed.
(d) In making a determination with respect to entitlement
to indemnification hereunder, the person or persons or entity making such
determination shall presume that Indemnitee is entitled to indemnification under
this Agreement if Indemnitee has submitted a request for indemnification in
accordance with Section 6(a) of this Agreement. Anyone seeking to overcome this
presumption shall have the burden of proof and the burden of persuasion, by
clear and convincing evidence.
(e) Indemnitee shall be deemed to have acted in good faith
if Indemnitee's action is based on the records or books of account of the
Enterprise, including financial statements, or on information supplied to
Indemnitee by the officers of the Enterprise in the course of their duties, or
on the advice of legal counsel for the Enterprise or on information or records
given or reports made to the Enterprise by an independent certified public
accountant or by an appraiser or other expert selected with reasonable care by
the Enterprise. In addition, the knowledge and/or actions, or failure to act, of
any director, officer, agent or employee of the Enterprise shall not be imputed
to Indemnitee for purposes of determining the right to indemnification under
this Agreement. Whether or not the foregoing provisions of this Section 6(e) are
satisfied, it shall in any event be presumed that Indemnitee has at all times
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company. Anyone seeking to overcome this
presumption shall have the burden of proof and the burden of persuasion, by
clear and convincing evidence.
If the person, persons or entity empowered or selected under Section 6 to
determine whether Indemnitee is entitled to indemnification shall not have made
a determination within thirty (30) days after receipt by the Company of the
request therefor, the requisite determination of entitlement to indemnification
shall be deemed to have been made and Indemnitee shall be entitled to such
indemnification, absent (i) a misstatement by Indemnitee of a material fact, or
an omission of a material fact necessary to make Indemnitee's statement not
materially misleading, in connection with the request for indemnification, or
(ii) a prohibition of such indemnification
5
<PAGE> 6
under applicable law; provided, however, that such 30 day period may be extended
for a reasonable time, not to exceed an additional fifteen (15) days, if the
person, persons or entity making the determination with respect to entitlement
to indemnification in good faith requires such additional time for the obtaining
or evaluating documentation and/or information relating thereto; and provided,
further, that the foregoing provisions of this Section 6(g) shall not apply if
the determination of entitlement to indemnification is to be made by the
stockholders pursuant to Section 6(b) of this Agreement and if (A) within
fifteen (15) days after receipt by the Company of the request for such
determination the Board of Directors or the Disinterested Directors, if
appropriate, resolve to submit such determination to the stockholders for their
consideration at an annual meeting thereof to be held within seventy five (75)
days after such receipt and such determination is made thereat, or (B) a special
meeting of stockholders is called within fifteen (15) days after such receipt
for the purpose of making such determination, such meeting is held for such
purpose within sixty (60) days after having been so called and such
determination is made thereat.
(f) Indemnitee shall cooperate with the person, persons or
entity making such determination with respect to Indemnitee's entitlement to
indemnification, including providing to such person, persons or entity upon
reasonable advance request any documentation or information which is not
privileged or otherwise protected from disclosure and which is reasonably
available to Indemnitee and reasonably necessary to such determination. Any
Independent Counsel, member of the Board of Directors, or stockholder of the
Company shall act reasonably and in good faith in making a determination under
the Agreement of the Indemnitee's entitlement to indemnification. Any costs or
expenses (including attorneys' fees and disbursements) incurred by Indemnitee in
so cooperating with the person, persons or entity making such determination
shall be borne by the Company (irrespective of the determination as to
Indemnitee's entitlement to indemnification) and the Company hereby indemnifies
and agrees to hold Indemnitee harmless therefrom.
(g) The Company acknowledges that a settlement or other
disposition short of final judgment may be successful if it permits a party to
avoid expense, delay, distraction, disruption and uncertainty. In the event that
any action, claim or proceeding to which Indemnitee is a party is resolved in
any manner other than by adverse judgment against Indemnitee (including, without
limitation, settlement of such action, claim or proceeding with or without
payment of money or other consideration) it shall be presumed that Indemnitee
has been successful on the merits or otherwise in such action, suit or
proceeding. Anyone seeking to overcome this presumption shall have the burden of
proof and the burden of persuasion, by clear and convincing evidence.
7. Remedies of Indemnitee.
(a) In the event that (i) a determination is made
pursuant to Section 6 of this Agreement that Indemnitee is not entitled to
indemnification under this Agreement, (ii) advancement of Expenses is not timely
made pursuant to Section 5 of this Agreement, (iii) no determination of
entitlement to indemnification shall have been made pursuant to Section 6(b) of
this Agreement within 90 days after receipt by the Company of the request for
indemnification, (iv) payment of indemnification is not made pursuant to this
Agreement within ten (10) days after receipt by the Company of a written request
therefor, or (v) payment of indemnification is
6
<PAGE> 7
not made within ten (10) days after a determination has been made that
Indemnitee is entitled to indemnification or such determination is deemed to
have been made pursuant to Section 6 of this Agreement, Indemnitee shall be
entitled to an adjudication in an appropriate court of the State of Delaware, or
in any other court of competent jurisdiction, of his entitlement to such
indemnification. Indemnitee shall commence such proceeding seeking an
adjudication within 180 days following the date on which Indemnitee first has
the right to commence such proceeding pursuant to this Section 7(a). The Company
shall not oppose Indemnitee's right to seek any such adjudication.
(b) In the event that a determination shall have been made
pursuant to Section 6(b) of this Agreement that Indemnitee is not entitled to
indemnification, any judicial proceeding commenced pursuant to this Section 7
shall be conducted in all respects as a de novo trial, on the merits and
Indemnitee shall not be prejudiced by reason of that adverse determination under
Section 6(b).
(c) If a determination shall have been made pursuant to
Section 6(b) of this Agreement that Indemnitee is entitled to indemnification,
the Company shall be bound by such determination in any judicial proceeding
commenced pursuant to this Section 7, absent a prohibition of such
indemnification under applicable law.
(d) In the event that Indemnitee, pursuant to this Section
7, seeks a judicial adjudication of his rights under, or to recover damages for
breach of, this Agreement, or to recover under any directors' and officers'
liability insurance policies maintained by the Company the Company shall pay on
his behalf, in advance, any and all expenses (of the types described in the
definition of Expenses in Section 13 of this Agreement) actually and reasonably
incurred by him in such judicial adjudication, regardless of whether Indemnitee
ultimately is determined to be entitled to such indemnification, advancement of
expenses or insurance recovery.
(e) The Company shall be precluded from asserting in any
judicial proceeding commenced pursuant to this Section 7 that the procedures and
presumptions of this Agreement are not valid, binding and enforceable and shall
stipulate in any such court that the Company is bound by all the provisions of
this Agreement.
8. Non-Exclusivity; Survival of Rights; Insurance; Subrogation.
(a) The rights of indemnification as provided by this
Agreement shall not be deemed exclusive of any other rights to which Indemnitee
may at any time be entitled under applicable law, the certificate of
incorporation of the Company, the Bylaws, any agreement, a vote of stockholders
or a resolution of directors, or otherwise. No amendment, alteration or repeal
of this Agreement or of any provision hereof shall limit or restrict any right
of Indemnitee under this Agreement in respect of any action taken or omitted by
such Indemnitee in his Corporate Status prior to such amendment, alteration or
repeal. To the extent that a change in the Law, whether by statute or judicial
decision, permits greater indemnification than would be afforded currently under
the Bylaws and this Agreement, it is the intent of the parties hereto that
Indemnitee shall enjoy by this Agreement the greater benefits so afforded by
such change. No right or remedy herein conferred is intended to be exclusive of
any other right or remedy, and
7
<PAGE> 8
every other right and remedy shall be cumulative and in addition to every other
right and remedy given hereunder or now or hereafter existing at law or in
equity or otherwise. The assertion or employment of any right or remedy
hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other right or remedy.
(b) To the extent that the Company maintains an insurance
policy or policies providing liability insurance for directors, officers,
employees, or agents or fiduciaries of the Company or of any other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
which such person serves at the request of the Company, Indemnitee shall be
covered by such policy or policies in accordance with its or their terms to the
maximum extent of the coverage available for any such director, officer,
employee or agent under such policy or policies.
(c) In the event of any payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all papers required and take all
action necessary to secure such rights, including execution of such documents as
are necessary to enable the Company to bring suit to enforce such rights.
(d) The Company shall not be liable under this Agreement
to make any payment of amounts otherwise indemnifiable hereunder if and to the
extent that Indemnitee has otherwise actually received such payment under any
insurance policy, contract, agreement or otherwise.
9. Exception to Right of Indemnification. Notwithstanding any
other provision of this Agreement, Indemnitee shall not be entitled to
indemnification under this Agreement with respect to any Proceeding brought by
Indemnitee, or any claim therein, unless (a) the bringing of such Proceeding or
making of such claim shall have been approved by the Board of Directors of the
Company or (b) such Proceeding is being brought by the Indemnitee to assert,
interpret or enforce his rights under this Agreement.
10. Duration of Agreement. All agreements and obligations of the
Company contained herein shall continue during the period Indemnitee is an
officer or director of the Company (or is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise) and shall continue
thereafter so long as Indemnitee shall be subject to any Proceeding (or any
proceeding commenced under Section 7 hereof) by reason of his Corporate Status,
whether or not he is acting or serving in any such capacity at the time any
liability or expense is incurred for which indemnification can be provided under
this Agreement. This Agreement shall be binding upon and inure to the benefit of
and be enforceable by the parties hereto and their respective successors
(including any direct or indirect successor by purchase, merger, consolidation
or otherwise to all or substantially all of the business or assets of the
Company), assigns, spouses, heirs, executors and personal and legal
representatives. This Agreement shall continue in effect regardless of whether
Indemnitee continues to serve as an officer or director of the Company or any
other Enterprise at the Company's request.
8
<PAGE> 9
11. Security. To the extent requested by the Indemnitee and
approved by the Board of Directors of the Company, the Company may at any time
and from time to time provide security to the Indemnitee for the Company's
obligations hereunder through an irrevocable bank line of credit, funded trust
or other collateral. Any such security, once provided to the Indemnitee, may not
be revoked or released without the prior written consent of the Indemnitee.
12. Enforcement.
(a) The Company expressly confirms and agrees that it
has entered into this Agreement and assumed the obligations imposed on it hereby
in order to induce Indemnitee to serve as an officer or director of the Company,
and the Company acknowledges that Indemnitee is relying upon this Agreement in
serving as an officer or director of the Company.
(b) This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and understandings, oral, written and implied,
between the parties hereto with respect to the subject matter hereof.
13. Definitions. For purposes of this Agreement:
(a) "Corporate Status" describes the status of a person
who is or was a director, officer, employee or agent or fiduciary of the Company
or of any other corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise which such person is or was serving at the express
written request of the Company.
(b) "Disinterested Director" means a director of the
Company who is not and was not a party to the Proceeding in respect of which
indemnification is sought by Indemnitee.
(c) "Enterprise" shall mean the Company and any other
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise of which Indemnitee is or was serving at the express written request
of the Company as a director, officer, employee, agent or fiduciary.
(d) "Expenses" shall include all reasonable attorneys'
fees, retainers, court costs, transcript costs, fees of experts, witness fees,
travel expenses, duplicating costs, printing and binding costs, telephone
charges, postage, delivery service fees, and all other disbursements or expenses
of the types customarily incurred in connection with prosecuting, defending,
preparing to prosecute or defend, investigating, participating, or being or
preparing to be a witness in a Proceeding.
(e) "Indemnitee" includes the individual signatory hereto,
each corporation, partnership, limited liability company, entity or other
organization on whose behalf such individual renders service by serving in the
capacity he serves on the Company's behalf (an "Affiliate Organization"), each
director, officer, general and limited partner, managing and limited member,
employee, or other affiliate of such Affiliate Organization, and each lineal
ancestor and descendant of such individual.
9
<PAGE> 10
(f) "Independent Counsel" means a law firm, or a member
of a law firm, that is experienced in matters of corporation law and neither
presently is, nor in the past five years has been, retained to represent: (i)
the Company or Indemnitee in any matter material to either such party (other
than with respect to matters concerning the Indemnitee under this Agreement, or
of other indemnitees under similar indemnification agreements), or (ii) any
other party to the Proceeding giving rise to a claim for indemnification
hereunder. Notwithstanding the foregoing, the term "Independent Counsel" shall
not include any person who, under the applicable standards of professional
conduct then prevailing, would have a conflict of interest in representing
either the Company or Indemnitee in an action to determine Indemnitee's rights
under this Agreement. The Company agrees to pay the reasonable fees of the
Independent Counsel referred to above and to fully indemnify such counsel
against any and all Expenses, claims, liabilities and damages arising out of or
relating to this Agreement or its engagement pursuant hereto.
(g) "Proceeding" includes any threatened, pending or
completed action, suit, arbitration, alternate dispute resolution mechanism,
investigation, inquiry, administrative hearing or any other actual, threatened
or completed proceeding, whether brought by or in the right of the Company or
otherwise and whether civil, criminal, administrative or investigative, in which
Indemnitee was, is or will be involved as a party or otherwise, by reason of the
fact that Indemnitee is or was a director of the Company, by reason of any
action taken by him or of any inaction on his part while acting as an officer or
director of the Company, or by reason of the fact that he is or was serving at
the request of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other Enterprise; in each case
whether or not he is acting or serving in any such capacity at the time any
liability or expense is incurred for which indemnification can be provided under
this Agreement; including one pending on or before the date of this Agreement;
and excluding one initiated by an Indemnitee pursuant to Section 7 of this
Agreement to enforce his rights under this Agreement.
14. Severability. If any provision or provisions of this
Agreement shall be held by a court of competent jurisdiction to be invalid,
void, illegal or otherwise unenforceable for any reason whatsoever: (a) the
validity, legality and enforceability of the remaining provisions of this
Agreement (including without limitation, each portion of any section of this
Agreement containing any such provision held to be invalid, illegal or
unenforceable, that is not itself invalid, illegal or unenforceable) shall not
in any way be affected or impaired thereby and shall remain enforceable to the
fullest extent permitted by law; and (b) to the fullest extent possible, the
provisions of this Agreement (including, without limitation, each portion of any
section of this Agreement containing any such provision held to be invalid,
illegal or unenforceable, that is not itself invalid, illegal or unenforceable)
shall be construed so as to give effect to the intent manifested thereby.
15. Modification and Waiver. No supplement, modification,
termination or amendment of this Agreement shall be binding unless executed in
writing by both of the parties hereto. No waiver of any of the provisions of
this Agreement shall be deemed or shall constitute a waiver of any other
provisions hereof (whether or not similar) nor shall such waiver constitute a
continuing waiver.
10
<PAGE> 11
16. Notice By Indemnitee. Indemnitee agrees promptly to notify
the Company in writing upon being served with any summons, citation, subpoena,
complaint, indictment, information or other document relating to any Proceeding
or matter which may be subject to indemnification covered hereunder. The failure
to so notify the Company shall not relieve the Company of any obligation which
it may have to the Indemnitee under this Agreement or otherwise unless and only
to the extent that such failure or delay materially prejudices the Company.
17. Notices. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if (i) delivered by hand and receipted for by the party to whom said
notice or other communication shall have been directed, or (ii) mailed by
certified or registered mail with postage prepaid, on the third business day
after the date on which it is so mailed:
(a) If to Indemnitee, to the address set forth below
Indemnitee's signature hereto.
(b) If to the Company, to:
1308 Orleans Drive
Sunnyvale, California 94089
Attention: President
or to such other address as may have been furnished to Indemnitee by the Company
or to the Company by Indemnitee, as the case may be.
18. Identical Counterparts. This Agreement may be executed in one
or more counterparts, each of which shall for all purposes be deemed to be an
original but all of which together shall constitute one and the same Agreement.
Only one such counterpart signed by the party against whom enforceability is
sought needs to be produced to evidence the existence of this Agreement.
19. Headings. The headings of the paragraphs of this Agreement
are inserted for convenience only and shall not be deemed to constitute part of
this Agreement or to affect the construction thereof.
20. Governing Law. The parties agree that this Agreement shall be
governed by, and construed and enforced in accordance with, the laws of the
State of Delaware without application of the conflict of laws principles
thereof.
21. Gender. Use of the masculine pronoun shall be deemed to
include usage of the feminine pronoun where appropriate.
11
<PAGE> 12
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on and as of the day and year first above written.
COMPUTER LITERACY, INC.
By:____________________________________
Name:_________________________________
Title:__________________________________
________________________________________
Name: ________________________________
Address:
________________________________________
________________________________________
________________________________________
<PAGE> 1
EXHIBIT 10.2
COMPUTER LITERACY, INC.
1996 STOCK PLAN
AMENDED AND RESTATED ON MAY 4, 1998
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE NO.
--------
<S> <C>
SECTION 1. ESTABLISHMENT AND PURPOSE........................................................1
SECTION 2. ADMINISTRATION...................................................................1
(a) Committees of the Board of Directors.................................................1
(b) Authority of the Board of Directors..................................................1
SECTION 3. ELIGIBILITY......................................................................1
(a) General Rule.........................................................................1
(b) Ten-Percent Stockholders.............................................................1
SECTION 4. STOCK SUBJECT TO PLAN............................................................2
(a) Basic Limitation.....................................................................2
(b) Additional Shares....................................................................2
SECTION 5. TERMS AND CONDITIONS OF AWARDS OR SALES..........................................2
(a) Stock Purchase Agreement.............................................................2
(b) Duration of Offers and Nontransferability of Rights..................................2
(c) Purchase Price.......................................................................2
(d) Withholding Taxes....................................................................2
(e) Restrictions on Transfer of Shares and Minimum Vesting...............................3
(f) Accelerated Vesting..................................................................3
SECTION 6. TERMS AND CONDITIONS OF OPTIONS..................................................3
(a) Stock Option Agreement...............................................................3
(b) Number of Shares.....................................................................3
(c) Exercise Price.......................................................................3
(d) Withholding Taxes....................................................................4
(e) Exercisability.......................................................................4
(f) Accelerated Exercisability...........................................................4
(g) Basic Term...........................................................................4
(h) Nontransferability...................................................................4
(i) Termination of Service (Except by Death).............................................4
(j) Leaves of Absence....................................................................5
(k) Death of Optionee....................................................................5
(l) No Rights as a Stockholder...........................................................5
(m) Modification, Extension and Assumption of Options....................................5
(n) Restrictions on Transfer of Shares and Minimum Vesting...............................6
i
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
(o) Accelerated Vesting..................................................................6
SECTION 7. PAYMENT FOR SHARES...............................................................6
(a) General Rule.........................................................................6
(b) Surrender of Stock...................................................................6
(c) Services Rendered....................................................................6
(d) Promissory Note......................................................................6
(e) Exercise/Sale........................................................................7
(f) Exercise/Pledge......................................................................7
SECTION 8. ADJUSTMENT OF SHARES.............................................................7
(a) General..............................................................................7
(b) Mergers and Consolidations...........................................................7
(c) Reservation of Rights................................................................7
SECTION 9. SECURITIES LAW REQUIREMENTS......................................................8
(a) General..............................................................................8
(b) Financial Reports....................................................................8
SECTION 10. NO RETENTION RIGHTS.............................................................8
SECTION 11. DURATION AND AMENDMENTS.........................................................8
(a) Term of the Plan.....................................................................8
(b) Right to Amend or Terminate the Plan.................................................8
(c) Effect of Amendment or Termination...................................................9
SECTION 12. DEFINITIONS.....................................................................9
SECTION 13. EXECUTION......................................................................11
ii
</TABLE>
<PAGE> 4
COMPUTER LITERACY, INC. 1996 STOCK PLAN
SECTION 1. ESTABLISHMENT AND PURPOSE.
The purpose of the Plan is to offer selected individuals an opportunity
to acquire a proprietary interest in the success of the Company, or to increase
such interest, by purchasing Shares of the Company's Stock. The Plan provides
both for the direct award or sale of Shares and for the grant of Options to
purchase Shares. Options granted under the Plan may include Nonstatutory Options
as well as ISOs intended to qualify under Section 422 of the Code.
Capitalized terms are defined in Section 12.
SECTION 2. ADMINISTRATION.
(a) COMMITTEES OF THE BOARD OF DIRECTORS. The Plan may be administered
by one or more Committees. Each Committee shall consist of two or more members
of the Board of Directors who have been appointed by the Board of Directors.
Each Committee shall have such authority and be responsible for such functions
as the Board of Directors has assigned to it. If no Committee has been
appointed, the entire Board of Directors shall administer the Plan. Any
reference to the Board of Directors in the Plan shall be construed as a
reference to the Committee (if any) to whom the Board of Directors has assigned
a particular function.
(b) AUTHORITY OF THE BOARD OF DIRECTORS. Subject to the provisions of
the Plan, the Board of Directors shall have full authority and discretion to
take any actions it deems necessary or advisable for the administration of the
Plan. All decisions, interpretations and other actions of the Board of Directors
shall be final and binding on all Purchasers, all Optionees and all persons
deriving their rights from a Purchaser or Optionee.
SECTION 3. ELIGIBILITY.
(a) GENERAL RULE. Only Employees, Outside Directors and Consultants
shall be eligible for the grant of Options or the direct award or sale of
Shares. Only Employees shall be eligible for the grant of ISOs.
(b) TEN-PERCENT STOCKHOLDERS. An individual who owns more than 10% of
the total combined voting power of all classes of outstanding stock of the
Company, its Parent or any of its Subsidiaries shall not be eligible for
designation as an Optionee or Purchaser unless (i) the Exercise Price is at
least 110% of the Fair Market Value of a Share on the date of grant, (ii) the
Purchase Price (if any) is at least 100% of the Fair Market Value of a Share and
(iii) in the case of an ISO, such ISO by its terms is not exercisable after the
expiration of five years from the date of grant. For purposes of this Subsection
(b), in determining stock ownership, the attribution rules of Section 424(d) of
the Code shall be applied.
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<PAGE> 5
SECTION 4. STOCK SUBJECT TO PLAN.
(a) BASIC LIMITATION. The aggregate number of Shares that may be issued
under the Plan (upon exercise of Options or other rights to acquire Shares)
shall not exceed 4,862,745(1) Shares, subject to adjustment pursuant to Section
8. The number of Shares that are subject to Options or other rights outstanding
at any time under the Plan shall not exceed the number of Shares that then
remain available for issuance under the Plan. The Company, during the term of
the Plan, shall at all times reserve and keep available sufficient Shares to
satisfy the requirements of the Plan.
(b) ADDITIONAL SHARES. In the event that any outstanding Option or other
right for any reason expires or is canceled or otherwise terminated, the Shares
allocable to the unexercised portion of such Option or other right shall again
be available for the purposes of the Plan. In the event that Shares issued under
the Plan are reacquired by the Company pursuant to any forfeiture provision,
right of repurchase or right of first refusal, such Shares shall again be
available for the purposes of the Plan, except that the aggregate number of
Shares which may be issued upon the exercise of ISOs shall in no event exceed
4,862,745 Shares (subject to adjustment pursuant to Section 8).
SECTION 5. TERMS AND CONDITIONS OF AWARDS OR SALES.
(a) STOCK PURCHASE AGREEMENT. Each award or sale of Shares under the
Plan (other than upon exercise of an Option) shall be evidenced by a Stock
Purchase Agreement between the Purchaser and the Company. Such award or sale
shall be subject to all applicable terms and conditions of the Plan and may be
subject to any other terms and conditions which are not inconsistent with the
Plan and which the Board of Directors deems appropriate for inclusion in a Stock
Purchase Agreement. The provisions of the various Stock Purchase Agreements
entered into under the Plan need not be identical.
(b) DURATION OF OFFERS AND NONTRANSFERABILITY OF RIGHTS. Any right to
acquire Shares under the Plan (other than an Option) shall automatically expire
if not exercised by the Purchaser within 30 days after the grant of such right
was communicated to the Purchaser by the Company. Such right shall not be
transferable and shall be exercisable only by the Purchaser to whom such right
was granted.
(c) PURCHASE PRICE. The Purchase Price of Shares to be offered under the
Plan shall not be less than 85% of the Fair Market Value of such Shares, and a
higher percentage may be required by Section 3(b). Subject to the preceding
sentence, the Purchase Price shall be determined by the Board of Directors at
its sole discretion. The Purchase Price shall be payable in a form described in
Section 7.
(d) WITHHOLDING TAXES. As a condition to the purchase of Shares, the
Purchaser shall make such arrangements as the Board of Directors may require for
the satisfaction of any federal, state, local or foreign withholding tax
obligations that may arise in connection with such purchase.
- --------
(1) 850,000 share increase was approved by the Board on June 27, 1997. A
3-for-1 stock split approved in September 1997 resulted in a share reserve of
4,862,745 shares.
2
<PAGE> 6
(e) RESTRICTIONS ON TRANSFER OF SHARES AND MINIMUM VESTING. Any Shares
awarded or sold under the Plan shall be subject to such special forfeiture
conditions, rights of repurchase, rights of first refusal and other transfer
restrictions as the Board of Directors may determine. Such restrictions shall be
set forth in the applicable Stock Purchase Agreement and shall apply in addition
to any restrictions that may apply to holders of Shares generally. Any right to
repurchase a Purchaser's Shares at the original Purchase Price (if any) upon
termination of the Purchaser's Service shall lapse at least as rapidly as the
following schedule:
<TABLE>
<CAPTION>
Anniversary of Date Percentage of
of Sale or Award Shares Vested
---------------- -------------
<S> <C>
First 20%
Second 40%
Third 60%
Fourth 80%
Fifth 100%
</TABLE>
Any such repurchase right may be exercised only within 90 days after the
termination of the Purchaser's Service for cash or for cancellation of
indebtedness incurred in purchasing the Shares.
(f) ACCELERATED VESTING. Unless the applicable Stock Purchase Agreement
provides otherwise, any right to repurchase a Purchaser's Shares at the original
Purchase Price (if any) upon termination of the Purchaser's Service shall lapse
and all of such Shares shall become vested if (i) the Company is subject to a
Change in Control and (ii) the repurchase right is not assigned to the entity
that employs the Purchaser immediately after the Change in Control or to its
parent or subsidiary.
SECTION 6. TERMS AND CONDITIONS OF OPTIONS.
(a) STOCK OPTION AGREEMENT. Each grant of an Option under the Plan shall
be evidenced by a Stock Option Agreement between the Optionee and the Company.
Such Option shall be subject to all applicable terms and conditions of the Plan
and may be subject to any other terms and conditions which are not inconsistent
with the Plan and which the Board of Directors deems appropriate for inclusion
in a Stock Option Agreement. The provisions of the various Stock Option
Agreements entered into under the Plan need not be identical.
(b) NUMBER OF SHARES. Each Stock Option Agreement shall specify the
number of Shares that are subject to the Option and shall provide for the
adjustment of such number in accordance with Section 8. The Stock Option
Agreement shall also specify whether the Option is an ISO or a Nonstatutory
Option.
(c) EXERCISE PRICE. Each Stock Option Agreement shall specify the
Exercise Price. The Exercise Price of an ISO shall not be less than 100% of the
Fair Market Value of a Share on the date of grant, and a higher percentage may
be required by Section 3(b). The Exercise Price of a Nonstatutory Option shall
not be less than 85% of the Fair Market Value of a Share on the date of grant,
and a higher percentage may be required by Section 3(b). Subject to the
preceding two
3
<PAGE> 7
sentences, the Exercise Price under any Option shall be determined by the Board
of Directors at its sole discretion. The Exercise Price shall be payable in a
form described in Section 7.
(d) WITHHOLDING TAXES. As a condition to the exercise of an Option, the
Optionee shall make such arrangements as the Board of Directors may require for
the satisfaction of any federal, state, local or foreign withholding tax
obligations that may arise in connection with such exercise. The Optionee shall
also make such arrangements as the Board of Directors may require for the
satisfaction of any federal, state, local or foreign withholding tax obligations
that may arise in connection with the disposition of Shares acquired by
exercising an Option.
(E) EXERCISABILITY. Each Stock Option Agreement shall specify the date
when all or any installment of the Option is to become exercisable. An Option
shall become exercisable at least as rapidly as set forth in the following
schedule:
<TABLE>
<CAPTION>
Anniversary of Percentage of Shares
Date of Option Grant Exercisable
-------------------- -----------
<S> <C>
First 20%
Second 40%
Third 60%
Fourth 80%
Fifth 100%
</TABLE>
Subject to the preceding sentence, the exercisability provisions of any Stock
Option Agreement shall be determined by the Board of Directors at its sole
discretion.
(f) ACCELERATED EXERCISABILITY. Unless the applicable Stock Option
Agreement provides otherwise, all of an Optionee's Options shall become
exercisable in full if (i) the Company is subject to a Change in Control, (ii)
such Options do not remain outstanding, (iii) such Options are not assumed by
the surviving corporation or its parent and (iv) the surviving corporation or
its parent does not substitute options with substantially the same terms for
such Options.
(g) BASIC TERM. The Stock Option Agreement shall specify the term of the
Option. The term shall not exceed 10 years from the date of grant, and a shorter
term may be required by Section 3(b). Subject to the preceding sentence, the
Board of Directors at its sole discretion shall determine when an Option is to
expire.
(h) NONTRANSFERABILITY. No Option shall be transferable by the Optionee
other than by beneficiary designation, will or the laws of descent and
distribution. An Option may be exercised during the lifetime of the Optionee
only by the Optionee or by the Optionee's guardian or legal representative. No
Option or interest therein may be transferred, assigned, pledged or hypothecated
by the Optionee during the Optionee's lifetime, whether by operation of law or
otherwise, or be made subject to execution, attachment or similar process.
(i) TERMINATION OF SERVICE (EXCEPT BY DEATH). If an Optionee's Service
terminates for any reason other than the Optionee's death, then the Optionee's
Options shall expire on the earliest of the following occasions:
4
<PAGE> 8
(i) The expiration date determined pursuant to Subsection (g)
above;
(ii) The date three months after the termination of the
Optionee's Service for any reason other than Disability; or
(iii) The date six months after the termination of the
Optionee's Service by reason of Disability.
The Optionee may exercise all or part of the Optionee's Options at any time
before the expiration of such Options under the preceding sentence, but only to
the extent that such Options had become exercisable before the Optionee's
Service terminated (or became exercisable as a result of the termination) and
the underlying Shares had vested before the Optionee's Service terminated (or
vested as a result of the termination). The balance of such Options shall lapse
when the Optionee's Service terminates. In the event that the Optionee dies
after the termination of the Optionee's Service but before the expiration of the
Optionee's Options, all or part of such Options may be exercised (prior to
expiration) by the executors or administrators of the Optionee's estate or by
any person who has acquired such Options directly from the Optionee by
beneficiary designation, bequest or inheritance, but only to the extent that
such Options had become exercisable before the Optionee's Service terminated (or
became exercisable as a result of the termination) and the underlying Shares had
vested before the Optionee's Service terminated (or vested as a result of the
termination).
(j) LEAVES OF ABSENCE. For purposes of Subsection (i) above, Service
shall be deemed to continue while the Optionee is on a bona fide leave of
absence, if such leave was approved by the Company in writing and if continued
crediting of Service for this purpose is expressly required by the terms of such
leave or by applicable law (as determined by the Company).
(k) DEATH OF OPTIONEE. If an Optionee dies while the Optionee is in
Service, then the Optionee's Options shall expire on the earlier of the
following dates:
(i) The expiration date determined pursuant to Subsection (g)
above; or
(ii) The date 12 months after the Optionee's death.
All or part of the Optionee's Options may be exercised at any time before the
expiration of such Options under the preceding sentence by the executors or
administrators of the Optionee's estate or by any person who has acquired such
Options directly from the Optionee by beneficiary designation, bequest or
inheritance, but only to the extent that such Options had become exercisable
before the Optionee's death or became exercisable as a result of the death. The
balance of such Options shall lapse when the Optionee dies.
(l) NO RIGHTS AS A STOCKHOLDER. An Optionee, or a transferee of an
Optionee, shall have no rights as a stockholder with respect to any Shares
covered by the Optionee's Option until such person becomes entitled to receive
such Shares by filing a notice of exercise and paying the Exercise Price
pursuant to the terms of such Option.
(m) MODIFICATION, EXTENSION AND ASSUMPTION OF OPTIONS. Within the
limitations of the Plan, the Board of Directors may modify, extend or assume
outstanding Options or may accept the
5
<PAGE> 9
cancellation of outstanding Options (whether granted by the Company or another
issuer) in return for the grant of new Options for the same or a different
number of Shares and at the same or a different Exercise Price. The foregoing
notwithstanding, no modification of an Option shall, without the consent of the
Optionee, impair the Optionee's rights or increase the Optionee's obligations
under such Option.
(n) RESTRICTIONS ON TRANSFER OF SHARES AND MINIMUM VESTING. Any Shares
issued upon exercise of an Option shall be subject to such special forfeiture
conditions, rights of repurchase, rights of first refusal and other transfer
restrictions as the Board of Directors may determine. Such restrictions shall be
set forth in the applicable Stock Option Agreement and shall apply in addition
to any restrictions that may apply to holders of Shares generally. Any right to
repurchase an Optionee's Shares at the original Exercise Price upon termination
of the Optionee's Service shall lapse at least as rapidly as the schedule set
forth in Subsection (e) above. Any such repurchase right may be exercised only
within 90 days after the termination of the Optionee's Service for cash or for
cancellation of indebtedness incurred in purchasing the Shares.
(o) ACCELERATED VESTING. Unless the applicable Stock Option Agreement
provides otherwise, any right to repurchase an Optionee's Shares at the original
Exercise Price upon termination of the Optionee's Service shall lapse and all of
such Shares shall become vested if (i) the Company is subject to a Change in
Control and (ii) the repurchase right is not assigned to the entity that employs
the Optionee immediately after the Change in Control or to its parent or
subsidiary.
SECTION 7. PAYMENT FOR SHARES.
(a) GENERAL RULE. The entire Purchase Price or Exercise Price of Shares
issued under the Plan shall be payable in cash or cash equivalents at the time
when such Shares are purchased, except as otherwise provided in this Section 7.
(b) SURRENDER OF STOCK. To the extent that a Stock Option Agreement so
provides, payment may be made all or in part with Shares owned by the Optionee
or the Optionee's representative. Such Shares shall be surrendered to the
Company in good form for transfer and shall be valued at their Fair Market Value
on the date when the Option is exercised. This Subsection (b) shall not apply to
the extent that acceptance of Shares in payment of the Exercise Price would
cause the Company to recognize compensation expense with respect to the Option
for financial reporting purposes.
(c) SERVICES RENDERED. At the discretion of the Board of Directors,
Shares may be awarded under the Plan in consideration of services rendered to
the Company, a Parent or a Subsidiary prior to the award.
(d) PROMISSORY NOTE. To the extent that a Stock Option Agreement or
Stock Purchase Agreement so provides, all or a portion of the Exercise Price or
Purchase Price (as the case may be) of Shares issued under the Plan may be paid
with a full-recourse promissory note. The Shares shall be pledged as security
for payment of the principal amount of the promissory note and interest thereon.
The interest rate payable under the terms of the promissory note shall not be
less than the minimum rate (if any) required to avoid the imputation of
additional interest under the Code.
6
<PAGE> 10
Subject to the foregoing, the Board of Directors (at its sole discretion) shall
specify the term, interest rate, amortization requirements (if any) and other
provisions of such note.
(e) EXERCISE/SALE. To the extent that a Stock Option Agreement so
provides, and if Stock is publicly traded, payment may be made all or in part by
the delivery (on a form prescribed by the Company) of an irrevocable direction
to a securities broker approved by the Company to sell Shares and to deliver all
or part of the sales proceeds to the Company in payment of all or part of the
Exercise Price and any withholding taxes.
(f) EXERCISE/PLEDGE. To the extent that a Stock Option Agreement so
provides, and if Stock is publicly traded, payment may be made all or in part by
the delivery (on a form prescribed by the Company) of an irrevocable direction
to pledge Shares to a securities broker or lender approved by the Company, as
security for a loan, and to deliver all or part of the loan proceeds to the
Company in payment of all or part of the Exercise Price and any withholding
taxes.
SECTION 8. ADJUSTMENT OF SHARES.
(a) GENERAL. In the event of a subdivision of the outstanding Stock, a
declaration of a dividend payable in Shares, a declaration of an extraordinary
dividend payable in a form other than Shares in an amount that has a material
effect on the Fair Market Value of the Stock, a combination or consolidation of
the outstanding Stock into a lesser number of Shares, a recapitalization, a
spin-off, a reclassification or a similar occurrence, the Board of Directors
shall make appropriate adjustments in one or more of (i) the number of Shares
available for future grants under Section 4, (ii) the number of Shares covered
by each outstanding Option or (iii) the Exercise Price under each outstanding
Option.
(b) MERGERS AND CONSOLIDATIONS. In the event that the Company is a party
to a merger or consolidation, outstanding Options shall be subject to the
agreement of merger or consolidation. Such agreement, without the Optionees'
consent, may provide for:
(i) The continuation of such outstanding Options by the Company
(if the Company is the surviving corporation);
(ii) The assumption of the Plan and such outstanding Options by
the surviving corporation or its parent;
(iii) The substitution by the surviving corporation or its
parent of options with substantially the same terms for such outstanding
Options; or
(iv) The cancellation of such outstanding Options without
payment of any consideration.
(c) RESERVATION OF RIGHTS. Except as provided in this Section 8, an
Optionee or Purchaser shall have no rights by reason of (i) any subdivision or
consolidation of shares of stock of any class, (ii) the payment of any dividend
or (iii) any other increase or decrease in the number of shares of stock of any
class. Any issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall not affect, and
no adjustment by reason
7
<PAGE> 11
thereof shall be made with respect to, the number or Exercise Price of Shares
subject to an Option. The grant of an Option pursuant to the Plan shall not
affect in any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure, to merge or consolidate or to dissolve, liquidate, sell or transfer
all or any part of its business or assets.
SECTION 9. SECURITIES LAW REQUIREMENTS.
(a) GENERAL. Shares shall not be issued under the Plan unless the
issuance and delivery of such Shares comply with (or are exempt from) all
applicable requirements of law, including (without limitation) the Securities
Act of 1933, as amended, the rules and regulations promulgated thereunder, state
securities laws and regulations, and the regulations of any stock exchange or
other securities market on which the Company's securities may then be traded.
(b) FINANCIAL REPORTS. The Company each year shall furnish to Optionees,
Purchasers and stockholders who have received Stock under the Plan its balance
sheet and income statement, unless such Optionees, Purchasers or stockholders
are key Employees whose duties with the Company assure them access to equivalent
information. Such balance sheet and income statement need not be audited.
SECTION 10. NO RETENTION RIGHTS.
Nothing in the Plan or in any right or Option granted under the Plan
shall confer upon the Purchaser or Optionee any right to continue in Service for
any period of specific duration or interfere with or otherwise restrict in any
way the rights of the Company (or any Parent or Subsidiary employing or
retaining the Purchaser or Optionee) or of the Purchaser or Optionee, which
rights are hereby expressly reserved by each, to terminate his or her Service at
any time and for any reason, with or without cause.
SECTION 11. DURATION AND AMENDMENTS.
(a) TERM OF THE PLAN. The Plan, as set forth herein, shall become
effective on the date of its adoption by the Board of Directors, subject to the
approval of the Company's stockholders. In the event that the stockholders fail
to approve the Plan within 12 months after its adoption by the Board of
Directors, any grants of Options or sales or awards of Shares that have already
occurred shall be rescinded, and no additional grants, sales or awards shall be
made thereafter under the Plan. The Plan shall terminate automatically 10 years
after its adoption by the Board of Directors and may be terminated on any
earlier date pursuant to Subsection (b) below.
(b) RIGHT TO AMEND OR TERMINATE THE PLAN. The Board of Directors may
amend, suspend or terminate the Plan at any time and for any reason; provided,
however, that any amendment of the Plan which increases the number of Shares
available for issuance under the Plan (except as provided in Section 8), or
which materially changes the class of persons who are eligible for the grant of
ISOs, shall be subject to the approval of the Company's stockholders.
Stockholder approval shall not be required for any other amendment of the Plan.
8
<PAGE> 12
(c) EFFECT OF AMENDMENT OR TERMINATION. No Shares shall be issued or
sold under the Plan after the termination thereof, except upon exercise of an
Option granted prior to such termination. The termination of the Plan, or any
amendment thereof, shall not affect any Share previously issued or any Option
previously granted under the Plan.
SECTION 12. DEFINITIONS.
(a) "BOARD OF DIRECTORS" shall mean the Board of Directors of the
Company, as constituted from time to time.
