-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KMLH7+KsIqgupAT5yW8ff1p7FP46FQm6MQsfDzW2+Cm2p05f0PWilKSd+Guncoz0 L+Y6yq0hKiPUx6abh3aZfA== 0000891618-99-004221.txt : 19990921 0000891618-99-004221.hdr.sgml : 19990921 ACCESSION NUMBER: 0000891618-99-004221 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 19990920 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LANDA MANAGEMENT SYSTEMS CORP CENTRAL INDEX KEY: 0001058177 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-87435 FILM NUMBER: 99714149 BUSINESS ADDRESS: STREET 1: 1072 MARAUDER STE A CITY: CHICO STATE: CA ZIP: 95973 S-1 1 FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 20, 1999 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 LANDA MANAGEMENT SYSTEMS CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 94-2817962 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION NUMBER) IDENTIFICATION NUMBER)
4151 ASHFORD DUNWOODY RD. SUITE 505 ATLANTA, GA 30319 (404) 531-9956 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) EUGENE SANTA CATTARINA LANDA MANAGEMENT SYSTEMS CORPORATION 4151 ASHFORD DUNWOODY RD. SUITE 505 ATLANTA, GA 30319 (404) 531-9956 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: MICHAEL J. DANAHER, ESQ. NILS H. OKESON, ESQ. MARTIN J. WATERS, ESQ. J. MARK RAY, ESQ. WILSON SONSINI GOODRICH & ROSATI ALSTON & BIRD LLP PROFESSIONAL CORPORATION ONE ATLANTIC CENTER 650 PAGE MILL ROAD 1201 WEST PEACHTREE STREET PALO ALTO, CA 94304 ATLANTA, GA 30309-3424 (650) 493-9300 (404) 881-7000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, as amended, check the following box and list the securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, as amended, 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 of 1933, as amended, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ PROPOSED MAXIMUM TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED PRICE REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------ Common Stock, no par value.............................. $40,000,000 $11,120 - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. 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 OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. (SUBJECT TO COMPLETION) ISSUED , 1999 PROSPECTUS SHARES [LOGO OF LANDACORP] COMMON STOCK This is an initial public offering of common stock by Landacorp, Inc. All of the shares of common stock being sold in this offering are being sold by Landacorp. ------------------ We have applied to list our common stock on the Nasdaq National Market under the symbol "LCOR." ------------------
Per Share Total ---------------- ---------------- Initial public offering price............................... $ $ Underwriting discounts and commissions...................... $ $ Proceeds to Landacorp, before expenses...................... $ $
We and certain of our stockholders have granted the underwriters an option for a period of 30 days to purchase up to additional shares of common stock. ------------------ INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7. ------------------ Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities, or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense. HAMBRECHT & QUIST SG COWEN VOLPE BROWN WHELAN & COMPANY , 1999 3 TABLE OF CONTENTS
PAGE ---- Prospectus Summary.......................................... 4 Risk Factors................................................ 7 Forward-Looking Statements.................................. 16 How We Intend to Use the Proceeds from the Offering......... 17 Dividend Policy............................................. 17 Capitalization.............................................. 18 Dilution.................................................... 19 Selected Financial Data..................................... 20 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 21 Business.................................................... 30 Management.................................................. 39 Certain Relationships and Related Transactions.............. 45 Principal Stockholders...................................... 47 Description of Capital Stock................................ 49 Shares Eligible for Future Sale............................. 52 Underwriting................................................ 54 Legal Matters............................................... 57 Experts..................................................... 57 Where You Can Find More Information......................... 57 Index to Financial Statements............................... F-1 Signatures.................................................. II-5 Power of Attorney........................................... II-5
------------------------ Landacorp(R) is a registered trademark of our company. We have applied to register the trademarks Maxsys(TM), maxMC(TM) and e-maxMC(TM). All other brand names and trademarks appearing in this prospectus are the property of their respective owners. 3 4 PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in the common stock. You should read the entire prospectus carefully, including "Risk Factors" and our financial statements before making an investment decision. In this prospectus, unless the context indicates otherwise, "Landacorp," "we," "us" and "our" refer to Landacorp, Inc. LANDACORP We offer business-to-business e-medical management solutions to healthcare payers and providers that are designed to help our clients control the cost and improve the quality of healthcare delivery. Our applications automate and streamline administrative and business processes and facilitate real-time interaction among various healthcare participants. We enable our clients to deliver consistent and appropriate medical care utilizing their chosen clinical guidelines and business process rules. We are also marketing e-medical management solutions that add functionality to payers' Web sites in order to attract repeat visits by members. We refer to Internet-based solutions that generate repeat visits as sticky applications. We currently provide our maxMC solution to six payers with more than seven million members and our Maxsys solutions to more than 200 hospital providers. We recently began offering e-maxMC, our Internet-based medical management solution for payer organizations. We believe that the lack of medical management functionality offered by existing Internet-based products and services provides a significant market opportunity for e-maxMC. We have successfully tested e-maxMC internally and expect to complete our beta test of the product in early 2000. The Internet is emerging as a powerful tool for connecting healthcare participants, enabling automation of workflow, enhancing the efficiency of case and disease management, and minimizing expenditures on unauthorized or inappropriate care. It is estimated that of the $1.0 trillion spent on healthcare in the U.S., more than $250 billion is wasted through delivery of unnecessary care, performance of redundant tests and procedures and excessive administrative costs. We believe payers and providers will increasingly rely on the Internet to improve and expand their businesses and to control the cost of healthcare delivery. To date, much of the Internet's potential has not been realized by the industry as existing Internet-based products and services have merely linked participants without providing the necessary medical management functionality. We leverage our open, ntier system architecture to complement existing legacy and Internet-based products and services by providing comprehensive medical management solutions that employ a rich set of functions, including: - care authorization features which apply customer defined and industry standard criteria sets to match payers' clinical guidelines with providers' and members' requests for care; - case and disease management tools that assist with the determination of appropriate levels of care, perform short- and long-term care planning and minimize unnecessary procedures; and - credentialing tools for maintaining and reviewing physician and other care provider information, such as continuing medical education credits, medical board certifications and adverse actions history. Our systems are scalable, flexible and secure, and can be deployed across a broad range of computing environments. As a result, our customers are able to configure and adapt our solutions to fit their specific workflow processes, clinical guidelines, existing information systems and business models. 4 5 Our objective is to be the leading provider of e-medical management solutions for healthcare payers and providers. Key components of our strategy include: - aggressively marketing our Internet-based medical management solution; - developing sticky applications for member-focused, payer-branded Web sites; - achieving greater market penetration and leveraging our existing customer base; - continuing to add functionality to our medical management solutions; and - pursuing strategic partnerships and acquisitions. The address of our principal executive offices is 4151 Ashford Dunwoody Road, Suite 505, Atlanta, Georgia, 30319. Our telephone number is (404) 531-9956. Our World Wide Web address is www.landacorp.com. The information on our Web site is not part of this prospectus. We were incorporated on April 27, 1982 as a California corporation. We reincorporated as a Delaware corporation on , 1999. Our fiscal year ends December 31. ------------------------- THE OFFERING COMMON STOCK OFFERED BY US.............. shares COMMON STOCK TO BE OUTSTANDING AFTER THE OFFERING................................ shares USE OF PROCEEDS......................... Working capital and general corporate purposes, including: - development and implementation of new applications; - enhancing our sales and marketing organization; and - possible strategic partnerships and acquisitions. PROPOSED NASDAQ NATIONAL MARKET SYMBOL.................................. LCOR ------------------------- This number does not include 891,115 shares of common stock subject to outstanding options with a weighted average exercise price of $1.25 per share. Please see "Capitalization" for a more complete discussion regarding our common stock and options to purchase our common stock and other related matters. ------------------------- Unless otherwise noted, all information in this prospectus: - assumes the conversion of all outstanding preferred stock into common stock on a one-for-one basis; - assumes the exercise of outstanding warrants to purchase 350,000 shares of common stock at an exercise price of $1.20 per share; - assumes a reincorporation in Delaware; and - assumes no exercise by the underwriters of their option to purchase additional shares of common stock to cover over-allotments, if any. 5 6 SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following summary financial data should be read in conjunction with our financial statements and their related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this prospectus. The statement of operations data for the years ended December 31, 1996, 1997 and 1998 are derived from, and are qualified by reference to, the audited financial statements included at the end of this prospectus. The statement of operations data for the six months ended June 30, 1998 and 1999 are derived from, and are qualified by reference to, the unaudited financial statements included at the end of this prospectus. The pro forma as adjusted balance sheet data summarized below gives effect to the receipt of the estimated net proceeds from the sale of shares of common stock offered by us in this offering at an initial public offering price of $ per share, after deducting underwriting discounts and commissions and estimated offering expenses, the exercise of warrants to purchase 350,000 shares of common stock at a price of $1.20 per share, and the conversion of all outstanding shares of preferred stock into common stock on a one-for-one basis.
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, --------------------------- --------------------- 1996 1997 1998 1998 1999 ------- ------- ------- ------- ----------- (UNAUDITED) STATEMENT OF OPERATIONS DATA: Total revenues................................ $ 1,939 $ 4,038 $ 6,217 $ 2,583 $ 4,651 Loss from operations.......................... (1,697) (803) (1,985) (724) (953) Net loss...................................... (1,897) (1,011) (1,910) (701) (904) Net loss per share: Basic and diluted.......................... $ (1.74) $ (0.91) $ (1.83) $ (0.66) $ (0.82) Weighted average shares.................... 1,089 1,110 1,044 1,058 1,100 Pro forma net loss per share (unaudited):(1) Basic and diluted.......................... $ (0.28) $ (0.11) Weighted average shares (unaudited)........ 6,904 7,900
JUNE 30, 1999 --------------------- PRO FORMA ACTUAL AS ADJUSTED ------ ----------- (UNAUDITED) BALANCE SHEET DATA: Cash and cash equivalents................................. $2,371 Working capital........................................... 463 Total assets.............................................. 4,346 Stockholders' equity...................................... 994
- ------------------------- (1) See Note 2 of Notes to Financial Statements for a discussion of the computation of pro forma basic and diluted net loss per share and weighted average shares outstanding. 6 7 RISK FACTORS You should carefully consider the risks described below before buying shares in this offering. If any of the following risks actually occur, our business, results of operations and financial condition could be materially adversely affected, the trading price of our common stock could decline, and you could lose all or part of your investment. OUR BUSINESS WILL SUFFER IF OUR PAYER PRODUCTS DO NOT ACHIEVE WIDESPREAD MARKET ACCEPTANCE Achieving our growth objectives depends on our maxMC and e-maxMC products achieving widespread market acceptance, which is difficult to predict at this time. maxMC was commercially released in 1997 and is currently used by six payer customers. Therefore, it currently has limited market acceptance. e-maxMC is expected to complete beta testing in early 2000. As a result, it has not achieved any market acceptance at this time and we currently do not have sufficient evidence to determine whether and to what extent it will achieve market acceptance. Achieving market acceptance for our medical management solutions will require ongoing improvement of their features and functionalities and enhanced sales and marketing efforts. Our business may suffer if we do not gain significant market share for our payer medical management solutions before our competitors introduce alternative products with features similar to ours. We cannot assure you that our payer solutions will achieve market acceptance, or that any pricing strategy that we develop, such as our planned subscription pricing for payers, will be economically viable or acceptable to the market. THE HEALTHCARE INDUSTRY MAY NOT ACCEPT OUR SOLUTIONS To be successful, we must attract a significant number of payer customers, such as managed care companies, and continue to attract provider customers, such as hospitals. We cannot determine the extent to which the payer market will accept our medical management solutions as substitutes for traditional methods of processing healthcare information and managing patient care. To date, many healthcare industry participants have been slow to adopt new technology solutions. We believe that the complex nature of healthcare processes and communications among healthcare industry participants, as well as concerns about confidentiality of patient information, may hinder the development and acceptance of new technology solutions such as our medical management solutions. In addition, customers using existing information systems in which they have made significant investments may refuse to adopt our solutions if they perceive that our products will not complement their existing systems. Consequently, the conversion from traditional methods of communication to electronic information exchange may not occur as rapidly as we expect it will. Even if the conversion does occur as rapidly as expected, payers and providers may use applications and services offered by others. WE HAVE A HISTORY OF QUARTERLY AND ANNUAL FLUCTUATIONS IN OUR REVENUE AND OPERATING RESULTS, AND EXPECT THESE FLUCTUATIONS TO CONTINUE, WHICH MAY RESULT IN VOLATILITY IN OUR STOCK PRICE Our quarterly and annual revenue and operating results have varied significantly in the past and are likely to vary significantly in the future due to a number of factors, many of which are outside of our control. The factors that may cause our quarterly revenue and operating results to fluctuate include: - fluctuations in demand for our products and services, including customers' reluctance to make large technology purchases as we approach, and shortly following, the year 2000; - the timing of customer orders and product implementations, particularly orders from large customers involving substantial implementation; - the length of our sales cycle, which varies and is unpredictable; 7 8 - the length of our implementation process, which varies, is unpredictable and often depends on matters outside of our control; - our ability to develop, introduce, implement and support new products and product enhancements; - the rate of adoption of our medical management solutions, which often require our customers to change some aspects of the way in which they have traditionally conducted business; - announcements and new product introductions by our competitors and deferrals of customer orders in anticipation of new products, services or product enhancements introduced by us or our competitors; and - changes in the prices at which we can sell our medical management solutions. Accordingly, you should not rely on the results of any past periods as an indication of our future performance. It is likely that in some future periods, our operating results may be below expectations of public market analysts or investors. If this occurs, our stock price may drop. IF WE DO NOT HIRE, RETAIN AND INTEGRATE ADDITIONAL SALES, MARKETING AND IMPLEMENTATION PERSONNEL OUR BUSINESS MAY SUFFER Our future growth depends to a significant extent on our ability to hire additional sales, marketing and implementation personnel. Competition for these people is intense. We have experienced difficulty in hiring qualified sales and marketing professionals, as well as database administrators, and we may not be successful in attracting and retaining such individuals. If we are unable to hire additional qualified sales and marketing personnel, our targeted revenue growth may not be achieved. In addition, even if our sales increase, our market penetration and revenue growth will be limited if we are unable to hire additional personnel to implement the products we sell. We also believe that our success depends to a significant extent on the ability of our key personnel to operate effectively, both individually and as a group. Many of our employees have only recently joined us, and we may experience high turnover rates in some categories of personnel. If we are unable to integrate new employees in a timely and cost-effective manner, our operating results may suffer. In addition, companies in our industry whose employees accept positions with competitors frequently claim that their competitors have engaged in unfair hiring practices. We may be subject to such claims in the future as we seek to hire qualified personnel. Any claim of this nature could result in material litigation. We could incur substantial costs in defending ourselves against these claims, regardless of their merits. BECAUSE WE OFFER A LIMITED NUMBER OF PRODUCTS AND OPERATE EXCLUSIVELY IN THE MARKET FOR MEDICAL MANAGEMENT SOLUTIONS, OUR BUSINESS IS NOT DIVERSIFIED We depend on a limited number of products and we operate exclusively in the market for medical management solutions. To date, we have derived substantially all of our revenue from the sale and associated support of Maxsys II (and its predecessor Maxsys I), a medical management solution marketed to hospital providers. We anticipate that substantially all of our revenue in the foreseeable future will be attributable to continued sales and associated support of that solution, as well as sales and support of maxMC and e-maxMC, our medical management solutions marketed to payers. Accordingly, our business is not diversified. Dependence on a limited product line makes us particularly susceptible to the successful introduction of, or changes in market preferences for, competing products. In addition, operating exclusively in the market for medical management solutions makes us particularly susceptible to downturns in that market that may be unrelated to the quality or competitiveness of our solutions. If demand for one or more of our solutions declines 8 9 or is never developed, or if the market for medical management solutions reduces or does not develop further, our business will be materially harmed. THE LOSS OF THE SERVICES OF OUR SENIOR MANAGEMENT AND OTHER KEY PERSONNEL COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS Our future success depends, in significant part, upon the continued service of our senior management and other key personnel. The loss of the services of Eugene Santa Cattarina, our President and Chief Executive Officer, Stephen Kay, our Chief Operating Officer and Chief Financial Officer, Bryan Lang, our founder, Chief Technology Officer and Chief Marketing Officer, or one or more other executive officers or key employees could have a material adverse effect on our business. We do not have employment contracts with any of our key personnel and with the exception of two executive officers and one key employee, we do not maintain key person life insurance on key personnel. WE HAVE A HISTORY OF LOSSES AND MAY NEVER BECOME PROFITABLE We have incurred significant losses since inception and expect to continue to incur losses on an annual basis for the foreseeable future. As of June 30, 1999, our accumulated deficit was $9.2 million. We expect to incur increased levels of product development, sales and marketing and administrative expenses and, as a result, we will need to increase our revenue significantly to achieve future profitability. Although our revenue has grown in recent quarters, we may not be able to sustain this growth and we may not realize sufficient revenue to achieve profitability. Further, even if we achieve profitability, given the competition and the evolving nature of the healthcare information technology and Internet market, we may not be able to sustain or increase profitability on a quarterly or annual basis. THE LENGTH AND COMPLEXITY OF OUR SALES CYCLE AND PRODUCT IMPLEMENTATION MAY CAUSE US TO EXPEND SUBSTANTIAL TIME, EFFORT AND FUNDS WITHOUT OFFSETTING REVENUE We do not control many of the factors that influence our customers' buying decisions and the implementation of our medical management solutions. The sales and implementation process for our solutions is lengthy and involves a significant technical evaluation and commitment of capital and other resources by our customers. The sale and implementation of our solutions are subject to delays due to healthcare payers' and providers' internal budgets and procedures for approving large capital expenditures and deploying new technologies within their organizations. The sales cycle for our solutions is unpredictable and has generally ranged from six to twenty-four months from initial contact to contract execution. Our implementation cycle is also difficult to predict and has typically ranged from six to fifteen months from contract execution to the live operation of the system. During the sales cycle and the implementation cycle, we may expend substantial time, effort and funds preparing contract proposals, negotiating the contract and implementing the solution without receiving offsetting revenue. OUR PRODUCTS ARE COMPLEX AND MAY CONTAIN UNDETECTED SOFTWARE ERRORS, WHICH COULD LEAD TO AN INCREASE IN OUR COSTS OR A REDUCTION IN OUR REVENUES Complex software products such as those included in our medical management solutions frequently contain undetected errors when first introduced or as new versions are released. We have, from time to time, found errors in our products, and in the future we may find additional errors in our existing, new or enhanced solutions. In addition, our solutions are combined with products from other vendors. As a result, it may be difficult to identify the source of the problem, should one occur. The occurrence of hardware and software errors, whether caused by our solutions or another vendor's products, could adversely affect sales of our solutions, cause us to incur significant warranty and repair costs, divert the attention of our technical personnel away from product development efforts and cause significant customer relations problems. 9 10 BECAUSE OUR INTELLECTUAL PROPERTY IS CRITICAL TO THE SUCCESS OF OUR BUSINESS, WE WOULD SUFFER IF WE WERE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY Because our solutions rely on proprietary technology for market acceptance, we believe that the protection of our intellectual property rights is critical to the success of our business. To protect our intellectual property rights, we rely on a combination of copyright, trademark and trade secret laws and restrictions on disclosure. We also enter into confidentiality or license agreements with our employees, consultants and corporate partners, and control access to and distribution of our software, documentation and other proprietary information. Despite our efforts to protect our proprietary rights, unauthorized parties may copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our solutions is difficult and the steps we have taken may not prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. If we are unable to protect our intellectual property from infringement, other companies may be able to use our intellectual property to offer competitive products at lower prices, and we may not be able to compete effectively against these companies. See "Business -- Intellectual Property." WE RELY HEAVILY ON OUR INTELLECTUAL PROPERTY, AND EFFORTS TO PROTECT IT MAY CAUSE US TO BECOME INVOLVED IN COSTLY AND LENGTHY LITIGATION, WHICH COULD HARM OUR BUSINESS Although we are not currently involved in any intellectual property litigation, we may be a party to litigation in the future either to protect our intellectual property or as a result of an alleged infringement by us of the intellectual property of others. These claims and any resulting litigation could subject us to significant liability for damages and could cause our proprietary rights to be invalidated. Litigation, regardless of the merits of the claim or outcome, would likely be time-consuming and expensive to resolve and would divert management time and attention from our core business. Any potential intellectual property litigation could also force us to do one or more of the following: - stop using the challenged intellectual property or selling our products or services that incorporate it; - obtain a license to use the challenged intellectual property or to sell products or services that incorporate it, which could be costly or unavailable; and - redesign those products or services that are based on or incorporate the challenged intellectual property, which could be costly and time consuming or could adversely affect the functionality and market acceptance of our products. If we are forced to take any of the foregoing actions, we may be unable to manufacture and sell our solutions, and our revenues would be substantially reduced. WE MAY FACE SIGNIFICANT COMPETITION The market for our products and services is intensely competitive and is characterized by rapidly changing technology, evolving user needs and frequent introduction of new products and services. Certain aspects of our medical management solutions compete with functionality supplied by our competitors, many of whom may have greater financial, technical, product development, marketing and other resources than we have. These organizations may be better known and have more customers than us. We may be unable to compete successfully against these organizations. The principal companies we compete against in the payer market include HPR (a subsidiary of McKesson HBOC), MedDecision and PhyCom. In the hospital provider market, we compete against MIDS and SoftMed Systems/IHS. 10 11 We expect that competition will continue to increase as a result of consolidation in the Internet, information technology and healthcare industries. See "Business -- Competition." RAPIDLY CHANGING TECHNOLOGY MAY IMPAIR OUR ABILITY TO DEVELOP AND MARKET OUR SOLUTIONS All businesses that rely on technology, including our business, are subject to: - rapid technological change; - changing customer needs; - frequent new product introductions; and - evolving industry standards. In particular, the Internet is rapidly evolving and the technology used in Internet related products is subject to rapid change and early obsolescence. These market characteristics are exacerbated by the emerging nature of the Internet market and the fact that many technology companies are expected to introduce new products and services in the near future. As the communications, computer and software industries continue to experience rapid technological change, we must be able to modify our products quickly to adapt to such changes. The demands of operating in such an environment may delay or prevent our development and introduction of new medical management functionality and solutions that continually meet changing market demands and that keep pace with evolving industry standards. Moreover, products that are superior to our solutions could be developed and implemented by competitors. OUR BUSINESS WILL SUFFER IF THE INTEGRITY AND SECURITY OF OUR SYSTEMS ARE COMPROMISED We believe that our business could be harmed if our customers were to experience system delays, failures or loss of data. The success of our Internet-based medical management solution for payers will depend on the efficient operation of Internet connections among our payer customers and their members and associated providers. These connections, in turn, depend on the efficient operation of Web browsers, Internet service providers and Internet backbone service providers. In the past, Internet users have occasionally experienced difficulties with Internet and online services due to system failures. Any disruption in Internet access provided by third parties could have a material adverse effect on the market acceptance of our Internet-based solution. Furthermore, we will be dependent on our customers' hardware suppliers for prompt delivery, installation and service of equipment that run our applications. Our customers will retain confidential customer and patient information using our solutions. An experienced computer user who is able to access our customers' computer systems could gain access to confidential patient and company information. Therefore, it is critical that our products remain and are perceived by the marketplace to be secure. The occurrence of security breaches could have a material adverse effect on the market acceptance of our products. We may be required to expend significant capital and other resources to protect against such security breaches or to alleviate problems caused by security breaches. We may also be required to spend significant resources and encounter significant delays in upgrading our systems to incorporate more advanced encryption and authentication technology as it becomes available. Concerns over the security of the Internet and other online transactions and the privacy of users may also inhibit the growth of the market for our Internet-based medical management solution. WE OPERATE IN AN INDUSTRY SUBJECT TO CHANGING REGULATORY INFLUENCES, WHICH MAY ADVERSELY AFFECT OUR REVENUES AND OPERATING RESULTS During the past several years, the U.S. healthcare industry has been subject to an increase in governmental regulation and reform proposals. These reforms may increase governmental involvement in healthcare, continue to reduce reimbursement rates and otherwise change the 11 12 operating environment for our customers. Our customers may react to these proposals and the uncertainty surrounding the proposals by curtailing or deferring investments, including those for our medical management solutions. Existing state and federal laws regulate the confidentiality of patient records and the circumstances under which such records may be released. In addition, both Congress and the Department of Health and Human Services are considering proposed legislation and regulations setting forth security standards for all health plans, clearinghouses and providers to follow with respect to healthcare information that is electronically transmitted, processed or stored. While these laws and regulations may not apply to us directly, our products must comply with existing and future laws and regulations in order to achieve market acceptance. Such compliance may be difficult and expensive or even impossible to achieve. Finally, these laws or regulations, when adopted, could restrict the ability of our customers to obtain, use or disseminate patient information, which in turn could adversely affect demand for our medical management solution. Because of the Internet's popularity and increasing use, new laws and regulations with respect to the Internet are becoming prevalent. Such new laws and regulations could limit the effectiveness and market acceptance of our Internet-based medical management solutions. We expect to conduct our business in compliance with all federal, state and local laws and regulations governing our operations. However, the impact of regulatory developments in the healthcare industry and the Internet is complex and difficult to predict, and there can be no assurance that we will not be materially adversely affected by existing or new regulatory requirements or interpretations. See "Business -- Government Regulation." CONSOLIDATION IN THE HEALTHCARE INDUSTRY COULD ADVERSELY AFFECT OUR BUSINESS Many healthcare industry participants are consolidating to create integrated healthcare delivery systems with greater market power. As the healthcare industry consolidates, competition to provide products and services to industry participants will become more intense and the importance of establishing a relationship with large industry participants will become greater. These industry participants may try to use their market power to negotiate price reductions for our products and services. If we were forced to reduce our prices, our operating results could suffer if we cannot achieve corresponding reductions in our expenses. IF WE OR OUR CUSTOMERS FAIL TO BE READY FOR THE YEAR 2000 CALENDAR CHANGE, OUR BUSINESS MAY BE DISRUPTED AND OUR REVENUES MAY DECLINE The Year 2000 issue refers to the potential for disruption to business activities caused by system failures or miscalculations that are triggered by advancement of date records after 1999. A failure due to Year 2000 issues involves numerous risks including: - potential claims from our customers and their constituents; - negative impact on market demand for medical management solutions until our customers complete preparations for the calendar change; and - manufacturing, information, facility and development systems problems, both those that are unique to us and those that affect geographical areas where our business and employees reside. Although we continue to test our medical management solutions' readiness for the Year 2000 calendar change and believe that our medical management solutions are ready for that event, we may yet discover that our current medical management solutions or any new solutions, applications or product enhancements that we develop in the future have problems because of the Year 2000 calendar change. In this event, our business may be adversely affected and our customer relationships may suffer. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000 Readiness." 12 13 WE MAY ENGAGE IN ACQUISITIONS THAT DILUTE OUR STOCKHOLDERS' EQUITY AND CAUSE US TO INCUR DEBT OR ASSUME CONTINGENT LIABILITIES As part of our strategy, we expect to review opportunities to buy other businesses or technologies that would complement our current products, expand the breadth of our market or enhance our technical capabilities, or that may otherwise offer growth opportunities. While we have no current agreements or active negotiations underway, we may buy businesses, products or technologies in the future. In the event of any future purchases, we could: - issue stock that would dilute our stockholders' percentage ownership; - incur debt; or - assume liabilities. These purchases could also involve numerous risks, including: - problems integrating the purchased operations, technologies or products; - unanticipated costs; - diversion of management's attention from our core business; - adverse effects on existing business relationships with suppliers and customers; - risks associated with entering markets in which we have no or limited prior experience; and - potential loss of key employees of purchased organizations. We may not be able to successfully integrate any businesses, products, technologies or personnel that we might purchase in the future. OUR PRINCIPAL STOCKHOLDERS HAVE SIGNIFICANT VOTING POWER, WHICH MAY LIMIT YOUR ABILITY TO INFLUENCE THE OUTCOME OF DIRECTOR ELECTIONS AND OTHER STOCKHOLDER MATTERS Upon completion of this offering, our executive officers and directors and their affiliates will beneficially own, in the aggregate, approximately % of our outstanding common stock. As a result, these stockholders will be able to exercise significant control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, which could delay or prevent an outside party from acquiring or merging with us. See "Principal Stockholders." PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT OR DELAY A CHANGE IN CONTROL OF OUR COMPANY AND MAY REDUCE THE MARKET PRICE OF OUR COMMON STOCK Provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable. These provisions include: - authorizing our board of directors to issue preferred stock without stockholder approval; - prohibiting cumulative voting in the election of directors; - requiring super-majority voting to effect significant amendments to our certificate of incorporation and bylaws; - limiting the ability of stockholders to act by written consent; and - establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings. 13 14 Certain provisions of Delaware law also may discourage, delay or prevent someone from acquiring or merging with us, which may cause the market price of our common stock to decline. OUR STOCK PRICE MAY BE VOLATILE AND YOU MANY NOT BE ABLE TO RESELL YOUR SHARES AT OR ABOVE THE INITIAL PUBLIC OFFERING PRICE There has been no public market for our common stock prior to this offering. The initial public offering price for our common stock will be determined through negotiations between the underwriters and us. This initial public offering price may vary from the market price of our common stock after the offering. If you purchase shares of common stock, you may not be able to resell those shares at or above the initial public offering price. The market price of our common stock may fluctuate significantly in response to factors, some of which are beyond our control, including: - actual or anticipated fluctuations in our operating results; - changes in market valuations of other technology companies; - announcements by us or our competitors of significant technical innovations, contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; - failure of our operating results to meet expectations of public market analysts or investors; - additions or departures of key personnel; and - sales of common stock in the future. In addition, the stock market has experienced extreme volatility that often has been unrelated to the performance of particular companies. These market fluctuations may cause our stock price to fall regardless of our performance. You should read the "Underwriting" section for a more complete discussion of the factors that were considered in determining the initial public offering price of our common stock. IF WE ARE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS, WE MAY BE UNABLE TO DEVELOP OR ENHANCE OUR MEDICAL MANAGEMENT SOLUTIONS, TAKE ADVANTAGE OF FUTURE OPPORTUNITIES OR RESPOND TO COMPETITIVE PRESSURES OR UNANTICIPATED EVENTS, EACH OF WHICH WOULD MATERIALLY HARM OUR BUSINESS We believe that the net proceeds of this offering, together with our existing cash balances, credit facilities and expected cash flow from operations, will be sufficient to meet our capital requirements at least through the next 12 months. However, we may be required, or could elect, to seek additional capital prior to that time. In the event we are required to raise additional capital, we may not be able to do so on favorable terms, if at all. Further, if we issue new equity securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of common stock. If we cannot raise capital on acceptable terms, we may be unable to develop or enhance our products, take advantage of future opportunities or respond to competitive pressures or unanticipated events. For additional information on our anticipated future capital requirements, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET MAY DEPRESS OUR STOCK PRICE Our current stockholders hold a substantial number of shares, which they will be able to sell in the public market in the near future. Sales of a substantial number of shares of our common stock after this offering could cause our stock price to fall. In addition, the sale of these shares could impair our ability to raise capital through the sale of additional stock. You should read 14 15 "Shares Eligible for Future Sale" for a full discussion of shares that may be sold in the public market in the future. YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE BOOK VALUE OF YOUR SHARES The initial public offering price is substantially higher than the book value per share of our outstanding common stock immediately after the offering. Accordingly, if you purchase common stock in the offering, you will incur immediate dilution of approximately $ in the book value per share of our common stock from the price you pay for our common stock. For additional information on this calculation, see "Dilution." 15 16 FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements that involve risks and uncertainties, which may include statements about our: - plans for implementing our Internet-based strategy, including the general release of e-maxMC, our new e-medical management solution for payers; - business strategy; - the market opportunity for our solutions; - plans for hiring additional personnel; - anticipated sources of funds and the ability to meet future liquidity and capital requirements; and - plans, objectives, expectations and intentions contained in this prospectus that are not historical facts. When used in this prospectus, the words "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," and similar expressions are generally intended to identify forward-looking statements. Because these forward-looking statements involve risks and uncertainties, actual results could differ materially from those expressed or implied by these forward-looking statements for a number of reasons, including those discussed under "Risk Factors" and elsewhere in this prospectus. We assume no obligation to update any forward-looking statements. 16 17 HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING We expect to receive net proceeds of approximately $ from the sale of shares of common stock (approximately $ if the underwriters exercise their over-allotment option in full), at the initial public offering price of $ per share, after deducting underwriting discounts and commissions and estimated offering expenses. We expect to use the net proceeds from this offering for working capital and other general corporate purposes, including expenditures for the development and implementation of new products, increasing the size of our sales and marketing organization and pursuing strategic partnerships and acquisitions that are complementary to our current and future business and product lines. Although we have no current commitments or agreements with respect to any such partnerships or acquisitions, we might in the future use a portion of the net proceeds from this offering to pay for such transactions. Pending these uses, the net proceeds of this offering will be invested in short-term, investment-grade, interest-bearing investments or accounts. DIVIDEND POLICY We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. 17 18 CAPITALIZATION The following table sets forth the capitalization of Landacorp as of June 30, 1999: - on an actual basis; - on a pro forma basis to reflect the conversion of 6,800,000 outstanding shares of preferred stock to common stock on a one-for-one basis and the exercise of outstanding warrants to purchase 350,000 shares of common stock at an exercise price of $1.20; and - on a pro forma basis as adjusted to reflect the sale by Landacorp of shares of common stock offered hereby at an assumed public offering price of $ per share and the receipt of the estimated net proceeds of such sale after deducting underwriting discounts and commissions and estimated offering expenses. The following information regarding the number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of June 30, 1999 and does not include: - 891,815 shares of our common stock subject to outstanding options at a weighted average exercise price of $1.25 per share; and - 379,345 additional shares of our common stock reserved for future issuance under our stock option plans. The information below is qualified by and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the notes to those statements appearing at the end of this prospectus.
JUNE 30, 1999 -------------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------------ ------------ ------------ (IN THOUSANDS) Stockholders' equity: Preferred stock, $0.001 par value; 8,000,000 shares authorized; 6,800,000 shares issued and outstanding, actual; no shares issued and outstanding, pro forma; no shares issued and outstanding, pro forma as adjusted..... $ 7,000 $ -- $ -- Common stock, $0.001 par value, 15,000,000 shares authorized; 2,607,000 shares issued and outstanding, actual, 9,757,000 shares issued and outstanding, pro forma; shares issued and outstanding, pro forma as adjusted...................... 3,000 10,000 Additional paid-in capital................ 15,312,000 15,312,000 Notes receivable from officers............ (189,000) (189,000) (189,000) Unearned stock-based compensation......... (2,017,000) (2,017,000) (2,017,000) Accumulated deficit....................... (12,122,000) (12,122,000) (12,122,000) ------------ ------------ ------------ Total stockholders' equity........ $ 994,000 $ 994,000 $ ============ ============ ============
18 19 DILUTION Our pro forma net tangible book value at June 30, 1999, after giving effect to the conversion of all outstanding shares of preferred stock into common stock on a one-for-one basis and the exercise of outstanding warrants to purchase 350,000 shares of common stock, was $916,000 or $0.09 per share. Pro forma net tangible book value per share represents the amount of our total tangible assets less total liabilities divided by the pro forma number of shares of common stock outstanding. Dilution in pro forma net tangible book value per share represents the difference between the amount per share paid by purchasers of common stock in this offering and the net tangible book value per share of our common stock immediately afterwards. Assuming our sale of shares of common stock offered by this prospectus at an assumed initial public offering price of $ per share, and after deducting underwriting discounts and commissions and estimated offering expenses, our pro forma net tangible book value at June 30, 1999 would have been approximately $ or $ per share. This represents an immediate decrease in net tangible book value of $ per share to new investors. The following table illustrates this dilution: Assumed initial public offering price per share............. $ Pro forma net tangible book value per share at June 30, 1999................................................... $0.09 Increase per share attributable to new investors.......... ----- As adjusted pro forma net tangible book value per share after this offering....................................... Dilution per share to new investors......................... $ ------- $ =======
The following table summarizes, on a pro forma basis at June 30, 1999, the differences between the number of shares of common stock purchased from us, the total consideration paid and the average price per share paid by existing stockholders and by new investors purchasing shares in this offering. We have assumed an initial public offering price of $ per share, and we have not deducted estimated underwriting discounts and commissions and estimated offering expenses in our calculations.
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ------------------- --------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE --------- ------- ----------- ------- --------- Existing stockholders.......... 9,757,000 % $11,696,000 % $1.20 New investors.................. --------- ------- ----------- ------- Total................ 100.0% $ 100.0% $ ========= ======= =========== =======
The foregoing discussion and tables assume no exercise of any outstanding stock options. At June 30, 1999, there were outstanding options to purchase an aggregate of 611,815 shares of common stock at a weighted average exercise price of $1.38 per share. To the extent any stock options are exercised, there will be further dilution to new investors. See "Capitalization" and "Management -- Benefit Plans." If the underwriters exercise their over-allotment in full, the following will occur: - the percentage of shares of common stock held by existing stockholders will decrease to approximately % of the total number of shares of our common stock outstanding after this offering; and - the number of shares held by new investors will increase to , or approximately % of the total number of shares of our common stock outstanding after this offering. 19 20 SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following selected financial data should be read in conjunction with our financial statements and their related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. The statement of operations data for the years ended December 31, 1996, 1997 and 1998, and the balance sheet data as of December 31, 1997 and 1998, are derived from the audited financial statements included at the end of this prospectus. The balance sheet data as of December 31, 1995 and 1996 are derived from audited financial statements not included elsewhere in this prospectus. The statement of operations data for the years ended December 31, 1994 and 1995, and the six month periods ended June 30, 1998 and 1999, and the balance sheet data as of December 31, 1994 and June 30, 1999 are derived from our unaudited financial statements and, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of Landacorp's financial position and results of operations. The results of operations for any interim period are not necessarily indicative of results to be expected for a full year.
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ------------------------------------------------------ ---------------- 1994 1995 1996 1997 1998 1998 1999 ----------- ------ ------- ------- ------- ------ ------ (UNAUDITED) (UNAUDITED) STATEMENT OF OPERATIONS DATA: Revenues: System sales................................... $ 886 $ 583 $ 1,007 $ 3,136 $ 4,967 $2,069 $3,725 Support services............................... 1,089 980 932 902 1,250 514 926 ------ ------ ------- ------- ------- ------ ------ Total revenues............................... 1,975 1,563 1,939 4,038 6,217 2,583 4,651 ------ ------ ------- ------- ------- ------ ------ Cost of revenues: System sales................................... 456 282 499 1,097 2,244 954 1,386 Support services............................... 263 235 285 299 419 190 288 ------ ------ ------- ------- ------- ------ ------ Total cost of revenues....................... 719 517 784 1,396 2,663 1,144 1,674 ------ ------ ------- ------- ------- ------ ------ Gross profit..................................... 1,256 1,046 1,155 2,642 3,554 1,439 2,977 Operating expenses: Sales and marketing............................ 382 376 782 1,176 1,588 757 1,327 Research and development....................... 905 1,127 1,269 1,294 1,393 653 727 General and administrative..................... 565 408 801 975 1,385 538 879 Stock-based compensation....................... -- -- -- -- 1,173 215 997 ------ ------ ------- ------- ------- ------ ------ Total operating expenses..................... 1,852 1,911 2,852 3,445 5,539 2,163 3,930 ------ ------ ------- ------- ------- ------ ------ Loss from operations............................. (596) (865) (1,697) (803) (1,985) (724) (953) Interest and other income, net................... -- -- -- -- 101 49 49 Interest expense................................. (27) (52) (200) (208) (26) (26) -- ------ ------ ------- ------- ------- ------ ------ Net loss......................................... $ (623) $ (917) $(1,897) $(1,011) $(1,910) $ (701) $ (904) ====== ====== ======= ======= ======= ====== ====== Net loss per share: Basic and diluted.............................. $ (.59) $ (.87) $ (1.74) $ (.91) $ (1.83) $ (.66) $ (.82) ====== ====== ======= ======= ======= ====== ====== Weighted average shares: Basic and diluted.............................. 1,051 1,051 1,089 1,110 1,044 1,058 1,100 Pro forma net loss per share (unaudited): Basic and diluted(1)........................... $ (.28) $ (.11) ======= ====== Pro forma weighted average shares (unaudited): Basic and diluted(1)........................... 6,726 7,900
DECEMBER 31, ------------------------------------------------------ JUNE 30, 1994 1995 1996 1997 1998 1999 ----------- ------- ------- ------- ------ ------------ (UNAUDITED) (UNAUDITED) BALANCE SHEET DATA: Cash and cash equivalents.............................. $ 45 $ 81 $ -- $ 142 $2,032 $2,371 Working capital (deficit).............................. (3,007) (2,700) (4,482) (5,545) 455 463 Total assets........................................... 930 613 1,536 1,181 3,866 4,346 Notes payable and accrued interest to stockholders..... 1,697 1,588 2,035 2,716 -- -- Stockholders' equity (deficit)......................... (2,753) (2,420) (4,269) (5,259) 899 994
- ------------------------- (1) See Note 2 of Notes to Financial Statements for a discussion of the computation of pro forma basic and diluted net loss per share and weighted average shares outstanding. 20 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS All statements, trend analyses and other information contained in the following discussion relative to markets for our products and trends in revenues, gross margins and anticipated expense levels, as well as other statements including words such as "anticipate," "believe," "could" "estimate," "expect" "intend" and "plan" and other similar expressions, constitute forward-looking statements. These forward-looking statements are subject to business and economic risks and uncertainties, and our actual results of operations may differ materially from the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Risk Factors" as well as other risks and uncertainties referenced in this prospectus. OVERVIEW We offer business-to-business e-medical management solutions to healthcare payers and providers that are designed to help our clients control the cost and improve the quality of healthcare delivery. Our applications automate and streamline administrative and business processes and enable real-time interaction among various healthcare participants. We currently provide our maxMC solution to six payers with more than seven million members and our Maxsys solutions to more than 200 hospital providers. We recently began offering e-maxMC, our Internet-based medical management solution for payers. We have successfully tested e-maxMC internally and expect to complete beta testing of the application in early 2000. We have historically derived revenues from the installation and licensing of our maxMC and Maxsys solutions, sublicensing third-party software applications as part of system implementations and delivery of post-contract customer support, training and consulting services. We are currently focusing our primary development, sales and marketing efforts on our e-maxMC, maxMC and Maxsys II solutions. Although we do not anticipate future system sales or enhancements of Maxsys I, we plan to continue to support it for the foreseeable future. Traditionally, system sale revenues and associated costs have been recognized using the percentage-of-completion method, with labor hours incurred relative to total estimated contract hours as the measure of progress towards completion. Revenues from sublicensing of third-party software are recognized upon installation. Support services are recognized ratably over the support period. Revenues from training and consulting are recognized as such services are delivered. We are introducing a new subscription-based fee structure for our e-maxMC and maxMC solutions that would provide for implementation services at a fixed hourly rate and the licensing of installed systems and post customer contract support through a monthly subscription fee based upon the number of members covered by the payer organization. If subscription-based contracts are entered into, we will recognize the fair value of the implementation services as such services are delivered and will recognize subscription fees on a monthly basis. We expect to expand our operations and employee base, including our sales, marketing, research and development, implementation, and support services resources. In particular, we intend to expand our sales force significantly to market our maxMC, e-maxMC and Maxsys II solutions to payer organizations and hospitals. We also intend to investigate new strategic relationships to enhance our ability to penetrate markets and develop and provide additional services which could lead to additional expenditures. During 1998 and 1999, we recorded unearned compensation totaling $4,166,000 and $1,591,000, respectively, in connection with the grant of certain options to employees. This amount is being amortized over the four-year vesting period of the related options. These options were issued to create incentives for continued performance. Of the total unearned compensation, $1,173,000 was amortized in 1998 and $997,000 was amortized in the six months ended June 30, 1999. We expect aggregate amortization to be $483,000 in the third quarter of 1999, $493,000 in the 21 22 fourth quarter of 1999, $1,503,000 in 2000, $765,000 in 2001, $289,000 in 2002 and $54,000 in 2003. Unearned compensation expense will be reduced for future periods to the extent that options are terminated prior to full vesting. RESULTS OF OPERATIONS The following table presents the statement of operations data as a percentage of total revenues:
Percentage of Revenues ----------------------------------------- Six Months Ended Year Ended December 31, June 30, ----------------------- -------------- 1996 1997 1998 1998 1999 ----- ----- ----- ----- ----- (unaudited) STATEMENT OF OPERATIONS DATA: Revenues: System sales..................................... 51.9% 77.7% 79.9% 80.1% 80.1% Support services................................. 48.1 22.3 20.1 19.9 19.9 ----- ----- ----- ----- ----- Total revenues................................ 100.0 100.0 100.0 100.0 100.0 ----- ----- ----- ----- ----- Cost of revenues: System sales..................................... 25.8 27.2 36.1 36.9 29.8 Support services................................. 14.7 7.4 6.7 7.4 6.2 ----- ----- ----- ----- ----- Total cost of revenues........................ 40.5 34.6 42.8 44.3 36.0 ----- ----- ----- ----- ----- Gross profit....................................... 59.5 65.4 57.2 55.7 64.0 ----- ----- ----- ----- ----- Operating expenses: Sales and marketing.............................. 40.3 29.1 25.5 29.3 28.5 Research and development......................... 65.4 32.0 22.4 25.3 15.7 General and administrative....................... 41.3 24.1 22.3 20.8 18.9 Stock-based compensation......................... -- -- 18.9 8.3 21.4 ----- ----- ----- ----- ----- Total operating expenses...................... 147.0 85.2 89.1 83.7 84.5 ----- ----- ----- ----- ----- Loss from operations............................... (87.5) (19.8) (31.9) (28.0) (20.5) Interest and other income, net..................... -- -- 1.6 1.9 1.1 Interest expense................................... (10.3) (5.2) (0.4) (1.0) -- ----- ----- ----- ----- ----- Net loss........................................... (97.8)% (25.0)% (30.7)% (27.1)% (19.4)% ===== ===== ===== ===== =====
COMPARISON OF SIX MONTHS ENDED JUNE 31, 1999 AND 1998 Revenues. During the six months ended June 30, 1999, system sales revenues were $3,725,000, an increase of $1,656,000 or 80% from system sales revenues of $2,069,000 during the six months ended June 30, 1998. This increase resulted from growth in the volume of maxMC and Maxsys II contracts and an increase in the value of maxMC contracts. During the six months ended June 30, 1999, one customer accounted for 14% of system sales revenues. During the six months ended June 30, 1999, support services revenues were $926,000, an increase of $412,000 or 80% from support services revenues of $514,000 during the six months ended June 30, 1998. This increase in support services revenues resulted from an increase in the number of support contracts sold for completed maxMC and Maxsys II contracts, partially offset by declines in the number of Maxsys I support customers. Cost of Revenues. Cost of systems sales revenues consists principally of costs incurred in the implementation of our software products, including personnel costs, non-reimbursed travel expenditures, related department overhead, amortization of capitalized software development costs, 22 23 costs of third party software products, and depreciation on equipment. Cost of system sales increased by $432,000 or 45% from $954,000, representing 46% of system sales revenues, during the six months ended June 30, 1998 to $1,386,000, representing 37% of system sales revenues, during the six months ended June 30, 1999. This cost increase resulted from an increase in personnel costs as employees were added to perform software implementations and additional license fees were paid to third party software vendors resulting from an increase in the volume of completed software contracts. The increase in the gross margin on system sales from 54% during the six months ended June 30, 1998 to 63% during the six months ended June 30, 1999 resulted from implementation efficiencies realized from the increased volume of software contracts and the increased size of individual software contracts. We expect that cost of system sales revenues will continue to increase as we add personnel to meet anticipated increases in contract volume. Cost of support services revenues consists of personnel costs, support costs for third party software licenses, related department overhead and depreciation on equipment. Cost of support services revenues increased by $98,000 or 52% from $190,000, representing 37% of support services revenues, during the six months ended June 30, 1998 to $288,000, representing 31% of support services revenues, during the six months ended June 30, 1999. This increase in dollars resulted from an increase in salaries, benefits and other personnel-related expenses as we increased the size of the support services staff due to the increased volume of customers purchasing support contracts. The increase in the gross margin on support services from 63% during the six months ended June 30, 1998 to 69% during the six months ended June 30, 1999 resulted from efficiencies realized from additional support contracts sold for completed Maxsys II and maxMC contracts. We expect that cost of support services revenues will continue to increase in dollar amount as we continue to expand our customer support department to meet anticipated customer demand. Research and Development. Research and development expenses consist of personnel costs, related department overhead and depreciation on equipment. Research and development expenses increased $74,000 or 11% from $653,000, representing 25% of total revenues, during the six months ended June 30, 1998 to $727,000, representing 16% of total revenues, during the six months ended June 30, 1999. This increase in dollars resulted from an increase in salaries, benefits and other personnel-related expenses as we increased the size of the research and development staff. We anticipate that we will continue to devote substantial resources to research and development and that such expenses will increase in dollar amounts. Sales and Marketing. Sales and marketing expenses consist principally of compensation for our sales and marketing personnel, advertising, trade show and other promotional costs, and department overhead. Sales and marketing expenses increased $570,000 or 75% from $757,000, representing 29% of total revenues, during the six months ended June 30, 1998 to $1,327,000, representing 29% of total revenues, during the six months ended June 30, 1999. This increase in dollars resulted from increased salaries, benefits and other personnel-related expenses due to growth in the number of sales and marketing personnel, increases in sales commissions due to an increase in the volume of customer contracts, increases in travel costs due to the increased headcount, and increases in trade shows and other marketing expenses incurred to build additional product awareness. We expect that sales and marketing expenses will continue to increase in dollar amounts as we continue to expand our sales and marketing efforts, continue to add personnel and increase promotional activities. General and Administrative. General and administrative expenses consist of compensation for personnel, fees for outside professional services, and allocated occupancy and overhead costs. General and administrative expenses increased $341,000 or 63% from $538,000, representing 21% of total revenues, during the six months ended June 30, 1998 to $879,000, representing 19% of total revenues, during the six months ended June 30, 1999. This increase in dollars was due to an increase in the number of employees, higher professional service fees, and increased occupancy costs due to the commencement of our Atlanta office lease payment, in December 1998. We believe that our general and administrative expenses will continue to increase in dollar amounts as a result 23 24 of our growing operations, the commencement of a new lease for expanded facilities in Chico in September 1999 and the expenses associated with operating as a public company. Stock-based Expenses. During the six months ended June 30, 1999, we recorded aggregate unearned compensation in the amount of $21,000 in connection with the grant of certain stock options during 1999. Amortization of stock-based compensation expense totaled $997,000 during 1999. See Note 8 of Notes to Financial Statements. Interest and Other Income and Interest Expense. Interest and other income consists primarily of earnings on our cash and cash equivalents. Interest and other income amounted to $49,000 during each six month period ended June 30, 1998 and 1999. During the six month period ended June 30, 1998, we incurred interest expense of $26,000 on obligations to stockholders of the Company. The obligations were paid in full in March 1998. Income Taxes. No income tax provision was recorded in the six months ended June 30, 1998 or 1999 due to the operating losses incurred. COMPARISON OF YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 Revenues. System sales revenues increased by $2,129,000 or 211% from $1,007,000 in 1996 to $3,136,000 in 1997 and by $1,831,000 or 58% to $4,967,000 in 1998. This increase in revenues resulted from growth in the volume of maxMC and Maxsys II contracts. The increase from 1997 to 1998 was also due to an increase in the value of maxMC contracts. In 1996, one customer accounted for 12% of system sales revenues and in 1998, one customer accounted for 13% of system sales revenues. No customer accounted for more than 10% of system sales revenues in 1997. Support services revenues decreased $30,000 or 3% from $932,000 in 1996 to $902,000 in 1997 and increased by $348,000 or 39% to $1,250,000 in 1998. The decrease from 1996 to 1997 in support services revenues resulted from the decline in the total number of Maxsys I customers purchasing support contracts. The increase from 1997 to 1998 in support services revenues resulted from additional support contracts obtained as a result of the completion of maxMC and Maxsys II software implementations, partially offset by a decline in Maxsys I support revenues resulting from a continued decline in the total number of Maxsys I support customers. Cost of Revenues. Cost of system sales increased $598,000 or 120% from $499,000, representing 50% of system sales revenues, in 1996 to $1,097,000, representing 35% of system sales revenues, in 1997 and by $1,147,000 or 105% to $2,244,000, representing 45% of system sales revenues, in 1998. This increase in dollars resulted primarily from an increase in personnel-related expenses arising from an increase in headcount and, to a lesser extent from an increase in license fees paid to third party software vendors resulting from an increase in the volume of completed implementations. The increase in the gross margin on system sales from 50% in 1996 to 65% in 1997 resulted from an increase in contract volume without a proportionate increase in headcount. The decrease in the gross margin on system sales from 65% in 1997 to 55% in 1998 resulted from an increase in headcount as personnel were added in anticipation of increases in the volume of software contracts. Cost of support services revenues increased by $14,000 or 5% from $285,000, representing 31% of support services revenues, in 1996 to $299,000, representing 33% of support services revenues, in 1997 and by $120,000 or 40% to $419,000, representing 34% of support services revenues, in 1998. This increase in dollars resulted from an increase in personnel-related expenses as we increased the size of the support services staff due to the increased volume of customers purchasing support contracts. The decrease in the gross margin on support services from 69% in 1996 to 67% in 1997 resulted from the decline in support services revenues due a decrease in the total number of Maxsys I customers. The decrease in gross margin on support services from 67% in 1997 to 66% in 1998 resulted from an increase in headcount to support the increase in customers purchasing support contracts. 24 25 Research and Development. Research and development expenses increased by $25,000 or 2% from $1,269,000, representing 65% of total revenues, in 1996 to $1,294,000, representing 32% of total revenues, in 1997 and by $99,000 or 8% to $1,393,000, representing 22% of total revenues in 1998. This increase in dollars resulted from an increase in personnel-related expenses as we increased the size of the research and development staff. Sales and Marketing. Sales and marketing expenses increased by $394,000 or 50% from $782,000, representing 40% of total revenues, in 1996 to $1,176,000, representing 29% of total revenues, in 1997 and by $412,000 or 35% to $1,588,000, representing 26% of total revenues, in 1998. This increase in dollars resulted from increased personnel-related expenses due to growth in the number of sales and marketing personnel, increases in sales commissions due to an increase in the volume of software contracts, increases in travel costs due to the increased headcount, and increases in trade shows and other marketing expenses to build additional product awareness. General and Administrative. General and administrative expenses increased by $174,000 or 22% from $801,000, representing 41% of total revenues, in 1996 to $975,000, representing 24% of total revenues, in 1997 and by $410,000 or 42% to $1,385,000, representing 22% of total revenues, in 1998. This increase in dollars was due to an increase in the number of employees and higher professional service fees. The increase from 1997 to 1998 was also due to increased employee relocation expenses. Stock-based Expenses. During 1998, we recorded aggregate unearned compensation in the amount of $4,166,000 in connection with the grant of certain stock options during 1998. Related amortization totaled $1,173,000 during 1998. See Note 8 of Notes to Financial Statements. INTEREST AND OTHER INCOME AND INTEREST EXPENSE Interest expense increased from $200,000 in 1996 to $208,000 in 1997 due to additional borrowings from stockholders, and decreased to $26,000 in 1998 due to the repayment of stockholder borrowings using proceeds from the sale of preferred stock in February 1998. INCOME TAXES No provision for federal and state income taxes was recorded as we incurred net operating losses in 1996, 1997 and 1998. As of December 31, 1998, we had net operating loss carryforwards for federal tax purposes of $6,309,000 and for state tax purposes of $1,442,000. These federal and state tax loss carryforwards are available to reduce future taxable income and expire at various dates through fiscal 2013. Under the provisions of the Internal Revenue Code, certain substantial changes in our ownership may limit the amount of net operating loss carryforwards that could be utilized annually in the future to offset taxable income. We have not recognized a deferred tax asset on our balance sheet. See Note 5 of Notes to Financial Statements. QUARTERLY FINANCIAL RESULTS The following table presents our quarterly results of operations for each of the six quarters in the period ended June 30, 1999. You should read the following table in conjunction with our financial statements and the related notes included in this prospectus. We have prepared this unaudited information on the same basis as the audited financial statements. This table includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair 25 26 presentation of our financial position and operating results for the quarters presented. You should not draw any conclusions about our future results from the results of operations for any quarter.