(b) "CHANGE IN CONTROL" shall mean:
(i) The consummation of a merger or consolidation of the Company
with or into another entity or any other corporate reorganization, if
more than 50% of the combined voting power of the continuing or
surviving entity's securities outstanding immediately after such merger,
consolidation or other reorganization is owned by persons who were not
stockholders of the Company immediately prior to such merger,
consolidation or other reorganization; or
(ii) The sale, transfer or other disposition of all or
substantially all of the Company's assets.
A transaction shall not constitute a Change in Control if its sole purpose is to
change the state of the Company's incorporation or to create a holding company
that will be owned in substantially the same proportions by the persons who held
the Company's securities immediately before such transaction.
(c) "CODE" shall mean the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" shall mean a committee of the Board of Directors, as
described in Section 2(a).
(e) "COMPANY" shall mean Computer Literacy, Inc., a Delaware
corporation.
(f) "CONSULTANT" shall mean an individual who performs bona fide
services for the Company, a Parent or a Subsidiary as a consultant or advisor,
excluding Employees and Outside Directors.
(g) "DISABILITY" shall mean that the Optionee is unable to engage in any
substantial gainful activity by reason of any medically determinable physical or
mental impairment.
(h) "EMPLOYEE" shall mean any individual who is a common-law employee of
the Company, a Parent or a Subsidiary.
(i) "EXERCISE PRICE" shall mean the amount for which one Share may be
purchased upon exercise of an Option, as specified by the Board of Directors in
the applicable Stock Option Agreement.
9
<PAGE> 13
(j) "FAIR MARKET VALUE" shall mean the fair market value of a Share, as
determined by the Board of Directors in good faith. Such determination shall be
conclusive and binding on all persons.
(k) "ISO" shall mean an employee incentive stock option described in
Section 422(b) of the Code.
(l) "NONSTATUTORY OPTION" shall mean a stock option not described in
Sections 422(b) or 423(b) of the Code.
(m) "OPTION" shall mean an ISO or Nonstatutory Option granted under the
Plan and entitling the holder to purchase Shares.
(n) "OPTIONEE" shall mean an individual who holds an Option.
(o) "OUTSIDE DIRECTOR" shall mean a member of the Board of Directors who
is not an Employee.
(p) "PARENT" shall mean any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company, if each of the
corporations other than the Company owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain. A corporation that attains the status of a Parent on
a date after the adoption of the Plan shall be considered a Parent commencing as
of such date.
(q) "PLAN" shall mean this Computer Literacy, Inc. 1996 Stock Plan.
(r) "PURCHASE PRICE" shall mean the consideration for which one Share
may be acquired under the Plan (other than upon exercise of an Option), as
specified by the Board of Directors.
(s) "PURCHASER" shall mean an individual to whom the Board of Directors
has offered the right to acquire Shares under the Plan (other than upon exercise
of an Option).
(t) "SERVICE" shall mean service as an Employee, Outside Director or
Consultant.
(u) "SHARE" shall mean one share of Stock, as adjusted in accordance
with Section 8 (if applicable).
(v) "STOCK" shall mean the Common Stock of the Company with a par value
of $0.001 per Share.
(w) "STOCK OPTION AGREEMENT" shall mean the agreement between the
Company and an Optionee which contains the terms, conditions and restrictions
pertaining to the Optionee's Option.
(x) "STOCK PURCHASE AGREEMENT" shall mean the agreement between the
Company and a Purchaser who acquires Shares under the Plan which contains the
terms, conditions and restrictions pertaining to the acquisition of such Shares.
10
<PAGE> 14
(y) "SUBSIDIARY" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company, if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain. A corporation that attains
the status of a Subsidiary on a date after the adoption of the Plan shall be
considered a Subsidiary commencing as of such date.
SECTION 13. EXECUTION.
To record the amendment and restatement of the Plan by the Board of
Directors, the Company has caused its authorized officer to execute the same.
COMPUTER LITERACY, INC.
By: /s/ Chris MacAskill
--------------------------------------
11
<PAGE> 1
EXHIBIT 10.3
COMPUTER LITERACY, INC.
1998 OMNIBUS EQUITY INCENTIVE PLAN
(AS ADOPTED JULY 13, 1998)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE 1. INTRODUCTION.................................................................1
ARTICLE 2. ADMINISTRATION...............................................................1
2.1 Committee Composition......................................................1
2.2 Committee Responsibilities.................................................1
2.3 Committee for Non-Officer Grants...........................................1
ARTICLE 3. SHARES AVAILABLE FOR GRANTS..................................................2
3.1 Basic Limitation...........................................................2
3.2 Annual Increase in Shares..................................................2
3.3 Additional Shares..........................................................2
3.4 Dividend Equivalents.......................................................2
ARTICLE 4. ELIGIBILITY..................................................................2
4.1 Incentive Stock Options....................................................2
4.2 Other Grants...............................................................2
ARTICLE 5. OPTIONS......................................................................3
5.1 Stock Option Agreement.....................................................3
5.2 Number of Shares...........................................................3
5.3 Exercise Price.............................................................3
5.4 Exercisability and Term....................................................3
5.5 Effect of Change in Control................................................3
5.6 Modification or Assumption of Options......................................4
5.7 Buyout Provisions..........................................................4
ARTICLE 6. PAYMENT FOR OPTION SHARES....................................................4
6.1 General Rule...............................................................4
6.2 Surrender of Stock.........................................................4
6.3 Exercise/Sale..............................................................4
6.4 Exercise/Pledge...........................................................5
6.5 Promissory Note............................................................5
6.6 Other Forms of Payment.....................................................5
ARTICLE 7. AUTOMATIC OPTION GRANTS TO OUTSIDE DIRECTORS.................................5
7.1 Initial Grants.............................................................5
7.2 Annual Grants..............................................................5
7.3 Accelerated Exercisability.................................................5
7.4 Exercise Price.............................................................6
7.5 Term.......................................................................6
7.6 Affiliates of Outside Directors............................................6
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE 8. STOCK APPRECIATION RIGHTS....................................................6
8.1 SAR Agreement..............................................................6
8.2 Number of Shares...........................................................6
8.3 Exercise Price.............................................................6
8.4 Exercisability and Term....................................................6
8.5 Effect of Change in Control................................................7
8.6 Exercise of SARs...........................................................7
8.7 Modification or Assumption of SARs.........................................7
ARTICLE 9. RESTRICTED SHARES............................................................7
9.1 Restricted Stock Agreement.................................................7
9.2 Payment for Awards.........................................................7
9.3 Vesting Conditions.........................................................8
9.4 Voting and Dividend Rights.................................................8
ARTICLE 10. STOCK UNITS.................................................................8
10.1 Stock Unit Agreement......................................................8
10.2 Payment for Awards........................................................8
10.3 Vesting Conditions........................................................8
10.4 Voting and Dividend Rights................................................9
10.5 Form and Time of Settlement of Stock Units................................9
10.6 Death of Recipient........................................................9
10.7 Creditors' Rights.........................................................9
ARTICLE 11. PROTECTION AGAINST DILUTION.................................................9
11.1 Adjustments...............................................................9
11.2 Dissolution or Liquidation...............................................10
11.3 Reorganizations..........................................................10
ARTICLE 12. DEFERRAL OF AWARDS.........................................................10
ARTICLE 13. AWARDS UNDER OTHER PLANS...................................................11
ARTICLE 14. PAYMENT OF DIRECTOR'S FEES IN SECURITIES...................................11
14.1 Effective Date...........................................................11
14.2 Elections to Receive NSOs, Restricted Shares or Stock Units..............11
14.3 Number and Terms of NSOs, Restricted Shares or Stock Units...............11
ARTICLE 15. LIMITATION ON RIGHTS.......................................................12
15.1 Retention Rights.........................................................12
15.2 Stockholders' Rights.....................................................12
15.3 Regulatory Requirements..................................................12
ARTICLE 16. WITHHOLDING TAXES..........................................................12
16.1 General..................................................................12
16.2 Share Withholding........................................................12
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
ARTICLE 17. FUTURE OF THE PLAN.........................................................12
17.1 Term of the Plan.........................................................12
17.2 Amendment or Termination.................................................13
ARTICLE 18. LIMITATION ON PAYMENTS.....................................................13
18.1 Scope of Limitation......................................................13
18.2 Basic Rule...............................................................13
18.3 Reduction of Payments....................................................13
18.4 Overpayments and Underpayments...........................................14
18.5 Related Corporations.....................................................14
ARTICLE 19. DEFINITIONS................................................................14
ARTICLE 20. EXECUTION..................................................................17
</TABLE>
iii
<PAGE> 5
COMPUTER LITERACY, INC.
1998 OMNIBUS EQUITY INCENTIVE PLAN
ARTICLE 1. INTRODUCTION.
The Plan was adopted by the Board effective July 13, 1998. The
purpose of the Plan is to promote the long-term success of the Company and the
creation of stockholder value by (a) encouraging Employees, Outside Directors
and Consultants to focus on critical long-range objectives, (b) encouraging the
attraction and retention of Employees, Outside Directors and Consultants with
exceptional qualifications and (c) linking Employees, Outside Directors and
Consultants directly to stockholder interests through increased stock ownership.
The Plan seeks to achieve this purpose by providing for Awards in the form of
Restricted Shares, Stock Units, Options (which may constitute incentive stock
options or nonstatutory stock options) or stock appreciation rights.
The Plan shall be governed by, and construed in accordance with,
the laws of the State of Delaware (except their choice-of-law provisions).
ARTICLE 2. ADMINISTRATION.
2.1 COMMITTEE COMPOSITION. The Plan shall be administered by the
Committee. The Committee shall consist exclusively of two or more directors of
the Company, who shall be appointed by the Board. In addition, the composition
of the Committee shall satisfy:
(a) Such requirements as the Securities and Exchange
Commission may establish for administrators acting under plans
intended to qualify for exemption under Rule 16b-3 (or its
successor) under the Exchange Act; and
(b) Such requirements as the Internal Revenue Service may
establish for outside directors acting under plans intended to
qualify for exemption under section 162(m)(4)(C) of the Code.
2.2 COMMITTEE RESPONSIBILITIES. The Committee shall (a) select the
Employees, Outside Directors and Consultants who are to receive Awards under the
Plan, (b) determine the type, number, vesting requirements and other features
and conditions of such Awards, (c) interpret the Plan and (d) make all other
decisions relating to the operation of the Plan. The Committee may adopt such
rules or guidelines as it deems appropriate to implement the Plan. The
Committee's determinations under the Plan shall be final and binding on all
persons.
2.3 COMMITTEE FOR NON-OFFICER GRANTS. The Board may also appoint a
secondary committee of the Board, which shall be composed of one or more
directors of the Company who need not satisfy the requirements of Section 2.1.
Such secondary committee may administer the Plan with respect to Employees and
Consultants who are not considered officers or directors of the Company under
section 16 of the Exchange Act, may grant Awards under the Plan to such
<PAGE> 6
Employees and Consultants and may determine all features and conditions of such
Awards. Within the limitations of this Section 2.3, any reference in the Plan to
the Committee shall include such secondary committee.
ARTICLE 3. SHARES AVAILABLE FOR GRANTS.
3.1 BASIC LIMITATION. Common Shares issued pursuant to the Plan may be
authorized but unissued shares or treasury shares. The aggregate number of
Options, SARs, Stock Units and Restricted Shares awarded under the Plan shall
not exceed (a) 3,000,000 plus (b) the aggregate number of Common Shares
remaining available for issuance under the Predecessor Plan as of July 13, 1998
(approximately 4,693,991 Common Shares), plus (c) the additional Common Shares
described in Sections 3.2 and 3.3. The limitation of this Section 3.1 shall be
subject to adjustment pursuant to Article 11.
3.2 ANNUAL INCREASE IN SHARES. As of February 1 of each year, commencing
with the year 2000, the aggregate number of Options, SARs, Stock Units and
Restricted Shares that may be awarded under the Plan shall automatically
increase by a number equal to the lesser of (a) 2% of the total number of Common
Shares then outstanding or (b) 1,000,000.
3.3 ADDITIONAL SHARES. If Restricted Shares or Common Shares issued upon
the exercise of Options are forfeited, then such Common Shares shall again
become available for Awards under the Plan. If Stock Units, Options or SARs are
forfeited or terminate for any other reason before being exercised, then the
corresponding Common Shares shall again become available for Awards under the
Plan. If Stock Units are settled, then only the number of Common Shares (if any)
actually issued in settlement of such Stock Units shall reduce the number
available under Section 3.1 and the balance shall again become available for
Awards under the Plan. If SARs are exercised, then only the number of Common
Shares (if any) actually issued in settlement of such SARs shall reduce the
number available under Section 3.1 and the balance shall again become available
for Awards under the Plan. The foregoing notwithstanding, the aggregate number
of Common Shares that may be issued under the Plan upon the exercise of ISOs
shall not be increased when Restricted Shares or other Common Shares are
forfeited.
3.4 DIVIDEND EQUIVALENTS. Any dividend equivalents paid or credited
under the Plan shall not be applied against the number of Restricted Shares,
Stock Units, Options or SARs available for Awards, whether or not such dividend
equivalents are converted into Stock Units.
ARTICLE 4. ELIGIBILITY.
4.1 INCENTIVE STOCK OPTIONS. Only Employees who are common-law employees
of the Company, a Parent or a Subsidiary shall be eligible for the grant of
ISOs. In addition, an Employee who owns more than 10% of the total combined
voting power of all classes of outstanding stock of the Company or any of its
Parents or Subsidiaries shall not be eligible for the grant of an ISO unless the
requirements set forth in section 422(c)(6) of the Code are satisfied.
4.2 OTHER GRANTS. Only Employees, Outside Directors and Consultants
shall be eligible for the grant of Restricted Shares, Stock Units, NSOs or SARs.
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ARTICLE 5. OPTIONS.
5.1 STOCK OPTION AGREEMENT. Each grant of an Option under the Plan shall
be evidenced by a Stock Option Agreement between the Optionee and the Company.
Such Option shall be subject to all applicable terms of the Plan and may be
subject to any other terms that are not inconsistent with the Plan. The Stock
Option Agreement shall specify whether the Option is an ISO or an NSO. The
provisions of the various Stock Option Agreements entered into under the Plan
need not be identical. Options may be granted in consideration of a reduction in
the Optionee's other compensation. A Stock Option Agreement may provide that a
new Option will be granted automatically to the Optionee when he or she
exercises a prior Option and pays the Exercise Price in the form described in
Section 6.2.
5.2 NUMBER OF SHARES. Each Stock Option Agreement shall specify the
number of Common Shares subject to the Option and shall provide for the
adjustment of such number in accordance with Article 11. Options granted to any
Optionee in a single fiscal year of the Company shall not cover more than
100,000 Common Shares, except that Options granted to a new Employee in the
fiscal year of the Company in which his or her service as an Employee first
commences shall not cover more than 300,000 Common Shares. The limitations set
forth in the preceding sentence shall be subject to adjustment in accordance
with Article 11.
5.3 EXERCISE PRICE. Each Stock Option Agreement shall specify the
Exercise Price; provided that the Exercise Price under an ISO shall in no event
be less than 100% of the Fair Market Value of a Common Share on the date of
grant and the Exercise Price under an NSO shall in no event be less than 85% of
the Fair Market Value of a Common Share on the date of grant. In the case of an
NSO, a Stock Option Agreement may specify an Exercise Price that varies in
accordance with a predetermined formula while the NSO is outstanding.
5.4 EXERCISABILITY AND TERM. Each Stock Option Agreement shall specify
the date or event when all or any installment of the Option is to become
exercisable. The Stock Option Agreement shall also specify the term of the
Option; provided that the term of an ISO shall in no event exceed 10 years from
the date of grant. A Stock Option Agreement may provide for accelerated
exercisability in the event of the Optionee's death, disability or retirement or
other events and may provide for expiration prior to the end of its term in the
event of the termination of the Optionee's service. Options may be awarded in
combination with SARs, and such an Award may provide that the Options will not
be exercisable unless the related SARs are forfeited.
5.5 EFFECT OF CHANGE IN CONTROL. The Committee may determine, at the
time of granting an Option or thereafter, that such Option shall become
exercisable as to all or part of the Common Shares subject to such Option in the
event that a Change in Control occurs with respect to the Company, subject to
the following limitations:
(a) In the case of an ISO, the acceleration of
exercisability shall not occur without the Optionee's written consent.
(b) If the Company and the other party to the transaction
constituting a Change in Control agree that such transaction is to be
treated as a
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"pooling of interests" for financial reporting purposes, and if such
transaction in fact is so treated, then the acceleration of
exercisability shall not occur to the extent that the Company's
independent accountants and such other party's independent accountants
separately determine in good faith that such acceleration would preclude
the use of "pooling of interests" accounting.
5.6 MODIFICATION OR ASSUMPTION OF OPTIONS. Within the limitations of the
Plan, the Committee may modify, extend or assume outstanding options or may
accept the cancellation of outstanding options (whether granted by the Company
or by another issuer) in return for the grant of new options for the same or a
different number of shares and at the same or a different exercise price. The
foregoing notwithstanding, no modification of an Option shall, without the
consent of the Optionee, alter or impair his or her rights or obligations under
such Option.
5.7 BUYOUT PROVISIONS. The Committee may at any time (a) offer to buy
out for a payment in cash or cash equivalents an Option previously granted or
(b) authorize an Optionee to elect to cash out an Option previously granted, in
either case at such time and based upon such terms and conditions as the
Committee shall establish.
ARTICLE 6. PAYMENT FOR OPTION SHARES.
6.1 GENERAL RULE. The entire Exercise Price of Common Shares issued upon
exercise of Options shall be payable in cash or cash equivalents at the time
when such Common Shares are purchased, except as follows:
(a) In the case of an ISO granted under the Plan, payment
shall be made only pursuant to the express provisions of the applicable
Stock Option Agreement. The Stock Option Agreement may specify that
payment may be made in any form(s) described in this Article 6.
(b) In the case of an NSO, the Committee may at any time
accept payment in any form(s) described in this Article 6.
6.2 SURRENDER OF STOCK. To the extent that this Section 6.2 is
applicable, all or any part of the Exercise Price may be paid by surrendering,
or attesting to the ownership of, Common Shares that are already owned by the
Optionee. Such Common Shares shall be valued at their Fair Market Value on the
date when the new Common Shares are purchased under the Plan. The Optionee shall
not surrender, or attest to the ownership of, Common Shares in payment of the
Exercise Price if such action would cause the Company to recognize compensation
expense (or additional compensation expense) with respect to the Option for
financial reporting purposes.
6.3 EXERCISE/SALE. To the extent that this Section 6.3 is applicable,
all or any part of the Exercise Price and any withholding taxes may be paid by
delivering (on a form prescribed by the Company) an irrevocable direction to a
securities broker approved by the Company to sell all or part of the Common
Shares being purchased under the Plan and to deliver all or part of the sales
proceeds to the Company.
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6.4 EXERCISE/PLEDGE. To the extent that this Section 6.4 is applicable,
all or any part of the Exercise Price and any withholding taxes may be paid by
delivering (on a form prescribed by the Company) an irrevocable direction to
pledge all or part of the Common Shares being purchased under the Plan to a
securities broker or lender approved by the Company, as security for a loan, and
to deliver all or part of the loan proceeds to the Company.
6.5 PROMISSORY NOTE. To the extent that this Section 6.5 is applicable,
all or any part of the Exercise Price and any withholding taxes may be paid by
delivering (on a form prescribed by the Company) a full-recourse promissory
note. However, the par value of the Common Shares being purchased under the
Plan, if newly issued, shall be paid in cash or cash equivalents.
6.6 OTHER FORMS OF PAYMENT. To the extent that this Section 6.6 is
applicable, all or any part of the Exercise Price and any withholding taxes may
be paid in any other form that is consistent with applicable laws, regulations
and rules.
ARTICLE 7. AUTOMATIC OPTION GRANTS TO OUTSIDE DIRECTORS.
7.1 INITIAL GRANTS. Each Outside Director who first becomes a member of
the Board after the date of the Company's initial public offering shall receive
a one-time grant of an NSO covering 7,500 Common Shares (subject to adjustment
under Article 11). Such NSO shall be granted on the date when such Outside
Director first joins the Board and shall become exercisable as follows: 25% of
the Common Shares shall be exercisable upon the completion of 12 months of
service and the balance shall become exercisable in equal monthly installments
over the next 36 months of service.
7.2 ANNUAL GRANTS. Upon the conclusion of each regular annual meeting of
the Company's stockholders held in the year 1999 or thereafter, each Outside
Director who will continue serving as a member of the Board thereafter shall
receive an NSO covering 1,500 Common Shares (subject to adjustment under Article
11), except that such NSO shall not be granted in the calendar year in which the
same Outside Director received the NSO described in Section 7.1. NSOs granted
under this Section 7.2 shall become exercisable in full on the first anniversary
of the date of grant.
7.3 ACCELERATED EXERCISABILITY. All NSOs granted to an Outside Director
under this Article 7 shall also become exercisable in full in the event of the
termination of such Outside Director's service because of death, total and
permanent disability or retirement at or after age 65. Upon a Change in Control
with respect to the Company, the Board may determine that the NSO's granted to
Outside Directors shall become exercisable as to all or part of the Common
Shares subject to such NSO's, except as provided in the following sentence. If
the Company and the other party to the transaction constituting a Change in
Control agree that such transaction is to be treated as a "pooling of interests"
for financial reporting purposes, and if such transaction in fact is so treated,
then the acceleration of exercisability shall not occur to the extent that the
Company's independent accountants and such other party's independent accountants
separately determine in good faith that such acceleration would preclude the use
of "pooling of interests" accounting.
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7.4 EXERCISE PRICE. The Exercise Price under all NSOs granted to an
Outside Director under this Article 7 shall be equal to 100% of the Fair Market
Value of a Common Share on the date of grant, payable in one of the forms
described in Sections 6.1, 6.2, 6.3 and 6.4.
7.5 TERM. All NSOs granted to an Outside Director under this Article 7
shall terminate on the earliest of (a) the 10th anniversary of the date of
grant, (b) the date three months after the termination of such Outside
Director's service for any reason other than death or total and permanent
disability or (c) the date twelve months after the termination of such Outside
Director's service because of death or total and permanent disability.
7.6 AFFILIATES OF OUTSIDE DIRECTORS. The Committee may provide that the
NSOs that otherwise would be granted to an Outside Director under this Article 7
shall instead be granted to an affiliate of such Outside Director. Such
affiliate shall then be deemed to be an Outside Director for purposes of the
Plan, provided that the service-related vesting and termination provisions
pertaining to the NSOs shall be applied with regard to the service of the
Outside Director.
ARTICLE 8. STOCK APPRECIATION RIGHTS.
8.1 SAR AGREEMENT. Each grant of an SAR under the Plan shall be
evidenced by an SAR Agreement between the Optionee and the Company. Such SAR
shall be subject to all applicable terms of the Plan and may be subject to any
other terms that are not inconsistent with the Plan. The provisions of the
various SAR Agreements entered into under the Plan need not be identical. SARs
may be granted in consideration of a reduction in the Optionee's other
compensation.
8.2 NUMBER OF SHARES. Each SAR Agreement shall specify the number of
Common Shares to which the SAR pertains and shall provide for the adjustment of
such number in accordance with Article 11. SARs granted to any Optionee in a
single calendar year shall in no event pertain to more than 100,000 Common
Shares, except that SARs granted to a new Employee in the fiscal year of the
Company in which his or her service as an Employee first commences shall not
pertain to more than 300,000 Common Shares. The limitations set forth in the
preceding sentence shall be subject to adjustment in accordance with Article 11.
8.3 EXERCISE PRICE. Each SAR Agreement shall specify the Exercise Price.
An SAR Agreement may specify an Exercise Price that varies in accordance with a
predetermined formula while the SAR is outstanding.
8.4 EXERCISABILITY AND TERM. Each SAR Agreement shall specify the date
when all or any installment of the SAR is to become exercisable. The SAR
Agreement shall also specify the term of the SAR. An SAR Agreement may provide
for accelerated exercisability in the event of the Optionee's death, disability
or retirement or other events and may provide for expiration prior to the end of
its term in the event of the termination of the Optionee's service. SARs may be
awarded in combination with Options, and such an Award may provide that the SARs
will not be exercisable unless the related Options are forfeited. An SAR may be
included in an ISO only at the time of grant but may be included in an NSO at
the time of grant or thereafter. An SAR
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granted under the Plan may provide that it will be exercisable only in the event
of a Change in Control.
8.5 EFFECT OF CHANGE IN CONTROL. The Committee may determine, at the
time of granting an SAR or thereafter, that such SAR shall become fully
exercisable as to all Common Shares subject to such SAR in the event that a
Change in Control occurs with respect to the Company, subject to the following
sentence. If the Company and the other party to the transaction constituting a
Change in Control agree that such transaction is to be treated as a "pooling of
interests" for financial reporting purposes, and if such transaction in fact is
so treated, then the acceleration of exercisability shall not occur to the
extent that the Company's independent accountants and such other party's
independent accountants separately determine in good faith that such
acceleration would preclude the use of "pooling of interests" accounting.
8.6 EXERCISE OF SARS. Upon exercise of an SAR, the Optionee (or any
person having the right to exercise the SAR after his or her death) shall
receive from the Company (a) Common Shares, (b) cash or (c) a combination of
Common Shares and cash, as the Committee shall determine. The amount of cash
and/or the Fair Market Value of Common Shares received upon exercise of SARs
shall, in the aggregate, be equal to the amount by which the Fair Market Value
(on the date of surrender) of the Common Shares subject to the SARs exceeds the
Exercise Price. If, on the date when an SAR expires, the Exercise Price under
such SAR is less than the Fair Market Value on such date but any portion of such
SAR has not been exercised or surrendered, then such SAR shall automatically be
deemed to be exercised as of such date with respect to such portion.
8.7 MODIFICATION OR ASSUMPTION OF SARS. Within the limitations of the
Plan, the Committee may modify, extend or assume outstanding SARs or may accept
the cancellation of outstanding SARs (whether granted by the Company or by
another issuer) in return for the grant of new SARs for the same or a different
number of shares and at the same or a different exercise price. The foregoing
notwithstanding, no modification of an SAR shall, without the consent of the
Optionee, alter or impair his or her rights or obligations under such SAR.
ARTICLE 9. RESTRICTED SHARES.
9.1 RESTRICTED STOCK AGREEMENT. Each grant of Restricted Shares under
the Plan shall be evidenced by a Restricted Stock Agreement between the
recipient and the Company. Such Restricted Shares shall be subject to all
applicable terms of the Plan and may be subject to any other terms that are not
inconsistent with the Plan. The provisions of the various Restricted Stock
Agreements entered into under the Plan need not be identical.
9.2 PAYMENT FOR AWARDS. Subject to the following sentence, Restricted
Shares may be sold or awarded under the Plan for such consideration as the
Committee may determine, including (without limitation) cash, cash equivalents,
full-recourse promissory notes, past services and future services. To the extent
that an Award consists of newly issued Restricted Shares, the Award recipient
shall furnish consideration with a value not less than the par value of such
Restricted Shares in the form of cash, cash equivalents or past services
rendered to the Company (or a Parent or Subsidiary), as the Committee may
determine.
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9.3 VESTING CONDITIONS. Each Award of Restricted Shares may or may not
be subject to vesting. Vesting shall occur, in full or in installments, upon
satisfaction of the conditions specified in the Restricted Stock Agreement. A
Restricted Stock Agreement may provide for accelerated vesting in the event of
the Participant's death, disability or retirement or other events. The Committee
may determine, at the time of granting Restricted Shares or thereafter, that all
or part of such Restricted Shares shall become vested in the event that a Change
in Control occurs with respect to the Company, except as provided in the next
following sentence. If the Company and the other party to the transaction
constituting a Change in Control agree that such transaction is to be treated as
a "pooling of interests" for financial reporting purposes, and if such
transaction in fact is so treated, then the acceleration of vesting shall not
occur to the extent that the Company's independent accountants and such other
party's independent accountants separately determine in good faith that such
acceleration would preclude the use of "pooling of interests" accounting.
9.4 VOTING AND DIVIDEND RIGHTS. The holders of Restricted Shares awarded
under the Plan shall have the same voting, dividend and other rights as the
Company's other stockholders. A Restricted Stock Agreement, however, may require
that the holders of Restricted Shares invest any cash dividends received in
additional Restricted Shares. Such additional Restricted Shares shall be subject
to the same conditions and restrictions as the Award with respect to which the
dividends were paid.
ARTICLE 10. STOCK UNITS.
10.1 STOCK UNIT AGREEMENT. Each grant of Stock Units under the Plan
shall be evidenced by a Stock Unit Agreement between the recipient and the
Company. Such Stock Units shall be subject to all applicable terms of the Plan
and may be subject to any other terms that are not inconsistent with the Plan.
The provisions of the various Stock Unit Agreements entered into under the Plan
need not be identical. Stock Units may be granted in consideration of a
reduction in the recipient's other compensation.
10.2 PAYMENT FOR AWARDS. To the extent that an Award is granted in the
form of Stock Units, no cash consideration shall be required of the Award
recipients.
10.3 VESTING CONDITIONS. Each Award of Stock Units may or may not be
subject to vesting. Vesting shall occur, in full or in installments, upon
satisfaction of the conditions specified in the Stock Unit Agreement. A Stock
Unit Agreement may provide for accelerated vesting in the event of the
Participant's death, disability or retirement or other events. The Committee may
determine, at the time of granting Stock Units or thereafter, that all or part
of such Stock Units shall become vested in the event that a Change in Control
occurs with respect to the Company, except as provided in the next following
sentence. If the Company and the other party to the transaction constituting a
Change in Control agree that such transaction is to be treated as a "pooling of
interests" for financial reporting purposes, and if such transaction in fact is
so treated, then the acceleration of vesting shall not occur to the extent that
the Company's independent accountants and such other party's independent
accountants separately determine in good faith that such acceleration would
preclude the use of "pooling of interests" accounting.
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10.4 VOTING AND DIVIDEND RIGHTS. The holders of Stock Units shall have
no voting rights. Prior to settlement or forfeiture, any Stock Unit awarded
under the Plan may, at the Committee's discretion, carry with it a right to
dividend equivalents. Such right entitles the holder to be credited with an
amount equal to all cash dividends paid on one Common Share while the Stock Unit
is outstanding. Dividend equivalents may be converted into additional Stock
Units. Settlement of dividend equivalents may be made in the form of cash, in
the form of Common Shares, or in a combination of both. Prior to distribution,
any dividend equivalents which are not paid shall be subject to the same
conditions and restrictions as the Stock Units to which they attach.
10.5 FORM AND TIME OF SETTLEMENT OF STOCK UNITS. Settlement of vested
Stock Units may be made in the form of (d) cash, (e) Common Shares or (f) any
combination of both, as determined by the Committee. The actual number of Stock
Units eligible for settlement may be larger or smaller than the number included
in the original Award, based on predetermined performance factors. Methods of
converting Stock Units into cash may include (without limitation) a method based
on the average Fair Market Value of Common Shares over a series of trading days.
Vested Stock Units may be settled in a lump sum or in installments. The
distribution may occur or commence when all vesting conditions applicable to the
Stock Units have been satisfied or have lapsed, or it may be deferred to any
later date. The amount of a deferred distribution may be increased by an
interest factor or by dividend equivalents. Until an Award of Stock Units is
settled, the number of such Stock Units shall be subject to adjustment pursuant
to Article 11.
10.6 DEATH OF RECIPIENT. Any Stock Units Award that becomes payable
after the recipient's death shall be distributed to the recipient's beneficiary
or beneficiaries. Each recipient of a Stock Units Award under the Plan shall
designate one or more beneficiaries for this purpose by filing the prescribed
form with the Company. A beneficiary designation may be changed by filing the
prescribed form with the Company at any time before the Award recipient's death.
If no beneficiary was designated or if no designated beneficiary survives the
Award recipient, then any Stock Units Award that becomes payable after the
recipient's death shall be distributed to the recipient's estate.
10.7 CREDITORS' RIGHTS. A holder of Stock Units shall have no rights
other than those of a general creditor of the Company. Stock Units represent an
unfunded and unsecured obligation of the Company, subject to the terms and
conditions of the applicable Stock Unit Agreement.
ARTICLE 11. PROTECTION AGAINST DILUTION.
11.1 ADJUSTMENTS. In the event of a subdivision of the outstanding
Common Shares, a declaration of a dividend payable in Common Shares, a
declaration of a dividend payable in a form other than Common Shares in an
amount that has a material effect on the price of Common Shares, a combination
or consolidation of the outstanding Common Shares (by reclassification or
otherwise) into a lesser number of Common Shares, a recapitalization, a spin-off
or a similar occurrence, the Committee shall make such adjustments as it, in its
sole discretion, deems appropriate in one or more of:
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(a) The number of Options, SARs, Restricted Shares and Stock
Units available for future Awards under Article 3;
(b) The limitations set forth in Sections 5.2 and 8.2;
(c) The number of NSOs to be granted to Outside Directors
under Article 7;
(d) The number of Common Shares covered by each outstanding
Option and SAR;
(e) The Exercise Price under each outstanding Option and
SAR; or
(f) The number of Stock Units included in any prior Award
which has not yet been settled.
Except as provided in this Article 11, a Participant shall have no rights by
reason of any issue by the Company of stock of any class or securities
convertible into stock of any class, any subdivision or consolidation of shares
of stock of any class, the payment of any stock dividend or any other increase
or decrease in the number of shares of stock of any class.
11.2 DISSOLUTION OR LIQUIDATION. To the extent not previously exercised
or settled, Options, SARs and Stock Units shall terminate immediately prior to
the dissolution or liquidation of the Company.
11.3 REORGANIZATIONS. In the event that the Company is a party to a
merger or other reorganization, outstanding Awards shall be subject to the
agreement of merger or reorganization. Such agreement shall provide for (a) the
continuation of the outstanding Awards by the Company, if the Company is a
surviving corporation, (b) the assumption of the outstanding Awards by the
surviving corporation or its parent or subsidiary, (c) the substitution by the
surviving corporation or its parent or subsidiary of its own awards for the
outstanding Awards, (d) full exercisability or vesting and accelerated
expiration of the outstanding Awards or (e) settlement of the full value of the
outstanding Awards in cash or cash equivalents followed by cancellation of such
Awards.
ARTICLE 12. DEFERRAL OF AWARDS.
The Committee (in its sole discretion) may permit or require a
Participant to:
(a) Have cash that otherwise would be paid to such
Participant as a result of the exercise of an SAR or the settlement of
Stock Units credited to a deferred compensation account established for
such Participant by the Committee as an entry on the Company's books;
(b) Have Common Shares that otherwise would be delivered to
such Participant as a result of the exercise of an Option or SAR
converted into an equal number of Stock Units; or
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(c) Have Common Shares that otherwise would be delivered to
such Participant as a result of the exercise of an Option or SAR or the
settlement of Stock Units converted into amounts credited to a deferred
compensation account established for such Participant by the Committee
as an entry on the Company's books. Such amounts shall be determined by
reference to the Fair Market Value of such Common Shares as of the date
when they otherwise would have been delivered to such Participant.
A deferred compensation account established under this Article 12 may be
credited with interest or other forms of investment return, as determined by the
Committee. A Participant for whom such an account is established shall have no
rights other than those of a general creditor of the Company. Such an account
shall represent an unfunded and unsecured obligation of the Company and shall be
subject to the terms and conditions of the applicable agreement between such
Participant and the Company. If the deferral or conversion of Awards is
permitted or required, the Committee (in its sole discretion) may establish
rules, procedures and forms pertaining to such Awards, including (without
limitation) the settlement of deferred compensation accounts established under
this Article 12.
ARTICLE 13. AWARDS UNDER OTHER PLANS.
The Company may grant awards under other plans or programs. Such
awards may be settled in the form of Common Shares issued under this Plan. Such
Common Shares shall be treated for all purposes under the Plan like Common
Shares issued in settlement of Stock Units and shall, when issued, reduce the
number of Common Shares available under Article 3.
ARTICLE 14. PAYMENT OF DIRECTOR'S FEES IN SECURITIES.
14.1 EFFECTIVE DATE. No provision of this Article 14 shall be effective
unless and until the Board has determined to implement such provision.
14.2 ELECTIONS TO RECEIVE NSOS, RESTRICTED SHARES OR STOCK UNITS. An
Outside Director may elect to receive his or her annual retainer payments and/or
meeting fees from the Company in the form of cash, NSOs, Restricted Shares or
Stock Units, or a combination thereof, as determined by the Board. Such NSOs,
Restricted Shares and Stock Units shall be issued under the Plan. An election
under this Article 14 shall be filed with the Company on the prescribed form.
14.3 NUMBER AND TERMS OF NSOS, RESTRICTED SHARES OR STOCK UNITS. The
number of NSOs, Restricted Shares or Stock Units to be granted to Outside
Directors in lieu of annual retainers and meeting fees that would otherwise be
paid in cash shall be calculated in a manner determined by the Board. The terms
of such NSOs, Restricted Shares or Stock Units shall also be determined by the
Board.
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ARTICLE 15. LIMITATION ON RIGHTS.
15.1 RETENTION RIGHTS. Neither the Plan nor any Award granted under the
Plan shall be deemed to give any individual a right to remain an Employee,
Outside Director or Consultant. The Company and its Parents, Subsidiaries and
Affiliates reserve the right to terminate the service of any Employee, Outside
Director or Consultant at any time, with or without cause, subject to applicable
laws, the Company's certificate of incorporation and by-laws and a written
employment agreement (if any).
15.2 STOCKHOLDERS' RIGHTS. A Participant shall have no dividend rights,
voting rights or other rights as a stockholder with respect to any Common Shares
covered by his or her Award prior to the time when a stock certificate for such
Common Shares is issued or, if applicable, the time when he or she becomes
entitled to receive such Common Shares by filing any required notice of exercise
and paying any required Exercise Price. No adjustment shall be made for cash
dividends or other rights for which the record date is prior to such time,
except as expressly provided in the Plan.
15.3 REGULATORY REQUIREMENTS. Any other provision of the Plan
notwithstanding, the obligation of the Company to issue Common Shares under the
Plan shall be subject to all applicable laws, rules and regulations and such
approval by any regulatory body as may be required. The Company reserves the
right to restrict, in whole or in part, the delivery of Common Shares pursuant
to any Award prior to the satisfaction of all legal requirements relating to the
issuance of such Common Shares, to their registration, qualification or listing
or to an exemption from registration, qualification or listing.
ARTICLE 16. WITHHOLDING TAXES.
16.1 GENERAL. To the extent required by applicable federal, state, local
or foreign law, a Participant or his or her successor shall make arrangements
satisfactory to the Company for the satisfaction of any withholding tax
obligations that arise in connection with the Plan. The Company shall not be
required to issue any Common Shares or make any cash payment under the Plan
until such obligations are satisfied.
16.2 SHARE WITHHOLDING. The Committee may permit a Participant to
satisfy all or part of his or her withholding or income tax obligations by
having the Company withhold all or a portion of any Common Shares that otherwise
would be issued to him or her or by surrendering all or a portion of any Common
Shares that he or she previously acquired. Such Common Shares shall be valued at
their Fair Market Value on the date when taxes otherwise would be withheld in
cash.
ARTICLE 17. FUTURE OF THE PLAN.
17.1 TERM OF THE PLAN. The Plan, as set forth herein, shall become
effective on July 13, 1998. The Plan shall remain in effect until it is
terminated under Section 17.2, except that no ISOs shall be granted on or after
the 10th anniversary of the later of (a) the date when the Board adopted the
Plan or (b) the date when the Board adopted the most recent increase in the
number
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of Common Shares available under Article 3 which was approved by the Company's
stockholders.
17.2 AMENDMENT OR TERMINATION. The Board may, at any time and for any
reason, amend or terminate the Plan. An amendment of the Plan shall be subject
to the approval of the Company's stockholders only to the extent required by
applicable laws, regulations or rules. No Awards shall be granted under the Plan
after the termination thereof. The termination of the Plan, or any amendment
thereof, shall not affect any Award previously granted under the Plan.
ARTICLE 18. LIMITATION ON PAYMENTS.
18.1 SCOPE OF LIMITATION. This Article 18 shall apply to an Award only
if:
(a) The independent auditors most recently selected by the
Board (the "Auditors") determine that the after-tax value of such Award
to the Participant, taking into account the effect of all federal, state
and local income taxes, employment taxes and excise taxes applicable to
the Participant (including the excise tax under section 4999 of the
Code), will be greater after the application of this Article 18 than it
was before the application of this Article 18; or
(b) The Committee, at the time of making an Award under the
Plan or at any time thereafter, specifies in writing that such Award
shall be subject to this Article 18 (regardless of the after-tax value
of such Award to the Participant).