QUARTER ENDED -------------------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, 1998 1998 1998 1998 1999 1999 --------- -------- ------------- ------------ --------- -------- (UNAUDITED) STATEMENTS OF OPERATIONS DATA: Revenues: System sales................... $ 677 $1,392 $1,766 $1,132 $1,688 $2,037 Support services............... 239 275 299 437 444 482 ------ ------ ------ ------ ------ ------ Total revenues.............. 916 1,667 2,065 1,569 2,132 2,519 ------ ------ ------ ------ ------ ------ Cost of revenues: System sales................... 432 522 672 618 707 679 Support services............... 90 100 107 122 145 143 ------ ------ ------ ------ ------ ------ Total cost of revenues...... 522 622 779 740 852 822 ------ ------ ------ ------ ------ ------ Gross profit..................... 394 1,045 1,286 829 1,280 1,697 ------ ------ ------ ------ ------ ------ Operating expenses: Sales and marketing............ 363 394 346 485 654 673 Research and development....... 335 318 371 369 368 359 General and administrative..... 264 274 461 386 427 452 Stock-based compensation....... 51 164 431 527 517 480 ------ ------ ------ ------ ------ ------ Total operating expenses.... 1,013 1,150 1,609 1,767 1,966 1,964 ------ ------ ------ ------ ------ ------ Loss from operations............. (619) (105) (323) (938) (686) (267) Interest and other income, net... 16 33 26 26 22 27 Interest expense................. (26) -- -- -- -- -- ------ ------ ------ ------ ------ ------ Net loss......................... $ (629) $ (72) $ (297) $ (912) $ (664) $ (240) ====== ====== ====== ====== ====== ======
As a Percentage of Total Revenues -------------------------------------------------------------------------- Revenues: System sales................... 73.9% 83.5% 85.5% 72.1% 79.2% 80.9% Support services............... 26.1 16.5 14.5 27.9 20.8 19.1 ------ ------ ------ ------ ------ ------ Total revenues.............. 100.0 100.0 100.0 100.0 100.0 100.0 ------ ------ ------ ------ ------ ------ Cost of revenues: System sales................... 47.2 31.3 32.5 39.4 33.2 26.9 Support services............... 9.8 6.0 5.2 7.8 6.8 5.7 ------ ------ ------ ------ ------ ------ Total cost of revenues...... 57.0 37.3 37.7 47.2 40.0 32.6 ------ ------ ------ ------ ------ ------ Gross profit..................... 43.0 62.7 62.3 52.8 60.0 67.4 ------ ------ ------ ------ ------ ------ Operating expenses: Sales and marketing............ 39.6 23.6 16.7 30.9 30.7 26.7 Research and development....... 36.6 19.1 18.0 23.5 17.3 14.3 General and administrative..... 28.8 16.4 22.3 24.6 20.0 17.9 Stock-based compensation....... 5.6 9.9 20.9 33.6 24.2 19.1 ------ ------ ------ ------ ------ ------ Total operating expenses.... 110.6 69.0 77.9 112.6 92.2 78.0 ------ ------ ------ ------ ------ ------ Loss from operations............. (67.6) (6.3) (15.6) (59.8) (32.2) (10.6) Interest and other income, net... 1.7 2.0 1.2 1.7 1.1 1.1 Interest expense................. (2.8) -- -- -- -- -- ------ ------ ------ ------ ------ ------ Net loss......................... (68.7%) (4.3%) (14.4%) (58.1%) (31.1%) (9.5%) ------ ------ ------ ------ ------ ------
26 27 Our revenues in the fourth quarter have generally been lower than those in the third quarter due to staff vacations and our customers' holiday schedules, which impact the progress of our implementation efforts. LIQUIDITY AND CAPITAL RESOURCES Since inception, we have financed our operations through net cash generated from operating activities, and private sales of common and preferred stock, with net proceeds totaling $11.1 million. As of June 30, 1999, we had $2.4 million in cash and cash equivalents and $463,000 in working capital with no outstanding debt. Net cash used in operating activities was $359,000 in 1996, $17,000 in 1997 and $2.4 million in 1998. Net cash provided by operating activities was $595,000 in the six months ended June 30, 1999. Net cash used to fund operating activities in 1996 reflects net losses before non-cash charges for depreciation and amortization and increases in accounts receivable, offset in part by increases in deferred revenues, and increases in accounts payable and accrued expenses. Net cash used to fund operating activities in 1997 reflects net losses before non-cash charges for depreciation and amortization and decreases in deferred revenue, offset in part by increases in accounts payable and accrued expenses, and decreases in accounts receivable. Net cash used to fund operating activities in 1998 reflects net losses before non-cash charges for depreciation and amortization, increases in accounts receivable, decreases in deferred revenue, and decreases in accounts payable and accrued expenses. Net cash provided by operating activities in the six months ended June 30, 1999 consists of net income before non-cash charges for depreciation and amortization, and increases to accounts payable, accrued expenses and deferred revenue. Net cash used in investing activities was $161,000 in 1996, $235,000 in 1997, $397,000 in 1998 and $258,000 for the six months ended June 30, 1999. Investing activities consist primarily of purchases of computer equipment, office furniture and leasehold improvements, and additions to capitalized software development costs. Net cash generated from financing activities was $439,000 in 1996, $394,000 in 1997, $4.7 million in 1998 and $2,000 for the six months ended June 30, 1999. Net cash generated from financing activities in 1996 and 1997 resulted almost entirely from net proceeds from bank and stockholder borrowings. Net cash generated from financing activities in 1998 resulted from the issuance of preferred stock and common stock, partially offset by principal payments on stockholder notes payable. In February 1999, we obtained a line of credit that allows maximum borrowings of $2.0 million. Advances on the line of credit are secured by all of our tangible and intangible personal property. At June 30, 1999, no credit had been drawn down against the line of credit. In August 1999, we borrowed $270,000 against the line of credit to finance certain fixed assets. We signed a lease for a new principal facility in March 1999. Lease payments commenced in September 1999 and will continue for eighty-four months, resulting in aggregate lease expenses of approximately $34,000 per quarter. At June 30, 1999, we had capital commitments in the amount of $272,000 related to the establishment of this facility. We believe that sales to hospital providers have decreased due to their internal Year 2000 issues. We expect this trend to continue through the first quarter of 2000. We expect to experience significant growth in our operating expenses for the foreseeable future in order to execute our business plan. As a result, we anticipate that operating expenses and planned capital expenditures will constitute a material use of our cash resources. In addition, we may utilize cash resources to fund acquisitions or investments in other businesses, technologies or product lines. We believe that available cash and cash equivalents and the net proceeds from the sale of the common stock in this offering will be sufficient to meet our working capital and operating expense requirements for at least the next twelve months. Thereafter, we may require 27 28 additional funds to support our working capital and operating expense requirements or for other purposes and may seek to raise such additional funds through public or private debt or equity financings. There can be no assurance that such additional financing will be available, or if available, will be on reasonable terms and not dilutive to our stockholders. YEAR 2000 READINESS Many currently installed computer systems, software products and other control devices are unable to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, many companies' computer systems, software products and control devices may need to be upgraded or replaced in order to operate properly in 2000 and beyond. We have designed our solutions to be Year 2000 compliant. The third-party software vendors whose products we sublicense to our customers have provided us with assurances that their software is also Year 2000 compliant. However, there can be no assurance that our solutions and the software we sublicense to our customers do not contain undetected errors or defects associated with Year 2000 date functions. If such errors or defects do exist, we may incur material costs to resolve them. We have assessed our material internal information technology systems, including our own solutions and third-party software and hardware technology, and our non-information technology systems. We have completed the majority of the necessary testing of our critical information technology systems and non-information technology systems. To the extent that we are not able to test the technology provided by third-party vendors, we have sought assurances from these vendors that their systems are Year 2000 compliant. We are not currently aware of any material operational issues or costs associated with preparing our internal information technology and non-information technology systems for the Year 2000. However, there can be no assurance that we will not experience material unanticipated problems and costs caused by undetected errors or defects in the technology used in our internal information technology and non-information technology systems. If our customers are not Year 2000 compliant, they may experience material costs to remedy problems, and they could potentially face litigation costs if problems with their information or other systems effect patient care. In either case, Year 2000 issues could reduce or eliminate the budgets that current or potential customers could have for our solutions or could delay purchases of our solutions. As a result, our business could be seriously harmed. We have funded our Year 2000 plan from operating cash flows and have not separately accounted for these costs in the past. To date, these costs have not been material. We will incur additional costs related to the Year 2000 plan but anticipate that the costs will continue to be funded out of our operating cash flow and regular personnel work schedules. Due to the Year 2000 readiness information gathered so far on our solutions and internal systems that are critical to our continued operations in the Year 2000, we believe that significant expenditures on contingency plans is not warranted and no such expenditures have been made. Finally, we are also subject to external forces that might generally affect industry and commerce, such as utility or transportation company Year 2000 compliance failure interruptions. Year 2000 issues affecting our business, if not adequately addressed by us, our third party vendors or suppliers or our customers, could have a number of "worst case" consequences. These include: - a significant decline in demand for our solutions; - the failure of our newer solutions or applications in development to achieve market acceptance; 28 29 - claims from our customers asserting liability, including liability for breach of warranties related to the failure of our solutions and services to function properly, and any resulting settlements or judgments; and - our inability to manage our own business. RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 is effective for financial statements for years beginning after December 15, 1998. SOP 98-1 provides guidance over accounting for computer software developed or obtained for internal use including the requirement to capitalize specified costs and amortization of such costs. We have adopted the provisions of SOP 98-1 in our fiscal year beginning January 1, 1999, and the effects of adoption did not have a material effect on our financial statements. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivatives and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for all fiscal quarters beginning with the quarter ending June 30, 1999. SFAS 133 establishes accounting and reporting standards of derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In July 1999, the Financial Accounting Standards Board issued SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133" ("SFAS 137"). SFAS 137 deferred the effective date until the first fiscal quarter ending June 30, 2000. We will adopt SFAS 133 in our quarter ending June 30, 2000 and do not expect such adoption to have a material effect on our financial statements. In December 1998, the AICPA issued Statement of Position No. 98-9, "Modification of SoP No. 97-2, Software Revenue Recognition, With respect to Certain Transactions" ("SoP 98-9"), which is effective for transactions entered into in fiscal years beginning after March 15, 1999. SoP 98-9 amends SoP 97-2 and extends the effective date of SoP No. 98-4 "Deferral of the Effective Date of a Provision of SoP 97-2, Software Revenue Recognition" ("SoP 98-4"), and provides additional interpretive guidance. The adoption of SoP 97-2 has not had, and the adoption of SoP 98-4 and SoP 98-9 are not expected to have, a material effect on our financial statements. 29 30 BUSINESS OVERVIEW We offer business-to-business e-medical management solutions to healthcare payers and providers designed to help our clients control the cost and improve the quality of healthcare delivery. Our applications automate and streamline administrative and business processes and facilitate real-time interaction among various healthcare participants. We enable our clients to deliver consistent and appropriate medical care utilizing their chosen clinical guidelines and business process rules. We are also marketing e-medical management solutions that add functionality to payers' Web sites in order to attract repeat visits by members. We refer to Internet-based solutions that generate repeat visits as sticky applications. We currently provide our maxMC solution to six payers with more than seven million members and our Maxsys solutions to more than 200 hospital providers. We recently began offering e-maxMC, our Internet-based medical management solution for payer organizations. We have successfully tested e-maxMC internally and expect to complete a beta test of the application in early 2000. We believe that the lack of medical management functionality offered by existing Internet-based products and services provides a significant market opportunity for e-maxMC. Our medical management solutions, which utilize an open, ntier system architecture, complement existing legacy and Internet-based products. Our systems are scalable, flexible and secure, and can be deployed across a broad range of computing environments. As a result, our customers are able to configure and adapt our solutions to fit their specific workflow processes, clinical guidelines, existing information systems and business models. THE INDUSTRY Growth and Proliferation of the Internet The Internet is the fastest growing medium in history. The Internet is increasingly being used for business-to-business and business-to-consumer interaction and is transforming the fundamental economics and structure of many industries. The use of the Internet has evolved from simple information publishing, messaging and data gathering to enabling critical business transactions and confidential communications. We believe payers and providers will increasingly rely on the Internet to improve and expand their businesses and to control the cost of healthcare delivery. In a recent survey by The Gartner Group, e-commerce ranked as the second most important initiative for managed care organizations after Year 2000 issues and was identified as the factor that will differentiate managed care organizations in the future. Complexity of the Healthcare Industry Healthcare costs in the United States have risen dramatically over the past two decades and now represent approximately $1.0 trillion, or 14% of the annual gross domestic product. It is estimated that of this $1.0 trillion, over $250 billion is wasted through the delivery of unnecessary care, performance of redundant tests and procedures and excessive administrative costs. Insurance carriers and other third-party payers have moved aggressively to control costs. These payers have established rules for providers and patients to follow in arriving at treatment decisions in order to manage the utilization of healthcare resources more efficiently. These rules have increased the complexity and administrative burden of delivering healthcare by requiring numerous and complicated interactions among various industry participants, including interactions related to eligibility verification, benefits determination, care authorization and case and disease management. Managing these interactions is labor and time intensive, as most information is delivered via paper-, phone- and fax-based exchanges and involves redundant data entry and significant communication inefficiencies. 30 31 Problems with the Current Healthcare Information Technology Environment The unique characteristics of the healthcare industry, including the large number of participants, the complexity of healthcare transactions and pervasive concerns about confidentiality of patient information, have inhibited the development of technology solutions that automate workflows across multiple industry participants. Healthcare organizations and their traditional technology vendors have focused on automating discrete business and administrative processes, such as billing and scheduling for physicians, or claims processing for hospitals and payers. As a result, the industry currently uses numerous different mainframe and client/server systems that do not communicate with one another, trapping information that needs to be shared among industry participants in isolated, proprietary databases using non-standardized data formats. Impact of the Internet on the Healthcare Industry We believe the healthcare industry, because of its size, fragmentation and dependence on information exchange, is extremely well suited to benefit from greater use of the Internet. Consumers are utilizing the Internet to become more involved in their personal healthcare by accessing healthcare information content and purchasing health-related goods and services. Healthcare organizations are increasingly utilizing the Internet to achieve greater connectivity and real-time communication among healthcare industry participants across the continuum of care. However, we believe that many existing Internet-based products have merely linked industry participants without adequately addressing the functionality needed to manage business and consumer processes, procedures and transactions. OUR SOLUTIONS We provide the medical management functionality lacking in existing legacy and Internet-based products and services. We leverage the open, ntier architecture of our systems to manage communication and interaction among payers, providers and members. Our solutions automate and streamline administrative and business processes, and minimize inefficient paper-, fax- and phone-based communications among payers, providers and members. Our solutions benefit payers by: - automating and streamlining workflow and business processes to enhance operational efficiencies; - increasing adherence to clinical guidelines to reduce delivery of inappropriate care; - providing sticky applications for their Web sites; - enhancing member satisfaction; and - aggregating member data for trend analysis and decision support. Our solutions benefit providers by: - automating and streamlining workflow and business processes to enhance operational efficiencies; - reducing payment denials and claims appeals by payers; - increasing quality and consistency of care; - improving the efficiency of incident reporting and reducing the risk of legal liability; - assisting with accreditation and administration of compliance programs; and - aggregating data for trend analysis and decision support. 31 32 Members benefit from: - increased access to health information content; - empowerment and self care, including participation in case management, disease management and wellness programs; and - improved information flow such as referral tracking, claims status inquiries and personal information updating. OUR STRATEGY Our objective is to be the leading provider of e-medical management solutions for healthcare payers and providers. Key components of our strategy include: Aggressively marketing our Internet-based medical management solution We will aggressively market e-maxMC to payers. We believe that the lack of medical management functionality offered by existing Internet-based products and services provides a significant market opportunity. Developing sticky applications for member-focused, payer-branded Web sites We will incorporate our sticky applications into payers' Web sites to assist them with their Internet healthcare initiatives. In addition, we plan to partner with leading companies to provide a comprehensive Internet services offering for our payer clients, including health content, disease management tools and e-commerce capabilities. We believe that this will enable us to forge stronger relationships with our payer clients and generate sponsorship, advertising and e-commerce revenues. Achieving greater market penetration and leveraging our existing customer base We intend to expand our sales and marketing team significantly in order to achieve greater penetration in our markets. We will continue to pursue opportunities for additional sales to customers who may wish to acquire our new product offerings or extend our solutions to new facilities and territories. We will maintain our commitment to providing excellent customer service. Continuing to add functionality to our medical management solutions We will further develop the features and functionality of our solutions to enhance our competitive position. We will continue to leverage our industry experience and understanding of payers' and providers' specific medical management requirements and respond to developments in the healthcare industry to address our customers' evolving business needs. We recently added functionality to our payer solution by incorporating an expedited appeals function in response to new government regulations requiring payers to process members' appeals of care denials within a seventy-two hour period. Pursuing strategic partnerships and acquisitions We intend to target and pursue strategic acquisitions and relationships to accelerate the implementation of elements of our strategy. We may pursue acquisitions, partnerships or licensing arrangements to obtain technology if we determine that to do so would be more cost effective or timely than developing our own. We also may choose to broaden our customer base through acquisitions to improve our economies of scale. 32 33 PRODUCTS We currently market our solutions to payers and providers. The flexible and open design of our applications enables us to configure them to address our customers' evolving needs and specific business requirements. Our solutions feature: - Rules Based Processing Capabilities. Our workflow engine utilizes a series of customized "if . . . then . . . " associations to trigger actions based upon changes in the state of any data within the database (e.g., automatically notifying a case manager if a high-risk authorization is requested). - Clinical Guidelines integrated into Workflow Applications. Our solutions incorporate externally licensed and/or internally developed medical management criteria into automated authorization, case management and disease management workflow processes. - Proprietary Interfacing Capabilities. We have developed more than 300 proprietary interfaces which enable efficient integration of our medical management solutions with other data systems. - Trend Analysis and Decision Support Tools. Our solutions enable healthcare personnel to graphically view data in order to identify trends and spend more time resolving issues rather than identifying them. MAXMC. Our core medical management solution for payers is maxMC. maxMC integrates a payer's internal medical management guidelines and business processes with member specific information to improve workflow and more effectively manage the care of the payer's members. Key functions of this product include: Authorization Center. Verifies membership and benefits eligibility. Incorporates industry standard clinical guidelines, including InterQual(R) and Milliman & Robertson, and/or customer-defined criteria into the authorization process to ensure consistent care decisions across member populations. Once the authorization data is input and the treatment request is authorized, the appropriate authorization data can be directly and promptly exported to the payer's claims adjudication systems. Case and Disease Management. Supports both case management and disease management programs using a combination of clinical disease assessment protocols selected by the client. These protocols can be employed to determine appropriate levels of care, perform short- and long-term care planning and minimize unnecessary and costly procedures. Health assessments can be deployed to identify members requiring case or disease management, care planning or education. Credentialing. Supports the provider credentialing process by automating the maintenance and review of physician and other care provider information, such as continuing medical education credits, medical board certifications and adverse actions, and import and export integration with the National Practitioner Data Bank and other governmental bodies. E-MAXMC. Our Internet-based medical management solution for payers, e-maxMC, leverages our Web-enabled architecture and the Internet's universal accessibility to integrate providers and members into payers' internal medical management systems. This product will enable providers and members secure access to a payer's medical management information and proprietary business processes, giving them the ability to engage in real-time, Internet-based transactions such as clinically-based authorizations, referrals and health risk assessments. We have successfully tested e-maxMC internally, and we expect to complete a beta test of the application in early 2000. We will leverage e-maxMC's sticky applications to assist our payer clients with the development of payer-branded healthcare Web sites and other Internet healthcare initiatives. In addition, we plan to provide payer organizations with, among other Internet services, health content, disease management tools and e-commerce capabilities in partnership with leading Internet 33 34 companies. We believe that this strategy will enable us to forge strong relationships with our payer clients, as well as generate sponsorship, advertising and e-commerce revenues. e-maxMC enables the following Web-based interactions between payers and providers: Referral Advice. Online notification to payers of referrals to specialists and others by primary care physicians. Authorization Requests and Communications. Affords primary care physicians and specialists a medium for conducting on-line eligibility checks, authorizations for care, clinical criteria analysis and benefits checks, in each case, in accordance with individual payers' requirements. Assignment of Care. Online capability for primary care physicians to assign care management to appropriate specialists. Cross-coverage. Online notification by one primary care physician that another primary care physician will provide on-call coverage for a specific period of time. Case and Disease Management Program Enrollment. Online requests that patients be considered for enrollment in a particular case or disease management program. Inpatient Admission. Online notification by an inpatient facility that a member has been admitted. Health Risk Assessment. Online completion of health risk assessments by primary care physicians and specialists. e-maxMC enables the following Web-based interactions between payers and its members: Information Exchange. Online reviewing and updating of member demographic information and checking of plan benefit and claim status information. Physician Selection. Online selection of primary care physician in accordance with payer-specific policies from up-to-date lists of in-network physicians. Health Risk Assessment. Online completion of health risk assessments by members. MAXSYS II. Our solution for hospital providers, Maxsys II, enables hospital providers to improve communications and apply more efficient workflow tools to the process of delivering healthcare. Maxsys II is the successor to our Maxsys I product. Key functions of the Maxsys II product include: Case/Utilization Management. Helps ensure patients receive appropriate levels of care, minimizes inappropriate length of stay expenses, avoids inefficient deployment of human resources and reduces reimbursement denials resulting from failure to follow payer guidelines. This is achieved by automating the initial evaluation and on-going review of patient care in order to monitor compliance with customer-defined clinical guidelines or industry standard clinical guidelines, such as InterQual(R) and Milliman & Robertson. Quality Management. Helps identify deficiencies in patient care or provider performance and alerts the facilities' process improvement personnel for early intervention. Monitors and evaluates the provider's care processes, treatments, operative procedures and outcomes. Allows quality managers to better monitor high-cost, high-risk procedures and to enforce quality initiatives by providing variance reporting, process monitoring and centralized data. Risk Management. Minimizes financial losses by automating and supporting timely and thorough investigations, interventions, communication and education regarding potential and actual claims. Through efficient incident reporting, a provider's risk management staff may be notified instantly as incidents are reported by personnel anywhere within the organization. The function 34 35 also supports efficient management, tracking, and analysis of potential and asserted claims by patient/episode, staff members, physicians, allied health professionals and visitors. Infection Control. Facilitates effective management of epidemology and analysis of treatment protocols based on the National Nosocomial Infections Study model, which reports the national standards for epidemology studies. Eliminates manual data entry by extracting pertinent data from other sources in a provider's information technology system and from data collected by case and quality management staff. Credentialing. Supports the provider credentialing process by automating the maintenance and review of physician and other care provider information such as continuing medical education credits, medical board certifications and adverse actions. Import and export integration with the National Practitioner Data Bank and other governmental bodies may be performed. SERVICES We offer comprehensive implementation services such as: - management of projects; - identification of customer-specific system requirements; - consideration of interactions between our software and our customer's information systems and designing appropriate workflow processes; - building proprietary interfaces to legacy and other database systems and configuring hardware and software to support optimal workflow processes; and - training customer personnel. We plan to offer a broad range of Internet-related services, such as: - co-developing payer-branded healthcare Web sites; - designing and implementing branding strategies and sticky applications; - determining hardware and software requirements; and - providing general health content, disease management tools and e-commerce capabilities in partnership with leading companies. CUSTOMERS We target payers with membership ranging from several million to 50,000 covered lives. We currently serve six payers with a combined membership of more than seven million participants. Our top three payer customers by total contract value are Blue Shield of California, Highmark (Blue Cross Blue Shield of Western Pennsylvania) and Renal Management Systems (a subsidiary of Baxter). Blue Shield of California and Highmark are currently implementing our maxMC solution and plan to be live with the solution in late 1999. Renal Management Systems, currently using maxMC, was the first of our customers to utilize maxMC's disease management functionality, which is implemented using a central database and twenty-two remote satellite operations throughout the United States. We target hospital providers with licensed beds ranging from several thousand to as few as 250. We currently serve over 200 providers. Our top three provider customers by total contract value are New York and Presbyterian Health Network located in New York, New York, All Children's Hospital of St. Petersburg, Florida and the Baptist Healthcare Systems, Inc. located in Louisville, Kentucky. New York and Presbyterian Health Network is currently implementing Maxsys II at nine of its thirteen facilities. All Children's Hospital has recently completed implementation of Maxsys II. Baptist Healthcare Systems has completed implementation of 35 36 Maxsys II across its five hospital system. Many of our hospital provider customers continue to use Maxsys I, the predecessor of Maxsys II, which we no longer market. TECHNOLOGY OVERVIEW We believe that our proprietary technology platform provides us with a significant competitive advantage. Our products utilize ntier and web architecture systems derived from our proprietary object oriented software foundation. Through the application of middleware platforms that include business rules and service functions, our technology supports our e-medical management solutions by ensuring high availability and scalability. We currently employ Oracle database management systems to support the data storage requirements of our solutions. We are also currently working towards releasing a Microsoft SQL Server database management system version to appropriately qualified sites. We have developed to an open architecture standard, allowing separate functional components to run on several different hardware platforms. Maxsys II and maxMC, based upon the leading fourth generation language of PowerBuilder, run on standard Intel-compatible PCs. Our common object request broker architecture, CORBA, based rules engine runs on Microsoft NT and Sun Solaris systems. emaxMC, which utilizes Java and Java Servelets for its functionality and either Microsoft's Internet Explorer or Netscape's Netscape Communicator browsers for the provider interface, makes use of any Internet capable system with the application itself being served by a Microsoft NT or Sun Solaris platform. Our data interface engine operates on the leading UNIX or Microsoft NT platforms. Additional servers may be placed in the system (e.g., report server or fax server) in order to ensure scalability without performance loss. The interaction of all these services and middleware makes the system truly ntiered, rather than two-tiered (client/server) or three-tiered (client/application/server). COMPETITION The market for our solutions is highly competitive and is characterized by rapidly changing technology, evolving user needs and the frequent introduction of new products. Certain aspects of our comprehensive medical management solutions compete with functionality supplied by other companies. The principal companies we compete against in the payer market include HPR (a subsidiary of McKesson HBOC), MedDecision and PhyCom. In the hospital provider market, we usually compete against MIDS and SoftMed Systems/IHS. We expect that competition will continue to increase as a result of consolidation in the Internet, information technology and healthcare industries. We believe that the principal factors affecting competition in our markets include, product functionality, performance, flexibility and features, use of open standards technology, quality of service and support, company reputation, price and overall cost of ownership. See "Risk Factors -- Competition." INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS We are dependent upon our proprietary information and technology. We rely primarily on a combination of copyright, trademark and trade secret laws and license agreements to establish and protect our rights in our software products and other proprietary technology. We require employees and third-party consultants and contractors to enter into nondisclosure agreements to limit use of, access to, and distribution of, our proprietary information. There can be no assurance that our means of protecting our proprietary rights will be adequate to prevent misappropriation. The laws of some foreign countries may not protect our proprietary rights as fully or in the same manner as do the laws of the United States. Also, despite the steps taken by us to protect our proprietary rights, it may be possible for unauthorized third parties to copy aspects of our products, reverse engineer such products or otherwise obtain and use information that we regard as proprietary. Furthermore, there can be no assurance that others will not independently develop 36 37 technologies similar or superior to our technology or design around the proprietary rights owned by us. GOVERNMENT REGULATION Participants in the healthcare industry, such as our payer and provider customers, are subject to extensive and frequently changing laws and regulations, including laws and regulations relating to the confidential treatment and secure transmission of healthcare information such as patient medical records. Additional legislation relating to the use and disclosure of medical information has been proposed at both the state and federal levels, and new federal laws or regulations are likely to be enacted in the near future. Pursuant to the Health Insurance Portability and Accountability Act of 1996, HIPAA, the Department of Health and Human Services, DHHS, has proposed regulations setting forth security standards for all health plans, clearinghouses and providers to follow with respect to an individual's healthcare information that is electronically transmitted, processed, or stored. In addition, HIPAA provides that if Congress does not enact legislation governing privacy of healthcare information by August 21, 1999, DHHS will issue regulations on the subject by February 21, 2000. Congress has not yet enacted any such privacy legislation, but is currently considering various legislative proposals regarding health information privacy. While we do not believe that the security and privacy provisions of HIPAA apply to Landacorp directly, our provider customers and our payer customers must comply with HIPAA, its associated regulations and all other applicable healthcare laws and regulations. Accordingly, in order for our medical management solutions to be marketable, they must contain features and functionality that allow our customers to comply with these laws and regulations. We believe our products currently allow our customers to comply with existing laws and regulations. However, because new regulations are yet to come and because the proposed regulations are subject to modification prior to becoming final, our products may require modification in the future. Any such modification could be expensive, could divert resources away from other product development efforts or could delay future releases or product enhancements. If we fail to offer solutions that permit our customers to comply with applicable laws and regulations our business will suffer. In addition, laws governing healthcare payers and providers are often not uniform among states. This could require us to undertake the expense and difficulty of tailoring our products in order for our customers to be in compliance with applicable state and local laws and regulations. The Internet and its associated technologies are also subject to government regulation. Many existing laws and regulations, when enacted, did not anticipate the methods of Internet-based medical management solutions we offer. We believe, however, that these laws and regulations may nonetheless be applied to us. Current laws and regulations which may affect our Internet-based business relate to the following: - patient medical record information; - the electronic transmission of information between healthcare providers, payers, clearinghouses and other healthcare industry participants; - the use of software applications in the diagnosis, cure, treatment, mitigation or prevention of disease; - health maintenance organizations, insurers, healthcare service providers and/or employee health benefit plans; and - the relationships between or among healthcare providers. We expect to conduct our Internet-based medical management business in substantial compliance with all material federal, state and local laws and regulations governing our operations. However, the impact of regulatory developments in the healthcare industry is complex and difficult to predict, and our business could be adversely affected by existing or new healthcare regulatory 37 38 requirements or interpretations. These requirements or interpretations could also limit the use of the Internet for our medical management solutions or even prohibit the sale of a particular product or service. Because of the Internet's popularity and increasing use, new laws and regulations with respect to the Internet are becoming more prevalent. Such laws and regulations have covered, or may cover in the future, issues such as: - security, privacy and encryption; - pricing; - content; - copyrights and other intellectual property; - contracting and selling over the Internet; - distribution; and - characteristics and quality of services. Moreover, the applicability to the Internet of existing laws in various jurisdictions, industry laws governing issues such as property ownership, sales and other taxes, libel and personal privacy, is uncertain and may take years to resolve. Demand for our Internet-based applications and services may be affected by additional regulation of the Internet. Any new legislation or regulation regarding the Internet, or the application of existing law and regulations to the Internet, could adversely affect our business. Additionally, while we do not currently operate outside of the United States, the international regulatory environment relating to the Internet market could have an adverse effect on our business, especially if we expand internationally. The growth of the Internet, coupled with publicity regarding Internet fraud, may also lead to the enactment of more stringent consumer protection laws. These laws may impose additional burdens on our business. The enactment of any additional laws or regulations in this area may impede the growth of the Internet, which could decrease our potential revenues or otherwise cause our business to suffer. EMPLOYEES As of August 31, 1999, we employed ninety-eight employees, including twenty-seven employees in research and development, forty-one employees in client services (including implementation and support services), nineteen employees in sales and marketing and eleven employees in finance and administration. Our success depends on our continued ability to attract and retain highly skilled and qualified personnel. Competition for such personnel is intense in the information technology industry, particularly for talented software developers, service consultants, and sales and marketing personnel. There can be no assurance that we will be able to attract and retain qualified personnel in the future. Our employees are not represented by any labor unions. We consider our relations with our employees to be good. FACILITIES Our corporate headquarters are located in Atlanta, Georgia, and our Research and Development and Support Departments are located in Chico, California. We have under leases approximately 21,000 square feet of office space. We anticipate that our current facilities are adequate for our current needs. LEGAL PROCEEDINGS Landacorp is not currently involved in any litigation. 38 39 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth information with respect to our executive officers and directors as of August 31, 1999.
NAME AGE POSITION ---- --- -------- Eugene Santa Cattarina............... 52 President, Chief Executive Officer and Director Stephen Kay.......................... 37 Chief Operating Officer and Chief Financial Officer Bryan Lang........................... 41 Chief Technology Officer, Chief Marketing Officer and Director David Brown.......................... 44 Senior Vice President, Sales Marlene McCurdy...................... 46 Senior Vice President, Client Services Thomas Stephenson.................... 57 Chairman of the Board of Directors Howard Cox........................... 55 Director Jason Rosenbluth, MD................. 42 Director Jerome Grossman, MD.................. 60 Director
- ------------------------- Eugene Santa Cattarina, President and Chief Executive Officer and Director, came to Landacorp in July 1998, after serving since 1996 as President and Chief Executive Officer of Medicode, Inc., a leading healthcare information technology company that was recently acquired by United Healthcare Corporation. From 1986 to 1993, Mr. Santa Cattarina served in a number of leadership positions with TDS Healthcare Systems Corporation, a healthcare software systems company, including President and Chief Operating Officer. Following the acquisition of TDS Healthcare Systems Corporation by ALLTEL Corporation in 1993, Mr. Santa Cattarina continued as President and Chief Operating Officer of TDS Healthcare Systems Corporation until 1994, and as Executive Vice President of ALLTEL Information Services-Healthcare Division from 1994 to 1995. From 1967 to 1986, he held various positions with Technicon Corporation, a clinical laboratory automation company, including President, Domestic Division. Stephen Kay, Chief Operating Officer and Chief Financial Officer, has been involved with Landacorp since 1992, initially as the Director of Finance of Landacorp UK Ltd. In early 1995, Mr. Kay was promoted to Chief Operating Officer of Landacorp. He is currently Chief Operating Officer and Chief Financial Officer of Landacorp and is responsible for overseeing finance and operations. He has worked in a consultative capacity in the structuring of contracts, implementation, and deployment plans of healthcare information systems for hospitals, integrated delivery networks, managed care organizations, and insurance companies, as well as for the United Kingdom's National Health Service. Mr. Kay is a member of The Institute of Chartered Accountants in England and Wales. He received his training at Touche Ross (now Deloitte Touche) in London, England. Bryan Lang, Chief Technology Officer and Chief Marketing Officer and Director, is the founder of Landacorp. Mr. Lang served as Chief Executive Officer of Landacorp from 1993 to 1998, has served as Chief Technology Officer since 1998, and as Chief Marketing Officer since January 1999. Mr. Lang has been a consultant and automated systems designer for seventeen years. He has worked extensively with healthcare industry projects in the United States, the United Kingdom, Canada, Saudi Arabia and Australia. A specialist in quality and resource management, he has worked with hundreds of hospitals, health maintenance organizations, ambulatory care services, private physician practices and the U.S. and Saudi armed forces. David Brown, Senior Vice President, Sales, joined Landacorp in July 1998. From 1997 to 1998, he was Vice President-Sales for HBO & Company's (now McKesson/HBOC) provider and payer solutions. From 1985 to 1997, Mr. Brown served in a number of sales and sales executive positions including Regional Sales Director/Vice President-Sales for Eclipsys Corporation (formerly ALLTEL Information Services-Healthcare Division, TDS Healthcare Systems Corporation and Technicon Data Systems). From 1983 to 1985, Mr. Brown was Regional Sales Director for 39 40 Compucare, a provider of mainframe- and minicomputer-based software and services to hospitals. Mr. Brown began his career in healthcare with Technicon in 1980 as a Hospital Consultant and then moved into the position of Sales Representative. Marlene McCurdy, Senior Vice President, Client Services, joined Landacorp in July 1998 after serving as Director, Implementation Strategy/Research & Development for Eclipsys Corporation since 1995. From 1990 to 1995, Ms. McCurdy held a number of implementation and technical support positions for TDS Healthcare Systems Corporation and ALLTEL Information Services -- Healthcare Division, including Director, Implementation Services. Thomas Stephenson, Director and Chairman of the Board, has been a director of Landacorp since February 1998. He has been a general partner and managing member of Sequoia Capital General Funds since 1988. Prior thereto, Mr. Stephenson was President of Fidelity Venture Associates, the venture capital subsidiary of Fidelity Investments. Mr. Stephenson is a director of Chapters Online and a number of private companies. Mr. Stephenson received his BA and MBA from Harvard University, and a law degree from Boston College Law School. Howard Cox, Director, has served as a director of Landacorp since February 1998. He is a General Partner of Greylock, a national venture capital firm headquartered in Boston, with which he has been associated for 28 years. Mr. Cox is a Director of Stryker Corporation in Michigan and numerous other private companies. Prior to joining Greylock, Mr. Cox served in the Office of the Secretary of Defense. Jason Rosenbluth, MD, Director, has served as a director of Landacorp since February 1998. Dr. Rosenbluth is a Managing Director of Bedrock Capital Partners, a venture capital firm which he co-founded in 1997. From 1993 to 1997, Dr. Rosenbluth was a healthcare securities analyst and managing director of Volpe Brown Whelan & Company, an investment banking firm. Dr. Rosenbluth currently serves as a director of a number of privately-held technology companies. Dr. Rosenbluth holds an MD from Cornell University Medical College and an MBA from the Wharton School of the University of Pennsylvania. Jerome Grossman, MD, Director, has been a director of Landacorp since May 1998. Dr. Grossman is currently chairman and Chief Executive Officer of a newly formed company, Lion Gate Management Corporation. From 1995 to early 1999, he was Chief Executive Officer of Health Quality Inc. He is chairman emeritus of New England Medical Center, Inc. Dr. Grossman has been a founder of several healthcare companies, and has held teaching, research, and medical positions at Tufts University School of Medicine, Massachusetts General Hospital and Harvard Medical School. Dr. Grossman serves as Trustee/Director of several corporations and institutions, including Wellesley College, Stryker Corporation, Arthur D. Little, Inc. and Stryker Corp. He served on the Board of the Federal Reserve Bank of Boston from 1990 to 1997 and was its Chairman from 1994 to 1997. BOARD COMPOSITION Landacorp's board of directors is currently comprised of six members. Four of our directors, Thomas Stephenson, Howard Cox, Jason Rosenbluth and Jerome Grossman, are not employees of Landacorp. BOARD COMMITTEES Audit Committee. The audit committee of the board of directors is comprised of Thomas Stephenson, Howard Cox, Jason Rosenbluth and Jerome Grossman. Jason Rosenbluth is the chairman of the audit committee. Compensation Committee. The compensation committee of the board of directors is comprised of Thomas Stephenson, Howard Cox, Jason Rosenbluth and Jerome Grossman. Howard Cox is the chairman of the compensation committee. 40 41 DIRECTOR COMPENSATION Employees of Landacorp and representatives of institutional investors in Landacorp do not receive any compensation for serving on the board of directors. Jerome Grossman receives a fee of $1,000 per board meeting attended. In 1998, Eugene Santa Cattarina received $4,000 for serving as a director of Landacorp prior to becoming employed by Landacorp. All of our directors, including employees and representatives of institutional investors in Landacorp, may be reimbursed for travel expenses incurred in attending board meetings. In addition, all of our directors are eligible to receive grants of stock options or other rewards pursuant to our stock option plan. In July, 1999, each non-employee member of the board of directors was granted an option to purchase 12,500 shares of our stock at $1.00 per share. These options become exercisable over a period of four years. Our shareholders have approved a policy of granting future non-employee directors initial option grants for 12,500 shares of stock, vesting over four years, when they join the board, and of granting all non-employee directors additional option grants for 5,000 shares, vesting over two years, effective on the date of each annual meeting. EXECUTIVE COMPENSATION The following table contains information in summary form concerning the compensation paid to our chief executive officer and each of our most highly compensated executive officers whose total salary, bonus and other compensation exceeded $100,000 during the year ended December 31, 1998. In accordance with the rules of the Securities Exchange Commission, the compensation described in this table does not include perquisites and other personal benefits received by the executive officers named in the table below which did not exceed the lesser of $50,000 or 10% of the total salary or bonus reported for those officers. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ----------------------- RESTRICTED SECURITIES ALL STOCK UNDERLYING OTHER 1999 ANNUAL AWARD(S) OPTIONS COMPENSATION SALARY NAME AND PRINCIPAL POSITION SALARY($) BONUS($) ($) (2) ($) ($)(1) --------------------------- --------- -------- ---------- ---------- ------------ ----------- Eugene Santa Cattarina.............. 103,366 -- -- 805,550 -- 250,000 President and Chief Executive Officer Stephen Kay......................... 168,700 15,000 -- 300,000 -- 175,000 Chief Operating Officer and Chief Financial Officer Bryan Lang.......................... 187,162 15,000 -- 195,000 -- 175,000 Chief Technology Officer and Chief Marketing Officer
- ------------------------- (1) Figures are based on annualized salary, excluding bonus, if any. (2) The figures listed represent the number of incentive stock options granted in October 1998. All the options were exercised during 1999. See "Certain Relationships and Related Transactions -- Early Exercise of Stock Options." 41 42 OPTION GRANTS The following table provides certain information regarding options granted by Landacorp to the named executive officers during the fiscal year ended December 31, 1998. OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE PERCENT OF AT ASSUMED TOTAL ANNUAL RATES OF NUMBER OF OPTIONS STOCK PRICE SECURITIES GRANTED TO APPRECIATION FOR UNDERLYING EMPLOYEES EXERCISE OPTION TERM DATE OF OPTIONS DURING PRICE EXPIRATION ---------------- NAME GRANT GRANTED PERIOD ($/SHARE) DATE 5% 10% ---- ------------ ---------- ---------- --------- ------------ ------ ------- Eugene Santa Cattarina.... October 1998 805,550 46.02% $0.12 October 2008 60,793 154,061 Stephen Kay............... October 1998 300,000 17.14 0.12 October 2008 22,640 57,375 Bryan Lang................ October 1998 195,000 11.14 0.12 October 2008 14,716 37,294
OPTION EXERCISES AND YEAR END OPTION VALUES The following table provides certain information with respect to options exercised by named executive officers during the fiscal year ended December 31, 1998 and the value of unexercised options held by named executive officers as of December 31, 1998. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
NUMBER OF SHARES UNDERLYING UNEXERCISED VALUE OF NUMBER OF OPTIONS AT FISCAL UNEXERCISED OPTIONS SHARES ACQUIRED YEAR END 1998 AT FISCAL YEAR END 1998(1) NAME ON EXERCISE($) VALUE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE($) ---- --------------- -------------- --------------------------- ------------------------------ Eugene Santa Cattarina............. -- -- 805,550/0 0/0 Stephen Kay............. -- -- 300,000/0 0/0 Bryan Lang.............. -- -- 195,000/0 0/0
- ------------------------- (1) For purposes of this calculation, value is based upon the difference between the fair market value of the securities at the at fiscal year ended December 31, 1998, and the exercise price. The exercise price was equal to the fair market value at the end of the fiscal year ended December 31, 1998. BENEFIT PLANS 1995 Incentive Stock Option Plan and 1998 Equity Incentive Plan The 1995 Incentive Stock Option Plan (the "1995 Plan") was adopted by the board of directors in April 1995, and ratified by the shareholders in December 1995. The 1998 Equity Incentive Plan (the "1998 Plan") was adopted by the board of directors in July 1998, and approved by the shareholders in September 1998. The 1998 Plan provides for the granting to employees of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and for the granting to employees, directors and consultants of non-statutory stock options and stock purchase rights. Since adoption of the 1998 Plan, no further options have been issued under the 1995 Plan. As of June 30, 1999, there were 3,000,000 shares of our common stock reserved for issuance under both plans. During 1998, options to purchase 95,000 shares of common stock granted under the 1995 and 1998 plans were exercised. At December 31, 1998, options to purchase 2,253,947 shares of common stock were outstanding, and options to purchase 588,797 shares of common stock 42 43 remained available. The outstanding options were exercisable at a weighted average price of $0.71 per share. During the six months ended June 30, 1999, options to purchase 1,572,284 shares of common stock granted under the 1995 and 1998 plans were exercised. At June 30, 1999, options to purchase 611,815 shares of common stock were outstanding, and options to purchase 658,645 shares of common stock remained available (unaudited). The outstanding options were exercisable at a weighted average price of $1.38 per share (unaudited). The 1995 Plan was administered by a stock option committee appointed by the board of directors. The 1998 Plan may be administered by the board of directors or a committee of the board. Currently our compensation committee administers the 1998 Plan. Options granted under the 1995 Plan will vest in full upon notice of (a) a merger, consolidation or reorganization in which we are not the surviving company, (b) the acquisition by another company of all or substantially all of our assets, or (c) our dissolution or liquidation. The options will expire within thirty days of such notice, or otherwise, by their own terms. Options granted under the 1998 Plan will terminate in the event of our dissolution or termination. In the event of (a) a merger, consolidation or reorganization in which we are not the surviving company, (b) a reverse merger in which we are the surviving company, but our shares immediately prior to the merger are converted into other property, or (c) the acquisition by another company of all or substantially all of our assets, the surviving or acquiring company must either assume the options, or substitute similar options or awards for those outstanding under our 1998 Plan. If the acquiring or surviving company refuses to do so, then all our outstanding options vest in full, and must be exercised or expire at the time of such event. The 1998 Plan will terminate automatically in July 2008, unless sooner terminated by the board of directors. 401(K) PLAN We maintain a tax-qualified employee savings and retirement plan, a 401(k) plan, that covers all of our eligible employees. Pursuant to the 401(k) plan, participants may elect to reduce their current compensation, on a pre-tax basis, by up to 15% of their taxable compensation or of the statutorily prescribed annual limit, whichever is lower, and have the amount of such reduction contributed to the 401(k) plan. Participants' salary reduction contributions are fully vested at all times. Landacorp contributes matching funds of up to 25% of employee contributions, subject to a cap of $900 per employee per year. Landacorp, in its sole discretion, may make additional employer contributions to the 401(k) plan. Participants' interests in their additional employer contributions, if any, vest in accordance with a five-year graduated vesting schedule. Participants generally are eligible for a distribution from the 401(k) plan upon their reaching age 59 1/2, age 65, death, disability or separation from service with Landacorp. The 401(k) plan is intended to qualify under Section 401(a) of the Internal Revenue Code of 1986, as amended, and its accompanying trust is intended to be a tax-exempt trust under Section 501(a) of the Internal Revenue Code of 1986, as amended. Contributions made on behalf of the participants, on a pre-tax basis, to the 401(k) plan, and income earned on such contributions, are not currently taxable to participants. All such contributions are tax deductible by Landacorp. LIMITATIONS OF DIRECTORS' LIABILITY AND INDEMNIFICATION Our certificate of incorporation limits the liability of our directors to the maximum extent permitted by Delaware law. Delaware law provides that the directors of a corporation will not be 43 44 personally liable for monetary damages for breach of the fiduciary duties as directors, except liability for any of the following: - any breach of their duty of loyalty to the corporation or its stockholders; - acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; - unlawful payments of dividends or unlawful stock repurchases or redemptions; or - any transaction from which the director derived an improper personal benefit. This limitation of liability does not apply to liabilities arising under the federal securities laws and does not affect the availability of equitable remedies such as injunctive relief or rescission. Our certificate of incorporation and bylaws provide that we will indemnify our directors and executive officers, and that we may indemnify our other officers and employees and other agents, to the fullest extent permitted by law. Our bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in such capacity, regardless of whether the bylaws would permit indemnification. We have entered into agreements to indemnify our executive officers, in addition to indemnification provided for in our bylaws. These agreements, among other things, provide for indemnification of our directors and executive officers for expenses, judgments, fines, and settlement amounts incurred by any such person in any action or proceedings arising out of such person's services as a director or executive officer of Landacorp or at our request. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers. We also maintain directors and officers liability insurance. At present, we are not aware of any pending litigation or proceeding involving any director, officer, employee or agent of Landacorp where indemnification will be required or permitted. Furthermore, we are not aware of any threatened litigation or proceeding that might result in a claim for indemnity by these individuals. 44 45 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Series D Preferred Stock Financing. In February 1998, we amended our articles of incorporation to authorize the issuance of 6,800,000 shares of Series D Preferred Stock ("Series D Preferred Stock"), to designate the Series D Preferred Stock and to provide the holders thereof with certain rights, privileges and preferences, including certain liquidation and dividend preferences. In addition, we entered into an Investors' Rights Agreement with each holder of Series D Preferred Stock pursuant to which Landacorp granted the holders of Series D Preferred Stock "piggy-back" registration rights with respect to certain registrations of our securities pursuant to the Securities Act. See "Description of Capital Stock." Immediately following the authorization, all 41,000 shares of Series A Preferred Stock were converted into shares of Series D Preferred Stock, on a one-for-one basis, and all 115,000 shares of Series B Preferred Stock and 450,000 shares of Series C Preferred Stock were converted into 1,122,000 shares of Series D Preferred Stock, using a ratio of 1.9833 shares of Series D Preferred Stock for each shares of Series B and Series C Preferred Stock. In February 1998, following these conversions, the holders of the converted Series D Preferred Stock sold all their shares to new investors, for $1.20 per share. Assuming conversion of all shares of preferred stock into common stock, the following directors and beneficial owners of more than five percent of our common stock acquired beneficial ownership of Series D preferred stock in this private placement:
DIRECTORS/5% STOCKHOLDERS NUMBER OF SHARES ------------------------- ---------------- Bedrock Capital Partners I, LP(1)........................... 1,750,000 Greylock IX Limited Partnership............................. 2,500,000 Sequoia Capital VII(2)...................................... 2,500,000 Eugene Santa Cattarina...................................... 41,667 Jason Rosenbluth(3)......................................... 1,750,000 Howard Cox(4)............................................... 2,500,000 Thomas Stephenson(5)........................................ 2,500,000
(1) Includes 1,575,000 shares held by Bedrock Capital Partners I, LP, 87,500 shares held by Credit Suisse First Boston Bedrock Fund, L.P., 6,250 shares held by Chris Paul, 6,250 shares held by Theodore Ridgeway and 75,000 shares held by the VBW Employee Bedrock Fund, LP. Bedrock General Partner I, LLC is a general partner of Bedrock Capital Partners I, LP and of VBW Employee Bedrock Fund, LP. (2) Includes 2,287,500 shares held by Sequoia Capital VII, 100,000 shares held by Sequoia Technology Partners VII, 46,400 shares held by SQP 1997, 26,100 shares held by Sequoia 1997 LLC and 40,000 shares held by Sequoia International Partners. SC VII-A Management Company LLC is a general partner of Sequoia Capital VII, Sequoia Technical Partners VII and Sequoia International Partners. (3) Includes 1,750,000 shares held by Bedrock Capital Partners I, LP and its affiliates, as listed in note 1 above. Dr. Rosenbluth is a co-founder and managing partner of Bedrock General Partner I, LLC, the general partner of Bedrock Capital Partners I, LP and of VBW Employee Bedrock Fund, LP. Dr. Rosenbluth disclaims beneficial ownership of the shares held by the entities or persons listed in note 1 above, except to the extent of his direct pecuniary interest in the shares. (4) Includes 2,500,000 shares held by Greylock IX Limited Partnership, Mr. Cox is a general partner of Greylock IX Limited Partnership. Mr. Cox is a general partner of Greylock IX GP Limited Partnership, which is a general partner of Greylock IX Limited Partnership. Mr. Cox disclaims beneficial ownership of the shares held by Greylock IX Limited Partnership, except to the extent of his direct pecuniary interest in the shares. (5) Includes 2,500,000 shares held by Sequoia Capital VII and its affiliates, as listed in note 2 above. Mr. Stephenson is a managing member of SC VII-A Management Company LLC, the general 45 46 partner of Sequoia Capital VII, Sequoia Technology Partners VII and Sequoia International Partners. Mr. Stephenson disclaims beneficial ownership of the shares held by the entities listed in note 2 above, except to the extent of his direct pecuniary interest in the shares. Warrants In conjunction with our sale of preferred stock in February 1998, we issued warrants to Mr. Gilbert Lang and Mrs. Beulah Lang and to Westminster Health Care PLC for the purchase of 100,000 and 250,000 shares of common stock, respectively, at the price of $1.20 per share. The warrants were fully vested and exercisable on the date of grant. The warrants expire on the earlier of February 28, 2003 or the closing of this offering. Stockholders' Notes We had notes payable to Mr. Gilbert Lang, Mrs. Beulah Lang, Mr. Bryan Lang and Mr. Roger Stratton totaling $1,720,000 and $2,221,000 at December 31, 1996 and 1997, respectively. These notes accrued interest at an annual rate of 12%. In March 1998, we used the proceeds of our February 1998 preferred stock financing to repay stockholder notes and related accrued interest totaling $2,558,000. During the year ended December 31, 1996, Mr. Bryan Lang converted notes payable totaling $27,000 as payment of the exercise price of 13,000 vested options. During the year ended December 31, 1997, Mr. Bryan Lang converted notes payable totaling $21,000 as payment of the exercise price of 10,000 vested options. During the six months ended June 30, 1998 and the year ended December 31, 1998, Mr. Gilbert Lang and Mrs. Beulah Lang converted notes payable totaling $289,000 as payment of the exercise price of 91,000 vested options. Early Exercise of Stock Options As of June 30, 1999, we had full recourse notes from Mr. Eugene Santa Cattarina, Mr. Stephen Kay, Mr. David Brown, Ms. Marlene McCurdy, Mr. Brandon Raines and Mr. Bryan Lang related to the early exercise of stock options in the amount of $189,000 (unaudited). These notes accrue interest at a rate of 6% per year, are secured by such shares of common stock, and are due and payable in the event of termination of the employee. Pursuant to the terms of the Restricted Stock Purchase Agreements, we have the option to repurchase a portion of these shares in the event of termination of the employee. Bonus in Respect of Waiver of Deferred Compensation Pursuant to agreement dated February 27, 1998, and in connection with the sale of the preferred stock, Bryan Lang agreed to waive any and all rights to $352,000 in deferred compensation that had accrued to his benefit. In connection with this waiver, a further agreement was made in the event that either Landacorp's common stock became publicly traded following an initial public offering, or that Landacorp was sold for a value in excess of $40,000,000, then a success fee from the proceeds would be paid to Mr. Lang in the amount of $352,000. Under the proposed terms of this offering, this capital bonus payment would be payable as part of the expenses of the offering. Line of Credit In 1997, we maintained an operating line of credit with a bank which was guaranteed by Westminster Health Care PLC. This line of credit expired on December 31, 1997, and the outstanding balance of $163,000 was repaid to the bank by Westminster Health Care PLC in exchange for a note payable by Landacorp. We repaid the note in March 1998. 46 47 PRINCIPAL STOCKHOLDERS Beneficial ownership is determined under the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Unless otherwise indicated below, to our knowledge, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. The number and percentage of shares beneficially owned are based on 9,757,210 shares of common stock outstanding as of August 31, 1999, assuming the conversion of all outstanding preferred stock and the exercise of all outstanding warrants. Shares of common stock subject to options that are currently exercisable or exercisable within sixty days of August 31, 1999 are deemed to be outstanding and to be beneficially owned by the person holding the options for the purpose of computing the percentage ownership of that person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. The number of shares of common stock outstanding after this offering includes shares of common stock being offered and does not include the shares that are subject to the underwriters' over-allotment option. Unless otherwise indicated, the address for each listed stockholder is the same as Landacorp's.