If this Article 18 applies to an Award, it shall supersede any contrary
provision of the Plan or of any Award granted under the Plan.
18.2 BASIC RULE. In the event that the Auditors determine that any
payment or transfer by the Company under the Plan to or for the benefit of a
Participant (a "Payment") would be nondeductible by the Company for federal
income tax purposes because of the provisions concerning "excess parachute
payments" in section 280G of the Code, then the aggregate present value of all
Payments shall be reduced (but not below zero) to the Reduced Amount. For
purposes of this Article 18, the "Reduced Amount" shall be the amount, expressed
as a present value, which maximizes the aggregate present value of the Payments
without causing any Payment to be nondeductible by the Company because of
section 280G of the Code.
18.3 REDUCTION OF PAYMENTS. If the Auditors determine that any Payment
would be nondeductible by the Company because of section 280G of the Code, then
the Company shall promptly give the Participant notice to that effect and a copy
of the detailed calculation thereof and of the Reduced Amount, and the
Participant may then elect, in his or her sole discretion, which and how much of
the Payments shall be eliminated or reduced (as long as after such
13
<PAGE> 18
election the aggregate present value of the Payments equals the Reduced Amount)
and shall advise the Company in writing of his or her election within 10 days of
receipt of notice. If no such election is made by the Participant within such
10-day period, then the Company may elect which and how much of the Payments
shall be eliminated or reduced (as long as after such election the aggregate
present value of the Payments equals the Reduced Amount) and shall notify the
Participant promptly of such election. For purposes of this Article 18, present
value shall be determined in accordance with section 280G(d)(4) of the Code. All
determinations made by the Auditors under this Article 18 shall be binding upon
the Company and the Participant and shall be made within 60 days of the date
when a Payment becomes payable or transferable. As promptly as practicable
following such determination and the elections hereunder, the Company shall pay
or transfer to or for the benefit of the Participant such amounts as are then
due to him or her under the Plan and shall promptly pay or transfer to or for
the benefit of the Participant in the future such amounts as become due to him
or her under the Plan.
18.4 OVERPAYMENTS AND UNDERPAYMENTS. As a result of uncertainty in the
application of section 280G of the Code at the time of an initial determination
by the Auditors hereunder, it is possible that Payments will have been made by
the Company which should not have been made (an "Overpayment") or that
additional Payments which will not have been made by the Company could have been
made (an "Underpayment"), consistent in each case with the calculation of the
Reduced Amount hereunder. In the event that the Auditors, based upon the
assertion of a deficiency by the Internal Revenue Service against the Company or
the Participant which the Auditors believe has a high probability of success,
determine that an Overpayment has been made, such Overpayment shall be treated
for all purposes as a loan to the Participant which he or she shall repay to the
Company, together with interest at the applicable federal rate provided in
section 7872(f)(2) of the Code; provided, however, that no amount shall be
payable by the Participant to the Company if and to the extent that such payment
would not reduce the amount which is subject to taxation under section 4999 of
the Code. In the event that the Auditors determine that an Underpayment has
occurred, such Underpayment shall promptly be paid or transferred by the Company
to or for the benefit of the Participant, together with interest at the
applicable federal rate provided in section 7872(f)(2) of the Code.
18.5 RELATED CORPORATIONS. For purposes of this Article 18, the term
"Company" shall include affiliated corporations to the extent determined by the
Auditors in accordance with section 280G(d)(5) of the Code.
ARTICLE 19. DEFINITIONS.
19.1 "AFFILIATE" means any entity other than a Subsidiary, if the
Company and/or one or more Subsidiaries own not less than 50% of such entity.
19.2 "AWARD" means any award of an Option, an SAR, a Restricted Share or
a Stock Unit under the Plan.
19.3 "BOARD" means the Company's Board of Directors, as constituted from
time to time.
19.4 "CHANGE IN CONTROL" shall mean:
(a) The consummation of a merger or consolidation of the
Company with or into another entity or any other corporate
reorganization, if more than 50% of the combined voting power of the
continuing or surviving
14
<PAGE> 19
entity's securities outstanding immediately after such merger,
consolidation or other reorganization is owned by persons who were not
stockholders of the Company immediately prior to such merger,
consolidation or other reorganization;
(b) The sale, transfer or other disposition of all or
substantially all of the Company's assets;
(c) A change in the composition of the Board, as a result of
which fewer than 50% of the incumbent directors are directors who either
(i) had been directors of the Company on the date 24 months prior to the
date of the event that may constitute a Change in Control (the "original
directors") or (ii) were elected, or nominated for election, to the
Board with the affirmative votes of at least a majority of the aggregate
of the original directors who were still in office at the time of the
election or nomination and the directors whose election or nomination
was previously so approved; or
(d) Any transaction as a result of which any person is the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing at
least 50% of the total voting power represented by the Company's then
outstanding voting securities. For purposes of this Paragraph (d), the
term "person" shall have the same meaning as when used in sections 13(d)
and 14(d) of the Exchange Act but shall exclude (i) a trustee or other
fiduciary holding securities under an employee benefit plan of the
Company or of a Parent or Subsidiary and (ii) a corporation owned
directly or indirectly by the stockholders of the Company in
substantially the same proportions as their ownership of the common
stock of the Company.
A transaction shall not constitute a Change in Control if its sole purpose is to
change the state of the Company's incorporation or to create a holding company
that will be owned in substantially the same proportions by the persons who held
the Company's securities immediately before such transaction.
19.5 "CODE" means the Internal Revenue Code of 1986, as amended.
19.6 "COMMITTEE" means a committee of the Board, as described in Article
2.
19.7 "COMMON SHARE" means one share of the common stock of the Company.
19.8 "COMPANY" means Computer Literacy, Inc., a Delaware corporation.
19.9 "CONSULTANT" means a consultant or adviser who provides bona fide
services to the Company, a Parent, a Subsidiary or an Affiliate as an
independent contractor. Service as a Consultant shall be considered employment
for all purposes of the Plan, except as provided in Section 4.1.
19.10 "EMPLOYEE" means a common-law employee of the Company, a Parent, a
Subsidiary or an Affiliate.
15
<PAGE> 20
19.11 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
19.12 "EXERCISE PRICE," in the case of an Option, means the amount for
which one Common Share may be purchased upon exercise of such Option, as
specified in the applicable Stock Option Agreement. "Exercise Price," in the
case of an SAR, means an amount, as specified in the applicable SAR Agreement,
which is subtracted from the Fair Market Value of one Common Share in
determining the amount payable upon exercise of such SAR.
19.13 "FAIR MARKET VALUE" means the market price of Common Shares,
determined by the Committee in good faith on such basis as it deems appropriate.
Whenever possible, the determination of Fair Market Value by the Committee shall
be based on the prices reported in The Wall Street Journal. Such determination
shall be conclusive and binding on all persons.
19.14 "ISO" means an incentive stock option described in section 422(b)
of the Code.
19.15 "NSO" means a stock option not described in sections 422 or 423 of
the Code.
19.16 "OPTION" means an ISO or NSO granted under the Plan and entitling
the holder to purchase Common Shares.
19.17 "OPTIONEE" means an individual or estate who holds an Option or
SAR.
19.18 "OUTSIDE DIRECTOR" shall mean a member of the Board who is not an
Employee. Service as an Outside Director shall be considered employment for all
purposes of the Plan, except as provided in Section 4.1.
19.19 "PARENT" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company, if each of the
corporations other than the Company owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain. A corporation that attains the status of a Parent on
a date after the adoption of the Plan shall be considered a Parent commencing as
of such date.
19.20 "PARTICIPANT" means an individual or estate who holds an Award.
19.21 "PLAN" means this Computer Literacy, Inc. 1998 Omnibus Equity
Incentive Plan, as amended from time to time.
19.22 "PREDECESSOR PLAN" means the Computer Literacy, Inc. 1996 Stock
Plan, as amended.
19.22 "RESTRICTED SHARE" means a Common Share awarded under the Plan.
19.23 "RESTRICTED STOCK AGREEMENT" means the agreement between the
Company and the recipient of a Restricted Share which contains the terms,
conditions and restrictions pertaining to such Restricted Share.
19.24 "SAR" means a stock appreciation right granted under the Plan.
16
<PAGE> 21
19.25 "SAR AGREEMENT" means the agreement between the Company and an
Optionee which contains the terms, conditions and restrictions pertaining to his
or her SAR.
19.26 "STOCK OPTION AGREEMENT" means the agreement between the Company
and an Optionee that contains the terms, conditions and restrictions pertaining
to his or her Option.
19.27 "STOCK UNIT" means a bookkeeping entry representing the equivalent
of one Common Share, as awarded under the Plan.
19.28 "STOCK UNIT AGREEMENT" means the agreement between the Company and
the recipient of a Stock Unit which contains the terms, conditions and
restrictions pertaining to such Stock Unit.
19.29 "SUBSIDIARY" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company, if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain. A corporation that attains
the status of a Subsidiary on a date after the adoption of the Plan shall be
considered a Subsidiary commencing as of such date.
ARTICLE 20. EXECUTION.
To record the adoption of the Plan by the Board, the Company has
caused its duly authorized officer to execute this document in the name of the
Company.
COMPUTER LITERACY, INC.
By: /s/ Chris MacAskill
-------------------------------
Title: President
----------------------------
17
<PAGE> 1
EXHIBIT 10.4
COMPUTER LITERACY, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
(AS ADOPTED JULY 13, 1998)
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<TABLE>
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TABLE OF CONTENTS
Page
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<S> <C>
SECTION 1. PURPOSE OF THE PLAN..............................................................1
SECTION 2. ADMINISTRATION OF THE PLAN.......................................................1
(a) Committee Composition...........................................................1
(b) Committee Responsibilities......................................................1
SECTION 3. ENROLLMENT AND PARTICIPATION.....................................................1
(a) Offering Periods................................................................1
(b) Accumulation Periods............................................................1
(c) Enrollment......................................................................1
(d) Duration of Participation.......................................................1
(e) Applicable Offering Period......................................................2
SECTION 4. EMPLOYEE CONTRIBUTIONS...........................................................2
(a) Frequency of Payroll Deductions.................................................2
(b) Amount of Payroll Deductions....................................................2
(c) Changing Withholding Rate.......................................................2
(d) Discontinuing Payroll Deductions................................................3
(e) Limit on Number of Elections....................................................3
SECTION 5. WITHDRAWAL FROM THE PLAN.........................................................3
(a) Withdrawal......................................................................3
(b) Re-Enrollment After Withdrawal..................................................3
SECTION 6. CHANGE IN EMPLOYMENT STATUS......................................................3
(a) Termination of Employment.......................................................3
(b) Leave of Absence................................................................3
(c) Death...........................................................................3
SECTION 7. PLAN ACCOUNTS AND PURCHASE OF SHARES.............................................4
(a) Plan Accounts...................................................................4
(b) Purchase Price..................................................................4
(c) Number of Shares Purchased......................................................4
(d) Available Shares Insufficient...................................................4
(e) Issuance of Stock...............................................................4
(f) Unused Cash Balances............................................................5
(g) Stockholder Approval............................................................5
SECTION 8. LIMITATIONS ON STOCK OWNERSHIP...................................................5
(a) Five Percent Limit..............................................................5
(b) Dollar Limit....................................................................5
i
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<TABLE>
<S> <C>
SECTION 9. RIGHTS NOT TRANSFERABLE..........................................................6
SECTION 10. NO RIGHTS AS AN EMPLOYEE........................................................6
SECTION 11. NO RIGHTS AS A STOCKHOLDER......................................................6
SECTION 12. SECURITIES LAW REQUIREMENTS.....................................................6
SECTION 13. STOCK OFFERED UNDER THE PLAN....................................................7
(a) Authorized Shares...............................................................7
(b) Anti-Dilution Adjustments.......................................................7
(c) Reorganizations.................................................................7
SECTION 14. AMENDMENT OR DISCONTINUANCE.....................................................7
SECTION 15. DEFINITIONS.....................................................................7
(a) Accumulation Period.............................................................7
(b) Board...........................................................................7
(c) Code............................................................................7
(d) Committee.......................................................................7
(e) Company.........................................................................8
(f) Compensation....................................................................8
(g) Corporate Reorganization........................................................8
(h) Eligible Employee...............................................................8
(i) Exchange Act....................................................................8
(j) Fair Market Value...............................................................8
(k) IPO5
(l) Offering Period.................................................................9
(m) Participant.....................................................................9
(n) Participating Company...........................................................9
(o) Plan............................................................................9
(p) Plan Account....................................................................9
(q) Purchase Price..................................................................9
(r) Stock...........................................................................9
(s) Subsidiary......................................................................9
SECTION 15. EXECUTION.......................................................................9
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<PAGE> 4
COMPUTER LITERACY, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
SECTION 1. PURPOSE OF THE PLAN.
The Plan was adopted by the Board on July 13, 1998, effective as of the
date of the IPO. The purpose of the Plan is to provide Eligible Employees with
an opportunity to increase their proprietary interest in the success of the
Company by purchasing Stock from the Company on favorable terms and to pay for
such purchases through payroll deductions. The Plan is intended to qualify under
section 423 of the Code.
SECTION 2. ADMINISTRATION OF THE PLAN.
(a) COMMITTEE COMPOSITION. The Plan shall be administered by the
Committee. The Committee shall consist exclusively of one or more directors of
the Company, who shall be appointed by the Board.
(b) COMMITTEE RESPONSIBILITIES. The Committee shall interpret the Plan
and make all other policy decisions relating to the operation of the Plan. The
Committee may adopt such rules, guidelines and forms as it deems appropriate to
implement the Plan. The Committee's determinations under the Plan shall be final
and binding on all persons.
SECTION 3. ENROLLMENT AND PARTICIPATION.
(a) OFFERING PERIODS. While the Plan is in effect, two overlapping
Offering Periods shall commence in each calendar year. The Offering Periods
shall consist of the 24-month periods commencing on each June 1 and December 1,
except that the first Offering Period shall commence on the date of the IPO and
end on November 30, 2000.
(b) ACCUMULATION PERIODS. While the Plan is in effect, two Accumulation
Periods shall commence in each calendar year. The Accumulation Periods shall
consist of the six-month periods commencing on each June 1 and December 1,
except that the first Accumulation Period shall commence on the date of the IPO
and end on May 31, 1999.
(c) ENROLLMENT. Any individual who, on the day preceding the first day
of an Offering Period, qualifies as an Eligible Employee may elect to become a
Participant in the Plan for such Offering Period by executing the enrollment
form prescribed for this purpose by the Committee. The enrollment form shall be
filed with the Company at the prescribed location not later than 15 days prior
to the commencement of such Offering Period.
(d) DURATION OF PARTICIPATION. Once enrolled in the Plan, a Participant
shall continue to participate in the Plan until he or she ceases to be an
Eligible Employee, withdraws from the Plan under Section 5(a) or reaches the end
of the Accumulation Period in which his or her employee contributions were
discontinued under Section 4(d) or 8(b). A Participant who
<PAGE> 5
discontinued employee contributions under Section 4(d) or withdrew from the Plan
under Section 5(a) may again become a Participant, if he or she then is an
Eligible Employee, by following the procedure described in Subsection (c) above.
A Participant whose employee contributions were discontinued automatically under
Section 8(b) shall automatically resume participation at the beginning of the
earliest Accumulation Period ending in the next calendar year, if he or she then
is an Eligible Employee.
(e) APPLICABLE OFFERING PERIOD. For purposes of calculating the Purchase
Price under Section 7(b), the applicable Offering Period shall be determined as
follows:
(i) Once a Participant is enrolled in the Plan for an Offering
Period, such Offering Period shall continue to apply to him or her until
the earliest of (A) the end of such Offering Period, (B) the end of his
or her participation under Subsection (d) above or (C) re-enrollment for
a subsequent Offering Period under Paragraph (ii) or (iii) below.
(ii) In the event that the Fair Market Value of Stock on the
last trading day before the commencement of the Offering Period for
which the Participant is enrolled is higher than on the last trading day
before the commencement of any subsequent Offering Period, the
Participant shall automatically be re-enrolled for such subsequent
Offering Period.
(iii) Any other provision of the Plan notwithstanding, the
Company (at its sole discretion) may determine prior to the commencement
of any new Offering Period that all Participants shall be re-enrolled
for such new Offering Period.
(iv) When a Participant reaches the end of an Offering Period
but his or her participation is to continue, then such Participant shall
automatically be re-enrolled for the Offering Period that commences
immediately after the end of the prior Offering Period.
SECTION 4. EMPLOYEE CONTRIBUTIONS.
(a) FREQUENCY OF PAYROLL DEDUCTIONS. A Participant may purchase shares
of Stock under the Plan solely by means of payroll deductions. Payroll
deductions, as designated by the Participant pursuant to Subsection (b) below,
shall occur on each payday during participation in the Plan.
(b) AMOUNT OF PAYROLL DEDUCTIONS. An Eligible Employee shall designate
on the enrollment form the portion of his or her Compensation that he or she
elects to have withheld for the purchase of Stock. Such portion shall be a whole
percentage of the Eligible Employee's Compensation, but not less than 1% nor
more than 15%.
(c) CHANGING WITHHOLDING RATE. If a Participant wishes to change the
rate of payroll withholding, he or she may do so by filing a new enrollment form
with the Company at the prescribed location at any time. The new withholding
rate shall be effective as soon as
2
<PAGE> 6
reasonably practicable after such form has been received by the Company. The new
withholding rate shall be a whole percentage of the Eligible Employee's
Compensation, but not less than 1% nor more than 15%.
(d) DISCONTINUING PAYROLL DEDUCTIONS. If a Participant wishes to
discontinue employee contributions entirely, he or she may do so by filing a new
enrollment form with the Company at the prescribed location at any time. Payroll
withholding shall cease as soon as reasonably practicable after such form has
been received by the Company. (In addition, employee contributions may be
discontinued automatically pursuant to Section 8(b).) A Participant who has
discontinued employee contributions may resume such contributions by filing a
new enrollment form with the Company at the prescribed location. Payroll
withholding shall resume as soon as reasonably practicable after such form has
been received by the Company.
(e) LIMIT ON NUMBER OF ELECTIONS. No Participant shall make more than 2
elections under Subsection (c) or (d) above during any Accumulation Period.
SECTION 5. WITHDRAWAL FROM THE PLAN.
(a) WITHDRAWAL. A Participant may elect to withdraw from the Plan by
filing the prescribed form with the Company at the prescribed location at any
time before the last day of an Accumulation Period. As soon as reasonably
practicable thereafter, payroll deductions shall cease and the entire amount
credited to the Participant's Plan Account shall be refunded to him or her in
cash, without interest. No partial withdrawals shall be permitted.
(b) RE-ENROLLMENT AFTER WITHDRAWAL. A former Participant who has
withdrawn from the Plan shall not be a Participant until he or she re-enrolls in
the Plan under Section 3(c). Re-enrollment may be effective only at the
commencement of an Offering Period.
SECTION 6. CHANGE IN EMPLOYMENT STATUS.
(a) TERMINATION OF EMPLOYMENT. Termination of employment as an Eligible
Employee for any reason, including death, shall be treated as an automatic
withdrawal from the Plan under Section 5(a). (A transfer from one Participating
Company to another shall not be treated as a termination of employment.)
(b) LEAVE OF ABSENCE. For purposes of the Plan, employment shall not be
deemed to terminate when the Participant goes on a military leave, a sick leave
or another bona fide leave of absence, if the leave was approved by the Company
in writing. Employment, however, shall be deemed to terminate 90 days after the
Participant goes on a leave, unless a contract or statute guarantees his or her
right to return to work. Employment shall be deemed to terminate in any event
when the approved leave ends, unless the Participant immediately returns to
work.
(c) DEATH. In the event of the Participant's death, the amount credited
to his or her Plan Account shall be paid to a beneficiary designated by him or
her for this purpose on the prescribed form or, if none, to the Participant's
estate. Such form shall be valid only if it was filed with the Company at the
prescribed location before the Participant's death.
3
<PAGE> 7
SECTION 7. PLAN ACCOUNTS AND PURCHASE OF SHARES.
(a) PLAN ACCOUNTS. The Company shall maintain a Plan Account on its
books in the name of each Participant. Whenever an amount is deducted from the
Participant's Compensation under the Plan, such amount shall be credited to the
Participant's Plan Account. Amounts credited to Plan Accounts shall not be trust
funds and may be commingled with the Company's general assets and applied to
general corporate purposes. No interest shall be credited to Plan Accounts.
(b) PURCHASE PRICE. The Purchase Price for each share of Stock purchased
at the close of an Accumulation Period shall be the lower of:
(i) 85% of the Fair Market Value of such share on the last
trading day in such Accumulation Period; or
(ii) 85% of the Fair Market Value of such share on the last
trading day before the commencement of the applicable Offering Period
(as determined under Section 3(e)) or, in the case of the first Offering
Period under the Plan, 85% of the price at which one share of Stock is
offered to the public in the IPO.
(c) NUMBER OF SHARES PURCHASED. As of the last day of each Accumulation
Period, each Participant shall be deemed to have elected to purchase the number
of shares of Stock calculated in accordance with this Subsection (c), unless the
Participant has previously elected to withdraw from the Plan in accordance with
Section 5(a). The amount then in the Participant's Plan Account shall be divided
by the Purchase Price, and the number of shares that results shall be purchased
from the Company with the funds in the Participant's Plan Account. The foregoing
notwithstanding, no Participant shall purchase more than 500 shares of Stock
with respect to any Accumulation Period nor more than the amounts of Stock set
forth in Sections 8(b) and 13(a). The Committee may determine with respect to
all Participants that any fractional share, as calculated under this Subsection
(c), shall be (i) rounded down to the next lower whole share or (ii) credited as
a fractional share.
(d) AVAILABLE SHARES INSUFFICIENT. In the event that the aggregate
number of shares that all Participants elect to purchase during an Accumulation
Period exceeds the maximum number of shares remaining available for issuance
under Section 13(a), then the number of shares to which each Participant is
entitled shall be determined by multiplying the number of shares available for
issuance by a fraction, the numerator of which is the number of shares that such
Participant has elected to purchase and the denominator of which is the number
of shares that all Participants have elected to purchase.
(e) ISSUANCE OF STOCK. Certificates representing the shares of Stock
purchased by a Participant under the Plan shall be issued to him or her as soon
as reasonably practicable after the close of the applicable Accumulation Period,
except that the Committee may determine that such shares shall be held for each
Participant's benefit by a broker designated by the Committee (unless the
Participant has elected that certificates be issued to him or her). Shares may
be registered in the name of the Participant or jointly in the name of the
Participant and his or her spouse as joint tenants with right of survivorship or
as community property.
4
<PAGE> 8
(f) UNUSED CASH BALANCES. An amount remaining in the Participant's Plan
Account that represents the Purchase Price for any fractional share shall be
carried over in the Participant's Plan Account to the next Accumulation Period.
Any amount remaining in the Participant's Plan Account that represents the
Purchase Price for whole shares that could not be purchased by reason of
Subsection (c) above, Section 8(b) or Section 13(a) shall be refunded to the
Participant in cash, without interest.
(g) STOCKHOLDER APPROVAL. Any other provision of the Plan
notwithstanding, no shares of Stock shall be purchased under the Plan unless and
until the Company's stockholders have approved the adoption of the Plan.
SECTION 8. LIMITATIONS ON STOCK OWNERSHIP.
(a) FIVE PERCENT LIMIT. Any other provision of the Plan notwithstanding,
no Participant shall be granted a right to purchase Stock under the Plan if such
Participant, immediately after his or her election to purchase such Stock, would
own stock possessing more than 5% of the total combined voting power or value of
all classes of stock of the Company or any parent or Subsidiary of the Company.
For purposes of this Subsection (a), the following rules shall apply:
(i) Ownership of stock shall be determined after applying the
attribution rules of section 424(d) of the Code;
(ii) Each Participant shall be deemed to own any stock that he
or she has a right or option to purchase under this or any other plan;
and
(iii) Each Participant shall be deemed to have the right to
purchase 500 shares of Stock under this Plan with respect to each
Accumulation Period.
(b) DOLLAR LIMIT. Any other provision of the Plan notwithstanding, no
Participant shall purchase Stock with a Fair Market Value in excess of the
following limit:
(i) In the case of Stock purchased during an Offering Period
that commenced in the current calendar year, the limit shall be equal to
(A) $25,000 minus (B) the Fair Market Value of the Stock that the
Participant previously purchased in the current calendar year (under
this Plan and all other employee stock purchase plans of the Company or
any parent or Subsidiary of the Company).
(ii) In the case of Stock purchased during an Offering Period
that commenced in the immediately preceding calendar year, the limit
shall be equal to (A) $50,000 minus (B) the Fair Market Value of the
Stock that the Participant previously purchased (under this Plan and all
other employee stock purchase plans of the Company or any parent or
Subsidiary of the Company) in the current calendar year and in the
immediately preceding calendar year.
5
<PAGE> 9
(iii) In the case of Stock purchased during an Offering Period
that commenced in the second preceding calendar year, the limit shall be
equal to (A) $75,000 minus (B) the Fair Market Value of the Stock that
the Participant previously purchased (under this Plan and all other
employee stock purchase plans of the Company or any parent or Subsidiary
of the Company) in the current calendar year and in the two preceding
calendar years.
For purposes of this Subsection (b), the Fair Market Value of Stock shall be
determined in each case as of the beginning of the Offering Period in which such
Stock is purchased. Employee stock purchase plans not described in section 423
of the Code shall be disregarded. If a Participant is precluded by this
Subsection (b) from purchasing additional Stock under the Plan, then his or her
employee contributions shall automatically be discontinued and shall resume at
the beginning of the earliest Accumulation Period ending in the next calendar
year (if he or she then is an Eligible Employee).
SECTION 9. RIGHTS NOT TRANSFERABLE.
The rights of any Participant under the Plan, or any Participant's
interest in any Stock or moneys to which he or she may be entitled under the
Plan, shall not be transferable by voluntary or involuntary assignment or by
operation of law, or in any other manner other than by beneficiary designation
or the laws of descent and distribution. If a Participant in any manner attempts
to transfer, assign or otherwise encumber his or her rights or interest under
the Plan, other than by beneficiary designation or the laws of descent and
distribution, then such act shall be treated as an election by the Participant
to withdraw from the Plan under Section 5(a).
SECTION 10. NO RIGHTS AS AN EMPLOYEE.
Nothing in the Plan or in any right granted under the Plan shall confer
upon the Participant any right to continue in the employ of a Participating
Company for any period of specific duration or interfere with or otherwise
restrict in any way the rights of the Participating Companies or of the
Participant, which rights are hereby expressly reserved by each, to terminate
his or her employment at any time and for any reason, with or without cause.
SECTION 11. NO RIGHTS AS A STOCKHOLDER.
A Participant shall have no rights as a stockholder with respect to any
shares of Stock that he or she may have a right to purchase under the Plan until
such shares have been purchased on the last day of the applicable Accumulation
Period.
SECTION 12. SECURITIES LAW REQUIREMENTS.
Shares of Stock shall not be issued under the Plan unless the issuance
and delivery of such shares comply with (or are exempt from) all applicable
requirements of law, including (without limitation) the Securities Act of 1933,
as amended, the rules and regulations promulgated thereunder, state securities
laws and regulations, and the regulations of any stock exchange or other
securities market on which the Company's securities may then be traded.
6
<PAGE> 10
SECTION 13. STOCK OFFERED UNDER THE PLAN.
(a) AUTHORIZED SHARES. The number of shares of Stock available for
purchase under the Plan shall be 300,000 (subject to adjustment pursuant to this
Section 13). On the first day of each fiscal year of the Company, commencing
with February 1, 2000, the aggregate number of shares of Stock available for
purchase during the life of the Plan shall automatically be increased by the
number of shares necessary to cause the number of shares then available for
purchase to be restored to 300,000 (subject to adjustment pursuant to this
Section 13).
(b) ANTI-DILUTION ADJUSTMENTS. The aggregate number of shares of Stock
offered under the Plan, the 500-share limitation described in Section 7(c) and
the price of shares that any Participant has elected to purchase shall be
adjusted proportionately by the Committee for any increase or decrease in the
number of outstanding shares of Stock resulting from a subdivision or
consolidation of shares or the payment of a stock dividend, any other increase
or decrease in such shares effected without receipt or payment of consideration
by the Company, the distribution of the shares of a Subsidiary to the Company's
stockholders or a similar event.
(c) REORGANIZATIONS. Any other provision of the Plan notwithstanding,
immediately prior to the effective time of a Corporate Reorganization, the
Offering Period and Accumulation Period then in progress shall terminate and
shares shall be purchased pursuant to Section 7, unless the Plan is assumed by
the surviving corporation or its parent corporation pursuant to the plan of
merger or consolidation. The Plan shall in no event be construed to restrict in
any way the Company's right to undertake a dissolution, liquidation, merger,
consolidation or other reorganization.
SECTION 14. AMENDMENT OR DISCONTINUANCE.
The Board shall have the right to amend, suspend or terminate the Plan
at any time and without notice. Except as provided in Section 13, any increase
in the aggregate number of shares of Stock to be issued under the Plan shall be
subject to approval by a vote of the stockholders of the Company. In addition,
any other amendment of the Plan shall be subject to approval by a vote of the
stockholders of the Company to the extent required by an applicable law or
regulation.
SECTION 15. DEFINITIONS.
(a) "ACCUMULATION PERIOD" means a six-month period during which
contributions may be made toward the purchase of Stock under the Plan, as
determined pursuant to Section 3(b).
(b) "BOARD" means the Board of Directors of the Company, as constituted
from time to time.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means a committee of the Board, as described in Section
2.
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<PAGE> 11
(e) "COMPANY" means Computer Literacy, Inc., a Delaware corporation.
(f) "COMPENSATION" means (i) the total compensation paid in cash to a
Participant by a Participating Company, including salaries, wages, bonuses,
incentive compensation, commissions, overtime pay and shift premiums, plus (ii)
any pre-tax contributions made by the Participant under section 401(k) or 125 of
the Code. "Compensation" shall exclude all non-cash items, moving or relocation
allowances, cost-of-living equalization payments, car allowances, tuition
reimbursements, imputed income attributable to cars or life insurance, severance
pay, fringe benefits, contributions or benefits received under employee benefit
plans, income attributable to the exercise of stock options, and similar items.
The Committee shall determine whether a particular item is included in
Compensation.
(g) "CORPORATE REORGANIZATION" means:
(i) The consummation of a merger or consolidation of the Company
with or into another entity or any other corporate reorganization; or
(ii) The sale, transfer or other disposition of all or
substantially all of the Company's assets or the complete liquidation or
dissolution of the Company.
(h) "ELIGIBLE EMPLOYEE" means any employee of a Participating Company
who meets the following requirements: his or her customary employment is
for more than five months per calendar year and for more than 20 hours
per week.
The foregoing notwithstanding, an individual shall not be considered an Eligible
Employee if his or her participation in the Plan is prohibited by the law of any
country which has jurisdiction over him or her or if he or she is subject to a
collective bargaining agreement that does not provide for participation in the
Plan.
(i) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(j) "FAIR MARKET VALUE" means the market price of Stock, determined by
the Committee as follows:
(i) If the Stock was traded on The Nasdaq National Market on the
date in question, then the Fair Market Value shall be equal to the
last-transaction price quoted for such date by The Nasdaq National
Market;
(ii) If the Stock was traded on a stock exchange on the date in
question, then the Fair Market Value shall be equal to the closing price
reported by the applicable composite transactions report for such date;
or
(iii) If none of the foregoing provisions is applicable, then
the Fair Market Value shall be determined by the Committee in good faith
on such basis as it deems appropriate.
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<PAGE> 12
Whenever possible, the determination of Fair Market Value by the Committee shall
be based on the prices reported in The Wall Street Journal or as reported
directly to the Company by Nasdaq or a stock exchange. Such determination shall
be conclusive and binding on all persons.
(k) "IPO" means the initial offering of Stock to the public pursuant to
a registration statement filed by the Company with the Securities and Exchange
Commission.
(l) "OFFERING PERIOD" means a 24-month period with respect to which the
right to purchase Stock may be granted under the Plan, as determined pursuant to
Section 3(a).
(m) "PARTICIPANT" means an Eligible Employee who elects to participate
in the Plan, as provided in Section 3(c).
(n) "PARTICIPATING COMPANY" means (i) the Company and (ii) each present
or future Subsidiary designated by the Committee as a Participating Company.
(o) "PLAN" means this Computer Literacy, Inc. 1998 Employee Stock
Purchase Plan, as it may be amended from time to time.
(p) "PLAN ACCOUNT" means the account established for each Participant
pursuant to Section 7(a).
(q) "PURCHASE PRICE" means the price at which Participants may purchase
Stock under the Plan, as determined pursuant to Section 7(b).
(r) "STOCK" means the Common Stock of the Company.
(s) "SUBSIDIARY" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company, if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
SECTION 16. EXECUTION.
To record the adoption of the Plan by the Board on July 13, 1998, the
Company has caused its authorized officer to execute the same.
COMPUTER LITERACY, INC.
By: /s/ Chris MacAskill
--------------------------------
Title: President
----------------------------
9
<PAGE> 1
EXHIBIT 10.5
SUB-SUBLEASE
THIS SUB-SUBLEASE (this "Sub-Sublease") is entered into as of the
___ day of November, 1996, by and between (i) MILLER FREEMAN, INC., a Delaware
corporation ("MFI"), and (ii) CBOOKS EXPRESS, a California corporation
("CBOOKS").
A. Pursuant to that certain Lease dated June 1, 1994 (the "Master
Lease"), by and between The Realty Associates Fund, III Limited Partnership (as
the successor to The Prudential Insurance Company of America) ("Master
Landlord"), as landlord, and Control Data Systems, Inc. ("CDS"), as tenant, CDS
is leasing from Master Landlord certain space in a building located at 1306
Orleans Drive, Sunnyvale, California 94089. A copy of the Master Lease is
attached hereto as Exhibit A.
B. Pursuant to that certain Sublease Agreement dated September 15, 1995
(the "Sublease"), CDS subleased to Avid Media Group, Inc. ("Avid") a portion of
the premises covered by the Master Lease consisting of approximately 6,000
rentable square feet as more particularly described in the Sublease (the
"Subleased Premises"). Pursuant to that certain Assignment of Sublease dated
September 27, 1996, Avid assigned its interest as tenant in the Sublease to MFI.
A copy of the Sublease is attached hereto as Exhibit B.
C. CBOOKS desires to sub-sublease the Subleased Premises from MFI and
MFI desires to sub-sublease the Subleased Premises to CBOOKS, on the terms,
covenants and conditions contained herein.
NOW, THEREFORE, in consideration of the mutual covenants and
promises of the parties contained herein, the parties hereto agree as follows:
1. Sub-Sublease. MFI subleases to CBOOKS and CBOOKS hires from
MFI the Subleased Premises. The Subleased Premises shall be delivered to CBOOKS
on the Commencement Date in "AS IS" condition, except that the Subleased
Premises shall be delivered in broom-clean condition with the building systems
in good working order on such date.
2. Term. Subject to Paragraph 9 hereof, the term of this
Sub-Sublease shall commence on November 1, 1996 (the "Commencement Date") and
shall expire on July 31, 1999, unless sooner terminated as hereafter provided or
as provided in the Master Lease (the "Term"). Notwithstanding the foregoing,
CBOOKS agrees that in the event of the failure or inability of MFI for any
reason to deliver possession of the Subleased Premises on or before the
Commencement Date:
(i) MFI shall not be liable for any damage caused
thereby; (ii) this Sub-Sublease shall not be void or voidable; (iii) CBOOKS
shall not be liable for rent until such time as MFI delivers possession of the
Subleased Premises to CBOOKS; and (iv) the Term shall not be extended by any
such delay. The Term is also subject to being shortened in the event certain
early termination rights are exercised under the Master Lease.
<PAGE> 2
3. Rent.
(a) Base Rent. CBOOKS shall pay to MFI during the Term as
base rent for the Subleased Premises the sum of Five Thousand Seven Hundred
Dollars ($5,700.00) per month, which amount shall be prorated for each
fractional month during the Term. The amounts payable pursuant to this Paragraph
3(a) are hereinafter referred to as "Base Rent."
(b) Additional Rent. As additional rent ("Additional
Rent"), beginning on January 1, 1998, CBOOKS shall pay MFI the increase, if any,
in operating expenses paid or incurred by MFI under Section 3 of the Sublease
over the operating expenses paid or incurred by MFI under said Section 3 for the
1997 calendar year. CBOOKS's share of such increases will be payable under the
terms of, and at the same time and in the same manner as required under the
Sublease.
(c) Payment. Base Rent, Additional Rent and any other
charges payable by CBOOKS to MFI under this Sub-Sublease shall be paid to MFI at
the place set forth as MFI's address for notices hereunder, or at such other
place as MFI may from time to time designate by notice to CBOOKS. All such
payments shall be made (i) with respect to Base Rent, on the first day of each
calendar month during the Term of this Sub-Sublease (except that the Base Rent
for the first month of the Term shall be due upon execution of this
Sub-Sublease), without prior notice or demand therefor and without any
deductions or offsets whatsoever; (ii) with respect to Additional Rent, as
provided in Paragraph 3(b) above; and (iii) with respect to all other payments,
fifteen (15) days prior to the date such payments are due to CDS under the
Sublease, or if no regular due date is specified under the Sublease, as
specified in MFI's written notice to CBOOKS. All such amounts shall be prorated
as appropriate.
(d) Late Payments. If any installment of Base Rent,
Additional Rent or any other amount due from CBOOKS under this Sub-Sublease
shall not be received by MFI within five (5) days after the date the same is due
and payable, CBOOKS shall pay to MFI a late charge equal to six percent (6%) of
such unpaid amounts. Acceptance of such late charges by MFI shall in no event
constitute a waiver of CBOOKS' default with respect to such overdue amount nor
shall such acceptance prevent MFI from exercising any of the other rights and
remedies granted to MFI hereunder.
(e) Deposit. Upon the execution of this Lease, CBOOKS
shall pay to MFI the sum of Five Thousand Seven Hundred Dollars ($5,700.00) (the
"Deposit") to be held as a non-interest bearing security deposit for the full
and faithful performance of each of CBOOKS's obligations under this
Sub-Sublease. In the event CBOOKS fails to perform or observe any of the
provisions of the Sub-Sublease to be performed or observed by CBOOKS, then, at
the option of the MFI, MFI may apply the Deposit or any portion thereof as may
be necessary to remedy any default in the payment of rent or otherwise remedy
any nonperformance by CBOOKS, and CBOOKS shall forthwith upon demand restore the
Deposit to the original amount specified. Any remaining portion of the Deposit
shall be returned to CBOOKS within thirty (30) days of the date of termination
of this Sub-Sublease, provided that CBOOKS shall have performed all of the terms
and conditions of this Sub-Sublease throughout the Term, and shall have vacated
the Subleased Premises in accordance with each and every term and condition of
this Sub-Sublease.
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<PAGE> 3
4. Use. CBOOKS shall use the Subleased Premises only for purposes
allowed under the Master Lease and the Sublease and for no other purpose. CBOOKS
shall not do or suffer anything to be done upon the Subleased Premises which
will cause injury to the Subleased Premises. CBOOKS shall comply with all
federal, state, and local laws, ordinances, regulations and standards relating
to its use of the Subleased Premises and its use, storage, sale and disposal of
hazardous or toxic substances, as such terms are defined in any such federal,
state, or local law, ordinance, regulation or standard. CBOOKS shall not use or
bring onto the Subleased Premises any hazardous or toxic substance. CBOOKS shall
provide immediate notice to MFI if a release of any hazardous or toxic substance
occurs or will occur within, on or under the Subleased Premises (whether by air,
water, or other means of transmission) during CBOOKS's tenancy of the Subleased
Premises. Failure to so provide such notice to MFI shall, at MFI's election,
constitute a default under this Sub-Sublease. CBOOKS shall indemnify, defend and
hold harmless MFI from and against any and all cost, expense (including
attorneys' or consultants' fees), damage, liability or loss incurred by MFI in
connection with the release, use, storage or disposal of a hazardous or toxic
substance on or about the Subleased Premises by CBOOKS, its employees, agents,
contractors, or invitees. MFI shall indemnify, defend and hold harmless CBOOKS
from and against any and all cost, expense (including attorneys' and
consultants' fees), damage, liability or loss incurred by CBOOKS in connection
with the release, use, storage or disposal of a hazardous or toxic substance on
or about the Subleased Premises by MFI, Avid or any of their employees, agents,
contractors or invitees.