PERCENTAGE OF SHARES NUMBER OF BENEFICIALLY OWNED SHARES -------------------- BENEFICIALLY BEFORE AFTER NAME OF BENEFICIAL OWNER OWNED OFFERING OFFERING ------------------------ ------------ -------- -------- Entities affiliated with Bedrock Capital Partners I, LP(1).................................................. 1,750,000 18.6% One Maritime Plaza, 11(th) Floor San Francisco, CA 94111 Greylock IX Limited Partnership.......................... 2,500,000 26.6 One Federal Street Boston, MA 02110 Sequoia Capital VII(2)................................... 2,500,000 26.6 3000 Sandhill Road, Building 4, Suite 780 Menlo Park, CA 94025 Eugene Santa Cattarina................................... 847,217 9.0 Bryan Lang............................................... 626,307 6.7 Jason Rosenbluth, M.D.(3)................................ 1,750,000 18.6 One Maritime Plaza, 11(th) Floor San Francisco, CA 94111 Howard Cox(4)............................................ 2,500,000 26.6 One Federal Street Boston, MA 02110 Thomas Stephenson(5)..................................... 2,500,000 26.6 3000 Sandhill Road, Building 4, Suite 780 Menlo Park, CA 94025 Jerome Grossman, M.D.(6)................................. 33,565 * 72 Spooner Road Chestnut Hill, MA 02617 Stephen Kay.............................................. 300,000 3.2 All directors and executive officers as a group (9 persons)(7)......................................... 8,803,824 93.3%
- ------------------------- * Less than 1% of the outstanding shares of common stock. (1) Includes 1,575,000 shares held by Bedrock Capital Partners I, LP, 87,500 shares held by Credit Suisse First Boston Bedrock Fund, L.P., 6,260 shares held by Chris Paul, 6,250 shares held by Theodore Ridgeway, and 75,000 shares held by the VBW Employee Bedrock Fund, LP. Bedrock General Partner I, LLC is a general partner of Bedrock Capital Partners I, LP and of VBW Employee Bedrock Fund, LP. 47 48 (2) Includes 2,287,000 shares held by Sequoia Capital VII, 100,000 shares held by Sequoia Technology Partners VII, 46,400 shares held by SQP 1997, 26,100 shares held by Sequoia 1997 LLC and 40,000 shares held by Sequoia International Partners. SC VII-A Management Company LLC is a general partner of Sequoia Capital VII, Sequoia Technical Partners VII and Sequoia International Partners. (3) Includes 1,750,000 shares held by Bedrock Capital Partners I, LP and its affiliates, as listed in note 1 above. Dr. Rosenbluth is a co-founder and managing partner of Bedrock General Partner I, LLC, the general partner of Bedrock Capital Partners I, LP and of VBW Employee Bedrock Fund, LP. Dr. Rosenbluth disclaims beneficial ownership of the shares held by the entities or persons listed in note 1 above, except to the extent of his direct pecuniary interest in the shares. Bedrock General Partner I, LLC has voting and disposition power over the shares underlying the options held by Dr. Rosenbluth. (4) Includes 2,500,000 shares held by Greylock IX Limited Partnership. Mr. Cox is a general partner of Greylock IX GP Limited Partnership, which is a general partner of Greylock IX Limited Partnership. Mr. Cox disclaims beneficial ownership of the shares held by Greylock IX Limited Partnership, except to the extent of his direct pecuniary interest in the shares. (5) Includes 2,500,000 shares held by Sequoia Capital VII and its affiliates, as listed in note 2 above. Mr. Stephenson is a managing member of SC VII-A Management Company LLC, the general partner of Sequoia Capital VII, Sequoia Technology Partners VII and Sequoia International Partners. Mr. Stephenson disclaims beneficial ownership of the shares held by the entities listed in note 2 above, except to the extent of his direct pecuniary interest in the shares. (6) Includes 33,565 shares of common stock issuable upon the exercise of options exercisable within sixty days of August 31, 1999. (7) Includes 33,565 shares of common stock issuable upon the exercise of options exercisable within sixty days of August 31, 1999. Includes 1,750,000 shares held by Bedrock Capital Partners I, LP and its affiliates, as listed in notes 1 and 3 above, 2,500,000 shares held by Greylock IX Limited Partnership, as listed in note 4 above, and 2,500,000 shares held by Sequoia Capital VII and its affiliates, as listed in notes 2 and 5 above. 48 49 DESCRIPTION OF CAPITAL STOCK GENERAL Landacorp's amended and restated certificate of incorporation, which will become effective upon the closing of this offering, authorizes the issuance of up to 15,000,000 shares of common stock, par value $0.001 per share, and 8,000,000 shares of preferred stock, par value $0.001 per share. This description is only a summary. You should refer to the amended and restated certificate of incorporation and bylaws which have been filed with the Securities and Exchange Commission as exhibits to our registration statement, of which this prospectus forms a part. As of August 31, 1999, 2,607,210 shares of common stock were outstanding and 6,800,000 shares of preferred stock convertible into 6,800,000 shares of common stock upon the completion of this offering were issued and outstanding. As of August 31, 1999 we had 109 stockholders. COMMON STOCK Each holder of common stock is entitled to one vote for each share on all matters to be voted upon by the stockholders. There are no cumulative voting rights. Subject to preferences to which holders of preferred stock issued in the future may be entitled, 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 funds legally available therefor. In the event of a liquidation, dissolution or winding up of Landacorp, holders of common stock would be entitled to share in Landacorp's assets remaining after the payment of liabilities and the satisfaction of any liquidation preference granted the holders of any then outstanding shares of Preferred Stock. Holders of common stock have 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, and the shares of common stock offered by Landacorp in this offering, when issued and paid for, will be fully paid and nonassessable. The rights, preferences and privileges of the holders of common stock are subject to and may be adversely affected by the rights of the holders of shares of any series of preferred stock which Landacorp may designate in the future. PREFERRED STOCK Upon the closing of this offering, the board of directors will be authorized, without stockholder approval, from time to time to issue up to an aggregate of 8,000,000 shares of preferred stock, $0.001 par value per share, in one or more series, each of such series to have such rights and preferences, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, as shall be determined by the Board of Directors. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of holders of any preferred stock that may be issued in the future. Issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could either have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, a majority of the outstanding stock of Landacorp. Landacorp has no present plans to issue any shares of preferred stock. REGISTRATION RIGHTS Pursuant to the terms of the Investor Rights Agreement dated February 27, 1998 and upon the consummation of this offering, the holders of 6,800,000 shares of common stock issuable upon conversion of the preferred stock, holders of 250,000 shares of common stock issued or issuable upon exercise of the warrant granted to Westminster Health Care Limited, holders of any common stock issued as a dividend or distribution, and their permitted transferees are entitled to rights with respect to the registration of such shares under the Securities Act. The holders of at least 30% of these securities may require us, subject to limitations, to file a registration statement if the aggregate gross offering price of at least $15 million. We are not required to effect (i) more than 49 50 two such registrations pursuant to such demand registration rights; (ii) a registration during the period in which any other registration statement has been filed and for a period of 180 days after such registration has been declared effective; or (iii) a registration for a period not to exceed 90 days, if the Board of Directors of Landacorp has made a good faith determination that such registration would be seriously detrimental to Landacorp or to its stockholders. Furthermore, pursuant to the terms of the Investor Rights Agreement, the holders of the these securities are entitled to registration rights in connection with any registration by us of our securities for our own account or the account of other security holders. In the event that we propose to register any shares of common stock under the Securities Act, the holders of such piggyback registration rights are entitled to receive notice of such registration and are entitled to include their shares therein. At any time after we become eligible to file a registration statement on Form S-3, holders of $500,000 of registrable securities may require us to file registration statements on Form S-3 under the Securities Act with respect to their shares of common stock. We are not required to effect more than two such registrations in any 12 month period. Each of the foregoing registration rights is subject to conditions and limitations, including the right of the underwriters in any underwritten offering to limit the number of shares of registrable securities to be included in such registration. The registration rights with respect to any holder thereof terminate upon the earlier of 5 years from the effective date of this offering or when the shares held by such holder may be sold under Rule 144 during any 90 day period. We are required to bear all of the expenses of all such registrations, except underwriting discounts and commissions. Registration of any of the registrable securities would result in such shares becoming freely tradable without restriction under the Securities Act immediately upon effectiveness of such registration. The Investor Rights Agreement also contains a commitment of Landacorp to indemnify the holders of registration rights, subject to limitations. Holders of the shares of common stock issuable upon exercise of the warrants described above are entitled to registration rights in connection with any registration by us of our securities for its own account or the account of other security holders. EFFECT OF SELECTED PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS, AND THE DELAWARE ANTITAKEOVER STATUTE Provisions of our amended and restated certificate of incorporation and bylaws may have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of Landacorp. Such provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. These provisions allow us to issue preferred stock without any vote or further action by the stockholders and eliminate the right of stockholders to act by written consent without a meeting. These provisions may make it more difficult for stockholders to take corporate actions and could have the effect of delaying or preventing a change in control of Landacorp. We are subject to the provisions of Section 203 of the Delaware General Corporation Law. Subject to exceptions, Section 203 of Delaware law prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the interested stockholder attained such status with the approval of the board of directors or unless the business combination is approved in a prescribed manner. A "business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. Subject to exceptions, an "interested stockholder" is a person who, together with affiliates and associates, owns, or within three years did own fifteen percent or more of a corporation's voting stock. This statute could prohibit or delay the accomplishments of mergers or other takeover or change in control attempts with respect to Landacorp and, accordingly, may discourage attempts to acquire us. 50 51 Our amended and restated certificate of incorporation eliminates the right of stockholders to act by written consent without a meeting and our bylaws eliminate the right of stockholders to call special meetings of stockholders. The amended and restated certificate of incorporation does not provide for cumulative voting in the election of directors. These and other provisions may have the effect of deferring hostile takeovers or delaying changes in control or management of Landacorp. The amendment of any of these provisions would require approval by the board of directors and holders of at least 66 2/3% of the outstanding common stock. BOARD OF DIRECTORS VACANCIES Our bylaws authorize the board of directors to fill vacant directorships or increase the size of the Board of Directors. This may deter a stockholder from removing incumbent directors and simultaneously gaining control of the board of directors by filling the vacancies created by such removal with its own nominees. STOCKHOLDER ACTION; SPECIAL MEETING OF STOCKHOLDERS Our certificate of incorporation provides that stockholders may act only at duly called annual or special meetings of stockholders, not by written consent. Our bylaws further provide that special meetings of our stockholders may be called only by the President, Chief Executive Officer or Chairman of the board of directors or a majority of the board of directors. ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR NOMINATIONS Our bylaws provide that stockholders seeking to bring business before our annual meeting of stockholders, or to nominate candidates for election as directors at our annual meeting of stockholders, must provide timely notice thereof in writing. To be timely, a stockholder's notice must be delivered to, or mailed and received at, our principal executive offices not less than 120 days prior to the first anniversary of the date of notice of annual meeting provided with respect to the previous year's annual meeting of stockholders provided, that if no annual meeting of stockholders was held in the previous year if the date of the annual meeting of stockholders has been changed to be more than 30 calendar days earlier than such anniversary, then notice by the stockholder, to be timely, must be received before the solicitation is made. The bylaws also specify requirements as to the form and content of a stockholder's notice. These provisions may discourage stockholders from bringing matters before our annual meeting of stockholders or from making nominations for directors at our annual meeting of stockholders. AUTHORIZED BUT UNISSUED SHARES Our authorized but unissued shares of common stock and preferred stock are available for future issuance without stockholder approval, subject to limitations imposed by the Nasdaq National Market. These additional shares may be utilized for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of authorized but unissued and unreserved common stock and preferred stock could render more difficult or discourage an attempt to obtain control of us by means of a tender offer, merger or otherwise. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is . 51 52 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no market for our common stock. Future sales of substantial amounts of common stock, including shares issued upon exercise of outstanding options, in the public market could adversely affect prevailing market prices. Furthermore, as described below, shares currently outstanding will be available for sale after the expiration of contractual restrictions on resale with us and/or the underwriters. Sales of substantial amounts of our common stock in the public market after contractual restrictions lapse could adversely affect the prevailing market price and our ability to raise equity capital in the future. Upon completion of this offering, we will have outstanding shares of common stock, assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options or warrants. Of these shares, the shares sold in this offering will be freely tradable without restriction under the Securities Act unless purchased by our "affiliates." Based on shares outstanding as of August 31, 1999, the remaining shares will become eligible for public sale as follows:
ELIGIBILITY OF RESTRICTED SHARES FOR SALE IN PUBLIC MARKET - ----------------------------------------------------------------------------- At effective date......................................... shares 90 days after effective date.............................. shares After 180 days post-effective date........................ shares
Lock-Up Agreements with the Underwriters Stockholders holding approximately % of our common stock, including all of our officers and directors, have signed lock-up agreements with the underwriters under which they agreed not to sell, transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for shares of common stock without the prior consent of Hambrecht & Quist LLC for a period of 180 days after the date of this prospectus. Hambrecht & Quist LLC may choose to release some of these shares from these restrictions prior to the expiration of this 180-day period, although we are not aware of any current intention to request them to do so. Rule 144 In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: 1% of the number of shares of our common stock then outstanding, which will equal approximately shares immediately after this offering; or the average weekly trading volume of the common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about Landacorp. Rule 144(k) Under Rule 144(k), a person who has not been one of our affiliates at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, is entitled to sell those shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Therefore, unless otherwise restricted, 144(k) shares may be sold immediately upon the completion of this offering. 52 53 Rule 701 Any employee, officer or director of, or consultant to, Landacorp who purchased shares under a written compensatory plan or contract may be entitled to sell our shares in reliance on Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. Rule 701 further provides that non-affiliates may sell these shares in reliance on Rule 144 without having to comply with the holding period, public information, volume limitation or notice provisions of Rule 144. Under this rule, all holders of Rule 701 shares are required to wait until 90 days after the date of this prospectus before selling those shares. However, because all shares that we have issued under Rule 701 are subject to lock-up agreements, they will only become eligible for sale when the 180-day lock-up agreements expire. As a result, they may be sold 90 days after the offering only if the holder obtains the prior written consent of Hambrecht & Quist LLC. 53 54 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the underwriters named below, through their representatives, Hambrecht & Quist LLC, SG Cowen Securities Corporation and Volpe Brown Whelan & Company, LLC, have severally agreed to purchase from Landacorp the following respective numbers of shares of common stock:
NUMBER OF NAME SHARES ---- --------- Hambrecht & Quist LLC....................................... SG Cowen Securities Corporation............................. Volpe Brown Whelan & Company, LLC........................... -------- Total............................................. ========
The Underwriting Agreement provides that the obligations of the underwriters are subject to certain conditions precedent, including the absence of any material adverse change in Landacorp's business and the receipt of certain certificates, opinions and letters from Landacorp, its counsel and its independent auditors. The nature of the underwriters' obligation is such that they are committed to purchase all shares of common stock offered hereby if any of such shares are purchased. The following tables show the per share and total underwriting discounts and commissions to be paid to the underwriters. Such amounts are shown assuming both no exercise and full exercise of the underwriters' over-allotment option to purchase additional shares. UNDERWRITING DISCOUNTS AND COMMISSIONS PAYABLE BY LANDACORP
WITH WITHOUT OVER-ALLOTMENT EXERCISE OVER-ALLOTMENT EXERCISE ----------------------- ----------------------- Per Share.................................. $ $ Total...................................... $ $
Landacorp estimates that the total expenses of this offering, excluding underwriting discounts and commissions, will be approximately $ . The underwriters propose to offer the shares of common stock directly to the public at the initial public offering price set forth on the cover page of this prospectus and to certain dealers at such price less a concession not in excess of $ per share. The underwriters may allow and such dealers may reallow a concession not in excess of $ per share to certain other dealers. After the initial public offering of the shares, the offering price and other selling terms may be changed by the representatives of the underwriters. The representatives have informed Landacorp that the underwriters do not intend to confirm discretionary sales in excess of 5% of the shares of common stock offered hereby. Landacorp has granted to the underwriters an option, exercisable no later than 30 days after the date of this prospectus, to purchase up to additional shares of common stock at the initial public offering price, less the underwriting discount, set forth on the cover page of this prospectus. To the extent that the underwriters exercise this option, each of the underwriters will have a firm commitment to purchase approximately the same percentage thereof which the number of shares of common stock to be purchased by it shown in the above table bears to the total number of shares of common stock offered hereby. Landacorp will be obligated, pursuant to the option, to sell shares to the underwriters to the extent the option is exercised. The underwriters 54 55 may exercise such option only to cover over-allotments made in connection with the sale of shares of common stock offered hereby. The offering of the shares is made for delivery when, as and if accepted by the underwriters and subject to prior sale and to withdrawal, cancellation or modification of the offering without notice. The underwriters reserve the right to reject an order for the purchase of shares in whole or in part. Landacorp has agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933, and to contribute to payments the underwriters may be required to make in respect thereof. Certain stockholders of Landacorp, including executive officers and directors, who will own in the aggregate shares of common stock after this offering, have agreed that they will not, without the prior written consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares of common stock, options or warrants to acquire shares of common stock or securities exchangeable for or convertible into shares of common stock owned by them during the 180-day period following the date of this prospectus. Landacorp has agreed that it will not, without the prior written consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares of common stock, options or warrants to acquire shares of common stock or securities exchangeable for or convertible into shares of common stock during the 180-day period following the date of this prospectus, except that Landacorp may issue shares upon the exercise of options granted prior to the date hereof, and may grant additional options under its stock option plans, provided that, without the prior written consent of Hambrecht & Quist LLC, such additional options shall not be exercisable during such period. An aggregate of shares of the Common Stock offered hereby have been reserved for purchase from the underwriters through a directed share program by persons having relationships with Landacorp. Such sales will be at the initial public offering price. The number of shares of Common Stock available for sale to the general public will be reduced to the extent such persons purchase the reserved shares. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares offered hereby. Affiliates of Volpe Brown Whelan & Company, LLC, Bedrock Capital Partners, L.P. and its affiliates, own an aggregate of 1,750,000 shares of Landacorp's Series D preferred stock, which, upon consummation of the offering, will automatically convert to shares of common stock on a one-for-one basis and will represent approximately % of the outstanding common stock. Because affiliates of Volpe Brown Whelan & Company, LLC beneficially own more than ten percent of the preferred equity of Landacorp prior to giving effect to any conversion of the preferred stock, this offering is being conducted in accordance with the "conflict of interests" provisions of Rule 2720 of the Conduct Rules of the National Association of Securities Dealers, Inc. Under Rule 2720, when a member of the NASD, such as of Volpe Brown Whelan & Company, LLC, proposes to underwrite or otherwise assist in the public distribution of securities by an issuer with which it may be deemed to have a "conflict of interest," the price at which such securities are to be distributed to the public must be no higher than that recommended by a "qualified independent underwriter" which must also participate in the preparation of the registration statement and the prospectus and which must exercise the usual standards of "due diligence" with respect to the preparation of the registration statement and the prospectus. In accordance with these requirements, Hambrecht & Quist LLC is assuming the responsibilities of acting as "qualified independent underwriter" and will recommend the maximum public offering price for the shares of common stock in compliance with the requirements of Rule 2720. In connection with this offering, Hambrecht & Quist LLC is performing due diligence investigations and is reviewing and participating in the preparation of this prospectus and the registration statement of which this prospectus forms a part. The initial public offering price of the common stock will be no higher than the price recommended by Hambrecht & Quist LLC. 55 56 Prior to this offering, there has been no public market for the common stock. The initial public offering price for the common stock will be determined by negotiation among Landacorp and the representatives of the several underwriters. Among the factors to be considered in determining the initial public offering price are prevailing market and economic conditions, revenues and earnings of Landacorp, market valuations of other companies engaged in activities similar to Landacorp, estimates of the business potential and prospects of Landacorp, the present state of Landacorp's business operations, Landacorp's management and other factors deemed relevant. The estimated initial public offering price range set forth on the cover of this preliminary prospectus is subject to change as a result of market conditions or other factors. Certain persons participating in this offering may over-allot or effect transactions which stabilize, maintain or otherwise affect the market price of the common stock at levels above those which might otherwise prevail in the open market, including by entering stabilizing bids, effecting syndicate covering transactions or imposing penalty bids. A stabilizing bid means the placing of any bid or effecting of any purchase, for the purpose of pegging, fixing or maintaining the price of the common stock. A syndicate covering transaction means the placing of any bid on behalf of the underwriting syndicate or the effecting of any purchase to reduce a short position created in connection with the offering. A penalty bid means an arrangement that permits the underwriters to reclaim a selling concession from a syndicate member in connection with the offering when shares of common stock sold by the syndicate member are purchased in syndicate covering transactions. These activities by the underwriters may stabilize, maintain or otherwise affect the market price of the common stock. As a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. Such transactions may be effected on the Nasdaq National Market, in the over-the-counter market, or otherwise. Such stabilizing, if commenced, may be discontinued at any time. 56 57 LEGAL MATTERS Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California, will pass upon the validity of the issuance of the shares of common stock offered by this prospectus. Alston & Bird LLP, Atlanta, Georgia, will pass upon certain legal matters in connection with this offering for the underwriters. EXPERTS The balance sheets of Landacorp as of December 31, 1997 and 1998 and the statements of operations, stockholders' equity and cash flows for each of the three years ended December 31, 1998, included in this prospectus, have been included herein in reliance upon the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. WHERE YOU CAN FIND MORE INFORMATION We have filed with Securities and Exchange Commission in Washington, D.C. a Registration Statement on Form S-1 under the Securities Act with respect to the common stock offered in this prospectus. This prospectus, filed as part of the registration statement, does not contain all of the information set forth in the registration statement and its exhibits and schedules, portions of which have been omitted as permitted by the rules and regulations of the SEC. For further information about us and the common stock, we refer you to the registration statement and to its exhibits and schedules. Statements in this prospectus about the contents of any contract, agreement or other document are not necessarily complete and, in each instance, we refer you to the copy of such contract, agreement or document filed as an exhibit to the registration statement. Each such statement is qualified in all respects by reference to the document to which it refers. Anyone may inspect the registration statement and its exhibits and schedules without charge at the public reference facilities the SEC maintains at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the SEC located at 7 World Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois, 60661. You may obtain copies of all or any part of these materials from the SEC upon payment to the SEC of prescribed fees. You may also inspect these reports and other information without charge at a Web site maintained by the SEC. The address of this site is http://www.sec.gov. Upon completion of this offering, we will become subject to the informational requirements of the Exchange Act and, in accordance therewith, file reports, proxy statements and other information with the SEC. You will be able to inspect and copy these reports, proxy statements and other information at the public reference facilities maintained by the SEC and at the SEC's regional offices at the addresses noted above. You also will be able to obtain copies of this material from the Public Reference Section of the SEC as described above, or inspect them without charge at the SEC's Web site. Our common stock has been approved for quotation on the Nasdaq National Market. Upon completion of this offering, you will be able to inspect reports, proxy statements and information statements and other information concerning us at the National Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006. 57 58 [THIS PAGE IS INTENTIONALLY LEFT BLANK] 58 59 LANDA MANAGEMENT SYSTEMS CORPORATION INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Accountants........................... F-2 Balance Sheet............................................... F-3 Statement of Operations..................................... F-4 Statement of Stockholders' Equity (Deficit)................. F-5 Statement of Cash Flows..................................... F-6 Notes to Financial Statements............................... F-7
F-1 60 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Landa Management Systems Corporation The reincorporation described in Note 9 to the financial statements has not been consummated at September 17, 1999. When the reincorporation has been consummated, we will be in a position to furnish the following report: "In our opinion, the accompanying balance sheet and the related statements of operations, of stockholders' equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Landa Management Systems Corporation at December 31, 1997 and 1998 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above." San Jose, California February 12, 1999, except for Note 9 which is as of September 17, 1999 F-2 61 LANDA MANAGEMENT SYSTEMS CORPORATION BALANCE SHEET
PRO FORMA STOCKHOLDERS' DECEMBER 31, EQUITY AT --------------------------- JUNE 30, JUNE 30, 1997 1998 1999 1999 ----------- ------------ ------------ ------------- (UNAUDITED) (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................. $ 142,000 $ 2,032,000 $ 2,371,000 Accounts receivable, net.................. 640,000 1,204,000 1,260,000 Other current assets...................... 113,000 186,000 184,000 ----------- ------------ ------------ Total current assets.............. 895,000 3,422,000 3,815,000 Property and equipment, net................. 187,000 352,000 453,000 Capitalized software, net................... 99,000 92,000 78,000 ----------- ------------ ------------ $ 1,181,000 $ 3,866,000 $ 4,346,000 =========== ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable.......................... $ 421,000 $ 125,000 $ 201,000 Accrued expenses.......................... 1,058,000 933,000 1,185,000 Deferred revenue.......................... 2,245,000 1,909,000 1,966,000 Accrued interest -- related party......... 495,000 -- -- Notes payable -- related party............ 2,221,000 -- -- ----------- ------------ ------------ Total current liabilities......... 6,440,000 2,967,000 3,352,000 ----------- ------------ ------------ Commitments and contingencies (Note 6) Stockholders' equity (deficit): Preferred Stock, $0.001 par value, issuable in series; aggregate liquidation amount $8,160,000 at December 31, 1998 and June 30, 1999 (unaudited); 8,000,000 shares authorized; 606,000, 6,800,000 and 6,800,000 (unaudited) shares issued and outstanding, no shares pro forma (unaudited)............................ 1,000 7,000 7,000 $ -- Common Stock, $0.001 par value, 15,000,000 shares authorized; 1,113,000, 1,030,000 and 2,607,000 (unaudited) shares issued and outstanding, 9,407,000 (unaudited) shares issued and outstanding pro forma.................................. 1,000 1,000 3,000 10,000 Additional paid-in capital................ 4,047,000 15,102,000 15,312,000 15,312,000 Notes receivable from officers............ -- -- (189,000) (189,000) Unearned stock-based compensation......... -- (2,993,000) (2,017,000) (2,017,000) Accumulated deficit....................... (9,308,000) (11,218,000) (12,122,000) (12,122,000) ----------- ------------ ------------ ------------ Total stockholders' equity (deficit)....................... (5,259,000) 899,000 994,000 $ 994,000 ----------- ------------ ------------ ============ $ 1,181,000 $ 3,866,000 $ 4,346,000 =========== ============ ============
The accompanying notes are an integral part of these financial statements. F-3 62 LANDA MANAGEMENT SYSTEMS CORPORATION STATEMENT OF OPERATIONS
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, --------------------------------------- ----------------------- 1996 1997 1998 1998 1999 ----------- ----------- ----------- ---------- ---------- (UNAUDITED) Revenues: System sales.................... $ 1,007,000 $ 3,136,000 $ 4,967,000 $2,069,000 $3,725,000 Support services................ 932,000 902,000 1,250,000 514,000 926,000 ----------- ----------- ----------- ---------- ---------- Total revenues.......... 1,939,000 4,038,000 6,217,000 2,583,000 4,651,000 ----------- ----------- ----------- ---------- ---------- Cost of revenues: System sales.................... 499,000 1,097,000 2,244,000 954,000 1,386,000 Support services................ 285,000 299,000 419,000 190,000 288,000 ----------- ----------- ----------- ---------- ---------- Total cost of revenues.............. 784,000 1,396,000 2,663,000 1,144,000 1,674,000 ----------- ----------- ----------- ---------- ---------- Gross profit...................... 1,155,000 2,642,000 3,554,000 1,439,000 2,977,000 ----------- ----------- ----------- ---------- ---------- Operating expenses: Sales and marketing............. 782,000 1,176,000 1,588,000 757,000 1,327,000 Research and development........ 1,269,000 1,294,000 1,393,000 653,000 727,000 General and administrative...... 801,000 975,000 1,385,000 538,000 879,000 Stock-based compensation........ -- -- 1,173,000 215,000 997,000 ----------- ----------- ----------- ---------- ---------- Total operating expenses.............. 2,852,000 3,445,000 5,539,000 2,163,000 3,930,000 ----------- ----------- ----------- ---------- ---------- Loss from operations.............. (1,697,000) (803,000) (1,985,000) (724,000) (953,000) Interest and other income, net.... -- -- 101,000 49,000 49,000 Interest expense.................. (200,000) (208,000) (26,000) (26,000) -- ----------- ----------- ----------- ---------- ---------- Net loss.......................... $(1,897,000) $(1,011,000) $(1,910,000) $ (701,000) $ (904,000) =========== =========== =========== ========== ========== Net income loss per share: Basic and diluted............... $ (1.74) $ (0.91) $ (1.83) $ (0.66) $ (0.82) =========== =========== =========== ========== ========== Weighted average shares: Basic and diluted............... 1,089,000 1,110,000 1,044,000 1,058,000 1,100,000 =========== =========== =========== ========== ========== Pro forma net loss per share (unaudited): Basic and diluted............... $ (0.28) $ (0.11) =========== ========== Pro forma weighted average shares (unaudited): Basic and diluted............... 6,726,000 7,900,000 =========== ==========
The accompanying notes are an integral part of these financial statements. F-4 63 LANDA MANAGEMENT SYSTEMS CORPORATION STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
PREFERRED STOCK COMMON STOCK ADDITIONAL NOTES RECEIVABLE UNEARNED ------------------ ------------------ PAID-IN FROM STOCK-BASED ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL OFFICERS COMPENSATION DEFICIT --------- ------ --------- ------ ----------- ---------------- ------------ ------------ Balance at December 31, 1995................... 606,000 $1,000 1,079,000 $1,000 $ 3,978,000 $ -- $ -- $ (6,400,000) Issuance of Common Stock.................. -- -- 24,000 -- 48,000 -- -- -- Net loss................. -- -- -- -- -- -- -- (1,897,000) --------- ------ --------- ------ ----------- --------- ----------- ------------ Balance at December 31, 1996................... 606,000 1,000 1,103,000 1,000 4,026,000 -- -- (8,297,000) Issuance of Common Stock.................. -- -- 10,000 -- 21,000 -- -- -- Net loss................. -- -- -- -- -- -- -- (1,011,000) --------- ------ --------- ------ ----------- --------- ----------- ------------ Balance at December 31, 1997................... 606,000 1,000 1,113,000 1,000 4,047,000 -- -- (9,308,000) Issuance of Common Stock.................. -- -- 95,000 -- 297,000 -- -- -- Conversion of Common Stock into Series D Preferred Stock........ 18,000 -- (178,000) -- -- -- -- -- Conversion of Series A, B and C Preferred Stock to Series D Preferred Stock........ -- -- -- -- -- -- -- -- Issuance of Series D Preferred Stock........ 6,176,000 6,000 -- -- 6,592,000 -- -- -- Unearned stock-based compensation........... -- -- -- -- 4,166,000 -- (4,166,000) -- Amortization of unearned stock-based compensation........... -- -- -- -- -- -- 1,173,000 -- Net loss................. -- -- -- -- -- -- -- (1,910,000) --------- ------ --------- ------ ----------- --------- ----------- ------------ Balance at December 31, 1998................... 6,800,000 7,000 1,030,000 1,000 15,102,000 -- (2,993,000) (11,218,000) Issuance of Common Stock (unaudited)............ -- -- 5,000 -- 2,000 -- -- -- Common Stock issued for notes receivable from officers (unaudited)... -- -- 1,572,000 2,000 187,000 (189,000) -- -- Unearned stock-based compensation (unaudited)............ -- -- -- -- 21,000 -- (21,000) -- Amortization of unearned stock-based compensation (unaudited)............ -- -- -- -- -- -- 997,000 -- Net loss (unaudited)..... -- -- -- -- -- -- -- (904,000) --------- ------ --------- ------ ----------- --------- ----------- ------------ Balance at June 30, 1999 (unaudited)............ 6,800,000 $7,000 2,607,000 $3,000 $15,312,000 $(189,000) $(2,017,000) $(12,122,000) ========= ====== ========= ====== =========== ========= =========== ============ TOTAL STOCKHOLDERS' EQUITY (DEFICIT) ------------- Balance at December 31, 1995................... $(2,420,000) Issuance of Common Stock.................. 48,000 Net loss................. (1,897,000) ----------- Balance at December 31, 1996................... (4,269,000) Issuance of Common Stock.................. 21,000 Net loss................. (1,011,000) ----------- Balance at December 31, 1997................... (5,259,000) Issuance of Common Stock.................. 297,000 Conversion of Common Stock into Series D Preferred Stock........ -- Conversion of Series A, B and C Preferred Stock to Series D Preferred Stock........ -- Issuance of Series D Preferred Stock........ 6,598,000 Unearned stock-based compensation........... -- Amortization of unearned stock-based compensation........... 1,173,000 Net loss................. (1,910,000) ----------- Balance at December 31, 1998................... 899,000 Issuance of Common Stock (unaudited)............ 2,000 Common Stock issued for notes receivable from officers (unaudited)... -- Unearned stock-based compensation (unaudited)............ -- Amortization of unearned stock-based compensation (unaudited)............ 997,000 Net loss (unaudited)..... (904,000) ----------- Balance at June 30, 1999 (unaudited)............ $ 994,000 ===========
The accompanying notes are an integral part of these financial statements. F-5 64 LANDA MANAGEMENT SYSTEMS CORPORATION STATEMENT OF CASH FLOWS
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, --------------------------------------- ------------------------ 1996 1997 1998 1998 1999 ----------- ----------- ----------- ----------- ---------- (UNAUDITED) Cash flows from operating activities: Net loss................................. $(1,897,000) $(1,011,000) $(1,910,000) $ (701,000) $ (904,000) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization........ 81,000 162,000 239,000 101,000 171,000 Provision for doubtful accounts...... 46,000 24,000 -- -- (20,000) Amortization of unearned stock-based compensation...................... -- -- 1,173,000 215,000 997,000 Changes in assets and liabilities: Accounts receivable............... (919,000) 529,000 (564,000) (749,000) (36,000) Other current assets.............. (51,000) 17,000 (73,000) (23,000) 2,000 Accounts payable.................. 188,000 59,000 (296,000) (95,000) 76,000 Accrued expenses.................. 375,000 251,000 (125,000) (404,000) 252,000 Deferred revenue.................. 1,633,000 (228,000) (336,000) (349,000) 57,000 Accrued interest-related party.... 185,000 180,000 (495,000) (495,000) -- ----------- ----------- ----------- ----------- ---------- Net cash provided by (used in) operating activities............ (359,000) (17,000) (2,387,000) (2,500,000) 595,000 ----------- ----------- ----------- ----------- ---------- Cash flows from investing activities: Purchases of property and equipment, net.................................... (112,000) (167,000) (321,000) (156,000) (221,000) Capitalized software development costs... (49,000) (68,000) (76,000) (37,000) (37,000) ----------- ----------- ----------- ----------- ---------- Net cash used in investing activities...................... (161,000) (235,000) (397,000) (193,000) (258,000) ----------- ----------- ----------- ----------- ---------- Cash flows from financing activities: Bank borrowings, net..................... 128,000 35,000 -- -- -- Proceeds from stockholder notes payable................................ 510,000 382,000 100,000 100,000 -- Payments on stockholder notes payable.... (220,000) (23,000) (2,032,000) (2,032,000) -- Proceeds from Common Stock issuances..... 21,000 -- 8,000 8,000 2,000 Proceeds from Preferred Stock issuances.............................. -- -- 6,598,000 6,598,000 -- ----------- ----------- ----------- ----------- ---------- Net cash provided by financing activities...................... 439,000 394,000 4,674,000 4,674,000 2,000 ----------- ----------- ----------- ----------- ---------- Increase (decrease) in cash and cash equivalents.............................. (81,000) 142,000 1,890,000 1,981,000 339,000 Cash and cash equivalents, beginning of period................................... 81,000 -- 142,000 142,000 2,032,000 ----------- ----------- ----------- ----------- ---------- Cash and cash equivalents, end of period... $ -- $ 142,000 $ 2,032,000 $ 2,123,000 $2,371,000 =========== =========== =========== =========== ========== Supplemental cash flow information: Cash paid for interest................... $ 1,000 $ 21,000 $ 526,000 $ 526,000 $ -- =========== =========== =========== =========== ========== Cash paid for income taxes............... $ 1,000 $ 1,000 $ 1,000 $ -- $ -- =========== =========== =========== =========== ========== Supplemental non-cash financing activities: Bank borrowing transferred to stockholder............................ $ -- $ -- $ 163,000 $ 163,000 $ -- =========== =========== =========== =========== ========== Stockholder notes payable converted into Common Stock........................... $ 27,000 $ 21,000 $ 289,000 $ 289,000 $ -- =========== =========== =========== =========== ========== Series A, B and C Preferred Stock converted into Series D Preferred Stock.................................. $ -- $ -- $ 1,291,000 $ 1,291,000 $ -- =========== =========== =========== =========== ========== Common Stock converted into Series D Preferred Stock........................ $ -- $ -- $ 22,000 $ 22,000 $ -- =========== =========== =========== =========== ========== Common Stock issued for notes receivable from officers.......................... $ -- $ -- $ -- $ -- $ 189,000 =========== =========== =========== =========== ==========
The accompanying notes are an integral part of these financial statements. F-6 65 LANDA MANAGEMENT SYSTEMS CORPORATION NOTES TO FINANCIAL STATEMENTS 1. THE COMPANY Landa Management Systems Corporation (the Company), was established in 1982 for the purpose of developing health care quality and resource management systems that target cost containment and quality improvement for hospitals and managed care organizations. The Company maintains offices in Chico, California and Atlanta, Georgia and derives all of its revenues from customers in the United States. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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 period. Actual results could differ from those estimates. Revenue recognition The Company derives revenues from the installation and licensing of health care quality and resource management software systems, sales of third party software applications as part of system implementations and from the delivery of post-contract customer support, training and consulting services. System sales revenues and the associated costs are recognized using the percentage-of-completion method, using labor hours incurred relative to total estimated contract hours as the measure of progress towards completion. When the current estimates of total contract revenue and contract cost indicate a loss, the Company records a provision for the estimated loss on the contract. The allowance for contract losses totaled $100,000 at December 31, 1997 and 1998 and $108,000 at June 30, 1999 (unaudited). Sales of software products of other vendors are recognized upon installation. Support services are recognized ratably over the support period. Revenues from training and consulting are recognized as such services are delivered. Amounts billed in advance of revenue recognition are recorded as deferred revenue. In future periods, the Company plans to introduce a new subscription-based fee structure to payer organizations that would provide for implementation services at a fixed hourly rate and licensing of the installed system and post-contract customer support through a monthly subscription fee based upon the number of members maintained by the payer organization. In connection with such future arrangements, if any, that conform to the new licensing structure, the Company will recognize the fair value of the implementation services as such services are delivered and will recognize license and post-contract customer support fees an a monthly basis at the subscription rate. Concentration of credit risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of trade accounts receivable. The Company's revenues are derived from software licensing and service transactions with customers in the United States. The Company performs ongoing credit evaluations of its customers and maintains an allowance for probable credit losses based upon its historical experience. F-7 66 LANDA MANAGEMENT SYSTEMS CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) At December 31, 1997, two customers accounted for 32% and 15% of gross accounts receivable, respectively. At December 31, 1998, four customers accounted for 16%, 15%, 14% and 11% of gross accounts receivable, respectively. At June 30, 1999, one customer accounted for 15% (unaudited) of gross accounts receivable. During the year ended December 31, 1998, one customer accounted for 10% of total revenues. During the six month period ended June 30, 1999, one customer accounted for 11% (unaudited) of total revenues. No individual customer accounted for 10% or more of total revenues during the years ended December 31, 1996 and 1997, and the six month period ended June 30, 1998 (unaudited), respectively. Cash and cash equivalents Cash equivalents include highly liquid investments with maturities of three months or less when purchased. Property and equipment Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful life of the asset, generally three to five years, or the lease term, if shorter. Impairment of long-lived assets The Company evaluates the recoverability of long-lived assets in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of " ("SFAS 121"). SFAS 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 available to such assets. Software development costs In accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed," the Company capitalizes certain software development costs from the date the technological feasibility of the product is established, using the working model approach, through the date the product is available for general release to customers. Capitalized costs are amortized on a product-by-product basis, based on the greater amount computed by using (a) the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product, or (b) straight-line amortization over the estimated product life. The Company evaluates the estimated net realizable value of capitalized costs relating to each software product on a quarterly basis and records write-downs to net realizable value for any amounts for which the net book value is in excess of net realizable value. Net realizable value is determined based upon the estimated future gross revenues from each product reduced by the estimated future costs of completing and disposing of that product. No write-downs of software development costs occurred during the years ended December 31, 1996, 1997 and 1998, or the six month periods ended June 30, 1998 (unaudited) and 1999 (unaudited), respectively. F-8 67 LANDA MANAGEMENT SYSTEMS CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Research and development Research and development costs include expenses incurred by the Company to develop and enhance its software products and are expensed as incurred. Stock-based compensation The Company accounts for stock-based employee compensation arrangements in accordance with provisions of APB No. 25, "Accounting for Stock Issued to Employees," and complies with the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Under APB No. 25, compensation cost is recognized based on the difference, if any, on the date of grant between the fair value of the Company's stock and the amount an employee must pay to acquire the stock. Advertising expense Advertising costs are expensed as incurred and totaled $42,000, $183,000 and $152,000 during the years ended December 31, 1996, 1997 and 1998, respectively, and $88,000 (unaudited) and $65,000 (unaudited) during the six months ended June 30, 1998 and 1999, respectively. Income taxes Income taxes are accounted for using an asset and liability approach, which requires the recognition of taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in the Company's financial statements or tax returns. The measurement of current and deferred tax assets and liabilities are based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized. Pro forma stockholders' equity (unaudited) Effective upon the closing of the Company's planned initial public offering, the outstanding shares of Series D Preferred Stock will automatically convert into 6,800,000 shares of Common Stock. The pro forma effects of the conversion are unaudited and have been reflected in the accompanying pro forma balance sheet at June 30, 1999. Net loss per share Basic net loss per share is computed using the weighted average number of common shares outstanding. Diluted net loss per share is computed using the weighted average number of common and potential common shares outstanding. Potential common shares consist of the incremental number of common shares issuable upon conversion Preferred Stock (using the if-converted method) and common shares issuable upon the exercise of stock options and warrants (using the treasury stock method). Potential common shares are excluded from the computation if their effect is anti-dilutive. Net loss per share computations are in accordance with SFAS No. 128, "Earnings Per Share," and the Securities and Exchange Commission Staff Accounting Bulletin ("SAB") No. 98. F-9 68 LANDA MANAGEMENT SYSTEMS CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The weighted average potential common shares excluded from the determination of basic and diluted net loss per share as their effect is anti-dilutive, are as follows:
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, --------------------------------- --------------------- 1996 1997 1998 1998 1999 --------- --------- --------- --------- --------- (UNAUDITED) Preferred Stock......................... 606,000 606,000 5,782,000 4,708,000 6,800,000 Common Stock options.................... 576,000 818,000 941,000 690,000 1,874,000 Common Stock warrants................... -- -- 292,000 232,000 350,000 --------- --------- --------- --------- --------- 1,182,000 1,424,000 7,015,000 5,630,000 9,024,000 ========= ========= ========= ========= =========
Pro forma net loss per share (Unaudited) Pro forma basic net loss per share is computed using the weighted average number of common shares outstanding and the pro forma effects of the automatic conversion of the Company's outstanding Preferred Stock into shares of Common Stock effective upon closing of the initial public offering as if such conversion occurred on January 1, 1998, or at date of original issuance, if later. Pro forma diluted net loss per share is computed using the pro forma weighted average number of common and potential common shares outstanding. Pro forma potential shares of Common Stock consist of Common Stock subject to repurchase and stock options and warrants (using the treasury stock method). Pro forma potential shares of Common Stock have been excluded from the computation as their effect is antidilutive. Fair value of financial information The Company's financial instruments, including cash and cash equivalents, accounts receivable and accounts payable are carried at cost, which approximates fair value due to the short maturity of these instruments. Segment information In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information. The Company identifies its operating segments based on business activities, management responsibility and geographical location, and reports one measure of profitability to the chief operating decision maker. During the years ended December 31, 1996, 1997 and 1998, and the six months ended June 30, 1999, the Company operated in a single business segment: licensing, installing and supporting computer software to customers located in the United States. Comprehensive income Effective January 1, 1998, the Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting comprehensive income and its components in financial statements. Comprehensive income, as defined, includes all changes in equity (net assets) during a period from non-owner sources. To date, the Company has not had any transactions that are required to be reported in comprehensive income. F-10 69 LANDA MANAGEMENT SYSTEMS CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Interim Financial Information (Unaudited) The accompanying interim financial statements as of June 30, 1999 and for the six months ended June 30, 1998 and 1999, are unaudited. The unaudited interim financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company's financial position as of June 30, 1999 and the results of the Company's operations and its cash flows for the six months ended June 30, 1998 and 1999. The financial data and other information disclosed in these notes to financial statements related to these periods are unaudited. The results for the six months ended June 30, 1999, are not necessarily indicative of the results to be expected for the year ending December 31, 1999. Recent accounting pronouncements In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 is effective for financial statements for years beginning after December 15, 1998. SOP 98-1 provides guidance over accounting for computer software developed or obtained for internal use including the requirement to capitalize specified costs and amortization of such costs. The Company has adopted the provisions of SOP 98-1 in its fiscal year beginning January 1, 1999, and the effects of adoption did not to have a material effect on the Company's financial statements. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivatives and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for all fiscal quarters beginning with the quarter ending June 30, 1999. SFAS 133 establishes accounting and reporting standards of derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In July 1999, the Financial Accounting Standards Board issued SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133" ("SFAS 137") SFAS 137 deferred the effective date until the first fiscal quarter ending June 30, 2000. The Company will adopt SFAS 133 in its quarter ending June 30, 2000 and does not expect such adoption to have a material effect impact on the Company's financial statements. In December 1998, the AICPA issued Statement of Position No. 98-9, "Modification of SoP No. 97-2, Software Revenue Recognition, With Respect to Certain Transactions" ("SoP 98-9"), which is effective for transactions entered into in fiscal years beginning after March 15, 1999. SoP 98-9 amends SoP 97-2 and extends the effective date of SoP No. 98-4 "Deferral of the Effective Date of a Provision of SoP 97-2, Software Revenue Recognition" ("SoP 98-4"), and provides additional interpretive guidance. The adoption of SoP 97-2 has not had, and the adoption of SoP 98-4 and SoP 98-9 are not expected to have, a material effect on the Company's financial statements. F-11 70 LANDA MANAGEMENT SYSTEMS CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. BALANCE SHEET COMPONENTS The components of certain balance sheet captions are as follows:
DECEMBER 31, ------------------------ JUNE 30, 1997 1998 1999 ---------- ---------- ----------- (UNAUDITED) Accounts receivable, net: Accounts receivable.......................... $ 727,000 $1,291,000 $1,327,000 Less: Allowance for doubtful accounts........ (87,000) (87,000) (67,000) ---------- ---------- ---------- $ 640,000 $1,204,000 $1,260,000 ========== ========== ========== Other current assets: Prepaid license fees......................... $ 79,000 $ 85,000 $ 56,000 Prepaid expenses and other................... 34,000 101,000 128,000 $ 113,000 $ 186,000 $ 184,000 ========== ========== ========== Property and equipment, net: Computer equipment........................... $ 631,000 $ 870,000 $1,051,000 Furniture and fixtures....................... 131,000 140,000 162,000 Leasehold improvements....................... 43,000 48,000 60,000 ---------- ---------- ---------- 805,000 1,058,000 1,273,000 Less: accumulated depreciation............... (618,000) (706,000) (820,000) ---------- ---------- ---------- $ 187,000 $ 352,000 $ 453,000 ========== ========== ========== Capitalized software, net: Capitalized software......................... $ 208,000 $ 284,000 $ 311,000 Less: accumulated amortization............... (109,000) (192,000) (233,000) ---------- ---------- ---------- $ 99,000 $ 92,000 $ 78,000 ========== ========== ========== Accrued expenses: Payroll related.............................. $ 849,000 $ 733,000 $ 944,000 Allowance for contract losses................ 100,000 100,000 108,000 Other........................................ 109,000 100,000 133,000 ---------- ---------- ---------- $1,058,000 $ 933,000 $1,185,000 ========== ========== ==========
4. RELATED PARTY TRANSACTIONS At December 31, 1996 and 1997, the Company had notes payable to certain stockholders totaling $1,720,000 and $2,221,000, respectively, which accrued interest at an annual rate of 12%. Interest expense recognized on stockholder notes totaled $185,000, $180,000 and $31,000 for the years ended December 31, 1996, 1997 and 1998, respectively, and $31,000 (unaudited) for the six months ended June 30, 1998. In March 1998, these stockholder notes payable and related accrued interest totaling $2,558,000 were repaid using proceeds from the Series D Preferred Stock issuance (See Note 7). During the year ended December 31, 1996, a stockholder paid $5,000 and converted notes payable totaling $190,000, as payment for the exercise of 54,000 vested options granted under the Company's 1995 Stock Option Plan. During the year ended December 31, 1997, stockholders converted notes payable totaling $21,000 as payment for the exercise of 10,000 vested options. During the six months ended June 30, 1998 and year ended December 31, 1998, stockholders converted notes payable totaling $289,000 as payment for the exercise of 91,000 vested options. F-12 71 LANDA MANAGEMENT SYSTEMS CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. RELATED PARTY TRANSACTIONS (CONTINUED) In 1997, the Company maintained an operating line of credit with a bank which was guaranteed by a stockholder (the guarantor). The line of credit expired on December 31, 1997, and the outstanding balance of $163,000 was repaid by the guarantor in exchange for a note payable from the Company. The Company repaid the note to the guarantor in March 1998. At June 30, 1999, the Company held full recourse notes receivable from officers related to their purchases of Common Stock in the amount of $189,000 (unaudited). The notes accrue interest at 6% per annum, are secured by all shares of the Company's Common Stock purchased by these individuals and are due and payable in 2006 or immediately in the event of termination. 5. INCOME TAXES No current provision or benefit for federal or state income taxes has been recorded for the years ended December 31, 1996, 1997 and 1998 and for the six months ended June 30, 1998 (unaudited) and 1999 (unaudited), as the Company has incurred net operating losses and has no carryback potential. At December 31, 1998, the Company had federal and state net operating loss carryforwards of approximately $6,309,000 and $1,442,000, respectively, available to reduce future taxable income. At June 30, 1999, the Company had federal and state net operating loss carryforwards of approximately $6,717,000 (unaudited) and $1,631,000 (unaudited), respectively, available to reduce future taxable income. Utilization of such carryforwards may be limited in certain circumstances including, but not limited to, cumulative stock ownership changes of more than 50 percent over a three-year period and expire at varying amounts during the period from 1999 through 2013. The Company believes that there were cumulative changes of ownership of greater than 50 percent in February 1998. Accordingly, the amount of loss carryforwards that can be utilized to reduce future taxable income for federal and state income tax purposes will be limited. Net deferred tax assets are composed of the following:
DECEMBER 31, -------------------------- JUNE 30, 1997 1998 1999 ----------- ----------- ----------- (UNAUDITED) Net operating loss carryforward............. $ 1,716,000 $ 2,228,000 $ 2,378,000 Depreciation and amortization............... 810,000 629,000 360,000 Research and development credits............ 115,000 210,000 250,000 Allowance for doubtful accounts............. 35,000 35,000 27,000 Allowance for contract losses............... 40,000 40,000 43,000 Other....................................... 122,000 40,000 115,000 ----------- ----------- ----------- Gross deferred tax assets................... 2,838,000 3,182,000 3,173,000 Less: valuation allowance................... (2,838,000) (3,182,000) (3,173,000) ----------- ----------- ----------- Net deferred tax assets..................... $ -- $ -- $ -- =========== =========== ===========
Based on a number of factors, including the lack of history of profits, management believes there is sufficient uncertainty regarding the realization of deferred tax assets such that a full valuation allowance has been provided. F-13 72 LANDA MANAGEMENT SYSTEMS CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. COMMITMENTS AND CONTINGENCIES Operating leases The Company leases its facilities and certain equipment under noncancelable operating leases which expire at various times through 2002. Future minimum lease payments at December 31, 1998 are as follows:
YEAR ENDING RENTAL DECEMBER 31, AMOUNTS ------------ ---------- 1999........................................................ $ 234,000 2000........................................................ 258,000 2001........................................................ 218,000 2002........................................................ 167,000 2003........................................................ 142,000 Thereafter.................................................. 136,000 ---------- $1,155,000 ==========
Rent expense under noncancelable operating leases totaled $218,000, $208,000 and $139,000 for the years ended December 31, 1996, 1997 and 1998, respectively and $73,000 (unaudited) and $112,000 (unaudited) for the six months ended June 30, 1998 and 1999, respectively. Line of credit agreement In February 1999, the Company obtained a line of credit that allows maximum borrowings of $2 million. Advances on the line of credit are collateralized by all tangible and intangible personal property of the Company, accrue interest at the lender's prime and are due in February 2000. The agreement also allows the Company to designate up to $300,000 of the maximum borrowings as a term note to finance equipment purchases. Borrowings under the term note must be drawn by August 1999 and are payable in 36 equal payments of principal plus interest beginning September 1999. The interest rate for borrowings under the term note is the lender's prime rate plus 1%. At June 30, 1999, the Company had no outstanding borrowings under the line of credit agreement or the term note. F-14 73 LANDA MANAGEMENT SYSTEMS CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. STOCKHOLDERS' EQUITY As of December 31, 1998, the Company's Articles of Incorporation authorized the Company to issue 15,000,000 shares of no par value Common Stock, and 41,000, 115,000, 450,000 and 6,800,000 shares of $0.001 par value Series A, B, C and D Preferred Stock, respectively. Preferred Stock Preferred Stock consists of the following:
SHARES ISSUED AND OUTSTANDING --------------------------------- DECEMBER 31, 1998 JUNE 30, 1999 DECEMBER 31, ------------------------ ------------------------ SHARES ------------------- JUNE 30, GROSS LIQUIDATION GROSS LIQUIDATION AUTHORIZED 1997 1998 1999 PROCEEDS AMOUNT PROCEEDS AMOUNT ---------- ------- --------- ----------- ---------- ----------- ---------- ----------- (UNAUDITED) (UNAUDITED) Series A............. 41,000 41,000 -- -- $ -- $ -- $ -- $ -- Series B............. 115,000 115,000 -- -- -- -- -- -- Series C............. 450,000 450,000 -- -- -- -- -- -- Series D............. 6,800,000 -- 6,800,000 6,800,000 8,513,000 8,160,000 8,513,000 8,160,000 Undesignated......... 594,000 -- -- -- -- -- -- -- --------- ------- --------- ----------- ---------- ---------- ---------- ---------- 8,000,000 606,000 6,800,000 6,800,000 $8,513,000 $8,160,000 $8,513,000 $8,160,000 ========= ======= ========= =========== ========== ========== ========== ==========
Recapitalization At December 31, 1997, the Company had 41,000, 115,000 and 450,000 outstanding shares of Series A, B and C Preferred Stock, respectively. In February 1998, the Company's Articles of Incorporation were amended to authorize the Company to issue 6,800,000 shares of Series D Preferred Stock. Immediately following the authorization, all 41,000 shares of Series A Preferred Stock were converted into Series D Preferred Stock on a one-for-one basis. All shares of Series B and Series C Preferred Stock were converted into 1,122,000 shares of Series D Preferred Stock using a conversion ratio of 1.9833 shares of Series D Preferred Stock issued for each share of Series B and Series C Preferred Stock converted. Additionally, certain stockholders converted 178,000 shares of Common Stock into 18,000 shares of Series D Preferred Stock using a conversion ratio of approximately .10 shares of Series D Preferred Stock issued for each share of Common Stock converted. Following the above conversions, in February 1998, the holders of the converted Series D Preferred Stock sold all of their shares to new investors for approximately $1.20 per share in accordance with an agreement between the Company and its stockholders. In addition, the Company issued 5,619,000 shares of Series D Preferred Stock to new investors for approximately $1.20 per share. Offering costs of $141,000 were recorded as an offset to the gross proceeds from the sale of Series D Preferred Stock. Voting Each share of Series D Preferred Stock has voting rights equal to one share of Common Stock into which it is convertible and votes together as one class with the Common Stock. Dividends Holders of Series A Preferred Stock were entitled to receive noncumulative dividends at a rate of 10 percent per year, when and if declared by the Company's Board of Directors. Holders of Series B and C Preferred Stock were entitled to receive cumulative dividends at a rate of 3 percent F-15 74 LANDA MANAGEMENT SYSTEMS CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. STOCKHOLDERS' EQUITY (CONTINUED) per year, when and if declared by the Company's Board of Directors. Cumulative dividends were to be paid before any dividends could be declared or paid on any other class of stock. No dividends were declared by the Board of Directors on the Series A, B and C Preferred Stock. Holders of Series D Preferred Stock are entitled to receive noncumulative dividends at a rate of 10 percent per year, when and if declared by the Company's Board of Directors. The holders of Series D Preferred Stock will also be entitled to participate in dividends on Common Stock, when and if declared by the Board of Directors, based on the number of shares of Common Stock held on an as-if converted basis. No dividends on Series D Preferred Stock or Common Stock were declared by the Company's Board of Directors during the year ended December 31, 1998 or the six months ended June 30,1999. Liquidation In the event of the liquidation, dissolution or winding up of the Company, including merger, consolidation, reorganization, sale of voting control or sale of substantially all of the assets of the Company in which the stockholders of the Company do not own a majority (50% or more) of the outstanding shares of the surviving corporation, the holders of Series D Preferred Stock are entitled to receive a sum equal to the original issue price of the stock plus all declared and unpaid dividends. The remaining assets, if any, shall be distributed ratably among the holders of Common Stock and Series D Preferred Stock on an as-if-converted to Common Stock basis. Should the Company's legally available assets be insufficient to satisfy the liquidation preferences, the funds will be distributed ratably among the holders of Series D Preferred Stock. Conversion Each share of Series D Preferred Stock is convertible at the option of the holder into shares of Common Stock by multiplying the appropriate conversion rate in effect by the number of Series D Preferred Stock being converted. The conversion rate is the quotient obtained by dividing the Original Issue Price by the conversion price (which is initially the respective Original Issue Price, until it is adjusted). Additionally, each share of Series D Preferred Stock shall automatically be converted upon (i) an initial public offering of the Company equal to or exceeding $6.00 per share with aggregate proceeds not less than $15,000,000, or (ii) the written consent of at least sixty six and two-thirds (66 2/3) percent of the Series D Preferred Stock holders then outstanding. At December 31, 1998 and June 30, 1999, the conversion rate was one-to-one. Common Stock warrants In conjunction with the Series D Preferred Stock issuance, the Company issued warrants to two stockholders for the rights to purchase 100,000 and 250,000 shares, respectively, of Common Stock at a price of $1.20 per share. The warrants were fully vested and exercisable on the date of grant and expire on the earlier of February 2003, or the closing of an initial public offering by the Company. The fair value of warrants, determined using the Black-Scholes option pricing model, was immaterial on the date of issuance. Restricted Common Stock In March and May 1999, certain officers exercised, in exchange for full recourse notes payable to the Company, stock options to purchase 1,572,284 (unaudited) shares of the Company's Common Stock at a price of $0.12 per share (See Note 4). Under the terms of the stock purchase F-16 75 LANDA MANAGEMENT SYSTEMS CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. STOCKHOLDERS' EQUITY (CONTINUED) agreements, the Company has the right to repurchase the unvested shares of Common Stock at the original issue price in the event the officers cease to be employees of the Company. The repurchase rights lapse ratably over 36 months. At June 30, 1999, 1,392,425 (unaudited) shares of Common Stock were subject to repurchase rights. 8. STOCK OPTION PLANS The Company has two stock option plans, the 1995 Stock Option Plan (1995 Plan) and the 1998 Equity Incentive Plan (1998 Plan), which provide for the granting of incentive stock option awards to employees of the Company. Under the two plans, options must be issued at prices not less than 100 percent of the estimated fair value of the stock on the date of grant and are exercisable for periods not exceeding ten years from the date of grant. Options granted to stockholders who own greater than 10 percent of the outstanding stock at the time of grant are exercisable for periods not exceeding five years from the date of grant and must be issued at prices not less than 110 percent of the estimated fair value at the date of grant. Options granted under the 1995 Plan vest in 25 percent increments 9, 15, 21 and 27 months after the date of grant. Options granted to employees under the 1998 Plan vest at a rate of 20 percent per year over five years from the grant date. Options granted to officers and directors under the 1998 Plan vest over periods determined by the Board of Directors, which was three years for options granted in 1998. The following table summarizes the status of the Company's stock option plans as of and for the years ended December 31, 1996, 1997 and 1998 and as of and for the six months ended June 30, 1999:
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, 1999 1996 1997 1998 (UNAUDITED) ------------------- ------------------- --------------------- ---------------------- WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE ------- --------- ------- --------- --------- --------- ---------- --------- Outstanding at beginning of year.... 487,048 $3.23 609,048 $2.85 900,298 $2.54 2,253,947 $0.71 Granted............ 164,000 1.94 379,500 1.95 1,750,349 0.12 1,000 0.50 Exercised.......... (24,000) 3.75 (10,000) 2.09 (95,000) 3.13 (1,572,284) 0.12 Forfeited.......... (18,000) 1.90 (78,250) 2.13 (6,700) 1.90 -- -- Cancelled.......... -- -- -- -- (295,000) 1.99 (70,848) 8.00 ------- ------- --------- ---------- Outstanding at period end.................. 609,048 2.85 900,298 2.54 2,253,947 0.71 611,815 1.38 ======= ======= ========= ========== Options exercisable at period end........... 427,798 3.23 602,298 2.84 432,848 2.90 397,375 1.90 ======= ======= ========= ========== Weighted-average fair value of options granted during the period............... $ -- $ -- $ 0.03 $ 0.12 ======= ======= ========= ==========
As of December 31, 1998 and June 30, 1999, 588,797 and 658,645 (unaudited) shares of Common Stock were reserved for future issuances. F-17 76 LANDA MANAGEMENT SYSTEMS CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. STOCK OPTION PLANS (CONTINUED) The following table summarizes information about stock options outstanding at December 31, 1998:
WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER OF REMAINING NUMBER OF REMAINING EXERCISE SHARES CONTRACTUAL LIFE SHARES CONTRACTUAL LIFE PRICES OUTSTANDING IN YEARS EXERCISABLE IN YEARS -------- ----------- ---------------- ----------- ---------------- $0.12 1,750,349 9.8 -- -- 1.90 432,750 5.9 362,000 5.9 8.00 70,848 0.3 70,848 0.3 --------- --- ------- --- 2,253,947 8.8 432,848 5.0 ========= === ======= ===
The following table summarizes information about stock options outstanding at June 30, 1999 (unaudited):
WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER OF REMAINING NUMBER OF REMAINING EXERCISE SHARES CONTRACTUAL LIFE SHARES CONTRACTUAL LIFE PRICES OUTSTANDING IN YEARS EXERCISABLE IN YEARS -------- ----------- ---------------- ----------- ---------------- $0.12 178,065 9.3 -- -- 0.50 1,000 9.8 -- -- 1.90 432,750 5.4 397,375 5.4 ------- --- ------- --- 611,815 6.5 397,375 5.4 ======= === ======= ===
Fair value disclosures The Company calculated the minimum value of each option on the date of grant using the Black-Scholes option pricing model as prescribed by SFAS No. 123 using the following assumptions:
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ------------------------ -------------- 1996 1997 1998 1998 1999 ---- ---- ---- ---- ---- (UNAUDITED) Risk-free interest rates...................... 6.3% 6.3% 5.8% 5.9% 5.0% Expected lives (in years)..................... 5.0 5.0 5.0 5.0 5.0 Dividend yield................................ 0.0% 0.0% 0.0% 0.0% 0.0% Expected volatility........................... 0.0% 0.0% 0.0% 0.0% 0.0%
F-18 77 LANDA MANAGEMENT SYSTEMS CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. STOCK OPTION PLANS (CONTINUED) Had compensation cost for the Company's stock-based compensation plans been determined based on the pro forma minimum value method prescribed by SFAS No. 123, the Company's net loss would have been as follows:
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ----------------------------------------- ---------------------- 1996 1997 1998 1998 1999 ----------- ----------- ----------- --------- --------- (UNAUDITED) Net loss: As reported............ $(1,897,000) $(1,011,000) $(1,910,000) $(701,000) $(904,000) Pro forma.............. $(1,897,000) $(1,011,000) $(1,912,000) $(701,000) $(921,000) Basic and diluted net loss per share: As reported............ $ (1.74) $ (0.91) $ (1.83) $ (0.66) $ (0.82) Pro forma.............. $ (1.74) $ (0.91) $ (1.83) $ (0.66) $ (0.84)
Unearned stock-based compensation In connection with certain stock option grants and common stock issuances during the year ended December 31, 1998 and the six months ended June 30, 1999, the Company recognized unearned compensation totaling $4,166,000 and $21,000 (unaudited), respectively, which is being amortized over the vesting periods of the related options using the multiple option approach prescribed by SFAS No. 123. Amortization expense recognized during the year ended December 31, 1998 and the six months ended June 30, 1998 and 1999, totaled $1,173,000, $215,000 (unaudited) and $997,000 (unaudited), respectively. 9. SUBSEQUENT EVENTS Line of credit agreement In August 1999, the Company borrowed $270,000 (unaudited) under the provisions of its line of credit agreement. Reincorporation In September 1999, the Board of Directors authorized the reincorporation of the Company from a California corporation to a Delaware corporation. The reincorporation is expected to become effective prior to the effective date of the Company's planned initial public offering. Stock option grants During July 1999, the Company granted options to purchase 279,000 shares of Common Stock to certain employees, officers and directors at a weighted average price of $0.95. In connection with the stock option grants, the Company will recognize $1,571,000 (unaudited) of unearned compensation over the related vesting period using the multiple option approach prescribed by SFAS No. 123. F-19 78 FOLD-OVER PAGE HEADER: Imagine... a healthcare industry where communication among clinical decision-makers is actually timely, interactive and meaningful. INSIDE SPREAD HEADER: Make the right connections. Landacorp e-medical management solutions. COPY HEADERS: Landacorp Providing business-to-business solutions to enable e-medical management. We provide comprehensive medical management and Internet-based solutions to healthcare payers and providers. Our products: o Automate and streamline administrative and business processes; o Enable secure, real-time interaction among various healthcare participants over the Internet; and o Add functionality to our payer clients' Web sites to attract repeat visits by members. Our solutions complement existing legacy and Internet-based products and services, enabling our customers to configure and adapt our solutions to fit their specific workflow processes and clinical guidelines. This is possible through our: o Open, ntier system architecture; o Rules-based processing capabilities; and o Proprietary interfaces. Our solutions help our clients: o Control the cost and improve the quality of healthcare delivery; o Develop their Internet healthcare initiatives; and o Improve their members' satisfaction and empowerment. DESCRIPTION OF DIAGRAM: The diagram illustrates the interactions between members and health plan and providers and health plan on mock computer screens that would be available to members and providers using our e-maxMC medical management solution via Internet connection. 79 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- [ ] SHARES [LANDACORP LOGO] COMMON STOCK --------------------- PROSPECTUS --------------------- HAMBRECHT & QUIST SG COWEN VOLPE, BROWN, WHELAN & COMPANY YOU SHOULD RELY ONLY ON INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK. NO ACTION IS BEING TAKEN IN ANY JURISDICTION OUTSIDE THE UNITED STATES TO PERMIT A PUBLIC OFFERING OF THE COMMON STOCK OR POSSESSION OR DISTRIBUTION OR DISTRIBUTION OF THIS PROSPECTUS IN ANY SUCH JURISDICTION. PERSONS WHO COME INTO POSSESSION OF THIS PROSPECTUS IN JURISDICTIONS OUTSIDE THE UNITED STATES ARE REQUIRED TO INFORM THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THIS OFFERING AND THE DISTRIBUTION IF THIS PROSPECTUS APPLICABLE TO THAT JURISDICTION. UNTIL (25 DAYS AFTER THE DAY OF THIS PROSPECTUS), ALL DEALERS THAT BUY, SELL OR TRADE IN OUR 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 80 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the costs and expenses, other than the underwriting discounts, payable by the Registrant in connection with the sale of the securities being registered. All amounts are estimates except the SEC registration fee, the NASD filing fee and the Nasdaq/ NMS listing fee. SEC Registration Fee........................................ $ 11,120 NASD Filing Fee............................................. Nasdaq National Market Listing Fee.......................... Printing Costs.............................................. Legal Fees and Expenses..................................... Accounting Fees and Expenses................................ Blue Sky Fees and Expenses.................................. Transfer Agent and Registrar Fees........................... Miscellaneous............................................... ---------- Total............................................. $ ,000,000 ==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the Delaware General Corporation Law permits a corporation to include in its charter documents, and in agreements between the corporation and its directors and officers, provisions expanding the scope of indemnification beyond that specifically provided by the current law. Our certificate of incorporation and bylaws provide that we will indemnify our directors and executive offices, and that we may indemnify our other officers and employees and other agents, to the fullest extent permitted by law. We believe that the indemnification under our bylaws covers at least negligence and gross negligence on the part of the indemnified parties. Our bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in such capacity, regardless of whether the bylaws would permit indemnification. We have entered into agreements to indemnify our executive offices, in addition to indemnification provided for in our bylaws. These agreements, among other things, provide for indemnification of our directors and executive officers for expenses, judgments, fines, and settlement amounts incurred by any such person in any action or proceedings arising out of such person's services as a director or executive officer of Landacorp or at our request. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers. We also maintain directors and officers liability insurance. At present, we are not aware of any pending litigation or proceeding involving any director, officer, employee or agent of Landacorp where indemnification will be required or permitted. Furthermore, we are not aware of any threatened litigation or proceeding that might result in a claim for indemnity by these individuals. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Since January 1, 1996, the Registrant has sold and issued the following unregistered securities: 1. In April 16, 1996, we sold 13,000 shares of common stock to a director for a purchase price of $27,000. II-1 81 2. In May 31, 1996, we sold 1,000 shares of common stock to for a purchase price of $ . 3. In September 26, 1996, we sold 10,000 shares of common stock to for a purchase price of $ . 4. In April 28, 1997, we sold 10,000 shares of common stock to a director for a purchase price of $ . 5. In February 26, 1998, we sold 46,000 shares of common stock to a director for a purchase price of $ . 6. In February 27, 1999, we sold our aggregate of 6,800,000 shares of Series D preferred stock to investors for an aggregate purchase price of $ . 7. In June 15, 1998, we sold an aggregate of 4,250 shares of common stock to for a purchase price of $ . 8. In March 17, 1999, we sold an aggregate of 1,362,285 shares of common stock to employees, officers, directors, for an aggregate purchase price of $165,373.50. The offers, sales and issuances of the above securities were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, and/or Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b) of the Securities Act as transactions by an issuer not involving a public offering or transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under such Rule 701. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and warrants issued in such transactions. All recipients had adequate access, through employment or other relationships, to information about Landacorp. ITEM 16. EXHIBITS. *1.1 Form of Underwriting Agreement. 3.1 Restated Articles of Incorporation of Landa Management Systems Corporation. 3.2 Bylaws effective prior to Registrant's reincorporation in Delaware. *3.3 Certificate of Incorporation, to be filed and become effective immediately following this offering. *3.4 Amended and Restated Certificate of Incorporation, to be filed and become effective immediately following this offering. *3.5 Form of Bylaws to become effective upon Registrant's reincorporation in Delaware. 4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 3.5, 10.5 and 10.11. *4.2 Specimen common stock certificate. *5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation. 10.1 Form of Indemnification Agreement between the Company and each of its directors and officers. *10.2 1995 Stock Plan. 10.3 1998 Equity Incentive Plan. 10.4 Series D Preferred Stock Purchase Agreement dated February 27, 1998. 10.5 Investor Rights Agreement dated February 27, 1998. *10.6 Sublease Agreement for Offices located at 4151 Ashford Dunwoody Rd., Atlanta, Georgia, between Landacorp and Unisys Corporation, dated September 1, 1991. *10.7 Lease Agreement for offices located on Fortress Avenue, Chico, CA, between Landacorp and Fortress Development Group, dated March 8, 1999. 10.8 Restricted Stock Purchase Agreement of Eugene Santa Cattarina, dated October 20, 1998. 10.9 Restricted Stock Purchase Agreement of Stephen Kay, dated October 20, 1998.