5. Sub-Sublease Subject to Sublease. This Sub-Sublease shall be
subject to all of the terms and conditions of the Sublease with the exception of
those items excluded pursuant to Paragraph 6(a) below, and from and after the
Commencement Date CBOOKS covenants to perform all of the obligations of
"Sublessee" under the Sublease accruing or required to be performed from and
after the Commencement Date, to the extent said terms and conditions are
consistent with the provisions of this Sub-Sublease, and only except as
otherwise limited by Paragraph 6(a) below. MFI shall be responsible for all of
the obligations of "Sublessee" under the Sublease accruing or required to be
performed prior to the Commencement Date. MFI agrees that it will not
voluntarily terminate the Sublease and that it will pay all rent due under the
Sublease as long as CBOOKS is performing its obligations under this
Sub-Sublease.
6. Incorporation of Sublease.
(a) Exclusions. To the extent consistent with this
Sub-Sublease, all of the terms and conditions of the Sublease are incorporated
herein as terms and conditions of this Sub-Sublease, with references therein to
"Sublessor" and "Sublessee" to be deemed to mean and refer to, respectively, MFI
and CBOOKS herein, and with references therein to "Sublease" to mean this
Sub-Sublease, and along with the sections and paragraphs set out in this
Sub-Sublease, shall be the complete terms and conditions of this Sub-Sublease;
provided, however, that the following sections of the Sublease shall be excluded
from this Sub-Sublease or otherwise revised as indicated: Paragraph 2 (except
that CBOOKS acknowledges the rights of CDS to terminate the Master Lease as
referenced in this Paragraph), Paragraph 3 (except to the extent of the
obligations provided in Paragraph 3(b) of this Sub-Sublease), Paragraph 5,
Paragraph 6 (except that CBOOKs shall have quiet enjoyment of the Subleased
Premises as long as it is not in default under this Sub-Sublease), Paragraph 7,
Paragraph 8 (except that MFI represents and warrants
3
<PAGE> 4
that it is not in default under the Sublease), Paragraph 9, Paragraph 13 (except
that the parties recognize that Colliers Parrish International, Inc. is
representing MFI and Wayne Mascia Associates is representing CBOOKS in
connection with the Sub-Sublease and that MFI agrees to pay any commission that
may due said brokers), and Paragraph 14. With respect to the provisions of the
Master Lease incorporated into the Sublease pursuant to Paragraph 4 of the
Sublease, references in such provisions to "Landlord" and "Tenant" shall be
deemed to mean and refer to respectively, the parties defined under the Sublease
as "Sublessor" and "Sublessee."
(b) Recourse to Master Landlord. Notwithstanding
Paragraph 6(a) hereof, it is understood and agreed that MFI shall have no
obligation or responsibility to provide or perform any service, maintenance,
utility, repair, alteration or other similar obligation which is the obligation
of Master Landlord or CDS to provide or perform pursuant to the terms of the
Master Lease or Sublease. If CBOOKS shall notify MFI that Master Landlord or CDS
is not supplying services to the Subleased Premises as required under the Master
Lease or Sublease, MFI will promptly request Master Landlord or CDS, as
appropriate, to perform such services. MFI shall in no event be liable to CBOOKS
nor shall CBOOKS's obligations under this Sub-Sublease be impaired or reduced or
the performance thereof excused because of any failure or delay on Master
Landlord's or CDS's part in providing any such services or in making any repairs
or alterations, or in performing or observing any similar obligation Master
Landlord under the Master Lease or CDS under the Sublease. If CDS shall default
in its obligation to provide services or make repairs as required under the
Sublease to the Subleased Premises, MFI at CBOOKS's request shall exercise
reasonable efforts to enforce MFI's rights against CDS (or to cause CDS to
enforce its rights against Master Landlord with respect to such services or
repairs), but MFI shall have no obligation to bring any legal action or
proceeding against CDS. Notwithstanding the foregoing, (i) if as a result of
CDS's or Master Landlord's failure to provide services or make repairs as
required under the Sublease CBOOK's use of the Subleased Premises is materially
and adversely affected for a period of thirty (30) or more days, and (ii) if MFI
fails to bring a legal action against CDS for such failure within ten (10) days
after CBOOK's written request to do so; then CBOOKS may elect to terminate this
Sub-Sublease provided it provides MFI with written notice of such termination
within thirty (3o) days after the later to occur of (i) and (ii) above.
(c) CBOOKS Has Read Master Lease and Sublease. CBOOKS
hereby acknowledges that it has read and is familiar with the terms of the
Master Lease and Sublease, and agrees that this Sub-Sublease is subordinate and
subject to the Master Lease and Sublease.
7. Assignment and Subletting. CBOOKS shall not sublet the
Subleased Premises or assign this Sub-Sublease without the prior written consent
of Master Landlord and CDS, to the extent such consent is required under the
Master Lease or Sublease. CBOOKS shall not sublet the Subleased Premises or
assign this Sub-Sublease without the prior written consent of MFI, except that
such consent shall not be required under the following circumstances provided
the assignee or sublessee has a net worth immediately following such sublet or
assignment of not less than $2,000,000, and CBOOKS provides MFI with reasonable
evidence of the same:
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<PAGE> 5
(a) Transfer to Purchaser. A transfer of a controlling
interest in CBOOKS, including any transfer of stock occurring in connection with
an initial public offering of stock in CBOOKS.
(b) Transfers to Affiliates. An assignment or sublease to
any corporation which controls, is controlled by or is under common control with
CBOOKS, or to any corporation resulting from the merger or consolidation with
CBOOKS, or to any person or entity which acquires all the assets of CBOOKS as a
going concern of the business that is being conducted on the Subleased Premises,
provided that the assignee assumes, in full, the obligations of CBOOKS under
this Sub-Sublease.
8. Miscellaneous.
(a) Notices. All notices or demands of any kind required
or desired to be given by MFI to CBOOKS or CBOOKS to MFI hereunder shall be in
writing and shall be sent by hand delivery or by a nationally recognized courier
service, in which event they shall be deemed given when the same are received,
or by depositing such notices or demands in the United States mail, certified or
registered, postage prepaid, return receipt requested (unless return receipt
indicates not delivered), in which event it shall be deemed given seventy-two
(72) hours after such deposit. All notices or demands shall be addressed to the
MFI or CBOOKS, as the case may be, at the address set forth after the signatures
to this Sub-Sublease.
(b) Entire Agreement. This Sub-Sublease represents the
entire agreement between the parties to this Sub-Sublease and supersedes all
prior agreements between the parties, whether written or oral. There are no
representations between MFI and CBOOKS other than those contained in this
Sub-Sublease. Any agreement hereafter made shall be ineffective to change,
modify, waive or discharge this Sub-Sublease in whole or in part unless such
agreement is in writing and signed by the party against whom enforcement of the
change, modification, waiver or discharge is sought.
(c) Successors and Assigns. The terms, covenants and
conditions contained in this Sub-Sublease shall, subject to the provisions of
this Sub-Sublease relating to assignment and subletting, apply to, be binding
upon and inure to the benefit of the heirs, successors and assigns of the
parties hereto.
(d) Waivers. No delay or omission in the exercise of any
right or remedy of MFI upon any default by CBOOKS shall impair such right or
remedy or be construed as a waiver of such default. The receipt and acceptance
by MFI of delinquent rents or charges, or the acceptance of partial payments of
such rents or charges, shall not constitute a waiver of any other default. No
act or conduct of MFI, including, without limitation, the acceptance of keys to
the Subleased Premises, shall constitute an acceptance of the surrender of the
Subleased Premises by CBOOKS before the expiration of or sooner termination of
the Term. Only a written notice from MFI to CBOOKS shall constitute acceptance
of the surrender of the Subleased Premises and accomplish a termination of this
Sub-Sublease.
(e) Time of Essence. Time is of the essence of this
Sub-Sublease.
5
<PAGE> 6
(f) Attorney's Fees. If any party commences an action
against the other party arising out of or in connection with this Sub-Sublease,
the prevailing party shall be entitled to recover from the nonprevailing party
the cost and expenses of such action, including reasonable attorneys' fees and
court costs. The "prevailing party" will be determined by the court before whom
the action was brought based upon the assessment of which party's major
arguments or positions taken in the suit or proceeding could fairly be said to
have prevailed over the other party's major arguments or positions on major
disputed issues in the court's decision.
(g) Counterparts. This Sub-Sublease may be executed in
counterparts, each of which shall constitute an original and shall be binding
upon all parties, their successors and permitted assigns.
9. Condition Precedent. Notwithstanding Paragraph 2 hereof, the
Commencement Date of this Sub-Sublease shall not occur until the Master Landlord
and CDS have consented to this Sub-Sublease in writing. In the event that such
consents are not obtained on or before November 8, 1996, this Sub-Sublease shall
have no further force and effect.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have executed this
Sub-Sublease as of the date first above written.
MFI: CBOOKS:
MILLER FREEMAN, INC. CBOOKS EXPRESS
By: /s/ W. Ambrose By: /s/ Chris MacAskill
---------------------------- --------------------------
Its: Senior Vice President & CFO Its: President
---------------------------- --------------------------
Address: Address:
600 Harrison Street 3347 Shady Spring Lane
San Francisco, CA 94107 Mountain View, CA 94040
Attn: Terry Wynn Attn: Chris MacAskill
CDS:
CONTROL DATA SYSTEMS, INC.
By: /s/ W.D. Seiler
-------------------------
Its: Director Real Estate
-------------------------
Address:
4201 Lexington Avenue, North
Arden Hills, MN 55126
Attn: R/E Dept.
7
<PAGE> 8
EXHIBIT A
MASTER LEASE AGREEMENT
8
<PAGE> 9
EXHIBIT B
SUBLEASE AGREEMENT
9
<PAGE> 10
EXHIBIT A
BASIC LEASE INFORMATION
<TABLE>
<S> <C>
DATE: June 1,1994
LANDLORD: THE PRUDENTIAL INSURANCE COMPANY OF
AMERICA, a New Jersey corporation
TENANT: CONTROL DATA SYSTEMS, INC., a Delaware corporation
PREMISES: Building Address: 1306 Orleans Drive
Sunnyvale, CA 94089
USE: General Office, warehouse and light electronic
manufacturing and assembly
TERM: Sixty (60) months
ESTIMATED COMMENCEMENT DATE: August 1, 1994
BASE RENT: $15,000 per month
ADVANCE RENT: $15,000 per month
ESTIMATED EXPENSES: Operating: $1,925.60 per month
Real Property Taxes: $2,007.88 per month
TENANT'S PERCENTAGE SHARE: 50% of Building
25% of Property
SECURITY DEPOSIT: None
BROKERS: Tenant's Brokers: Mr. Eric Anderson
Cornish & Carey Commercial
Mr. Gregg Von Thaden
J.R. Parrish
Landlord's Broker: David P. Jonas
Blickman Turkus Commercial
Industrial Real Estate
CONTRACT MANAGER: Edward Pike Company
ADDRESS FOR NOTICES Landlord: The Prudential Insurance Company
of America
4309 Hacienda Drive, Suite 500
Pleasanton, CA 94588
Contract Manager: Edward Pike Company
P.O. Box 689
Orinda, CA 94563
with a copy to:
Edward Pike Company
2157 O'Toole Avenue
San Jose, CA 95131
Tenant: Control Data Systems, Inc.
</TABLE>
<PAGE> 11
4201 Lexington Avenue North
Arden Hills, MN 55126
Attn: Director of Real Estate
With a copy to: Legal Department
TENANT IMPROVEMENTS: Base Allowance: $205,000
Maximum Allowance: $330,000
EXHIBITS AND ADDENDUM: Exhibit A - Site Plan of Premises
Exhibit B - Commencement Date Memorandum
Exhibit C - ADA Improvements
Exhibit D - Rules and Regulations
Exhibit E - Commission Schedule
INITIALS: /s/ WA /s/ WDS
----------------- ------------------
Landlord Tenant
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<PAGE> 12
THIS LEASE, which is effective as of the date set forth in the
Basic Lease Information, is entered into by Landlord and Tenant, as set forth in
the Basic Lease Information. Terms which are capitalized in this Lease and not
expressly defined herein shall have the meanings set forth in the Basic Lease
Information.
1. Premises. Landlord leases to Tenant, and Tenant leases from
Landlord, the Premises described in the Basic Lease Information, together with
the right in common to use the Common Areas of the Building and the Property (as
shown in Exhibit A). The Common Areas shall mean the areas and facilities within
the Building and the Property provided and designated by Landlord for the
general use, convenience or benefit of Tenant and other tenants and occupants of
the Building and/or the Property (e.g., loading and unloading areas; sidewalks;
walkways; driveways; landscaped areas; common entrances and hallways; trash
disposal facilities; and unreserved parking areas).
2. Term.
(a) Lease Term. The Term of this Lease shall commence on
the Commencement Date (as defined in subsection 2(b)) and, unless terminated on
an earlier date in accordance with the terms of this Lease, shall extend for the
period (i.e., Term) specified in the Basic Lease Information.
(b) Commencement Date. The "Commencement Date" of this
Lease shall be the earliest to occur of the following, as reasonably determined
by Landlord: (i) August 1, 1994, or (ii) the date Tenant occupies the Premises
for the conduct of Tenant's business. For purposes of the foregoing, Tenant
shall not be deemed to be conducting business if Tenant's sole activity in the
Premises is the construction of Tenant Improvements pursuant to Section 7.
(c) Premises Not Delivered. If, for any reason, Landlord
cannot deliver possession of the Premises to Tenant by the Estimated
Commencement Date (as set forth in the Basic Lease Information), (i) Tenant
shall not be obligated to pay Rent until the Commencement Date; (ii) the Term
shall not be extended; (iii} the failure shall not affect the validity of this
Lease, or the obligations of Tenant under this Lease; and (iv) Landlord shall
not be subject to any liability.
(d) Commencement Date Memorandum. When the Commencement
Date is determined, the parties shall execute a Commencement Date Memorandum, in
the form attached hereto as Exhibit B, setting forth the Commencement Date and
the expiration date ("Expiration Date") of this Lease.
(e) Early Entry. If Tenant is permitted to enter the
Premises prior to the Commencement Date for the purposes of fixturing or any
purpose other than occupancy permitted by Landlord, the entry shall be subject
to all the terms and provisions of this Lease, except that the payment of Rent
shall commence as of the Commencement Date.
3. Rent. As used in this Lease, the term "Rent" shall include:
(i) the Base Rent; (ii) Tenant's Percentage Share of the Operating Expenses paid
or incurred by Landlord during the calendar year; and (iii) all other amounts
which Tenant is obligated to pay under the
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terms of this Lease. All amounts of money payable by Tenant to Landlord shall be
paid without prior notice or demand, deduction or offset. This Lease is intended
to be a triple net lease, with all costs, expenses and charges (including the
Operating Expenses) paid by Tenant except as otherwise specifically provided in
subsection 10(b). Tenant hereby acknowledges that late payment by Tenant to
Landlord of Rent will cause Landlord to incur costs not contemplated by this
Lease, the exact amount of which will be difficult to ascertain. Such costs
include, but are not limited to, processing and accounting charges, and late
charges which may be imposed on Landlord by the terms of any trust deed covering
the Premises. Accordingly, if any installment of Rent or any other sums due from
Tenant shall not be received by Landlord when due, Tenant shall pay to Landlord
a late charge equal to six percent (6%) 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. In addition,
any amount which is not paid when due shall bear interest from the date due
until the date paid at the rate equal to the Reference Rate announced from time
to time by the Bank of America plus five percent (5%) ("Interest Rate").
4. Base Rent. Tenant shall pay Base Rent to Contract Manager (or
other entity designated by Landlord), in advance, on the first day of each
calendar month of the Term, at Contract Manager's address for notices (as set
forth in the Basic Lease Information) or at such other address as Landlord may
designate. The Base Rent shall be the amount set forth in the Basic Lease
Information.
5. Operating Expenses.
(a) Operating Expenses as Portion of Rent. Tenant shall
pay as additional Rent Tenant's Percentage Share of the Operating Expenses paid
or incurred by Landlord during the calendar year. Tenant acknowledges that
certain Operating Expenses will be allocated to the Building and certain
Operating Expenses will be allocated to the Property. Landlord's reasonable
allocation of Operating Expenses to the Building and the Property shall be
conclusive and binding on the parties.
(b) Definition of Operating Expenses. The term "Operating
Expenses" shall mean (i) all of Landlord's direct costs and expenses of
operation, repair and maintenance of the Building, the Property and the Common
Areas and supporting facilities, as determined by Landlord in accordance with
generally accepted accounting principles or other recognized accounting
principles, consistently applied; (ii) costs, or a portion thereof, properly
allocable to the Building, Property or Common Areas of any capital improvements
made to the Building, Property or Common Areas by Landlord which comprise
labor-saving devices or other equipment intended to improve the operating
efficiency of any system within the Building, Property or Common Areas (such as
an energy management computer system) to the extent of cost savings in Operating
Expenses as a result of the device or equipment, as reasonably determined by
Landlord; and (iii) costs properly allocable to the Building, Property or Common
Areas of any capital improvements made to the Building, Property or Common Areas
by Landlord that are required under any governmental governmental law or
regulation that was not applicable to the Building, Property and Common Area at
the time they were constructed, or that
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are reasonably required for the health and safety of tenants in the Property or
Building, the costs, or allocable portion thereof, to be amortized over its
useful life as reasonably determined by Landlord and Tenant will pay Tenant's
Percentage Share based on the time remaining in the lease term, together with
interest upon the unamortized balance at the Interest Rate or such higher rate
as may have been paid by Landlord on funds borrowed for the purpose of
constructing the capital improvements. The term "Operating Expenses" shall
include the costs of all utilities (including surcharges) for the Property and
Building; the cost of all insurance which Landlord or Landlord's lender deems
necessary for the Property and Building; a reasonable management fee; and the
Real Property Taxes (as defined in subsection 5(f)). If Landlord elects to
self-insure or includes the Property under blanket insurance policies covering
multiple properties, then the term "Operating Expenses" shall include the
portion of the cost of such self-insurance or blanket insurance allocated by
Landlord to this Property. For each calendar year during the Term, the
percentage increase in the cost of insurance against property damage caused by
earthquake included in Operating Expenses allocated to the Premises over the
cost of such insurance for the immediately prior calendar year shall not exceed
the percentage increase in the CPI (as defined in Subsection 41.c) last
published on or before December 31 of the year in question over the CPI last
published prior to January 1 of such calendar year; provided further that the
amount of such increase in the cost of earthquake insurance included in
Operating Expenses for such calendar year shall deemed to be not be more than
eight percent (8%) nor less than three percent (3%) of the cost of such
earthquake insurance allocated to the Premises for the calendar year immediately
prior to the calendar year in question.
(c) Exclusions from Operating Expenses. The term
"Operating Expenses" shall not include (i) the cost of any additional or
extraordinary services provided to other tenants of the Property; (ii) costs
paid directly by Tenant; (iii) principal and interest payments on loans secured
by deeds of trust recorded against Property; (iv) real estate sales or leasing
brokerage commissions; or (v) executive salaries of off-site personnel employed
by Landlord except for the charge (or pro rata share) of the manager of the
Property and Building. In addition, for each calendar year during the Term, the
Operating Expenses for such calendar year shall not exceed the Operating
Expenses Cap applicable to such year. As used in this Lease, the term "Operating
Expenses Cap" shall mean the following: (i) for the calendar year 1994, there
shall be no Operating Expenses Cap; (ii) for the calendar year 1995, the term
"Operating Expenses Cap" shall mean the Operating Expenses for calendar year
1994 multiplied times one hundred fifteen percent (115%); and (iii) for each
calendar year after 1995, the Operating Expenses Cap shall be an amount equal to
the Operating Expenses Cap in effect for the immediately prior calendar year
multiplied times one hundred fifteen percent (115%).
(d) Estimates of Operating Expenses. During December of
each calendar year during the Term, or as soon thereafter as practicable,
Landlord shall give Tenant written notice of Landlord's estimate of the amount
of Operating Expenses which will be payable for the ensuing calendar year. On or
before the first day of each month during the ensuing calendar year, Tenant
shall pay to Landlord one-twelfth (1/12) of the estimated amount; provided,
however, that if notice is not given in December, Tenant shall continue to pay
on the basis of the then applicable Rent until the month after the notice is
given. If at any time it appears to Landlord that the amount payable for the
current calendar year will vary from Landlord's estimate by more than five
percent (5%), Landlord may give notice to Tenant of Landlord's revised estimate
for the year, and subsequent payments by Tenant for the Year shall
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be based on the revised estimate; provided, however, that Landlord shall not
give notice of a revised estimate for any year more frequently than once a
calendar quarter.
(e) Annual Adjustment. Within one hundred twenty (120)
days after the close of each calendar year of the Term, or as soon after the one
hundred twenty (120) day period as practicable, Landlord shall deliver to Tenant
a statement of the actual Operating Expenses for the prior calendar year. If, on
the basis of the statement, Tenant owes an amount that is less than the
estimated payments for the calendar year previously made by Tenant, Landlord
shall apply the excess to the next payment of Operating Expenses due. If, on the
basis of the statement, Tenant owes an amount that is more than the estimated
payments for the calendar year previously made by the Tenant, Tenant shall pay
the deficiency to Landlord within thirty (30) days after delivery of the
statement. The statement of Operating Expenses shall be presumed correct and
shall be deemed final and binding upon Tenant unless (i) Tenant in good faith
objects in writing thereto within thirty (30) days after delivery of the
statement to Tenant (which writing shall state, in reasonable detail, all of the
reasonable detail, all of the reasons for the objection); and (ii) Tenant pays
in full, within thirty (30) days after delivery of the statement to Tenant, any
amount owed by Tenant with respect to the statement which is not in dispute. If
Tenant objects to Landlord's allocation to this Property of the cost of
self-insurance or blanket insurance, such allocation shall nonetheless be
presumed correct and shall be deemed final and binding upon Tenant unless
Tenant's timely written objection includes credible evidence that Landlord could
have obtained substantially comparable insurance coverage for this Property
alone at lower cost. Tenant shall have the right upon not less than five (5)
business days notice to inspect, at Landlord's office or such other location
reasonably designated by Landlord, at Tenant's sole cost and expense, Landlord's
records related to the amount and calculation of Operating Expenses; provided
however, such inspection must be conducted (if at all) within thirty (30) days
after the delivery of Landlord's Statement of Operating Expenses for such year.
In the event inspection discloses that Tenant has overpaid Operating Expenses
for the calendar year, and the results of such inspection are verified by
Landlord (which verification shall not be unreasonably withheld), then Landlord
shall reimburse Tenant for such overpayment within forty-five (45) days after
the completion of such inspection.
(f) Definition of Real Property Taxes. The term "Real
Property Taxes" shall mean any ordinary or extraordinary form of assessment or
special assessment, license fee, rent tax, levy, penalty (if a result of
Tenant's delinquency), or tax, other than net income, estate, succession,
inheritance, transfer or franchise taxes, imposed by any authority having the
direct or indirect power to tax, or by any city, county, state or federal
government for any maintenance or improvement or other district or division
thereof. The term shall include all transit charges, housing fund assessments,
real estate taxes and all other taxes relating to the Premises, Building and/or
Property, all other taxes which may be levied in lieu of real estate taxes, all
assessments, assessment bonds, levies, fees and other governmental charges
(including, but not limited to, charges for traffic facilities, improvements,
child care, water services studies and improvements, and fire services studies
and improvements)for amounts necessary to be expended because of governmental
orders, whether general or special, ordinary or extraordinary, unforeseen as
well as foreseen, of any kind and nature for public improvement, services,
benefits or any other purposes which are assessed, levied, confirmed, imposed or
become a lien upon the Premises, Building or Property or become payable during
the Term.
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(g) Acknowledgment of Parties. It is acknowledged by
Landlord and Tenant that Proposition 13 was adopted by the voters of the State
of California in the June, 1978 election, and that assessments, taxes, fees,
levies and charges may be imposed by governmental agencies for such purposes as
fire protection, street, sidewalk, road, utility construction and maintenance,
refuse removal and for other governmental services which formerly may have been
provided without charge to property owners or occupants. It is the intention of
the parties that all new and increased assessments, taxes, fees, levies and
charges due to Proposition 13 or any other cause are to be included within the
definition of Real Property Taxes for purposes of this Lease.
(h) Taxes on Tenant Improvements and Personal Property.
Notwithstanding any other provision hereof, Tenant shall pay the full amount of
any Real Property Taxes during the Term resulting from any and all alterations
and tenant improvements of any kind whatsoever placed in, on or about the
Premises for the benefit of, at the request of, or by Tenant. Tenant shall pay,
prior to delinquency, all taxes assessed or levied against Tenant's personal
property in, on or about the Premises. When possible, Tenant shall cause its
personal property to be assessed and billed separately from the real or personal
property of Landlord.
6. Proration of Rent. If the Commencement Date is not the first
day of the month, or if the end of the Term is not the last day of the month,
Rent shall be prorated on a monthly basis (based upon a thirty (30) day month)
for the fractional month during the month which this Lease commences or
terminates. The termination of this Lease shall not affect the obligations of
Landlord and Tenant pursuant to subsection 5(e) which are to be performed after
the termination.
7. Tenant Improvements.
(a) Tenant shall construct within the Premises certain
tenant improvements ("Tenant Improvements") in accordance with this Section 7.
Tenant will provide Landlord with preliminary plans and specifications and
working drawings for the Tenant Improvements, which Landlord shall have the
right to approve, and which approval shall not be unreasonably withheld or
delayed; provided, however, Landlord shall have the right to withhold such
approval acting in Landlord's sole discretion if the proposed Tenant
Improvements materially affect the structure, roof or exterior appearance of the
Premises, except for store front glass replacing the roll up door located within
the Premises (so long as obstacles are placed in front of the glass to prevent
vehicles from inadvertently driving through the glass). Tenant shall be required
to install as part of the Tenant Improvements the improvements specified on
attached Exhibit C. Tenant shall construct the Tenant Improvements in accordance
with the plans and specifications and working drawings, approved by Landlord, in
good and workmanlike manner, using new and refurbished materials and in
accordance with all applicable laws. Any such refurbished materials shall be
shown on the plans and specifications submitted for Landlord's approval. Any
proposed change in the approved plans and specifications and/or the working
drawings shall be subject to Landlord's further approval as specified above. The
initial Tenant Improvements approved by Landlord shall not be considered an
alteration under Section 9 and shall not be required to be removed from the
Premises upon the expiration or earlier termination of the Term. Landlord shall
contribute to the cost of the Tenant Improvements a tenant improvements
allowance (the "Tenant Improvement Allowance") in an amount not to exceed
$330,000, as specified below.
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(b) Tenant shall submit to Landlord invoices and other
reasonable substantiating documentation with respect to the Tenant Improvements,
and within thirty (30) days after Landlord's receipt thereof, Landlord shall pay
to Tenant the amounts requested in the submitted invoices, provided that the
following conditions have been satisfied: (1) on the date of such request,
Tenant is not in default of Tenant's obligations under the Lease; (2) the work
and/or materials for which reimbursement is requested has been completed and
conforms with the approved plans specifications and drawings and otherwise
complies with the requirements of Section 7(a) as reasonably determined by
Landlord; and (3) Tenant shall have delivered to Landlord such mechanic's lien
waivers as Landlord may reasonably request to assure lien-free construction and
completion of the Tenant Improvements. Upon Tenant's request, which request
shall be delivered concurrently with the invoices for which Tenant is requesting
payment, provided that all other conditions to payment have been satisfied,
Landlord shall make payments of the Tenant Improvement Allowance co-payable to
Tenant and Tenant's contractor. Subject to the limitations specified below, this
procedure shall be repeated until Landlord has expended the full Tenant
Improvement Allowance. Tenant shall have six (6) months from August 1, 1994 to
construct the Tenant Improvements and submit invoices, an architect's
certificate certifying compliance with clause (2) above with respect to work for
which payment is requested, and such lien releases as Landlord may request
pursuant to clause (3) above therefor to obtain reimbursement from Landlord from
the Tenant Improvement Allowance. If Tenant does not construct such Tenant
Improvements and submit invoices and such substantiating documentation therefor
within such six (6) month period. Tenant shall be deemed to have waived any
right to claim any further payment under the Tenant Improvement Allowance. In no
event shall Tenant's obligation to pay rent be reduced by any unexpended amount
of the Tenant Improvement Allowance. Tenant shall have the right to apply the
Tenant Improvements Allowance only to costs and fees incurred by Tenant in the
design and construction of the Tenant Improvements, including but not limited
to, telephone wiring and computer cabling.
(c) If Tenant receives more than Two Hundred Five
Thousand Dollars ($205,000) (the "Base Allowance") of the Tenant Improvement
Allowance, then monthly Base Rent shall be increased by an amount equal to
Twenty One and 25/100 Dollars ($21.25) for each One Thousand Dollars ($1,000),
or portion thereof, of the Tenant Improvement Allowance received by Tenant which
exceeds the Base Allowance.
8. Uses of Premises.
(a) Tenant shall use the Premises solely for the use set
forth in the Basic Lease Information, and Tenant shall not use the premises for
any other purpose without obtaining the prior written consent of Landlord, which
consent shall be given or withheld in the sole and absolute discretion of
Landlord without any requirement of reasonableness in the exercise of that
discretion. Tenant shall, at its own cost and expense, comply with all laws,
rules, regulations, orders, permits, licenses and ordinances issued by any
governmental authority (including, without limitation, except as provided in
Section 43, the Americans with Disabilities Act) which relate to the condition,
use or occupancy of the Premises during the term of this Lease. Tenant shall not
use the Premises in any manner that will constitute waste, nuisance, or
unreasonable annoyance (including, without limitation, the use of loudspeakers
or sound or light apparatus that can be heard or seen outside the Premises) to
other tenants in the Building and/or the Property.
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(b) "Hazardous Substance" shall mean the substances
including, within the definitions of the term "Hazardous Substance" under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, 42 U.S.C. Section 9601 et seq., and the California
Carpenter-Presley-Tanner Hazardous Substance Account Act, California Health &
Safety Code Section 25300 et seq., and regulations promulgated thereunder, as
amended. "Hazardous Waste" shall mean to (a) any waste listed as or meeting the
identified characteristics of a "Hazardous Waste" under the Resource
Conservation and Recovery Act of 1976, 42 U.S.C. Section 6901 et seq., and
regulations promulgated pursuant thereto, collectively "RCRA", or (b) any waste
meeting the identified characteristics of "Hazardous Waste" under California
Hazardous Waste Control Law, California Health and Safety Code Section 25100 et.
seq., and regulations promulgated pursuant thereto, collectively "CHWCL".
"Hazardous Waste Facility" shall mean a hazardous waste facility as defined
under CHWCL.
(c) Tenant covenants that, at its sole cost and expense,
it will comply with all applicable laws, rules, regulations, orders, permits,
licenses and operating plans of any governmental authority with respect to the
use, handling, generation, transportation, storage, treatment and/or disposal of
hazardous substances or wastes which Tenant and/or Tenant's agents, employees
and/or contractors uses on or about the Premises, and Tenant will provide
Landlord with copies of all permits, registrations or other similar documents
that authorize Tenant to conduct any such activities in connection with its
authorized use of the Premises. Additionally, Tenant agrees to comply with the
Rules and Regulations attached hereto as Exhibit D, the requirements of the
Board of Fire Underwriters or Landlord's insurance carrier, and to comply with
covenants, conditions and restrictions ("CC&R's"), if any, applicable to the
Property.
(d) Tenant agrees that it shall not operate on the
Premises any facility required to be permitted or licensed as a Hazardous Waste
Facility or for which interim status as such is required. Nor shall Tenant store
any Hazardous Wastes on the Premises for ninety (90) days or more.
(e) Tenant agrees to comply with all applicable laws,
rules, regulations, orders, and permits relating to underground storage, tanks
(including any installation, monitoring, maintenance, closure and/or removal of
such tanks) as such tanks are defined in California Health and Safety Code,
Section 25281(u), including, without limitation, complying with California
Health and Safety Code Sections 25280-25299.6 and the regulations promulgated
thereunder. Tenant shall furnish to Landlord copies of all registrations and
permits for all underground storage tanks.
(f) If applicable, Tenant shall provide to Landlord in
writing the following information and/or documentation at the Commencement Date
and within sixty (60) days of any change in the required information and/or
documentation:
(i) A list of all hazardous substances and/or
wastes that Tenant uses, handles, generates, transports, stores, treats or
disposes in connection with its operations on the Premises.
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(ii) Copies of all Material Safety Data Sheets
("MSDS's") required to be completed with respect to operations of Tenant at the
Premises in accordance with Title 8, California Code of Regulations Section 5194
or 42 U.S.C. Section 11021, or any amendments thereto. In lieu of this
requirement, Tenant may provide a Hazardous Material Inventory Sheet that
details the MSDS's.
(iii) Copies of all hazardous waste manifests, as
defined in Title 22, California Code of Regulations Section 66481, that Tenant
is required to complete in all connections with its operations at the Premises.
(iv) A copy of any Hazardous Materials Management
Plans required with respect to Tenant's operations.
(v) Copies of any contingency Plans and Emergency
Procedures required of Tenant due to its operations in accordance with Title 22,
Chapter 30, Article 20, of the California Code of Regulations, and any
amendments thereto.
(vi) Copies of any biennial reports to be
furnished to California Department of Health Services relating to hazardous
substances or wastes.
(vii) Copies of all industrial waste water
discharge permits.
(g) Tenant shall secure Landlord's prior written approval
for any proposed receipt, storage, possession, use, transfer or disposal of
"Radioactive Materials" or "Radiation", as such materials are defined in Title
17, California Code of Regulations Sections 30100(w) and (z) or possessing the
characteristics of the materials so defined, which approval Landlord may
withhold in its sole and absolute discretion. The Tenant in connection with any
authorized receipt, storage, possession, use, transfer or disposal of
radioactive materials or radiation shall:
(i) Comply with all federal, state and local
laws, rules, regulations, orders, licenses and permits;
(ii) Furnish Landlord with a list of all
radioactive materials or radiation received, stored, possessed, used,
transferred or disposed; and
(iii) Furnish Landlord with all licenses,
registration materials, inspection reports, orders and permits in connection
with the receipt, storage, possession, use, transfer or disposal or radioactive
materials or radiation.
(h) Tenant agrees to comply with any and all applicable
laws, rules, regulations, and orders with respect to the release into the
environment of any hazardous wastes or substances or radiation or radioactive
materials. Tenant agrees to notify Landlord in writing of any unauthorized
release into the environment within twenty-four (24) hours of the time at which
Tenant becomes aware of such release.
(i) Tenant shall indemnify, defend, and hold Landlord
harmless from any and all claims, losses (including, but not limited to, loss of
rental income and loss due to
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business interruption), damages, (including diminution in value or loss of
rental value following expiration or earlier termination of the Term)
liabilities, costs, legal fees, and expenses of any sort arising out of or
relating to any unauthorized release into the environment of hazardous
substances or wastes or radiation or radioactive materials by Tenant or any of
Tenant's agents, contractors or invitees, or Tenant's failure to comply with
Subparagraphs (a)-(h) of this section of the Lease.
(j) Tenant agrees to cooperate with Landlord in
furnishing Landlord with complete information regarding Tenant's receipt,
handling, use, storage, transportation, generation, treatment and/or disposal of
hazardous substances or wastes or radiation or radioactive materials. Upon
request, Tenant agrees to grant Landlord reasonable access at reasonable times
to the Premises to inspect Tenant's receipt, handling, use, storage,
transportation, generation, treatment and/or disposal of hazardous substances
wastes or radiation or radioactive materials without being deemed guilty of any
disturbance of Tenant's use or possession and without being liable to Tenant in
any manner.
(k) Notwithstanding Landlord's rights of inspection and
review under this paragraph, Landlord shall have no obligation or duty to so
inspect or review, and no third party shall be entitled to rely on Landlord to
conduct any sort of inspection or review by reason of the provisions of this
paragraph.
(l) This Section 8 of the Lease shall survive termination
of the Lease.
9. Alternations.
(a) Permitted Alterations. Tenant shall give Landlord not
less than ten (10) days' notice of any alteration Tenant desires to make to the
Premises. Tenant shall not make any alteration in, on or about the Premises
without the prior written consent of Landlord unless the alteration does not
affect the Building structure, the exterior appearance of the Building, the roof
or the Building systems (e.g., electrical systems) and the aggregate cost of
such alterations during any two (2) year period is not in excess of Fifteen
Thousand Dollars ($15,000.00). Tenant shall comply with all rules, laws,
ordinances and requirements applicable at the time Tenant make any alteration
and shall deliver to Landlord a complete set of "as built" plans and
specifications for each alteration. Tenant shall be solely responsible for
maintenance and repair of all alterations made by Tenant. As used in this
Section 9, the term "alteration" shall include any alteration, addition or
improvement.
(b) Liens. If, because of any act or omission of Tenant
or any subtenant, licensee or invitee of Tenant and/or their respective agents,
employees and/or contractors, any mechanics' lien or other lien is filed against
the Premises, the Building, the Property or against other property of Landlord
(whether or not the lien is valid or enforceable), Tenant, at its own expense,
shall cause it to be discharged of record within a reasonable time, not to
exceed thirty (30) days, after the date of the filing. In addition, Tenant shall
defend and indemnity Landlord and hold it harmless from any and all claims,
losses, damages, judgments, settlements, costs and expenses, including
attorneys' fees, resulting from the lien.
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(c) Ownership of Alterations. Any alteration made by
Tenant immediately shall become Landlord's property. Except as provided in
subsection 9(d), Landlord may require Tenant, at Tenant's sole expense and by
the end of the Term, to remove any alterations made by Tenant and to restore the
Premises to its condition prior to the alteration.
(d) Request Regarding Removal Obligation. At the time
that Tenant requests Landlord's consent to any alteration, Tenant may request
that Landlord notify Tenant if Landlord will require Tenant, at Tenant's sole
expense, to remove any or all of the alteration by the end of the Term, and to
restore the Premises to its condition prior to the alteration.
10. Repairs.
(a) Tenant's Obligation. Except as provided in subsection
10(b), Tenant, at all times during the Term and at Tenant's sole cost and
expense, shall keep the Premises and every part thereof in good condition and
repair, ordinary wear and tear, damage thereto not caused by Tenant, by fire,
earthquake, acts of God or the elements excepted. Upon delivery of the Premises
to Tenant, the plumbing, electrical, and mechanical systems shall be in good
working condition and order. Landlord shall repair, at its sole cost and expense
any defective or malfunctioning component of the heating, ventilation and air
conditioning system (HVAC), the plumbing system and/or electrical system,
provided that Tenant delivers written notice to Landlord describing the nature
or malfunction within one hundred eighty (180) days after delivery of possession
of the Premises to Tenant; provided further that Landlord shall not be
responsible for such repairs, if such repairs are required as a result of an act
or omission of Tenant and/or Tenant's agents, employees and/or contractors
(including, without limitation, the installation by Tenant of the Tenant
Improvements). After the expiration of such one hundred eighty (180) day period,
any maintenance, repair and/or replacement of such utility systems shall be
performed by Tenant at Tenant's sole cost and expense, except for a defect or
malfunction of which Tenant has notified Landlord within such one hundred eighty
(180) day period. Tenant hereby waves all right to make repairs at the expense
of Landlord or in lieu thereof to vacate the Premises as provided in California
Civil Code Section 1942 or any other law, statute or ordinance now or hereafter
in effect.
(b) Landlord's Obligations. Landlord, at Landlord's
expense, shad repair and maintain the structural portions of the roof (but not
roof membrane or other non-structural elements of the roof, except as provided
below) and structural portions of the Building unless the maintenance and repair
are caused in whole or in part by the act, neglect, fault or omission of any
duty of Tenant, its agents, servants, employees or invitees, in which case
Tenant shall pay to Landlord the cost of the maintenance and repairs caused in
whole or in part by Tenant. Not later than sixty (60) days after the
Commencement Date, Landlord shall cause the details of where the HVAC units are
located on the roof and at the point where the flashing terminates at the
perimeter wall to be recaulked, at Landlord's sole cost and expense. There shall
be no abatement of Rent and no liability of Landlord by reason of any injury to
or interference with Tenant's business arising from the making of any repairs,
alternations or improvements in or to the fixtures, appurtenances and equipment
therein. Landlord shall maintain the Common Areas and the costs of such
maintenance shall be included in Operating Expenses.
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11. Damage or Destruction.
(a) Landlord's Obligation to Rebuild. If the Premises are
damaged or destroyed, Landlord promptly and diligently shall repair the Premises
unless Landlord has the option to terminate this Lease as provided herein, and
Landlord elects to terminate.
(b) Right to Terminate. Landlord and Tenant each shall
have the option to terminate this Lease if the Premises or the Building is
destroyed or damaged by fire or other casualty, regardless of whether the
casualty is insured against under this Lease, if Landlord reasonably determines
that the repair of the Premises or the Building cannot be completed within one
hundred eighty (180) days after the casualty. If a party desires to exercise the
right to terminate this Lease as a result of a casualty, the party shall
exercise the right by giving the other party written notice of its election to
terminate within thirty (30) days after the damage or destruction, in which
event this Lease shall terminate fifteen (15) days after the date of the notice.
If neither Landlord nor Tenant exercises the right to terminate this Lease,
Landlord promptly shall commence the process of obtaining necessary permits and
approvals, and shall commence repair of the Premises as soon as practicable and
thereafter prosecute the repair diligently to completion, in which event this
Lease shall continue in full force and effect.
(c) Limited Obligation to Repair. Landlord's obligation,
should Landlord elect or be obligated to repair or rebuild, shall be limited to
the Building shell and any tenant improvements which are constructed and paid
for by Landlord pursuant to Exhibit B. Tenant, at its option and expense, shall
replace or fully repair all trade fixtures, equipment and other improvements
installed by Tenant and existing at the time of the damage or destruction.
(d) Abatement of Rent. In the event of any damage or
destruction to the Premises which does not result in termination of this Lease,
the Base Rent temporarily shall be abated proportionately to the degree the
Premises are untenantable as a result of the damage or destruction, commencing
from the date of the damage or destruction and continuing during the period
required by Landlord to substantially complete its repair and restoration of the
Premises; provided, however, that nothing herein shall preclude Landlord from
being entitled to collect the full amount of any rent loss insurance proceeds.
Tenant shall not be entitled to any compensation or damages from Landlord for
loss of the use of the Premises, damage to Tenant's personal property or any
inconvenience occasioned by any damage, repair or restoration. Tenant hereby
waives the provisions of Section 1932, Subdivision 2, and Section 1933,
Subdivision 4, of the California Civil Code, and the provisions of any similar
law hereafter enacted.
(e) Damage Near End of Term and Extensive Damage. In
addition to the rights to termination under subsection 11(b), either Landlord or
Tenant shall have the right to cancel and terminate this Lease as of the date of
the occurrence of destruction or damage if the Premises or the Building is
substantially destroyed or damaged (i.e., there is damage or destruction which
Landlord determines would require more than six (6) months to repair) and made
untenantable during the last twelve (12) months of the Term. Landlord or Tenant
shall give notice of its election to terminate this Lease under this subsection
11(e) within thirty 130) days after Landlord determines that the damage or
destruction would require more than six (6) months to repair. If neither
Landlord nor Tenant elects to terminate this Lease, the repair of the damage
shall be governed by subsection 11(a) or 11(b), as the case may be.
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(f) Insurance Proceeds. If this Lease is terminated,
Landlord may keep all the insurance proceeds resulting from the damage, except
for those proceeds which specifically insured Tenant's personal property and
trade fixtures.
12. Eminent Domain. If all or any part of the Premises is taken
for public or quasi-public use by a governmental authority under the power of
eminent domain or is conveyed to a governmental authority in lieu of such
taking, and if the taking or conveyance causes the remaining part of the
Premises to be untenantable and inadequate for use by Tenant for the purpose for
which they were leased, then Tenant, at its option and by giving notice within
fifteen (15) days after the taking, may terminate this Lease as of the date
Tenant is required to surrender possession of the Premises. If a part of the
Premises is taken or convoyed but the remaining part is tenantable and adequate
for Tenant's use, then this Lease shall be terminated as to the part taken or
conveyed as of the date Tenant surrenders possession; Landlord shall make such
repairs, alterations and improvements as may be necessary to render the part not
taken or conveyed tenantable; and the Rent shall be reduced in proportion to the
part of the Premises taken or conveyed. All compensation awarded for the taking
or conveyance shall be the property of Landlord without any deduction therefrom
for any estate of Tenant, and Tenant hereby assigns to Landlord all its right,
title and interest in and to the award. Tenant shall have the right, however, to
recover from the governmental authority, but not from Landlord, such
compensation as may be awarded to Tenant on account of (i) the then unamortized
cost of any alterations paid for by Tenant; (ii) the value of Tenant's trade
fixtures; (iii) Tenant's loss of goodwill (so long as such award does not reduce
any award to Landlord); (iv) Tenant's relocation costs and (v) Tenant's loss of
business and business interruption.
13. Indemnity and Insurance.
(a) Indemnity. Tenant shall be responsible for, shall
insure against, and shall indemnify Landlord and its constituent parts and hold
them harmless from, any and all liability for any loss, damage or injury to
person or property occurring in, on or about the Premises, and Tenant hereby
releases Landlord and its constituent parts from any and all liability for the
same except to the extent it is determined that such liability arose from the
sole negligence of Landlord, its employees, agents or subcontractors. Tenant's
obligation to indemnify Landlord and its constituent parts hereunder shall
include the duty to defend against any claims asserted by reason of any loss,
damage or injury, and to pay any judgments, settlements, costs, fees and
expenses, including attorney's fees, incurred in connection therewith.
(b) Insurance. At all times during the term of this
Lease, Tenant shall carry, at its own expense, for the protection of Tenant,
Landlord, Landlord's constituent parts and Landlord's management agents, as
their interests may appear, one or more policies of comprehensive general public
liability and property damage insurance, issued by one or more insurance
companies acceptable to Landlord with minimum coverages of One Million Dollars
($1,000,000.00) for injury to one person in any one accident, Three Million
Dollars ($3,000,000.00) for injuries to more than one person in any one accident
and Two Million Dollars ($2,000,000.00) in property damage per accident and
insuring against any and all liability for which Tenant is responsible under
this Lease. The insurance policy or policies shall name Landlord, Landlord's
constituent parts and Landlord's management agents as additional insured, and
shall provide that the policy or policies may not be cancelled on less than
thirty (30)
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days' prior written notice to Landlord. Tenant shall furnish Landlord with
certificates evidencing the insurance. If Tenant fails to carry the insurance
and furnish Landlord with copies of all the policies after a request to do so,
Landlord shall have the right to obtain the insurance and collect the cost
thereof from Tenant as additional Rent.
14. Assignment and Subletting.
(a) Landlord's Consent. Tenant shall not assign, sublet
or otherwise transfer all or any portion of Tenant's interest in this Lease
(collectively, "sublet") without Landlord's prior written consent, which consent
shall not be unreasonably withheld. Consent by Landlord to one sublet shell not
be deemed to be a consent to any subsequent sublet.
(b) Effect of Sublet. Each sublet to which Landlord has
consented shall be by an instrument in writing, in a form satisfactory to
Landlord as evidenced by Landlord's written approval. Each sublessee shall agree
in writing, for the benefit of Landlord, to assume, to be bound by and to
perform the terms, conditions and covenants of this Lease to be performed by
Tenant. Tenant shall not be released from personal liability for the performance
of each term, condition and covenant of this Lease, and Landlord shall have the
right to proceed against Tenant without proceeding against the subtenant.
(c) Information to be Furnished. If Tenant desires at any
time to sublet the Premises, Tenant first shall notify Landlord of its desire to
do so and shall submit in writing to Landlord (i) the name of the proposed
subtenant (ii) the nature of the proposed subtenant's business to be carried on
in the Premises; (iii) the terms and provisions of the proposed sublease and a
copy of the proposed sublease form; and (iv) such financial information,
including financial statements, as Landlord reasonably may request concerning
the proposed subtenant.
(d) Landlord's Election. At any time within fifteen (15)
days after Landlord's receipt of the information specified in subsection 144(c),
Landlord, by written notice to Tenant, may elect to either approve or disapprove
the sublease, which consent shall not be unreasonably withheld. If Landlord
fails to elect either of the alternatives within the twenty (20) day period, it
shall be deemed that Landlord has refused its consent to the sublet. If Landlord
refuses its consent, Landlord shall deliver to Tenant a statement of the basis
for its refusal. Any attempted sublet without Landlord's consent shall not be
effective.
(e) Payment Upon Sublet. If Landlord consents to the
sublet, Tenant thereafter may enter into a valid sublet of the Premises or
portion thereof, upon the terms and conditions set forth in the information
furnished by Tenant to Landlord pursuant to subsection 15(c), subject to the
condition that fifty percent (50%) of any excess of the monies due to Tenant
under the sublet ("subrent") after expenses for tenant improvements, marketing
costs and commissions paid for by Tenant in connection with such subletting over
the Rent required to be paid by Tenant hereunder shall be paid to Landlord. Any
subrent to be paid to Landlord pursuant hereto shall be payable to Landlord as
and with the Base Rent payable to Landlord hereunder pursuant to the terms of
Section 4. The term "subrent" as used herein shall include any consideration of
any kind received, or to be received, by Tenant from the subtenant, it the sums
are related to Tenant's interest in this Lease or in the Premises, including,
without
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limitation, bonus money, and payments (in excess of fair market value thereof)
for Tenant's assets, fixtures, inventory, accounts, goodwill, equipment,
furniture, general intangibles and any capital stock or other equity ownership
of Tenant.
(f) Executed Counterparts. No sublet shall be valid nor
shall any subtenant take possession of the Premises until an executed
counterpart of the sublease has been delivered to Landlord and approved in
writing.
(g) Transfer to Purchaser. A transfer of this Lease to
one or more purchasers of a majority interest in Tenant shall be deemed a sublet
under this Lease, except for a transfer of controlling interest in Control Data
Systems, Inc.
(h) Transfers to Affiliates. Tenant may assign this Lease
or sublet the Premises, without Landlord's consent, to any corporation which
controls, is controlled by or is under common control with Tenant, or to any
corporation resulting from the merger or consolidation with Tenant, or to any
person or entity which acquires all the assets of Tenant as a going concern of
the business that is being conducted on the Premises, provided that the assignee
assumes, in full, the obligations of Tenant under this Lease.
15. Default.
(a) Tenant's Default. At the option of Landlord, a
material breach of this Lease by Tenant shall exist if any of the following
events (severally, "Event of Default"; collectively, "Events of Default") shall
occur: (i) it Tenant shall have failed to pay Rent, including Tenant's
Percentage Share of Operating expenses, or any other sum required to be paid
hereunder when due, together with interest at the Interest Rate, from the date
the amount became due through the date of payment, inclusive; (ii) it Tenant
shall have failed to perform any term, covenant or condition of this Lease
except those requiring the payment of money, and Tenant shall have failed to
cure the breach within fifteen (15) days after written notice from Landlord if
the breach could reasonably be cured within the fifteen (15) day period;
provided, however, it the failure could not reasonably be cured within the
fifteen (15) day period, then Tenant shall not be in default unless it has
failed to promptly commence and thereafter continue to make diligent and
reasonable efforts to cure the failure as soon as practicable as reasonably
determined by Landlord; (iii) if Tenant shall have assigned its assets for the
benefit of its creditors; (iv) if the sequestration of, attachment of, or
execution on, any material part of the property of Tenant or on any property
essential to the conduct of Tenant's business shall have occurred, and Tenant
shall have failed to obtain a return or release of the property within thirty
(30) days thereafter, or prior to sale pursuant to any sequestration, attachment
or levy, whichever is earlier; (v) if Tenant shall have failed to continuously
and uninterruptedly conduct its business in the Premises, or shall have
abandoned or vacated the Premises; (vi) if a court shall have made or entered
any decree or order adjudging Tenant to be insolvent, or approving as properly
filed a petition seeking reorganization of Tenant or directing the winding up or
liquidation of Tenant, and the decree or order shall have continued for period
of thirty (30) days; (vii) if Tenant shall make or suffer any transfer which
constitutes a fraudulent or otherwise avoidable transfer under any provision of
the federal Bankruptcy Laws or any applicable state law: or (viii) if Tenant
shall have failed to comply with the provisions of Section 23 or 25. An Event of
Default shall constitute a default under this Lease.
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(b) Remedies Upon Tenant's Default. Upon an Event of
Default, Landlord shall have the following remedies, in addition to all other
rights and remedies provided by law, equity, statute or otherwise provided in
this Lease, to which Landlord may resort cumulatively or in the alternative:
(i) Upon an Event of Default, Landlord may
continue this Lease in full force and effect, and this Lease shall continue in
full force and effect as long as Landlord does not terminate Tenant's right to
possession, and Landlord shall have the right to collect Rent when due. During
the period Tenant is in default, Landlord may enter the Premises and relet it,
or any part of it, to third parties for Tenant's account, provided that any Rent
in excess of the Rent due hereunder shall be payable to Landlord. Tenant shall
be liable immediately to Landlord for all costs Landlord incurs in reletting the
Premises, including, without limitation, brokers' commissions, expenses of
cleaning and redecorating the Premises required by the reletting and like costs.
Reletting may be for a period shorter or longer than the remaining Term of this
Lease. Tenant shall pay to Landlord the Rent and other sums due under this Lease
on the dates the Rent is due, less the Rent and other sums Landlord receives
from any reletting. No act by Landlord allowed by this subsection (i) shall
terminate this Lease unless Landlord notifies Tenant in writing that Landlord
elects to terminate this Lease.
(ii) Upon an Event of Default, Landlord may
terminate Tenant's right to possession of the Premises at any time by giving
written notice to that effect. No act by Landlord other than giving written
notice to Tenant shall terminate this Lease. Acts of maintenance, efforts to
relet the Premises or the appointment of a receiver on Landlord's initiative to
protect Landlord's interest under this Lease shall not constitute a termination
of Tenant's right to possession. On termination, Landlord shall have the right
to remove all personal property of Tenant and store it at Tenant's cost and to
recover from Tenant as damages: (a) the worth at the time of award of unpaid
Rent and other sums due and payable which had been earned at the time of
termination; plus (b) the worth at the time of award of the amount by which the
unpaid Rent and other sums due and payable which would have been payable after
termination until the time of award exceeds the amount of the Rent loss that
Tenant proves could have been reasonably avoided; plus (c) the worth at the time
of award of the amount by which the unpaid Rent and other sums due and payable
for the balance of the Term after the time of award exceeds the amount of the
Rent loss that Tenant proves could be reasonably avoided; plus (d) any other
amount necessary to compensate Landlord for all the detriment proximately caused
by Tenant's failure to perform Tenant's obligations under this Lease, or which,
in the ordinary course of things, would be likely to result therefrom,
including, without limitation, any costs or expenses incurred by Landlord: (1)
in retaking possession of the Premises, including reasonable attorneys' fees and
costs therefor; (2) maintaining or preserving the Premises for reletting to a
new tenant, including repairs or alterations to the Premises for the reletting;
(3) leasing commissions; (4) any other costs necessary or appropriate to relet
the Premises; and (5) at Landlord's election, such other amounts in addition to
or in lieu of the foregoing as may be permitted from time to time by the laws of
the State of California.
The Worth at the time of award, of the amounts referred to in subsections
(ii)(a) and (ii)(b) is computed by allowing interest at the Interest Rate, on
the unpaid Rent and other sums due and payable from the termination date through
the date of award. The "worth at the time of award" of the amount referred to in
subsection (ii)(c) is computed by discounting the amount at the
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discount rate of the Federal Reserve Bank of San Francisco at the time of award,
plus one percent (1%). Tenant waives redemption or relief from forfeiture under
California Code of Civil Procedure Sections 1174 and 1179, or under any other
present or future law, if Tenant is evicted or Landlord takes possession of the
Premises by reason of any default of Tenant hereunder.
(c) Landlord's Default. Landlord shall not be deemed to
be in default in the performance of any obligation required to be performed by
Landlord hereunder unless and until Landlord has failed to performed the
obligation within thirty (30) days after receipt of written notice by Tenant to
Landlord specifying wherein Landlord has tailed to perform the obligation;
provided, however, that if the nature of Landlord's obligation is such that more
than thirty (30) days are required for its performance, then Landlord shall not
be deemed to be in default if Landlord shall commence the performance within the
thirty (30) day period and thereafter shall diligently prosecute the same to
completion.
16. Landlord's Right to Perform Tenant's Covenants. If Tenant
shall at any time fail to make any payment or perform any other act on its part
to be made or performed under this Lease, Landlord may, but shall not be
obligated to make the payment or perform any other act to the extent Landlord
may deem desirable and, in connection therewith, pay expenses and employ
counsel. Any payment or performance by Landlord shall not waive or release
Tenant from any obligations of Tenant under this Lease. All sums so paid by
Landlord, and all penalties, interest and costs in connection therewith, shall
be due and payable by Tenant on the next day after any payment by Landlord,
together with interest thereon at the Interest Rate, from that date to the date
of payment thereof by Tenant to Landlord, plus collection costs and attorneys'
fees. Landlord shall have the same rights and remedies for the nonpayment
thereof as in the case of default in the payment of Rent.
17. Intentionally omitted.
18. Surrender of Premises. By taking possession of the Premises,
Tenant shall be deemed to have accepted the Premises and the Property in good,
clean and completed condition and repair, subject to all applicable laws, codes
and ordinances. On the expiration or early termination of this Lease, Tenant
shall surrender the Premises to Landlord in its condition as of the Commencement
Date, normal wear and tear excepted. Tenant shall remove from the Premises all
of Tenant's personal property, trade fixtures and any alterations required to be
removed pursuant to Section 9. Tenant shall repair damage or perform any
restoration work required by the removal. If Tenant fails to remove any personal
property, trade fixtures or alterations after the end of the Term, Landlord may
remove the property and store it at Tenant's expense, including interest at the
Interest Rate. It the Premises are not so surrendered at the termination of this
Lease, Tenant shall indemnify Landlord against all loss or liability resulting
from delay by Tenant in so surrendering the Premises, including, without
limitation, any claims made by any succeeding tenant, losses to Landlord due to
lost opportunities to lease to succeeding tenants, and attorneys' fees and
costs.
19. Holding Over. If Tenant remains in possession of all or any
part of the Premises after the expiration of the Term or the termination of this
Lease, the tenancy shall be month-to-month only and shall not constitute a
renewal or extension for any further term. In such event, Base Rent shall be
increased in an amount equal to one hundred fifty percent (150%)
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of the Base Rent during the last month of the Term (including any extensions),
and any other sums due under this Lease shall be payable in the amount, and at
the times, specified in this Lease. The month-to-month tenancy shall be subject
to every other term, condition, covenant and agreement contained in this Lease
and Tenant shall vacate the Premises immediately upon Landlord's request.
20. Access to Premises. Tenant shall permit Landlord and its
agents to enter the Premises at all reasonable times upon reasonable notice,
except in the case of an emergency (in which event no notice shall be
necessary), to inspect the Premises; to post Notices of Nonresponsibility and
similar notices and to show the Premises to interested parties such as
prospective mortgagors, purchasers and tenants to make necessary alterations,
additions, improvements or repairs either to the Premises, the Building or other
premises within the Building; and to discharge Tenant's obligations hereunder
when Tenant has failed to do so within a reasonable time after written notice
from Landlord. The above rights are subject to reasonable security regulations
of Tenant, and to the requirement that Landlord shall at all times act in a
manner to cause the least possible interference with Tenant's operations.
21. Signs. The size, design, color, location and other physical
aspects of any sign in or on the Building shall be subject to the CC&R's, if
any, Rules and Landlord's approval prior to installation, and to any appropriate
municipal or other governmental approvals. The costs of any permitted sign, and
the costs of its installation, maintenance and removal, shall be at Tenant's
sole expense and shall be paid within ten (10) days of Tenant's receipt of a
bill from Landlord for the costs. Tenant shall have the right to install a
monument sign on the Property subject to the following terms and conditions: (a)
the location, size, design and other matters concerning the physical location
and appearance of the sign shall be subject to Landlord's prior written
approval; (b) Tenant shall obtain all necessary approvals and permits for the
installation of the sign and the sign shall be installed in compliance with all
applicable laws; (c) the sign shall be considered an alteration pursuant to
Section 9; and (d) the sign shall not violate the signage rights of any other
tenant on the Property or any CC&Rs.
22. Waiver of Subrogation. Anything in this Lease to the contrary
notwithstanding, Landlord and Tenant each hereby waives and releases the other
of and from any and all rights of recovery, claim, action or cause of action
against the other, its subsidiaries, directors, agents, officers and employees,
for any loss or damage that may occur to the Premises, the Building or the
Property; to improvements to the Building or personal property (building
contents) within the Building; or to any furniture, equipment, machinery, goods
and supplies not covered by this Lease which Tenant may bring or obtain upon the
Premises or any additional improvements which Tenant may construct on the
Premises by reason of fire, the elements or any other cause which is required to
be insured against under this Lease, regardless of cause or origin, including
negligence of Landlord or Tenant and their agents, subsidiaries, directors,
officers and employees, to the extent insured against under the terms of any
insurance policies carried by Landlord or Tenant and in force at the time of any
such damage, but only if the insurance in question permits such a partial
release in connection with obtaining a waiver of subrogation from the insurer.
Because this Section 22 will preclude the assignment of any claim mentioned in
it by way of subrogation or otherwise to an insurance company or any other
person, each party to this Lease agrees immediately to give to each insurance
company written notice of the terms of the mutual waivers contained in this
Section and to have the insurance policies
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properly endorsed, if necessary, to prevent the invalidation of the insurance
coverages by reason of the mutual waivers contained in this Section.
23. Subordination.
(a) Subordinate Nature. Except as provided in Subsection
23(b), this Lease is subject and subordinate to all ground and underlying
leases, mortgages and deeds of trust which now or may hereafter affect the
Property, the Building or the premises, to the CC&R's, if any, and to all
renewals, modifications, consolidations, replacements and extensions thereof.
Within ten (10) days after Landlord's written request therefor, Tenant shall
execute any and all documents required by Landlord, the lessor under any ground
or underlying lease ("Lessor"), or the holder or holders of any mortgage or deed
of trust ("Holder") to make this Lease subordinate to the lien of any lease,
mortgage or deed of trust, as the case may be.
(b) Possible Priority of Lease. If a Lessor or a Holder
advises Landlord that it desires or requires this Lease to be prior and superior
to a lease, mortgage or deed of trust, Landlord may notify Tenant. Within seven
(7) days of Landlord's notice, Tenant shall execute, have acknowledged and
deliver to Landlord any and all documents or instruments, in the form presented
to Tenant, which Landlord, Lessor or Holder deems necessary or desirable to make
this Lease prior and superior to the lease, mortgage or deed of trust.
(c) Recognition or Attornment Agreement. If Landlord or
Holder requests Tenant to execute a document subordinating this Lease, the
document shall provide that, so long as Tenant is not in default, Lessor or
Holder shall agree to enter into either a recognition or attornment agreement
with Tenant, or a new lease with Tenant upon the same terms and conditions as to
possession of the Premises, which shall provide that Tenant may continue to
occupy the Premises so long as Tenant shall pay the Rent and observe and perform
all the provisions of this Lease to be observed and performed by Tenant.
24. Transfer of the Property. Upon transfer of the Property and
assignment of this Lease, Landlord shall be entirely freed and relieved of all
liability under any and all of its covenants and obligations contained in or
derived from this Lease occurring after the consummation of the transfer and
assignment. Tenant shall attorn to any entity purchasing or otherwise acquiring
the Premises at any sale or other proceeding.
25. Estoppel Certificates. Within ten (10) days following written
request by Landlord, Tenant shall execute and deliver to Landlord an estoppel
certificate, in the form prepared by Landlord. The certificate shall: (i)
certify that this Lease is unmodified and in full force and effect or, if
modified, state the nature of the modification and certify that this Lease, as
so modified, is in full force and effect, and the date to which the Rent and
other charges are paid in advance, if any; (ii) acknowledge that there are not,
to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder,
or it there are uncured defaults on the part of the Landlord, state the nature
of the uncured defaults; and (iii) evidence the status of the Lease as may be
required either by a lender making a loan to Landlord to be secured by deed of
trust or mortgage covering the Premises or a purchaser of the Property from
Landlord.
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26. Mortgage Protection In the event of any default on the part
of Landlord, Tenant will give notice by registered or certified mail to any
beneficiary of a deed of trust or mortgagee of a mortgage covering the Property
and shall offer the beneficiary or mortgagee a reasonable opportunity to cure
the default, including time to obtain possession of the Property or the Premises
by power of sale or a judicial foreclosure, if such should prove necessary to
effect a cure.
27. Attorney's Fees. If either party shall bring any action or
legal proceeding for damages for an alleged breach of any provision of this
Lease, to recover rent or other sums due, to terminate the tenancy of the
Premises or to enforce, protect or establish any term, condition or covenant of
this Lease or right of either party, the prevailing party shall be entitled to
recover, as a part of the action or proceedings, or in a separate action brought
for that purpose, such attorneys' fees and court costs as may be fixed by the
court or jury. The prevailing party shall be the party which secures a final
judgment in its favor.
28. Brokers. Tenant warrants and represents that it has had no
dealings with any real estate broker or agent in connection with the negotiation
of this Lease, except for any brokers(s) specified in the Basic Lease
Information, and that it knows of no other real estate broker or agent who is or
might be entitled to a commission in connection with this Lease. Tenant shall
indemnify and hold harmless Landlord from and against any and all liabilities or
expenses arising out of claims made by any other broker or individual for
commissions or fees resulting from this Lease. Brokerage commissions shall be
paid by Landlord in accordance with attached Exhibit E.
29. Parking. Tenant shall have the right to park in the
Building's parking facilities in common with other tenants of the Building upon
terms and conditions, as may from time to time be established by Landlord.
Tenant agrees not to use in excess of its proportionate share of parking
facilities and agrees to cooperate with Landlord and other tenants in the use of
the parking facilities. Landlord reserves the right, in its absolute discretion,
to determine whether the parking facilities are becoming crowded and to allocate
and assign parking spaces among Tenant and the other tenants. Landlord shall not
be liable to Tenant, nor shall this Lease be affected, if any parking is
impaired by moratorium, initiative, referendum, law, ordinance, regulation or
order passed, issued or made by any governmental or quasi-governmental body. As
of the date of this Lease, there is one (1) parking space for each two hundred
eighty five (285) rentable square feet of building space within the Property.
Landlord acknowledges that Landlord will not construct any additional
improvements on the Property which would cause, the number of parking spaces to
be less than one (1) per two hundred eighty five (285) rentable square feet of
building space on the Property. However, Tenant acknowledges that parking may be
interfered with or impaired as a result of damage, destruction, taking by a
governmental authority, moratorium, initiative, referendum, law, ordinance,
regulation or order passed by a governmental or quasi-governmental authority, or
temporarily as a result of maintenance, repair or other improvements being
performed by Landlord on the Property.
30. Utilities and Services. Tenant shall be solely responsible
for obtaining and paying for all utilities and services, including heating, air
conditioning, ventilation (i.e., HVAC service contracts, janitorial and
security) in connection with the Premises. Landlord shall not be liable for, and
Tenant shall not be entitled to any abatement or reduction of Rent by reason of,
no
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eviction of Tenant shall result from and, further, Tenant shall not be relieved
from the performance of any covenant or agreement in this Lease because of,
Landlord's failure to furnish or Tenant's failure to obtain any such utility or
service any of the foregoing.
31. Modification for Lender. If, in connection with obtaining
financing for the Premises or any portion thereof, Landlord's lender shall
request reasonable modification to this Lease as a condition to such financing,
Tenant shall not withhold, delay or defer its consent thereto, provided such
modifications, do not materially affect Tenant's rights hereunder (as determined
by Tenant acting in Tenants sole discretion but in otherwise good faith).
32. Acceptance. Delivery of this Lease, duly executed by Tenant,
constitutes an offer to lease the Premises as set forth herein, and under no
circumstances shall such delivery be deemed to create an option or reservation
to lease the Premises for the benefit of Tenant. This Lease shall become
effective and binding only upon execution hereof by Landlord and delivery of a
signed copy to Tenant. Upon acceptance of Tenant's offer to lease under the
terms hereof, Landlord shall be entitled to retain any sums received by Landlord
and apply them to damages, costs and expenses incurred by Landlord if Tenant
fails to accept delivery of the Premises. Tenant will pay first months rent upon
receipt of the fully executed lease.
33. Use of Names. Tenant shall not use the name of the Building
or the name of the business park in which the Building is located in the name or
title of its business or occupation without Landlord's prior written consent,
which consent Landlord may withhold in its sole discretion. Landlord reserves
the right to change the name of the Building without Tenant's consent and
without any liability to Landlord.
34. Recording. Neither Landlord nor Tenant shall record this
Lease, nor a short form memorandum of this Lease, without the prior written
consent of the other.
35. Quitclaim. Upon any termination of this Lease pursuant to its
terms, Tenant, at Landlord's request, shall execute, have acknowledged and
deliver to Landlord a quitclaim deed of all Tenant's interest in the Premises,
Building and Property created by this Lease.
36. Notices. Any notice or demand required or desired to be given
under this Lease shall be in writing and shall be given by hand delivery,
telecopy or the United States mail. Notices which are sent by telecopy shall be
deemed to have been given upon receipt. Notices which are mailed shall be deemed
to have been given when seventy-two (72) hours have elapsed after the notice was
deposited in the United States mail, registered or certified, the postage
prepaid, addressed to the party to be served. As of the date of execution of
this Lease, the addresses of Landlord and Tenant are as specified in the Basic
Lease Information. Either party may change its address by giving notice of the
change in accordance with this Section.
37. Landlord's Exculpation. In the event of default, breach or
violation by Landlord (which term includes Landlord's partners, co-venturers and
co-tenants, and officers, directors, employees, agents and representatives of
Landlord and Landlord's partners, co-venturers and co-tenants) of any of
Landlord's obligations under this Lease, Landlord's liability to Tenant shall be
limited to its ownership interest in the Building and Property or the
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<PAGE> 32
proceeds of a public sale of the ownership interest pursuant to the foreclosure
of a judgment against Landlord. Landlord shall not be personally liable, or
liable in any event, for any deficiency beyond its ownership interest in the
Building and Property.
38. Additional Structures. Any diminution or interference with
light, air or view by any structure which may be erected on land adjacent to the
Building shall in no way alter this Lease or impose any liability on Landlord.
39. General.
(a) Captions. The captions and headings used in this
Lease are for the purpose of convenience only and shall not be construed to
limit or extend the meaning of any part of this Lease.
(b) Time. Time is of the essence for the performance of
each term, condition and covenant of this Lease.
(c) Severability. If any provision of this Lease is held
to be invalid, illegal or unenforceable, the invalidity, illegality, or
unenforceability shall not affect any other provision of this Lease, but this
Lease shall be construed as if the invalid, illegal or unenforceable provision
had not been contained herein.
(d) Choice of Law; Construction. This Lease shall be
construed and enforced in accordance with the laws of the State of California.
The language in all parts of this Lease shall in all cases be construed as a
whole according to its fair meaning and not strictly for or against either
Landlord or Tenant.
(e) Gender; Singular; Plural. When the context of this
Lease requires, the neuter gender includes the masculine, the feminine, a
partnership or corporation or joint venture, and the singular includes the
plural.
(f) Binding Effect. The covenants and agreements
contained in this Lease shall be binding on the parties hereto and on their
respective successors and assigns (to the extent this Lease is assignable).
(g) Waiver. The waiver of Landlord of any breach of any
term, condition or covenant of this Lease shall not be deemed to be a waiver of
the provision or any subsequent breach of the same or any other term, condition
or covenant of this Lease. The subsequent acceptance of Rent hereunder by
Landlord shall not be deemed to be a waiver of any preceding breach at the time
of acceptance of the payment. No covenant, term or condition of this Lease shall
be deemed to have been waived by Landlord unless the waiver is in writing signed
by Landlord.
(h) Entire Agreement. This Lease is the entire agreement
between the parties, and there are no agreements or representations between the
parties except as expressed herein. Except as otherwise provided herein, no
subsequent change or addition to this Lease shall be binding unless in writing
and signed by the parties hereto.
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<PAGE> 33
(i) Waiver of Jury. To the extent permitted by law,
Tenant hereby waives any right it may have to a jury trial in the event of
litigation between Tenant and Landlord pertaining to this Lease.
(j) Counterparts. This Lease may be executed in
counterparts, each of which shall be an original, but all counterparts shall
constitute one (1) instrument.
(k) Exhibits. The Basic Lease Information and all
exhibits attached hereto are hereby incorporated herein and made an integral
part hereof.
(l) Addendum. The Addendum, if any, attached hereto is
hereby incorporated herein and made an integral part hereof.
40. Right to Terminate.
Provided that Tenant is not in default under this Lease, either
at the time of the delivery of the termination notice referenced in Subsection
(a) below, or any time thereafter until the effective date of termination,
Tenant shall have the option to terminate this Lease subject to the terms and
conditions specified below:
(a) Tenant shall have the right to terminate this Lease
effective as of the expiration of the thirty-sixth (36th) full calendar month
following the Commencement Date by delivery of written notice to Landlord of
such termination not later than six (6) months prior to the effective date of
such termination, together with the Lease Termination Payment (as defined
below). If Tenant has not timely delivered the foregoing notice together with
the Lease Termination Payment, Tenant shall be deemed to have waived Tenant's
right to terminate pursuant to this Section 40.
(b) As used herein, the term "Lease Termination Payment"
shall mean an amount equal to the sum of the unamortized portion of the Tenant
Improvement Allowance furnished by Landlord pursuant to Section 7 hereof, and
legal fees (such legal fees not to exceed $1,500) incurred in connection with
this Lease as amortized over the period commencing as of the Commencement Date
and ending on the Expiration Date, together with interest on such unamortized
amount at the rate of ten percent (10%) per annum. The Lease Termination Payment
shall be delivered to Landlord concurrently with the delivery of Tenant's notice
electing to terminate the Lease. If the Lease Termination Payment is not made as
specified above (time being of the essence), at Landlord's election, Tenant's
termination notice shall be deemed to not have been validly delivered, and this
Lease shall remain in full force and effect.
(c) Upon the effective date of the termination of this
Lease pursuant to this Section 40, Tenant shall surrender possession of the
Premises to Landlord subject to the terms of this Lease including without
limitation Section 18 of the Lease.
(d) If Tenant is in default either at the time of the
delivery of Tenant's notice of electing to terminate the lease or at any time
thereafter until the effective date of termination, then, at Landlord's
election, Tenant's election to terminate shall be deemed null and void and this
Lease shall continue in full force and effect.
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<PAGE> 34
41. Option to Extend.
(a) Terms of Option. Provided that Tenant is not in
default under this Lease either at the time of exercise of the right to extend
or on the Expiration Date, Tenant shall have the non-assignable right, at its
option, to extend this Lease for one (1) period of five (5) years (the
"Extension Term") commencing on the Expiration Date. If Tenant elects to extend
this Lease for the Extension Term, Tenant shall give unequivocal written notice
("Exercise Notice") of its exercise to Landlord not less than six (6) months,
nor more than nine (9) months prior to the Expiration Date. Tenant's failure to
give the Exercise Notice in a timely manner shall be deemed a waiver of Tenant's
right to extend. The terms, covenants and conditions applicable to the Extension
Term shall be the same terms, covenants and conditions of this Lease except that
(i) Tenant shall not be entitled to any further option to extend, and (ii) the
Base Rent for the Premises during the Extension Term shall be determined as
provided in Subsection 41.b. below, (iii) Landlord shall have no obligation to
improve or otherwise modify the Premises or to provide any tenant improvement
allowance, and (iv) Tenant shall have no right to terminate this Lease pursuant
to Section 40.
(b) Determination of Base Rent During Extension Term.
(i) Agreement on Rent. Subject to the limitations
of this Section, Landlord and Tenant agree that the initial Base Rent during the
Extension Term shall be equal to ninety-five percent (95%) of the fair market
rental value of the Premises for the Extension Term. Landlord and Tenant shall
have thirty (30) days after Landlord receives the Exercise Notice in which to
agree on the initial Base Rent during the Extension Term. In determining the
fair market rental value of the Premises during the Extension Term,
consideration shall be given to the uses of the Premises permitted under this
Lease, the quality, size, design and location of the Premises, and the rental
value of comparable research and development space located in the proximity of
the Moffett Park, Orleans Drive area in the City of Sunnyvale. In no event shall
the initial Base Rent for the Extension Term be less than the initial Base Rent
last payable under this Lease during the Term. If Landlord and Tenant agree on
the Base Rent for the Extension Term during the thirty (30) day period, they
shall immediately execute an amendment to this Lease stating the initial Base
Rent. The Base Rent shall be subject to adjustment as specified in subsection
41.c. effective upon the first day of the thirty-first (31st) month of the
Extension Term.
(ii) Selection of Appraisers. If Landlord and
Tenant are unable to agree on the initial Base Rent for the Extension Term
within the thirty (30) day period, then within fifteen (15) days after the
expiration of the thirty (30) day period, Landlord and Tenant each, at its cost
and by giving notice to the other party, shall appoint a competent and
disinterested real estate appraiser with at least five (5) years full-time
commercial appraisal experience in Sunnyvale to appraise and set the initial
Base Rent during the Extension Term. If either Landlord or Tenant does not
appoint an appraiser within ten (10) days after the other party has given notice
of the name of its appraiser, the single appraiser appointed shall be the sole
appraiser and shall set the initial Base Rent during the Extension Term. If two
(2) appraisers are appointed by Landlord and Tenant as stated in this section,
they shall meet promptly and attempt to set the initial Base Rent for the
Extension Term. If the two (2) appraisers are unable to agree within thirty (30)
days after the second appraiser has been appointed, they shall attempt to select
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<PAGE> 35
a third appraiser meeting the qualifications stated in this section within ten
(10) days after the last day the two (2) appraisers are given to set the initial
Base Rent. If they are unable to agree on the third appraiser, either Landlord
or Tenant, by giving ten (10) days' notice to the other party, can apply to the
then president of the real estate board of Santa Clara County, or to the
Presiding Judge of the Superior Court of Santa Clara County for, the selection
of a third appraiser who meets the qualifications stated in this section.
Landlord and Tenant each shall bear one-half (1/2) of the cost of appointing the
third appraiser and of paying the third appraiser's fee. The third appraiser,
however selected, shall be a person who has not previously acted in any capacity
for either Landlord or Tenant.
(iii) Value Determined By Three (3) Appraisers.
Within thirty (30) days after the selection of the third appraiser, a majority
of the appraisers shall set the Base Rent for the Extension Term. If a majority
of the appraisers is unable to set the Base Rent within the stipulated period of
time, Landlord's appraiser shall arrange for simultaneous exchange of written
appraisals from each of the appraisers and the three (3) appraisals shall be
added together and their total divided by three (3); ninety-five percent (95%)
of the resulting quotient shall be the initial Base Rent for the Premises during
the Extension Term. If, however, the low appraisal and/or the high appraisal
are/is more than ten percent (10%) lower and/or higher than the middle
appraisal, the low appraisal and/or the high appraisal shall be disregarded. If
only one (1) appraisal is disregarded, the remaining two (2) appraisals shall be
added together and their total divided by two (2); ninety-five percent (95%) of
the resulting quotient shall be the initial Base Rent for the Premises during
the Extension Term. If both the low appraisal and the high appraisal are
disregarded as stated in this Paragraph, ninety-five percent (95%) of the middle
appraisal shall be the initial Base Rent for the Premises during the Extension
Term.
(iv) Notice to Landlord and Tenant. After the
initial Base Rent for the Extension Term has been set, the appraisers shall
immediately notify Landlord and Tenant, and Landlord and Tenant shall
immediately execute an amendment to this Lease stating the initial Base Rent.