II-2 82 10.10 Restricted Stock Purchase Agreement of Bryan Lang, dated October 20, 1998. 10.11 Voting Rights Agreement dated February 27, 1998. *10.12 Licensing Agreement by and between Interqual, Incorporated and Landa management Systems Corporation, dated September 8, 1992. *10.14 Sublicensor Agreement by and between Interqual(R) Incorporated and Landa Management Systems, effective April 15, 1994. *10.15 Distribution Agreement for Interqual(R)Medical Appropriateness Review Systems, signed on January 1, 1996. *10.16 License Agreement - Software Developers, between Milliman & Robertson, Inc. and Landacorp, dated August 17, 1998. 23.1 Consent of Independent Accountants *23.2 Consents of Wilson Sonsini Goodrich & Rosati, P.C. (included in Exhibit 5.1) 24.1 Powers of Attorney (included in this Registration Statement at page II-5) 27.1 Financial Data Schedule
- ------------------------ * To be filed by amendment (b) Financial Statement Schedules Schedule II -- Valuation and Qualifying Accounts Other schedules are omitted because they are not applicable, or because the information is included in the Financial Statements or the Notes thereto. ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof. II-3 83 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Palo Alto, State of California on September 20, 1999. By: /s/ STEPHEN P. KAY ------------------------------------ Stephen P. Kay Chief Operating Officer and Chief Financial Officer (Principal Financial and Accounting Officer) POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints, jointly and severally, Eugene Santa Cattarina and Stephen P. Kay, and each of them, as his attorney-in-fact, with full power of substitution, for him in any and all capacities, to sign any and all amendments to this registration statement (including post-effective amendments), and any and all registration statements filed pursuant to Rule 462 under the Securities Act of 1933, as amended, in connection with or related to the offering contemplated by this registration statement and its amendments, if any, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorney to any and all amendments to said registration statement. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities indicated on September 20, 1999:
SIGNATURE TITLE --------- ----- /s/ EUGENE SANTA CATTARINA President, Chief Executive Officer and - ----------------------------------------------------- Director Eugene Santa Cattarina /s/ STEPHEN P. KAY Chief Operating Officer - ----------------------------------------------------- and Chief Financial Officer Stephen P. Kay (Principal Financial and Accounting Officer) /s/ BRYAN H. LANG Chief Technology Officer, - ----------------------------------------------------- Chief Marketing Officer and Director Bryan H. Lang /s/ THOMAS F. STEPHENSON Chairman of the Board of Directors - ----------------------------------------------------- Thomas F. Stephenson /s/ HOWARD E. COX Director - ----------------------------------------------------- Howard E. Cox /s/ JASON M. ROSENBLUTH Director - ----------------------------------------------------- Jason M. Rosenbluth /s/ JEROME H. GROSSMAN Director - ----------------------------------------------------- Jerome H. Grossman
II-4 84 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- *1.1 Form of Underwriting Agreement. 3.1 Restated Articles of Incorporation of Landa Management Systems Corporation. 3.2 Bylaws effective prior to Registrant's reincorporation in Delaware. *3.3 Certificate of Incorporation, to be filed and become effective immediately following this offering. *3.4 Amended and Restated Certificate of Incorporation, to be filed and become effective immediately following this offering. *3.5 Form of Bylaws to become effective upon Registrant's reincorporation in Delaware. 4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 3.5, 10.5 and 10.11. *4.2 Specimen common stock certificate. *5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation. 10.1 Form of Indemnification Agreement between the Company and each of its directors and officers. *10.2 1995 Stock Plan. 10.3 1998 Equity Incentive Plan. 10.4 Series D Preferred Stock Purchase Agreement dated February 27, 1998. 10.5 Investor Rights Agreement dated February 27, 1998. *10.6 Sublease Agreement for Offices located at 4151 Ashford Dunwoody Rd., Atlanta, Georgia, between Landacorp and Unisys Corporation, dated September 1, 1991. *10.7 Lease Agreement for offices located on Fortress Avenue, Chico, CA, between Landacorp and Fortress Development Group, dated March 8, 1999. 10.8 Restricted Stock Purchase Agreement of Eugene Santa Cattarina, dated October 20, 1998. 10.9 Restricted Stock Purchase Agreement of Stephen Kay, dated October 20, 1998. 10.10 Restricted Stock Purchase Agreement of Bryan Lang, dated October 20, 1998. 10.11 Voting Rights Agreement dated February 27, 1998. *10.12 Licensing Agreement by and between Interqual, Incorporated and Landa management Systems Corporation, dated September 8, 1992. *10.14 Sublicensor Agreement by and between Interqual(R) Incorporated and Landa Management Systems, effective April 15, 1994. *10.15 Distribution Agreement for Interqual(R)Medical Appropriateness Review Systems, signed on January 1, 1996. *10.16 License Agreement - Software Developers, between Milliman & Robertson, Inc. and Landacorp, dated August 17, 1998. 23.1 Consent of Independent Accountants *23.2 Consents of Wilson Sonsini Goodrich & Rosati, P.C. (included in Exhibit 5.1) 24.1 Powers of Attorney (included in this Registration Statement at page II-5) 27.1 Financial Data Schedule
- ------------------------ * To be filed by amendment EX-3.1 2 AMENDED AND RESTATED ARTICLES OF INCORPORATION 1 EXHIBIT 3.1 RESTATED ARTICLES OF INCORPORATION OF LANDA MANAGEMENT SYSTEMS CORPORATION Bryan H. Lang and Gilbert H. Lang hereby certify that: ONE: They are the duly elected and acting President and Secretary, respectively, of Landa Management Systems Corporation, a California corporation (the "Corporation" or the "Company"). TWO: The Articles of Incorporation of this corporation are hereby amended and restated to read as follows: I. The name of the Corporation is Landa Management Systems Corporation. II. The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. III. A. This Corporation is authorized to issue two classes of stock, no par value, to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the corporation is authorized to issue is Twenty-Three Million (23,000,000) shares, no par value, Fifteen Million (15,000,000) shares of which shall be Common Stock (the "Common Stock") and Eight Million (8,000,000) shares of which shall be Preferred Stock (the "Preferred Stock"). B. The Preferred Stock may be issued from time to time in one or more series. Except as provided in this Article III, the Board of Directors is hereby authorized to fix or alter from time to time the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions 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 which they had prior to the adoption of the resolution originally fixing the number of shares of such series. 1 2 C. Forty-One Thousand Three Hundred (41,300) of the authorized shares of Preferred Stock are hereby designated "Series A Preferred Stock" (the "Series A Preferred"). One Hundred Fifteen Thousand Four Hundred Forty-Six (115,446) of the authorized shares of Preferred Stock are hereby designated "Series B Preferred Stock" (the "Series B Preferred"). Four Hundred Fifty Thousand Four Hundred Eighty-One (450,481) of the authorized shares of Preferred Stock are hereby designated "Series C Preferred Stock" (the "Series C Preferred"). Six Million Seven Hundred Fifty Thousand (6,750,000) of the authorized shares of Preferred Stock are hereby designated "Series D Preferred Stock" (the "Series D Preferred"). The Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred are hereinafter collectively referred to as the "Series Preferred." D. The rights, preferences, privileges, restrictions and other matters relating to the Series Preferred are as follows: 1. DIVIDEND RIGHTS. (a) Holders of Series Preferred, in preference to the holders of any other stock of the Company ("Junior Stock"), shall be entitled to receive, when and as declared by the Board of Directors, but only out of funds that are legally available therefor, cash dividends at the rate per annum on each outstanding share of Series Preferred (as adjusted for any stock dividends, combinations or splits with respect to such shares) of ten percent (10%) for the Series A Preferred (commencing on the fifth anniversary of the issuance thereof), three percent (3%) for the Series B Preferred, three percent (3%) for the Series C Preferred and ten percent (10%) for the Series D Preferred of the "Original Issue Price" of each Series. The Original Issue Price of the Series A Preferred shall be one dollar ($1.00), the Original Issue Price of the Series B Preferred shall be two dollars and seventeen cents ($2.17), the Original Issue Price of the Series C Preferred shall be two dollars and twenty-two cents ($2.22), and the Original Issue Price of the Series D Preferred shall be one dollar and twenty cents ($1.20). Such dividends shall be payable only when, as and if declared by the Board of Directors. Dividends on the Series A Preferred and the Series D Preferred shall be noncumulative. Dividends on the Series B Preferred and the Series C Preferred shall be cumulative. (b) So long as any shares of Series Preferred shall be outstanding, no dividend, whether in cash or property, shall be paid or declared, nor shall any other distribution be made, on any Junior Stock, nor shall any shares of any Junior Stock of the Company be purchased, redeemed, or otherwise acquired for value by the Company (except for acquisitions of Common Stock by the Company pursuant to agreements which permit the Company to repurchase such shares upon termination of services to the Company or in exercise of the Company's right of first refusal upon a proposed transfer) until all dividends (set forth in Section 1(a) above) on the Series Preferred shall have been paid or declared and set apart. In the event dividends are paid on any share of Common Stock, an additional dividend shall be paid with respect to all outstanding shares of Series Preferred in an amount equal per share (on an as-if-converted to Common Stock basis) to the amount paid or set aside for each share of Common Stock. The provisions of this Section 1(b) shall not, however, apply to (i) a dividend payable in Common Stock, (ii) the acquisition of shares of any Junior Stock in exchange for any shares of any other Junior Stock, or (iii) any repurchase of any outstanding securities of the Company that is 2 3 unanimously approved by the Company's Board of Directors. The holders of the Series Preferred expressly waive their rights, if any, as described in California Corporations Code Sections 503 and 506 as they relate to repurchase of shares of Common Stock from service providers upon termination of employment. 2. VOTING RIGHTS. (a) Except as otherwise provided herein or as required by law, the Series Preferred shall be voted equally with the shares of the Common Stock of the Company and not as a separate class, at any annual or special meeting of shareholders of the Company, and may act by written consent in the manner as the Common Stock, in either case upon the following basis: each holder of shares of Series Preferred shall be entitled to such number of votes as shall be equal to the whole number of shares of Common Stock into which such holder's aggregate number of shares of Series Preferred are convertible (pursuant to Section 4 hereof) immediately after the close of business on the record date fixed for such meeting or the effective date of such written consent. The Series A Preferred shall be non-voting and shall have no voting rights except as required by law or as set forth in paragraph (b) below. (b) Notwithstanding paragraph (a) above, the Series A Preferred, voting as a separate class, shall be entitled to elect one (1) member of the Company's Board of directors and to remove from office director and to fill any vacancy caused by the death, resignation or removal of such director if the Company has failed, for eight (8) fiscal quarters, to pay all or any part of the dividends then payable with respect to the Series A Preferred pursuant to Section 1(a) above, and such right shall continue until such dividends have been declared and paid or set apart. 3. LIQUIDATION RIGHTS. (a) Upon any liquidation, dissolution, or winding up of the Company, whether voluntary or involuntary, before any distribution or payment shall be made to the holders of any Junior Stock, the holders of Series Preferred shall be entitled to be paid out of the assets of the Company an amount per share of Series Preferred equal to the sum of (i) the Original Issue Price for such series and (ii) all declared (and, in the case of the Series B Preferred and Series C Preferred, undeclared) and unpaid dividends on such shares of Preferred Stock for each share of Series Preferred held by them. (b) After the payment of the full liquidation preference of the Series Preferred as set forth in Section 3(a) above, the assets of the Company legally available for distribution, if any, shall be distributed ratably to the holders of the Common Stock and Series D Preferred on an as-if-converted to Common Stock basis. (c) The following events shall be considered a liquidation under Section 3(a): (i) any consolidation or merger of the Company with or into any other corporation or other entity or person, or any other corporate reorganization, in which 3 4 the stockholders of the Company immediately prior to such consolidation, merger or reorganization, own less than 50% of the Company's voting power immediately after such consolidation, merger or reorganization, or any transaction or series of related transactions in which shareholders of the Company transfer in excess of fifty percent (50%) of the Company's voting power (an "Acquisition"); or (ii) a sale, lease or other disposition of all or substantially all of the assets of the Company (an "Asset Transfer"). (d) If, upon liquidation, distribution, or winding up, the assets of the Company shall be insufficient to make payment in full to all holders of Series Preferred, then such assets shall be distributed among the holders of Series Preferred at the time outstanding, ratably in proportion to the full amounts to which they would otherwise be respectively entitled. 4. CONVERSION RIGHTS. The holders of the Series Preferred Shall have the following rights with respect to the conversion of the Series Preferred into shares of Common Stock: (a) OPTIONAL CONVERSION. Subject to and in compliance with the provisions of this Section 4, any shares of Series Preferred may, at the option of the holder, be converted at any time into fully-paid and nonassessable shares of Common Stock. The number of shares of Common Stock to which a holder of Series Preferred shall be entitled upon conversion shall be the product obtained by multiplying the "Conversion Rate" for such series of Preferred Stock then in effect (determined as provided in Section 4(b)) by the number of shares of Series Preferred being converted. (b) CONVERSION RATE. The conversion rate in effect at any time for conversion of the Series A Preferred (the "Series A Conversion Rate") shall be the quotient obtained by dividing the Original Issue Price of the Series A Preferred by the "Series A Conversion Price," calculated as provided in Section 4(c). The conversion rate in effect at any time for conversion of the Series B Preferred (the "Series B Conversion Rate") shall be the quotient obtained by dividing the Original Issue Price of the Series B Preferred by the "Series B Conversion Price," calculated as provided in Section 4(c). The conversion rate in effect at any time for conversion of the Series C Preferred (the "Series C Conversion Rate") shall be the quotient obtained by dividing the Original Issue Price of the Series C Preferred by the "Series C Conversion Price," calculated as provided in Section 4(c). The conversion rate in effect at any time for conversion of the Series D Preferred (the "Series D Conversion Rate") shall be the quotient obtained by dividing the Original Issue Price of the Series D Preferred by the "Series D Conversion Price," calculated as provided in Section 4(c). (c) CONVERSION PRICE. (i) The conversion price for the Series A Preferred shall initially be $1.00 (the "Series A Conversion Price"). Such initial Series A Conversion Price shall be adjusted from time to time in accordance with this Section 4. All references to the Series A 4 5 Conversion Price herein shall mean the Series A Conversion Price as so adjusted. The conversion price for the Series B Preferred shall initially be 52.17 (the "Series B Conversion Price"). Such initial Series B Conversion Price shall be adjusted from time to time in accordance with this Section 4. All references to the Series B Conversion Price herein shall mean the Series B Conversion Price as so adjusted. The conversion price for the Series C Preferred shall initially be $2.22 (the "Series C Conversion Price"). Such initial Series C Conversion Price shall be adjusted from time to time in accordance with this Section 4. All references to the Series C Conversion Price herein shall mean the Series C Conversion Price as so adjusted. The conversion price for the Series D Preferred shall be $1.20 (the "Series D Conversion Price"). Such initial Series D Conversion Price shall be adjusted from time to time in accordance with this Section 4. All references to the Series D Conversion Price herein shall mean the Series D Conversion Price as so adjusted. Those sections of these Amended and Restated Articles of Incorporation that refer to adjustment of the Conversion Price shall apply independently to the Series A Conversion Price, Series B Conversion Price, Series C Conversion Price and Series D Conversion Price. (ii) In the event that after the Original Issue Date (as defined in subsection (e) below), the Board of Directors of the Company determines that the number of shares of Common Stock deemed to be outstanding (as described in the second sentence of subsection (j)(i) below) as of the Original Issue Date exceeded 2,118,325.09 then the Series D Conversion Price shall be adjusted such that (A) the sum obtained by multiplying (I) the quotient of (w) the Series D Original Issue Price divided by (x) the Series D Conversion Price, by (II) the quotient of (y) the total number of shares of Series D outstanding immediately prior to the time of such determination divided by (z) the total number of shares of Common Stock deemed to be outstanding immediately prior to such determination equals (B) the sum obtained by multiplying (III) the quotient of (ww) the Series D Original Issue Price divided by (xx) the new Series D Conversion Price, by (B) the quotient of (yy) the total number of shares of Series D then outstanding by (zz) the total number of shares of Common Stock deemed to have been outstanding as of the Original Issue date plus such additional shares of Common Stock deemed to have been outstanding as of the Original Issue Date as determined by the Board of Directors. (d) MECHANICS OF CONVERSION. Each holder of Series Preferred who desires to convert the same into shares of Common Stock pursuant to this Section 4 shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Company or any transfer agent for the Series Preferred, and shall give written notice to the Company at such office that such holder elects to convert the same. Such notice shall state the number of shares of Series Preferred being converted. Thereupon, the Company shall promptly issue and deliver at such office to such holder a certificate or certificates for the number of shares of Common Stock to which such holder is entitled and shall promptly pay in cash or, at the option of the Company, in Common Stock (at the Common Stock's fair market value determined by the Board of Directors as of the date of such conversion), any declared and unpaid dividends on the shares of Series Preferred being converted. Such conversion shall be deemed to have been made at the close of business on the date of such surrender of the certificates representing the shares of Series Preferred to be converted, and the person entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder of such shares of Common Stock on such date. 5 6 (e) ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS. If the Company shall at any time or from time to time after the date that the first share of Series D Preferred Stock is issued (the "Original Issue Date") effect a subdivision of the outstanding Common Stock, the Conversion Price in effect immediately before that subdivision shall be proportionately decreased. Conversely, if the Company shall at any time or from time to time after the Original Issue Date combine the outstanding shares of Common Stock into a smaller number of shares, the Conversion Price in effect immediately before the combination shall be proportionately increased. Any adjustment under this Section 4(e) shall become effective at the close of business on the date the subdivision or combination becomes effective. (f) ADJUSTMENT FOR COMMON STOCK DIVIDENDS AND DISTRIBUTIONS. If the Company at any time or from time to time after the Original Issue Date makes, or fixes a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, in each such event the Conversion Price that is then in effect shall be decreased as of the time of such issuance or, in the event such record date is fixed, as of the close of business on such record date, by multiplying the Conversion Price then in effect by a fraction (i) the numerator of which is the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (ii) the denominator of which is the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, that if such record date is fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Conversion Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Conversion Price shall be adjusted pursuant to this Section 4(f) to reflect the actual payment of such dividend or distribution. (g) ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS. If the Company at any time or from time to time after the Original Issue Date makes, or fixes a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Company other than shares of Common Stock, in each such event provision shall be made so that the holders of the Series Preferred shall receive upon conversion thereof, in addition to the number of shares of Common Stock receivable thereupon, the amount of other securities of the Company which they would have received had their Series Preferred been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the conversion date, retained such securities receivable by them as aforesaid during such period, subject to all other adjustments called for during such period under this Section 4 with respect to the rights of the holders of the Series Preferred or with respect to such other securities by their terms. (h) ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE AND SUBSTITUTION. If at any time or from time to time after the Original Issue Date, the Common Stock issuable upon the conversion of the Series Preferred is changed into the same or a different number of shares of any class or classes of stock, whether by recapitalization, reclassification or otherwise (other than an Acquisition or Asset Transfer as defined in Section 3(c) or a subdivision or combination of shares or stock dividend or a reorganization, merger, consolidation or sale of assets provided for 6 7 elsewhere in this Section 4), in any such event each holder of Series Preferred shall have the right thereafter to convert such stock into the kind and amount of stock and other securities and property receivable upon such recapitalization, reclassification or other change by holders of the maximum number of shares of Common Stock into which such shares of Series Preferred could have been converted immediately prior to such recapitalization, reclassification or change, all subject to further adjustment as provided herein or with respect to such other securities or property by the terms thereof. (i) REORGANIZATIONS, MERGERS, CONSOLIDATIONS OR SALES OF ASSETS. If at any time or from time to time after the Original Issue Date, there is a capital reorganization of the Common Stock (other than an Acquisition or Asset Transfer as defined in Section 3(c) or as recapitalization, subdivision, combination, reclassification, exchange or substitution of shares provided for elsewhere in this Section 4), as a part of such capital reorganization, provision shall be made so that the holders of the Series Preferred shall thereafter be entitled to receive upon conversion of the Series Preferred the number of shares of stock or other securities or property of the Company to which a holder of the number of shares of Common Stock deliverable upon conversion would have been entitled on such capital reorganization, subject to adjustment in respect of such stock or securities by the terms thereof. 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 Series Preferred after the capital reorganization to the end that the provisions of this Section 4 (including adjustment of the Conversion Price then in effect and the number of shares issuable upon conversion of the Series Preferred) shall be applicable after that event and be as nearly equivalent as practicable. (j) SALE OF SHARES BELOW CONVERSION PRICE. (i) If at any time or from time to time after the Original Issue Date, the Company issues or sells, or is deemed by the express provisions of this subsection (j) to have issued or sold, Additional Shares of Common Stock (as hereinafter defined), other than as a dividend or other distribution on any class of stock as provided in Section 4(f) above, and other than a subdivision or combination of shares of Common Stock as provided in Section 4(e) above, for an Effective Price (as hereinafter defined) less than the then effective Conversion Price, then and in each such case the then existing Conversion Price shall be reduced, as of the opening of business on the date of such issue or sale, (A) in the case of the Series B Preferred and the Series C Preferred, to a price determined by multiplying the Conversion Price by a fraction (I) the numerator of which shall be (X) the number of shares of Common Stock deemed outstanding (as defined below) immediately prior to such issue or sale, plus (Y) the number of shares of Common Stock which the aggregate consideration received (as defined in subsection (j)(ii)) by the Company for the total number of Additional Shares of Common Stock so issued would purchase at such Conversion Price, and (II) the denominator of which shall be the number of shares of Common Stock deemed outstanding (as defined below) immediately prior to such issue or sale plus the total number of Additional Shares of Common Stock so issued and (B) in the case of the Series D Preferred, to the Effective Price. For the purposes of the preceding sentence, the "number of shares of Common Stock deemed to be outstanding" as of a given date shall be the sum of (AA) the number of shares of Common Stock actually outstanding, (BB) the number of shares of Common Stock into which the then outstanding shares of Series Preferred could be 7 8 converted if fully converted on the day immediately preceding the given date and (CC) the number of shares of Common Stock which could be obtained through the exercise or conversion of all other rights, options and convertible securities on the day immediately preceding the given date (including, for these purposes, only those rights, options or convertible securities obtainable, exercisable or convertible at a price per share less than or equal to the Conversion Price then in effect). No adjustment shall be made to the Conversion Price of the Series A Preferred. (ii) For the purpose of making any adjustment required under this Section 4(j), the consideration received by the Company for any issue or sale of securities shall (A) to the extent it consists of cash, be computed at the net amount of cash received by the Company after deduction of any underwriting or similar commissions, compensation or concessions paid or allowed by the Company in connection with such issue or sale but without deduction of any expenses payable by the Company, (B) to the extent it consists of property other than cash, be computed at the fair value of that property as determined in good faith by the Board of Directors, and (C) if Additional Shares of Common Stock, Convertible Securities (as hereinafter defined) or rights or options to purchase either Additional Shares of Common Stock or Convertible Securities are issued or sold together with other stock or securities or other assets of the Company for a consideration which covers both, be computed as the portion of the consideration so received that may be reasonably determined in good faith by the Board of Directors to be allocable to such Additional Shares of Common Stock, Convertible Securities or rights or options. (iii) For the purpose of the adjustment required under this Section 4(j), if the Company issues or sells any rights or options for the purchase of, or stock or other securities convertible into, Additional Shares of Common Stock (such convertible stock or securities being herein referred to as "Convertible Securities") and if the Effective Price of such Additional Shares of Common Stock is less than the Conversion Price, in each case the Company shall be deemed to have issued at the time of the issuance of such rights or options or Convertible Securities, the maximum number of Additional Shares of Common Stock issuable upon exercise or conversion thereof and to have received as consideration for the issuance of such shares an amount equal to the total amount of the consideration, if any, received by the Company for the issuance of such rights or options or Convertible Securities, plus, in the case of such rights or options, the minimum amounts of consideration, if any, payable to the Company upon the exercise of such rights or options, plus, in the case of Convertible Securities, the minimum amounts of consideration, if any, payable to the Company (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities) upon the conversion thereof; provided that if in the case of Convertible Securities the minimum amounts of such consideration cannot be ascertained, but are a function of antidilution or similar protective clauses, the Company shall be deemed to have received the minimum amounts of consideration without reference to such clauses; provided further that if the minimum amount of consideration payable to the Company upon the exercise or conversion of rights, options or Convertible Securities is reduced over time or on the occurrence or non-occurrence of specified events other than by reason of antidilution adjustments, the Effective Price shall be recalculated using the figure to which such minimum amount of consideration is reduced; provided further that if the minimum amount of consideration payable to the Company upon the exercise or conversion of such rights, options or Convertible Securities is subsequently increased, the Effective Price shall be again recalculated using the 8 9 increased minimum amount of consideration payable to the Company upon the exercise or conversion of such rights, options or Convertible Securities. No further adjustment of the Conversion Price, as adjusted upon the issuance of such rights, options or Convertible Securities, shall be made as a result of the actual issuance of Additional Shares of Common Stock on the exercise of any such rights or options or the conversion of any such Convertible Securities. If any such rights or options or the conversion privilege represented by any such Convertible Securities shall expire without having been exercised, the Conversion Price as adjusted upon the issuance of such rights, options or Convertible Securities shall be readjusted to the Conversion Price which would have been in effect had an adjustment been made on the basis that the only Additional Shares of Common Stock so issued were the Additional Shares of Common Stock, if any, actually issued or sold on the exercise of such rights or options or rights of conversion of such Convertible Securities, and such Additional Shares of Common Stock, if any, were issued or sold for the consideration actually received by the Company upon such exercise, plus the consideration, if any, actually received by the Company for the granting of all such rights or options, whether or not exercised, plus the consideration received for issuing or selling the Convertible Securities actually converted, plus the consideration, if any, actually received by the Company (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities) on the conversion of such Convertible Securities, provided that such readjustment shall not apply to prior conversions of Series Preferred. (iv) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued by the Company or deemed to be issued pursuant to this Section 4(j), whether or not subsequently reacquired or retired by the Company other than (a) shares of Common Stock issued upon conversion of the Series Preferred; (b) up to 1,283,708 shares of Common Stock (and/or options, warrants or Common Stock purchase rights, and the Common Stock issued pursuant to such options, warrants or other rights) issued or to be issued to employees, officers or directors of, or consultants or other service providers to the Company or any subsidiary pursuant to stock purchase or stock option plans or other arrangements that are approved by the Board; and (c) shares of Common Stock issued pursuant to the exercise of options, warrants or convertible securities outstanding as of the Original Issue Date. The "Effective Price" of Additional Shares of Common Stock shall mean the quotient determined by dividing the total number of Additional Shares of Common Stock issued or sold, or deemed to have been issued or sold by the Company under this Section 4(j), into the aggregate consideration received, or deemed to have been received by the Company for such issue under this Section 4(j), for such Additional Shares of Common Stock. (K) ACCOUNTANTS' CERTIFICATE OF ADJUSTMENT. In each case of an adjustment or readjustment of the Conversion Price for the number of shares of Common Stock or other securities issuable upon conversion of the Series Preferred, if the Series Preferred is then convertible pursuant to this Section 4, the Company, at its expense, shall compute such adjustment or readjustment in accordance with the provisions hereof and prepare a certificate showing such adjustment or readjustment, and shall mail such certificate, by first class mail, postage prepaid, to each registered holder of Series Preferred at the holder's address as shown in the Company's books. The certificate shall set forth such adjustment or readjustment, showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (i) the consideration received or deemed to be received by the Company for any Additional Shares of 9 10 Common Stock issued or sold or deemed to have been issued or sold, (ii) the Conversion Price at the time in effect, (iii) the number of Additional Shares of Common Stock and (iv) the type and amount, if any, of other property which at the time would be received upon conversion of the Series Preferred. (l) NOTICES OF RECORD DATE. Upon (i) any taking by the Company 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 or other distribution, or (ii) any Acquisition (as defined in Section 3(c)) or other capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company, any merger or consolidation of the Company with or into any other corporation, or any Asset Transfer (as defined in Section 3(c)), or any voluntary or involuntary dissolution, liquidation or winding up of the Company, the Company shall mail to each holder of Series Preferred at least twenty (20) days prior to the record date specified therein a notice specifying (A) the date on which any such record is to be taken for the purpose of such dividend or distribution and a description of such dividend or distribution, (B) the date on which any such Acquisition, reorganization, reclassification, transfer, consolidation, merger, Asset Transfer, dissolution, liquidation or winding up is expected to become effective, and (C) the date, if any, that is to be fixed as to when the holders of record of Common Stock (or other securities) shall be entitled to exchange their shares of Common Stock (or other securities) for securities or other property deliverable upon such Acquisition, reorganization, reclassification, transfer, consolidation, merger, Asset Transfer, dissolution, liquidation or winding up. (m) AUTOMATIC CONVERSION. (i) Each share of Series Preferred shall automatically be converted into shares of Common Stock, based on the then-effective Conversion Price, at any time upon the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the outstanding shares of Series Preferred, or immediately upon the closing of a firmly underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "Securities Act"), covering the offer and sale of Common Stock for the account of the Company in which (i) the per share price is at least $6.00 (as adjusted for stock splits, recapitalizations and the like), and (ii) the net cash proceeds to the Company (after underwriting discounts, commissions and fees) are at least $15,000,000 (a "Qualified Public Offering"). Upon such automatic conversion, any accumulated and unpaid dividends shall be paid in accordance with the provisions of Section 4(d). (ii) Upon the occurrence of the event specified in paragraph (i) above, the outstanding shares of Series Preferred shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Company or its transfer agent; provided, however, that the Company shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion unless the certificates evidencing such shares of Series Preferred are either delivered to the Company or its transfer agent as provided below, or the holder notifies the Company or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Company to indemnify the Company from any loss incurred by it in connection with such certificates. Upon the occurrence of such automatic 10 11 conversion of the Series Preferred, the holders of Series Preferred shall surrender the certificates representing such shares at the office of the Company or any transfer agent for the Series Preferred. Thereupon, there shall be issued and delivered to such holder promptly at such office and in its name as shown on such surrendered certificate or certificates, a certificate or certificates for the number of shares of common Stock into which the shares of Series Preferred surrendered were convertible on the date on which such automatic conversion occurred, and the Company shall promptly pay in cash or, at the option of the Company, Common Stock (at the Common Stock's fair market value determined by the Board as of the date of such conversion), or, at the option of the Company, both, all declared and unpaid dividends on the shares of Series Preferred being converted, to and including the date of such conversion. (n) FRACTIONAL SHARES. No fractional shares of Common Stock shall be issued upon conversion of Series Preferred. All shares of Common Stock (including fractions thereof) issuable upon conversion of more than one share of Series Preferred by a holder thereof shall be aggregated for purposes of determining whether the conversion would result in the issuance of any fractional share. If, after the aforementioned aggregation, the conversion would result in the issuance of any fractional share, the Corporation shall, in lieu of issuing any fractional share, pay cash equal to the product of such fraction multiplied by the Common Stock's fair market value (as determined by the Board) on the date of conversion. (o) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series Preferred, 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 the Series Preferred. 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 the Series Preferred, the Company 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 purpose. (p) NOTICES. Any notice required by the provisions of this Section 5 shall be in writing and shall be deemed effectively given: (i) upon personal delivery to the party to be notified, (ii) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient; if not, then on the next business day, (iii) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (iv) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All notices shall be addressed to each holder of record at the address of such holder appearing on the books of the Company. (q) PAYMENT OF TAXES. The Company will pay all taxes (other than taxes based upon income) and other governmental charges that may be imposed with respect to the issue or delivery of shares of Common Stock upon conversion of shares of Series Preferred, excluding any tax or other charge imposed in connection with any transfer involved in the issue and delivery of shares of Common Stock in a name other than that in which the shares of Series Preferred so converted were registered. 11 12 5. NO REISSUANCE OF SERIES PREFERRED. No share or shares of Series referred acquired by the Corporation by reason of redemption, purchase, conversion or otherwise shall be reissued. 6. RIGHTS OF FIRST REFUSAL. (a) SUBSEQUENT OFFERINGS. Each holder of Series B Preferred, Series C Preferred and Series D Preferred shall have a right of first refusal to purchase its pro rata share of all Equity Securities (as defined below) that the Company may, from time to time, propose to sell and issue after the Original Issue Date, other than the Equity Securities excluded by paragraph (e) hereof. Each pro rata share shall be equal to the ratio of (a) the number of shares of the Company's Common Stock (including all shares of Common Stock issued or issuable upon conversion of the Series B Preferred, Series C Preferred or Series D Preferred held by all such shareholders) which such shareholder is deemed to hold immediately prior to the issuance of such Equity Securities to (b) the total number of shares of the Company's outstanding Common Stock (including all shares of Common Stock issued or issuable upon conversion of the Series B Preferred, Series C Preferred or Series D Preferred held by such shareholder or upon the exercise of any outstanding warrants or options) immediately prior to the issuance of the Equity Securities. The term "Equity Securities" shall mean (i) any Common Stock, Preferred Stock or other security of the Company, (ii) any security convertible, with or without consideration, into any Common Stock, Preferred Stock or other security (including any option to purchase such a convertible security), (iii) any security carrying any warrant or right to subscribe to or purchase any Common Stock, Preferred Stock or other security or (iv) any such warrant or right. (b) If the Company proposes to issue any Equity Securities, it shall give each holder of Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock written notice of its intention, describing the Equity Securities, the price and the terms and conditions upon which the Company proposes to issue the same. Each such holder shall have twenty (20) days from the giving of such notice to agree to purchase its pro rata share of the Equity Securities for the price and upon the terms and conditions specified in the notice by giving written notice to the Company and stating therein the quantity of Equity Securities to be purchased. Notwithstanding the foregoing, the Company shall not be required to offer or sell such Equity Securities to any shareholder who would cause the Company to be in violation of applicable federal securities laws by virtue of such offer or sale. (c) If not all of the holders of Series B Preferred, Series C Preferred and Series D Preferred elect to purchase their pro rata share of the Equity Securities, then the Company shall promptly notify in writing the shareholders who do so elect and shall offer such shareholders the right to acquire such unsubscribed shares. Such shareholders shall have five (5) days after receipt of such notice to notify the Company of its election to purchase all or a portion thereof of the unsubscribed shares. If the shareholders holding the right of first refusal set forth in this Section 6 fail to exercise in full the rights of first refusal, the Company shall have one hundred twenty (120) days thereafter to sell the Equity Securities in respect of which such shareholders' rights were not exercised, at a price and upon general terms and conditions materially no more favorable to the purchasers thereof than specified in the Company's notice to the shareholders 12 13 pursuant to paragraph (b) above. If the Company has not sold such Equity Securities within one hundred twenty (120) days of the notice provided pursuant to Section 4.2, the Company shall not thereafter issue or sell any Equity Securities, without first offering such securities to the holders of Series B Preferred, Series C Preferred and Series D Preferred in the manner provided above. (d) The rights of first refusal established by this Section 6 shall not apply to, and shall terminate upon the effective date of the registration statement pertaining to a Qualified Public Offering. (e) The rights of first refusal established by this Section 6 shall have no application to any of the following Equity Securities: (i) up to an aggregate amount of 1,283,708 shares of Common Stock (and/or options, warrants or other Common Stock purchase rights issued pursuant to such options, warrants or other rights) issued or to be issued to employees, officers or directors of, or consultants or advisors to the Company or any subsidiary, pursuant to stock purchase or stock option plans or other arrangements that are approved by the Board of Directors; (ii) stock issued pursuant to any rights or agreements outstanding as of the Original Issue Date, options and warrants outstanding as of the Original Issue Date and stock issued pursuant to any such rights or agreements granted after the Original Issue Date, provided that the rights of first refusal established by this Section 6 applied with respect to the initial sale or grant by the Company of such rights or agreements; (iii) any Equity Securities issued for consideration other than cash pursuant to a merger, consolidation, acquisition or similar business combination; (iv) shares of Common Stock issued in connection with any stock split, stock dividend or recapitalization by the Company; (v) shares of Common Stock issued upon conversion of the Series Preferred; (vi) any Equity Securities issued pursuant to any equipment leasing arrangement, or debt financing from a bank or similar financial institution; and (vii) any Equity Securities that are issued by the Company in a registration statement filed under the Securities Act. IV. A. The liability of the directors of the Corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. B. The Corporation is authorized to indemnify the directors and officers of the Corporation to the fullest extent permissible under California law. 13 14 C. Any repeal or modification of this Article shall only be prospective and shall not effect the rights under this Article in effect at the time of the alleged occurrence of any action or omission to act giving rise to liability or indemnification. THREE: The foregoing amendment and restatement of the articles of incorporation has been duly approved by the Board of Directors of this Corporation. FOUR: The foregoing amendment and restatement of the articles of incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 of the California Corporations Code. The Corporation has two classes of stock outstanding and each such class of stock is entitled to vote with respect to the amendment herein set forth. The total number of outstanding shares of Common Stock of the Corporation immediately prior to the filing of these Amended and Restated Articles of Incorporation is One Million One Hundred Thirteen Thousand and Seven (1,113,007). The total number of outstanding shares of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock of the Corporation, respectively, immediately prior to the filing of this Amendment were Forty-One Thousand Three Hundred (41,300), One Hundred Fifteen Thousand Four Hundred Forty-Six (115,446) and Four Hundred Fifty Thousand Four Hundred Eighty-One (450,481). The number of shares of each class voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than fifty percent (50%) of the outstanding Common Stock voting as a close and more than fifty percent (50%) of the outstanding shares of Series A Preferred Stock voting separately, more than fifty percent (50%) of the outstanding shares of Series B Preferred Stock voting separately, and more than fifty percent (50%) of the outstanding shares of Series C Preferred Stock voting separately. 14 15 We further declare under penalty of perjury that the matters set forth in the foregoing certificate are true and correct of our own knowledge. Executed at Sacramento, California, on February 23, 1998. /s/ BRYAN H. LANG ------------------------------- Bryan H. Lang, President /s/ GILBERT H. LANG ------------------------------- Gilbert H. Lang, Secretary The undersigned, Bryan H. Lang and Gilbert H. Lang, the President and Secretary, respectively, of Landa Management Systems Corporation declare under penalty of perjury that the matters set out in the foregoing Certificate are true to their own knowledge. Executed at Sacramento, California, on February 23, 1998. /s/ BRYAN H. LANG ------------------------------- Bryan H. Lang, President /s/ GILBERT H. LANG ------------------------------- Gilbert H. Lang, Secretary SIGNATURE PAGE EX-3.2 3 BYLAWS OF LANDACORP 1 EXHIBIT 3.2 AMENDED AND RESTATED BYLAWS OF LANDA MANAGEMENT SYSTEMS CORPORATION (A CALIFORNIA CORPORATION) 2 TABLE OF CONTENTS
PAGE Article I Offices ..........................................................................1 Section 1. Principal Office ...............................................................1 Section 2. Other Offices .................................................................1 Article II Corporate Seal ................................................................1 Section 3. Corporate Seal ................................................................1 Article III Shareholder's Meetings And Voting Rights .......................................1 Section 4. Place of Meetings .............................................................1 Section 5. Annual Meeting ................................................................2 Section 6. Postponement of Annual Meeting ................................................2 Section 7. Special Meetings ..............................................................2 Section 8. Notice of Meetings ............................................................2 Section 9. Manner of Giving Notice .......................................................3 Section 10. Quorum and Transaction of Business ............................................4 Section 11. Adjournment and Notice of Adjourned Meetings ..................................4 Section 12. Waiver of Notice, Consent to Meeting or Approval of Minutes ...................4 Section 13. Action by Written Consent Without a Meeting ...................................5 Section 14. Voting ........................................................................5 Section 15. Persons Entitled to Vote or Consent ...........................................6 Section 16. Proxies .......................................................................7 Section 17. Inspectors of Election ........................................................7 Article IV Board of Directors ..............................................................8 Section 18. Powers ........................................................................8 Section 19. Number of Directors ...........................................................8 Section 20. Election of Directors, Term, Qualifications ...................................8 Section 21. Resignations ..................................................................8 Section 22. Removal .......................................................................8 Section 23. Vacancies .....................................................................9 Section 24. Regular Meetings ..............................................................9 Section 25. Electronic Participation ......................................................9 Section 26. Special Meetings ..............................................................9 Section 27. Notice of Meetings ...........................................................10
i. 3 TABLE OF CONTENTS
PAGE Section 28. Place of Meetings............................................................10 Section 29. Action by Written Consent Without a Meeting..................................10 Section 30. Quorum and Transaction of Business...........................................10 Section 31. Adjournment..................................................................10 Section 32. Organization.................................................................10 Section 33. Compensation.................................................................11 Section 34. Committees...................................................................11 Article V Officers.......................................................................12 Section 35. Officers.....................................................................12 Section 36. Appointment..................................................................12 Section 37. Inability to Act.............................................................12 Section 38. Resignations.................................................................12 Section 39. Removal......................................................................12 Section 40. Vacancies....................................................................12 Section 41. Chairman of the Board........................................................12 Section 42. President....................................................................13 Section 43. Vice Presidents..............................................................13 Section 44. Secretary....................................................................13 Section 45. Chief Financial Officer......................................................14 Section 46. Compensation.................................................................14 Article VI Contracts, Loans, Bank Accounts, Checks And Drafts.............................14 Section 47. Execution of Contracts and Other Instruments.................................15 Section 48. Loans........................................................................15 Section 49. Bank Accounts................................................................15 Section 50. Checks, Drafts, Etc..........................................................15 Article VII Certificates For Shares And Their Transfer.....................................15 Section 51. Certificate for Shares.......................................................16 Section 52. Transfer on the Books........................................................16 Section 53. Lost, Destroyed and Stolen Certificates......................................16 Section 54. Issuance, Transfer and Registration of Shares................................16 Article VIII Inspection Of Corporate Records................................................17
ii. 4 TABLE OF CONTENTS
PAGE Section 55. Inspection by Directors......................................................17 Section 56. Inspection by Shareholders...................................................17 (a) Inspection of Corporate Records.....................................................17 (b) Inspection of Bylaws................................................................18 Section 57. Written Form.................................................................18 Article IX Miscellaneous...................................................................18 Section 58. Fiscal Year..................................................................18 Section 59. Annual Report................................................................18 Section 60. Record Date..................................................................19 Section 61. Bylaw Amendments.............................................................19 Section 62. Construction and Definition..................................................19 Article X Indemnification..................................................................19 Section 63. Indemnification of Directors, Officers, Employees And Other Agents...........19 (a) Directors...........................................................................20 (b) Officers, Employees and Other Agents................................................20 (c) Determination by the Corporation....................................................20 (d) Good Faith..........................................................................20 (e) Expenses............................................................................21 (f) Enforcement.........................................................................21 (g) Non-Exclusivity of Rights...........................................................21 (h) Survival of Rights..................................................................22 (i) Insurance...........................................................................22 (j) Amendments..........................................................................22 (k) Employee Benefit Plans..............................................................22 (l) Saving Clause.......................................................................22 (m) Certain Definitions.................................................................22 Article XI Right Of First Refusal..........................................................23 Section 64. Right of First Refusal.......................................................23 Article XII Loans Of Officers And Others....................................................25 Section 65. Certain Corporate Loans and Guaranties.......................................25
iii. 5 AMENDED AND RESTATED BYLAWS OF LANDA MANAGEMENT SYSTEMS CORPORATION (A CALIFORNIA CORPORATION) ARTICLE I OFFICES SECTION 1. PRINCIPAL OFFICE. The principal executive office of the corporation shall be located at such place as the Board of Directors may from time to time authorize. If the principal executive office is located outside this state, and the corporation has one or more business offices in this state, the Board of Directors shall fix and designate a principal business office in the State of California. SECTION 2. OTHER OFFICES. Additional offices of the corporation shall be located at such place or places, within or outside the State of California, as the Board of Directors may from time to time authorize. ARTICLE II CORPORATE SEAL SECTION 3. CORPORATE SEAL. If the Board of Directors adopts a corporate seal such seal shall have inscribed thereon the name of the corporation and the state and date of its incorporation. If and when a seal is adopted by the Board of Directors, such seal may be engraved, lithographed, printed, stamped, impressed upon, or affixed to any contract, conveyance, certificate for shares, or other instrument executed by the corporation. ARTICLE III SHAREHOLDERS' MEETINGS AND VOTING RIGHTS SECTION 4. PLACE OF MEETINGS. Meetings of shareholders shall be held at the principal executive office of the corporation, or at any other place, within or outside the State of California, which may be fixed either by the Board of Directors or by the written consent of all persons entitled to vote at such meeting, given either before or after the meeting and filed with the Secretary of the Corporation. SECTION 5. ANNUAL MEETING. The annual meeting of the shareholders of the corporation shall be held on any date and time which may from time to time be designated by the Board of Directors. At such annual meeting, directors shall be elected and any other business may be transacted which may properly come before the meeting. SECTION 6. POSTPONEMENT OF ANNUAL MEETING. The Board of Directors and the President shall each have authority to hold at an earlier date and/or time, or to postpone to a later date and/or time, the annual meeting of shareholders. 1. 6 SECTION 7. SPECIAL MEETINGS. (a) Special meetings of the shareholders, for any purpose or purposes, may be called by the Board of Directors, the Chairman of the Board of Directors, the President, or the holders of shares entitled to cast not less than ten percent (10%) of the votes at the meeting. (b) Upon written request to the Chairman of the Board of Directors, the President, any vice president or the Secretary of the corporation by any person or persons (other than the Board of Directors) entitled to call a special meeting of the shareholders, such officer forthwith shall cause notice to be given to the shareholders entitled to vote, that a meeting will be held at a time requested by the person or persons calling the meeting, such time to be not less than thirty-five (35) nor more than sixty (60) days after receipt of such request. If such notice is not given within twenty (20) days after receipt of such request, the person or persons calling the meeting may give notice thereof in the manner provided by law or in these bylaws. Nothing contained in this Section 7 shall be construed as limiting, fixing or affecting the time or date when a meeting of shareholders called by action of the Board of Directors may be held. SECTION 8. NOTICE OF MEETINGS. Except as otherwise may be required by law and subject to subsection 7(b) above, written notice of each meeting of shareholders shall be given to each shareholder entitled to vote at that meeting (see Section 15 below), by the Secretary, assistant secretary or other person charged with that duty, not less than ten (10) (or, if sent by third class mail, thirty (30)) nor more than sixty (60) days before such meeting. Notice of any meeting of shareholders shall state the date, place and hour of the meeting and, (a) in the case of a special meeting, the general nature of the business to be transacted, and no other business may be transacted at such meeting; (b) in the case of an annual meeting, the general nature of matters which the Board of Directors, at the time the notice is given, intends to present for action by the shareholders; (c) in the case of any meeting at which directors are to be elected, the names of the nominees intended at the time of the notice to be presented by management for election; and (d) in the case of any meeting, if action is to be taken on any of the following proposals, the general nature of such proposal: (1) a proposal to approve a transaction within the provisions of California Corporations Code, Section 310 (relating to certain transactions in which a director has a direct or indirect financial interest); (2) a proposal to approve a transaction within the provisions of California Corporations Code, Section 902 (relating to amending the Articles of Incorporation of the corporation); (3) a proposal to approve a transaction within the provisions of California Corporations Code, Sections 181 and 1201 (relating to reorganization); (4) a proposal to approve a transaction within the provisions of California Corporations Code, Section 1900 (winding up and dissolution); 2. 7 (5) a proposal to approve a plan of distribution within the provisions of California Corporations Code, Section 2007 (relating to certain plans providing for distribution not in accordance with the liquidation rights of preferred shares, if any). At a special meeting, notice of which has been given in accordance with this Section, action may not be taken with respect to business, the general nature of which has not been stated in such notice. At an annual meeting, action may be taken with respect to business stated in the notice of such meeting, given in accordance with this Section, and, subject to subsection 8(d) above, with respect to any other business as may properly come before the meeting. SECTION 9. MANNER OF GIVING NOTICE. Notice of any meeting of shareholders shall be given either personally or by first-class mail, or, if the corporation has outstanding shares held of record by 500 or more persons (determined as provided in California Corporations Code Section 605) on the record date for such meeting, third-class mail, or telegraphic or other written communication, addressed to the shareholder at the address of that shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice. If no such address appears on the corporation's books or is given, notice shall be deemed to have been given if sent to that shareholder by first-class mail or telegraphic or other written communication to the corporation's principal executive office, or if published at least once in a newspaper of general circulation in the county where that office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. If any notice addressed to a shareholder at the address of that shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the shareholder at that address, all future notices shall be deemed to have been duly given without further mailing if these shall be available to the shareholder on written demand by the shareholder at the principal executive office of the corporation for a period of one year from the date of the giving of the notice. An affidavit of mailing of any notice or report in accordance with the provisions of this Section 9, executed by the Secretary, Assistant Secretary or any transfer agent, shall be prima facie evidence of the giving of the notice. SECTION 10. QUORUM AND TRANSACTION OF BUSINESS. (a) At any meeting of the shareholders, a majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum. If a quorum is present, the affirmative vote of the majority of shares represented at the meeting and entitled to vote on any matter shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by law or by the Articles of Incorporation, and except as provided in subsection (b) below. (b) The shareholders present at a duly called or held meeting of the shareholders at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, provided that any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. (c) In the absence of a quorum, no business other than adjournment may be transacted, except as described in subsection (b) above. 3. 8 Section 11. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting of shareholders may be adjourned from time to time, whether or not a quorum is present, by the affirmative vote of a majority of shares represented at such meeting either in person or by proxy and entitled to vote at such meeting. In the event any meeting is adjourned, it shall not be necessary to give notice of the time and place of such adjourned meeting pursuant to Sections 8 and 9 of these bylaws; provided that if any of the following three events occur, such notice must be given: (a) announcement of the adjourned meeting's time and place is not made at the original meeting which it continues or (b) such meeting is adjourned for more than forty-five (45) days from the date set for the original meeting or (c) a new record date is fixed for the adjourned meeting. At the adjourned meeting, the corporation may transact any business which might have been transacted at the original meeting. SECTION 12. WAIVER OF NOTICE, CONSENT TO MEETING OR APPROVAL OF MINUTES. (a) Subject to subsection (b) of this Section, the transactions of any meeting of shareholders, however called and noticed, and wherever held, shall be as valid as though made at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote but not present in person or by proxy signs a written waiver of notice or a consent to holding of the meeting or an approval of the minutes thereof. (b) A waiver of notice, consent to the holding of a meeting or approval of the minutes thereof need not specify the business to be transacted or transacted at nor the purpose of the meeting; provided that in the case of proposals described in subsection (d) of Section 8 of these bylaws, the general nature of such proposals must be described in any such waiver of notice and such proposals can only be approved by waiver of notice, not by consent to holding of the meeting or approval of the minutes. (c) All waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. (d) A person's attendance at a meeting shall constitute waiver of notice of and presence at such meeting, except when such person objects at the beginning of the meeting to transaction of any business because the meeting is not lawfully called or convened and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters which are required by law or these bylaws to be in such notice (including those matters described in subsection (d) of Section 8 of these bylaws), but are not so included if such person expressly objects to consideration of such matter or matters at any time during the meeting. SECTION 13. ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action which may be taken at any meeting of shareholders may be taken without a meeting and without prior notice if written consents setting forth the action so taken are signed by the holders of the outstanding shares having not less than the 4. 9 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. Directors may not be elected by written consent except by unanimous written consent of all shares entitled to vote for the election of directors; provided that any vacancy on the Board of Directors (other than a vacancy created by removal) which has not been filled by the board of directors may be filled by the written consent of a majority of outstanding shares entitled to vote for the election of directors. Any written consent may be revoked pursuant to California Corporations Code Section 603(c) prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the Secretary. Such revocation must be in writing and will be effective upon its receipt by the Secretary. If the consents of all shareholders entitled to vote have not been solicited in writing, and if the unanimous written consent of all such shareholders shall not have been received, the Secretary shall give prompt notice of any corporate action approved by the shareholders without a meeting to those shareholders entitled to vote on such maters who have not consented thereto in writing. This notice shall be given in the manner specified in Section 9 of these bylaws. In the case of approval of (i) a transaction within the provisions of California Corporations Code, Section 310 (relating to certain transactions in which a director has an interest), (ii) a transaction within the provisions of California Corporations Code, Section 317 (relating to indemnification of agents of the corporation), (iii) a transaction within the provisions of California Corporations Code, Sections 181 and 1201 (relating to reorganization), and (iv) a plan of distribution within the provisions of California Corporations Code, Section 2007 (relating to certain plans providing for distribution not in accordance with the liquidation rights of preferred shares if any), the notice shall be given at lest ten (10) days before the consummation of any action authorized by that approval. SECTION 14. VOTING. The shareholders entitled to vote at any meeting of shareholders shall be determined in accordance with the provisions of Section 15 of these bylaws, subject to the provisions of Sections 702 through 704 of the California Corporations Code (relating to voting shares held by a fiduciary, in the name of a corporation, or in joint ownership). Voting at any meeting of shareholders need not be by ballot; provided, however, that elections for directors must be by ballot if balloting is demanded by a shareholder at the meeting and before the voting begins. Every person entitled to vote at an election for directors may cumulate the votes to which such person is entitled, i.e., such person may cast a total number of votes equal to the number of directors to be elected multiplied by the number of votes to which such person's shares are entitled, and may cast said total number of votes for one or more candidates in such proportions as such person thinks fit; provided, however, no shareholder shall be entitled to so cumulate such shareholder's votes unless the candidates for which such shareholder is voting have been placed in nomination prior to the voting and a shareholder has given notice at the meeting, prior to the vote, of an intention to cumulate votes. In any election of directors, the candidates receiving the highest number of votes, up to the number of directors to be elected, are elected. Except as may be otherwise provided in the Articles of Incorporation or by law, and subject to the foregoing provisions regarding the cumulation of votes, each shareholder shall be entitled to one vote for each share held. 10 Any shareholder may vote part of such shareholders' shares in favor of a proposal and refrain from voting the remaining shares or vote them against the proposal, other than elections to office, but, if the shareholder fails to specify the number of shares such shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares such shareholder is entitled to vote. No shareholder approval, other than unanimous approval of those entitled to vote, will be valid as to proposals described in subsection 8(d) of these bylaws unless the general nature of such business was stated in the notice of meeting or in any written waiver of notice. SECTION 15. PERSONS ENTITLED TO VOTE OR CONSENT. The Board of Directors may fix a record date pursuant to Section 60 of these bylaws to determine which shareholders are entitled to notice of and to vote at a meeting or consent to corporate actions, as provided in Sections 13 and 14 of these bylaws. Only persons in whose name shares otherwise entitled to vote stand on the stock records of the corporation on such date shall be entitled to vote or consent. If no record date is fixed: (a) The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held; (b) The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, when no prior action by the Board of Directors has been taken, shall be the day on which the first written consent is given; (c) The record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto, or the sixtieth (60th) day prior to the date of such other action, whichever is later. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the Board of Directors fixes a new record date for the adjourned meeting; provided, however, that the Board of Directors shall fix a new record date if the meeting is adjourned for more than forty-five (45) days from the date set for the original meeting. Shares of the corporation held by its subsidiary or subsidiaries (as defined in California Corporations Code, Section 189(b)) are not entitled to vote in any matter. SECTION 16. PROXIES. Every person entitled to vote or execute consents may do so either in person or by one or more agents authorized to act by a written proxy executed by the person or such person's duly authorized agent and filed with the Secretary of the corporation; provided that no such proxy shall be valid after the expiration of eleven (11) months from the date of its execution unless otherwise provided in the proxy. The manner of execution, suspension, revocation, exercise and effect of proxies is governed by law. SECTION 17. INSPECTORS OF ELECTION. Before any meeting of shareholders, the Board of Directors may appoint any persons, other than nominees for office, to act as inspectors of election at the 6 11 meeting or its adjournment. If no inspectors of election are so appointed, the chairman of the meeting may, and on the request of any shareholder or a shareholder's proxy shall, appoint inspectors of election at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting on the request of one or more shareholders or proxies, the majority of shares represented in person or proxy shall determine whether one (1) or three (3) inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, the chairman of the meeting may, and upon the request of any shareholder or a shareholder's proxy shall, appoint a person to fill that vacancy. These inspectors shall: (A) Determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies; (B) Receive votes, ballots, or consents; (C) Hear and determine all challenges and questions in any way arising in connection with the right to vote; (D) Count and tabulate all votes or consents; (E) Determine when the polls shall close; (F) Determine the result; and (G) Do any other acts that may be proper to conduct the election or vote with fairness to all shareholders. ARTICLE IV BOARD OF DIRECTORS SECTION 18. POWERS. Subject to the provisions of law or any limitations in the Articles of Incorporation or these bylaws, as to action required to be approved by the shareholders or by outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised, by or under the direction of the Board of Directors. The Board of Directors may delegate the management of the day-to-day operation of the business of the corporation to a management company or other person, provided that the business and affairs of the corporation shall be managed and all corporate powers shall be exercised under the ultimate direction of the Board of Directors. SECTION 19. NUMBER OF DIRECTORS. The authorized number of directors of the corporation shall be not less than a minimum of five (5) nor more than a maximum of nine (9) (which maximum number in no case shall be greater than two times said minimum, minus one) and the number of directors presently authorized is five (5). The exact number of directors shall be set within these limits from time to time (a) by approval of the Board of Directors, or (b) by the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute at least a majority of the required quorum) or by the written consent of shareholders pursuant to Section 13 hereinabove. 7 12 Any amendment of these bylaws changing the maximum or minimum number of directors may be adopted only by the affirmative vote of a majority of the outstanding shares entitled to vote; provided, an amendment reducing the minimum number of directors to less than five (5), cannot be adopted if votes cast against its adoption at a meeting or the shares not consenting to it in the case of action by written consent are equal to more than 16-2/3 percent of the outstanding shares entitled to vote. No reduction of the authorized number of directors shall remove any director prior to the expiration of such director's term of office. SECTION 20. ELECTION OF DIRECTORS, TERM, QUALIFICATIONS. The directors shall be elected at each annual meeting of shareholders to hold office until the next annual meeting. Each director, including a director elected or appointed to fill a vacancy, shall hold office either until the expiration of the term for which elected or appointed and until a successor has been elected and qualified, or until his death, resignation or removal. Directors need not be shareholders of the corporation. SECTION 21. RESIGNATIONS. Any director of the corporation may resign effective upon giving written notice to the Chairman of the Board, the President, the Secretary or the Board of Directors of the corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation specifies effectiveness at a future time, a successor may be elected pursuant to Section 23 of these bylaws to take office on the date that the resignation becomes effective. SECTION 22. REMOVAL. The Board of Directors may declare vacant the office of a director who has been declared of unsound mind by an order of court or who has been convicted of a felony. The entire Board of Directors or any individual director may be removed from office without cause by the affirmative vote of a majority of the outstanding shares entitled to vote on such removal; provided, however, that unless the entire Board is removed, no individual director may be removed when the votes cast against such director's removal, or not consenting in writing to such removal, would be sufficient to elect that director if voted cumulatively at an election at which the same total number of votes cast were cast (or, if such action is taken by written consent, all shares entitled to vote were voted) and the entire number of directors authorized at the time of such director's most recent election were then being elected. SECTION 23. VACANCIES. A vacancy or vacancies on the Board of Directors shall be deemed to exist in case of the death, resignation or removal of any director, or upon increase in the authorized number of directors or if shareholders fail to elect the full authorized number of directors at an annual meeting of shareholders or if, for whatever reason, there are fewer directors on the Board of Directors, than the full number authorized. Such vacancy or vacancies may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director. The shareholders may elect a director at any time to fill any vacancy not filled by the directors. Any such election by written consent, other than to fill a vacancy created by removal, requires the consent of a majority of the outstanding shares entitled to vote. Any such election by written consent to fill a vacancy created by removal requires the consent of all of the outstanding shares entitled to vote. If, after the filling of any vacancy by the directors, the directors then in office who have been elected by the shareholders constitute less than a majority of the directors then in office, any holder or holders of an aggregate of five percent (5%) or more of the shares outstanding at that time and having the right to vote for such directors may call a special meeting of shareholders to be held to elect the entire Board of Directors. The term of office of any director shall terminate upon such election of a successor. 8. 13 SECTION 24. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held at such times, places and dates as fixed in these bylaws or by the Board of Directors; provided, however, that if the date for such a meeting falls on a legal holiday, then the meeting shall be held at the same time on the next succeeding full business day. Regular meetings of the Board of Directors held pursuant to this Section 24 may be held without notice. SECTION 25. ELECTRONIC PARTICIPATION. So long as permitted by statute, directors may participate in a meeting through any means of communication, including conference telephone, electronic video screen communication, or other communications equipment. Participating in a meeting pursuant to this section constitutes presence in person at that meeting if each participating director is provided the means to communicate with all of the other directors concurrently and (a) the meeting is held by conference telephone or video conferencing or other communications mode enabling participants to determine, through voice or image recognition, that a participant is or is not a director entitled to participate in the meeting or (b) another communications device (such as a computer modem) is used in conjunction with another method (determined in the discretion of the chairperson of the meeting) enabling participants to determine that a participant is or is not a director entitled to participate in the meeting. Such verification method may include use of passwords or similar codes for gaining access to the meeting or encryption and authentication technology approved in the discretion of the chairperson. SECTION 26. SPECIAL MEETINGS. Special meetings of the Board of Directors for any purpose may be called by the Chairman of the Board of the President or any vice president or the Secretary of the corporation or any two (2) directors. SECTION 27. NOTICE OF MEETINGS. Notice of the date, time and place of all meetings of the Board of Directors, other than regular meetings held pursuant to Section 24 above shall be delivered personally, orally or in writing, or by telephone, including a voice messaging system or other system or technology designed to record and communication messages, telegraph, facsimile, electronic mail or other electronic means, to each director, at least forty-eight (48) hours before the meeting, or sent in writing to each director by first-class mail, charges prepaid, at least four (4) days before the meeting. Such notice may be given by the Secretary of the corporation or by the person or persons who called a meeting. Such notice need not specify the purpose of the meeting. Notice of any meeting of the Board of Directors need not be given to any director who signs a waiver of notice of such meeting, or a consent to holding the meeting or an approval of the minutes thereof, either before or after the meeting, or who attends the meeting without protesting prior thereto or at its commencement such director's lack of notice. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. SECTION 28. PLACE OF MEETINGS. Meetings of the Board of Directors may be held at any place within or without the state which has been designated in the notice of the meeting or, if not stated in the notice or there is no notice, designated in the bylaws or by resolution of the Board of Directors. SECTION 29. ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting, if all members of the Board of Directors individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board of Directors. Such action by written consent shall have the same force and effect as a unanimous vote of such directors. SECTION 30. QUORUM AND TRANSACTION OF BUSINESS. A majority of the authorized number of directors shall constitute a quorum for the transaction of business. Every act or decision done or made by a 9 14 majority of the directors present at a meeting duly held at which a quorum is present shall be the act of the Board of Directors, unless the law, the Articles of Incorporation or these bylaws specifically require a greater number. A meeting at which a quorum is initially present may continue to transact business, notwithstanding withdrawal of directors, if any action taken is approved by at least a majority of the number of directors constituting a quorum for such meeting. In the absence of a quorum at any meeting of the Board of Directors, a majority of the directors present may adjourn the meeting, as provided in Section 31 of these bylaws. SECTION 31. ADJOURNMENT. Any meeting of the Board of Directors, whether or not a quorum is present, may be adjourned to another time and place by the affirmative vote of a majority of the directors present. If the meeting is adjourned for more than twenty-four (24) hours, notice of such adjournment to another time or place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of the adjournment. SECTION 32. ORGANIZATION. The Chairman of the Board shall preside at every meeting of the Board of Directors, if present. If there is no Chairman of the Board or if the Chairman is not present, a Chairman chosen by a majority of the directors present shall act as chairman. The Secretary of the corporation or, in the absence of the Secretary, any person appointed by the Chairman shall act as secretary of the meeting. SECTION 33. COMPENSATION. Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement for expenses, as may be fixed or determined by the Board of Directors. SECTION 34. COMMITTEES. The Board of Directors may, by resolution adopted by a majority of the authorized number of directors, designate one or more committees, each consisting of two (2) or more directors, to serve at the pleasure of the Board of Directors. The Board of Directors, by a vote of the majority of authorized directors, may designate one or more directors as alternate members of any committee, to replace any absent member at any meeting of such committee. Any such committee shall have authority to act in the manner and to the extent provided in the resolution of the Board of Directors, and may have all the authority of the Board of Directors in the management of the business and affairs of the corporation, except with respect to: (a) the approval of any action for which shareholders' approval or approval of the outstanding shares also is required by the California Corporation Code; (b) the filling of vacancies on the Board of Directors or any of its committees; (c) the fixing of compensation of directors for serving on the Board of Directors or any of its committees; (d) the adoption, amendment or repeal of these bylaws; (e) the amendment or repeal of any resolution of the Board of Directors which by its express terms is not so amendable or repealable; (f) a distribution to shareholders, except at a rate or in a periodic amount or within a price range determined by the Board of Directors; or 10 15 (g) the appointment of other committees of the Board of Directors or the members thereof. Any committee may from time to time provide by resolution for regular meetings at specified times and places. If the date of such a meeting falls on a legal holiday, then the meeting shall be held at the same time on the next succeeding full business day. No notice of such a meeting need be given. Such regular meetings need not be held if the committee shall so determine at any time before or after the time when such meeting would otherwise have taken place. Special meetings may be called at any time in the same manner and by the same persons as stated in Section 26 and 27 of these bylaws for meetings of the Board of Directors. The provisions of Sections 25, 28, 29, 30, 31 and 32 of these bylaws shall apply to committees, committee members and committee meetings as if the words "committee" and "committee member" were substituted for the word "Board of Directors", and "director", respectively, throughout such sections. ARTICLE V OFFICERS SECTION 35. OFFICERS. The corporation shall have a Chairman of the Board or a President or both, a Secretary, a Chief Financial Officer and such other offices with such titles and duties as the Board of Directors may determine. Any two or more offices may be held by the same person. SECTION 36. APPOINTMENT. All officers shall be chosen and appointed by the Board of Directors; provided, however, the Board of Directors may empower the chief executive officer of the corporation to appoint such officers, other than Chairman of the Board, President, Secretary or Chief Financial Officer, as the business of the corporation may require. All officers shall serve at the pleasure of the Board of Directors, subject to the rights, if any, of an officer under a contract of employment. SECTION 37. INABILITY TO ACT. In the case of absence or inability to act of any officer of the corporation or of any person authorized by these bylaws to act in such officer's place, the Board of Directors may from time to time delegate the powers or duties of such officer to any other officer, or any director or other person whom it may select, for such period of time as the Board of Directors deem necessary. SECTION 38. RESIGNATIONS. Any officer may resign at any time upon written notice to the corporation, without prejudice to the rights, if any, of the corporation under any contract to which such officer is a party. Such resignation shall be effective upon its receipt by the Chairman of the Board, the President, the Secretary of the Board of Directors, unless a different time is specified in the notice for effectiveness of such resignation. The acceptance of any such resignation shall not be necessary to make it effective unless otherwise specified in such notice. SECTION 39. REMOVAL. Any officer may be removed from office at any time, with or without cause, but subject to the rights, if any, of such officer under any contract of employment, by the Board of Directors or by any committee to whom such power of removal has been duly delegated, or, with regard to any officer who has been appointed by the chief executive officer pursuant to Section 36 above, by the chief executive officer or any other officer upon whom such power of removal may be conferred by the Board of Directors. 11. 16 SECTION 40. VACANCIES. A vacancy occurring in any office for any cause may be filled by the Board of Directors, in the manner prescribed by this Article of the bylaws for initial appointment to such office. SECTION 41. CHAIRMAN OF THE BOARD. The Chairman of the Board, if there be such an officer, shall, if present, preside at all meetings of the Board of Directors and shall exercise and perform such other powers and duties as may be assigned from time to time by the Board of Directors or prescribed by these bylaws. If no President is appointed, the Chairman of the Board is the general manager and chief executive officer of the corporation, and shall exercise all powers of the President described in Section 42 below. SECTION 42. PRESIDENT. Subject to such powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there be such an officer, the President shall be the general manager and chief executive officer of the corporation and shall have general supervision, direction, and control over the business and affairs of the corporation, subject to the control of the Board of Directors. The President may sign and execute, in the name of the corporation, any instrument authorized by the Board of Directors, except when the signing and execution thereof shall have been expressly delegated by the Board of Directors or by these bylaws to some other officer or agent of the corporation. The President shall have all the general powers and duties of management usually vested in the president of a corporation, and shall have such other powers and duties as may be prescribed from time to time by the Board of Directors or these bylaws. The President shall have discretion to prescribe the duties of other officers and employees of the corporation in a manner not inconsistent with the provisions of these bylaws and the directions of the Board of Directors. SECTION 43. VICE PRESIDENTS. In the absence or disability of the President, in the event of a vacancy in the office of President, or in the event such officer refuses to act, the Vice President shall perform all the duties of the President and, when so acting, shall have all the powers of, and be subject to all the restrictions on, the President. If at any such time the corporation has more than one vice president, the duties and powers of the President shall pass to each vice president in order of such vice president's rank as fixed by the Board of Directors or, if the vice presidents are not so ranked, to the vice president designated by the Board of Directors. The vice presidents shall have such other powers and perform such other duties as may be prescribed for them from time to time by the Board of Directors or pursuant to Section 35 and 36 of these bylaws or otherwise pursuant to these bylaws. SECTION 44. SECRETARY. The Secretary shall: (a) Keep, or cause to be kept, minutes of all meetings of the corporation's shareholders, Board of Directors, and committees of the Board of Directors, if any. Such minutes shall be kept in written form. (b) Keep, or cause to be kept, at the principal executive office of the corporation, or at the office of its transfer agent or registrar, if any, a record of the corporation's shareholders, showing the names and addresses of all shareholders, and the number and classes of shares held by each. Such records shall be kept in written form or any other form capable of being converted into written form. (c) Keep, or cause to be kept, at the principal executive office of the corporation, or if the principal executive office is not in California, at its principal business office in California, an original or copy of these bylaws, as amended. 12. 17 (d) Give, or cause to be given, notice of all meetings of shareholders, directors and committees of the Board of Directors, as required by law or by these bylaws. (e) Keep the seal of the corporation, if any, in safe custody. (f) Exercise such powers and perform such duties as are usually vested in the office of secretary of a corporation, and exercise such other powers and perform such other duties as may be prescribed from time to time by the Board of Directors or these bylaws. If any assistant secretaries are appointed, the assistant secretary, or one of the assistant secretaries in the order of their rank as fixed by the Board of Directors or, if they are not so ranked, the assistant secretary designated by the Board of Directors, in the absence or disability of the Secretary or in the event of such officer's refusal to act or if a vacancy exists in the office of Secretary, shall perform the duties and exercise the powers of the Secretary and discharge such duties as may be assigned from time to time pursuant to these bylaws or by the Board of Directors. SECTION 45. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall: (a) Be responsible for all functions and duties of the treasurer of the corporation. (b) Keep and maintain, or cause to be kept and maintained, adequate and correct books and records of account for the corporation. (c) Receive or be responsible for receipt of all monies due and payable to the corporation from any source whatsoever; have charge and custody of, and be responsible for, all monies and other valuables of the corporation and be responsible for deposit of all such monies in the name and to the credit of the corporation with such depositaries as may be designated by the Board of Directors or a duly appointed and authorized committee of the Board of Directors. (d) Disburse or be responsible for the disbursement of the funds of the corporation as may be ordered by the Board of Directors or a duly appointed and authorized committee of the Board of Directors. (e) Render to the chief executive officer and the Board of Directors a statement of the financial condition of the corporation if called upon to do so. (f) Exercise such powers and perform such duties as are usually vested in the office of chief financial officer of a corporation, and exercise such other powers and perform such other duties as may be prescribed by the Board of Directors or these bylaws. If any assistant financial officer is appointed, the assistant financial officer or one of the assistant financial officers, if there are more than one, in the order of their rank as fixed by the Board of Directors or, if they are not so ranked, the assistant financial officer designated by the Board of Directors, shall, in the absence or disability of the Chief Financial Officer or in the event of such officer's refusal to act, perform the duties and exercise the powers of the Chief Financial Officer, and shall have such powers and discharge such duties as may be assigned from time to time pursuant to these bylaws or by the Board of Directors. 13. 18 SECTION 46. COMPENSATION. The compensation of the officers shall be fixed from time to time by the Board of Directors, and no officer shall be prevented from receiving such compensation by reason of the fact that such officer is also a director of the corporation. ARTICLE VI CONTRACTS, LOANS, BANK ACCOUNTS, CHECKS AND DRAFTS SECTION 47. EXECUTION OF CONTRACTS AND OTHER INSTRUMENTS. Except as these bylaws may otherwise provide, the Board of Directors or its duly appointed and authorized committee may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation, and such authorization may be general or confined to specific instances. Except as so authorized or otherwise expressly provided in these bylaws, no officer, agent, or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or in any amount. SECTION 48. LOANS. No loans shall be contracted on behalf of the corporation and no negotiable paper shall be issued in its name, unless and except as authorized by the Board of Directors or its duly appointed and authorized committee. When so authorized by the Board of Directors or such committee, any officer or agent of the corporation may effect loans and advances at any time for the corporation from any bank, trust company, or other institution, or from any firm, corporation or individual, and for such loans and advances may make execute and deliver promissory notes, bonds or other evidences of indebtedness of the corporation and, when authorized as aforesaid, may mortgage, pledge, hypothecate or transfer any and all stocks, securities and other property, real or personal, at any time held by the corporation, and to that end endorse, assign and deliver the same as security for the payment of any and all loans, advances, indebtedness, and liabilities of the corporation. Such authorization may be general or confined to specific instances. SECTION 49. BANK ACCOUNTS. The Board of Directors or its duly appointed and authorized committee from time to time may authorize the opening and keeping of general and/or special bank accounts with such banks, trust companies, or other depositaries as may be selected by the Board of Directors, its duly appointed and authorized committee or by any officer or officers, agent or agents, of the corporation to whom such power may be delegated from time to time by the Board of Directors. The Board of Directors or its duly appointed and authorized committee may make such rules and regulations with respect to said bank accounts, not inconsistent with the provisions of these bylaws, as are deemed advisable. SECTION 50. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for the payment of money, notes, acceptances or other evidences of indebtedness issued in the name of the corporation shall be signed by such officer or officers, agent or agents, of the corporation, and in such manner, as shall be determined from time to time by resolution of the Board of Directors or its duly appointed and authorized committee. Endorsements for deposit to the credit of the corporation in any of its duly authorized depositaries may be made, without counter-signature by the President or any vice president or the Chief Financial Officer or any assistant financial officer or by any other officer or agent of the corporation to whom the Board of Directors or its duly appointed and authorized committee, by resolution, shall have delegated such power or by hand-stamped impression in the name of the corporation. 14. 19 ARTICLE VII CERTIFICATES FOR SHARES AND THEIR TRANSFER SECTION 51. CERTIFICATE FOR SHARES. Every holder of shares in the corporation shall be entitled to have a certificate signed in the name of the corporation by the Chairman or Vice Chairman of the Board or the President or a Vice President and by the Chief Financial Officer or an assistant financial officer or by the Secretary or an assistant secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of 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 such person were an officer, transfer agent or registrar at the date of issue. In the event that the corporation shall issue any shares as only partly paid, the certificate issued to represent such partly paid shares shall have stated thereon the total consideration to be paid for such shares and the amount paid thereon. SECTION 52. TRANSFER ON THE BOOKS. Upon surrender to the Secretary or transfer agent (if any) of the corporation of a certificate for shares of the corporation duly endorsed, with reasonable assurance that the endorsement is genuine and effective, or accompanied by proper evidence of succession, assignment or authority to transfer and upon compliance with applicable federal and state securities laws and if the corporation has no statutory duty to inquire into adverse claims or has discharged any such duty and if any applicable law relating to the collection of taxes has been complied with, it shall be the duty of the corporation, by its Secretary or transfer agent, to cancel the old certificate, to issue a new certificate to the person entitled thereto and to record the transaction on the books of the corporation. SECTION 53. LOST, DESTROYED AND STOLEN CERTIFICATES. The holder of any certificate for shares of the corporation alleged to have been lost, destroyed or stolen shall notify the corporation by making a written affidavit or affirmation of such fact. Upon receipt of said affidavit or affirmation the Board of Directors, or its duly appointed and authorized committee or any officer or officers authorized by the Board so to do, may order the issuance of a new certificate for shares in the place of any certificate previously issued by the corporation and which is alleged to have been lost, destroyed or stolen. However, the Board of Directors or such authorized committee, officer or officers may require the owner of the allegedly lost, destroyed or stolen certificate, or such owner's legal representative, to give the corporation a bond or other adequate security sufficient to indemnify the corporation and its transfer agent and/or registrar, if any, against any claim that may be made against it or them on account of such allegedly lost, destroyed or stolen certificate or the replacement thereof. Said bond or other security shall be in such amount, on such terms and conditions and, in the case of a bond, with such surety or sureties as may be acceptable to the Board of Directors or to its duly appointed and authorized committee or any officer or officers authorized by the Board of Directors to determine the sufficiency thereof. The requirement of a bond or other security may be waived in particular cases at the discretion of the Board of Directors or its duly appointed and authorized committee or any officer or officers authorized by the Board of Directors so to do. SECTION 54. ISSUANCE, TRANSFER AND REGISTRATION OF SHARES. The Board of Directors may make such rules and regulations, not inconsistent with law or with these bylaws, as it may deem advisable concerning the issuance, transfer and registration of certificates for shares of the capital stock of the corporation. The Board of Directors may appoint a transfer agent or registrar of transfers, or both, and may require all certificates for shares of the corporation to bear the signature of either or both. 15. 20 ARTICLE VIII INSPECTION OF CORPORATE RECORDS SECTION 55. INSPECTION BY DIRECTORS. Every director shall have the absolute right at any reasonable time to inspect and copy all books, records, and documents of every kind of the corporation and any of its subsidiaries and to inspect the physical properties of the corporation and any of its subsidiaries. Such inspection may be made by the director in person or by agent or attorney, and the right of inspection includes the right to copy and make extracts. SECTION 56. INSPECTION BY SHAREHOLDERS. (a) Inspection of Corporate Records. (1) A shareholder or shareholders holding at least five (5%) percent in the aggregate of the outstanding voting shares of the corporation or who hold at least one percent of such voting shares and have filed a Schedule 14B with the United States Securities and Exchange Commission relating to the election of directors of the corporation shall have an absolute right to do either or both of the following: (i) Inspect and copy the record of shareholders' names and addresses and shareholdings during usual business hours upon five (5) business days' prior written demand upon the corporation; or (ii) Obtain from the transfer agent, if any, for the corporation, upon five business days' prior written demand and upon the tender of its usual charges for such a list (the amount of which charges shall be stated to the shareholder by the transfer agent upon request), a list of the shareholders' names and addresses who are entitled to vote for the election of directors and their shareholdings, as of the most recent record date for which it has been compiled or as of a date specified by the shareholder subsequent to the date of demand. (2) The record of shareholders shall also be open to inspection and copying by any shareholder or holder of a voting trust certificate at any time during usual business hours upon written demand on the corporation, for a purpose reasonably related to such holder's interest as a shareholder or holder of a voting trust certificate. (3) The accounting books and records and minutes of proceedings of the shareholders and the Board of Directors and of any committees of the Board of Directors of the corporation and of each of its subsidiaries shall be open to inspection, copying and making extracts upon written demand on the corporation of any shareholder or holder of a voting trust certificate at any reasonable time during usual business hours, for a purpose reasonably related to such holder's interests as a shareholder or as a holder of such voting trust certificate. (4) Any inspection, copying, and making of extracts under this subsection (a) may be done in person or by agent or attorney. (b) Inspection of Bylaws. The original or a copy of these bylaws shall be kept as provided in Section 44 of these bylaws and shall be open to inspection by the shareholders at all reasonable times during office hours. If the principal executive office of the corporation is not in California, and the 16. 21 corporation has no principal business office in the state of California, a current copy of these bylaws shall be furnished to any shareholder upon written request. SECTION 57. WRITTEN FORM. If any record subject to inspection pursuant to Section 56 above is not maintained in written form, a request for inspection is not complied with unless and until the corporation at its expense makes such record available in written form. ARTICLE IX MISCELLANEOUS SECTION 58. FISCAL YEAR. Unless otherwise fixed by resolution of the Board of Directors, the fiscal year of the corporation shall end on the 31st day of December in each calendar year. SECTION 59. ANNUAL REPORT. (a) Subject to the provisions of Section 59(b) below, the Board of Directors shall cause an annual report to be sent to each shareholder of the corporation in the manner provided in Section 9 of these bylaws not later than one hundred twenty (120) days after the close of the corporation's fiscal year. Such report shall include a balance sheet as of the end of such fiscal year and an income statement and statement of changes in financial position for such fiscal year, accompanied by any report thereon of independent accountants or, if there is no such report, the certificate of an authorized officer of the corporation that such statements were prepared without audit from the books and records of the corporation. When there are more than 100 shareholders of record of the corporation's shares, as determined by Section 605 of the California Corporations Code, additional information as required by Section 150(b) of the California Corporations Code shall also be contained in such report, provided that if the corporation has a class of securities registered under Section 12 of the United States Securities Exchange Act of 1934, that Act shall take precedence. Such report shall be sent to shareholders at least fifteen (15) (or, if sent by third-class mail, thirty-five (35)) days prior to the next annual meeting of shareholders after the end of the fiscal year to which it relates. (b) If and so long as there are fewer than 100 holders of record of the corporation's shares, the requirement of sending of an annual report to the shareholders of the corporation is hereby expressly waived. SECTION 60. RECORD DATE. The Board of Directors may fix a time in the future as a record date for the determination of the shareholders entitled to notice of or to vote at any 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 shares or entitled to exercise any rights in respect of any other lawful action. The record date so fixed shall not be more than sixty (60) days nor less than ten (10) days prior to the date of the meeting nor more than sixty (60) days prior to any other action or event for the purpose of which it is fixed. If no record date is fixed, the provisions of Section 15 of these bylaws shall apply with respect to notice of meetings, votes, and consents and the record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolutions relating thereto, or the sixtieth (60th) day prior to the date of such other action or event, whichever is later. Only shareholders of record at the close of business on the record date shall be entitled to notice and to vote or to receive the dividend, distribution or allotment of rights or to exercise the rights, as the case 17. 22 may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the Articles of Incorporation, by agreement or by law. SECTION 61. BYLAW AMENDMENTS. Except as otherwise provided by law or Section 19 of these bylaws, these bylaws may be amended or repealed by the Board of Directors of by the affirmative vote of a majority of the outstanding shares entitled to vote, including, if applicable, the affirmative vote of a majority of the outstanding shares of each class or series entitled by law or the Articles of Incorporation to vote as a class or series on the amendment or repeal or adoption of any bylaw or bylaws; provided, however, after issuance of shares, a bylaw specifying or changing a fixed number of directors or the maximum or minimum number or changing from a fixed to a variable board or vice versa may only be adopted by approval of the outstanding shares as provided herein. SECTION 62. CONSTRUCTION AND DEFINITION. Unless the context requires otherwise, the general provisions, rules of construction, and definitions contained in the California Corporations Code shall govern the construction of these bylaws. Without limiting the foregoing, "shall" is mandatory and "may" is permissive. ARTICLE X INDEMNIFICATION SECTION 63. INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS. (a) DIRECTORS. The corporation shall indemnify its directors to the fullest extent not prohibited by the California General Corporation Law; provided, however, that the corporation may limit the extent of such indemnification by individual contracts with its directors; and, provided, further, that the corporation shall not be required to indemnify any director in connection with any proceeding (or part thereof) initiated by such person or any proceeding by such person against the corporation or its directors, officers, employees or other agents unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized by the board of directors of the corporation or (iii) such indemnification is provided by the corporation, in its sole discretion, pursuant to the powers vested in the corporation under the California General Corporation Law. (b) OFFICERS, EMPLOYEES AND OTHER AGENTS. The corporation shall have the power to indemnify its officers, employees and other agents as set forth in the California General Corporation Law. (c) DETERMINATION BY THE CORPORATION. Promptly after receipt of a request for indemnification hereunder (and in any event within 90 days thereof) a reasonable, good faith determination as to whether indemnification of the director is proper under the circumstances because each director has met the applicable standard of care shall be made by: (1) a majority vote of a quorum consisting of directors who are not parties to such proceeding; (2) if such quorum is not obtainable, by independent legal counsel in a written opinion; or 18. 23 (3) approval or ratification by the affirmative vote of a majority of the shares of this corporation represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute at least a majority of the required quorum) or by written consent of a majority of the outstanding shares entitled to vote; where in each case the shares owned by the person to be indemnified shall not be considered entitled to vote thereon. (d) GOOD FAITH. (1) For purposes of any determination under this bylaw, a director shall be deemed to have acted in good faith and in a manner he reasonably believed to be in the best interests of the corporation and its shareholders, and, with respect to any criminal action or proceeding, to have had no reasonable cause to believe that his conduct was unlawful, if his action is based on information, opinions, reports and statements, including financial statements and other financial data, in each case prepared or presented by: (i) one or more officers or employees of the corporation whom the director believed to be reliable and competent in the matters presented; (ii) counsel, independent accountants or other persons as to matters which the director believed to be within such person's professional competence; and (iii) a committee of the Board upon which such director does not serve, as to matters within such committee's designated authority, which committee the director believes to merit confidence; so long as, in each case, the director acts without knowledge that would cause such reliance to be unwarranted. (2) The termination of any proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in the best interests of the corporation and its shareholders or that he had reasonable cause to believe that his conduct was unlawful. (3) The provisions of this paragraph (d) shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standard of conduct set forth by the California General Corporation Law. (e) EXPENSES. The corporation shall advance, prior to the final disposition of any proceeding, promptly following request therefor, all expenses incurred by any director in connection with such proceeding upon receipt of an undertaking by or on behalf of such person to repay said amounts if it shall be determined ultimately that such person is not entitled to be indemnified under this bylaw or otherwise. (f) ENFORCEMENT. Without the necessity of entering into an express contract, all rights to indemnification and advances to directors under this bylaw shall be deemed to be contractual rights and be effective to the same extent and as if provided for in a contract between the corporation and the director. Any right to indemnification or advances granted by this bylaw to a director shall be enforceable by or on behalf of the person holding such right in the forum in which the proceeding is or was pending or, if such forum is not available or a determination is made that such forum is not convenient, in any court of competent jurisdiction if (i) the claim for indemnification advances is denied, in whole or in 19. 24 part, or (ii) no disposition of such claim is made within ninety (90) days of request therefor. The claimant in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting his claim. The corporation shall be entitled to raise as a defense to any such action (other than an action brought to enforce a claim for expenses incurred in connection with any proceeding in advance of its final disposition when the required undertaking has been tendered to the corporation) that the claimant has not met the standards of conduct that make it permissible under the California General Corporation Law for the corporation to indemnify the claimant for the amount claimed. Neither the failure of the corporation (including its board of directors, independent legal counsel or its shareholders) to have made such a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he has met the applicable standard of conduct set forth in the California General Corporation Law, nor an actual determination by the corporation (including its board of directors, independent legal counsel or its shareholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant has not met the applicable standard of conduct. (g) NON-EXCLUSIVITY OF RIGHTS. To the fullest extent permitted by the corporation's Articles of Incorporation and the California General Corporation Law, the rights conferred on any person by this bylaw shall not be exclusive of any other right which such person may have or hereafter acquire under any statute, provision of the Articles of Incorporation, bylaws, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding office. The corporation is specifically authorized to enter into individual contracts with any or all of its directors, officers, employees or agents respecting indemnification and advances, to the fullest extent permitted by the California General Corporation Law and the corporation's Articles of Incorporation. (h) SURVIVAL OF RIGHTS. The rights conferred on any person by this bylaw shall continue as to a person who has ceased to be a director and shall inure to the benefit of the heirs, executors and administrators of such a person. (i) INSURANCE. The corporation, upon approval by the board of directors, may purchase insurance on behalf of any person required or permitted to be indemnified pursuant to this bylaw. (j) AMENDMENTS. Any repeal or modification of this bylaw shall only be prospective and shall not affect the rights under this bylaw in effect at the time of the alleged occurrence of any action or omission to act that is the cause of any proceeding against any agent of the corporation. (k) EMPLOYEE BENEFIT PLANS. The corporation shall indemnify the directors and officers of the corporation who serve at the request of the corporation as trustees, investment managers or other fiduciaries of employee benefit plans to the fullest extent permitted by the California General Corporation Law. (l) SAVING CLAUSE. If this bylaw or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each director to the fullest extent permitted by any applicable portion of this bylaw that shall not have been invalidated, or by any other applicable law. (m) CERTAIN DEFINITIONS. For the purposes of this bylaw, the following definitions shall apply: 20. 25 (1) The term "proceeding" shall be broadly construed and shall include, without limitation, the investigation, preparation, prosecution, defense, settlement and appeal of any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative. (2) The term "expenses" shall be broadly construed and shall include, without limitation, court costs, attorney's fees, witness fees, fines, amounts paid in settlement or judgment and any other costs and expenses of any nature or kind incurred in connection with any proceeding, including expenses of establishing a right to indemnification under this bylaw or any applicable law. (3) The term the "corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this bylaw with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. (4) References to a "director," "officer," "employee," or "agent" of the corporation shall include, without limitation, situations where such person is serving at the request of the corporation as a director, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise. ARTICLE XI RIGHT OF FIRST REFUSAL SECTION 64. RIGHT OF FIRST REFUSAL. No shareholder shall sell, assign, pledge, or in any manner transfer any of the shares of stock of the corporation or any right or interest therein, whether voluntarily or by operation of law, or by gift or otherwise, except by a transfer which meets the requirements hereinafter set forth in this bylaw. (a) If the shareholder desires to sell or otherwise transfer any of his shares of stock, then the shareholder shall first give written notice thereof to the corporation. The notice shall name the proposed transferee and state the number of shares to be transferred, the proposed consideration, and all other terms and conditions of the proposed transfer. (b) For thirty (30) days following receipt of such notice, the corporation shall have the option to purchase all (but not less than all) of the shares specified in the notice at the price and upon the terms set forth in such notice; provided, however, that, with the consent of the shareholder, the corporation shall have the option purchase a lesser portion of the shares specified in said notice at the price and upon the terms set forth therein. In the event of a gift, property settlement or other transfer in which the proposed transferee is not paying the full price for the shares, and that is not otherwise exempted from the provisions of this Section 64, the price shall be deemed to be the fair market value of the stock at such time as determined in good faith by the Board of Directors. In the event the corporation elects to purchase all of the shares or, with consent of the shareholder, a lesser portion of the shares, it shall give written notice to 21. 26 the transferring shareholder of its election and settlement for said shares shall be made as provided below in paragraph (d). (c) The corporation may assign its rights hereunder. (d) In the event the corporation and/or its assignee(s) elect to acquire any of the shares of the transferring shareholder as specified in said transferring shareholder's notice, the Secretary of the corporation shall so notify the transferring shareholder and settlement thereof shall be made in cash within thirty (30) days after the Secretary of the corporation receives said transferring shareholder's notice; provided that if the terms of payment set forth in said transferring shareholder's notice were other than cash against delivery, the corporation and/or its assignee(s) shall pay for said shares on the same terms and conditions set forth in said transferring shareholder's notice. (e) In the event the corporation and/or its assignee(s) do not elect to acquire all of the shares specified in the transferring shareholder's notice, said transferring shareholder may, within the sixty-day period following the expiration of the option rights granted to the corporation and/or its assignee(s) herein, transfer the shares specified in said transferring shareholder's notice which were not acquired by the corporation and/or its assignee(s) as specified in said transferring shareholder's notice. All shares so sold by said transferring shareholder shall continue to be subject to the provisions of this bylaw in the same manner as before said transfer. (f) Anything to the contrary contained herein notwithstanding, the following transactions shall be exempt from the provisions of this bylaw: (1) A shareholder's transfer of any or all shares held either during such shareholder's lifetime or on death by will or intestacy to such shareholder's immediate family or to any custodian or trustee for the account of such shareholder or such shareholder's immediate family. "Immediate family" as used herein shall mean spouse, lineal descendant, father, mother, brother, or sister of the shareholder making such transfer. (2) A shareholder's bona fide pledge or mortgage of any shares with a commercial lending institution, provided that any subsequent transfer of said shares by said institution shall be conducted in the manner set forth in this bylaw. (3) A shareholder's transfer of any or all of such shareholder's shares to the corporation or to any other shareholder of the corporation. (4) A shareholder's transfer of any or all of such shareholder's shares to a person who, at the time of such transfer, is an officer or director of the corporation. (5) A corporate shareholder's transfer of any or all of its shares pursuant to and in accordance with the terms of any merger, consolidation, reclassification of shares or capital reorganization of the corporate shareholder, or pursuant to a sale of all or substantially all of the stock or assets of a corporate shareholder. (6) A corporate shareholder's transfer of any or all of its shares to any or all of its shareholders. 22. 27 (7) A transfer by a shareholder which is a limited or general partnership to any or all of its partners or former partners. (8) A transfer by a shareholder which is a limited liability company to any or all of its members or former members. In any such case, the transferee, assignee, or other recipient shall receive and hold such stock subject to the provisions by this bylaw, and there shall be no further transfer of such stock except in accord with this bylaw. (g) The provisions of this bylaw may be waived with respect to any transfer either by the corporation, upon duly authorized action of its Board of Directors, or by the shareholders, upon the express written consent of the owners of a majority of the voting power of the corporation (excluding the votes represented by those shares to be transferred by the transferring shareholder). This bylaw may be amended or repealed either by a duly authorized action of the Board of Directors or by the shareholders, upon the express written consent of the owners of a majority of the voting power of the corporation. (h) Any sale or transfer, or purported sale or transfer, of securities of the corporation shall be null and void unless the terms, conditions, and provisions of this bylaw are strictly observed and followed. (i) The foregoing right of first refusal shall terminate on either of the following dates, whichever shall first occur: (1) On February 10, 2008; or (2) Upon the date securities of the corporation are first offered to the public pursuant to a registration statement filed with, and declared effective by, the United States Securities and Exchange Commission under the Securities Act of 1933, as amended. (j) The certificates representing shares of stock of the corporation shall bear on their face the following legend so long as the foregoing right of first refusal remains in effect: "The shares represented by this Certificate are subject to a right of first refusal option in favor of the Corporation and/or its Assignee(s), as provided in the Bylaws of the Corporation." ARTICLE XII LOANS OF OFFICERS AND OTHERS SECTION 65. CERTAIN CORPORATE LOANS AND GUARANTIES. If the corporation has outstanding shares held of record by 100 or more persons on the date of approval by the Board of Directors, the corporation may make loans of money or property to, or guarantee the obligations of, any officer of the corporation or its parent or any subsidiary, whether or not a director of the corporation or its parent or any subsidiary, or adopt an employee benefit plan or plans authorizing such loans or guaranties, upon the approval of the Board of Directors alone, by a vote sufficient without counting the vote of any interested director or directors, if the Board of Directors determines that such a loan or guaranty or plan may 23. 28 reasonably be expected to benefit the corporation. Notwithstanding the foregoing, the corporation shall have the power to make loans permitted by the California Corporations Code. 24. EX-10.1 4 FORM OF INDEMNIFICATION AGREEMENT 1 EXHIBIT 10.1 INDEMNITY AGREEMENT THIS AGREEMENT is made and entered into this 27th day of February by and between LANDA MANAGEMENT SYSTEMS CORPORATION, a California corporation (the "Company"), and ("Indemnitee"). RECITALS WHEREAS, Indemnitee performs a valuable service to the Company in his or her capacity as a member of the Board of Directors and an Officer of the Company; WHEREAS, the shareholders of the Company have adopted provisions in the Company's Amended and Restated Articles of Incorporation (the "Articles") and the Company's Amended and Restated Bylaws (the "Bylaws") providing for the indemnification of the directors, officers, employees and other agents of the Company, including persons serving at the request of the Company in such capacities with other corporations or enterprises, as authorized by the California General Corporation Law, as amended (the "Code"); WHEREAS, the Articles, the Bylaws and the Code, by their non-exclusive nature, permit contracts between the Company and its directors, officers, employees and other agents with respect to indemnification of such persons; and WHEREAS, in order to induce Indemnitee to serve as a member of the Board of Directors and an Officer of the Company, the Company has determined and agreed to enter into this Agreement with Indemnitee; NOW, THEREFORE, in consideration of Indemnitee's continued service as a member of the Board of Directors and an Officer after the date hereof, the parties hereto agree as follows: AGREEMENT 1. SERVICES TO THE COMPANY. Indemnitee will serve as a member of the Board of Directors and an Officer of the Company or as a director, officer or other fiduciary of the Company or an affiliate of the Company (including any employee benefit plan of the Company) faithfully and to the best of his or her ability so long as he or she is duly elected and qualified in accordance with the provisions of the Bylaws or other applicable charter documents of the Company or such affiliate; provided, however, that Indemnitee may at any time and for any reason resign from such position (subject to any contractual obligation that Indemnitee may have assumed apart from this Agreement) and that the Company or any affiliate shall have no obligation under this Agreement to continue Indemnitee in any such position. 2. INDEMNITY. Subject to a determination pursuant to Section 8 hereof, the Company hereby agrees to hold harmless and indemnify Indemnitee: 1. 2 (a) against any and all expenses (including attorneys' fees), witness fees, damages, judgments, fines and amounts paid in settlement and any other amounts that Indemnitee becomes legally obligated to pay because of any claim or claims made against or by him or her in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, arbitrational, administrative or investigative (including an action by or in the right of the Company) to which Indemnitee is, was or at any time becomes a party, or is threatened to be made a party, by reason of the fact that Indemnitee is, was or at any time becomes a director, officer, employee or other agent of the Company, or is or was serving or at any time serves at the request of the Company as a director, officer, employee or other agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise; and (b) otherwise to the fullest extent not prohibited by the Articles, the Bylaws or the Code. 3. LIMITATIONS ON ADDITIONAL INDEMNITY. To the extent that any of the matters set forth in subsections (a) through (l) of this Section 3 are successfully established by the Company as defenses in accordance with the provisions of Section 9 hereof, no indemnity pursuant to Section 2 hereof will be payable by the Company: (a) on account of any claim against Indemnitee for an accounting of profits made from the purchase or sale by Indemnitee of securities of the Company pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any federal, state or local statutory law; (b) on account of Indemnitee's conduct from which Indemnitee derived an improper personal benefit; (c) on account of Indemnitee's conduct that he or she believed to be contrary to the best interests of the Company or its shareholders or that involved the absence of good faith on the part of Indemnitee; (d) on account of Indemnitee's conduct that constituted intentional misconduct or a knowing and culpable violation of law; (e) on account of Indemnitee's conduct that showed a reckless disregard for Indemnitee's duty to the Company or its shareholders in circumstances in which Indemnitee was aware, or should have been aware, in the ordinary course of performing his or her duties, of a risk of serious injury to the Company or its shareholders; (f) on account of Indemnitee's conduct that constituted an unexcused pattern of inattention that amounted to an abdication of the Indemnitee's duty to the Company or its shareholders; (g) on account of Indemnitee's conduct which constituted a violation of the Indemnitee's duties under Sections 310 or 316 of the Code; 2. 3 (h) for which payment is actually made to Indemnitee under a valid and collectible insurance policy or under a valid and enforceable indemnity clause, bylaw or agreement, except in respect of any excess beyond payment under such insurance, clause, bylaw or agreement; (i) if indemnification is not lawful (and, in this respect, both the Company and Indemnitee have been advised that the Securities and Exchange Commission considers indemnification for liabilities arising under the federal securities laws to be against public policy and is, therefore, unenforceable and that claims for indemnification should be submitted to appropriate courts for adjudication); (j) in connection with any proceeding (or part thereof) initiated by Indemnitee, or any proceeding by Indemnitee against the Company or its directors, officers, employees or other agents, unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized by the Board of Directors of the Company, (iii) such indemnification is provided by the Company, in its sole discretion, pursuant to the powers vested in the Company under the Code, or (iv) the proceeding is initiated pursuant to Section 9 hereof; (k) with respect to any action by or in the right of the Company: (i) if Indemnitee is adjudged to be liable to the Company in performance of Indemnitee's duty to the Company and its shareholders, unless and only to the extent that the court in which such action is or was pending shall determine upon application that, in view of all of the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for expenses, and then only to the extent that the court shall determine; (ii) for expenses incurred in defending a pending action which is settled or otherwise disposed of without court approval; or (iii) for amounts paid in settling or otherwise disposing of a pending action without court approval; and (l) to the extent, and only to the extent, that indemnification with respect to such action (i) would be inconsistent with the Articles or Bylaws, or a resolution of the shareholders or agreement of the Company prohibiting or otherwise limiting such indemnification and in effect at the time of the accrual of the action or (ii) would be inconsistent with any condition expressly imposed by a court in approving a settlement, unless Indemnitee has been successful on the merits or unless the indemnification has been approved by the shareholders of the Company in accordance with Section 153 of the Code (with the shares of the Indemnitee not being entitled to vote thereon). 4. CONTINUATION OF INDEMNITY. All agreements and obligations of the Company contained herein shall continue during the period Indemnitee is a director, officer, employee or other agent of the Company (or is serving or had served at the request of the Company as a director, officer, employee or other agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise) and shall continue thereafter so long as Indemnitee shall be subject to any possible claim or threatened, pending or completed action, suit or 3. 4 proceeding, whether civil, criminal, arbitrational, administrative or investigative, by reason of the fact that Indemnitee had served in the capacity referred to herein. 5. PARTIAL INDEMNIFICATION. Indemnitee shall be entitled under this Agreement to indemnification by the Company for a portion of the expenses (including attorneys' fees), witness fees, damages, judgments, fines and amounts paid in settlement and any other amounts that Indemnitee becomes legally obligated to pay in connection with any action, suit or proceeding referred to in Section 2 hereof even if not entitled hereunder to indemnification for the total amount thereof, and the Company shall indemnify Indemnitee for the portion thereof to which Indemnitee is entitled. 6. NOTIFICATION AND DEFENSE OF CLAIM. Not later than thirty (30) days after receipt by Indemnitee of notice of the commencement of any action, suit or proceeding, Indemnitee will, if a claim in respect thereof is to be made against the Company under this Agreement, notify the Company of the commencement thereof; but the omission so to notify the Company will not relieve it from any liability which it may have to Indemnitee otherwise than under this Agreement. With respect to any such action, suit or proceeding as to which Indemnitee notifies the Company of the commencement thereof: (A) the Company will be entitled to participate therein at its own expense; (B) except as otherwise provided below, the Company may, at its option and jointly with any other indemnifying party similarly notified and electing to assume such defense, assume the defense thereof, with counsel reasonably satisfactory to Indemnitee. After notice from the Company to Indemnitee of its election to assume the defense thereof, the Company will not be liable to Indemnitee under this Agreement for any legal or other expenses subsequently incurred by Indemnitee in connection with the defense thereof except for reasonable costs of investigation or otherwise as provided below. Indemnitee shall have the right to employ separate counsel in such action, suit or proceeding but the fees and expenses of such counsel incurred after notice from the Company of its assumption of the defense thereof shall be at the expense of Indemnitee unless (i) the employment of counsel by Indemnitee has been authorized by the Company, (ii) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of the defense of such action or (iii) the Company shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of Indemnitee's separate counsel shall be at the expense of the Company. The Company shall not be entitled to assume the defense of any action, suit or proceeding brought by or on behalf of the Company or as to which Indemnitee shall have made the conclusion provided for in clause (ii) above; and (c) the Company shall not be liable to indemnify Indemnitee under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent, which shall not be reasonably withheld. The Company shall be permitted to settle any action except that it shall not settle any action or claim in any manner which would impose any penalty or limitation on Indemnitee without Indemnitee's written consent, which may be given or withheld in Indemnitee's sole discretion. 4. 5 7. EXPENSES. The Company shall advance, prior to the final disposition of any proceeding, promptly following request therefor, all expenses incurred by Indemnitee in connection with such proceeding upon receipt of an undertaking by or on behalf of Indemnitee to repay said amounts if it shall be determined, ultimately that Indemnitee is not entitled to be indemnified under the provisions of this Agreement, the Bylaws, the Articles, the Code or otherwise. Notwithstanding the foregoing, unless otherwise determined pursuant to Section 10, no advance shall be made by the Company if a determination is reasonably and promptly made by the Board of Directors by a majority vote of a quorum consisting of directors who are not parties to the proceeding (or, if no such quorum exists, by independent legal counsel in a written opinion) that the facts known to the decision making party at the time such determination is made demonstrate clearly and convincingly demonstrate that such person acted in bad faith or in a manner that such person did not believe to be in the best interests of the Company and its shareholders. 8. DETERMINATION BY THE COMPANY. To the extent required by the Code, promptly after a receipt of a request for indemnification hereunder made by Indemnitee (and in any event within 90 days), the Company shall make a reasonable, good faith determination as to whether indemnification of Indemnitee is proper under the Code by means of: (A) A majority vote of a quorum consisting of directors who are not parties to such proceeding; (B) If such quorum is not obtainable, by independent legal counsel in a written opinion; (C) Approval or ratification by the affirmative vote of a majority of the shares of the COMPANY represented and voting at a duly held meeting which a quorum is present (which shares voting affirmatively also constitute at least a majority of the required quorum) or by written consent of a majority of the outstanding shares entitled to vote; where in each case the shares owned by the person to be indemnified shall not be considered entitled to vote thereon. Such determination shall be reasonably made in good faith by the decision-making party based upon the facts known to the decision-making party at the time such determination is made. 9. ENFORCEMENT. Any right to indemnification or advances granted by this Agreement to Indemnitee shall be enforceable by or on behalf of Indemnitee in the forum in which the proceeding is or was pending, or, if such forum is not available or a determination is made that such forum is not convenient, in any court of competent jurisdiction if (i) the claim for indemnification or advances is denied, in whole or in part, or (ii) no disposition of such claim is made within ninety (90) days of request therefor. Indemnitee, in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting his or her claim. The Company shall be entitled to raise by pleading as an affirmative defense to any action for which a claim for indemnification is made under Section 2 hereof that Indemnitee is not entitled to indemnification because of the limitations set forth in Section 3 hereof. Neither the failure of the Company (including its Board of Directors, its shareholders or independent legal counsel) to have made a determination prior to the commencement of such enforcement action that indemnification of Indemnitee is proper in the circumstances, nor an actual 5. 6 determination by the Company (including its Board of Directors, its shareholders or independent legal counsel) that such indemnification is improper shall be a defense to the action or create a presumption that Indemnitee is not entitled to indemnification under this Agreement or otherwise. 10. SUBROGATION. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights or recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights. 11. NON-EXCLUSIVITY OF RIGHTS. The rights conferred on Indemnitee by this Agreement shall not be exclusive of any other right which Indemnitee may have or hereafter acquire under any statute, provision of the Articles or Bylaws, agreement, vote of shareholders or directors, or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding office. 12. SURVIVAL OF RIGHTS. (A) The rights conferred on Indemnitee by this Agreement shall continue after Indemnitee has ceased to be a director, officer, employee or other agent of the Company or to serve at the request of the Company as a director, officer, employee or other agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise and shall inure to the benefit of Indemnitee's heirs, executors and administrators. (B) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had occurred. 13. SEPARABILITY. Each of the provisions of this Agreement is a separate and distinct agreement and independent of the others, so that if any provision hereof shall be held to be invalid for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of the other provisions hereof. Furthermore, if this Agreement shall be invalidated in its entirety on any ground, then the Company shall nevertheless indemnify Indemnitee to the fullest extent provided by the Articles, the Bylaws, the Code or any other applicable law. 14. GOVERNING LAW. This Agreement shall be interpreted and enforced in accordance with the laws of the State of California. 15. AMENDMENT AND TERMINATION. No amendment, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by both parties hereto. 16. 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 but one and the same Agreement. Only one such counterpart need be produced to evidence the existence of this Agreement. 6. 7 17. HEADINGS. The headings of the sections of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction hereof. 18. NOTICES. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given (i) upon delivery if delivered by hand to the party to whom such communication was directed or (ii) upon the third business day after the date on which such communication was mailed if mailed by certified or registered mail with postage prepaid: (a) If to Indemnitee, at the address indicated below his or her signature hereunder. (b) If to the Company, to LANDA MANAGEMENT SYSTEMS CORPORATION 1072 Marauder, Suite A Chico, CA 95973 Attention: President or to such other address as may have been furnished to Indemnitee by the Company. 7. 