(c) Effective upon the first day of the thirty-first
(31st) month of the Extension Term {the "Adjustment Date"), the Base Rent shall
be increased to an amount which results from multiplying the Base Rent in effect
immediately prior to the Adjustment Date by a fraction, the numerator of which
shall be the Consumer Price Index ("CPI") now known as the "U.S. Department of
Labor, Bureau of Labor Statistics Consumer Price Index, San
Francisco-Oakland-San Jose Bay Area Region, All Items (1982-84 = 100) last
published prior to the Adjustment Date and the denominator of which shall be the
CPI last published prior to the commencement of the Extension Term; provided,
however, in no event shall the Base Rent ever decrease as a result of the
foregoing computation. For purposes of the foregoing, the increase in Base Rent
as a result of the foregoing adjustment shall not be more than that which would
be payable if the Base Rent were increased eight percent (8%) on each twelve
(12) month anniversary of the commencement of the Extension Term and four
percent (4%) on the Adjustment Date or less than the amount which would be
payable if the Base Rent were increased four percent (4%) on each twelve (12)
month anniversary of the commencement of the Extension Term and two percent (2%)
on the Adjustment Date. In the event the format or components of the CPI are
materially changed or the CPI is discontinued, Landlord may
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reasonably substitute another index which is intended to measure increases in
consumer prices in a manner similar to the foregoing index.
42. Quiet Possession. Upon Tenant paying the rent for the
Premises and observing and performing all of the covenants, conditions and
provisions on Tenant's part to be observed and performed hereunder, Tenant shall
have quiet possession of the Premises for the entire term hereof subject to all
of the provisions of this Lease.
43. Americans With Disabilities Act. Landlord and Tenant
acknowledge that the Premises is a "commercial facility" as such term is defined
in Title III of the Americans with Disabilities Act 42 U.S.C. Section 1201 et
seq. (the "ADA"). If it is determined by a governmental authority with
applicable jurisdiction that, as of the date Landlord delivers the Premises to
Tenant, the Premises is not in compliance with Title III of the ADA as
applicable to commercial facilities, Landlord shall make such modifications to
the Premises as may be required by such governmental authority. Tenant
acknowledges that the foregoing obligation of Landlord shall not apply to
modifications to the Premises required as a result of or related to (a) the
Tenant Improvements, (b) alterations made by or on behalf of Tenant, or (c) the
disability of an employee, prospective employee or contractor of Tenant.
[Remainder of page intentionally left blank]
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IN WITNESS WHEREOF, the parties have executed this Lease
effective as of the date first above written.
"LANDLORD"
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA,
A NEW JERSEY CORPORATION
By: /s/ Wes Ambrose
-------------------------------------
Its: Vice President
"TENANT"
CONTROL DATA SYSTEMS, INC.
A DELAWARE CORPORATION
By: /s/ W.D. Seiler
-------------------------------------
Its: Director Real Estate
-------------------------------------
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EXHIBIT A
[graphic depiction of site plan]
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EXHIBIT B
COMMENCEMENT DATE MEMORANDUM
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
LANDLORD: THE PRUDENTIAL INSURANCE COMPANY OF AMERICA,
a New Jersey corporation
- --------------------------------------------------------------------------------
TENANT: CONTROL DATA SYSTEMS, a Delaware corporation
- --------------------------------------------------------------------------------
LEASE DATE: June 1, 1994
- --------------------------------------------------------------------------------
PREMISES: 1306 Orleans Drive, Sunnyvale, CA 94089
- --------------------------------------------------------------------------------
</TABLE>
Pursuant to Section 2.D. of the above-referenced Lease, the Commencement Date
hereby is established as August 1, 1994, and the Expiration Date is hereby
established as July 31, 1999.
LANDLORD
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA,
a New Jersey corporation
By: /s/ Wes Ambrose
-------------------------------------
Its Vice President
TENANT
CONTROL DATA SYSTEMS, INC.
a Delaware corporation
By: /s/ W. D. Seiler
------------------------------------
Its: Director Real Estate
------------------------------------
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<PAGE> 40
EXHIBIT C
PHASING
I. Contractor should provide a separate price for items: 1, 2, 3, 4, 5, 10, 11,
15.
II. Contractor should provide a separate price for items: 6, 7, 8, 9, 12, 13,
14.
<TABLE>
<CAPTION>
REQUIREMENTS NUMBER OF
LOCATIONS
REQUIRED
<S> <C>
1. Provide new HC. van and vehicle parking. 1
2. Provide H.C. hardware pull at door exterior. 3
3. Provide H.C. hardware at door interior. 3
4. Provide 16" high kickplates at doors. 3
5. Provide new H.C. threshold. 6
6. Provide new HC curd cut & ramp. 1
7. Clearance required at edge of door adjacent to latch is 18". 2
Existing clearance is 16". Solution: relocate door and frame
2" over.
8. Vestibule clearance required in direction of travel is 2
5'.0". Existing clearance is 4'. Solution: Remove door and
frame; provide cased opening.
9. Clearance required beneath countertop is 29'. Existing 2
clearance is 27 1/2". Solution: modify apron at front edge of
countertop to provide 29" clearance without raising counter.
10. Water faucets are knobs rather than levers. Solution: 2
change faucets at one sink to have levers.
11. Reverse swing of toilet door. 1
12. Reverse swing of door to locker/shower area. 1
13. Shower stall has sliding glass doors with a lip at 2
threshold. Solution: remove doors and provide plastic curtain on
horizontal rod.
14. Maximum height for countertops is 34". Existing 2
countertops are 36". Solution: Modify existing to 34" or provide
new.
15. Provide a site sign at entrance to parking lot that says 1
"Unauthorized vehicles parked in designated handicapped spaces not
displaying distinguishing placards or license plates issued for
physically
</TABLE>
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<PAGE> 41
EXHIBIT D
RULES AND REGULATIONS
1. No sign, placard, picture, advertisement, name or notice shall be
installed or displayed on any part of the outside or inside of the
Building without the prior written consent of Landlord. Landlord shall
have the right to remove, at Tenant's expense and without notice, any
sign installed or displayed in violation of this rule.
2. Except as consented to in writing by Landlord or in accordance with
Building standard improvements, no draperies, curtains, blinds, shades,
screens or other devices shall be hung at or used in connection with any
window or exterior door or doors of the Premises. No awning shall be
permitted on any part of the Premises. Tenant shall not place anything
against or near glass partitions or doors or windows which may appear
unsightly from outside the Promises.
3. Tenant shall not obstruct any sidewalks, halls, lobbies, passages,
exits, entrances, elevators or stairways of the Building. No tenant and
no employee or invitee of any tenant shall go upon the roof of the
Building or make any roof or terrace penetrations.
4. If Tenant requires a burglar alarm, it shall first obtain, and comply
with, Landlord's instructions for its installation.
5. Tenant shall not place a load upon any floor of the Premises which
exceeds the maximum load per square foot which the floor was designed to
carry and which is allowed by law. Tenant's business machines and
mechanical equipment which cause noise or vibration which may be
transmitted to the structure of the Building or to any space therein,
and which is objectionable to Landlord or to any tenants in the
Building, shall be placed and maintained by Tenant, at Tenant's expense,
on vibration eliminators or other devices sufficient to eliminate noise
or vibration.
6. Tenant shall not use or keep in the Premises any toxic or hazardous
materials or any kerosene, gasoline or inflammable or combustible fluid
or material other than those limited quantities necessary for the
operation or maintenance of office equipment. Tenant shall not use or
permit to be used in the Premises any foul or noxious gas or substance,
or permit or allow the Premises to be occupied or used in a manner
offensive or objectionable to Landlord or other occupants of the
Building by reason of noise, odors or vibrations. No animal, except
seeing eye does when in the company of their masters, may be brought
into or kept in the Building.
7. Tenant shall cooperate fully with Landlord to assure the most effective
operation of the Building's heating and air conditioning and to comply
with any governmental energy-saving rules, laws or regulations.
8. Landlord reserves the right, exercisable without notice and without
liability to Tenant, to change the name and street address of the
Building.
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<PAGE> 42
9. Tenant shall close and lock the doors of its Premises, shut off all water
faucets or other water apparatus and turn off all lights and other
equipment which is not required to be continuously run. Tenant shall be
responsible for any damage or injuries sustained by other tenants or
occupants of the Building or Landlord for noncompliance with this Rule.
10. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall
not be used for any purpose other than that for which they were
constructed, and no foreign substance of any kind whatsoever shall be
placed therein. The expense of any breakage, stoppage or damage resulting
from any violation of this rule shall be borne by the tenant who, or
whose employees or invitees, shall have caused it.
11. Tenant shall not install any radio or television antenna, loudspeaker or
other device on the roof or exterior walls of the Building. Tenant shall
not interfere with radio or television broadcasting or reception from or
in the Budding or elsewhere.
12. Tenant shall not affix any floor covering to the floor of the Premises in
any manner except as approved by Landlord. Tenant shall repair, or be
responsible for the cost of repair of any damage resulting from
noncompliance with this Rule.
13. Canvassing, soliciting and distributing handbills or any other written
material and peddling in the Building are prohibited, and each tenant
shall cooperate to prevent these activities.
14. Tenant shall store all its trash and garbage in a separate designated
area. Tenant shall not place in any trash box or receptacle any material
which cannot be disposed of in the ordinary and customary manner of trash
and garbage disposal. All garbage and refuse disposal shall be made in
accordance with directions issued from time to time by Landlord.
15. Use by Tenant of Underwriters' Laboratory approved equipment for brewing
coffee, tea, hot chocolate and similar beverages and microwaving food
shall be permitted, provided that the equipment and use is in accordance
with all applicable federal, state, county and city laws, codes,
ordinances, rules and regulations.
16. Tenant shall not use the name of the Building in connection with or in
promoting or advertising the business of Tenant, except as Tenant's
address, without the written consent of Landlord.
17. Tenant shall comply with all safety, fire protection and evacuation
procedures and regulations established by Landlord or any governmental
agency. Tenant shall be responsible for any increased insurance premiums
attributable to Tenant's use of the Premises, Building or Property.
18. Tenant assumes any and all responsibility for protecting its Premises
from theft and robbery, which responsibility includes keeping doors
locked and other means of entry to the Premises closed.
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<PAGE> 43
19. Tenant shall not use the Premises, or suffer or permit anything to be
done on, in or about the Premises, which may result in an increase to
Landlord in the cost of insurance maintained by Landlord on the Building
and Common Areas.
20. Tenant shall not park its vehicles in any parking areas designated by
Landlord as areas for parking by visitors to the Building or other
reserved parking spaces. Tenant shall not leave vehicles in the Building
parking areas overnight, nor park any vehicles in the Building parking
areas other than automobiles, motorcycles, motor driven or non-motor
driven bicycles or four-wheeled trucks. Tenant, its agents, employees and
invitees shall not park any one (1) vehicle in more than one (1) parking
space.
21. Landlord may waive any one or more of these Rules and Regulations for the
benefit of Tenant or any other tenant, but no waiver by Landlord shall be
construed as a waiver of the Rules and Regulations in favor of Tenant or
any other tenant, nor prevent Landlord from thereafter enforcing the
Rules and Regulations against any or all of the tenants of the Building.
22. Those Rules and Regulations are in addition to, and shall not be
construed to in any way modify or amend, in whole or in part, the terms,
covenants, agreements and conditions of any lease of premises in the
Building.
23. Landlord reserves the right to make other reasonable Rules and
Regulations as, in its judgment, may from time to time be needed for
safety and security, for care and cleanliness of the Building and for the
preservation of good order therein. Tenant agrees to abide by all Rules
and Regulations hereinabove stated and any additional rules and
regulations which are adopted.
24. Tenant shall be responsible for the observance of all of the foregoing
rules by Tenant's employees, agents, clients, customers, invitees, and
guests.
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<PAGE> 44
EXHIBIT E
COMMISSION SCHEDULE
Landlord and Blickman Turkus Commercial Industrial Real Estate (Landlord's
Broker") ate parties to that certain agreement regarding the payment of
brokerage commissions in connection with this Lease. Landlord and the
undersigned Brokers specified in the Basic Lease Information hereby acknowledge
that the total commission payable in connection with this Lease is $70,200, but
that $24,300 of such total commission shall not be payable until Tenant has
irrevocably waived Tenant's right to terminate this Lease pursuant to Section 40
of this Lease. In the event Tenant so terminates this Lease, such $24,300 sum
shall not be payable by Landlord or Tenant to any Broker, and no Broker shall
assert any claim thereto. Upon payment of the foregoing commission by Landlord
to Landlord's Broker, Landlord's Broker shall be responsible for payment of
amounts payable to any other broker.
ACKNOWLEDGED AND AGREED:
BLICKMAN TURKUS COMMERCIAL INDUSTRIAL REAL ESTATE
By: /s/ Dario Jonas
--------------------------
Its: Partner, V.P.
--------------------------
J. R. PARRISH
By: /s/ P. Guggion
--------------------------
Its:
--------------------------
CORNISH & CAREY COMMERCIAL
By: /s/ F. Anderson
--------------------------
Its:
--------------------------
35
<PAGE> 45
EXHIBIT 3
AVID MEDIA GROUP
1306 Orleans Drive
Sunnyvale, California
GENERAL NOTES
ALL AREAS OF NEW WORK ARE CLOUDED.
FLOORING: Existing flooring to remain. Patch carpet and provide floor
base to match existing where existing walls are removed.
WALLS: Existing walls to remain unchanged unless otherwise noted.
Patch, texture and paint existing walls to match existing
where walls are removed.
CEILING: Existing ceiling to remain unchanged.
DOORS: All doors are existing and shall remain unchanged unless
otherwise noted. New doors shall be 3'7" B3 birch in anod
alum. rames to match existing.
LIGHTING: Modify lighting and switching to match existing and per code
requirements where new walls are installed.
FIRE SPRINKLERS: Modify fire sprinklers where new walls are installed per
code requirements.
FIRE EXTINGUISHERS: Provide fire extinguishers per code requirements.
REFERENCE NOTES
A. Remove existing sidelight from door frame and install 20 min. labeled
pair of doors with closers, astragal, coordinator, autoflush bolts and
smoke seals. Also provide magnetic hold opens activated by smoke
detectors. Paint touch-up frame to match existing.
B. Provide new 1-hour F.R. wall to underside of ceiling and provide new 20
minute labeled door and frame to match existing with closer and smoke
seals.
C. Remove portion of wall and provide new 20 min. labeled door and frame to
match existing with closer and smoke seals.
D. Provide new wall to underside of ceiling. Texture, paint to cover, and
provide floor base to match existing.
E. Remove existing door and frame and provide new wall to underside of
ceiling. Texture, paint to cover, and provide floor base to match
existing.
F. Remove existing wall shown dashed.
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<PAGE> 46
G. Remove portion of existing wall and portion of surface mounted wipe
moulding shown dashed. Provide 4'7" gypsum board cased opening.
H. Remove portion of existing wall shown dashed. Provide 6'7" gypsum board
cased opening. Remove any electrical outlets, conduits and wiring to
source.
I. Provide alternative price to install new gyps board o/metal stud
partition to underside of existing 12" high opening, tape texture and
paint to match existing. Also provide new pair of 3'7" B3 birch doors
and anod, alum frame.
[graphics depiction of floor plan 1/8" = 1' - 0"]
37
<PAGE> 47
EXHIBIT B
SUBLEASE AGREEMENT
THIS SUBLEASE, made this 15th day of September, 1995 by and
between Control Data Systems, Inc., a Delaware corporation, hereinafter
designated "Sublessor", and Avid Media Group, Inc., a California corporation,
hereinafter designated "Sublessee".
1. Demise of Premises. In consideration of the rents and
covenants herein stipulated to be paid and performed by Sublessee, Sublessor
hereby demises and sublets to Sublessee, and Sublessee hereby takes from
Sublessor, a portion of that space presently leased by Sublessor containing
6,000 rentable square feet (Sublease Premises), under that certain lease (herein
referred to collectively as the "Master Lease") entered into by and between The
Prudential Insurance Company of America ("Master Landlord") and Sublessee dated
June 1, 1994 and all rights, privileges, and appurtances related to such
Sublease Premises. The Sublease Premises are located at 1306 Orleans Dr.,
Sunnyvale, CA 94089 and outlined as "Space A" on Exhibit "1" attached hereto and
incorporated herein by reference. The Master Lease is attached hereto as Exhibit
"2" and incorporated herein by reference.
2. Term. Sublessee shall have and hold the Sublease Premises for
a term of forty-six (46) months commencing on October 1, 1995 and terminating on
July 31, 1999 subject to Sublessor's election to exercise it's early termination
options under the terms of the Master Lease.
Sublessor may, at it's election, exercise the early termination
right contained in Paragraph 40 of the Master Lease and this Sublease shall
terminate on the early termination date as if it were the original Sublease
expiration date. In the event Sublessor elects to exercise it's early
termination right it shall provide written notice to Sublessee prior to January
15, 1997 of it's intent and shall reimburse Sublessee for it's reasonable moving
expenses. Moving expenses shall mean those reasonable costs related to the
physical relocation of Sublessee's furniture, fixtures, and equipment to another
location within a sixty (60) mile radius of the Sublease Premises.
If Sublessor is unable to deliver possession of the Sublease
Premises to Sublessee by October 1, 1995 because Sublessor has not substantially
completed all work to be performed by it pursuant to Paragraph 5 of this
Sublease Agreement, or for any other reason, Sublessor shall have no liability
to Sublessee for damages but the commencement date shall be deferred until the
date on which Sublessor is able to deliver possession of the Sublease Premises
to the Sublessee. In the event the commencement date is other than as stated in
Paragraph 2 of this Sublease Agreement, immediately after the actual
commencement date is determined it shall be confirmed by Sublessor and Sublessee
in writing.
Sublessee shall have access to the Sublease Premises two weeks
prior to the commencement date for the installation of fixtures and equipment.
Sublessee hereby agrees that it will not cause any delays in the completion of
the renovations required to be performed by Sublessor as a result of it's early
access to the Sublease Premises.
<PAGE> 48
3. Rental. Sublessee agrees to pay Sublessor annual rent of Sixty
Four Thousand Eight Hundred Dollars ($64,800.00) payable in monthly installments
of Five Thousand Four Hundred Dollars ($5,400.00), in advance, on the first day
of each calendar month during the Term. Sublessee covenants and agrees to pay
Sublessor rent at the address set forth in the notice provision of this Sublease
or at such other place as Sublessor may designate in writing. Rent shall be
payable without notice or demand, without abatement, deduction or setoff. Rent
for any portion of a month shall be prorated.
In addition to the annual rent payable under this Sublease as set
forth above, Sublessee shall pay to Sublessor as additional rent, any increases
in operating expenses as described in Paragraph 5 of the Master Lease above
those for calendar year 1996. Additional rent payments for operating expense
increases shall commence on January 1, 1997. The current pro rata percentage
applicable to the Sublease Premises is twenty-four (24%) of the operating
expenses billed to Sublessor by Master Landlord. In no event shall the annual
increase in operating expenses exceed One Thousand Seven Hundred Forty Dollars
($1,740.00).
4. Incorporation of the Master Lease. The obligations,
conditions, and rights of Sublessor herein, as Tenant under the Master Lease,
provided in the following paragraphs of the Master Lease, are hereby granted to
and assumed by Sublessee herein - All, except paragraphs 2(a), 2(b), 4, 7,
10(a), 28, 30, 36, 40, and 41.
Breach of the above provisions of the Master Lease or failure to
perform Sublessor's obligations thereunder shall be a breach of this Sublease.
The rights of the Landlord under the above provisions of the Master Lease may be
enforced by, and are for the benefit of, both the Sublessor herein and the
Landlord under the Master Lease. Notwithstanding the foregoing, Sublessee shall
not be responsible to Master Landlord for a default by Sublessor under the
Master Lease unless such default arose from a default by Sublessee under this
Sublease.
5. Preparation of Sublease Premises. Prior to October 1, 1995,
Sublessor shall complete the renovations identified on the plans and
specifications hereto attached as "Exhibit 3" and incorporated herein by
reference. All renovations shall be subject to the terms of the Master Lease and
prior approval of the Master Landlord will be required. Sublessor shall
contribute an amount not to exceed Sixteen Thousand Five Hundred Dollars
($16,500.00) towards the cost of the renovations and Sublessee shall be
responsible for any and all costs related to the renovations in excess of this
amount. Sublessee shall be liable to Sublessor for any such excess which shall
be considered additional rent and due and payable within thirty (30) days of
receipt of a statement from Sublessor.
6. Quiet Enjoyment. Sublessee hereunder shall be guaranteed quiet
enjoyment of the Sublease Premises from Sublessor.
7. Notices. Whenever any notice, demand, approval, consent,
request, or election is given or made pursuant to this Sublease, it shall be in
writing. Communications and payments to the Sublessor shall be addressed as
follows:
2
<PAGE> 49
Control Data Systems, Inc.
4201 Lexington Ave. North
Arden Hills, MN 55126
Attn: Real Estate Dept.
or to such other address as may be specified by written notice to Sublessee.
Communications to the Sublessee shall be addressed as follows:
Avid Media Group, Inc.
1306 Orleans Dr.
Sunnyvale, CA 94089
or to such other address as may be specified by written notice to Sublessor. Any
communications so addressed shall be duly served if mailed by registered or
certified mail, return receipt requested.
8. Representations and Warranties. Sublessor hereby warrants and
represents that it is not in default under the Master Lease, and that all rent
and other amounts due Landlord under the Master Lease have been paid. The
representations and warranties shall survive the termination of this Sublease.
9. Prepaid Rent. Concurrently with the execution of this
Sublease, Sublessee shall pay to Sublessor, in the amount set forth hereinabove:
(1) the full amount of the first month's rent in prepayment of the first 30
days' rent, and (2) the full amount of one month's rent, which amount shall be
held by Sublessee as a security deposit.
10. Services and Utilities. Sublessor shall provide janitorial
services to the Sublease Premises to substantially the same extent or to the
extent mutually agreed upon by Sublessee and Janitorial service, and in
substantially the same manner as these services are provided to it's own
organizations within the building. Sublessee shall pay Sublessor a monthly fee
for providing janitorial services which shall represent Sublessee's pro-rata
share of the costs of Sublessor to provide the service. Said cost shall include,
but is not limited to, the costs of labor, materials, supplies, and equipment
used to clean and maintain the building. Sublessor shall invoice Sublessee
monthly for janitorial services and Sublessee's fee shall be considered as
additional rent and shall be due with the rental payment each month during the
term of this Sublease.
Sublessor shall furnish to the Sublease Premises, during usual
business hours, reasonable air conditioning, heating and ventilation. For the
purposes hereof, "usual business hours" shall mean between the hours of 8:00 am
and 6:00 pm, Monday through Friday, except legal holidays.
Sublessor shall furnish the electrical energy necessary for
general illumination of the Sublease Premises by the existing overhead
fluorescent lighting fixtures, and for the operation of 120 and 208 volt
business machines, appliances, and lamps. In the event that Sublessee installs
electrical equipment beyond the above standard or consumes a load which exceeds
two (2) watts per rentable square foot for overhead lighting and two and
one-half (2 1/2) watts per rentable square foot for 120 and 208 convenience
outlets Sublessor may increase the
3
<PAGE> 50
Rent by a reasonable amount to compensate it for the costs incurred by it in
furnishing such additional electrical energy.
Sublessor shall be responsible for maintaining the building
foundation, roof, exterior walls, parking lot foundation, interior, and exterior
in accordance with the terms of the Master Lease.
11. Signage. Sublessee shall have the right to install vinyl
lettering on the front doors of the Sublease Premises and to use the monument
sign adjacent to the Sublease Premises lobby, subject to the terms of the Master
Lease and the consent of the Master Landlord. The cost of installation,
maintenance, and removal shall be at Sublessee's expense.
12. Parking. Sublessee shall have access to the parking areas on
a first-come, first-serve, unassigned basis per the terms of paragraph 29 of the
Master Lease.
13. Real Estate Brokers. Sublessor and Sublessee agree that
Colliers Parrish International, Inc. and Cornish & Carey Commercial are the
recognized real estate brokers representing the parties in connection with this
Sublease. Sublessor agrees to pay any commission that may be due said real
estate brokers.
14. Hazardous Materials. Sublessor represents that to the best of
its knowledge, that as of the date of this Sublease, the Sublease Premises are
free of Hazardous Materials. Sublessor agrees that Sublessee shall have no
liability or responsibility whatsoever for any Hazardous Materials on or about
the Sublease Premises which were not caused by Sublessee. Sublessor shall
indemnify, defend and hold Sublessee harmless against all claims, losses or
liabilities arising out of or in connection with the presence, use, storage,
disposal, removal or clean-up of any Hazardous Materials in or about the
Sublease Premises which were not caused by Sublessee.
SUBLESSOR: Control Data Systems, Inc.
By: /s/ Walter D. Seiler
-----------------------------------
Walter D. Seiler
Date: 9/18/95
-----------------------------------
SUBLESSEE: Avid Media Group, Inc.
By: /s/ Michael Kornet
-----------------------------------
Michael Kornet
Date: 9/15/95
-----------------------------------
4
<PAGE> 51
Landlord's Consent to Sublease
The undersigned ("Landlord"), Landlord under the Master Lease,
hereby consents to the foregoing Sublease without waiver of any restriction in
the Master Lease concerning further assignment or subletting. Landlord certifies
that, as of the date of Landlord's execution hereof, Sublessor is not in default
or breach of any provisions of the Master Lease, and that the Master Lease has
not been amended or modified except as set forth in the foregoing Sublease. In
no event shall Landlord consent to a sublease as provided herein to diminish or
alter the terms and obligations of Tenant under the Master Lease.
By: See attached consent form
-------------------------------------
Date:
-------------------------------------
Title:
-------------------------------------
5
<PAGE> 52
EXHIBIT 1
[Graphic Description of Floor Plan]
6
<PAGE> 53
IN WITNESS WHEREOF, the parties hereto have executed this
Sub-Sublease as of the date first above written.
MFI: CBOOKS:
MILLER FREEMAN, INC. CBOOKS EXPRESS
By: /s/ W. Ambrose By: /s/ Chris MacAskill
----------------------------- --------------------------
Its: Senior Vice President and CFO Its: President
----------------------------- --------------------------
Address: Address:
600 Harrison Street 3347 Shady Spring Lane
San Francisco, CA 94107 Mountain View, CA 94040
Attn: Terry Wynn Attn: Chris MacAskill
CDS: Control Data Systems, Inc.
By: /s/ W. D. Seiler
---------------------------
Its: Director Real Estate
Address:
4201 Lexington Ave. North
Arden Hills, MN 55126
Attn: R/E Dept.
7
<PAGE> 54
[Graphic Description of Floor Plan]
8
<PAGE> 55
CONSENT TO SUBLETTING
I. PARTIES AND DATE.
THIS CONSENT TO SUBLETTING ("Consent") is dated as of November
___, 1996, and is made by and among Control Data Systems, Inc., a Delaware
corporation ("Tenant"), Miller Freeman, Inc., a Delaware corporation (as
successor in interest to Avid Media Group, Inc.) ("Subtenant"), CBooks Express,
a California corporation ("Sub-Subtenant"), and The Realty Associates Fund, III,
a limited partnership (as successor in interest to The Prudential Insurance
Company of America) ("Landlord").
II. RECITALS.
A. Landlord and Tenant are parties to that certain Standard Form
Lease (the "Lease") dated June 1, 1994, for the premises located at 1306-1308
Orleans Drive, Sunnyvale, CA 94089 (the "Premises"). The capitalized terms used
and not otherwise defined herein shall have the same definitions as set forth in
the Lease.
B. Tenant and Subtenant are parties to that certain Sublease
dated September 15, 1995 (the "Sublease") covering a portion of the Premises
consisting of approximately 6,000 square feet of the Premises in the location
depicted on Exhibit "A" attached hereto (hereafter the "Subleased Premises").
Landlord previously consented to such subletting.
C. Subtenant desires to sub-sublet to Sub-Subtenant the Subleased
Premises and Subtenant and Sub-Subtenant desire Landlord and Tenant to consent
to such sub-subletting. Landlord and Tenant are willing to grant such consent,
subject to and conditioned upon the agreements, acknowledgements and
representations of Subtenant and Sub-Subtenant set forth below.
III. TERMS OF CONSENT.
A. Tenant.
For valuable consideration, receipt of which is hereby
acknowledged, Tenant hereby reaffirms the covenants and representations made by
Tenant to Landlord in that certain Consent to Subletting dated September 28,
1995.
B. Subtenant.
For valuable consideration, receipt of which is hereby
acknowledged, Subtenant:
1. Agrees:
a. that it shall not be released from its
obligations under the Sublease, including
all monetary obligations.
<PAGE> 56
b. to promptly perform, or to cause the
performance by Sub-Subtenant, of all duties,
obligations and responsibilities of
Subtenant under the Sublease.
c. that it is, by a separate agreement
("Sub-Sublease Agreement") with
Sub-Subtenant, sub-subleasing to
Sub-Subtenant the Subleased Premises,
subject and subordinate to the Lease and the
Sublease. Tenant has attached a true and
correct copy of the Sub-Sublease Agreement
hereto.
2. Represents and warrants that:
a. it has not failed to disclose to Landlord
and Tenant any information which, if known
by Landlord and Tenant, might provide
grounds for Landlord and Tenant to withhold
its consent to the sub-subletting described
herein pursuant to any of the provisions set
forth under Article XIV of the Lease.
b. neither Subtenant nor, to the best of
Subtenant's knowledge, Tenant is in default
under any term, provision or condition of
the Sublease.
C. Sub-Subtenant.
For valuable consideration, receipt of which is hereby
acknowledged, Sub-Subtenant:
1. Agrees:
a. that the Sub-Sublease Agreement, a true and
correct copy of which is attached hereto, is
expressly subject and subordinate to the
provisions of the Lease and the Sublease.
b. not to violate any of the terms, provisions,
conditions or requirements set forth in the
Lease and the Sublease, whether or not any
of the same are inconsistent with any terms
or provisions of the Sub-Sublease Agreement.
c. that it is not claiming any interest in the
Subleased Premises or the Premises other
than as a sub-subtenant under the
Sub-Sublease Agreement.
d. that if the subletting as evidenced by the
Sub-Sublease Agreement terminates by reason
of a termination of the Lease, Landlord may,
at its option by delivering written notice
to Subtenant, assume the obligations of
Subtenant
2
<PAGE> 57
under the Sub-Sublease Agreement, in which
event Sub-Subtenant shall recognize and
attorn to Landlord as if it were the
"sub-sublessor" under the Sub-Sublease.
2. Acknowledges that Landlord and Tenant have not made
any express or implied oral or written
representation or promise that:
a. future assignments or subletting will be
approved.
b. Sub-Subtenant will enjoy financial success
in operating any business on the Premises.
c. it will grant any extension of the Term or
enter into any other modification of the
Lease.
3. Acknowledges that it has been provided with a copy
of the Lease and the Sublease, as the same are
attached to the Sub-Sublease Agreement, and that it
has read the Lease and the Sublease and all
amendments and fully understands its obligations
and responsibilities under the Lease and Sublease.
4. Represents and warrants to Landlord and Tenant that
all information which it has provided to Landlord,
Tenant or Subtenant which Landlord has reviewed in
connection with its determination to consent to the
subletting described herein is true, accurate and
complete, and fairly and accurately represents the
business, condition and status of Sub-Subtenant.
5. The address of Sub-Subtenant's principal place of
business is:
3347 Shady Spring Lane
Mountain View, CA 94040
Subtenant's Contact: Chris MacAskill
IV. CONSENT.
For valuable consideration, including the agreements,
acknowledgements, and representations of Tenant, Subtenant and Sub-Subtenant set
forth above, Landlord and Tenant consent to Subtenant's sub-subletting of the
Subleased Premises to Sub-Subtenant in accordance with the Sub-Sublease
Agreement.
V. GENERAL.
A. Attorney's Fees.
The provisions of paragraph 27 of the Lease respecting attorney's
fees shall apply to this Consent.
3
<PAGE> 58
B. Authority To Execute Agreement.
Each individual executing this Consent on behalf of a partnership
or corporation represents that he or she is duly authorized to execute and
deliver this Consent on behalf of the partnership and/or corporation and agrees
to deliver evidence of his or her authority to Landlord upon request by
Landlord.
C. Governing Law.
This Consent and any enforcement of the agreements,
acknowledgments and representations set forth above shall be governed by and
construed in accordance with the laws of the State of California.
D. Counterparts.
If this Consent is executed in counterparts, each counterpart
shall be deemed an original.
4
<PAGE> 59
IN WITNESS WHEREOF, the parties hereto have executed this Consent
as of the date and year first above written.
TENANT SUBTENANT
CONTROL DATA SYSTEMS, INC., MILLER FREEMAN, INC.
a Delaware corporation a Delaware corporation
By: /s/ W.D. Seiler By: /s/ W. Ambrose
--------------------------- ---------------------------------
Name: W.D. Seiler Name: Warren Ambrose
--------------------------- ---------------------------------
Its: Director, Real Estate Its: Senior Vice President & CFO
--------------------------- ---------------------------------
SUB-SUBTENANT LANDLORD
CBOOKS EXPRESS, a California THE REALTY ASSOCIATES FUND, III
corporation a limited partnership
by: Realty Associates Fund III GP, LP
(its general partner)
by: Realty Fund III GP, Inc.
(its general partner)
By: /s/ Chris MacAskill By: signature illegible
--------------------------- ---------------------------------
Name: Chris MacAskill Name:
--------------------------- ---------------------------------
Its: President Its:
--------------------------- ---------------------------------
5
<PAGE> 60
SUBLEASE AGREEMENT
THIS SUBLEASE, made this 25th day of June 1997 by and between
Control Data Systems, Inc., a Delaware corporation, hereinafter designated
"Sublessor", and CBooks Express Inc., a California corporation, hereinafter
designated "Sublessee."
1. DEMISE OF PREMISES. In consideration of the rents and
covenants herein stipulated to be paid and performed by Sublessee, Sublessor
hereby demises and sublets to Sublessee, and Sublessee hereby takes from
Sublessor, a portion of that space presently leased by Sublessor, containing
7,635 rentable square feet hereinafter designated "Sublease Premises," under
that certain lease (herein referred to collectively as the "Master Lease") dated
June 1, 1994 and all rights, privileges, and appurtances related to such
Sublease Premises. The Sublease Premises are located at 1306 Orleans Dr.,
Sunnyvale, CA 94089 and highlighted on "Exhibit 1" attached hereto and
incorporated herein by reference. The Master Lease is attached hereto as
"Exhibit 2" and incorporated herein by reference.
2. TERM. Sublessee shall have and hold the Sublease Premises for
a term of twenty-five months (25) commencing on July 1, 1997 and terminating on
July 31, 1999. In the event Sublessor is unable to deliver possession of the
Sublease Premises to Sublessee by July 1, 1997 because Sublessor has not
substantially completed all work to be performed by it pursuant to Paragraph 5
of this Sublease Agreement, or for any other reason, Sublessor shall have no
liability to Sublessee for any damages but the commencement date shall be
deferred until the date on which Sublessor is able to deliver possession of the
Sublease Premises to Sublessee. In the event the commencement date is other than
as stated in Paragraph 2 of this Sublease Agreement, immediately after the
actual commencement date is determined it shall be confirmed by Sublessor and
Sublessee in writing.
In the event Sublessor does not deliver the Sublease Premises to
Sublessee by August 15, 1997, Sublessee, shall have the right to terminate this
Sublease Agreement upon written notice to Sublessor. Said notice shall be
provided to Sublessor no later than August 18, 1997.
Sublessee may enter upon the Sublease Premises prior to the
Commencement Date for the purpose of moving or installing Sublessee's furniture,
equipment, fixtures, business machines, or other personal property. In the event
Sublessee does so, it is hereby agreed that Sublessee shall hold Sublessor
harmless from any and all liability for any interruption or loss of Sublessee's
business or damage to Sublessee's property from any cause or occurrence
whatsoever.
3. RENTAL. The monthly rent for the Sublease Premises over the
term of this Sublease Agreement shall be as set forth in the following schedule:
<TABLE>
<CAPTION>
LEASE PERIOD MONTHLY RENT
------------ ------------
<S> <C>
July 1, 1997 to December 31, 1997 $ 9,543.75
January 1, 1998 to December 31, 1998 $ 9,925.50
January 1, 1998 to July 31, 1999 $10,307.25
</TABLE>
<PAGE> 61
Sublessee agrees to pay Sublessor rent in advance, on the first
day of each calendar month during the Term. Sublessee covenants and agrees to
pay Sublessor rent at the address set forth in the notice provision of this
Sublease Agreement or at such other place as Sublessor may designate in writing.
Rent shall be payable without notice or demand, without abatement, deduction or
setoff. Rent for any portion of a month shall be prorated. If any installment of
rent or any other sums due from Sublessee shall not be received by Sublessor
within five days after receipt of written notice by Sublessee, Sublessee shall
pay Sublessor a late charge equal to six percent (6%) of such overdue amount.
Acceptance of late charge by Sublessor shall in no event constitute a waiver of
Sublessee's default with respect to such overdue amount, nor prevent Sublessor
from exercising any of the other rights and remedies granted hereunder.
4. PARAGRAPHS INCORPORATED FROM THE MASTER LEASE. With regards to
the Sublease Premises from the commencement date of this Sublease Agreement to
it's termination, the obligations, conditions, and rights of Sublessor herein,
as Tenant under the Master Lease, provided in the following paragraphs of the
Master Lease, are hereby granted to and assumed by Sublessee herein - All
paragraphs, except paragraphs 2, 3, 4, 5, 7, 10(a), 19, 28, 30, 36, 40, 41, and
43. Breach of the above provisions of the Master Lease or failure to perform
Sublessor's obligations thereunder shall be a breach of this Sublease. The
rights of the Lessor under the above provisions of the Master Lease may be
enforced by, and are for the benefit of, both the Sublessor herein and the
Lessor under the Master Lease.
5. PREPARATION OF PREMISES. Sublessee accepts the Sublease
Premises "as is" except that prior to July 15, 1997, Sublessor shall, at it's
expense, complete the renovations identified on the plans and specifications
attached hereto as "Exhibit 3" and "Exhibit 4" and incorporated herein by
reference. All renovations shall be subject to the terms of the Master Lease and
prior approval of the Master Landlord will be required. Sublessee agrees to
comply with the terms and conditions of Paragraph 9 of the Master Lease with
regards to all alterations it may make.
6. QUIET ENJOYMENT. Sublessee hereunder shall be guaranteed quiet
enjoyment of the premises.
7. NOTICES. Whenever any notice, demand, approval, consent,
request, or election is given or made pursuant to this Sublease, it shall be in
writing. Communications and payments to the Sublessor shall be addressed as
follows:
Control Data Systems, Inc.
4201 Lexington Ave. North
Arden Hills, MN 55126
Attn: Real Estate Director
2
<PAGE> 62
or to such other address as may be specified by written notice to Sublessee.
Communications to the Sublessee shall be addressed as follows:
CBooks Express, Inc.
1308 Orleans Dr.
Sunnyvale, CA 94089
Attn: Chris MacAskill
or to such other address as may be specified by written notice to Sublessor. Any
communications so addressed shall be duly served if mailed by registered or
certified mail, return receipt requested.
8. REPRESENTATIONS AND WARRANTIES. Sublessor hereby warrants and
represents that it is not in default under the Master Lease, and that all rent
and other amounts due Landlord under the Master Lease have been paid. The
representations and warranties shall survive the termination of this Sublease.
9. SECURITY DEPOSIT. Concurrently with the execution of this
Sublease, Sublessee shall pay to Sublessor the full amount of one month's rent
of Nine Thousand Five Hundred Forty-Three and 75/100 dollars ($9,543.75) which
shall be held by Sublessor as a security deposit. If Sublessee fails to pay rent
or other charges due hereunder, or otherwise defaults with respect to any
provisions of this Sublease, Sublessor may use, apply or retain all or any
portion of said deposit for the payment of any rent or other charge in default
for the payment of any other sum to which Sublessor may become obligated by
reason of Sublessee's default, or to compensate Sublessor for any loss or damage
which Sublessor may suffer thereby. If Sublessee performs all of Sublessee's
obligations hereunder, said deposit shall be returned, without payment of
interest, to Sublessee at the expiration of the term hereof, and after Sublessee
has vacated the Premises.
10. SERVICES & UTILITIES. Sublessor shall provide janitorial
services to the Sublease Premises to substantially the same extent and in
substantially the same manner as these services are provided to it's own
organizations within the building.
Sublessor shall furnish to the Sublease Premises, during usual
business hours, reasonable heating, ventilation, and air conditioning. For the
purposes hereof, "usual business hours" shall mean between the hours of 8:00
a.m. and 6:00 p.m, Monday through Friday and 9:00 a.m. and 1:00 p.m. on
Saturday, legal holidays excepted. If and when requested to do so by Sublessee
at least twenty-four (24) hours in advance, Sublessor shall furnish reasonable
heating, ventilation, and air conditioning to the Sublease Premises at times
other than usual business hours. Sublessor shall invoice Sublessee for such
after-hours heating, ventilation, and air conditioning at the rate of Eight
Dollars ($8.00) per hour per HVAC zone utilized, and Sublessee shall pay each
such invoice as additional rent hereunder within thirty (30) days after receipt
thereof. Sublessor reserves the right to increase this hourly rate from time to
time to reflect increases in it's costs to provide the services.