8 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and year first above written. LANDA MANAGEMENT SYSTEMS CORPORATION By: --------------------------------- Title: ------------------------------ INDEMNITEE ------------------------------------- Indemnitee Print Name and Address: ------------------------------------- ------------------------------------- S-1 EX-10.3 5 1998 EQUITY INCENTIVE PLAN 1 EXHIBIT 10.3 LANDA MANAGEMENT SYSTEMS CORPORATION 1998 EQUITY INCENTIVE PLAN ADOPTED JULY 29, 1998 APPROVED BY SHAREHOLDERS _______________, 199___ TERMINATION DATE: JULY 28, 2008 1. PURPOSES. (a) ELIGIBLE STOCK AWARD RECIPIENTS. The persons eligible to receive Stock Awards are the Employees, Directors and Consultants of the Company and its Affiliates. (b) AVAILABLE STOCK AWARDS. The purpose of the Plan is to provide a means by which eligible recipients of Stock Awards may be given an opportunity to benefit from increases in value of the Common Stock through the granting of the following Stock Awards: (i) Incentive Stock Options, (ii) Nonstatutory Stock Options, (iii) stock bonuses and (iv) rights to acquire restricted stock. (c) GENERAL PURPOSE. The Company, by means of the Plan, seeks to retain the services of the group of persons eligible to receive Stock Awards, to secure and retain the services of new members of this group and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates. 2. DEFINITIONS. (a) "AFFILIATE" means any parent corporation or subsidiary corporation of the Company, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f), respectively, of the Code. (b) "BOARD" means the Board of Directors of the Company. (c) "CODE" means the Internal Revenue Code of 1986, as amended. (d) "COMMITTEE" means a Committee appointed by the Board in accordance with subsection 3(c). (e) "COMMON STOCK" means the common stock of the Company. (f) "COMPANY" means Landa Management Systems Corporation. (g) "CONSULTANT" means any person, including an advisor, (i) engaged by the Company or an Affiliate to render consulting or advisory services and who is compensated for such services or (ii) who is a member of the Board of Directors of an Affiliate. However, the term "Consultant" shall not include either Directors of the Company who are not compensated 1 2 by the Company for their services as Directors or Directors of the Company who are merely paid a director's fee by the Company for their services as Directors. (h) "CONTINUOUS SERVICE" means that the Participant's service with the Company or an Affiliate, whether as an Employee, Director or Consultant, is not interrupted or terminated. The Participant's Continuous Service shall not be deemed to have terminated merely because of a change in the capacity in which the Participant renders service to the Company or an Affiliate as an Employee, Consultant or Director or a change in the entity for which the Participant renders such service, provided that there is no interruption or termination of the Participant's Continuous Service. For example, a change in status from an Employee of the Company to a Consultant of an Affiliate or a Director of the Company will not constitute an interruption of Continuous Service. The Board or the chief executive officer of the Company, in that party's sole discretion, may determine whether Continuous Service shall be considered interrupted in the case of any leave of absence approved by that party, including sick leave, military leave or any other personal leave. (i) "COVERED EMPLOYEE" means the chief executive officer and the four (4) other highest compensated officers of the Company for whom total compensation is required to be reported to shareholders under the Exchange Act, as determined for purposes of Section 162(m) of the Code. (j) "DIRECTOR" means a member of the Board of Directors of the Company. (k) "DISABILITY" means (i) before the Listing Date, the inability of a person, in the opinion of a qualified physician acceptable to the Company, to perform the major duties of that person's position with the Company or an Affiliate of the Company because of the sickness or injury of the person and (ii) after the Listing Date, the permanent and total disability of a person within the meaning of Section 22(e)(3) of the Code. (l) "EMPLOYEE" means any person employed by the Company or an Affiliate. Mere service as a Director or payment of a director's fee by the Company or an Affiliate shall not be sufficient to constitute "employment" by the Company or an Affiliate. (m) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (n) "FAIR MARKET VALUE" means, as of any date, the value of the Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or traded on the Nasdaq National Market System or the Nasdaq SmallCap Market, the Fair Market Value of a share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in the Common Stock) on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable. 2 3 (ii) In the absence of such markets for the Common Stock, the Fair Market Value shall be determined in good faith by the Board. (iii) Prior to the Listing Date, the value of the Common Stock shall be determined in a manner consistent with Section 260.140.50 of Title 10 of the California Code of Regulations. (o) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (p) "LISTING DATE" means the first date upon which any security of the Company is listed (or approved for listing) upon notice of issuance on any securities exchange or designated (or approved for designation) upon notice of issuance as a national market security on an interdealer quotation system if such securities exchange or interdealer quotation system has been certified in accordance with the provisions of Section 25100(o) of the California Corporate Securities Law of 1968. (q) "NON-EMPLOYEE DIRECTOR" means a Director of the Company who either (i) is not a current Employee or Officer of the Company or its parent or a subsidiary, does not receive compensation (directly or indirectly) from the Company or its parent or a subsidiary for services rendered as a consultant or in any capacity other than as a Director (except for an amount as to which disclosure would not be required under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act ("Regulation S-K")), does not possess an interest in any other transaction as to which disclosure would be required under Item 404(a) of Regulation S-K and is not engaged in a business relationship as to which disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is otherwise considered a "non-employee director" for purposes of Rule 16b-3. (r) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an Incentive Stock Option. (s) "OFFICER" means (i) before the Listing Date, any person designated by the Company as an officer and (ii) on and after the Listing Date, a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (t) "OPTION" means an Incentive Stock Option or a Nonstatutory Stock Option granted pursuant to the Plan. (u) "OPTION AGREEMENT" means a written agreement between the Company and an Optionholder evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan. (v) "OPTIONHOLDER" means a person to whom an Option is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Option. 3 4 (w) "OUTSIDE DIRECTOR" means a Director of the Company who either (i) is not a current employee of the Company or an "affiliated corporation" (within the meaning of Treasury Regulations promulgated under Section 162(m) of the Code), is not a former employee of the Company or an "affiliated corporation" receiving compensation for prior services (other than benefits under a tax qualified pension plan), was not an officer of the Company or an "affiliated corporation" at any time and is not currently receiving direct or indirect remuneration from the Company or an "affiliated corporation" for services in any capacity other than as a Director or (ii) is otherwise considered an "outside director" for purposes of Section 162(m) of the Code. (x) "PARTICIPANT" means a person to whom a Stock Award is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Stock Award. (y) "PLAN" means this Landa Management Systems Corporation 1998 Equity Incentive Plan. (z) "RULE 16b-3" means Rule 16b-3 promulgated under the Exchange Act or any successor to Rule 16b-3, as in effect from time to time. (aa) "SECURITIES ACT" means the Securities Act of 1933, as amended. (bb) "STOCK AWARD" means any right granted under the Plan, including an Option, a stock bonus and a right to acquire restricted stock. (cc) "STOCK AWARD AGREEMENT" means a written agreement between the Company and a holder of a Stock Award evidencing the terms and conditions of an individual Stock Award grant. Each Stock Award Agreement shall be subject to the terms and conditions of the Plan. (dd) "TEN PERCENT SHAREHOLDER" means a person who owns (or is deemed to own pursuant to Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any of its Affiliates. 3. ADMINISTRATION. (a) ADMINISTRATION BY BOARD. The Board shall administer the Plan unless and until the Board delegates administration to a Committee, as provided in subsection 3(c). (b) POWERS OF BOARD. The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (i) To determine from time to time which of the persons eligible under the Plan shall be granted Stock Awards; when and how each Stock Award shall be granted; what type or combination of types of Stock Award shall be granted; the provisions of each Stock Award granted (which need not be identical), including the time or times when a person shall be permitted to receive stock pursuant to a Stock Award; and the number of shares with respect to which a Stock Award shall be granted to each such person. 4 5 (ii) To construe and interpret the Plan and Stock Awards granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Stock Award Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (iii) To amend the Plan or a Stock Award as provided in Section 12. (iv) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company, which are not in conflict with the provisions of the Plan. (c) DELEGATION TO COMMITTEE. (i) GENERAL. The Board may delegate administration of the Plan to a Committee or Committees of one or more members of the Board, and the term "Committee" shall apply to any person or persons to whom such authority has been delegated. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, including the power to delegate to a subcommittee any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board shall thereafter be to the Committee or subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. (ii) COMMITTEE COMPOSITION WHEN COMMON STOCK IS PUBLICLY TRADED. At such time as the Common Stock is publicly traded, in the discretion of the Board, a Committee may consist solely of two or more Outside Directors, in accordance with Section 162(m) of the Code, and/or solely of two or more Non-Employee Directors, in accordance with Rule 16b-3. Within the scope of such authority, the Board or the Committee may (i) delegate to a committee of one or more members of the Board who are not Outside Directors the authority to grant Stock Awards to eligible persons who are either (1) not then Covered Employees and are not expected to be Covered Employees at the time of recognition of income resulting from such Stock Award or (2) not persons with respect to whom the Company wishes to comply with Section 162(m) of the Code and/or) (ii) delegate to a committee of one or more members of the Board who are not Non-Employee Directors the authority to grant Stock Awards to eligible persons who are not then subject to Section 16 of the Exchange Act. 4. SHARES SUBJECT TO THE PLAN. (a) SHARE RESERVE. Subject to the provisions of Section 11 relating to adjustments upon changes in stock, the stock that may be issued pursuant to Stock Awards shall not exceed in the aggregate three million (3,000,000) shares of Common Stock. 5 6 (b) REVERSION OF SHARES TO THE SHARE RESERVE. If any Stock Award shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full (or vested in the case of Restricted Stock), the stock not acquired under such Stock Award shall revert to and again become available for issuance under the Plan. If any Common Stock acquired pursuant to the exercise of an Option shall for any reason be repurchased by the Company under an unvested share repurchase option provided under the Plan, the stock repurchased by the Company under such repurchase option shall not revert to and again become available for issuance under the Plan. (c) SOURCE OF SHARES. The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. 5. ELIGIBILITY. (a) ELIGIBILITY FOR SPECIFIC STOCK AWARDS. Incentive Stock Options may be granted only to Employees. Stock Awards other than Incentive Stock Options may be granted to Employees, Directors and Consultants. (b) TEN PERCENT SHAREHOLDERS. No Ten Percent Shareholder shall be eligible for the grant of an Incentive Stock Option unless the exercise price of such Option is at least one hundred ten percent (110%) of the Fair Market Value of the Common Stock at the date of grant and the Option is not exercisable after the expiration of five (5) years from the date of grant. Prior to the Listing Date, no Ten Percent Shareholder shall be eligible for the grant of a Nonstatutory Stock Option unless the exercise price of such Option is at least one hundred ten percent (110%) of the Fair Market Value of the Common Stock at the date of grant. Prior to the Listing Date, no Ten Percent Shareholder shall be eligible for a restricted stock award unless the purchase price of the restricted stock is at least one hundred percent (100%) of the Fair Market Value of the Common Stock at the date of grant. (c) SECTION 162(m) LIMITATION. Subject to the provisions of Section 11 relating to adjustments upon changes in stock, no employee shall be eligible to be granted Options covering more than seven hundred fifty thousand (750,000) shares of the Common Stock during any calendar year. This subsection 5(c) shall not apply prior to the Listing Date and, following the Listing Date, this subsection 5(c) shall not apply until (i) the earliest of: (1) the first material modification of the Plan (including any increase in the number of shares reserved for issuance under the Plan in accordance with Section 4); (2) the issuance of all of the shares of Common Stock reserved for issuance under the Plan; (3) the expiration of the Plan; or (4) the first meeting of shareholders at which Directors of the Company are to be elected that occurs after the close of the third calendar year following the calendar year in which occurred the first registration of an equity security under Section 12 of the Exchange Act; or (ii) such other date required by Section 162(m) of the Code and the rules and regulations promulgated thereunder. 6 7 6. OPTION PROVISIONS. Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. All Options shall be separately designated Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and a separate certificate or certificates will be issued for shares purchased on exercise of each type of Option. The provisions of separate Options need not be identical, but each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions: (a) TERM. Subject to the provisions of subsection 5(b) regarding Ten Percent Shareholders, no Option shall be exercisable after the expiration of ten (10) years from the date it was granted. (b) EXERCISE PRICE OF AN INCENTIVE STOCK OPTION. Subject to the provisions of subsection 5(b) regarding Ten Percent Shareholders, the exercise price of each Incentive Stock Option shall be not less than one hundred percent (100%) of the Fair Market Value of the stock subject to the Option on the date the Option is granted. Notwithstanding the foregoing, an Incentive Stock Option may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code. (c) EXERCISE PRICE OF A NONSTATUTORY STOCK OPTION. Subject to the provisions of subsection 5(b) regarding Ten Percent Shareholders, the exercise price of each Nonstatutory Stock Option granted prior to the Listing Date shall be not less than one hundred percent (100%) of the Fair Market Value of the stock subject to the Option on the date the Option is granted. The exercise price of each Nonstatutory Stock Option granted on or after the Listing Date shall be not less than one hundred percent (100%) of the Fair Market Value of the stock subject to the Option on the date the Option is granted. Notwithstanding the foregoing, a Nonstatutory Stock Option may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code. (d) CONSIDERATION. The purchase price of stock acquired pursuant to an Option shall be paid, to the extent permitted by applicable statutes and regulations, either (i) in cash at the time the Option is exercised or (ii) at the discretion of the Board at the time of the grant of the Option (or subsequently in the case of a Nonstatutory Stock Option) by (1) delivery to the Company of other Common Stock, (2) according to a deferred payment or other arrangement (which may include, without limiting the generality of the foregoing, the use of other Common Stock) with the Participant or (3) in any other form of legal consideration that may be acceptable to the Board; provided, however, that at any time that the Company is incorporated in Delaware, payment of the Common Stock's "par value," as defined in the Delaware General Corporation Law, shall not be made by deferred payment. In the case of any deferred payment arrangement, interest shall be compounded at least annually and shall be charged at the minimum rate of interest necessary to avoid the treatment as 7 8 interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement. (e) TRANSFERABILITY OF AN INCENTIVE STOCK OPTION. An Incentive Stock Option shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Optionholder only by the Optionholder. Notwithstanding the foregoing provisions of this subsection 6(e), the Optionholder may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionholder, shall thereafter be entitled to exercise the Option. (f) TRANSFERABILITY OF A NONSTATUTORY STOCK OPTION. A Nonstatutory Stock Option granted prior to the Listing Date shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Optionholder only by the Optionholder. A Nonstatutory Stock Option granted on or after the Listing Date shall be transferable to the extent provided in the Option Agreement. If the Nonstatutory Stock Option does not provide for transferability, then the Nonstatutory Stock Option shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Optionholder only by the Optionholder. Notwithstanding the foregoing provisions of this subsection 6(f), the Optionholder may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionholder, shall thereafter be entitled to exercise the Option. (g) VESTING GENERALLY. The total number of shares of Common Stock subject to an Option may, but need not, vest and therefore become exercisable in periodic installments which may, but need not, be equal. The Option may be subject to such other terms and conditions on the time or times when it may be exercised (which may be based on performance or other criteria) as the Board may deem appropriate. The vesting provisions of individual Options may vary. The provisions of this subsection 6(g) are subject to any Option provisions governing the minimum number of shares as to which an Option may be exercised. (h) MINIMUM VESTING PRIOR TO THE LISTING DATE. Notwithstanding the foregoing subsection 6(g), Options granted prior to the Listing Date shall provide for vesting of the total number of shares at a rate of at least twenty percent (20%) per year over five (5) years from the date the Option was granted, subject to reasonable conditions such as continued employment. However, in the case of such Options granted to Officers, Directors or Consultants, the Option may become fully exercisable, subject to reasonable conditions such as continued employment, at any time or during any period established by the Company; for example, the vesting provision of the Option may provide for vesting of less than twenty percent (20%) per year of the total number of shares subject to the Option. (i) TERMINATION OF CONTINUOUS SERVICE. In the event an Optionholder's Continuous Service terminates (other than upon the Optionholder's death or Disability), the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise it as of the date of termination) but only within such period of time ending on the earlier of (i) the date three (3) months following the termination of the Optionholder's Continuous Service (or such longer or shorter period specified in the Option Agreement, which, for Options granted 8 9 prior to the Listing Date, shall not be less than thirty (30) days, unless such termination is for cause), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionholder does not exercise his or her Option within the time specified in the Option Agreement, the Option shall terminate. (j) EXTENSION OF TERMINATION DATE. An Optionholder's Option Agreement may also provide that if the exercise of the Option following the termination of the Optionholder's Continuous Service (other than upon the Optionholder's death or Disability) would be prohibited at any time solely because the issuance of shares would violate the registration requirements under the Securities Act, then the Option shall terminate on the earlier of (i) the expiration of the term of the Option set forth in subsection 6(a) or (ii) the expiration of a period of three (3) months after the termination of the Optionholder's Continuous Service during which the exercise of the Option would not be in violation of such registration requirements. (k) DISABILITY OF OPTIONHOLDER. In the event an Optionholder's Continuous Service terminates as a result of the Optionholder's Disability, the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise it as of the date of termination), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination (or such longer or shorter period specified in the Option Agreement, which, for Options granted prior to the Listing Date, shall not be less than six (6) months) or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionholder does not exercise his or her Option within the time specified herein, the Option shall terminate. (l) DEATH OF OPTIONHOLDER. In the event (i) an Optionholder's Continuous Service terminates as a result of the Optionholder's death or (ii) the Optionholder dies within the period (if any) specified in the Option Agreement after the termination of the Optionholder's Continuous Service for a reason other than death, then the Option may be exercised (to the extent the Optionholder was entitled to exercise the Option as of the date of death) by the Optionholder's estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the option upon the Optionholder's death pursuant to subsection 6(e) or 6(f), but only within the period ending on the earlier of (1) the date eighteen (18) months following the date of death (or such longer or shorter period specified in the Option Agreement, which, for Options granted prior to the Listing Date, shall not be less than six (6) months) or (2) the expiration of the term of such Option as set forth in the Option Agreement. If, after death, the Option is not exercised within the time specified herein, the Option shall terminate. (m) EARLY EXERCISE. The Option may, but need not, include a provision whereby the Optionholder may elect at any time before the Optionholder's Continuous Service terminates to exercise the Option as to any part or all of the shares subject to the Option prior to the full vesting of the Option. Subject to the "Repurchase Limitation" in subsection 10(h), any unvested shares so purchased may be subject to an unvested share repurchase option in favor of the Company or to any other restriction the Board determines to be appropriate. 9 10 (n) RIGHT OF REPURCHASE. Subject to the "Repurchase Limitation" in subsection 10(h), the Option may, but need not, include a provision whereby the Company may elect, prior to the Listing Date, to repurchase all or any part of the vested shares acquired by the Optionholder pursuant to the exercise of the Option. (o) RIGHT OF FIRST REFUSAL. The Option may, but need not, include a provision whereby the Company may elect, prior to the Listing Date, to exercise a right of first refusal following receipt of notice from the Optionholder of the intent to transfer all or any part of the shares exercised pursuant to the Option. Except as expressly provided in this subsection 6(o), such right of first refusal shall otherwise comply with any applicable provisions of the Bylaws of the Company. (p) RE-LOAD OPTIONS. Without in any way limiting the authority of the Board to make or not to make grants of Options hereunder, the Board shall have the authority (but not an obligation) to include as part of any Option Agreement a provision entitling the Optionholder to a further Option (a "Re-Load Option") in the event the Optionholder exercises the Option evidenced by the Option Agreement, in whole or in part, by surrendering other shares of Common Stock in accordance with this Plan and the terms and conditions of the Option Agreement. Any such Re-Load Option shall (i) provide for a number of shares equal to the number of shares surrendered as part or all of the exercise price of such Option; (ii) have an expiration date which is the same as the expiration date of the Option the exercise of which gave rise to such Re-Load Option; and (iii) have an exercise price which is equal to one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Re-Load Option on the date of exercise of the original Option. Notwithstanding the foregoing, a Re-Load Option shall be subject to the same exercise price and term provisions heretofore described for Options under the Plan. Any such Re-Load Option may be an Incentive Stock Option or a Nonstatutory Stock Option, as the Board may designate at the time of the grant of the original Option; provided, however, that the designation of any Re-Load Option as an Incentive Stock Option shall be subject to the one hundred thousand dollars ($100,000) annual limitation on exercisability of Incentive Stock Options described in subsection 10(d) and in Section 422(d) of the Code. There shall be no Re-Load Options on a Re-Load Option. Any such Re-Load Option shall be subject to the availability of sufficient shares under subsection 4(a) and the "Section 162(m) Limitation" on the grants of Options under subsection 5(c) and shall be subject to such other terms and conditions as the Board may determine which are not inconsistent with the express provisions of the Plan regarding the terms of Options. 7. PROVISIONS OF STOCK AWARDS OTHER THAN OPTIONS. (a) STOCK BONUS AWARDS. Each stock bonus agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The terms and conditions of stock bonus agreements may change from time to time, and the terms and conditions of separate stock bonus agreements need not be identical, but each stock bonus agreement shall include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions: 10 11 (i) CONSIDERATION. A stock bonus shall be awarded in consideration for past services actually rendered to the Company for its benefit. (ii) VESTING. Subject to the "Repurchase Limitation" in subsection 10(h), shares of Common Stock awarded under the stock bonus agreement may, but need not, be subject to a share repurchase option in favor of the Company in accordance with a vesting schedule to be determined by the Board. (iii) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. Subject to the "Repurchase Limitation" in subsection 10(h), in the event a Participant's Continuous Service terminates, the Company may reacquire any or all of the shares of Common Stock held by the Participant which have not vested as of the date of termination under the terms of the stock bonus agreement. (iv) TRANSFERABILITY. For a stock bonus award made before the Listing Date, rights to acquire shares under the stock bonus agreement shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Participant only by the Participant. For a stock bonus award made on or after the Listing Date, rights to acquire shares under the stock bonus agreement shall be transferable by the Participant only upon such terms and conditions as are set forth in the stock bonus agreement, as the Board shall determine in its discretion, so long as stock awarded under the stock bonus agreement remains subject to the terms of the stock bonus agreement. (b) RESTRICTED STOCK AWARDS. Each restricted stock purchase agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The terms and conditions of the restricted stock purchase agreements may change from time to time, and the terms and conditions of separate restricted stock purchase agreements need not be identical, but each restricted stock purchase agreement shall include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions: (i) PURCHASE PRICE. Subject to the provisions of subsection 5(b) regarding Ten Percent Shareholders, the purchase price under each restricted stock purchase agreement shall be such amount as the Board shall determine and designate in such restricted stock purchase agreement. For restricted stock awards made prior to the Listing Date, the purchase price shall not be less than one hundred percent (100%) of the stock's Fair Market Value on the date such award is made or at the time the purchase is consummated. For restricted stock awards made on or after the Listing Date, the purchase price shall not be less than one hundred percent (100%) of the stock's Fair Market Value on the date such award is made or at the time the purchase is consummated. (ii) CONSIDERATION. The purchase price of stock acquired pursuant to the restricted stock purchase agreement shall be paid either: (i) in cash at the time of purchase; (ii) at the discretion of the Board, according to a deferred payment or other arrangement with the Participant; or (iii) in any other form of legal consideration that may be acceptable to the Board in its discretion; provided, however, that at any time that the Company is incorporated in 11 12 Delaware, then payment of the Common Stock's "par value," as defined in the Delaware General Corporation Law, shall not be made by deferred payment. (iii) VESTING. Subject to the "Repurchase Limitation" in subsection 10(h), shares of Common Stock acquired under the restricted stock purchase agreement may, but need not, be subject to a share repurchase option in favor of the Company in accordance with a vesting schedule to be determined by the Board. (iv) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. Subject to the "Repurchase Limitation" in subsection 10(h), in the event a Participant's Continuous Service terminates, the Company may repurchase or otherwise reacquire any or all of the shares of Common Stock held by the Participant which have not vested as of the date of termination under the terms of the restricted stock purchase agreement. (v) TRANSFERABILITY. For a restricted stock award made before the Listing Date, rights to acquire shares under the restricted stock purchase agreement shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Participant only by the Participant. For a restricted stock award made on or after the Listing Date, rights to acquire shares under the restricted stock purchase agreement shall be transferable by the Participant only upon such terms and conditions as are set forth in the restricted stock purchase agreement, as the Board shall determine in its discretion, so long as stock awarded under the restricted stock purchase agreement remains subject to the terms of the restricted stock purchase agreement. 8. COVENANTS OF THE COMPANY. (a) AVAILABILITY OF SHARES. During the terms of the Stock Awards, the Company shall keep available at all times the number of shares of Common Stock required to satisfy such Stock Awards. (b) SECURITIES LAW COMPLIANCE. The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to grant Stock Awards and to issue and sell shares of Common Stock upon exercise of the Stock Awards; provided, however, that this undertaking shall not require the Company to register under the Securities Act the Plan, any Stock Award or any stock issued or issuable pursuant to any such Stock Award. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock upon exercise of such Stock Awards unless and until such authority is obtained. 9. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of stock pursuant to Stock Awards shall constitute general funds of the Company. 12 13 10. MISCELLANEOUS. (a) ACCELERATION OF EXERCISABILITY AND VESTING. The Board shall have the power to accelerate the time at which a Stock Award may first be exercised or the time during which a Stock Award or any part thereof will vest in accordance with the Plan, notwithstanding the provisions in the Stock Award stating the time at which it may first be exercised or the time during which it will vest. (b) SHAREHOLDER RIGHTS. No Participant shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such Stock Award unless and until such Participant has satisfied all requirements for exercise of the Stock Award pursuant to its terms. (c) NO EMPLOYMENT OR OTHER SERVICE RIGHTS. Nothing in the Plan or any instrument executed or Stock Award granted pursuant thereto shall confer upon any Participant or other holder of Stock Awards any right to continue to serve the Company or an Affiliate in the capacity in effect at the time the Stock Award was granted or shall affect the right of the Company or an Affiliate to terminate (i) the employment of an Employee with or without notice and with or without cause, (ii) the service of a Consultant pursuant to the terms of such Consultant's agreement with the Company or an Affiliate or (iii) the service of a Director pursuant to the Bylaws of the Company or an Affiliate, and any applicable provisions of the corporate law of the state in which the Company or the Affiliate is incorporated, as the case may be. (d) INCENTIVE STOCK OPTION $100,000 LIMITATION. To the extent that the aggregate Fair Market Value (determined at the time of grant) of stock with respect to which Incentive Stock Options are exercisable for the first time by any Optionholder during any calendar year (under all plans of the Company and its Affiliates) exceeds one hundred thousand dollars ($100,000), the Options or portions thereof which exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options. (e) INVESTMENT ASSURANCES. The Company may require a Participant, as a condition of exercising or acquiring stock under any Stock Award, (i) to give written assurances satisfactory to the Company as to the Participant's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Stock Award; and (ii) to give written assurances satisfactory to the Company stating that the Participant is acquiring the stock subject to the Stock Award for the Participant's own account and not with any present intention of selling or otherwise distributing the stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (iii) the issuance of the shares upon the exercise or acquisition of stock under the Stock Award has been registered under a then currently effective registration statement under the Securities Act or (iv) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, 13 14 place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the stock. (f) WITHHOLDING OBLIGATIONS. To the extent provided by the terms of a Stock Award Agreement, the Participant may satisfy any federal, state or local tax withholding obligation relating to the exercise or acquisition of stock under a Stock Award by any of the following means (in addition to the Company's right to withhold from any compensation paid to the Participant by the Company) or by a combination of such means: (i) tendering a cash payment; (ii) authorizing the Company to withhold shares from the shares of the Common Stock otherwise issuable to the participant as a result of the exercise or acquisition of stock under the Stock Award; or (iii) delivering to the Company owned and unencumbered shares of the Common Stock. (g) INFORMATION OBLIGATION. Prior to the Listing Date, to the extent required by Section 260.140.46 of Title 10 of the California Code of Regulations, the Company shall deliver financial statements to Participants at least annually. This subsection 10(g) shall not apply to key Employees whose duties in connection with the Company assure them access to equivalent information. (h) REPURCHASE LIMITATION. The terms of any repurchase option shall be specified in the Stock Award and may be either at Fair Market Value at the time of repurchase or at not less than the original purchase price. To the extent required by Section 260.140.41 and Section 260.140.42 of Title 10 of the California Code of Regulations, any repurchase option contained in a Stock Award granted prior to the Listing Date shall be upon the terms described below: (i) FAIR MARKET VALUE. If the repurchase option gives the Company the right to repurchase the shares upon termination of employment at not less than the Fair Market Value of the shares to be purchased on the date of termination of Continuous Service, then (i) the right to repurchase shall be exercised for cash or cancellation of purchase money indebtedness for the shares within ninety (90) days of termination of Continuous Service (or in the case of shares issued upon exercise of Stock Awards after such date of termination, within ninety (90) days after the date of the exercise) or such longer period as may be agreed to by the Company and the Participant (for example, for purposes of satisfying the requirements of Section 1202(c)(3) of the Code regarding "qualified small business stock") and (ii) the right terminates when the shares become publicly traded. (ii) ORIGINAL PURCHASE PRICE. If the repurchase option gives the Company the right to repurchase the shares upon termination of Continuous Service at the original purchase price, then (i) the right to repurchase at the original purchase price shall lapse at the rate of at least twenty percent (20%) of the shares per year over five (5) years from the date the Stock Award is granted (without respect to the date the Stock Award was exercised or became exercisable) and (ii) the right to repurchase shall be exercised for cash or cancellation of purchase money indebtedness for the shares within ninety (90) days of termination of Continuous Service (or in the case of shares issued upon exercise of Options after such date of termination, within ninety (90) days after the date of the exercise) or such longer period as may 14 15 be agreed to by the Company and the Participant (for example, for purposes of satisfying the requirements of Section 1202(c)(3) of the Code regarding "qualified small business stock"). 11. ADJUSTMENTS UPON CHANGES IN STOCK. (a) CAPITALIZATION ADJUSTMENTS. If any change is made in the stock subject to the Plan, or subject to any Stock Award, without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan will be appropriately adjusted in the class(es) and maximum number of securities subject to the Plan pursuant to subsection 4(a) and the maximum number of securities subject to award to any person pursuant to subsection 5(c), and the outstanding Stock Awards will be appropriately adjusted in the class(es) and number of securities and price per share of stock subject to such outstanding Stock Awards. The Board, the determination of which shall be final, binding and conclusive, shall make such adjustments. (The conversion of any convertible securities of the Company shall not be treated as a transaction "without receipt of consideration" by the Company.) (b) CHANGE IN CONTROL--DISSOLUTION OR LIQUIDATION. In the event of a dissolution or liquidation of the Company, then such Stock Awards shall be terminated if not exercised (if applicable) prior to such event. (c) CHANGE IN CONTROL--ASSET SALE, MERGER, CONSOLIDATION OR REVERSE MERGER. In the event of (i) a sale of fifty percent (50%) or more of the assets of the Company, (ii) a merger or consolidation in which the Company is not the surviving corporation, or (iii) a reverse merger in which the Company is the surviving corporation but the shares of Common Stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise, then any surviving corporation or acquiring corporation shall assume any Stock Awards outstanding under the Plan or shall substitute similar stock awards for those outstanding under the Plan (including an award to acquire the same consideration paid to the shareholders in the transaction described in this subsection 11(c)). In the event any surviving corporation or acquiring corporation refuses to assume such Stock Awards or to substitute similar stock awards for those outstanding under the Plan, then with respect to Stock Awards held by Participants whose Continuous Service has not terminated, the vesting of such Stock Awards (and, if applicable, the time during which such Stock Awards may be exercised) shall be accelerated in full, and the Stock Awards shall terminate if not exercised (if applicable) at or prior to such event. With respect to any other Stock Awards outstanding under the Plan, such Stock Awards shall terminate if not exercised (if applicable) prior to such event. (d) CHANGE IN CONTROL--SECURITIES ACQUISITION. After the Listing Date, in the event of an acquisition by any person, entity or group within the meaning of Section 13(d) or 14(d) of the Exchange Act, or any comparable successor provisions (excluding any employee benefit plan, or related trust, sponsored or maintained by the Company or an Affiliate) of the beneficial 15 16 ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable successor rule) of securities of the Company representing at least fifty percent (50%) of the combined voting power entitled to vote in the election of directors, then any surviving corporation or acquiring corporation shall assume any Stock Awards outstanding under the Plan or shall substitute similar stock awards for those outstanding under the Plan. In the event any surviving or acquiring corporation refuses to assume such Stock Awards or to substitute similar stock awards for those outstanding under the Plan, then with respect to Stock Awards held by Participants whose Continuous Service has not terminated, the vesting of such Stock Awards (and, if applicable, the time during which such Stock Awards may be exercised) shall be accelerated in full, and the Stock Awards shall terminate if not exercised (if applicable) at or prior to such event. With respect to any other Stock Awards outstanding under the Plan, such Stock Awards shall terminate if not exercised (if applicable) prior to such event. 12. AMENDMENT OF THE PLAN AND STOCK AWARDS. (a) AMENDMENT OF PLAN. The Board at any time, and from time to time, may amend the Plan. However, except as provided in Section 11 relating to adjustments upon changes in stock, no amendment shall be effective unless approved by the shareholders of the Company to the extent shareholder approval is necessary to satisfy the requirements of Section 422 of the Code, Rule 16b-3 or any Nasdaq or securities exchange listing requirements. (b) SHAREHOLDER APPROVAL. The Board may, in its sole discretion, submit any other amendment to the Plan for shareholder approval, including, but not limited to, amendments to the Plan intended to satisfy the requirements of Section 162(m) of the Code and the regulations thereunder regarding the exclusion of performance-based compensation from the limit on corporate deductibility of compensation paid to certain executive officers. (c) CONTEMPLATED AMENDMENTS. It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide eligible Employees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock Options granted under it into compliance therewith. (d) NO IMPAIRMENT OF RIGHTS. Rights under any Stock Award granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (i) the Company requests the consent of the Participant and (ii) the Participant consents in writing. (e) AMENDMENT OF STOCK AWARDS. The Board at any time, and from time to time, may amend the terms of any one or more Stock Awards; provided, however, that the rights under any Stock Award shall not be impaired by any such amendment unless (i) the Company requests the consent of the Participant and (ii) the Participant consents in writing. 13. TERMINATION OR SUSPENSION OF THE PLAN. (a) PLAN TERM. The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on the day before the tenth (10th) anniversary of the 16 17 date the Plan is adopted by the Board or approved by the shareholders of the Company, whichever is earlier. No Stock Awards may be granted under the Plan while the Plan is suspended or after it is terminated. (b) NO IMPAIRMENT OF RIGHTS. Suspension or termination of the Plan shall not impair rights and obligations under any Stock Award granted while the Plan is in effect except with the written consent of the Participant. 14. EFFECTIVE DATE OF PLAN. The Plan shall become effective as determined by the Board, but no Stock Award shall be exercised (or, in the case of a stock bonus, shall be granted) unless and until the Plan has been approved by the shareholders of the Company, which approval shall be within twelve (12) months before or after the date the Plan is adopted by the Board. 17 EX-10.4 6 SERIES D PREFERRED STOCK PURCHASE AGREEMENT 1 EXHIBIT 10.4 LANDA MANAGEMENT SYSTEMS CORPORATION SERIES D PREFERRED STOCK PURCHASE AGREEMENT FEBRUARY 27, 1998 2 TABLE OF CONTENTS
PAGE SECTION 1. AGREEMENT TO SELL AND PURCHASE ................................ 2 1.1 Authorization of Shares ....................................... 2 1.2 Sale and Purchase ............................................. 2 SECTION 2. CLOSING, DELIVERY AND PAYMENT ................................. 2 2.1 Closing ....................................................... 2 2.2 Delivery ...................................................... 2 2.3 Contemplated Transfers ........................................ 2 SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE LANGS ... 3 3.1 Organization, Good Standing and Qualification ................. 3 3.2 Capitalization; Voting Rights ................................. 3 3.3 Authorization; Binding Obligations ............................ 4 3.4 Financial Statements .......................................... 4 3.5 Liabilities ................................................... 4 3.6 Agreements; Action ............................................ 4 3.7 Obligations to Related Parties ................................ 5 3.8 Changes ....................................................... 5 3.9 Title to Properties and Assets; Liens, etc. ................... 6 3.10 Patents and Trademarks ........................................ 7 3.11 Compliance with Other Instruments ............................. 8 3.12 Litigation .................................................... 8 3.13 Tax Returns and Payments ...................................... 9 3.14 Employees ..................................................... 9 3.15 Proprietary Information and Inventions Agreements ............. 9 3.16 Obligations of Management; Stipulated Activities .............. 9 3.17 Registration Rights ........................................... 10 3.18 Compliance with Laws; Permits ................................. 10 3.19 Environmental and Safety Laws ................................. 10 3.20 Offering Valid ................................................ 10 3.21 Full Disclosure ............................................... 10
i. 3 TABLE OF CONTENTS (CONTINUED)
PAGE 3.22 Minute Books .................................................. 11 3.23 Section 83(b) Elections ....................................... 11 3.24 Insurance ..................................................... 11 SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS ............ 11 SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS .............. 11 5.1 Requisite Power and Authority ................................. 12 5.2 Investment Representations .................................... 12 5.3 Transfer Restrictions ......................................... 13 SECTION 6. CONDITIONS TO CLOSING ......................................... 13 6.1 Conditions to Purchasers' Obligations at the Closing .......... 13 6.2 Conditions to Obligations of the Company ...................... 15 SECTION 7. SHAREHOLDER RELEASES; SURVIVAL; INDEMNIFICATION ............... 16 7.1 Shareholder Release ........................................... 16 7.2 Survival; Remedies ............................................ 16 7.3 Indemnification of Purchaser .................................. 16 7.4 Indemnification by Purchasers ................................. 17 7.5 Notice of Claim ............................................... 17 SECTION 8. MISCELLANEOUS ................................................. 17 8.1 Governing Law ................................................. 17 8.2 Successors and Assigns ........................................ 17 8.3 Entire Agreement .............................................. 17 8.4 Severability .................................................. 17 8.5 Amendment and Waiver .......................................... 18 8.6 Delays or Omissions ........................................... 18 8.7 Notices ....................................................... 18 8.8 Expenses ...................................................... 18 8.9 Attorneys' Fees ............................................... 18 8.10 Titles and Subtitles .......................................... 19
ii. 4 TABLE OF CONTENTS (CONTINUED)
PAGE 8.11 Counterparts .................................................. 19 8.12 Broker's Fees ................................................. 19 8.13 Exculpation Among Purchasers .................................. 19 8.14 Pronouns ...................................................... 19 8.15 Broker's Fees ................................................. 19 8.16 California Corporate Securities Law ........................... 19
iii. 5 LANDA MANAGEMENT SYSTEMS CORPORATION SERIES D PREFERRED STOCK PURCHASE AGREEMENT THIS SERIES D PREFERRED STOCK PURCHASE AGREEMENT (the "Agreement") is entered into as of February 27, 1998, by and among LANDA MANAGEMENT SYSTEMS CORPORATION, a California corporation (the "Company"), and severally and not jointly, Brack Davis ("Davis"), Hugh Curnutt ("Curnutt"), Westminster Health Care Limited ("Westminster"), and Gilbert Lang, Beulah Lang, Beulah J.T. Lang (the "Langs"; Davis, Curnutt, Westminster and the Langs are sometimes referred to collectively as the "Shareholders" and each individually as a "Shareholder"), and each of those persons and entities, severally and not jointly, whose names are set forth on the Schedule of Purchasers attached hereto as Exhibit A-1 (which persons and entities are hereinafter collectively referred to as "Purchasers" and each individually as a "Purchaser"). RECITALS WHEREAS, the Company and the Shareholders have entered into an Exchange Agreement dated as of the date hereof (the "Exchange Agreement") pursuant to which (i) Davis and Curnutt have exchanged 21,300 shares and 20,000 shares, respectively, of Series A Preferred Stock of the Company held by each of them for an equal number of shares of Series D Preferred Stock of the Company ("Series D Preferred"), (ii) Westminster has exchanged 115,446 shares of Series B Preferred Stock of the Company and 450,481 shares of Series C Preferred Stock of the Company held by it for an aggregate of 1,125,000 shares of Series D Preferred, and (iii) the Langs exchanged an aggregate of 178,332.5 shares of Common Stock of the Company held by them for an aggregate of 17,833 shares of Series D Preferred (the shares of Series D Preferred issued to each of the Shareholders pursuant to the Exchange Agreement are referred to collectively as the "Exchange Series D Shares"); WHEREAS, it is a condition to the willingness of Westminster to approve the amendment to the Company's Articles of Incorporation contemplated by this Agreement and the sale and delivery of the Exchange Series D Shares held by it hereunder that the Company issue and deliver to Westminster warrants to purchase 250,000 shares of Common Stock of the Company (the "Westminster Warrant"); WHEREAS, the Purchasers desire to purchase from the Shareholders all of the Exchange Series D Shares held by each of them on the terms and conditions set forth herein; WHEREAS, each of the Shareholders desires to sell the Exchange Series D Shares held by it to the Purchasers on the terms and conditions set forth herein; WHEREAS, the Purchasers desire to purchase directly from the Company an aggregate of 5,615,867 shares of Series D Preferred (the "Shares") on the terms and conditions set forth herein; and; WHEREAS, the Company desires to issue and sell the Shares to the Purchasers on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises hereinafter set forth, the parties hereto agree as follows: 1. 6 SECTION 1. AGREEMENT TO SELL AND PURCHASE. 1.1 AUTHORIZATION OF SHARES. On or prior to the Closing (as defined in Section 2 below), (a) (i) the Exchange Series D Shares shall have been issued to each of the Shareholders pursuant to the Exchange Agreement and (ii) each Shareholder, to the extent necessary, shall have authorized the sale to the Purchasers of the Exchange Series D Shares held by it, and (b) the Company shall have authorized (i) the sale and issuance to Purchasers of the Shares and (ii) the issuance of such shares of Common Stock to be issued upon conversion of the Shares (the "Conversion Shares"). The Shares, the Exchange Series D Shares and the Conversion Shares shall have the rights, preferences, privileges and restrictions set forth in the Amended and Restated Articles of Incorporation of the Company, as amended, in the form attached hereto as Exhibit B (the "Restated Articles"). 1.2 SALE AND PURCHASE. Subject to the terms and conditions hereof, at the Closing (as hereinafter defined) (a) the Company hereby agrees to issue and sell to each Purchaser, severally and not jointly, and each Purchaser agrees to purchase from the Company, severally and not jointly, the number of Shares set forth opposite such Purchaser's name on Exhibit A, and (b) each Shareholder hereby agrees to sell to each Purchaser, severally and not jointly, and each Purchaser agrees to Purchase from each Shareholder, severally and not jointly, the number of Exchange Series D Shares set forth opposite such Purchaser's name on Exhibit A, in each case at a purchase price of one dollar and twenty cents ($1.20) per share. SECTION 2. CLOSING, DELIVERY AND PAYMENT. 2.1 CLOSING. The closing of the sale and purchase of the Shares and the Exchange Series D Shares under this Agreement (the "Closing") shall take place at 5:00 p.m. on the date hereof, at the offices of Cooley Godward LLP, 3000 Sand Hill Road, Building 3, Suite 230, Menlo Park, California 94025, or at such other time or place as the Company and Purchasers may mutually agree (such date is hereinafter referred to as the "Closing Date"). 2.2 DELIVERY. At the Closing, subject to the terms and conditions hereof, (a) the Company will deliver to the Purchasers certificates representing the number of Shares to be purchased from the Company at the Closing by each Purchaser, and (b) each Shareholder will deliver to the Purchasers certificates representing the number of Exchange Series D Shares to be purchased from it at the Closing by each Purchaser, against payment of the purchase price therefor by check or wire transfer made payable to the order of the Company or a Shareholder, as applicable, cancellation of indebtedness or any combination of the foregoing. 2.3 CONTEMPLATED TRANSFERS. Notwithstanding anything herein or in the Investor Rights Agreement (as defined below) to the contrary, Bedrock Capital Side-By-Side, L.P. ("Bedrock Side Fund") shall be entitled, at any time or times within one hundred eighty (180) days immediately following the Closing, to transfer to no more than three (3) of its affiliates all, or any lesser number as it deems appropriate, of the Shares and/or Exchange Series D Shares purchased by it hereunder. From and after any such transfer, such transferee shall be deemed a "Purchaser" for all purposes of this Agreement and an "Investor" for all purposes of the Investor Rights Agreement and the Voting Agreement (as each term is defined in Section 3.1 below). 2. 7 SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE LANGS. Except as set forth on a Schedule of Exceptions delivered by the Company and the Langs to the Purchasers at the Closing, the Company and the Langs each hereby represent and warrant to each Purchaser as of the date of this Agreement as follows: 3.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California. The Company has all requisite corporate power and authority to own and operate its properties and assets, to execute and deliver this Agreement, the Investor Rights Agreement in the form attached hereto as Exhibit C (the "Investor Rights Agreement") and the Voting Agreement in the form attached hereto as Exhibit D (the "Voting Agreement"; the Investor Rights Agreement and the Voting Agreement, collectively, the "Related Agreements" and the Agreement and the Related Agreements together, the "Agreements"), to issue and sell the Shares and the Conversion Shares and to carry out the provisions of the Agreements and the Restated Articles and to carry on its business as presently conducted and as presently proposed to be conducted. The Company is duly qualified and is authorized to do business and is in good standing as a foreign corporation in all jurisdictions in which the nature of its activities and of its properties (both owned and leased) makes such qualification necessary, except for those jurisdictions in which failure to do so would not have a material adverse effect on the Company or its business. The Company owns no equity securities of any other corporation, limited partnership or similar entity. The Company is not a participant in any joint venture, partnership or similar arrangement. 3.2 CAPITALIZATION; VOTING RIGHTS. The authorized capital stock of the Company, immediately prior to the Closing, consists of Fifteen Million (15,000,000) shares of Common Stock, no par value share, (a) 1,025,674.76 shares of which are issued and outstanding, (b) 1,047,848 shares of which are reserved for future issuance to key employees pursuant to the Company's 1984 Stock Option Plan, as amended, and the 1995 Stock Option Plan (collectively, the "Stock Option Plans"), and (c) Eight Million (8,000,000) shares of Preferred Stock, no par value, (i) 41,300 of which are designated Series A Preferred Stock, none of which are issued and outstanding, (ii) 115,446 of which are designated as Series B Preferred Stock, none of which are issued and outstanding, (iii) 450,481 of which are designated as Series C Preferred Stock, none of which are issued and outstanding, and (iv) 6,800,000 of which are designated Series D Preferred Stock, 1,184,133 of which are issued and outstanding. All issued and outstanding shares of the Company's Common Stock and Preferred Stock (A) have been duly authorized and validly issued to the persons listed an Exhibit D hereto, (B) are fully paid and nonassessable, and (C) were issued in compliance with all applicable state, federal and foreign laws concerning the issuance of securities. The rights, preferences, privileges and restrictions of the Shares and the Exchange Series D Shares are as stated in the Restated Articles. Each series of Preferred Stock is convertible into Common Stock on a one-for-one basis. The Conversion Shares have been duly and validly reserved for issuance. Other than as set forth on Exhibit E, there are no outstanding options, warrants, rights (including conversion or preemptive rights and rights of first refusal), proxy or shareholder agreements, or agreements of any kind for the purchase or acquisition from the Company of any of its securities. When issued in compliance with the provisions of this Agreement and the Restated Articles, the Shares and the Conversion Shares will be validly issued, fully paid and nonassessable, and will be free of any liens or encumbrances; provided, however, that the Shares, the Exchange Series D Shares and the Conversion Shares may be subject to restrictions on transfer under state and/or federal securities laws as set forth herein or as otherwise required by such laws at the time a transfer is proposed. 3. 8 3.3 AUTHORIZATION; BINDING OBLIGATIONS. All corporate action on the part of the Company, its officers, directors and shareholders necessary for the authorization of the Exchange Agreement, the Agreement and each Related Agreement, the performance of all obligations of the Company hereunder and thereunder at the Closing and the authorization, sale, issuance and delivery of the Shares pursuant hereto and the Conversion Shares pursuant to the Restated Articles has been taken or will be taken prior to the Closing. The Exchange Agreement is a valid and binding obligation of the Company, and each Agreement, when executed and delivered, will be a valid and binding obligation of the Company enforceable in accordance with its terms, except in each case (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights; (b) general principles of equity that restrict the availability of equitable remedies; and (c) to the extent that the enforceability of the indemnification provisions in Sections 2.9 and 2.15 of the Investor Rights Agreement may be limited by applicable laws. The sale of the Shares and the subsequent conversion of the Shares and Exchange Series D Shares into Conversion Shares are not and will not be subject to any preemptive rights or rights of first refusal that have not been properly waived or complied with. 3.4 FINANCIAL STATEMENTS. Attached hereto as Exhibit F are copies of the Company's (a) audited balance sheets as of December 31, 1996 and September 30, 1997 and audited statement of income and cash flows for the nine months ending September 30, 1997, and (b) its unaudited balance sheet as at December 31, 1997 (the "Statement Date") (collectively, the "Financial Statements"). The Financial Statements, together with the notes thereto, are complete and correct in all material respects, have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated, except as disclosed therein, and present fairly the financial condition and position of the Company as of September 30, 1997 and the Statement Date; provided, however, that the unaudited financial statements are subject to normal recurring year-end audit adjustments (which are not expected to be material), and do not contain all footnotes required under generally accepted accounting principles. 3.5 LIABILITIES. The Company has no material liabilities and, to the best knowledge of the Company and the Langs, there are no material contingent liabilities not disclosed in the Financial Statements, except current liabilities incurred in the ordinary course of business subsequent to the Statement Date which have not been, either in any individual case or in the aggregate, materially adverse to the Company. The Company has not assumed, by contract, agreement, operation or law or otherwise, any material obligations of Landacorp UK Ltd. 3.6 AGREEMENTS; ACTION. (a) Except for agreements explicitly contemplated hereby and described on the Schedule of Exceptions, and agreements between the Company and its employees with respect to the sale of the Company's Common Stock, there are no agreements, understandings or proposed transactions between the Company and any of its officers, directors, affiliates or any affiliate thereof. (b) There are no agreements, understandings, instruments, contracts, proposed transactions, judgments, orders, writs or decrees to which the Company is a party or, to the knowledge of the Company or the Langs, by which the Company is bound which may involve (i) obligations (contingent or otherwise) of, or payments to, the Company in excess of $15,000 (other than obligations of, or payments to, the Company arising from purchase or sale agreements entered into in the ordinary course of business), or (ii) the license of any patent, copyright, trade secret or other proprietary right to or from the Company (other than licenses arising from the purchase of "off the shelf" or other standard products), or (iii) 4. 9 provisions restricting or affecting the development, manufacture or distribution of the Company's products or services, or (iv) indemnification by the Company with respect to infringements of proprietary rights (other than indemnification obligations arising from purchase or sale agreements entered into in the ordinary course of business). (c) The Company has not (i) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or series of its capital stock, (ii) incurred any indebtedness for money borrowed or any other liabilities (other than with respect to dividend obligations, distributions, indebtedness and other obligations incurred in the ordinary course of business or as disclosed in the Financial Statements) individually in excess of $15,000 or, in the case of indebtedness and/or liabilities individually less than $15,000, or in excess of $25,000 in the aggregate, (iii) made any loans or advances to any person, other than ordinary advances for travel expenses, or (iv) sold, exchanged or otherwise disposed of any of its assets or rights, other than the sale of its inventory in the ordinary course of business. (d) For the purposes of subsections (b) and (c) above, all indebtedness, liabilities, agreements, understandings, instruments, contracts and proposed transactions involving the same person or entity (including persons or entities the Company has reason to believe are affiliated therewith) shall be aggregated for the purpose of meeting the individual minimum dollar amounts of such subsections. (e) The Company has not engaged, in the past three (3) months, in any discussion (i) with any representative of any corporation or corporations regarding the consolidation or merger of the Company with or into any such corporation or corporations, (ii) with any corporation, partnership, association or other business entity or any individual regarding the sale, conveyance or disposition of all or substantially all of the assets of the Company, or a transaction or series of related transactions involving the disposition of more than fifty percent (50%) of the voting power of the Company, or (iii) regarding any other form of acquisition, liquidation, dissolution or winding up of the Company. 3.7 OBLIGATIONS TO RELATED PARTIES. There are no obligations of the Company to any officer, director, shareholder, or employee of the Company other than (a) for payment of salary for services rendered, (b) reimbursement for reasonable expenses incurred on behalf of the Company and (c) for other standard employee benefits made generally available to all employees (including stock option agreements outstanding under any stock option plan approved by the Board of Directors of the Company). No officer, director or shareholder of the Company, nor any member of any of their immediate families, is indebted to the Company or has any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation which competes with the Company, except that officers, directors and/or shareholders of the Company may own stock in publicly traded companies which may compete with the Company. No officer, director or shareholder, nor any member of any of their immediate families, is, directly or indirectly, interested in any material contract with the Company (other than such contracts as relate to any such person's ownership of capital stock or other securities of the Company). Except as may be disclosed in the Financial Statements, the Company is not a guarantor or indemnitor of any indebtedness of any other person, firm or corporation. 3.8 CHANGES. Since the Statement Date, there has not been, to the knowledge of the Company or the Langs; (a) Any change in the assets, liabilities, financial condition or operations of the Company from that reflected in the Financial Statements, other than changes in the ordinary course of 5. 10 business, none of which individually or in the aggregate has had or is expected to have a material adverse effect on such assets, liabilities, financial condition or operations of the Company; (b) Any resignation or termination of any key officer of the Company; and the Company, to the best knowledge of the Company and the Langs, does not know of the impending resignation or termination of employment of any such officer; (c) Any material change, except in the ordinary course of business, in the contingent obligations of the Company by way of guaranty, endorsement, indemnity, warranty or otherwise; (d) Any damage, destruction or loss, whether of not covered by insurance, materially and adversely affecting the properties, business or prospects or financial condition of the Company; (e) Any waiver by the Company of a valuable right or of a material debt owed to it; (f) Any direct or indirect loans made by the Company to any shareholder, employee, officer or director of the Company, other than advances made in the ordinary course of business; (g) Any material change in any compensation arrangement or agreement with any employee, officer, director or shareholder; (h) Any declaration or payment of any dividend or other distribution of the assets of the Company; (i) Any labor organization activity; (j) Any debt, obligation or liability incurred, assumed or guaranteed by the Company, except those for immaterial amounts and for current liabilities incurred in the ordinary course of business; (k) Any sale, assignment or transfer of any patents, trademarks, copyrights, trade secrets or other intangible assets; (1) Any change in any material agreement to which the Company is a party or by which it is bound which materially and adversely affects the business, assets, liabilities, financial condition, operations or prospects of the Company, including compensation agreements with the Company's employees; (m) Any threatened discontinuance, or proposed material amendment to the terms of, any agreement of the Company, with (i) any creditor of the Company, to which the Company's annual obligations exceed $20,000, or (ii) any customer of the Company under which payments to the Company on an annual basis exceed $20,000; or (n) Any other event or condition of any character that, either individually or cumulatively, has materially and adversely affected the business, assets, liabilities, financial condition, operations or prospects of the Company. 3.9 TITLE TO PROPERTIES AND ASSETS; LIENS, ETC. The Company has good and marketable title to its properties and assets, including the properties and assets reflected in the most recent balance sheet 6. 11 included in the Financial Statements, and good title to its leasehold estates, in each case subject to no mortgage, pledge, lien, lease, encumbrance or charge, other than (a) those resulting from taxes which have not yet become delinquent, (b) minor liens and encumbrances which do not materially detract from the value of the property subject thereto or materially impair the operations of the Company, and (c) those that have otherwise arisen in the ordinary course of business. All facilities, machinery, equipment, fixtures, vehicles and other properties owned, leased or used by the Company are in good operating condition and repair and are reasonably fit and usable for the purposes for which they are being used. The Company is in compliance with all material terms of each lease to which it is a party or is otherwise bound. 3.10 PATENTS AND TRADEMARKS. (a) The Company owns or possesses sufficient legal rights to all patents, trademarks, service marks, trade names, copyrights, trade secrets, information and other proprietary rights and processes necessary for its business as now conducted and as proposed to be conducted, without any infringement of the rights of others. (b) There is no outstanding, nor has the Company ever entered into, any option, license or agreement of any kind relating to any patents, trademarks, service marks, trade names, copyrights, trade secrets, information or other proprietary rights or processes that grant any form of an exclusive right or license to any third party. (c) No trade secret, confidential, proprietary or other non-public information relating to, contained in, or used by or in connection with, the computer software program commonly referred to as, and marketed by the Company under the name of, Maxsys II ("Maxsys II") is contained in or may be derived from Prizm (as hereinafter defined). (d) No part of the Source Code (as hereinafter defined) of Prizm has been released or made available to any third party except the following hospitals located in the United Kingdom: St. Thomas' and Guys Hospital, Hastings Hospital, Brighton Hospital, Worthings and Southlands Hospital and Bromley Hospital (collectively, the "Hospitals"). For purposes of this Agreement, "Source Code" shall mean any computer software program which is not in machine readable format, and is not suitable for machine execution without the intervening steps of interpretation or compilation, but including any accompanying documentation, manuals or supporting materials. For purposes of this Agreement, "Prizm" shall mean the computer software program commonly referred to as Prizm and developed by the Company pursuant to the Development Agreement of August 11, 1989 between the South East Thames Regional Health Authority and Landa Management Systems Corporation. (e) The Company has granted to the Hospitals a non-exclusive, non-transferable license (without the right to grant sublicenses) to use the Source Code of Prizm solely for maintenance of Prizm and for no other reason (the "License"). The License provides that the Source Code of Prizm must be treated as the confidential information of the Company, may not be disclosed to third parties, and may not be used in a manner inconsistent with the License. To the best knowledge of the Company and the Langs, the Hospitals are not now, and have not at any time been, in breach of the License. (f) Neither the Company nor the Langs have received any communication alleging that the Company has violated or, by conducting its business as proposed, would violate any of the patents, trademarks, service marks, trade names, copyrights or trade secrets or other proprietary rights of any other person or entity. 7. 12 (g) The Company has taken all reasonable measures and precautions necessary to protect and maintain the confidentiality and secrecy of the Company's patents, trademarks, service marks, trade names, copyrights, trade secrets, information and other proprietary rights and processes and otherwise to maintain and protect the value thereof and has obtained from all current and former employees and from all current and former consultants and independent contractors signed agreements appropriately assigning to the Company, and restricting the use and disclosure of, such patents, trademarks, service marks, trade names, copyrights, trade secrets, information and other proprietary rights and processes. (h) No employee of the Company is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with his or her duty to the Company or that would conflict with the Company's business as proposed to be conducted. (i) Neither the execution nor delivery of this Agreement, nor the carrying on of the Company's business by the employees of the Company, not the conduct of the Company's business as proposed, will conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant or instrument under which any Company employee is now obligated. (j) It will not be necessary to utilize any inventions, trade secrets or proprietary information of any of the Company's employees made prior to their employment by the Company, except for inventions, trade secrets or proprietary information that have been assigned to the Company. 