Sublessor shall furnish the electrical energy necessary for
general illumination of the Sublease Premises by the existing overhead
fluorescent lighting fixtures, and for the operation of 120 and 208 volt
business machines, appliances, and lamps. In the event that
3
<PAGE> 63
Sublessee installs electrical equipment beyond the above standard or consumes a
load which exceeds two (2) watts per rentable square foot for overhead lighting
and two and one-half (2 1/2) watts per rentable square foot for 120 and 208 volt
convenience outlets, Sublessor may increase the Rent by a reasonable amount to
compensate it for costs incurred in furnishing such additional electrical energy
11. PARKING. Sublessee shall have access to the parking areas on
a first-come, first-served, unassigned basis per the terms of Paragraph 29 of
the Master Lease.
12. HOLDING OVER. Sublessor and Sublessee agree that in no event
shall Sublessee hold over in the Sublease Premises or in any portion thereof
beyond the term of this Sublease. If Sublessee holds over beyond the term of
this Sublease, Sublessee hereby agrees to assume all financial and legal
liabilities incurred by Sublessor as a result of Sublessee's holding over. Such
liabilities may include, but are not limited to, rent, additional rent, and
damages for all space leased by Sublessor as Tenant under the Master Lease.
13. RENEWAL OPTION. In the event Sublessor elects to exercise the
Option to Extend contained in paragraph 41 of the Master Lease, Sublessee shall
be granted first right of refusal to sublease the Sublease Premises at terms
acceptable to Sublessor.
14. REAL ESTATE BROKERS. Sublessor and Sublessee agree that
Colliers Parrish International, Inc. is the recognized real estate brokers
representing the parties in connection with this Sublease. Sublessor agrees to
pay any commission that may be due said real estate brokers.
SUBLESSOR: Control Data Systems, Inc.
By:
-------------------------------
Walter D. Seiler
Date:
SUBLESSEE: CBooks Express, Inc.
By: /s/ Chris MacAskill
-------------------------------
Date:
-------------------------------
AGREED TO BY LESSOR UNDER THE MASTER LEASE:
By:
-------------------------------
Date:
-------------------------------
4
<PAGE> 64
EXHIBIT 1
[Graphic - Description of Site Plan]
5
<PAGE> 65
EXHIBIT 3
[Graphic - Description of Site Plan]
6
<PAGE> 66
EXHIBIT 4
RENOVATIONS TO SUBLEASE PREMISES
1. Remove approximately nine linear feet of existing partition running
between corridor and office. Repair remaining partitions and floor
covering to match existing.
2. Remove existing door and frame and repair partitions and floor covering to
match existing.
3. Install double fire doors and frame as shown. Use doors removed from #4
below.
4. Remove existing double fire doors and frame and repair partitions and
floor covering to match existing.
5. Provide and install approximately 35 linear feet of drywall partition as
shown on sketch. Partition should extend from raised floor to dropped
ceiling. Finish to match existing. Rewire lights in computer room to be
controlled by separate switches at each entrance.
6. Remove existing double doors and frame and install partitions to close
opening. Finish to match existing.
7
<PAGE> 67
CONSENT TO SUBLETTING
I. PARTIES AND DATE.
THIS CONSENT TO SUBLETTING ("Consent") is dated as of August 7,
1997, and is made by and among Control Data Systems, a Delaware
corporation ("Tenant"), CBooks Express Inc., a California corporation
("Subtenant"), The Realty Associates Fund III, L.P., ("Landlord").
II. RECITALS.
A. Landlord and Tenant are parties to that certain Standard Form
Lease (the "Lease") dated June 1, 1994, for the Premises known as 1306 Orleans
Drive, Sunnyvale, California. The capitalized terms used and not otherwise
defined herein shall have the same definitions as set forth in the Lease.
B. Pursuant to Article XIV of the Lease, Tenant has a limited
right, subject to the consent of Landlord and conditioned upon certain
requirements and payments to Landlord as set forth therein, to sublet all or a
portion of the Premises.
C. Tenant desires to sublet to Subtenant a portion of the
Premises consisting of approximately 7,635 square feet of the Premises in the
location depicted on Exhibit "A" attached hereto (hereafter the "Subleased
Premises"), and Tenant and Subtenant desire Landlord to consent to such
subletting. Landlord is willing to grant such consent, subject to and
conditioned upon the agreements, acknowledgments and representations of Tenant
and Subtenant set forth below.
III. TERMS OF CONSENT.
A. Tenant.
For valuable consideration, receipt of which is hereby
acknowledged, Tenant:
1. Agrees:
a. that it shall not be released from its
obligations under the Lease, including all
monetary obligations.
b. to promptly perform, or to cause the
performance by Subtenant, of all duties,
obligations and responsibilities of Tenant
under the Lease.
c. that it is, by a separate agreement
("Sublease Agreement") with Subtenant,
subleasing to Subtenant the Subleased
<PAGE> 68
Premises, subject and subordinate to the
Lease. Tenant has attached a true and
correct copy of the Sublease Agreement
hereto.
d. to promptly pay to Landlord all "Bonus
Value" which Tenant may receive arising out
of the subletting consented to hereunder, in
accordance with Section 14.5 of the Lease.
2. Represents and warrants that:
a. it has not failed to disclose to Landlord
any information which, if known by Landlord,
might provide grounds for Landlord to
withhold its consent to the subletting
described herein pursuant to any of the
provisions set forth under Article XIV of
the Lease.
b. neither Tenant nor, to the best of Tenant's
knowledge, Landlord is in default under any
term, provision or condition of the Lease.
B. Subtenant
For valuable consideration, receipt of which is hereby
acknowledged, Subtenant:
1. Agrees:
a. that the Sublease Agreement, a true and
correct copy of which is attached hereto, is
expressly subject and subordinate to the
provisions of the Lease.
b. at the request of Landlord, to pay over to
Landlord all Rent and other sums due and
payable by Subtenant under the Sublease
Agreement. In no event shall Sublessee be
required to pay Rents due under this
Agreement to both Tenant and Landlord.
c. not to violate any of the terms, provisions,
conditions or requirements set forth in the
Lease, whether or not any of the same are
inconsistent with any terms or provisions of
the Sublease Agreement.
d. that it is not claiming any interest in the
Subleased Premises or the Premises other
than as a subtenant under the Sublease
Agreement.
e. that if the subletting as evidenced by the
Sublease Agreement terminates by reason of a
termination of the Lease, Landlord may, at
its option by delivering written
2
<PAGE> 69
notice to Subtenant, assume the obligations of
Tenant under the Sublease Agreement, in which
event Subtenant shall recognize and attorn to
Landlord as if it were the "sublessor" under the
Sublease.
2. Acknowledges that Landlord has not made any express
or implied oral or written representation or
promise that:
a. future assignments or subletting will be
approved.
b. Subtenant will enjoy financial success in
operating any business on the Premises.
c. it will grant any extension of the Term or
enter into any other modification of the Lease.
3. Acknowledges that it has been provided with a copy
of the Lease, together with all amendments, if any,
and that it has read the Lease and all amendments
and fully understands its obligations and
responsibilities under the Lease.
4. Represents and warrants to Landlord that all
information which it has provided to Tenant or
Landlord which Landlord has reviewed in connection
with its determination to consent to the subletting
described herein is true, accurate and complete,
and fairly and accurately represents the business,
condition and status of Subtenant.
5. The address of Subtenant's principal place of
business is:
---------------------------------------------------
---------------------------------------------------
Subtenant's Contact:
---------------------------------------------------
Telephone:
-----------------------------------------
IV. CONSENT.
For valuable consideration, including the agreements,
acknowledgments, and representations of Tenant and Subtenant set forth
above, Landlord consents to Tenant's subletting of the Subleased
Premises to Subtenant in accordance with the Sublease Agreement.
3
<PAGE> 70
V. GENERAL.
A. Attorney's fees
The provisions of the Lease respecting attorney's fees shall
apply to this Consent.
B. Authority to Execute Agreement
Each individual executing this Consent on behalf of a partnership
or corporation represents that he or she is duly authorized to execute and
deliver this Consent on behalf of the partnership and/or corporation and agrees
to deliver evidence of his or her authority to Landlord upon request by
Landlord.
C. Governing Law
This Consent and any enforcement of the agreements,
acknowledgments and representations of Assignor and Assignee set forth above
shall be governed by and construed in accordance with the laws of the State of
California.
D. Counterparts
If this Consent is executed in counterparts, each counterpart
shall be deemed an original.
4
<PAGE> 71
IN WITNESS WHEREOF, the parties hereto have executed this Consent
as of the date and year first above written.
TENANT SUBTENANT
CONTROL DATA SYSTEMS, INC. CBOOKS EXPRESS, INC.,
a Delaware corporation a California corporation
By: /s/ W. D. Seiler By: /s/ Chris MacAskill
--------------------------- ------------------------------
Name: W.D. Seiler Name: Chris MacAskill
--------------------------- ------------------------------
Its: Director, Real Estate Its: CEO 8/27/97
--------------------------- ------------------------------
LANDLORD
THE REALTY ASSOCIATES FUND III, L.P.
By: Realty Associates Fund III, GP,
Limited Partnership (its general
partner)
By: Realty Fund III GP, Inc.
(its general partner)
By:
-----------------------------------
Michael A. Ruane, Chairman or
Arthur I. Segel, President
5
<PAGE> 1
EXHIBIT 10.6
* CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTION HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
CBT SYSTEMS, LTD. AND COMPUTER LITERACY INC. AGREEMENT
This Agreement is entered as of this 7th day of March, 1998
("Effective Date") by and between CBT Systems, Ltd., having its principal place
of business at 1005 Hamilton Court, Menlo Park, California 94205 ("CBT") and
Computer Literacy Inc., a California corporation, having its principal place of
business at 1308 Orleans Drive, Sunnyvale, CA 94089 ("CL").
NOW THEREFORE, for good and valuable consideration, the
parties hereby agree as follows:
1. GRANT OF RIGHTS
1.1 License. Subject to the terms and conditions of this Agreement, CBT
hereby grants to CL a non-transferable, non-exclusive license to distribute
CBT's proprietary computer programs described on Exhibit A in object code format
(the "Courseware") and any documentation supporting the Courseware provided from
time to time by CBT (the "Documentation") solely to third parties ("End Users")
pursuant to a personal use, perpetual license for use on a single personal
computer. All copies of Courseware distributed by CL shall be distributed with
CBT's current End User License, as amended by CBT from time to time upon sixty
(60) days' notice to CL (the "End User License").
1.2 Exclusive. During the term of this agreement, CBT will not enter an
agreement with []* to distribute the Courseware or enter into an agreement with
a third party through which the Courseware is intended to be distributed to []*.
In exchange, during the term of this agreement, CL will not distribute computer
based training products branded by []* unless such branded product is []* that
is not []*.
1.3 Ownership. As between CBT and CL, CBT owns and retains all right,
title, and interest in and to the Courseware, Documentation, and all trademarks,
service marks or tradenames associated with the Courseware or Documentation (the
"Trademarks"), including all copyrights, patents, trade secret rights,
trademarks and other intellectual property rights therein. Except as expressly
granted herein, CBT does not grant to CL any right or license, either express or
implied, in the Courseware, Documentation, or Trademarks. CL shall not
disassemble, decompile, or otherwise attempt to derive source code from the
Courseware.
1.4 Minimum Commitment. CL agrees to purchase from CBT at least the
minimum quantity of the Courseware set forth on Exhibit B (the "Total Purchase
Commitment"). Annual Purchase Commitments for renewal terms, if any, shall be
determined by mutual agreement. Notwithstanding anything to the contrary
contained in this Agreement, CBT shall be entitled to terminate this Agreement
thirty (30) days after written notice to CL if CL fails to satisfy its Total
Purchase Commitment pursuant to the terms in Section 3.3.
2. CL'S OBLIGATIONS
2.1 CL's Marketing Obligations. CL will design and designate a CBT
partners' area on CL's web site for Prentice Hall customers that want to
purchase CBT's Courseware. CBT will direct users to this CBT partners' area
([]*) in promoting Bundled Prentice Hall Promotions. "Bundled Prentice Hall
Promotions" shall mean a product offering in which a Prentice Hall title is
bundled with CBT Courseware. Such referral shall be placed in a manner that will
direct a user of the Bundled Prentice Hall Promotion to go to the CBT partners'
area on CL's web site for any inquiries regarding the Courseware. CL shall not
make any representations or warranties other than those contained in the
Documentation and shall not make any representations or warranties on CBT's
behalf.
2.2 Trademarks. During the term of this Agreement, CL shall have the
right to use and reproduce the Trademarks in connection with CL's marketing,
advertising, promotion, and distribution of the Courseware. CL's
- ----------
* CONFIDENTIAL TREATMENT REQUESTED FOR REDACTED PORTION.
<PAGE> 2
use of the Trademarks shall not create any right, title or interest therein. CL
shall use the Trademarks only in a manner which complies in all material
respects with CBT's policies in effect from time to time and all such use shall
be for CBT's benefit. CL shall submit to CBT a representation of the Trademarks
that CL intends to use for any purpose for CBT's approval of design, color, and
other details prior to their initial use. CL shall not publish, disseminate,
exhibit, or otherwise distribute any material bearing such representations
without CBT's prior approval. CL shall not remove, obscure or alter CBT's
copyright notice or the Trademarks from the Courseware or Documentation. If CL,
in the course of distributing the Courseware, acquires any goodwill or
reputation in any of the Trademarks, all such goodwill or reputation shall
automatically vest in CBT when and as, on an on-going basis, such acquisition of
goodwill or reputation occurs, as well as at the expiration or termination of
this Agreement, without any separate payment or other consideration of any kind
to CL, and CL agrees to take all such actions necessary to effect such vesting.
CL shall not contest the validity of any of the Trademarks or CBT's exclusive
ownership of them. CL shall not adopt, use, or register, whether as a corporate
name, trademark, service mark or other indication of origin, any of the
Trademarks, or any word or mark confusingly similar to the Trademarks in any
jurisdiction.
2.3 Support for Courseware. CBT shall provide support to CL, upon
request, based upon its then customary support policies, at no charge. CBT shall
also provide training at CBT, at no charge to personnel of CL, as reasonably
necessary to enable CL to carry out its support obligations hereunder.
2.4 Compliance with Applicable Laws. CL shall comply with all laws and
regulations applicable to CL's performance and distribution of the Courseware
and Courseware hereunder. Without limiting the generality of the foregoing, CL
(a) shall not distribute the Courseware in any country where such distribution
would be unlawful; (b) shall comply with all Department of Commerce and other
United States exports controls regarding the license and delivery of technology
and products abroad including the Export Administration Act of 1979, as amended,
any successor legislation, and the Export Administration Regulations issued by
the Department of Commerce, Bureau of Export Administration. CL shall, at its
own expense, make, obtain, and maintain in force at all times during the term of
this Agreement, all filings, registrations, licenses, permits and authorizations
(collectively "Authorizations") in the Territory required for CL to perform its
obligations under this Agreement.
2.5 Protection of Proprietary Rights. CL shall not do anything to
compromise CBT's proprietary rights related to the Courseware, including without
limitation, CBT's copyrights, patent, trade secret, and trademark rights
("Proprietary Rights"), and will cooperate, at CBT's expense, in CBT's efforts
to protect its Proprietary Rights. CL shall promptly notify CBT of any known
infringements of CBT's Proprietary Rights that come to CL's attention. CBT shall
have the exclusive right to institute infringement or other appropriate legal
action against alleged prospective or actual infringers of its Proprietary
Rights. CBT shall incur all expenses in connection therewith and shall retain
all monetary recoveries received therefrom.
3. PRICE AND PAYMENT; SHIPMENT AND DELIVERY
3.1 Suggested End User Price. CL is free to determine its own End User
prices for the Courseware. Although CBT may publish suggested end user prices
for the Courseware from time to time, these are suggestions only.
3.2 Per Copy Fees. After CL's Courseware orders have exceeded the []*
Total Purchase Commitment set forth in Section 3.3, CL shall pay to CBT for each
copy of the Courseware shipped hereunder per copy fees (the "Per Copy Fees")
equal to []* of the suggested end user prices for the Courseware as set forth on
Exhibit B hereto, as adjusted by CBT from time to time in its sole discretion
("Suggested Prices"). In the event that CBT changes the Suggested Prices, Per
Copy Fees based on such changed Suggested Prices shall apply to any order for
the Courseware received by CBT after the effective date of the increase or
decrease. CBT shall provide CL with at least []* days written notice of any
increase in the Per Copy Fees.
3.3 Purchase Commitment. CL shall pay CBT []* of the Total Purchase
Commitment ([]*) within []* after execution of this Agreement. The next payment
shall be due on []* in the amount of []*. Starting on the first anniversary of
the effective date (the "First Anniversary") CL shall pay CBT []* on or before
the
- --------
* CONFIDENTIAL TREATMENT REQUESTED FOR REDACTED PORTION.
2
<PAGE> 3
end of each []* following the First Anniversary, and in no event later than the
dates set out in Exhibit B). Should CL's Courseware orders exceed the []*
commitment before the end of the two year term, CL will be required to pay the
balance of the []* before CBT ships additional Courseware. Upon shipment of
Courseware after the []* purchase commitment has been exceeded, CL will pay a
royalty for the Courseware on a []* basis, accompanied with a detailed royalty
statement. CL shall pay CBT a late charge on outstanding amounts due equal to
[]*. If CL fails to make payment when due, CBT reserves the right, in its
reasonable commercial judgement, to place CL on credit hold, in which case CBT
may cease CL's rights to fulfill orders. If CBT elects to suspend CL's rights to
fulfill orders, then CL's obligation to fulfill the Total Purchase Commitment
shall be suspended until the credit hold is released and when resumed, if the
suspension extends for a period longer than three months, the Payment Schedule
for the Total Purchase Commitment shall be equitably adjusted (as agreed between
the parties in good faith) in order to take into account the period in which CL
could not fulfill orders. All payments shall be made in United States dollars,
free of any withholding tax and of any currency control, or other restrictions
to CBT, at the address within the United States indicated by CBT to CL. Except
as provided in Section 4.2(a), []* CBT shall be []*.
3.4 Finder's Fee. CL is authorized to co-market with CBT through a
process in which CL may submit a co-marketing opportunity to CBT for
"co-marketing consideration". CBT agrees to co-market its products to CL
prospects/accounts in accordance with the following qualification criteria:
(a) The prospect/account cannot be an existing CBT client.
(b) The prospect/account cannot be currently engaged in a
sales cycle with CBT.
(c) The prospect/account cannot be an Affiliate (defined
below) of an existing CBT client if such existing client has an agreement with
CBT that allows the existing client to license the CBT product in question to
such prospect/account. An "Affiliate" of a party shall mean an entity directly
or indirectly controlling, controlled by or under common control with that party
where control means the ownership or control, directly or indirectly, of more
than fifty percent (50%) of all of the voting power of the shares (or other
securities or rights) entitled to vote for the election of directors or other
governing authority, as of the date of this Agreement or hereafter during the
term of this Agreement, provided that such entity shall be considered an
Affiliate only for the time during which such control exists.
(d) Fulfillment (order processing, shipping and invoicing) of
products will be done directly by CBT. CL will provide CBT with all of the
information required to process the order resulting from the co-marketing
engagement.
(e) Where the situation warrants, exceptions to the above
criteria, including leads to territories outside North America, may be requested
by CL; however, CBT will determine whether an exception request is permitted.
If the opportunity meets the qualification criteria, CL may then register the
opportunity with CBT and remove itself from further participation in the sales
cycle. CBT will then work directly with the End User to formulate a proposal.
If CBT enters into an agreement with the End User within []* days of opportunity
registration, CL will be paid a dollar amount ("Finder's Fee") equal to []* of
the []*, calculated as follows:
The total dollar value of the agreement which is due to be paid to CBT over the
term of the agreement as of the effective date of the agreement, will be
determined ("Contract Value"). The Contract Value will then be divided by the
number of years specified by the term of the agreement to determine the Annual
Value. []* the dollar amount []* shall be the Finder's Fee.
CBT will pay CL the Finder's Fee within thirty (30) days of CBT's receipt of
payment by the applicable End User for the amount representing the Annual Value
of the Agreement.
- ----------
* CONFIDENTIAL TREATMENT REQUESTED FOR REDACTED PORTION.
3
<PAGE> 4
3.5 Taxes, Tariffs, Fees. CBT's suggested end user prices and Per Copy
Fees do not include any national, state or local sales, use, value added or
other taxes, customs duties, or similar tariffs and fees which may be required
to be paid or collected upon the delivery of the Courseware or upon collection
of the prices for the Courseware or the Per Copy Fees. Should any tax or levy be
made, CL agrees to pay such tax or levy and indemnify CBT against any claim for
such amount. CL represents and warrants to CBT that all Courseware acquired
hereunder is for redistribution in the ordinary course of CL's business, and CL
agrees to provide CBT with appropriate resale certificate numbers and other
documentation satisfactory to the applicable taxing authorities to substantiate
any claim of exemption from any such taxes or fees.
3.6 Shipment and Delivery. CBT will keep CL informed of changes to the
bill of materials for the Courseware. Shipment and Delivery of the Courseware
and Documentation to CL shall be as set forth on Exhibit C.
3.7 Inventory Rotation. CL shall have the right to return unsold
inventory that has a ship date of no more than six (6) months prior to the date
of return in exchange for new inventory of the same or lesser value. CL will pay
all freight expenses incurred.
4. PROPRIETARY RIGHTS
4.1 Product Warranty. CBT warrants that for a period of []* days
following delivery to CL, the Courseware will perform substantially as set forth
in the Documentation and that the media on which the Courseware is furnished to
CL will be free from defects in materials and workmanship during normal use.
EXCEPT AS EXPRESSLY SET FORTH ABOVE, THE COURSEWARE AND DOCUMENTATION ARE
PROVIDED "AS IS". CBT HEREBY DISCLAIMS ALL OTHER WARRANTIES, EXPRESS, IMPLIED,
OR STATUTORY, INCLUDING WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
4.2 Proprietary Rights Indemnification.
(a) CBT shall indemnify CL and hold it harmless from any and
all damages, liabilities, costs and expenses (including but not limited to
reasonable attorneys' fees) incurred by CL as a result of any claim (or a claim
by an end user that is related to a claim) that the Courseware or the Trademarks
or any part thereof infringes any patent, copyright, trademark or trade secret
of any third party, provided that CL promptly notifies CBT in writing of any
such claim and CBT shall control and defend or settle any such claim at CBT's
expense and with CBT's choice of counsel. CL shall cooperate with CBT, at CBT's
expense, in defending or settling such claim and CL may join in defense with
counsel of its choice at its own expense. CL may not settle any claim without
CBT's prior written consent. Following notice of any claim with respect to which
CL believes itself entitled to indemnification under this section, CBT shall
have the right at its option and expense to (i) procure for CL and the End-Users
the right or license to use the Courseware as delivered; (ii) modify the
infringing materials so as to render them non-infringing; (iii) replace the
Courseware or parts thereof with other functionally equivalent software; or (iv)
if (i), (ii) and (iii), and each of them, are not commercially feasible,
terminate this Agreement and refund to CL amounts paid for unsold inventory,
which inventory CL shall promptly return to CBT.
(b) CBT shall have no liability for any infringement based on
(i) the use of the Courseware other than as set forth in the Documentation; (ii)
the modification of the Courseware by any party other than CBT if such
infringement would have been avoided by the use of the unmodified Courseware; or
(iii) the combination or use of the Courseware with other software, items or
processes not furnished by CBT if such infringement would have been avoided by
the use of the Courseware alone. If the Courseware being distributed infringes
an intellectual property right of a third party, CL shall have up to 90 days
(after a new release of the Courseware that does not infringe has been provided
to CL) to begin distribution of such new release. CBT shall have no liability or
obligation to indemnify pursuant to this Section for any infringement violation
due to use of Courseware by an end user that was not provided with a new release
within such ninety (90) day period. THIS SECTION 4.2 STATES
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* CONFIDENTIAL TREATMENT REQUESTED FOR REDACTED PORTION.
4
<PAGE> 5
CBT'S ENTIRE OBLIGATION WITH RESPECT TO ANY CLAIM REGARDING THE INTELLECTUAL
PROPERTY RIGHTS OF ANY THIRD PARTY.
4.3 LIMITATION OF LIABILITY. EXCEPT FOR A CLAIM PURSUANT TO SECTION
4.2, THE LIABILITY OF EITHER PARTY OR CBT'S LICENSORS, IF APPLICABLE, TO THE
OTHER PARTY OR TO ANY THIRD PARTY ARISING OUT OF THIS AGREEMENT, EXCEED THE
TOTAL AMOUNT ACTUALLY RECEIVED BY CBT HEREUNDER DURING THE PREVIOUS TWELVE (12)
MONTHS. NOTWITHSTANDING THE ABOVE, IN NO EVENT SHALL EITHER PARTY OR CBT'S
LICENSORS, IF APPLICABLE, BE LIABLE TO THE OTHER PARTY OR ANY THIRD PARTY FOR
LOSS OF DATA, COSTS OF PROCUREMENT OF SUBSTITUTE GOODS OR SERVICES, OR ANY
INDIRECT, INCIDENTAL, SPECIAL, OR CONSEQUENTIAL DAMAGES UNDER ANY CAUSE OF
ACTION, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
THIS LIMITATION SHALL APPLY NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF
ANY LIMITED REMEDY PROVIDED HEREIN.
5. TERM AND TERMINATION
5.1 Term of Agreement. The term of this Agreement shall commence on the
Effective Date and continue for a period of two (2) years. This agreement shall
automatically renew for additional one-year terms. Either party may terminate
this Agreement for convenience effective on any date on or after the date that
is twenty-five (25) months after the Effective Date, by giving at least thirty
(30) days' written notice of termination to the other party.
5.2 Automatic Termination. This Agreement shall terminate automatically
without notice and without further action by either party in the event that the
other party becomes insolvent (i.e. becomes unable to pay its debts in the
ordinary course of business as they come due) or makes an assignment of this
Agreement for the benefit of creditors.
5.3 Termination for Breach. This Agreement may be terminated by either
party in the event of a material breach of this Agreement by the other party
that is not cured within forty-five (45) days of written notice of such breach
delivered to such party.
5.4 Effect of Termination. Upon the expiration or termination of this
Agreement:
(a) Each party shall immediately pay to the other party all
accrued fees and any other amounts due to the other party hereunder.
(b) CL shall, within forty-five (45) days of such expiration
or termination (i) return to CBT all Demonstration Copies, any Master Copies
received hereunder, and all other material received from CBT and for which CL
has not paid CBT a per copy fee; (ii) erase any and all of the foregoing from
all computer memories and storage devices within CL's possession or control; and
(iii) provide CBT with a signed written statement certifying that it has
complied with the foregoing obligations.
(c) All rights and licenses granted by CBT hereunder shall
terminate, provided such termination shall not result in the termination of End
User Licenses for copies of the Courseware which have been purchased by End
Users.
(d) Notwithstanding the foregoing, upon the expiration or
termination of this Agreement for any reason other than CL's breach, CL may
distribute its existing inventory of Courseware for a period of []* after the
date of such expiration or termination. All applicable provisions of this
Agreement shall continue in force solely for the purpose of permitting CL to
distribute such existing inventory.
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* CONFIDENTIAL TREATMENT REQUESTED FOR REDACTED PORTION.
5
<PAGE> 6
(e) Sections 4, 5 and 6, and the reports and audit provisions
of Exhibit C, to the extent applicable, shall survive.
5.5 Limitation of Liability Upon Termination. In the event of
termination by either party in accordance with any of the provisions of this
Agreement, neither party shall be liable to the other because of such
termination for compensation, reimbursement or damages on account of the loss of
prospective profits or anticipated sales or on account of expenditures,
inventory, investments, leases or commitments in connection with the business or
goodwill of CBT or CL.
6. GENERAL PROVISIONS
6.1 This Agreement Controls. This Agreement shall control CL's
reproduction and distribution of the Courseware and Documentation. All different
or additional terms or conditions in any CL purchase order or similar document
shall be null and void.
6.2 Notices. All notices shall be given in writing and shall be
considered effective when (a) personally delivered, (b) upon confirmed receipt
if sent by electronic mail or facsimile; or (c) two (2) days after posting if
sent by registered private carrier (e.g. DHL, Federal Express, etc.). Notice
shall be sent to the parties at their respective addresses set forth above or to
such other address as either party may specify by written notice.
6.3 Merger; Amendment; Waiver. This Agreement, including the Exhibits
hereto, constitutes the final, complete, and exclusive agreement between the
parties with respect to the subject matter hereof and supersedes all prior or
contemporaneous agreements. No modification, amendment, or waiver of any
provision of this Agreement shall be effective unless in writing signed by both
parties. The failure or delay by either party in exercising any right, power or
remedy under this Agreement shall not operate as a waiver of any such right,
power or remedy.
6.4 Independent Contractor. CL is an independent contractor, and
nothing herein shall be construed to create an employer-employee, partnership,
joint venture, or agency relationship between the parties. CL shall have no
authority, right or power to create any obligation or responsibility on behalf
of CBT.
6.5 Assignment. Except to an entity that succeeds to all or
substantially all the assets or business of a party, neither party may assign
any of its rights or delegate any of its obligations hereunder, whether by
operation of law or otherwise, without the other party's prior written consent.
Notwithstanding the foregoing, if CL assigns this Agreement to a direct
competitor of CBT, CBT has the option to terminate this Agreement immediately.
Subject to the foregoing, this Agreement shall bind and inure to the benefit of
the parties, their respective successors and permitted assigns.
6.6 Severability. If any provision of this Agreement shall be held by a
court of competent jurisdiction to be contrary to law, such provision shall be
changed and interpreted so as to best accomplish the objectives of the original
provision to the fullest extent allowed by law and the remaining provisions of
this Agreement shall remain in full force and effect.
6.7 Governing Law. This Agreement shall be governed by and construed
under the laws of the State of California, excluding conflict of law provisions
and excluding the 1980 United Nations Convention on Contracts for the
International Sale of Goods. The parties consent to the personal and exclusive
jurisdiction of and venue in the state and federal courts of Santa Clara County,
California, U.S.A. for any disputes arising out of this Agreement.
6.9 Multiple Counterparts. This Agreement may be executed
simultaneously in two or more counterparts, each one of which shall be deemed an
original, but all of which shall constitute one and the same instrument.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of
the date first above written.
<TABLE>
<S> <C>
COMPUTER LITERACY INC. CBT SYSTEMS, LTD.
Name: /s/ Dennis Capovilla By: /s/ Richard Okumoto
------------------------------------------- --------------------------------------------
Title: V.P. Sales and Business Development Title: Vice President and Chief Financial Officer
------------------------------------------- --------------------------------------------
Date: 3/26/98 Date: 3/27/98
------------------------------------------- --------------------------------------------
</TABLE>
APPLICABLE ATTACHED EXHIBITS
Please Initial Below if attached:
(____) Exhibit A
(D.C.) Exhibit B
(D.C.) Exhibit C: Reproduction
7
<PAGE> 8
EXHIBIT A
COURSEWARE -
Name Version Language
DOCUMENTATION -
8
<PAGE> 9
EXHIBIT B
SUGGESTED PRICES FOR COURSEWARE - [PRICE LIST TO COME.]
TOTAL PURCHASE COMMITMENT - []*
PER COPY FEES - []*
PAYMENT SCHEDULE:
[]* Due within []* following Execution
[]* Due []*
[]* Due []*
[]* Due []*
[]* Due []*
[]* Due []*
- ----------
* CONFIDENTIAL TREATMENT REQUESTED FOR REDACTED PORTION.
9
<PAGE> 10
EXHIBIT C
REPRODUCTION
C-1 Additional Definitions.
"Master Copy" means the copy of the Courseware, which CL may use to make copies
of the Courseware under Section C-2.
C-2 Reproduction License. Subject to the terms and conditions of this Agreement,
CBT hereby grants to CL a non-transferable, non-exclusive license to make copies
of the Courseware from the Master Copy and to make copies of the End User
License and Documentation solely for distribution as part of the Courseware
pursuant to Section of the Agreement. CL may not sublicense the rights granted
in this Exhibit C.
C-3 Restrictions. The licenses granted to CL in Section C-2 above are expressly
conditioned upon CL's compliance with the following:
CL shall ensure that each copy of the Courseware is accompanied by one (1) copy
of the End User License. CL shall not alter, modify, change or replace the End
User License.
CL's FAILURE TO COMPLY WITH THE PROVISIONS OF THIS SECTION C-3 SHALL BE DEEMED A
MATERIAL BREACH OF THIS AGREEMENT.
C-4 Delivery. Within thirty (30) days after the Effective Date or at such other
time as the parties shall mutually agree, CBT shall deliver to CL one (1) Master
Copy and one (1) copy of the End User License.
C-5 Shipment Terms. All shipments hereunder shall be F.O.B. CBT's shipping
location (either CBT's address or that of third party fulfillment contractors),
freight collect, unless specified otherwise by CBT in writing.
C-6 Inspection. CL shall inspect all items upon arrival at their destination and
shall, within ten (10) days of arrival, give written notice to CBT of any claim
of damage or shortages. Should CL fail to give such notice, or fail to obtain an
extension to such ten (10) day period from CBT, the items shall be deemed to be
accepted by CL.
C-7 Reports. Within thirty (30) days after the end of each calendar quarter, and
at such other times as CBT may request, CL shall deliver to CBT a written fee
report certified as accurate by an authorized representative of CL which sets
forth for such calendar quarter the number of copies of the Courseware
distributed and the number of copies of the Courseware reproduced by CL.
C-8 Audit. CL shall use reasonable efforts to make and keep materially accurate
records of all reproduction and distribution of the Courseware under this
Agreement. Upon reasonable notice and at CBT's expense, CBT may appoint an
independent certified public accountant to inspect, copy, and audit CL's
relevant sales and accounting records to ensure compliance with the payment
terms of this Agreement. Such inspection and audit shall be at CL's office
during normal business hours upon at least fourteen (14) days prior notice and
shall not interfere unreasonably with CL's business activities. Inspections and
audits shall be made no more frequently than twice a year. In the event any such
audit reveals underpayment of more than five percent (5%) of amounts payable to
CBT during the period subject to audit, CL shall pay the cost of such audit in
addition to the amounts due.
10
<PAGE> 11
ADDENDUM TO
CBT SYSTEMS, LTD. AND COMPUTER LITERACY, INC. AGREEMENT
This Addendum is entered as of this first day of June, 1998
(the "Addendum Effective Date") with respect to that certain Agreement, dated
March 7, 1998, by and between CBT Systems, Ltd., a Delaware corporation, with a
principal place of business at 1005 Hamilton Court, Menlo Park, California,
94205 ("CBT") and Computer Literacy, Inc., a California corporation, having its
principal place of business at 1308 Orleans Drive, Sunnyvale, California, 94089
("CL") (the "Agreement"). Except as set forth in this Addendum all terms and
provisions of the Agreement shall remain in full force and effect. Capitalized
terms not otherwise defined herein shall have the meaning given to them in the
Agreement.
WHEREAS CBT and SAP America, Inc. ("SAP") have an agreement
providing for the development and distribution of CBT interactive educational
software to deliver training with respect to SAP products ("SAP CBT
Courseware"), and CBT and SAP desire to extend that agreement to provide for
marketing and distribution of SAP Courseware by means of an Internet website
that features both parties' logos and trademarks; and
WHEREAS CBT and CL desire to enter into an agreement to
provide for the distribution of SAP CBT Courseware and other SAP-related
Courseware owned or developed by CBT (collectively "SAP Courseware") by means of
a website hosted by CL that is designated as a site jointly maintained by CBT,
SAP and CL.
NOW, THEREFORE, for good and valuable consideration, the
parties hereto agree as follows:
1. CL will use reasonable efforts to create, host, and maintain
an Internet website on which SAP Courseware which CBT owns or develops is
promoted and which features the logos and trademarks of each of CBT, SAP and CL
(the "Co-Branded Website"). CL agrees that the Co-Branded Website will present a
professional look and feel, and provide editorial content and guidance to
visitors to the Co-Branded Website except as expressly set forth to the contrary
within this Addendum, SAP Courseware shall be deemed "Courseware" for purposes
of the Agreement.
2. CBT hereby grants CL the worldwide right and license to
market and distribute SAP Courseware on the Co-Branded Website, including CBT's
SAP-related Courseware that CL is currently authorized to distribute pursuant to
the Agreement, and to fulfill customer orders submitted electronically thereto.
3. CL agrees to provide electronic "links" from CL's proprietary
Internet website to the Co-Branded Website and to monitor and report when orders
for SAP Courseware submitted to the Co-Branded Website have originated from CL's
website or from either the respective proprietary website of CBT or SAP.
4. CL will provide quarterly customized electronic reporting to
CBT for sales pursuant to the Co-Branded Website. The reports will include, if
such information is reasonably available to CL, information regarding sales by
title, by state and by country, as well as the origin and generation of such
sales, such as by link from the proprietary website of CBT, CL or SAP. In
addition, CL will use reasonable efforts provide complete "webographics:"
click-thru analysis by day, by link, and by title. The appropriate format will
be determined in conjunction with CBT to ensure smooth data transfer and minimal
reformatting effort. CL will submit the agreed quarterly reports to CBT no later
than thirty (30) days from the end of a calendar quarter.
11
<PAGE> 12
5. CL will provide CBT with a dedicated point of contact who
will be responsible for managing all ongoing efforts between the two parties,
including account management, product selection, marketing and merchandising
efforts, and ongoing process improvements.
6. CBT shall incur and ensure that CL has the right to use and
reproduce the SAP's trademarks in connection with marketing, advertising,
promotions and distribution of the SAP Courseware. In addition, SAP's trademark
shall be deemed "Trademarks" for purposes of the Agreement.
7. Notwithstanding the Per Copy Fees set forth in the Agreement,
CL and CBT agree that the amount to be paid by CL to CBT for SAP Courseware
ordered and fulfilled in connection with the Co-Branded Website will be as
follows: CL shall pay CBT []* for all sales of the SAP Courseware orders
fulfilled by CL. In addition, if an SAP Courseware order is generated from a
user placing an order from http://www.clbooks.com/sap, CL shall pay CBT []* as a
referral fee for such sale.
8. The foregoing payment shall be the only payment made to CBT
in relation to the specific SAP Courseware ordered. Furthermore, any payments
made pursuant to this Addendum shall count towards calculating units for the
Total Purchase Commitment.
9. Unless extended by mutual written agreement, this Addendum
will terminate nine (9) months from the Effective Date.
10. THE CO-BRANDED WEBSITE IS PROVIDED "AS-IS". CL HEREBY
DISCLAIMS ALL OTHER WARRANTIES, EXPRESSED OR IMPLIED OR STATUTORY, INCLUDING
WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS, FOR A
PARTICULAR PURPOSE OR NONINFRINGEMENT.
IN WITNESS WHEREOF, the parties hereto have signed this
Agreement as of the date first above written.
COMPUTER LITERACY INC. CBT SYSTEMS USA, LTD.
By: __________________________ By: ______________________________
Title: _______________________ Title: ___________________________
Date: ________________________ Date: ____________________________
- ----------
* CONFIDENTIAL TREATMENT REQUESTED FOR REDACTED PORTION.
12
<PAGE> 13
ADDENDUM NO. 2 TO
AGREEMENT
BETWEEN
CBT SYSTEMS, LTD. AND COMPUTER LITERACY, INC.
This Addendum No. 2 (the "Addendum") is entered as of this
20th day of June, 1998 with respect to that certain Agreement, dated March 7,
1998 (the "Distribution Agreement"), by and between CBT Systems, Ltd., a
Delaware corporation, with a principal place of business at 1005 Hamilton Court,
Menlo Park, California 94205 ("CBT") and Computer Literacy, Inc., a California
corporation, having its principal place of business at 1308 Orleans Drive,
Sunnyvale, California 94089 ("CL"). Except as set forth in this Addendum, all
terms and provisions of the Distribution Agreement shall remain in full force
and effect. Capitalized terms not otherwise defined herein shall have the
meaning given to them in the Distribution Agreement.
WHEREAS CBT and CL desire to amend the Distribution Agreement to expand CL's
distribution rights and increase CL's purchase commitment,
NOW, THEREFORE, for good and valuable consideration, the parties hereto agree as
follows:
1. Right to Distribute Pursuant to Multi-User Licenses. The first sentence of
Section 1.1 of the Distribution Agreement shall be amended and restated to read
in its entirety as follows:
"1.1 License. Subject to the terms and conditions of this Agreement,
CBT hereby grants to CL a non-transferable, non-exclusive license to distribute
CBT's proprietary computer programs described on Exhibit A in object code format
(the "Courseware") and any documentation supporting the Courseware provided from
time to time by CBT (the "Documentation") to third parties ("End Users")
pursuant to either a personal use, perpetual license for use on a single
personal computer or pursuant to a multi-user license for a maximum of []* on a
stand-alone computer or network node."
2. []* Minimum Commitment. The amount stated as the Total Purchase Commitment in
Section 3.3 of the Distribution Agreement shall be changed from []* to []*, and
the payment schedule attached as Exhibit B shall replace Exhibit B to the
Distribution Agreement. The third and fourth sentences of Section 3.3 shall be
deleted and replaced by the following:
"3.3 Purchase Commitment. . . . Starting on the first anniversary of
the Effective Date (the "First Anniversary") CL shall pay CBT the remaining
amount of the Total Purchase Commitment in installments in the amounts and on or
before the dates set out in Exhibit B. Should CL's Courseware orders exceed the
[]* Total Purchase Commitment before the end of the []*, CL will be required to
pay the balance of the []* before CBT ships additional Courseware. . ."
3. Further Discounts in Per Copy Fees Upon Reaching Certain Targets;
Co-Marketing Expenditures. Section 3.2 of the Distribution Agreement shall be
amended by adding the following sentences:
"3.2 Per Copy Fees. . . . If CL's Courseware orders have exceeded []*
by []*, a number that reflects []* of the revenue target CBT has set for CL's
distribution activities, CL's Per Copy Fees in the []* of the term shall be
reduced by []*, resulting in []* Per Copy Fees commencing with Courseware orders
placed after []*. []* shall []* in an []* this additional discount over the
period from []* through []*. To illustrate: if CL's Per Copy Fees in the third
year of the term of the Distribution Agreement equal []* after
- ----------
* CONFIDENTIAL TREATMENT REQUESTED FOR REDACTED PORTION.
13
<PAGE> 14
the additional discount is applied to Courseware orders in the amount of []*
before the discount, []* shall []* CBT products in that same period."
4. Extension of Initial Term. Section 5.1 of the Distribution Agreement shall be
amended and restated to read in its entirety as follows:
"5.1 Term of Agreement. The term of this Agreement shall commence on
the Effective Date and continue for a period of three years and three months
(the "Initial Term"), terminating on June 20, 2001. This Agreement shall
automatically renew for additional one-year terms -- unless terminated by either
party at least one hundred and eighty (180) days prior to the end of the current
term; provided however, that early termination of the Initial Term, will not
reduce CL's total Purchase Commitment or change agreed payment terms therefor."
5. Exhibit B. Exhibit B shall be amended and restated as set forth in the
Attachment to this Amendment.
IN WITNESS WHEREOF, the parties hereto have signed this
Agreement as of the date first above written.
<TABLE>
<S> <C>
COMPUTER LITERACY INC. CBT SYSTEMS USA, LTD.
By: /s/ Dennis Capovilla By: /s/ Richard Okumoto
---------------------------------- -------------------------------------------
Title: Vice President Title: Vice President and Chief Financial Officer
---------------------------------- -------------------------------------------
Date: 6/22/98 Date: 6/24/98
---------------------------------- -------------------------------------------
</TABLE>
- ----------
* CONFIDENTIAL TREATMENT REQUESTED FOR REDACTED PORTION.
14
<PAGE> 15
ATTACHMENT
EXHIBIT B
TOTAL PURCHASE COMMITMENT - []*
AMOUNT PAID TO DATE: []*
PAYMENT SCHEDULE FOR REMAINING []*:
[]* DUE []*
[]* DUE []*
[]* DUE []*
[]* DUE []*
[]* DUE []*
[]* DUE []*
[]* DUE []*
[]* []*
[]* []*
- ----------
* CONFIDENTIAL TREATMENT REQUESTED FOR REDACTED PORTION.
15
<PAGE> 1
EXHIBIT 10.7
EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into as of December 18, 1996, by and between
CHRISTOPHER MACASKILL (the "Employee") and CBOOKS EXPRESS, INC., a California
corporation (the "Company").
1. Term of Employment.
(a) Basic Rule. The Company agrees to continue the Employee's
employment, and the Employee agrees to remain in employment with the Company,
from the date of this Agreement until the date when the Employee's employment
terminates pursuant to Subsection (b), (c) or (d) below.
(b) Without Cause. Subject to Section 7, the Company may terminate the
Employee's employment at any time and for any reason by giving the Employee 30
days' advance notice in writing. The Employee may terminate his employment by
giving the Company 30 days' advance notice in writing. The Employee's employment
shall terminate automatically in the event of his death. Any waiver of notice
shall be valid only if it is made in writing and expressly refers to the
applicable notice requirement of this Section 1.
(c) Cause. The Company may terminate the Employee's employment at any
time for Cause. For all purposes under this Agreement, "Cause" shall mean (i) a
failure by the Employee to perform any of his duties hereunder, other than a
failure resulting from the Employee's complete or partial incapacity due to
physical or mental illness or impairment, (ii) any other breach by the Employee
of his obligations hereunder, (iii) gross misconduct or fraud or (iv) conviction
of, or a plea of "guilty" or "no contest" to, a felony.
(d) Disability. The Company may terminate the Employee's active
employment due to Disability by giving the Employee 30 days' advance notice in
writing. For all purposes under this Agreement, "Disability" shall mean that the
Employee, at the time notice is given, has failed to perform his duties under
this Agreement for a period of not less than three consecutive months as the
result of his incapacity due to physical or mental illness. In the event that
the Employee resumes the performance of substantially all of his duties
hereunder before the termination of his active employment under this Subsection
(d) becomes effective, the notice of termination shall automatically be deemed
to have been revoked.
(e) Rights Upon Termination. Except as expressly provided in Section 7,
upon the termination of the Employee's employment pursuant to this Section 1,
the Employee shall only be entitled to the compensation, benefits and
reimbursements described in Sections 3, 4 and 5 for the period preceding the
effective date of the termination. The payments under this Agreement shall fully
discharge all responsibilities of the Company to the Employee.
(f) Termination of Agreement. This Agreement shall terminate when all
obligations of the parties hereunder have been satisfied.
<PAGE> 2
2. Duties and Scope of Employment.
(a) Position. The Company agrees to employ the Employee as its President
for the term of his employment under this Agreement ("Employment").
(b) Obligations. During the term of his Employment, the Employee shall
devote his full business efforts and time to the Company and its subsidiaries
(if any). He shall not render services to any other person or entity without the
express prior approval of the Company's Board of Directors.
3. Salary. During the term of his Employment, the Company agrees to pay
the Employee as compensation for his services a base salary at the annual rate
of $80,000 or at such higher rate as the Company may determine from time to
time. Such salary shall be payable in accordance with the Company's standard
payroll procedures. The annual compensation specified in this Section, together
with any increases in such compensation that the Company may grant from time to
time, is referred to in this Agreement as "Base Compensation."
4. Employee Benefits and Vacation. During the term of his Employment,
the Employee shall be eligible to participate in the employee benefit and group
insurance plans maintained by the Company, subject in each case to the generally
applicable terms and conditions of the plan in question and to the
determinations of any person or committee administering such plan. During the
term of his Employment, the Employee shall also accrue paid vacation in
accordance with the Company's standard vacation policy.
5. Business Expenses. During the term of his Employment, the Employee
shall be authorized to incur necessary and reasonable travel, entertainment and
other business expenses in connection with his duties hereunder. The Company
shall reimburse the Employee for such expenses upon presentation of an itemized
account and appropriate supporting documentation, all in accordance with the
Company's generally applicable policies.
6. Vesting Under Stock Purchase Agreement. Section 3.1(b) of the Stock
Purchase Agreement entered into as of June 12, 1995, by the Company, the
Employee and Kim Orumchian, as amended as of September 26, 1996, shall be
amended further by adding at the end thereof the following new language:
"In the event that the Corporation is subject to a Change in Control, an
additional portion of the Shares issued to the Purchasers under this
Agreement shall become Vested. Such portion shall be the greater of:
(i) 50% of the Shares then remaining vested; or
(ii) the number of Shares that would have become vested during the
12-month period next following the Change in Control.
For purposes of this Agreement, `Change in Control' shall mean:
(i) The consummation of a merger or consolidation of the Corporation with or
into another entity or any other corporate reorganization, if more than
50% of the combined voting power of the continuing or surviving entity's
securities
2
<PAGE> 3
outstanding immediately after such merger, consolidation or other
reorganization is owned by persons who were not stockholders of the
Corporation immediately prior to such merger, consolidation or other
reorganization; or
(ii)The sale, transfer or other disposition of all or substantially all of
the Corporation's assets.
A transaction shall not constitute a Change in Control if its sole purpose
is to change the state of the Corporation's incorporation or to create a
holding company that will be owned in substantially the same proportions by
the persons who held the Corporation's securities immediately before such
transaction."
7. Involuntary Termination. The Company shall continue to pay the
Employee's Base Compensation, at the annual rate then in effect, for six months
if the Company terminates the Employee's Employment without his consent for any
reason other than Cause or Disability after the closing of the sale of the
Company's Series B Preferred Stock (the "Closing"). The payments under this
Section 7 shall cease in the event of the Employee's death.
8. Successors.
(a) Company's Successors. This Agreement shall be binding upon any
successor (whether direct or indirect and whether by purchase, lease, merger,
consolidation, liquidation or otherwise) to all or substantially all of the
Company's business and/or assets. For all purposes under this Agreement, the
term "Company" shall include any successor to the Company's business and/or
assets which becomes bound by this Agreement.
(b) Employee's Successors. This Agreement and all rights of the Employee
hereunder shall inure to the benefit of, and be enforceable by, the Employee's
personal or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
9. Nondisclosure. Prior to the commencement of Employee's Employment,
Employee shall enter into a Confidentiality and Proprietary Rights Agreement
with the Company.
10. Miscellaneous Provisions.
(a) Notice. Notices and all other communications contemplated by this
Agreement shall be in writing and shall be deemed to have been duly given when
personally delivered or when mailed by U.S. registered mail, return receipt
requested and postage prepaid. In the case of the Employee, mailed notices shall
be addressed to him at the home address which he most recently communicated to
the Company in writing. In the case of the Company, mailed notices shall be
addressed to its corporate headquarters, and all notices shall be directed to
the attention of its Secretary.
(b) Waiver. No provision of this Agreement shall be modified, waived or
discharged unless the modification, waiver or discharge is agreed to in writing
and signed by the Employee and by an authorized officer of the Company (other
than the Employee). No waiver by either party of any breach of, or of compliance
with, any condition or provision of this Agreement
3
<PAGE> 4
by the other party shall be considered a waiver of any other condition or
provision or of the same condition or provision at another time.
(c) Whole Agreement; Modifications. No agreements, representations or
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into by
either party with respect to the subject matter hereof. A modification of this
Agreement shall be valid only if it is made in writing and executed by both
parties hereto.
(d) Withholding Taxes. All payments made under this Agreement shall be
subject to reduction to reflect taxes or other charges required to be withheld
by law.
(e) Choice of Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California (except their provisions governing the choice of law).
(f) Severability. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability of
any other provision hereof, which shall remain in full force and effect.
(g) Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or the breach thereof, shall be settled by arbitration in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association, and judgment on the award rendered by the arbitrator may be entered
in any court having jurisdiction thereof. All fees and expenses of the
arbitrator and such Association shall be paid equally by the parties.
(h) No Assignment. The rights of any person to payments or benefits
under this Agreement shall not be made subject to option or assignment, either
by voluntary or involuntary assignment or by operation of law, including
(without limitation) bankruptcy, garnishment, attachment or other creditor's
process, and any action in violation of this Subsection (h) shall be void.
(i) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
4
<PAGE> 5
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in
the case of the Company by its duly authorized officer, as of the day and year
first above written.
/s/ Chris MacAskill
--------------------------------
Employee
CBOOKS EXPRESS, INC.
By: /s/ Kim Orumchian
-----------------------------
<PAGE> 6
AMENDMENT TO THE EMPLOYMENT AGREEMENT
THIS AMENDMENT TO THE EMPLOYMENT AGREEMENT is entered into and
effective as of May 30, 1997, by and between CHRIS MACASKILL (the "Employee")
and CBOOKS EXPRESS, INC., a California corporation (the "Company").
WHEREAS, the parties hereto have previously entered into that
certain Employment Agreement by and between the parties hereto dated as December
18, 1996 (the "Prior Agreement") and desire to amend Section 7 of the Prior
Agreement in its entirety with the following provision.
NOW THEREFORE, The Parties hereto hereby agree as follows:
1. Section 7 of the Prior Agreement shall be amended in its entirety to read:
7. Involuntary Termination. The Company shall continue to pay the
Employee's Base Compensation, at the annual rate then in effect, for six months
from the date the Company provides notice to the Employee pursuant to Section 1
if the Company terminates the Employee's Employment without his consent for any
reason other than Cause or Disability. The payments under this Section 7 shall
cease in the event of the Employee's death. For the first three months following
the notice to the Employee pursuant to Section 1, the payments due under this
Section 7 shall be made to the Employee in monthly installments based on the
Employee's Base Compensation for that respective month. For the remaining three
months, the payments due under this Section 7 shall be paid to the Employee in
monthly installments based on the Employee's Base Compensation; provided,
however that the monthly payment due to the Employee for these remaining three
months shall be reduced for that specific monthly period by an amount, if any,
equal to the compensation received for that specific monthly period by the
Employee from an employer (other than the Company) who has hired the Employee
following his termination from the Company.
2. This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
3. Other than as specifically set forth herein, the Prior Agreement shall remain
in full force and effect.
<PAGE> 7
IN WITNESS WHEREOF, each of the parties has executed this
Amendment to the Employment Agreement, in the case of the Company by its duly
authorized officer, as of the day and year first above written.
/s/ Chris MacAskill
------------------------------------
Chris MacAskill
CBOOKS EXPRESS, INC.
By: /s/ Kim Orumchian
---------------------------------
Title: Vice President Engineering
-------------------------------
<PAGE> 1
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into and effective as of December
18, 1996, by and between KIM ORUMCHIAN (the "Employee") and CBOOKS EXPRESS,
INC., a California corporation (the "Company").
1. Term of Employment.
(a) Basic Rule. The Company agrees to continue the Employee's
employment, and the Employee agrees to remain in employment with the Company,
from the date of this Agreement until the date when the Employee's employment
terminates pursuant to Subsection (b), (c) or (d) below.
(b) Without Cause. Subject to Section 7, the Company may
terminate the Employee's employment at any time and for any reason by giving the
Employee 30 days' advance notice in writing. The Employee may terminate his
employment by giving the Company 30 days' advance notice in writing. The
Employee's employment shall terminate automatically in the event of his death.
Any waiver of notice shall be valid only if it is made in writing and expressly
refers to the applicable notice requirement of this Section 1.
(c) Cause. The Company may terminate the Employee's employment
at any time for Cause. For all purposes under this Agreement, "Cause" shall mean
(i) a failure by the Employee to perform any of his duties hereunder, other than
a failure resulting from the Employee's complete or partial incapacity due to
physical or mental illness or impairment, which failure persists unreasonably
after notification by the Company, (ii) any other breach by the Employee of his
obligations hereunder, (iii) gross misconduct or fraud or (iv) conviction of, or
a plea of "guilty" or "no contest" to, a felony.
(d) Disability. The Company may terminate the Employee's
active employment due to Disability by giving the Employee 30 days' advance
notice in writing. For all purposes under this Agreement, "Disability" shall
mean that the Employee, at the time notice is given, has failed to perform his
duties under this Agreement for a period of not less than three consecutive
months as the result of his incapacity due to physical or mental illness. In the
event that the Employee resumes the performance of substantially all of his
duties hereunder before the termination of his active employment under this
Subsection (d) becomes effective, the notice of termination shall automatically
be deemed to have been revoked.
(e) Rights Upon Termination. Except as expressly provided in
Section 7, upon the termination of the Employee's employment pursuant to this
Section 1, the Employee shall only be entitled to the compensation, benefits and
reimbursements described in Sections 3, 4 and 5 for the period preceding the
effective date of the termination. The payments under this Agreement shall fully
discharge all responsibilities of the Company to the Employee.
(f) Termination of Agreement. This Agreement shall terminate
when all obligations of the parties hereunder have been satisfied.
<PAGE> 2
2. Duties and Scope of Employment.
(a) Position. The Company agrees to employ the Employee as its
Vice President for the term of his employment under this Agreement
("Employment").
(b) Obligations. During the term of his Employment, the
Employee shall devote his full business efforts and time to the Company and its
subsidiaries (if any). He shall not render services to any other person or
entity without the express prior approval of the Company's Board of Directors.
3. Salary. During the term of his Employment, the Company
agrees to pay the Employee as compensation for his services a base salary at the
annual rate of $80,000 or at such higher rate as the Company may determine from
time to time. Such salary shall be payable in accordance with the Company's
standard payroll procedures. The annual compensation specified in this Section,
together with any increases in such compensation that the Company may grant from
time to time, is referred to in this Agreement as "Base Compensation."
4. Employee Benefits and Vacation. During the term of his
Employment, the Employee shall be eligible to participate in the employee
benefit and group insurance plans maintained by the Company, subject in each
case to the generally applicable terms and conditions of the plan in question
and to the determinations of any person or committee administering such plan.
During the term of his Employment, the Employee shall also accrue paid vacation
in accordance with the Company's standard vacation policy.
5. Business Expenses. During the term of his Employment, the
Employee shall be authorized to incur necessary and reasonable travel,
entertainment and other business expenses in connection with his duties
hereunder. The Company shall reimburse the Employee for such expenses upon
presentation of an itemized account and appropriate supporting documentation,
all in accordance with the Company's generally applicable policies.
6. Vesting Under Stock Purchase Agreement. Section 3.1(b) of
the Stock Purchase Agreement entered into as of June 12, 1995, by the Company,
the Employee and Christopher MacAskill, as amended as of September 26, 1996,
shall be amended further by adding at the end thereof the following new
language:
"In the event that the Corporation is subject to a Change in Control, an
additional portion of the Shares issued to the Purchasers under this
Agreement shall become Vested. Such portion shall be the greater of:
(i) 50% of the Shares then remaining vested; or
(ii) the number of Shares that would have become vested during the
12-month period next following the Change in Control.
For purposes of this Agreement, 'Change in Control' shall mean:
(a) The consummation of a merger or consolidation of the Corporation
with or into another entity or any other corporate reorganization,
if more than 50% of
2
<PAGE> 3
the combined voting power of the continuing or surviving entity's
securities outstanding immediately after such merger,
consolidation or other reorganization is owned by persons who were
not stockholders of the Corporation immediately prior to such
merger, consolidation or other reorganization; or
(b) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets.
A transaction shall not constitute a Change in Control if its sole purpose
is to change the state of the Corporation's incorporation or to create a
holding company that will be owned in substantially the same proportions by
the persons who held the Corporation's securities immediately before such
transaction."
7. Involuntary Termination. The Company shall continue to pay
the Employee's Base Compensation, at the annual rate then in effect, for six
months if the Company terminates the Employee's Employment without his consent
for any reason other than Cause or Disability after the closing of the sale of
the Company's Series B Preferred Stock (the "Closing"). The payments under this
Section 7 shall cease in the event of the Employee's death.
8. Successors.
(a) Company's Successors. This Agreement shall be binding upon
any successor (whether direct or indirect and whether by purchase, lease,
merger, consolidation, liquidation or otherwise) to all or substantially all of
the Company's business and/or assets. For all purposes under this Agreement, the
term "Company" shall include any successor to the Company's business and/or
assets which becomes bound by this Agreement.
(b) Employee's Successors. This Agreement and all rights of
the Employee hereunder shall inure to the benefit of, and be enforceable by, the
Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
9. Nondisclosure. Prior to the commencement of Employee's
Employment, Employee shall enter into a Confidentiality and Proprietary Rights
Agreement with the Company.
10. Miscellaneous Provisions.
(a) Notice. Notices and all other communications contemplated
by this Agreement shall be in writing and shall be deemed to have been duly
given when personally delivered or when mailed by U.S. registered mail, return
receipt requested and postage prepaid. In the case of the Employee, mailed
notices shall be addressed to him at the home address which he most recently
communicated to the Company in writing. In the case of the Company, mailed
notices shall be addressed to its corporate headquarters, and all notices shall
be directed to the attention of its Secretary.
(b) Waiver. No provision of this Agreement shall be modified,
waived or discharged unless the modification, waiver or discharge is agreed to
in writing and signed by the Employee and by an authorized officer of the
Company (other than the Employee). No waiver by either party of any breach of,
or of compliance with, any condition or provision of this Agreement
3
<PAGE> 4
by the other party shall be considered a waiver of any other condition or
provision or of the same condition or provision at another time.
(c) Whole Agreement; Modifications. No agreements,
representations or understandings (whether oral or written and whether express
or implied) which are not expressly set forth in this Agreement have been made
or entered into by either party with respect to the subject matter hereof. A
modification of this Agreement shall be valid only if it is made in writing and
executed by both parties hereto.
(d) Withholding Taxes. All payments made under this Agreement
shall be subject to reduction to reflect taxes or other charges required to be
withheld by law.
(e) Choice of Law. The validity, interpretation, construction
and performance of this Agreement shall be governed by the laws of the State of
California (except their provisions governing the choice of law).
(f) Severability. The invalidity or unenforceability of any
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full force
and effect.
(g) Arbitration. Any controversy or claim arising out of or
relating to this Agreement, or the breach thereof, shall be settled by
arbitration in accordance with the Commercial Arbitration Rules of the American
Arbitration Association, and judgment on the award rendered by the arbitrator
may be entered in any court having jurisdiction thereof. All fees and expenses
of the arbitrator and such Association shall be paid equally by the parties.
(h) No Assignment. The rights of any person to payments or
benefits under this Agreement shall not be made subject to option or assignment,
either by voluntary or involuntary assignment or by operation of law, including
(without limitation) bankruptcy, garnishment, attachment or other creditor's
process, and any action in violation of this Subsection (h) shall be void.
(i) Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
4
<PAGE> 5
IN WITNESS WHEREOF, each of the parties has executed this
Agreement, in the case of the Company by its duly authorized officer, as of the
day and year first above written.
/s/ Kim Orumchian
---------------------------
Employee
CBOOKS EXPRESS, INC.
By: /s/ Chris MacAskill
------------------------
<PAGE> 6
AMENDMENT TO THE EMPLOYMENT AGREEMENT
THIS AMENDMENT TO THE EMPLOYMENT AGREEMENT is entered into and
effective as of May 30, 1997, by and between KIM ORUMCHIAN (the "Employee") and
CBOOKS EXPRESS, INC., a California corporation (the "Company").
WHEREAS, the parties hereto have previously entered into that
certain Employment Agreement by and between the parties hereto dated as December
18, 1996 (the "Prior Agreement") and desire to amend Section 7 of the Prior
Agreement in its entirety with the following provision.
NOW THEREFORE, The Parties hereto hereby agree as follows:
1. Section 7 of the Prior Agreement shall be amended in its entirety to read:
7. Involuntary Termination. The Company shall continue to pay the
Employee's Base Compensation, at the annual rate then in effect, for six months
from the date the Company provides notice to the Employee pursuant to Section 1
if the Company terminates the Employee's Employment without his consent for any
reason other than Cause or Disability. The payments under this Section 7 shall
cease in the event of the Employee's death. For the first three months following
the notice to the Employee pursuant to Section 1, the payments due under this
Section 7 shall be made to the Employee in monthly installments based on the
Employee's Base Compensation for that respective month. For the remaining three
months, the payments due under this Section 7 shall be paid to the Employee in
monthly installments based on the Employee's Base Compensation; provided,
however that the monthly payment due to the Employee for these remaining three
months shall be reduced for that specific monthly period by an amount, if any,
equal to the compensation received for that specific monthly period by the
Employee from an employer (other than the Company) who has hired the Employee
following his termination from the Company.
2. This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
3. Other than as specifically set forth herein, the Prior Agreement shall remain
in full force and effect.
<PAGE> 7
IN WITNESS WHEREOF, each of the parties has executed this
Amendment to the Employment Agreement, in the case of the Company by its duly
authorized officer, as of the day and year first above written.
/s/ Kim Orumchian
------------------------------------
Kim Orumchian
CBOOKS EXPRESS, INC.
By: /s/ Chris MacAskill
---------------------------------
Title: President
------------------------------
<PAGE> 1
EXHIBIT 10.9
October 2, 1997
Mr. Riki Tokuno
8040 S.W. Churchill Court
Tigard, Oregon 97224
I am please to extend this offer to you to join Computer Literacy as Vice
President of Retail Operations and Chief Operating Officer. Details of the offer
are as follows:
I. Reimbursement for Relocation Expenses
A. House Hunting Trips
To assist the employee in finding living quarters at the new location, the
Company will reimburse expenses for:
1. Actual transportation costs for employee and family for two trips to the San
Jose area. It is expected that employee will use the most economical fares
available.
2. Hotel and car rental expenses for a maximum of ten days.
3. Meals to a maximum of $25 per person per day.
B. Temporary Living Expenses
The Company will reimburse normal and reasonable living expenses in a fully
furnished home or apartment to a maximum of 90 days from the date of permanent
arrival to the San Jose area.
C. Expenses for Moving and Storing Household Goods and Automobile
The Company will pay the costs of packing, loading, moving, unloading, and
unpacking relating to the relocation. All household goods will be moved by a
reputable common carrier moving company.
The Company will pay the costs of transporting one automobile.
The Company will pay the costs of storage of household goods to a maximum of 90
days and the subsequent redelivery to employee possession.
D. Transportation and Moving Expenses for Employee and Family
The Company will pay for the transportation and living expenses in moving family
members to the new location. This will include:
1. Actual auto expenses incurred.
2. Lodging expenses for a maximum of five days at the old or new location or
while traveling from the old to the new location.
3. Meals
<PAGE> 2
II. Sale and Purchase of Primary Residence
A. Sale of Primary Residence
The Company will reimburse the relocating employee for normal and reasonable
costs incurred with the sale of their primary residence including:
1. Real estate commissions up to a maximum of 6%
2. Escrow fees
3. Two appraisals
4. Title insurance
5. Reconveyance of trust deed
6. Lien search
7. Transfer tax
8. Necessary return travel to consummate sale
B. Purchase of Primary Residence
The Company will reimburse employee for costs associated with the purchase of a
new home including:
1. Title search
2. Recording fees for deed and mortgage
3. Survey
4. Legally required stamps
5. Title insurance, as required
6. Attorneys fees
7. Credit reports
8. Application fees
9. Transfer taxes
10. Stamp taxes
11. Escrow fees
12. Appraisal fees
13. Inspection fees
14. Points, discount points, and/or loan origination fees up to a maximum of
$12,500 in the aggregate.
III. Settling In Allowance
The Company will pay the relocating employee $5,000 as a settling-in allowance
to cover the incidental miscellaneous expenses of a move.
2
<PAGE> 3
IV. Tax Gross Ups
Employee will be entitled to a tax gross-up payment resulting from
reimbursements to the employee or direct payments made to third party on behalf
of the employee. The gross-up payment is made to compensate the employee for the
effect of federal, state, and local income taxes and the OASDI (Medicare)
portion of FICA.
Expenses qualifying for tax gross-up payments are those that are charged as
taxable income and may include:
House Hunting Trips
Temporary Living
Meals
Home Sale Costs
Home Purchase Costs
Settling In Allowance
Moving Household Goods
Transportation and Moving
V. Salary
Annual salary of $165,000 paid bi-weekly. Annual salary increases based upon
mutually agreed performance objectives and determined in a manner consistent
with those of other officers in the company.
VI. Bonus
Target bonus factor of 30% of annual salary based primarily on the Company
achievement of financial objectives. For the first twelve months of employment a
minimum guaranteed bonus of $25,000, annualized, will be paid quarterly.
VII. Sign-on Bonus
A one-time bonus of $25,000 will be paid on the first payday of 1998.
VIII. Equity
100,000 stock options granted upon date of hire. 10,000 options become fully
vested immediately. 25% (25,000) vest after twelve months. The balance vest at a
rate of 1/48th of the total per month for 36 months.
IX. Benefits
The Company offers standard medical and dental insurance immediately upon
employment. The employee bi-weekly contribution for a family will be
approximately $70, depending on the type of coverage selected.
3
<PAGE> 4
You will be eligible to participate in the 401K plan after one year of
employment. The Company match is 50% up to the first 4% of contribution.
Currently, the Company offers 2 weeks vacation each year for the first three
years of employment and three weeks thereafter. This policy is currently under
review and may change in the next thirty days.
4
<PAGE> 5
If the above terms of this offer are acceptable to you, please sign under the
acceptance section below.
We are very excited about having you join the Computer Literacy team. If you
have any questions or comments, please don't hesitate to call me.
Sincerely,
/s/ Chris MacAskill
- -------------------------------------
Chris MacAskill
President and Chief Executive Officer
Acceptance:
/s/ Riki Tokuno
- ------------------------------
Signature
Riki Tokuno
- ------------------------------
Name
10/2/97
- ------------------------------
Date
5
<PAGE> 1
EXHIBIT 10.10
COMPUTER LITERACY, INC.
August 26, 1997
Donald P. Alvarez
Dear Don:
Computer Literacy, Inc. (the "Company") is pleased to offer you
employment on the following terms:
1. POSITION. You will serve in a full-time capacity as Vice President
of Finance and Chief Financial Officer of the Company, reporting to myself. By
signing this letter agreement, you represent and warrant to the Company that you
are under no contractual commitments inconsistent with your obligations to the
Company.
2. SALARY. You will be paid a salary at the annual rate of $125,000,
payable in semi-monthly installments in accordance with the Company's standard
payroll practices for salaried employees. This salary will be subject to
adjustment pursuant to the Company's employee compensation policies in effect
from time to time.
3. BONUS. For your first year of employment, the Company will guarantee
to you a bonus in the amount of $15,000.
4. STOCK OPTIONS. Subject to the approval of the Company's Board of
Directors, you will be granted an option to purchase 100,000 shares of the
Company's Common Stock. The exercise price per share will be equal to the fair
market value per share on the date the option is granted or on your first day of
employment, whichever is later. The option will be subject to the terms and
conditions applicable to options granted under the Company's 1996 Stock Plan, as
described in that Plan and the applicable stock option agreement. The option
will be immediately exercisable, but the purchased shares will be subject to
repurchase by the Company at the exercise price in the event that your service
terminates before you vest in the shares. You will vest in 25% of the option
shares after 12 months of service, and the balance will vest in monthly
installments over the next 36 months of service, as described in the applicable
stock option agreement. In the event of a Change in Control (as defined in the
Plan), the vesting of your option will be accelerated, and an additional number
of option shares will become vested that is equal to the greater of: (i) 50% of
any unvested option shares; or (ii) a number of shares equal to the number you
would become vested in had you provided 12 months of additional service
following the Change in Control.
5. PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT. Like all Company
employees, you will be required, as a condition to your employment with the
Company, to sign the Company's standard Proprietary Information and Inventions
Agreement, a copy of which is attached hereto as Exhibit A.
<PAGE> 2
Donald P. Alvarez Page 2
6. PERIOD OF EMPLOYMENT. Your employment with the Company will be "at
will," meaning that either you or the Company will be entitled to terminate your
employment at any time and for any reason, with or without cause. Any contrary
representations which may have been made to you are superseded by this offer.
This is the full and complete agreement between you and the Company on this
term. Although your job duties, title, compensation and benefits, as well as the
Company's personnel policies and procedures, may change from time to time, the
"at will" nature of your employment may only be changed in an express written
agreement signed by you and a duly authorized officer of the Company.
7. OUTSIDE ACTIVITIES. While you render services to the Company, you
will not engage in any other gainful employment, business or activity without
the written consent of the Company. While you render services to the Company,
you also will not assist any person or organization in competing with the
Company, in preparing to compete with the Company or in hiring any employees of
the Company.
8. WITHHOLDING TAXES. All forms of compensation referred to in this
letter are subject to reduction to reflect applicable withholding and payroll
taxes.
9. ENTIRE AGREEMENT. This letter and the Exhibit attached hereto
contain all of the terms of your employment with the Company and supersede any
prior understandings or agreements, whether oral or written, between you and the
Company.
10. AMENDMENT AND GOVERNING LAW. This letter agreement may not be
amended or modified except by an express written agreement signed by you and a
duly authorized officer of the Company. The terms of this letter agreement and
the resolution of any disputes will be governed by California law.
We hope that you find the foregoing terms acceptable. You may indicate
your agreement with these terms and accept this offer by signing and dating both
the enclosed duplicate original of this letter and the enclosed Proprietary
Information and Inventions Agreement and returning them to me. As required by
law, your employment with the Company is also contingent upon your providing
legal proof of your identity and authorization to work in the United States. We
look forward to having you join us as soon as possible.
If you have any questions, please call me.
Very truly yours,
COMPUTER LITERACY, INC.
By: /s/ Chris MacAskill
-----------------------------------
Chief Executive Officer
Chris MacAskill
<PAGE> 3
Donald P. Alvarez Page 3
I have read and accept this employment offer:
/s/ Donald P. Alvarez
- ------------------------------
Signature of Donald P. Alvarez
Dated: August 26, 1997
Attachment
Exhibit A: Proprietary Information and Inventions Agreement
<PAGE> 1
EXHIBIT 10.11
COMPUTER LITERACY, INC.
February 27, 1998
Robert Cudd
4576 Fairway Drive
Soquel, CA 95073
Dear Robert:
Computer Literacy, Inc. (the "Company") is pleased to offer you
employment on the following terms:
1. POSITION. You will serve in a full-time capacity as Vice President
of Marketing of the Company, reporting to myself. By signing this letter
agreement, you represent and warrant to the Company that you are under no
contractual commitments inconsistent with your obligations to the Company.
2. SALARY. You will be paid a salary at the annual rate of $135,000,
payable in semi-monthly installments in accordance with the Company's standard
payroll practices for salaried employees. This salary will be subject to
adjustment pursuant to the Company's employee compensation policies in effect
from time to time.
3. BONUS. For your first year of employment, the Company will guarantee
to you a bonus in the amount of $25,000 to be paid in quarterly installments.
Upon your execution of this offer letter, you will receive a $10,000 signing
bonus. Upon a presentation of valid receipts, the Company will reimburse to you
your moving expenses in an amount not exceeding $3,000.
4. STOCK OPTIONS. Subject to the approval of the Company's Board of
Directors, you will be granted an option to purchase 260,000 shares of the
Company's Common Stock. The exercise price per share will be equal to the fair
market value per share on the date the option is granted or on your first day of
employment, whichever is later. The option will be subject to the terms and
conditions applicable to options granted under the Company's 1996 Stock Plan, as
described in that Plan and the applicable stock option agreement. The option
will be immediately exercisable, but the purchased shares will be subject to
repurchase by the Company at the exercise price in the event that your service
terminates before you vest in the shares. You will vest in 25% of the option
shares after 12 months of service, and the balance will vest in monthly
installments over the next 36 months of service, as described in the applicable
stock option agreement. In the event of a Change in Control (as defined in the
Plan), the vesting of your option will be accelerated, and an additional number
of option shares will become vested that is equal to the greater of: (i) 50% of
any unvested option shares; or (ii) a number of shares equal to the number you
would become vested in had you provided 12 months of additional service
following the Change in Control.
5. PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT. Like all Company
employees, you will be required, as a condition to your employment with the
<PAGE> 2
Robert Cudd Page 2
Company, to sign the Company's standard Proprietary Information and Inventions
Agreement, a copy of which is attached hereto as Exhibit A.
6. PERIOD OF EMPLOYMENT. Your employment with the Company will be "at
will," meaning that either you or the Company will be entitled to terminate your
employment at any time and for any reason, with or without cause. Any contrary
representations which may have been made to you are superseded by this offer.
This is the full and complete agreement between you and the Company on this
term. Although your job duties, title, compensation and benefits, as well as the
Company's personnel policies and procedures, may change from time to time, the
"at will" nature of your employment may only be changed in an express written
agreement signed by you and a duly authorized officer of the Company.
7. OUTSIDE ACTIVITIES. While you render services to the Company, you
will not engage in any other gainful employment, business or activity without
the written consent of the Company. While you render services to the Company,
you also will not assist any person or organization in competing with the
Company, in preparing to compete with the Company or in hiring any employees of
the Company.
8. WITHHOLDING TAXES. All forms of compensation referred to in this
letter are subject to reduction to reflect applicable withholding and payroll
taxes.
9. ENTIRE AGREEMENT. This letter and the Exhibit attached hereto
contain all of the terms of your employment with the Company and supersede any
prior understandings or agreements, whether oral or written, between you and the
Company.
10. AMENDMENT AND GOVERNING LAW. This letter agreement may not be
amended or modified except by an express written agreement signed by you and a
duly authorized officer of the Company. The terms of this letter agreement and
the resolution of any disputes will be governed by California law.
We hope that you find the foregoing terms acceptable. You may indicate
your agreement with these terms and accept this offer by signing and dating both
the enclosed duplicate original of this letter and the enclosed Proprietary
Information and Inventions Agreement and returning them to me. As required by
law, your employment with the Company is also contingent upon your providing
legal proof of your identity and authorization to work in the United States. We
look forward to having you join us as soon as possible.
If you have any questions, please call me.
Very truly yours,
COMPUTER LITERACY, INC.
By: /s/ Chris MacAskill
-------------------------------------
Chief Executive Officer
Chris MacAskill
<PAGE> 3
Robert Cudd Page 3
I have read and accept this employment offer:
/s/ Robert Cudd
- --------------------------------
Signature of Robert Cudd
Dated: February 27, 1998
Attachment
Exhibit A: Proprietary Information and Inventions Agreement
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Computer Literacy,
Inc. on Form SB-2 of our report on Computer Literacy, Inc. dated July 10, 1998
(August 25, 1998 as to the fifth paragraph of Note 1 and the last two paragraphs
of Note 10), appearing in the Prospectus, which is part of such Registration
Statement.
We also consent to the use in this Registration Statement of our report on
Computer Literacy Bookshops, Inc. dated July 10, 1998, appearing in the
Prospectus, which is part of this Registration Statement.
/s/ Deloitte & Touche LLP
- -----------------------------
Deloitte & Touche LLP
San Jose, California
November 17, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 4,974
<SECURITIES> 0
<RECEIVABLES> 153
<ALLOWANCES> 0
<INVENTORY> 3,683
<CURRENT-ASSETS> 9,250
<PP&E> 1,885
<DEPRECIATION> 703
<TOTAL-ASSETS> 13,598
<CURRENT-LIABILITIES> 3,620
<BONDS> 0
13,744
0
<COMMON> 27
<OTHER-SE> (3,846)
<TOTAL-LIABILITY-AND-EQUITY> 13,598
<SALES> 0
<TOTAL-REVENUES> 10,948
<CGS> 0
<TOTAL-COSTS> 7,405
<OTHER-EXPENSES> 6,726
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7
<INCOME-PRETAX> (3,190)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,190)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,190)
<EPS-PRIMARY> (0.53)<F1>
<EPS-DILUTED> 0
<FN>
<F1>For purposes of this Exhibit, Primary mean Basic.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> APR-30-1998
<CASH> 2,134
<SECURITIES> 0
<RECEIVABLES> 546
<ALLOWANCES> 0
<INVENTORY> 3,357
<CURRENT-ASSETS> 6,426
<PP&E> 2,128
<DEPRECIATION> 758
<TOTAL-ASSETS> 10,898
<CURRENT-LIABILITIES> 2,565
<BONDS> 0
13,769
0
<COMMON> 32
<OTHER-SE> (5,517)
<TOTAL-LIABILITY-AND-EQUITY> 10,898
<SALES> 0
<TOTAL-REVENUES> 4,394
<CGS> 0
<TOTAL-COSTS> 3,014
<OTHER-EXPENSES> 3,083
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (32)
<INCOME-PRETAX> (1,671)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,671)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,671)
<EPS-PRIMARY> (.27)<F1>
<EPS-DILUTED> 0
<FN>
<F1>For purposes of this Exhibit, Primary mean Basic.
</FN>
</TABLE>