3.11 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in violation or default of any term of its Restated Articles or Bylaws, or of any provision of any mortgage, indenture, contract, agreement, instrument or contract to which it is party or by which it is bound or of any judgment, decree, order, writ or, to the knowledge of the Company or the Langs, any statute, rule or regulation applicable to the Company which would materially and adversely affect the business, assets, liabilities, financial condition, operations or prospects of the Company. The execution, delivery, and performance of and compliance with this Agreement and each Related Agreement, and the issuance and sale of the Shares pursuant hereto and of the Conversion Shares pursuant to the Restated Articles, will not, with or without the passage of time or giving of notice, result in any such material violation, or be in conflict with or constitute a default under any such term, or result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company or the suspension, revocation, impairment, forfeiture or nonrenewal of any permit license, authorization or approval applicable to the Company, its business or operations or any of its assets or properties. 3.12 LITIGATION. There is no action, suit, proceeding or investigation pending, or to the knowledge of the Company or the Langs currently threatened, against the Company that questions the validity of this Agreement, or any related Agreement or the right of the Company to enter into any of such agreements, or to consummate the transactions contemplated hereby or thereby, or which might result, either individually or in the aggregate, in any material adverse change in the assets, condition, affairs or prospects of the Company, financially or otherwise, or any change in the current equity ownership of the Company, nor are the Company or the Langs aware that there is any basis for the foregoing. The foregoing includes, without limitation, actions pending or threatened (or any basis therefor known to the Company or the Langs) involving the prior employment of any of the Company's employees, their use in connection with the Company's business of any information or techniques allegedly proprietary to any of their former employers, or their obligations under any agreements with prior employers. The Company is neither a party nor subject to the provisions of any order, writ, injunction, judgment or decree of any court or 8. 13 government agency or instrumentality. There is no action, suit, proceeding or investigation by the Company currently pending or which the Company intends to initiate. 3.13 TAX RETURNS AND PAYMENTS. The Company has timely filed all tax returns (foreign, federal, state and local) required to be filed by it. All taxes shown to be due and payable on such returns, any assessments imposed, and to the knowledge of the Company and the Langs, all other taxes due and payable by the Company on or before the Closing have been paid or will be paid prior to the time they become delinquent. Neither the Company nor the Langs have been advised (a) that any of the Company's returns, foreign, federal, state or other, have been or are being audited as of the date hereof, or (b) of any deficiency in assessment or proposed judgment to the Company's foreign, federal, state or other taxes. Neither the Company nor the Langs has knowledge of any liability for any tax to be imposed upon the Company's properties or assets as of the date of this Agreement for which the Company has not adequately provided. 3.14 EMPLOYEES. The Company has no collective bargaining agreement with any of its employees. There is no labor union organizing activity pending or, to the knowledge of the Company or the Langs, threatened with respect to the Company. No employee has any agreement or contract, written or verbal, regarding his employment. The Company is not a party to or bound by any currently effective employment contract, deferred compensation arrangement, bonus plan, incentive plan, profit sharing plan, retirement agreement or other employee compensation plan or agreement. To the knowledge of the Company and the Langs, no employee of the Company, nor any consultant with whom the Company has contracted, is in violation of any term of any employment contract, proprietary information agreement or any other agreement relating to the right of any such individual to be employed by, or to contract with, the Company because of the nature of the business to be conducted by the Company, and to the knowledge of the Company and the Langs, the continued employment by the Company of its present employees, and the performance of the Company's contracts with its independent contractors, will not result in any such violation. Neither the Company nor the Langs has received any notice alleging that any such violation has occurred. No employee of the Company has been granted the right to continued employment by the Company or to any material compensation following termination of employment with the Company. Neither the Company nor the Langs is aware that any officer or key employee, or that any group of key employees, intends to terminate his, her or their employment with the Company, nor does the Company have a present intention to terminate the employment of any officer, key employee or group of key employees. 3.15 PROPRIETARY INFORMATION AND INVENTIONS AGREEMENTS. Each current employee, officer and consultant of the Company has executed a Proprietary Information and Inventions Agreement in the form of Exhibit G attached hereto, and each former employee, officer and consultant of the Company has executed a "proprietary information and inventions agreement" in a form satisfactory to the Purchasers. No current employee, officer or consultant of the Company has excluded works or inventions made prior to his or her employment with the Company from his or her assignment of inventions pursuant to such employee, officer or consultant's Proprietary Information and Inventions Agreement. 3.16 OBLIGATIONS OF MANAGEMENT; STIPULATED ACTIVITIES. Each officer of the Company is currently devoting one hundred percent (100%) of his or her business time to the conduct of the business of the Company. Neither the Company nor the Langs is aware that any officer or key employee of the Company plans to work less than full time at the Company in the future. Exhibit H hereto sets forth a complete and accurate list of all "Stipulated Activities" of each senior officer of the Company (each a "Principal"). The term "Stipulated Activity" shall mean any of the following as to each Principal: (a) being 9. 14 the beneficial owner of (i) more than 5% of the outstanding equity securities of any entity other than the Company or (ii) securities (including debt securities and guarantees of indebtedness, but excluding securities traded on a national securities exchange or in the over-the-counter market and securities issued by money market or similar funds) of any entity other than the Company with an original cost, fair market value and/or obligation on the part of such Principal, contingent or otherwise (even if the obligation is evidenced by non-recourse debt or guaranty), in excess of $100,000; or (b) being an employee, officer, director or general partners of, or consultant to, any person or entity other than that Company. For purposes of determining Stipulated Activities, any actions taken by the spouse, children or entities controlled by each Principal will be imputed to be activities conducted by such Principal. 3.17 REGISTRATION RIGHTS. Except as required pursuant to the Investor Rights Agreement, the Company is presently not under any obligation, and has not granted any rights, to register (as defined in Section 1.1 of the Investor Rights Agreement) any of the Company's presently outstanding securities or any of its securities that may hereinafter be issued. 3.18 COMPLIANCE WITH LAWS; PERMITS. To the knowledge of the Company and the Langs, the Company is not in violation of any applicable statute, rule, regulation, order or restriction of any domestic or foreign government or any instrumentality or agency thereof in respect of the conduct of its business or the ownership of its properties, which violation would materially and adversely affect the business, assets, liabilities, financial condition, operations or prospects of the Company. No governmental order, permission, consent, approval or authorization is required to be obtained and no registration or declaration is required to be filed in connection with the execution and delivery of this Agreement and the issuance of the Shares or the Conversion Shares, except such as has been duly and validly obtained or filed, or with respect to any filing that must be made after the Closing, as will be filed in a timely manner. The Company has all franchises, permits, licenses and any similar authority necessary for the conduct of its business as now being conducted by it, the lack of which could materially and adversely affect the business, properties, prospects or financial condition of the Company and the Company and the Langs believe the Company can obtain, without undue burden or expense, any similar authority for the conduct of its business as planned to be conducted. 3.19 ENVIRONMENTAL AND SAFETY LAWS. To the knowledge of the Company and the Langs, the Company is not in violation of any applicable statute, law or regulation relating to the environment or occupational health and safety, and to their knowledge, no material expenditures are or will be required in order to comply with any such existing statute, law or regulation. 3.20 OFFERING VALID. Assuming the accuracy of the representations and warranties of the Purchasers contained in Section 5.2 hereof, the offer, sale and issuance of the Shares and the Conversion Shares will be exempt from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), and will have been registered or qualified (or are exempt from registration and qualification) under the registration, permit or qualification requirements of all applicable state securities laws. Neither the Company nor any agent on its behalf has solicited or will solicit any offers to sell or has offered to sell or will offer to sell all or any part of the Shares to any person or persons so as to bring the sale of such Shares by the Company within the registration provisions of the Securities Act or any state securities laws. 3.21 FULL DISCLOSURE. This Agreement, the Exhibits hereto, the Investor Rights Agreement and all other documents delivered by the Company to Purchasers or their attorneys or agents in connection herewith of therewith or with the transactions contemplated hereby or thereby, do not contain any untrue 10. 15 statement of a material fact nor, to the knowledge of the Company or the Langs, omit to state a material fact, necessary in order to make the statements contained herein or therein not misleading. To the knowledge of the Company and the Langs, there are no facts which (individually or in the aggregate) materially adversely affect the business, assets, liabilities, financial condition, prospects or operations of the Company that have not been set forth in the Agreement, the Exhibits hereto, any Related Agreement or in other documents delivered to Purchasers or their attorneys or agents in connection herewith. 3.22 MINUTE BOOKS. The minute books of the Company provided to the Purchasers contain a complete summary of all meetings of directors and shareholders since the time of its incorporation. 3.23 SECTION 83(b) ELECTIONS. To the knowledge of the Company and the Langs, all elections and notices permitted by Section 83(b) of the Code and any analogous provisions of applicable state tax laws have been timely filed by all employees who have purchased shares of the Company's common stock under agreements that provide for the vesting of such shares. 3.24 INSURANCE. The Company has fire and casualty insurance policies with coverage customary for companies similarly situated to the Company. SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS. 4.1 AUTHORIZATION. This Agreement constitutes the valid and binding obligation of each Shareholder, enforceable in accordance with its terms. 4.2 TITLE TO SERIES D EXCHANGE SHARES. Each Shareholder represents that it has good, valid and absolute title to, and beneficial ownership of the Exchange Series D Shares being sold by it hereunder, and neither such shares nor the rights of such Shareholder to such shares have been assigned, transferred, hypothecated, pledged or otherwise disposed of, in whole or in part. The Exchange Series D Shares, when sold and delivered by each Shareholder to the Purchasers as contemplated by this Agreement, will transfer to the Purchasers good, valid and absolute title to, and beneficial ownership of, the Exchange Series D Shares, free and clear of all liens and encumbrances. The Exchange Series D Shares being sold and delivered by each Shareholder to the Purchasers pursuant to this Agreement constitute all of the equity securities of the Company held by each such Shareholder (including, without limitation, options, warrants, and other securities convertible or exercisable into equity securities of the Company). 4.3 SHAREHOLDER INVESTMENT DECISION. Each Shareholder has entered into this Agreement based on his, her or its own investigation and analysis and that of advisors retained by such Shareholder. Each Shareholder understands that the Company's plans for the future, if successful, may result in an increase in the value of the Exchange Series D Shares being sold by it hereunder, and that the future value of the Exchange Series D Shares could exceed the amounts payable to each Shareholder hereunder. Neither any Purchaser nor any Releasee (as defined below) has made any representation to the Shareholder about the advisability of the decision to sell his, her or its Exchange Series D Shares. SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each Purchaser hereby represents and warrants to the Company and the Shareholders as follows (such representations and warranties do not lessen or obviate the representations and warranties of the Company and the Shareholders set forth in this Agreement): 11. 16 5.1 REQUISITE POWER AND AUTHORITY. Purchaser has all necessary power and authority under all applicable provisions of law to execute and deliver this Agreement and each Related Agreement and to carry out their provisions. All action on Purchaser's part required for the lawful execution and delivery of this Agreement and each Related Agreement have been or will be effectively taken prior to the Closing. Upon their execution and delivery, this Agreement and the Related Agreement will be valid and binding obligations of Purchaser, enforceable in accordance with their terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights, (b) general principles of equity that restrict the availability of equitable remedies, and (c) to the extent that the enforceability of the indemnification provisions of Sections 2.9 and 2.15 of the Investor Rights Agreement may be limited by applicable laws. 5.2 INVESTMENT REPRESENTATIONS. Purchaser understands that neither the Shares, the Exchange Series D Shares nor the Conversion Shares have been registered under the Securities Act. Purchaser also understands that the Shares are being offered and sold pursuant to an exemption from registration contained in the Securities Act based in part upon Purchaser's representations contained in the Agreement. Purchaser hereby represents and warrants as follows: (a) PURCHASER BEARS ECONOMIC RISK. Purchaser has substantial experience in evaluating and investing in private placement transactions of securities in companies similar to the Company so that it is capable of evaluating the merits and risks of its investment in the Company and has the capacity to protect its own interests. Purchaser must bear the economic risk of this investment indefinitely unless the Shares and the Exchange Series D Shares (or the Conversion Shares) are registered pursuant to the Securities Act, or an exemption from registration is available. Purchaser understands that the Company has no present intention of registering the Shares, the Exchange Series D Shares, the Conversion Shares or any shares of its Common Stock. Purchaser also understands that there is no assurance that any exemption from registration under the Securities Act will be available and that, even if available, such exemption may not allow Purchaser to transfer all or any portion of the Shares, the Exchange Series D Shares or the Conversion Shares under the circumstances, in the amounts or at the times Purchaser might propose. (b) ACQUISITION FOR OWN ACCOUNT. Purchaser is acquiring the Shares, the Exchange Series D Shares and the Conversion Shares for Purchaser's own account for investment only, and not with a view towards their distribution. (c) PURCHASER CAN PROTECT ITS INTEREST. Purchaser represents that by reason of its, or of its management's business or financial experience, Purchaser has the capacity to protect its own interests in connection with the transactions contemplated in this Agreement and the Investor Rights Agreement. Further, Purchaser is aware of no publication of any advertisement in connection with the transactions contemplated in the Agreement. (d) ACCREDITED INVESTOR. Purchaser represents that it is an accredited investor within the meaning of Regulation D under the Securities Act. (e) COMPANY INFORMATION. Purchaser has received and read the Financial Statements and has had an opportunity to discuss the Company's business, management and financial affairs with directors, officers and management of the Company and has had the opportunity to review the Company's operations and facilities. Purchaser has also had the opportunity to ask questions of and 12. 17 receive answers from, the Company and its management regarding the terms and conditions of this investment. (f) RULE 144. Purchaser acknowledges and agrees that the Shares and the Exchange Series D Shares, and, if issued, the Conversion Shares must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. Purchaser has been advised or is aware of the provisions of Rule 144 promulgated under the Securities Act as in effect from time to time, which permits limited resale of shares purchased in a private placement subject to the satisfaction of certain conditions, including, among other things: the availability of certain current public information about the Company, the resale occurring following the required holding period under Rule 144 and the number of shares being sold during any three-month period not exceeding specified limitations. (g) RESIDENCE. If the Purchaser is an individual, then the Purchaser resides in the state or province identified in the address of the Purchaser set forth on Exhibit A-1; if the Purchaser is a partnership, corporation, limited liability company or other entity, then the office or offices of the Purchaser in which its investment decision was made is located at the address or addresses of the Purchaser set forth on Exhibit A-1. 5.3 TRANSFER RESTRICTIONS. Each Purchaser acknowledges and agrees that the Shares and the Exchange Series D Shares, if issued, the Conversion Shares are subject to restrictions on transfer as set forth in the Investor Rights Agreement. SECTION 6. CONDITIONS TO CLOSING. 6.1 CONDITION TO PURCHASERS' OBLIGATIONS AT THE CLOSING. Purchasers' obligations to purchase the Shares and the Exchange Series D Shares at the Closing are subject to the satisfaction or waiver, at or prior to the Closing, of the following conditions: (a) REPRESENTATIONS AND WARRANTIES TRUE; PERFORMANCE OF OBLIGATIONS. The representations and warranties made by the Company and the Langs in Section 3 hereof, and the representations and warranties made by each Shareholder in Section 4 hereof, shall be true and correct in all material respects as of the Closing Date with the same force and effect as if they had been made as of the Closing Date, and the Company and each of the Shareholders shall have performed all obligations and conditions herein required to be performed or observed by each of them on or prior to the Closing. (b) LEGAL INVESTMENT. On the Closing Date, the sale and issuance of the Shares and the Exchange Series D Shares and the proposed issuance of the Conversion Shares shall be legally permitted by all laws and regulations to which Purchasers, the Company and the Shareholders are subject. (c) CONSENTS, PERMITS, AND WAIVERS. The Company shall have obtained any and all consents, permits, and waivers necessary or appropriate for consummation of the transactions contemplated by the Agreement and the Related Agreements (except for such as may be properly obtained subsequent to the Closing). (d) FILING OF RESTATED ARTICLES. The Restated Articles shall have been filed with the Secretary of the State of California. 13. 18 (e) CORPORATE DOCUMENTS. The Company shall have delivered to Purchasers or their counsel, copies of all corporate documents of the Company as Purchasers shall reasonably request. (f) RESERVATION OF CONVERSION SHARES. The Conversion Shares issuable upon conversion of the Shares and the Exchange Series D Shares shall have been duly authorized and reserved for issuance upon such conversion. (g) COMPLIANCE CERTIFICATE. The Company shall have delivered to Purchasers a Compliance Certificate, executed by the President of the Company, dated the date of the Closing, to the effect that the conditions specified in subsections (a), (c), (d) and (f) of this Section 6.1 have been satisfied. (h) INVESTOR RIGHTS AGREEMENT. An Investor Rights Agreement substantially in the form attached hereto as Exhibit C shall have been executed and delivered by the parties thereto. (i) VOTING AGREEMENT. A Voting Agreement substantially in the form attached hereto as Exhibit D shall have been executed and delivered by the Company, each Purchaser and holders of no less than sixty percent (60%) of all Common Stock outstanding as of the Closing. (j) BOARD OF DIRECTORS. Upon the Closing, the authorized size of the Board of Directors of the Company shall be five (5) members and the Board shall consist of Jason Rosenbluth, Howard Cox, Tom Stephenson, Bryan Lang and Gene Cattarina. (k) LEGAL OPINION. The Purchasers shall have received from legal counsel to the Company and opinion addressed to them, dated as of the Closing Date, in substantially the form attached hereto as Exhibit I. (l) EXCHANGES. The Exchange Agreement shall have been entered into by the Company and the Shareholders and all transactions contemplated thereby shall have been consummated. (m) LOAN REPAYMENT. The Company and each of the Langs shall have entered into an agreement in form and substance satisfactory to the Purchasers pursuant to which, in exchange for payment by the Company of $1,692,600.00 (the "Loan Redemption Agreement") and issuance to the Langs of warrants to purchase 100,000 shares of the Company's Common Stock in substantially the form attached hereto as Exhibit J (the "Warrant"), all obligations of the Company under all demand and other debt instruments dated prior to February 27, 1998 shall be satisfied, and the Company and the Langs shall be prepared to effect such transactions simultaneous with the transactions contemplated hereby. (n) WESTMINSTER WARRANT. The Company shall have delivered to Westminster the Westminster Warrant in substantially the form attached hereto as Exhibit J. (o) CAPITALIZATION CERTIFICATE. The Company shall have delivered to the Purchasers a Capitalization Certificate, executed by the President and the Chief Operating Officer of the Company, dated the date of Closing, certifying as to the number, form and ownership of all outstanding equity securities of the Company (including, without limitation, options, warrants and other securities convertible or exercisable into equity securities). (p) TAX PAYMENTS. The Company shall have provided evidence satisfactory to each of the Purchasers of the amounts of all tax obligations (foreign, federal, state and local) of the Company, 14. 19 together with evidence satisfactory to the Purchasers that all such tax obligations shall be satisfied immediately following the Closing. (q) BYLAWS. The Company shall have adopted Amended and Restated Bylaws in the form attached hereto as Exhibit L. (r) PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT. Each employee, and each consultant of the Company requested by the Purchasers to do so, shall have entered into a Proprietary Information and Inventions Agreement. (s) PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in connection with the transactions contemplated at the Closing hereby and all documents and instruments incident to such transactions shall be reasonably satisfactory in substance and form to the Purchasers and their special counsel, and the Purchasers and their special counsel shall have received all such counterpart originals or certified or other copies of such documents as they may reasonably request. 6.2 CONDITIONS TO OBLIGATIONS OF THE COMPANY. The Company's obligation to issue and sell the Shares and the obligations of each Shareholder to sell the Exchange Series D Shares held by it, at the Closing is subject to the satisfaction or waiver, on or prior to the Closing, of the following conditions: (a) REPRESENTATIONS AND WARRANTIES TRUE. The representations and warranties made by the Purchasers acquiring Shares in Section 4 hereof shall be true and correct in all material respects at the date of the Closing, with the same force and effect as if they had been made on and as of such date. (b) PERFORMANCE OF OBLIGATIONS. The Purchasers shall have performed and complied with all agreements and conditions herein required to be performed or complied with by the Purchasers on or before the Closing. (c) FILING OF RESTATED ARTICLES. The Restated Articles shall have been filed with the Secretary of State of the State of California. (d) INVESTOR RIGHTS AGREEMENT. An Investor Rights Agreement substantially in the form attached hereto as Exhibit C shall have been executed and delivered by the Purchasers. (e) VOTING AGREEMENT. A Voting Agreement substantially in the form attached hereto as Exhibit D shall have been executed and delivered by the Company, each Purchaser and holders of no less than sixty percent (60%) of all Common Stock outstanding as of the Closing. (f) CONSENTS, PERMITS, AND WAIVERS. The Company shall have obtained any and all consents, permits and waivers necessary or appropriate for consummation of the transactions contemplated by the Agreement and the Investor Rights Agreement (except for such as may be properly obtained subsequent to the Closing). 15. 20 SECTION 7. SHAREHOLDER RELEASES; SURVIVAL; INDEMNIFICATION. 7.1 SHAREHOLDER RELEASE. (a) Each Shareholder hereby discharges and releases each Purchaser and each of its officers, directors, employees, agents, attorneys, parents, subsidiaries and affiliates, and their respective partners, former partners, members and former members (collectively, the "Releasees") from all rights, claims, obligations, debts liabilities and relationships of whatever kind or nature, known or unknown, past, present, or future, whether contractual or fiduciary, arising out of such Shareholders' investment in, and ownership and sale to the Purchasers of the Exchange Series D Shares sold by it hereunder. (b) Each Shareholder has considered the possibility that he, she or it may not now fully know the nature or value of the claims which are released pursuant to subsection (a) above. Nevertheless, each Shareholder intends to assume the risk of releasing such unknown claims. TO THAT END, EACH SHAREHOLDER EXPRESSLY WAIVES ITS RIGHTS UNDER SECTION 1542 OF THE CALIFORNIA CIVIL CODE, WHICH PROVIDES: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." 7.2 SURVIVAL; REMEDIES. (a) The parties hereto agree that the representations, warranties, obligations and covenants contained in this Agreement shall survive the Closing Date for a period of five (5) years thereafter; provided, however, that in the event a claim for indemnification is made or a notice of claim is given prior to the expiration date, the indemnification obligation shall continue until the applicable claim has been finally resolved. (b) In addition to any other remedy to which any Purchaser shall be entitled, whether at law or in equity, and notwithstanding any applicable statute of limitations, each Purchaser shall have the right to rescind the purchase of Series D Shares and/or Exchange Series D Shares from the Company and/or any Shareholder, at a price per share of $1.20, in the event of any material breach by the Company and/or such Shareholder of any representation and warranty made by it hereunder. 7.3 INDEMNIFICATION OF PURCHASER. Subject to the provisions of this Section 7, the Shareholders and the Company hereby agree that each Purchaser shall be held harmless from, protected against and reimbursed for any and all Loss (as defined below), resulting from the inaccuracy or breach of any representation, warranty, obligation or covenant made or given by it in or pursuant to this Agreement; provided, however, that for purposes of this Section 7.3, the final sentence of Section 3.10(e) shall be interpreted without regard to the initial clause thereof. Each Shareholder and the Company shall be obligated to satisfy such party's pro rata portion of the indemnification obligation to the Purchasers determined by dividing the indemnification obligation by the total number of Exchange Series D Shares and Series D Shares and multiplying the result by the number of Exchange Series D Shares and Series D Shares owned by it. Except as set forth in the immediately succeeding sentence, in no event shall a Shareholder be obligated hereunder for an amount exceeding the amount paid to it hereunder for its Exchange Series D Shares. The aggregate amount the Langs shall be obligated to pay hereunder shall not 16. 21 exceed $1,750,000, representing the aggregate amount paid to it in consideration of the Exchange Series D Shares sold by it hereunder and under the Loan Redemption Agreement. As used in this Agreement, the term "Loss" means any cost, damage, disbursement, expense, liability, loss, deficiency, diminution in value, penalty, fine, assessment or settlement of any kind or nature, whether foreseeable or unforeseeable, including but not limited to, interest or other carrying costs, penalties, legal, accounting or other professional fees or expenses incurred in the investigation, collection, prosecution or defense of claims, inquiries, hearings or other legal or administrative proceedings and amounts paid in settlement, that may be imposed on or otherwise incurred or suffered by any Purchaser. The parties agree that, notwithstanding anything herein contrary, with respect to any claim or indemnification for any Loss brought by any Purchaser against any Shareholder, such Shareholder shall have no right of contribution against the Company. 7.4 INDEMNIFICATION BY PURCHASERS. Each Purchaser shall indemnify and hold harmless the Company and its Shareholders from and against any Loss resulting from the inaccuracy or breach of any representation, warranty, obligation or covenant made or given by it in or pursuant to this Agreement. 7.5 NOTICE OF CLAIM. An indemnified party shall give an indemnifying party prompt written notice of any threatened, potential or actual claim or the commencement of any action by a third party in respect of which indemnification may be sought hereunder. For purposes hereof, any notice to be given by a Purchaser hereunder shall be given to each of the Shareholders and the Company. The indemnifying party shall have the right to participate in or control any such action at its own expense and the indemnified party shall have the right (but not the duty) to participate in the defense thereof, which shall be at the indemnifying party's expense, unless it is finally determined that the indemnified party was not entitled to indemnification. Whether or not an indemnifying party chooses to control the defense of any indemnified party's action, each party hereto and their respective successors and assigns will cooperate in the defense and shall take all actions in connection with such defense as may be reasonably requested. SECTION 8. MISCELLANEOUS. 8.1 GOVERNING LAW. This Agreement shall be governed in all respects by the laws of the State of California as such laws are applied to agreements between California residents entered into and performed entirely in California. 8.2 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto and shall inure to the benefit of and be enforceable by each person who shall be a holder of the Shares from time to time. 8.3 ENTIRE AGREEMENT. This Agreement, the Exhibits and Schedules hereto, the Investor Rights Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and no party shall be liable or bound to any other in any manner by any representations, warranties, covenants and agreements except as specifically set forth herein and therein. 8.4 SEVERABILITY. In case any provision of the Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 17. 22 8.5 AMENDMENT AND WAIVER. (a) This Agreement may be amended or modified only upon the written consent of the Company and holders of at least a majority of the Shares and Exchange Series D Shares (treated as if converted and including any Conversion Shares into which the Shares and/or Exchange Series D Shares have been converted that have not been sold to the public) and each Shareholder adversely affected by any such proposed amendment. (b) The obligations of the Company, each Shareholder and the rights of the holders of the Shares, the Exchange Series D Shares and the Conversion Shares under the Agreement may be waived only with the written consent of the holders of at least a majority of the Shares and/or Exchange Series D Shares (treated as if converted and including any Conversion Shares into which the Shares have been converted that have not been sold to the public) and each Shareholder adversely affected by any such proposed amendment. 8.6 DELAYS OR OMISSIONS. It is agreed that no delay or omission to exercise any right, power or remedy accruing to any party, upon any breach, default or noncompliance by another party under this Agreement, the Investor Rights Agreement or the Restated Articles, shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach, default or noncompliance, or any acquiescence therein, or of or in any similar breach, default or noncompliance thereafter occurring. It is further agreed that any waiver, permit, consent or approval of any kind or character on any Purchaser's part of any breach, default or noncompliance under this Agreement, the Investor Rights Agreement or under the Restated Articles or any waiver on such party's part of any provisions or conditions of the Agreement, the Investor Rights Agreement, or the Restated Articles must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement, the Related Agreements, the Restated Articles, by law, or otherwise afforded to any party, shall be cumulative and not alternative. 8.7 NOTICES. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified; (b) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient, if not, then on the next business day; (c) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (d) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the Company at the address as set forth on the signature page hereof, to Purchaser at the address set forth on Exhibit A-1 attached hereto and to the Shareholder at the address set forth on Exhibit A-2 attached hereto or at such other address as the Company, a Purchaser or a Shareholder may designate by ten (10) days advance written notice to the other parties hereto. 8.8 EXPENSES. The Company shall pay all costs and expenses that it incurs with respect to the negotiation, execution, delivery and performance of the Agreement. The Company shall, at the Closing, reimburse the reasonable fees and expenses of the Purchasers, including the fees and expenses of Cooley Godward LLP, special counsel for the Purchasers incurred in connection with the negotiation, execution, delivery and performance of this Agreement; provided, however, that the Company's obligations hereunder shall not exceed $50,000 without the Company's prior written consent. 8.9 ATTORNEYS' FEES. In the event that any dispute among the parties to this Agreement should result in litigation, the prevailing party in such dispute shall be entitled to recover from the losing party all 18. 23 fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Agreement, including without limitation, such reasonable fees and expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and expenses of appeals. 8.10 TITLES AND SUBTITLES. The titles of the sections and subsections of the Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 8.11 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 8.12 BROKER'S FEES. Each party hereto represents and warrants that no agent, broker, investment banker, person or firm acting on behalf of or under the authority of such party hereto is or will be entitled to any broker's or finder's fee or any other commission directly or indirectly in connection with the transactions contemplated herein. Each party hereto further agrees to indemnify each other party for any claims, losses or expenses incurred by such other party as a result of the representation in this Section 8.12 being untrue. 8.13 EXCULPATION AMONG PURCHASERS. Each Purchaser acknowledges that it is not relying upon any person, firm, or corporation, other than the Company and its officers and directors, in making its investment or decision to invest in the Company. Each Purchaser agrees that no Purchaser, nor any respective controlling person, officer, director, partner, agent, or employee of any Purchaser, shall be liable for any action heretofore or hereafter taken or omitted to be taken by any of them in connection with the Shares, the Series D Exchange Shares and Conversion Shares. 8.14 PRONOUNS. All pronouns contained herein, and any variations thereof, shall be deemed to refer to the masculine, feminine or neutral, singular or plural, as to the identity of the parties hereto may require. 8.15 BROKER'S FEES. Each party hereto represents and warrants that no agent, broker, investment banker, person or firm acting on behalf of or under the authority of such party hereto is or will be entitled to any broker's or finder's fee or any other commission directly or indirectly in connection with the transactions contemplated herein. Each party hereto further agrees to indemnify each other party for any claims, losses or expenses incurred by such other party as a result of the representation in this Section 8.15 being untrue. 8.16 CALIFORNIA CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION OR IN THE ABSENCE OF AN EXEMPTION FROM SUCH QUALIFICATION IS UNLAWFUL. PRIOR TO ACCEPTANCE OF SUCH CONSIDERATION BY THE COMPANY, THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED OR AN EXEMPTION FROM SUCH QUALIFICATION BEING AVAILABLE. 19. 24 IN WITNESS WHEREOF, the parties hereto have executed the SERIES D PREFERRED STOCK PURCHASE AGREEMENT as of the date set forth in the first paragraph hereof. COMPANY: PURCHASERS: LANDA MANAGEMENT SYSTEMS CORPORATION BEDROCK CAPITAL PARTNERS I, L.P. By: /s/ [ILLEGIBLE] By: -------------------------------- ------------------------------- Title: [ILLEGIBLE] Title: ----------------------------- ---------------------------- SHAREHOLDERS: BEDROCK CAPITAL SIDE-BY-SIDE, L.P. By: ------------------------------- - ----------------------------------- BRACK DAVIS Title: ---------------------------- - ----------------------------------- HUGH CURNUTT GREYLOCK IX LIMITED PARTNERSHIP By: GREYLOCK IX GP LIMITED PARTNERSHIP ITS GENERAL PARTNER WESTMINSTER HEALTH CARE LIMITED By: ------------------------------- By: -------------------------------- SEQUOIA CAPITAL VII, Its: A CALIFORNIA LIMITED PARTNERSHIP ------------------------------- BY: SC VII-A MANAGEMENT, LLC A CALIFORNIA LIMITED LIABILITY /s/ GILBERT H. LANG COMPANY, - ----------------------------------- ITS GENERAL PARTNER GILBERT H. LANG By: ------------------------------- Managing Member - ----------------------------------- BEULAH T. LANG SEQUOIA TECHNOLOGY PARTNERS VII A CALIFORNIA LIMITED PARTNERSHIP By: SC VII-A MANAGEMENT, LLC A CALIFORNIA LIMITED LIABILITY - ----------------------------------- COMPANY, GILBERT H. and BEULAH T. LANG ITS GENERAL PARTNER By: ------------------------------- Managing Member - ----------------------------------- BEULAH J.T. LANG SIGNATURE PAGE TO SERIES D PREFERRED STOCK PURCHASE AGREEMENT 25 SQP 1997 By: SC VII-A Management, LLC A California Limited Liability Company, Its General Partner By: --------------------------------------- Managing Member SEQUOIA 1997 LLC By: SC VII-A Management, LLC A California Limited Liability Company, Its General Partner By: --------------------------------------- Managing Member SEQUOIA INTERNATIONAL PARTNERS By: SC VII-A Management, LLC A California Limited Liability Company, Its General Partner By: --------------------------------------- Managing Member ------------------------------------------ GENE CATTARINA ------------------------------------------ JOHN KARLEN SIGNATURE PAGE TO SERIES D PREFERRED STOCK PURCHASE AGREEMENT EX-10.5 7 INVESTOR RIGHTS AGREEMENT 1 EXHIBIT 10.5 LANDA MANAGEMENT SYSTEMS CORPORATION INVESTOR RIGHTS AGREEMENT 2 TABLE OF CONTENTS
PAGE ---- 1. GENERAL..........................................................1 1.1 Definitions.................................................1 2. REGISTRATION; RESTRICTIONS ON TRANSFER...........................2 2.1 Restrictions on Transfer....................................2 2.2 Demand Registration.........................................3 2.3 Piggyback Registrations.....................................4 2.4 Form S-3 Registration.......................................5 2.5 Expenses of Registration....................................6 2.6 Obligations of the Company..................................7 2.7 Termination of Registration Rights..........................8 2.8 Delay of Registration; Furnishing Information...............8 2.9 Indemnification.............................................8 2.10 Assignment of Registration Rights..........................10 2.11 Amendment of Registration Rights...........................10 2.12 Limitation on Subsequent Registration Rights...............10 2.13 "Market Stand-Off" Agreement...............................10 2.14 Rule 144 Reporting.........................................11 2.15 Indemnification and Contribution...........................11 3. COVENANTS OF THE COMPANY........................................12 3.1 Basic Financial Information and Reporting..................12 3.2 Inspection Rights..........................................13 3.3 Confidentiality of Records.................................13 3.4 Reservation of Common Stock................................13 3.5 Key Man Insurance..........................................13 3.6 Proprietary Information and Inventions Agreement...........13 3.7 Related Party Transactions.................................13 3.8 Board of Directors Approval................................13 3.9 Directors' Liability and Indemnification...................14 3.10 Reincorporation............................................14 3.11 Executive Compensation.....................................14 3.12 Real Property Holding Corporation..........................15
3 3.13 Stipulated Activities.............................................. 15 3.14 Termination of Covenants........................................... 15 4. MISCELLANEOUS........................................................... 15 4.1 Governing Law...................................................... 15 4.2 Survival........................................................... 15 4.3 Successors and Assigns............................................. 15 4.4 Entire Agreement................................................... 16 4.5 Severability....................................................... 16 4.6 Amendment and Waiver............................................... 16 4.7 Delays or Omissions................................................ 16 4.8 Notices............................................................ 16 4.9 Attorneys' Fees.................................................... 16 4.10 Titles and Subtitles............................................... 17 4.11 Counterparts....................................................... 17 Attachment A Schedule of Investors A-1 Attachment B Form of Indemnity Agreement B-1 4 LANDA MANAGEMENT SYSTEMS CORPORATION INVESTOR RIGHTS AGREEMENT THIS INVESTOR RIGHTS AGREEMENT (the "Agreement") is entered into as of the 27th day of February, 1998, by and among LANDA MANAGEMENT SYSTEMS CORPORATION, a California corporation (the "Company"), and the purchasers of the Company's Series D Preferred Stock ("Series D Stock") set forth on Exhibit A-1 of that certain Series D Preferred Stock Purchase Agreement of even date herewith (the "Purchase Agreement") and Attachment A hereto. The purchasers of the Series D Stock shall be referred to hereinafter as the "Investors" and each individually as an "Investor." RECITALS WHEREAS, pursuant to the Purchase Agreement, the Investors propose to purchase an aggregate of Six Million Eight Hundred Thousand (6,800,000) shares of the Company's Series D Stock, of which Five Million Six Hundred Fifteen Thousand Eight Hundred Sixty-Seven (5,615,867) shall be issued and sold by the Company to the Investors and an aggregate of One Million One Hundred Eighty-Four Thousand One Hundred Thirty-Three (1,184,133) shall be sold to the Investors by certain holders of outstanding shares of Series D Stock (the "Shareholders"), which shares represent all shares of Series D Stock currently held by such Shareholders; and WHEREAS, as a condition of entering into the Purchase Agreement, the Investors have requested that the Company extend to them registration rights, information rights and other rights as set forth below. NOW, THEREFORE, in consideration of the mutual promises, representations, warranties, covenants and conditions set forth in this Agreement and in the Purchase Agreement, the parties mutually agree as follows: 1. GENERAL. 1.1 DEFINITIONS. As used in this Agreement the following terms shall have the following respective meanings: "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "FORM S-3" means such form under the Securities Act as in effect on the date hereof or any successor registration form under the Securities 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. "HOLDER" means any person owning of record Registrable Securities that have not been sold to the public or any assignee of record of such Registrable Securities in accordance with Section 2.10 hereof. "INITIAL OFFERING" means the Company's first firm commitment underwritten public offering of its Common Stock registered under the Securities Act. 1. 5 "REGISTER," "REGISTERED," AND "REGISTRATION" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of effectiveness of such registration statement or document. "REGISTRABLE SECURITIES" means (a) Common Stock of the Company issued or issuable upon conversion of the Shares; (b) Common Stock of the Company issued or issuable upon exercise of that certain Warrant to purchase 250,000 shares of Common Stock issued to Westminster Health Care Limited and dated as of the date hereof; and (c) 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, such above-described securities. Notwithstanding the foregoing, Registrable Securities shall not include any securities sold by a person to the public either pursuant to a registration statement or Rule 144 or sold in a private transaction in which the transferror's rights under Section 2 of this Agreement are not assigned. "REGISTRABLE SECURITIES THEN OUTSTANDING" shall be the number of shares determined by calculating the total number of shares of the Company's Common Stock that are Registrable Securities and either (a) are then issued and outstanding or (b) are issuable pursuant to then exercisable or convertible securities. "REGISTRATION EXPENSES" shall mean all expenses incurred by the Company in complying with Sections 2.2, 2.3 and 2.4 hereof, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel for the Company, reasonable fees and disbursements not to exceed Fifteen Thousand Dollars ($15,000) of a single special counsel for the Holders, blue sky fees and expenses and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company which shall be paid in any event by the Company). "SEC" OR "COMMISSION" means the Securities and Exchange Commission. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended. "SELLING EXPENSES" shall mean all underwriting discounts and selling commissions applicable to the sale. "SHARES" shall mean (i) the Company's Series D Stock issued and sold by the Company and (ii) the Company's Series D Stock sold by the Shareholders pursuant to the Purchase Agreement, and held by the Investors listed on Exhibit A hereto and their permitted assigns. 2. REGISTRATION; RESTRICTIONS ON TRANSFER. 2.1 RESTRICTIONS ON TRANSFER. (a) Each Holder agrees not to make any disposition of all or any portion of the Shares or Registrable Securities unless and until: (i) There is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or 2. 6 (ii) (A) The transferee has agreed in writing to be bound by the terms of this Agreement, (B) such Holder shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (C) if reasonably requested by the Company, such Holder shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of such shares under the Securities Act. It is agreed that the Company will not require opinions of counsel for transactions made pursuant to Rule 144 except in unusual circumstances. (iii) Notwithstanding the provisions of paragraphs (i) and (ii) above, no such registration statement or opinion of counsel shall be necessary for a transfer by a Holder which is (A) a partnership to its partners or former partners in accordance with partnership interests, (B) a corporation to its shareholders in accordance with their interest in the corporation, (C) a limited liability company to its members or former members in accordance with their interest in the limited liability company, or (D) to the Holder's family member or trust for the benefit of an individual Holder; provided that in each case the transferee will be subject to the terms of this Agreement to the same extent as if he were an original Holder hereunder. (b) Each certificate representing Shares or Registrable Securities shall (unless otherwise permitted by the provisions of the Agreement) be stamped or otherwise imprinted with a legend substantially similar to the following (in addition to any legend required under applicable state securities laws or as provided elsewhere in this Agreement): THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. (c) The Company shall be obligated to reissue promptly unlegended certificates at the request of any holder thereof if the holder shall have obtained an opinion of counsel (which counsel may be counsel to the Company) reasonably acceptable to the Company to the effect that the securities proposed to be disposed of may lawfully be so disposed of without registration, qualification or legend. (d) Any legend endorsed on an instrument pursuant to applicable state securities laws and the stop-transfer instructions with respect to such securities shall be removed upon receipt by the Company of an order of the appropriate blue sky authority authorizing such removal. 2.2 DEMAND REGISTRATION. (a) Subject to the conditions of this Section 2.2, if the Company shall receive a written request from the Holders of more than thirty percent (30%) of the Registrable Securities then outstanding (the "Initiating Holders") that the Company file a registration statement under the Securities Act covering the registration of Registrable Securities having an aggregate offering price to the public in excess of $15,000,000 (a "Qualified Public Offering"), then the Company shall, within thirty (30) days of the receipt thereof, give written notice of such request to all Holders, and subject to the limitations of this Section 2.2, use its best efforts to effect, as soon as practicable, the registration under the Securities Act of all Registrable Securities that the Holders request to be registered. 3. 7 (b) If the Initiating Holders intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to this Section 2.2 or any request pursuant to Section 2.4 and the Company shall include such information in the written notice referred to in Section 2.2(a) or Section 2.4(a), as applicable. In such event, the right of any Holder to include its Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder) to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by a majority in interest of the Initiating Holders (which underwriter or underwriters shall be reasonably acceptable to the Company). Notwithstanding any other provision of this Section 2.2 or Section 2.4, if the underwriter advises the Company that marketing factors require a limitation of the number of securities to be underwritten (including Registrable Securities) then the Company shall so advise all Holders of Registrable Securities which would otherwise be underwritten pursuant hereto, and the number of shares that may be included in the underwriting shall be allocated to the Holders of such Registrable Securities on a pro rata basis based on the number of Registrable Securities held by all such Holders (including the Initiating Holders). Any Registrable Securities excluded or withdrawn from such underwriting shall be withdrawn from the registration. (c) The Company shall not be required to effect a registration pursuant to this Section 2.2: (i) prior to the second anniversary of the date of this Agreement; or (ii) after the Company has effected two (2) registrations pursuant to this Section 2.2, and such registrations have been declared or ordered effective; or (iii) during the period starting with the date of filing of, and ending on the date one hundred eighty (180) days following the effective date of the registration statement pertaining to the Initial Offering; provided that the Company makes reasonable good faith efforts to cause such registration statement to become effective; (iv) if within thirty (30) days of receipt of a written request from Initiating Holders pursuant to Section 2.2(a), the Company gives notice to the Holders of the Company's intention to make its Initial Offering within ninety (90) days; or (v) if the Company shall furnish to Holders requesting a registration statement pursuant to this Section 2.2, a certificate signed by the Chairman of the Board 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 effected at such time, in which event the Company shall have the right to defer such filing for a period of not more than ninety (90) days after receipt of the request of the Initiating Holders; provided that such right to delay a request shall be exercised by the Company not more than twice in any twelve (12) month period. 2.3 PIGGYBACK REGISTRATIONS. The Company shall notify all Holders of Registrable Securities in writing at least thirty (30) days prior to the filing of any registration statement under the Securities Act for purposes of a public offering of securities of the Company (including, but not limited to, registration statements relating to secondary offerings of securities of the Company, but excluding registration statements relating to employee benefit plans or with respect to corporate reorganizations or other transactions under Rule 145 of the Securities Act) and will afford each such Holder an opportunity to 4. 8 include in such registration statement all or part of such Registrable Securities held by such Holder. Each Holder desiring to include in any such registration statement all or any part of the Registrable Securities held by it shall, within fifteen (15) days after the above-described notice from the Company, so notify the Company in writing. Such notice shall state the intended method of disposition of the Registrable Securities by such Holder. If a Holder decides not to include all of its Registrable Securities in any registration statement thereafter filed by the Company, such Holder shall nevertheless continue to have the right to include any Registrable Securities in any subsequent registration statement or registration statements as may be filed by the Company with respect to offerings of its securities, all upon the terms and conditions set forth herein. (a) UNDERWRITING. If the registration statement under which the Company gives notice under this Section 2.3 is for an underwritten offering, the Company shall so advise the Holders of Registrable Securities. In such event, the right of any such Holder to be included in a registration pursuant to this Section 2.3 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their Registrable Securities through such underwriting shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company. Notwithstanding any other provision of the Agreement, if the underwriter determines in good faith that marketing factors require a limitation of the number of shares to be underwritten, the number of shares that may be included in the underwriting shall be allocated, first, to the Company; second, to the Holders on a pro rata basis based on the total number of Registrable Securities held by the Holders; and third, to any shareholder of the Company (other than a Holder) on a pro rata basis. No such reduction shall reduce the securities being offered by the Company for its own account to be included in the registration and underwriting or (ii) reduce the amount of securities of the selling Holders included in the registration below twenty-five (25%) of the total amount of securities included in such registration, unless such offering is the Initial Offering and such registration does not include shares of any other selling shareholders, in which event any or all of the Registrable Securities of the Holders may be excluded in accordance with the immediately preceding sentence. In no event will shares of any other selling shareholder be included in such registration which would reduce the number of shares which may be included by Holders without the written consent of Holders of not less than a majority of the Registrable Securities proposed to be sold in the offering. (b) RIGHT TO TERMINATE REGISTRATION. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 2.3 prior to the effectiveness of such registration whether or not any Holder has elected to include securities in such registration. The Registration Expenses of such withdrawn registration shall be borne by the Company in accordance with Section 2.5 hereof. 2.4 FORM S-3 REGISTRATION. In case the Company shall receive from any Holder or Holders of Registrable Securities a written request or requests that the Company effect a registration on Form S-3 (or any successor to Form S-3) or any similar short-form registration statement 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 of Registrable Securities; 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 5. 9 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 fifteen (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 2.4: (i) if Form S-3 (or any successor or similar form) is not available for such offering by the Holders, or (ii) if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate price to the public of less than $500,000, or (iii) if the Company shall furnish to the Holders a certificate signed by the Chairman of the Board of Directors 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 ninety (90) days after receipt of the request of the Holder or Holders under this Section 2.4; provided, that such right to delay a request shall be exercised by the Company not more than once in any twelve (12) month period, or (iv) if the Company has, within the twelve (12) month period preceding the date of such request, already effected two (2) registrations on Form S-3 for the Holders pursuant to this Section 2.4, or (v) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance. (c) Subject to the foregoing, the Company shall file a Form S-3 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 such Registration Expenses incurred in connection with registrations requested pursuant to this Section 2.4 after the first two (2) registrations shall be paid by the selling Holders pro rata in proportion to the number of shares sold by each. 2.5 EXPENSE OF REGISTRATION. Except as specifically provided herein, all Registration Expenses incurred in connection with any registration, qualification or compliance pursuant to Section 2.2 or any registration under Section 2.3 or Section 2.4 herein shall be borne by the Company. All Selling Expenses incurred in connection with any registrations hereunder, shall be borne by the holders of the securities so registered pro rata on the basis of the number of shares so registered. The Company shall not, however, be required to pay for expenses of any registration proceeding begun pursuant to Section 2.2 or 2.4, the request of which has been subsequently withdrawn by the Initiating Holders unless (a) the withdrawal is based upon material adverse information concerning the Company of which the Initiating Holders were not aware at the time of such request or (b) the Holders of a majority of Registrable Securities agree to forfeit their right to one requested registration pursuant to Section 2.2 or Section 2.4, as applicable, in which event such right shall be forfeited by all Holders). If the Holders are required to pay the Registration Expenses, such expenses shall be borne by the holders of securities (including Registrable Securities) requesting such registration in proportion to the number of shares for which registration was requested. If the Company is required to pay the Registration Expenses of a withdrawn offering pursuant to clause (a) above, then the Holders shall not forfeit their rights pursuant to Section 2.2 or Section 2.4 to a demand registration. 6. 10 2.6 OBLIGATIONS OF THE COMPANY. Whenever required 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 all reasonable 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 up to ninety (90) days or, if earlier, until the Holder or Holders have completed the distribution related thereto. (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement. (c) Furnish to the Holders such number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (d) Use all reasonable 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(s) of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (f) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (g) Furnish, at the request of a majority of the Holders participating in the registration, on the date that such Registrable Securities are delivered to the underwriters for sale, 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 as of 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 and reasonably satisfactory to a majority in interest of the Holders requesting registration, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities and (ii) a letter dated as of 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 and reasonably satisfactory to a majority in interest of the Holders requesting registration, addressed to the underwriters, if any, and if permitted by applicable accounting standards, to the Holders requesting registration of Registrable Securities. 7. 11 2.7 TERMINATION OF REGISTRATION RIGHTS. All registration rights granted under this Section 2 shall terminate and be of no further force and effect five (5) years after the date of the Company's Initial Offering. In addition, a Holder's registration rights shall expire if (a) the Company has completed its Initial Offering and is subject to the provisions of the Exchange Act, (b) such Holder (together with its affiliates, partners and former partners, members and former members) holds less than 1% of the Company's outstanding Common Stock (treating all share of convertible Preferred Stock on an as converted basis) and (c) all Registrable Securities held by and issuable to such Holder (and its affiliates, partners and former partners) may be sold under Rule 144 during any ninety (90) day period. 2.8 DELAY OF REGISTRATION; FURNISHING INFORMATION. (a) 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 2. (b) It shall be a condition precedent to the obligations of the Company to take any action pursuant to Section 2.2, 2.3 or 2.4 that the selling Holders shall furnish to the Company such information regarding themselves, the Registrable Securities held by them and the intended method of disposition of such securities as shall be required to effect the registration of their Registrable Securities. (c) The Company shall have no obligation with respect to any registration requested pursuant to Section 2.2 or Section 2.4 if, due to the operation of subsection 2.2(b), the number of shares or the anticipated aggregate offering price of the Registrable Securities to be included in the registration does not equal or exceed the number of shares or the anticipated aggregate offering price required to originally trigger the Company's obligation to initiate such registration as specified in Section 2.2 or Section 2.4, whichever is applicable. 2.9 INDEMNIFICATION. In the event any Registrable Securities are included in a registration statement under Sections 2.2, 2.3 or 2.4: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, the partners, officers, directors and legal counsel of each Holder, any underwriter (as defined in the Securities Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Exchange Act, against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation") by the Company: (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 Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law in connection with the offering covered by such registration statement; and the Company will reimburse each such Holder, partner, officer, director, legal counsel, underwriter or controlling person for 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 Section 2.9(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 8. 12 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 such Holder, partner, officer, director, legal counsel, underwriter or controlling person of such Holder. (b) To the extent permitted by law, each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration qualifications or compliance is being effected, indemnify and hold harmless the Company, each of its directors, its officers, and legal counsel and each person, if any, who controls the Company within the meaning of the Securities Act, any underwriter and any other Holder selling securities under such registration statement or any of such other Holder's partners, directors or officers or any person who controls such Holder, against any losses, claims, damages or liabilities (joint or several) to which the Company or any such director, officer, controlling person, underwriter or other such Holder, or partner, director, officer or controlling person of such other Holder may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder under an instrument duly executed by such Holder and stated to be specifically for use in connection with such registration, and each such Holder will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, legal counsel, controlling person, underwriter or other Holder, or partner, officer, director, legal counsel or controlling person of such other Holder in connection with investigating or defending any such loss, claim, damage, liability or action if it is judicially determined that there was such a Violation; provided, however, that the indemnity agreement contained in this Section 2.9(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 further, that in no event shall any indemnity under this Section 2.9 exceed the proceeds from the offering received by such Holder. (c) Promptly after receipt by an indemnified party under this Section 2.9 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 2.9, 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 shall have the right to retain its own 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 materially prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 2.9, 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 2.9. (d) If the indemnification provided for in this Section 2.9 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any losses, claims, damages or liabilities referred to herein, the indemnifying party, in lieu of indemnifying such indemnified party thereunder, shall to the extent permitted by applicable law contribute to the amount paid or payable by such 9 13 indemnified party as a result of such loss, claim, damage or liability 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 Violation(s) that resulted in such loss, claim, damage or liability, as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by a court of law 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; provided, that in no event shall any contribution by a Holder hereunder exceed the proceeds from the offering received by such Holder. (e) The obligations of the Company and the Holders under this Section 2.9 shall survive completion of any offering of Registrable Securities in a registration statement and the termination of this agreement. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. 2.10 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company to register Registrable Securities pursuant to this Section 2 may be assigned by a Holder to a transferee or assignee of Registrable Securities which (a) is a subsidiary, parent, general partner, limited partner or retired partner, member or former member of a Holder, (b) is a Holder's family member or trust for the benefit of an individual Holder, or (c) acquires at least two hundred fifty thousand (250,000) shares of Registrable Securities (as adjusted for stock splits and combinations); provided, however, (i) the transferor shall, within ten (10) days after such transfer, furnish to the Company written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned and (ii) such transferee shall agree to be subject to all restrictions set forth in this Agreement. Notwithstanding the foregoing, and transfer effected pursuant to Section 2.3 of the Stock Purchase Agreement shall not be subject to the limitation set forth in subsection (c) above. 2.11 AMENDMENT OF REGISTRATION RIGHTS. Any provision of this Section 2 may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Holders of at least a majority of the Registrable Securities then outstanding. Any amendment or waiver effected in accordance with this Section 2.11 shall be binding upon each Holder and the Company. By acceptance of any benefits under this Article II, Holders of Registrable Securities hereby agree to be bound by the provisions hereunder. 2.12 LIMITATION ON SUBSEQUENT REGISTRATION RIGHTS. After the date of this Agreement, the Company shall not, without the prior written consent of the Holders of a majority of the Registrable Securities then outstanding, enter into any agreement with any holder or prospective holder of any securities of the Company that would grant such holder registration rights senior to those granted to the Holders hereunder. 2.13 "MARKET STAND-OFF" AGREEMENT. Each Holder hereby agrees that such Holder shall not sell or otherwise transfer or dispose of any Common Stock (or other securities) of the Company held by such Holder (other than those included in the registration) for a period specified by the representative of the underwriters of Common Stock (or other securities) of the Company not to exceed one hundred eighty (180) days following the effective date of a registration statement of the Company filed under the Securities Act, provided that: 10. 14 (i) such agreement shall apply only to the Company's Initial Offering; and (ii) all officers and directors of the Company and holders of at least one percent (1%) of the Company's voting securities enter into similar agreements. Each Holder agrees to execute and deliver such other agreements as may be reasonably requested by the Company or the underwriter which are consistent with the foregoing or which are necessary to give further effect thereto. The obligations described in this Section 2.13 shall not apply to a registration relating solely to employee benefit plans on Form S-1 or Form S-8 or similar forms that may be promulgated in the future, or a registration relating solely to a Commission Rule 145 transaction on Form S-4 or similar forms that may be promulgated in the future. The Company may impose stop-transfer instructions with respect to the shares of Common Stock (or other securities) subject to the foregoing restriction until the end of said one hundred eighty (180) day period. 2.14 RULE 144 REPORTING. With a view to making available to the Holders the benefits of certain rules and regulations of the SEC which may permit the sale of the Registrable Securities to the public without registration, the Company agrees to use its best efforts to: (a) Make and keep public information available, as those terms are understood and defined in SEC Rule 144 or any similar or analogous rule promulgated under the Securities Act, at all times after the effective date of the first registration filed by the Company for an 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 Exchange Act; (c) So long as a Holder owns any Registrable Securities, furnish to such Holder forthwith upon request: a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 of the Securities Act, and of the Exchange Act (at any time after it has become subject to such reporting requirements); a copy of the most recent annual or quarterly report of the Company; and such other reports and documents as a Holder may reasonably request in availing itself of any rule or regulation of the SEC allowing it to sell any such securities without registration. 2.15 INDEMNIFICATION AND CONTRIBUTION. In addition to the indemnification obligations of the Company pursuant to Sections 2.9 and 3.9 hereto: (a) The Company agrees to indemnify and hold harmless each Investor and its general partners (collectively, the "Indemnitees") against any investigations, proceedings, claims, or actions and for any expenses, damages, liabilities, or losses (joint or several) arising out of any such investigation, proceeding, claim or action, to which any such Investor may become subject under the Securities Act and any rules or regulation promulgated thereunder, the Exchange Act and any rules or regulations promulgated thereunder, or any state law or regulation, or common law, arising out of, related to or in any way attributable to an Indemnitee's investment in the Company that arise out of or are based upon (i) any breach of any representation, warranty, agreement or covenant of the Company contained herein or in the Purchase Agreement, (ii) any untrue statement or alleged omission to state a material fact in any registration statement filed by the Company or any amendment or supplement thereto, or (iii) any untrue statement or alleged untrue statement of any material fact or the omission or alleged omission to state a material fact in any prospectus distributed by the Company or any amendment or supplement thereto or (iv) any round of financing of the Company (including but not limited to non-participation or non-pro rata 11. 15 participation), or (v) any statement by or on behalf of the Company or action taken by or on behalf of the Company. Upon written request, the Company agrees to reimburse each Indemnitee for any legal or other expenses reasonably incurred in connection with investigating or defending any such investigation, proceeding, claim, or action, as such expenses or other costs are incurred; provided, however, each Indemnitee shall reimburse the Company for any such sums paid to it if it is ultimately determined by final judgment of a court of competent jurisdiction that such Indemnitee is not entitled to indemnification. The Indemnitees, collectively, may select their own counsel. This indemnity agreement shall extend upon the same terms and conditions to, and shall inure to the benefit of, each person, if any, who controls any Indemnitee within the meaning of the Securities Act or the Exchange Act. 3. COVENANTS OF THE COMPANY. 3.1 BASIC FINANCIAL INFORMATION AND REPORTING. (a) The Company will maintain true books and records of account in which full and correct entries will be made of all its business transactions pursuant to a system of accounting established and administered in accordance with generally accepted accounting principles consistently applied, and will set aside on its books all such proper accruals and reserves as shall be required under generally accepted accounting principles consistently applied. (b) As soon as practicable after the end of each fiscal year of the Company, and in any event within one hundred twenty (120) days thereafter, the Company will furnish each Investor a consolidated balance sheet of the Company, as at the end of such fiscal year, and a consolidated statement of income and a consolidated statement of cash flows of the Company, for such year, all prepared in accordance with generally accepted accounting principles consistently applied and setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail. Such financial statements shall be accompanied by a report and opinion thereon by independent public accountants of national standing selected by the Company's Board of Directors. (c) The Company will furnish each Investor, as soon as practicable after the end of the first, second and third quarterly accounting periods in each fiscal year of the Company, and in any event within forty-five (45) days thereafter, a consolidated balance sheet of the Company as of the end of each such quarterly period, and a consolidated statement of income and a consolidated statement of cash flows of the Company for such period and for the current fiscal year to date, prepared in accordance with generally accepted accounting principles, with the exception that no notes need be attached to such statements and year-end audit adjustments may not have been made. (d) So long as an Investor (with its affiliates) shall own not less than two hundred fifty thousand (250,000) shares of Registrable Securities (as adjusted for stock splits and combinations) (a "Major Investor"), the Company will furnish each such Major Investor (i) at least thirty (30) days prior to the beginning of each fiscal year an annual budget and operating plans for such fiscal year (and as soon as available, any subsequent revisions thereto); and (ii) as soon as practicable after the end of each month, and in any event within twenty (20) days thereafter, a consolidated balance sheet of the Company as of the end of each such month, and a consolidated statement of income and a consolidated statement of cash flows of the Company for such month and for the current fiscal year to date, including a comparison to plan figures for such period, prepared in accordance with generally accepted accounting principles consistently applied, with the exception that no notes need be attached to such statements and year-end audit adjustments may not have been made. 12. 16 3.2 INSPECTION RIGHTS. Each Major Investor shall have the right to visit and inspect any of the properties of the Company or any of its subsidiaries, and to discuss the affairs, finances and accounts of the Company or any of its subsidiaries with its officers, and to review such information as is reasonably requested at all such reasonable times and as often as may be reasonably requested; provided, however, that the Company shall not be obligated under this Section 3.2 with respect to a competitor of the Company or with respect to information which the Board of Directors determines in good faith is confidential and should not, therefore, be disclosed. 3.3 CONFIDENTIALITY OF RECORDS. Each Investor agrees to use, and to use its best efforts to insure that its authorized representatives use, the same degree of care as such Investor uses to protect its own confidential information to keep confidential any information furnished to it which the Company identifies as being confidential or proprietary (so long as such information is not in the public domain), except that such Investor may disclose such proprietary or confidential information to any partner, subsidiary or parent of such Investor for the purpose of evaluating its investment in the Company as long as such partner, subsidiary or parent is advised of the confidentiality provisions of this Section 3.3. 3.4 RESERVATION OF COMMON STOCK. The Company will at all times reserve and keep available, solely for issuance and delivery upon the conversion of the Series D Stock, all Common Stock issuable from time to time upon such conversion. 3.5 KEY MAN INSURANCE. Subject to the approval of the Board of Directors, the Company will use its best efforts to obtain and maintain in full force and effect term life insurance in the amount of two million dollars ($2,000,000) on the lives of each of Bryan Lang, Stephen Kay and one million dollars ($1,000,000) on the life of Brandon L. Raines, naming the Company as beneficiary. 3.6 PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT. The Company shall require all employees and consultants to execute and deliver a Proprietary Information and Inventions Agreement in the form attached to the Purchase Agreement. 3.7 RELATED PARTY TRANSACTIONS. The Company shall not enter into any agreement with any shareholder, officer or director of the Company, or any "affiliate" or "associate" of any such person (as such terms are defined in the rules and regulations promulgated under the Securities Act), including without limitation any agreement or other arrangement providing for the furnishing of services by, rental of real or personal property from, or otherwise requiring payments to, any such person or entity, without the consent of at least a majority of the members of the Company's Board of Directors having no interest in such agreement or arrangement. 3.8 BOARD OF DIRECTORS APPROVAL. The Company shall not, without the approval of a majority of the Board of Directors with all Directors voting, take any of the following actions: (a) repurchase or redeem any equity securities, pay or declare a dividend, whether in cash or property, or otherwise authorize any distribution to shareholders (except for acquisitions of common stock by the Company pursuant to agreements which permit the company to repurchase such shares upon termination of employment, the exercise of the Company's right of first refusal upon a proposed transfer, or as set forth in Company's Articles of Incorporation in connection with the rights preferences and privileges of the Series D Stock); (b) purchase equity securities of, loan to or invest in any business entity more than one hundred thousand ($100,000) dollars; 13. 17 (c) incur any debt in any twelve month period in excess of one hundred thousand ($100,000) dollars, except pursuant to short term commercial lending arrangements of six months or less for working capital purposes or in accordance with the company's budget as previously approved by the company's Board of Directors or otherwise in the ordinary course of business in accordance with the Company's past practices; (d) sell or otherwise transfer securities of any of its subsidiaries to any third party; (e) except as required by law in the event of an employee's termination, pay any deferred salaries or fees except for those employees' and directors' salaries and fees incurred from October 1, 1997 to the date hereof; or (f) make any fundamental change in the operations of the Company as now conducted or as proposed to be conducted. 3.9 DIRECTORS' LIABILITY AND INDEMNIFICATION. The Company's Articles of Incorporation and Bylaws shall provide (a) for elimination of the liability of director to the maximum extent permitted by law and (b) for indemnification of directors for acts on behalf of the Company to the maximum extent permitted by law. In addition, the Company shall enter into and use its best efforts to at all times maintain indemnification contracts substantially in the form attached as Attachment B hereto with each of its directors to indemnify such directors to the maximum extent permissible under California law. 3.10 REINCORPORATION. Subject to the approval of the Board of Directors and the shareholders of the Company, the Company shall, within six (6) months of the date hereof, reincorporate the Company in the State of Delaware. In the event of any delay, the Company shall use its best efforts to effect such reincorporation as promptly as possible following the expiration of such six (6) month period. 3.11 EXECUTIVE COMPENSATION. Subject to the approval of the Board of Directors of the Company, promptly following the date hereof, (a) the Company and Bryan Lang ("Lang") shall enter into an agreement which shall include, without limitation, provision for (i) Lang's waiver of all prospective bonuses or commissions that may otherwise be due under agreements between Lang and the Company as of the date hereof, (ii) bonuses to be paid to Lang based upon performance criteria mutually agreed upon by Lang and the Company, and (iii) a waiver of all deferred compensation owed to Lang by the Company as of the date hereof in exchange for the right to receive, as a performance bonus, $335,000 upon an Initial Offering, or a change of control (as defined below) in which the aggregate proceeds payable to the Company and/or its Shareholders exceeds Forty Million Dollars ($40,000,000) and (b) the Company and Stephen Kay ("Kay") shall enter into an agreement which shall include, without limitation, provision for (i) Kay's waiver of all prospective bonuses or commissions that may otherwise be due under agreements between Kay and the Company as of the date hereof and (ii) bonuses to be paid to Kay based upon performance criteria mutually agreed upon by Kay and the Company. A "Change in Control" shall be deemed to have occurred if (i) a tender offer shall be made and consummated for the ownership of more than fifty percent (50%) of the outstanding voting securities of the Company, (ii) the Company shall be merged or consolidate with another corporation and as a result of such merger or consolidation less than fifty percent (50%) of the outstanding voting securities of the surviving or resulting corporation shall be owned in the aggregate by the former shareholders of the Company, as the same shall have existed immediately prior to such merger or consolidation, (iii) the Company shall sell all or substantially all of its assets to another corporation which is not a wholly-owned subsidiary, or (iv) a person within the meaning of Section 3(a)(9) or Section 13(d)(3) (as in effect on the date hereof) of the 14. 18 Securities and Exchange act of 1934 ("Exchange Act"), shall acquire more than fifty percent (50%) of the outstanding voting securities of the Company (whether directly, indirectly, beneficially or of record). For purposes hereof, ownership of voting securities shall take into account and shall including ownership as determined by applying the provisions of Rule 13d-3(d)(1)(i) (as in effect on the date hereof) pursuant to the Exchange Act. 3.12 REAL PROPERTY HOLDING CORPORATION. The Company covenants that it will operate in a manner such that it will not become a "United States real property holding corporation" as that term is defined in Section 897(c)(2) of the Internal Revenue Code of 1986, as amended, and the regulations thereunder ("FIRPTA"). The Company agrees to make determinations as to its status as a USRPHC, and will file statements concerning those determinations with the Internal Revenue Service, in the manner and at the times required under Reg. Section 1.897-2(h), or any supplementary or successor provision thereto. Within 30 days of a request from an Investor or any of its partners, the Company will inform the requesting party, in the manner set forth in Reg. Section 1.897-2(h)(1)(iv) or any supplementary or successor provision thereto, whether that party's interest in the Company constitutes a United States real property interest (within the meaning of Internal Revenue Code Section 897(c)(1) and the regulations thereunder) and whether the Company has provided to the Internal Revenue Service all required notices as to its USRPHC status. 3.13 STIPULATED ACTIVITIES. Each senior officer of the Company (each, a "Principal") shall, within ten (10) days of the occurrence thereof, provide the Board of Directors of the Company with a list and description of each Stipulated Activity (as defined in the Purchase Agreement) in which such Principal is engaged or otherwise involved which has commenced, expired or been modified since such Principal delivered the most recent such list and description to the Board of Directors. 3.14 TERMINATION OF COVENANTS. All covenants of the Company contained in Section 3 of this Agreement shall expire and terminate as to each Investor on the effective date of the registration statement pertaining to the Initial Offering. 4. MISCELLANEOUS. 4.1 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. 4.2 SURVIVAL. The representations, warranties, covenants, and agreements made herein shall survive any investigation made by any Holder and the closing of the transactions contemplated hereby. All statements as to factual matters contained in any certificate or other instrument delivered by or on behalf of the Company pursuant hereto in connection with the transactions contemplated hereby shall be deemed to be representations and warranties by the Company hereunder solely as of the date of such certificate or instrument. 4.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto and shall inure to the benefit of and be enforceable by each person who shall be a holder of Registrable Securities from time to time; provided, however, that prior to the receipt by the Company of adequate written notice of the transfer of any Registrable Securities specifying the full name and address of the transferee, the Company may deem and treat the person listed as the holder of such shares in its records as the absolute owner and holder of such shares for all purposes, including the payment of dividends or any redemption price. 15. 19 4.4 ENTIRE AGREEMENT. This Agreement, the Exhibits and Schedules hereto, the Purchase Agreement and the other documents delivered pursuant thereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and no party shall be liable or bound to any other in any manner by any representations, warranties, covenants and agreements except as specifically set forth herein and therein. 4.5 SEVERABILITY. In case any provision of the Agreement shall be invalid, illegal, or unenforceable, the validity, legality, and unenforceability of the remaining provisions shall not in any way be affected or impaired thereby. 4.6 AMENDMENT AND WAIVER. (a) Except as otherwise expressly provided, this Agreement may be amended or modified only upon the written consent of the Company and the holders of at least a majority of the Registrable Securities. (b) Except as otherwise expressly provided, the obligations of the Company and the rights of the Holders under this Agreement may be waived only with the written consent of the holders of at least a majority of the Registrable Securities. (c) Notwithstanding the foregoing, this Agreement may be amended with only the written consent of the Company to include additional purchasers of Shares as "Investors," "Holders" and parties hereto. 4.7 DELAYS OR OMISSIONS. It is agreed that no delay or omission to exercise any right, power, or remedy accruing to any Holder, upon any breach, default, or noncompliance of the Company under this Agreement shall impair any such right, power, or remedy, nor shall it be construed to be a waiver of any such breach, default or noncompliance, or any acquiescence therein, or of any similar breach, default or noncompliance thereafter occurring. It is further agreed that any waiver, permit, consent, or approval of any kind or character on any Holder's part of any breach, default or noncompliance under the Agreement or any waiver on such Holder's part of any provisions or conditions of this Agreement must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement, by law, or otherwise afforded to Holders, shall be cumulative and not alternative. 4.8 NOTICES. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified, (b) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient; if not, then on the next business day, (c) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the party to be notified at the address as set forth on the signature pages hereof or Exhibit A hereto or at such other address as such party may designate by ten (10) days advance written notice to the other parties hereto. 4.9 ATTORNEYS' FEES. In the event that any dispute among the parties to this Agreement should result in litigation, the prevailing party in such dispute shall be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Agreement, including without limitation, such reasonable fees and expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and expenses of appeals. 16. 20 4.10 TITLES AND SUBTITLES. The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 4.11 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 17. 21 IN WITNESS WHEREOF, the parties hereto have executed this INVESTOR RIGHTS AGREEMENT as of the date set forth in the first paragraph hereof. COMPANY: INVESTORS: LANDA MANAGEMENT SYSTEMS CORPORATION BEDROCK CAPITAL PARTNERS I, L.P. By: /s/ [ILLEGIBLE] By: --------------------------------- -------------------------------- Title: [ILLEGIBLE] Title: ------------------------------ ----------------------------- BEDROCK CAPITAL SIDE-BY-SIDE, L.P. By: -------------------------------- Title: ----------------------------- GREYLOCK IX LIMITED PARTNERSHIP BY: GREYLOCK IX GP LIMITED PARTNERSHIP, ITS GENERAL PARTNER By: /s/ [ILLEGIBLE] -------------------------------- SEQUOIA CAPITAL VII A CALIFORNIA LIMITED PARTNERSHIP BY: SC VII-A MANAGEMENT, LLC A CALIFORNIA LIMITED LIABILITY COMPANY, ITS GENERAL PARTNER By: -------------------------------- Managing Member SEQUOIA TECHNOLOGY PARTNERS VII A CALIFORNIA LIMITED PARTNERSHIP BY: SC VII-A MANAGEMENT, LLC A CALIFORNIA LIMITED LIABILITY COMPANY, ITS GENERAL PARTNER By: -------------------------------- Managing Member SIGNATURE PAGE TO INVESTOR RIGHTS AGREEMENT 22 SQP 1997 BY: SC VII-A MANAGEMENT, LLC A CALIFORNIA LIMITED LIABILITY COMPANY, ITS GENERAL PARTNER By: -------------------------------- Managing Member SEQUOIA 1997 LLC BY: SC VII-A MANAGEMENT, LLC A CALIFORNIA LIMITED LIABILITY COMPANY, ITS GENERAL PARTNER By: -------------------------------- Managing Member SEQUOIA INTERNATIONAL PARTNERS BY: SC VII-A MANAGEMENT, LLC A CALIFORNIA LIMITED LIABILITY COMPANY, ITS GENERAL PARTNER By: -------------------------------- Managing Member ----------------------------------- GENE CATTARINA ----------------------------------- JOHN KARLEN SIGNATURE PAGE TO INVESTOR RIGHTS AGREEMENT EX-10.8 8 RESTRICTED STOCK PURCHASE AGREEMENT-EUGENE SANTA C 1 EXHIBIT 10.08 STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made this day 17th March 1999 by and between LANDA MANAGEMENT SYSTEMS CORPORATION, a California corporation (the "Company"), and Eugene Santa Cattarina, ("Purchaser"). WITNESSETH: WHEREAS, Purchaser holds a stock option dated October 20th, 1998 to purchase shares of common stock of the Company (the "Option") pursuant to the Company's 1998 Equity Incentive Plan (the "Plan") which Purchaser desires to exercise; and WHEREAS, Purchaser wishes to take advantage of the early exercise provision of the Option, and therefore to enter into this Agreement. NOW, THEREFORE, IT IS AGREED between the parties as follows: 1. Purchaser hereby agrees to purchase from the Company, and the Company hereby agrees to sell to Purchaser, an aggregate of eight hundred and five thousand, five hundred and fifty shares (805,550) of common stock (the "Stock") of the Company, for a purchase price of 12/100 US dollars ($0.12) per share (total purchase price: Ninety six thousand, six hundred and sixty six 00/100 US dollars ($96,666.00)), payable as follows: Cash at Closing $ 0.00 Promissory Note in the form of Exhibit D (the "Note") $ 96,666.00 ----------- Total Purchase Price $ 96,666.00 ===========
The closing hereunder shall occur at the offices of the Company on the date of this Agreement or at such other time and place as the parties may mutually agree upon in writing. At the closing, Purchaser shall deliver two (2) stock assignments in the form of Exhibit B, duly endorsed (with date and number of shares left blank), joint escrow instructions (the "Joint Escrow Instructions") in the form of Exhibit C, duly executed by Purchaser, and the total purchase price (including an executed Note in the form of Exhibit D if a portion of the total purchase price is to be paid by promissory note and an executed pledge agreement in the form of Exhibit E (the "Pledge Agreement") under which all shares of the Stock acquired by Note shall be pledged as collateral security for the payment of the indebtedness represented by the Note. At the closing or as soon thereafter as practicable, the Company shall deliver to the Escrow Agent (as defined in paragraph 8 below) share certificates for all of the Stock that is to be subject to the Purchase Option (as defined in paragraph 2 below), and shall deliver share certificates to Purchaser for all of the Stock, if any, that is not to be subject to the Purchase Option or the Pledge 1 2 Agreement. The certificates for all of the Stock that is subject to the Pledge Agreement but not the Purchase Option shall be retained by the Company as security pursuant to the Pledge Agreement. 2. The Stock to be purchased by Purchaser pursuant to this Agreement shall be subject to the following option ("Purchase Option"): (a) In the event that Purchaser's Continuous Service (as that term is defined in the Plan) shall terminate for any reason (including Purchaser's death), or no reason, with or without cause, the Purchase Option may be exercised. The Company shall have the right at any time within ninety (90) days after such termination of Continuous Service, or such longer period as may determined by the Company if such later repurchase is deemed necessary by the Company for treatment of its stock as Qualified Small Business Stock under Section 1202 of the Internal Revenue Code of 1986, as amended, and regulations promulgated thereunder, to exercise its option to repurchase from Purchaser or his personal representative, as the case may be, at the price per share paid by Purchaser pursuant to this Agreement ("Option Price"), up to but not exceeding the number of unvested shares of the Stock set forth on Exhibit A hereto, which is incorporated herein by this reference. (b) In addition, and without limiting the foregoing Purchase Option, if at any time during the term of the Purchase Option there occurs a transaction described in Section 11(b) or 11(c) of the Plan (e.g., a dissolution, liquidation, asset sale, merger, consolidation or reverse merger of the Company), then: (i) the Company shall exercise the Purchase Option to the same extent that the unvested portion of the Option would have terminated pursuant to Section 11(b) or 11(c) of the Plan if the Option had not been exercised pursuant to this Agreement, (ii) the Purchase Option shall lapse to the same extent that the unvested portion of the Option would have automatically accelerated pursuant to Section 11(c) of the Plan if the Option had not been exercised pursuant to this Agreement or (iii) the Purchase Option may be assigned to any successor to the Company to the same extent that the unvested portion of the Option would have been assumed or substituted by such successor if the Option had not been exercised pursuant to this Agreement, in which case the Purchase Option shall apply on the same basis as set forth above to the Stock or to the consideration received for the Stock by the Purchaser in the transaction (as the case may be) if Purchaser's Continuous Service with such successor terminates for any reason. The continuing or surviving entity shall be deemed to be the successor to the Company for purposes of this Agreement, and references herein to the "Company" shall be deemed to refer to such successor. (c) The Company shall be entitled to pay for any of the Stock purchased pursuant to its Purchase Option at the Company's option in cash, by offset against any indebtedness owing to the Company by Purchaser including without limitation any note given in payment for the Stock, or a combination of both. (d) This Agreement is not an employment contract and nothing in this Agreement shall be deemed to create in any way whatsoever any obligation on the part of Purchaser to continue in the employ of the Company or any Affiliate (as defined in the Plan) thereof, or of the Company or any Affiliate thereof to continue Purchaser in its employ. In addition, nothing in this Agreement shall obligate the Company or any Affiliate thereof, their 2 3 respective stockholders, boards of directors, officers or employees to continue any relationship that you might have as a director or consultant for the Company or any Affiliate thereof. 3. The Purchase Option may be exercised by giving written notice of exercise delivered or mailed as provided in paragraph 14. Upon providing of such notice and payment or tender of the purchase price, the Company shall become the legal and beneficial owner of the Stock being purchased and all rights and interests therein or related thereto. 4. If from time to time during the term of the Purchase Option there is any stock dividend or liquidating dividend or distribution of cash and/or property, stock split or other change in the character or amount of any of the outstanding securities of the Company, then, in such event, any and all new, substituted or additional securities or other property to which Purchaser is entitled by reason of his ownership of Stock will be immediately subject to the Purchase Option and be included in the word "Stock" for all purposes of the Purchase Option with the same force and effect as the shares of Stock then subject to the Purchase Option. While the total Option Price shall remain the same after each such event, the Option Price per share of Stock upon exercise of the Purchase Option shall be appropriately adjusted. 5. All certificates representing any shares of Stock of the Company subject to the provisions of this Agreement shall have endorsed thereon legends in substantially the following form: (a) "The shares represented by this certificate are subject to an option set forth in an agreement between the Company and the registered holder, or registered holder's predecessor in interest, a copy of which is on file at the principal office of this Company. Any transfer or attempted transfer of any shares subject to such option is void without the prior express written consent of the issuer of these shares." (b) "These securities have not been registered under the Securities Act of 1933. They may not be sold, offered for sale, pledged or hypothecated in the absence of an effective registration statement as to the securities under said Act or an opinion of counsel satisfactory to the Company that such registration is not required." (c) "The shares represented by this certificate are subject to a right of first refusal option in favor of the Company and/or its assignee(s) as provided in the Bylaws of the Company." (d) "Any legend required to be placed thereon by the California Commissioner of Corporations. 6. Purchaser acknowledges that he or she is aware that the Stock to be issued to him or her by the Company pursuant to this Agreement has not been registered under the Securities Act of 1933, as amended (the "Act"), on the basis that no distribution or public offering of the Stock is to be effected, and in this connection acknowledges that the Company is relying on the following representations. In this connection, Purchaser warrants and represents to the Company that he or she is acquiring the Stock for investment and not with a view to or for sale in 3 4 connection with any distribution of the Stock or with any present intention of distributing or selling the Stock and he or she does not presently have reason to anticipate any change in circumstances or any particular occasion or event which would cause him or her to sell the Stock. Purchaser recognizes that the Stock must be held indefinitely unless it is subsequently registered under the Act or an exemption from such registration is available and, further, recognizes that the Company is under no obligation to register the Stock or to comply with any exemption from such registration. 7. Purchaser is aware that the Stock may not be sold pursuant to Rule 144 adopted under the Act unless certain conditions are met and until Purchaser has held the Stock for the applicable holding period set forth in Rule 144. Among the conditions for use of Rule 144 is the availability of specified current public information about the Company. Purchaser recognizes that the Company presently has no plans to make such information available to the public. Whether or not the Purchase Option is exercised or has lapsed, Purchaser further agrees not to make any disposition of any of the Stock in any event unless and until: (a) There is then in effect a registration statement under the Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (b) (i) Purchaser shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (ii) Purchaser shall have given the Company an opinion of counsel, which opinion and counsel shall be satisfactory to the Company, to the effect that such disposition will not require registration of the Stock under the Act. 8. As security for his faithful performance of the terms of this Agreement and to insure the availability for delivery of Purchaser's Stock upon exercise of the Purchase Option herein provided for, Purchaser agrees, at the closing hereunder (or as soon thereafter as practicable), to deliver (or have the Company deliver on the Purchaser's behalf) to and deposit with the Secretary of the Company ("Escrow Agent"), as Escrow Agent in this transaction, two (2) stock assignments duly endorsed (with date and number of shares left blank) in the form attached hereto as Exhibit B, together with a certificate or certificates evidencing all of the Stock subject to the Purchase Option; said documents are to be held by the Escrow Agent and delivered by said Escrow Agent pursuant to the Joint Escrow Instructions of the Company and Purchaser set forth in Exhibit C attached hereto and incorporated herein by this reference, which instructions shall also be delivered to the Escrow Agent at the closing hereunder (or as soon thereafter as practicable). 9. Purchaser shall not sell or transfer any of the Stock subject to the Purchase Option or any interest therein so long as such Stock is subject to the Purchase Option. In addition, the Purchaser agrees that the Company (or a representative of the underwriters) may, in connection with the first underwritten registration of the offering of any securities of the Company under the Act, require that Purchaser not sell, dispose of, transfer, make any short sale of, grant any option for the purchase of, or enter into any hedging or similar transaction with the same economic 4 5 effect as a sale, any of the Stock or other securities of the Company held by you, for a period of time specified by the underwriter(s) (not to exceed one hundred eighty (180) days) following the effective date of the registration statement of the Company filed under the Act. 10. The Company shall not be required (a) to transfer on its books any shares of Stock of the Company which shall have been sold or transferred in violation of any of the provisions set forth in this Agreement or (b) to treat as owner of such shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such shares shall have been so transferred. 11. Subject to the provisions of paragraphs 9 and 10 above, Purchaser (but not any unapproved transferee) shall, during the term of this Agreement, exercise all rights and privileges of a stockholder of the Company with respect to the Stock. 12. The shares of Stock purchased under the terms of this Agreement are subject to the right of first refusal provided for in the Bylaws of the Company. 13. The parties agree to execute such further instruments and to take such further action as reasonably may be necessary to carry out the intent of this Agreement. 14. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in any United States Post Office Box, by registered or certified mail with postage and fees prepaid, addressed to the other party hereto at his address hereinafter shown below his signature or at such other address as such party may designate by ten (10) days' advance written notice to the other party hereto. 15. This Agreement shall bind and inure to the benefit of the successors and assigns of the Company and, subject to the restrictions on transfer herein set forth, inure to the benefit of and be binding upon Purchaser, his heirs, executors, administrators, successors, and assigns. Without limiting the generality of the foregoing, the Purchase Option of the Company hereunder shall be assignable by the Company at any time or from time to time, in whole or in part. 5 6 IN WITNESS WHEREOF, the parties hereto have executed this Stock Purchase Agreement as of the day and year first set forth above. LANDA MANAGEMENT SYSTEMS CORPORATION By: /s/ STEPHEN P. KAY -------------------------------- Its: COO/CFO ------------------------------- Address: 1072 Marauder Street, Suite A Chico, CA 95973 /s/ EUGENE SANTA CATTARINA ----------------------------------- EUGENE SANTA CATTARINA Address: 540 Chestnut Rose Lane Atlanta, GA 30327 ATTACHMENTS: Exhibit A Vesting Schedule Exhibit B Assignment Separate from Certificate Exhibit C Joint Escrow Instructions Exhibit D Promissory Note Exhibit E Pledge Agreement 6 7 EXHIBIT A VESTING SCHEDULE
IF CONTINUOUS SERVICE NUMBER OF UNVESTED SHARES TERMINATES: SUBJECT TO PURCHASE OPTION: Before 19th July 1999 805,550.0 shares After 19th July 1999 but before 19th August 1999 604,162.5 shares After 19th August 1999 but before 19th September 1999 587,380.2 shares After 19th September 1999 but before 19th October 1999 570,597.9 shares After 19th October 1999 but before 19th November 1999 553,815.6 shares After 19th November 1999 but before 19th December 1999 537,033.3 shares After 19th December 1999 but before 19th January 2000 520,251.0 shares After 19th January 2000 but before 19th February 2000 503,468.7 shares After 19th February 2000 but before 19th March 2000 486,686.4 shares After 19th March 2000 but before 19th April 2000 469,904.1 shares After 19th April 2000 but before 19th May 2000 453,121.8 shares
1 8 EXHIBIT A (CONTINUED) VESTING SCHEDULE
IF CONTINUOUS SERVICE NUMBER OF UNVESTED SHARES TERMINATES: SUBJECT TO PURCHASE OPTION: After 19th May 2000 but before 19th June 2000 436,339.5 shares After 19th June 2000 but before 19th July 2000 419,557.2 shares After 19th July 2000 but before 19th August 2000 402,774.9 shares After 19th August 2000 but before 19th September 2000 385,992.6 shares After 19th September 2000 but before 19th October 2000 369,210.3 shares After 19th October 2000 but before 19th November 2000 352,428.0 shares After 19th November 2000 but before 19th December 2000 335,645.7 shares After 19th December 2000 but before 19th January 2001 318,863.4 shares After 19th January 2001 but before 19th February 2001 302,081.1 shares After 19th February 2001 but before 19th March 2001 285,298.8 shares
2. 9 EXHIBIT A (CONTINUED) VESTING SCHEDULE
IF CONTINUOUS SERVICE NUMBER OF UNVESTED SHARES TERMINATES: SUBJECT TO PURCHASE OPTION: After 19th March 2001 but before 19th April 2001 268,516.5 shares After 19th April 2001 but before 19th May 2001 251,734.2 shares After 19th May 2001 but before 19th June 2001 234,951.9 shares After 19th June 2001 but before 19th July 2001 218,169.6 shares After 19th July 2001 but before 19th August 2001 201,387.3 shares After 19th August 2001 but before 19th September 2001 184,605.0 shares After 19th September 2001 but before 19th October 2001 167,822.7 shares After 19th October 2001 but before 19th November 2001 151,040.4 shares After 19th November 2001 but before 19th December 2001 134,258.1 shares After 19th December 2001 but before 19th January 2002 117,475.8 shares
3 10 EXHIBIT A (CONTINUED) VESTING SCHEDULE
IF CONTINUOUS SERVICE NUMBER OF UNVESTED SHARES TERMINATES: SUBJECT TO PURCHASE OPTION: After 19th January 2002 but before 19th February 2002 100,693.5 shares After 19th February 2002 but before 19th March 2002 83,911.2 shares After 19th March 2002 but before 19th April 2002 67,128.9 shares After 19th April 2002 but before 19th May 2002 50,346.6 shares After 19th May 2002 but before 19th June 2002 33,564.3 shares After 19th June 2002 but before 19th July 2002 16,782.0 shares After 19th July 2002 0.0 shares
4 11 EXHIBIT B ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED and pursuant to that certain Stock Purchase Agreement dated as of 17th March 1999, (the "Agreement") Eugene Santa Cattarina hereby sells, assigns and transfers unto Landa Management Systems Corporation ____________________(___)shares of common stock of Landa Management Systems Corporation, a California corporation, standing in the undersigned's name on the books of said corporation represented by Certificate No. _____ herewith, and does hereby irrevocably constitute and appoint __________________ attorney to transfer the said stock on the books of the said corporation with full power of substitution in the premises. This Assignment may be used only in accordance with and subject to the terms and conditions of the Agreement, in connection with the repurchase of shares of Common Stock issued to the undersigned pursuant to the Agreement, and only to the extent that such shares remain subject to the Company's Purchase Option under the Agreement. Dated: ------------------ /s/ EUGENE SANTA CATTARINA --------------------------------- [Signature] Eugene Santa Cattarina --------------------------------- [INSTRUCTION: Please do not fill in any blanks other than the signature line. The purpose of this Assignment is to enable the Company to exercise its repurchase option set forth in the Agreement without requiring additional signatures on the part of Purchaser.] 12 EXHIBIT B ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED and pursuant to that certain Stock Purchase Agreement dated as of 17th March 1999, (the "Agreement") Eugene Santa Cattarina hereby sells, assigns and transfers unto Landa Management Systems Corporation ____________________(___)shares of common stock of Landa Management Systems Corporation, a California corporation, standing in the undersigned's name on the books of said corporation represented by Certificate No. _____ herewith, and does hereby irrevocably constitute and appoint __________________ attorney to transfer the said stock on the books of the said corporation with full power of substitution in the premises. This Assignment may be used only in accordance with and subject to the terms and conditions of the Agreement, in connection with the repurchase of shares of Common Stock issued to the undersigned pursuant to the Agreement, and only to the extent that such shares remain subject to the Company's Purchase Option under the Agreement. Dated: ------------------ /s/ EUGENE SANTA CATTARINA --------------------------------- [Signature] Eugene Santa Cattarina --------------------------------- [INSTRUCTION: Please do not fill in any blanks other than the signature line. The purpose of this Assignment is to enable the Company to exercise its repurchase option set forth in the Agreement without requiring additional signatures on the part of Purchaser.] 13 EXHIBIT C JOINT ESCROW INSTRUCTIONS Stephen P. Kay, Company Secretary Landa Management Systems Corporation 1072 Marauder, Suite A Chico, CA 95973 Dear Sir: As Escrow Agent for both Landa Management Systems Corporation, a California corporation ("Company"), and the undersigned purchaser of stock of the Company ("Purchaser"), you are hereby authorized and directed to hold the documents delivered to you pursuant to the terms of that certain Stock Purchase Agreement ("Agreement"), dated 17TH MARCH 1999, to which a copy of these Joint Escrow Instructions is attached as Exhibit C in accordance with the following instructions: 1. In the event the Company or an assignee shall elect to exercise the Purchase Option set forth in the Agreement, the Company or its assignee will give to Purchaser and you a written notice specifying the number of shares of stock to be purchased, the purchase price, and the time for a closing hereunder at the principal office of the Company. Purchaser and the Company hereby irrevocably authorize and direct you to close the transaction contemplated by such notice in accordance with the terms of said notice. 2. At the closing you are directed (a) to date any stock assignments necessary for the transfer in question, (b) to fill in the number of shares being transferred, and (c) to deliver same, together with the certificate evidencing the shares of stock to be transferred, to the Company against the simultaneous delivery to you of the purchase price (which may include suitable acknowledgment of cancellation of indebtedness) of the number of shares of stock being purchased pursuant to the exercise of the Purchase Option. 3. Purchaser irrevocably authorizes the Company to deposit with you any certificates evidencing shares of stock to be held by you hereunder and any additions and substitutions to said shares as specified in the Agreement. Purchaser does hereby irrevocably constitute and appoint you as his attorney-in-fact and agent for the term of this escrow to execute with respect to such securities and other property all documents of assignment and/or transfer and all stock certificates necessary or appropriate to make all securities negotiable and complete any transaction herein contemplated. 4. This escrow shall terminate upon expiration or exercise in full of the Purchase Option, whichever occurs first. 1. 14 5. If at the time of termination of this escrow you should have in your possession any documents, securities, or other property belonging to Purchaser, you shall deliver all of same to Purchaser and shall be discharged of all further obligations hereunder; provided, however, that if at the time of termination of this escrow you are advised by the Company that the property subject to this escrow is the subject of a pledge or other security agreement, you shall deliver all such property to the pledgeholder or other person designated by the Company. 6. Except as otherwise provided in these Joint Escrow Instructions, your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto. 7. You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties or their assignees. You shall not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith and any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith. 8. You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law, and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree of any court, you shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction. 9. You shall not be liable in any respect on account of the identity, authority or rights of the parties executing or delivering or purporting to execute or deliver the Agreement or any documents or papers deposited or called for hereunder. 10. You shall not be liable for the outlawing of any rights under any statute of limitations with respect to these Joint Escrow Instructions or any documents deposited with you. 11. Your responsibilities as Escrow Agent hereunder shall terminate if you shall cease to be Secretary of the Company or if you shall resign by written notice to each party. In the event of any such termination, the Company may appoint any officer or assistant officer of the Company as successor Escrow Agent and Purchaser hereby confirms the appointment of such successor or successors as his attorney-in-fact and agent to the full extent of your appointment. 12. If you reasonably require other or further instruments in connection with these Joint Escrow Instructions or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments. 13. It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the securities, you are authorized and 2. 15 directed to retain in your possession without liability to anyone all or any part of said securities until such dispute shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but you shall be under no duty whatsoever to institute or defend any such proceedings. 14. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery, including delivery by express courier or five days after deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to each of the other parties hereunto entitled at the following addresses, or at such other addresses as a party may designate by ten days' advance written notice to each of the other parties hereto: COMPANY: Stephen P. Kay, Company Secretary Landa Management Systems Corporation 1072 Marauder, Suite A Chico, CA 95973 PURCHASER: Eugene Santa Cattarina 540 Chestnut Rose Lane Atlanta, GA 30327 ESCROW AGENT: Stephen P. Kay, Company Secretary Landa Management Systems Corporation 1072 Marauder, Suite A Chico, CA 95973 15. By signing these Joint Escrow Instructions you become a party hereto only for the purpose of said Joint Escrow instructions; you do not become a party to the Agreement. 16. You shall be entitled to employ such legal counsel and other experts (including without limitation the firm of Cooley Godward LLP) as you may deem necessary properly to advise you in connection with your obligations hereunder. You may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor. The Corporation shall be responsible for all fees generated by such legal counsel in connection with your obligations hereunder. 17. This instrument shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. It is understood and agreed that references to "you" or "your" herein refer to the original Escrow Agent and to any and all successor Escrow Agents. It is understood and agreed that the Corporation may at any time or from time to time assign its rights under the Agreement and these Joint Escrow Instructions in whole or in part. 18. This Agreement shall be governed by and interpreted and determined in accordance with the laws of the State of California, as such laws are applied by California courts to contracts made and to be performed entirely in California by residents of that state. 3. 16 Very truly yours, LANDA MANAGEMENT SYSTEM CORPORATION /s/ STEPHEN P. KAY By: Stephen P. Kay, Chief Financial Officer ---------------------------------------- PURCHASER /s/ EUGENE SANTA CATTARINA Eugene Santa Cattarina -------------------------------------------- Escrow Agent: /s/ STEPHEN P. KAY - --------------------------------------- Stephen P. Kay, Company Secretary 4. 17 EXHIBIT D FULL RECOURSE PROMISSORY NOTE $96,666.00 17th MARCH 1999 FOR VALUE RECEIVED, the undersigned hereby unconditionally promises to pay to the order of Landa Management Systems Corporation, a California corporation (the "Company"), at Chico, California, or at such other place as the holder hereof may designate in writing, in lawful money of the United States of America and in immediately available funds, the principal sum of Ninety nine thousand six hundred sixty six 00/100 Dollars ($96,666.00) together with interest accrued from the date hereof on the unpaid principal at the rate of 6.00% per annum, or the maximum rate permissible by law (which under the laws of the State of California shall be deemed to be the laws relating to permissible rates of interest on commercial loans), whichever is less, as follows: PRINCIPAL REPAYMENT. The outstanding principal amount hereunder shall be DUE AND PAYABLE IN FULL ON MARCH l6TH, 2006. INTEREST PAYMENTS. Interest shall be ACCRUED ANNUALLY and shall be calculated on the basis of a 360-day year for the actual number of days elapsed; provided, however, that in the event that the undersigned's employment by or association with the Company is terminated for any reason prior to payment in full of this Note, this Note shall be accelerated and all remaining unpaid principal and interest shall become due and payable immediately after such termination. Moreover, the Company may, in connection with the first underwritten registration of the offering of any securities of the Company under the Securities Act of 1933, as amended (the "Securities Act"), require that this Note shall be accelerated and all remaining unpaid principal and interest shall become due and payable within two hundred ten (210) days following the effective date of the registration statement of the Company filed under the Securities Act. If the undersigned fails to pay any of the principal and accrued interest when due, the Company, at its sole option, shall have the right to accelerate this Note, in which event the entire principal balance and all accrued interest shall become immediately due and payable, and immediately collectible by the Company pursuant to applicable law. This Note may be prepaid at any time without penalty. All money paid toward the satisfaction of this Note shall be applied first to the payment of interest as required hereunder and then to the retirement of the principal. This Note is a full recourse promissory note. The full amount of this Note is secured by a pledge of shares of Common Stock of the Company, and is subject to all of the terms and provisions of the Stock Purchase Agreement and the Pledge Agreement, each of even date herewith between the undersigned and the Company. 1. 18 The undersigned hereby represents and agrees that the amounts due under this Note are not consumer debt, and are not incurred primarily for personal, family or household purposes, but are for business and commercial purposes only. The undersigned hereby waives presentment, protest and notice of protest, demand for payment, notice of dishonor and all other notices or demands in connection with the delivery, acceptance, performance, default or endorsement of this Note. The holder hereof shall be entitled to recover, and the undersigned agrees to pay when incurred, all costs and expenses of collection of this Note, including without limitation, reasonable attorneys' fees. This Note shall be governed by, and construed, enforced and interpreted in accordance with, the laws of the State of California, excluding conflict of laws principles that would cause the application of laws of any other jurisdiction. Signed /s/ EUGENE SANTA CATTARINA ------------------------------- Eugene Santa Cattarina 2. 19 EXHIBIT E PLEDGE AGREEMENT 1. As collateral security for the payment of that certain $96,666.00 promissory note issued this date to Landa Management Systems Corporation ("Pledgee") by the undersigned (hereinafter called "indebtedness"), the undersigned hereby assigns, transfers to and pledges with the Pledgee the securities listed on Schedule 1 hereto which were this day delivered to be deposited with Pledgee, together with any stock rights, rights to subscribe, dividends paid in cash or other property in connection with the complete or partial liquidation of Pledgee, stock dividends, dividends paid in stock, new securities or other property except cash dividends other than liquidating dividends to which the undersigned is or may hereafter become entitled to receive on account of such property, and in the event that the undersigned receives any such, the undersigned will immediately deliver it to Pledgee to be held by Pledgee hereunder in the same manner as the property originally pledged hereunder. All property assigned, transferred to and pledged with Pledgee under this paragraph is hereinafter called "collateral." At any time, without notice, and at the expense of the undersigned, Pledgee in its name or in the name of its nominee or of the undersigned may, but shall not be obligated to: (a) collect by legal proceedings or otherwise all dividends (except cash dividends other than liquidating dividends), interest, principal payments and other sums now or hereafter payable upon or on account of said collateral; (b) enter into any extension, reorganization, deposit, merger, or consolidation agreement, or any agreement in any way relating to or affecting the collateral, and in connection therewith may deposit or surrender control of such collateral thereunder, accept other property in exchange for such collateral and do and perform such acts and things as it may deem proper, and any money or property received in exchange for such collateral shall be applied to the indebtedness or thereafter held by it pursuant to the provisions hereof; (c) insure, process and preserve the collateral; (d) cause the collateral to be transferred to its name or to the name of its nominee; (e) exercise as to such collateral all the rights, powers, and remedies of an owner, except that so long as the indebtedness is not in default the undersigned shall retain all voting rights as to the collateral. The undersigned agrees to pay prior to delinquency all taxes, charges, liens and assessments against the collateral, and upon the failure of the undersigned to do so Pledgee at its option may pay any of them and shall be the sole judge of the legality or validity thereof and the amount necessary to discharge the same. All advances, charges, costs and expenses, including reasonable attorneys' fees, incurred or paid by Pledgee in exercising any right, power or remedy conferred by this agreement, or in the enforcement thereof, shall become a part of the indebtedness secured hereunder and shall be paid to Pledgee by the undersigned immediately and without demand. At the option of Pledgee and without necessity of demand or notice, all or any part of the indebtedness of the undersigned shall immediately become due and payable irrespective of any agreed maturity, upon the happening of any of the following events: (a) failure to keep or perform any of the terms or provisions of this agreement; (b) default in the payment of principal or interest when due; (c) the levy of any attachment, execution or other process against the 1. 20 collateral; or (d) the insolvency, commission of an act of bankruptcy, general assignment for the benefit of creditors, filing of any petition in bankruptcy or for relief under the provisions of Title 11, United States Code, Bankruptcy, of, by, or against the undersigned. In the event of the nonpayment of any indebtedness when due, whether by acceleration or otherwise, or upon the happening of any of the events specified in the last preceding paragraph, Pledgee may then, or at any time thereafter, at its election, apply, set off, collect or sell in one or more sales, or take such steps as may be necessary to liquidate and reduce to cash in the hands of Pledgee in whole or in part, with or without any previous demands or demand of performance or notice or advertisement, the whole or any part of the collateral in such order as Pledgee may elect, and any such sale may be made either at public or private sale at its place of business or elsewhere, or at any broker's board or securities exchange, either for cash or upon credit or for future delivery; provided, however, that if such disposition is at private sale, then the purchase price of the collateral shall be equal to the public market price then in effect, or, if at the time of sale no public market for the collateral exists, then, in recognition of the fact that the sale of the collateral would have to be registered under the Securities Act of 1933 and that the expenses of such registration are commercially unreasonable for the type and amount of collateral pledged hereunder, Pledgee and the undersigned hereby agree that such private sale shall be at a purchase price mutually agreed to by Pledgee and the undersigned or, if the parties cannot agree upon a purchase price, then at a purchase price established by a majority of three independent appraisers knowledgeable of the value of such collateral, one named by the undersigned within 10 days after written request by the Pledgee to do so, one named by Pledgee within such 10 day period, and the third named by the two appraisers so selected, with the appraisal to be rendered by such body within 30 days of the appointment of the third appraiser. The cost of such appraisal, including all appraiser's fees, shall be charged against the proceeds of sale as an expense of such sale. Pledgee may be the purchaser of any or all collateral so sold and hold the same thereafter in its own right free from any claim of the undersigned or right of redemption. Demands of performance, notices of sale, advertisements and presence of property at sale are hereby waived, and Pledgee is hereby authorized to sell hereunder any evidence of debt pledged to it. Any sale hereunder may be conducted by any officer or agent of Pledgee. The proceeds of the sale of any of the collateral and all sums received or collected by Pledgee from or on account of such collateral shall be applied by Pledgee to the payment of expenses incurred or paid by Pledgee in connection with any sale, transfer or delivery of the collateral, to the payment of any other costs, charges, attorneys' fees or expenses mentioned herein, and to the payment of the indebtedness or any part hereof, all in such order and manner as Pledgee in its discretion may determine. Pledgee shall pay any balance to the undersigned. Pledgee shall be under no duty or obligation whatsoever to make or give any presentments, demands for performance, notices of non-performance, protests, notices of protest or notices of dishonor in connection with any obligations or evidences of indebtedness held by Pledgee as collateral, or in connection with any obligations or evidences of indebtedness which constitute in whole or in part the indebtedness secured hereunder. Pledgee may at any time deliver the collateral or any part thereof to the undersigned and the receipt of the undersigned shall be a complete and full acquittance for the collateral so delivered, and Pledgee shall thereafter be discharged from any liability or responsibility therefor. 2. 21 Upon the transfer of all or any part of the indebtedness Pledgee may transfer all or any part of the collateral and shall be fully discharged thereafter from all liability and responsibility with respect to such collateral so transferred, and the transferee shall be vested with all the rights and powers of Pledgee hereunder with respect to such collateral so transferred; but with respect to any collateral not so transferred Pledgee shall retain all rights and powers hereby given. Until all indebtedness shall have been paid in full the power of sale and all other rights, powers and remedies granted to Pledgee hereunder shall continue to exist and may be exercised by Pledgee at any time and from time to time irrespective of the fact that the indebtedness or any part thereof may have become barred by any statute of limitations, or that the personal liability of the undersigned may have ceased. Pledgee agrees that so long as the indebtedness is not in default, shares of Landa Management Systems Corporation common stock held hereunder as collateral for the indebtedness shall be released from pledge as the indebtedness is paid. Such releases shall be at the rate of one share for each $0.12 of principal amount of indebtedness paid. Release from pledge, however, shall not result in release from the provisions of those certain Joint Escrow Instructions, if any, of even date herewith among the parties to this Pledge Agreement and the Escrow Agent named therein or from the Repurchase Option of Landa Management Systems Corporation, set forth in the Stock Purchase Agreement dated 17th March 1999, if any, between the parties to this Pledge Agreement. The rights, powers and remedies given to Pledgee by this agreement shall be in addition to all rights, powers and remedies given to Pledgee by virtue of any statute or rule of law. Pledgee may exercise its Pledgee's lien or right of setoff with respect to the indebtedness in the same manner as if the indebtedness were unsecured. Any forbearance or failure or delay by Pledgee in exercising any right, power or remedy hereunder shall not be deemed to be a waiver of such right, power or remedy, and any single or partial exercise of any right, power or remedy hereunder shall not preclude the further exercise thereof; and every right, power and remedy of Pledgee shall continue in full force and effect until such right, power or remedy is specifically waived by an instrument in writing executed by Pledgee. Dated: 17th March 1999 /s/ EUGENE SANTA CATTARINA -------------------------------------------- Eugene Santa Cattarina ATTACHMENT: Schedule 1 3. 22 SCHEDULE 1 TO PLEDGE AGREEMENT 805,550 shares of Common Stock in Landa Management Systems Corporation. 23 [LANDACORP LETTERHEAD] [ILLEGIBLE] 1999 [ILLEGIBLE] Internal Revenue [ILLEGIBLE] Revenue Service Center [ILLEGIBLE] , GA 39901-0002 RE: ELECTION UNDER SECTION 83(b) Gentlemen: The undersigned hereby elects, pursuant to the provisions of Sections 55-56 and 83(b) of the Internal Revenue Code of 1986, as amended (the "Code"), to include in alternative minimum taxable income for the undersigned's current taxable year, as compensation for services, the excess, if any, of the fair market value of the property described below at the time of transfer over the amount paid for such property. The undersigned also elects pursuant to Section 83(b) of the Code to include in gross income for the taxable year in which the undersigned disposes of some or all of the property described below in a transaction which fails to satisfy the requirements of Section 422(a)(1) of the Code (a "disqualifying disposition"), as compensation for services, the excess, if any, of the fair market value of the disposed property at the time of transfer to the undersigned over the amount paid for such property. Pursuant to Treasury Regulations Section 1.83-2, the following information is submitted: Name: Eugene Santa Cattarina ("Purchaser") Address: 540 Chestnut Rose Lane, Atlanta, GA 30327 Social Security No.: ###-##-#### Property Description: 805,550 shares of Common stock (the "Stock") of Landa Management Systems Corporation (the "Corporation"). The date on which the Stock was purchased is 17th March 1999. The taxable year for which the election is made is the calendar year 1999/the fiscal year ending 31st December 1999. Restrictions: "If, on or before 19th July 2002 the employment of the Purchaser by the Corporation terminates for any reason, the Corporation shall have the option to repurchase some or all of the Stock (depending upon the date of such termination) for a price equal to the cost of the Stock repurchased." The fair market value at the time of transfer of the Stock, determined without regard to any restriction other than a restriction which by its terms will never lapse, is $96,666.00 (805,550 shares having a fair market value of $0.12 per share). Purchase Price: $96,666.00 (805,550 shares at $0.12 per share). A copy of this statement has been furnished to the Corporation and the transferee of the Stock if different than Purchaser. Very truly yours, /s/ EUGENE SANTA CATTARINA --------------------------------- Eugene Santa Cattarina EX-10.9 9 RESTRICTED STOCK PURCHASE AGREEMENT-STEPHEN KAY 1 EXHIBIT 10.09 STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made this day 17th March 1999 by and between LANDA MANAGEMENT SYSTEMS CORPORATION, a California corporation (the "Company"), and Stephen P. Kay, ("Purchaser"). WITNESSETH: WHEREAS, Purchaser holds a stock option dated October 20th, 1998 to purchase shares of common stock of the Company (the "Option") pursuant to the Company's 1998 Equity Incentive Plan (the "Plan") which Purchaser desires to exercise; and WHEREAS, Purchaser wishes to take advantage of the early exercise provision of the Option, and therefore to enter into this Agreement. NOW, THEREFORE, IT IS AGREED between the parties as follows: 1. Purchaser hereby agrees to purchase from the Company, and the Company hereby agrees to sell to Purchaser, an aggregate of three hundred thousand (300,000) shares of the common stock (the "Stock") of the Company, for a purchase price of 12/100 US dollars ($0.12) per share (total purchase price: Thirty six thousand 00/100 US dollars ($36,000.00)), payable as follows: Cash at Closing $ 0.00 Promissory Note in the form of Exhibit D (the "Note") $ 36,000.00 ----------- Total Purchase Price $ 36,000.00 ===========
The closing hereunder shall occur at the offices of the Company on the date of this Agreement or at such other time and place as the parties may mutually agree upon in writing. At the closing, Purchaser shall deliver two (2) stock assignments in the form of Exhibit B, duly endorsed (with date and number of shares left blank), joint escrow instructions (the "Joint Escrow Instructions") in the form of Exhibit C, duly executed by Purchaser, and the total purchase price (including an executed Note in the form of Exhibit D if a portion of the total purchase price is to be paid by promissory note and an executed pledge agreement in the form of Exhibit E (the "Pledge Agreement") under which all shares of the Stock acquired by Note shall be pledged as collateral security for the payment of the indebtedness represented by the Note. At the closing or as soon thereafter as practicable, the Company shall deliver to the Escrow Agent (as defined in paragraph 8 below) share certificates for all of the Stock that is to be subject to the Purchase Option (as defined in paragraph 2 below), and shall deliver share certificates to Purchaser for all of the Stock, if any, that is not to be subject to the Purchase Option or the Pledge 1 2 Agreement. The certificates for all of the Stock that is subject to the Pledge Agreement but not the Purchase Option shall be retained by the Company as security pursuant to the Pledge Agreement. 2. The Stock to be purchased by Purchaser pursuant to this Agreement shall be subject to the following option ("Purchase Option"): (a) In the event that Purchaser's Continuous Service (as that term is defined in the Plan) shall terminate for any reason (including Purchaser's death), or no reason, with or without cause, the Purchase Option may be exercised. The Company shall have the right at any time within ninety (90) days after such termination of Continuous Service, or such longer period as may determined by the Company if such later repurchase is deemed necessary by the Company for treatment of its stock as Qualified Small Business Stock under Section 1202 of the Internal Revenue Code of 1986, as amended, and regulations promulgated thereunder, to exercise its option to repurchase from Purchaser or his personal representative, as the case may be, at the price per share paid by Purchaser pursuant to this Agreement ("Option Price"), up to but not exceeding the number of unvested shares of the Stock set forth on Exhibit A hereto, which is incorporated herein by this reference. (b) In addition, and without limiting the foregoing Purchase Option, if at any time during the term of the Purchase Option there occurs a transaction described in Section 11(b) or 11(c) of the Plan (e.g., a dissolution, liquidation, asset sale, merger, consolidation or reverse merger of the Company), then: (i) the Company shall exercise the Purchase Option to the same extent that the unvested portion of the Option would have terminated pursuant to Section 11(b) or 11(c) of the Plan if the Option had not been exercised pursuant to this Agreement, (ii) the Purchase Option shall lapse to the same extent that the unvested portion of the Option would have automatically accelerated pursuant to Section 11(c) of the Plan if the Option had not been exercised pursuant to this Agreement or (iii) the Purchase Option may be assigned to any successor to the Company to the same extent that the unvested portion of the Option would have been assumed or substituted by such successor if the Option had not been exercised pursuant to this Agreement, in which case the Purchase Option shall apply on the same basis as set forth above to the Stock or to the consideration received for the Stock by the Purchaser in the transaction (as the case may be) if Purchaser's Continuous Service with such successor terminates for any reason. The continuing or surviving entity shall be deemed to be the successor to the Company for purposes of this Agreement, and references herein to the "Company" shall be deemed to refer to such successor. (c) The Company shall be entitled to pay for any of the Stock purchased pursuant to its Purchase Option at the Company's option in cash, by offset against any indebtedness owing to the Company by Purchaser including without limitation any note given in payment for the Stock, or a combination of both. (d) This Agreement is not an employment contract and nothing in this Agreement shall be deemed to create in any way whatsoever any obligation on the part of Purchaser to continue in the employ of the Company or any Affiliate (as defined in the Plan) thereof, or of the Company or any Affiliate thereof to continue Purchaser in its employ. In addition, nothing in this Agreement shall obligate the Company or any Affiliate thereof, their 2 3 respective stockholders, boards of directors, officers or employees to continue any relationship that you might have as a director or consultant for the Company or any Affiliate thereof. 3. The Purchase Option may be exercised by giving written notice of exercise delivered or mailed as provided in paragraph 14. Upon providing of such notice and payment or tender of the purchase price, the Company shall become the legal and beneficial owner of the Stock being purchased and all rights and interests therein or related thereto. 4. If from time to time during the term of the Purchase Option there is any stock dividend or liquidating dividend or distribution of cash and/or property, stock split or other change in the character or amount of any of the outstanding securities of the Company, then, in such event, any and all new, substituted or additional securities or other property to which Purchaser is entitled by reason of his ownership of Stock will be immediately subject to the Purchase Option and be included in the word "Stock" for all purposes of the Purchase Option with the same force and effect as the shares of Stock then subject to the Purchase Option. While the total Option Price shall remain the same after each such event, the Option Price per share of Stock upon exercise of the Purchase Option shall be appropriately adjusted. 5. All certificates representing any shares of Stock of the Company subject to the provisions of this Agreement shall have endorsed thereon legends in substantially the following form: (a) "The shares represented by this certificate are subject to an option set forth in an agreement between the Company and the registered holder, or registered holder's predecessor in interest, a copy of which is on file at the principal office of this Company. Any transfer or attempted transfer of any shares subject to such option is void without the prior express written consent of the issuer of these shares." (b) "These securities have not been registered under the Securities Act of 1933. They may not be sold, offered for sale, pledged or hypothecated in the absence of an effective registration statement as to the securities under said Act or an opinion of counsel satisfactory to the Company that such registration is not required." (c) "The shares represented by this certificate are subject to a right of first refusal option in favor of the Company and/or its assignee(s) as provided in the Bylaws of the Company." (d) "Any legend required to be placed thereon by the California Commissioner of Corporations. 6. Purchaser acknowledges that he or she is aware that the Stock to be issued to him or her by the Company pursuant to this Agreement has not been registered under the Securities Act of 1933, as amended (the "Act"), on the basis that no distribution or public offering of the Stock is to be effected, and in this connection acknowledges that the Company is relying on the following representations. In this connection, Purchaser warrants and represents to the Company that he or she is acquiring the Stock for investment and not with a view to or for sale in 3 4 connection with any distribution of the Stock or with any present intention of distributing or selling the Stock and he or she does not presently have reason to anticipate any change in circumstances or any particular occasion or event which would cause him or her to sell the Stock. Purchaser recognizes that the Stock must be held indefinitely unless it is subsequently registered under the Act or an exemption from such registration is available and, further, recognizes that the Company is under no obligation to register the Stock or to comply with any exemption from such registration. 7. Purchaser is aware that the Stock may not be sold pursuant to Rule 144 adopted under the Act unless certain conditions are met and until Purchaser has held the Stock for the applicable holding period set forth in Rule 144. Among the conditions for use of Rule 144 is the availability of specified current public information about the Company. Purchaser recognizes that the Company presently has no plans to make such information available to the public. Whether or not the Purchase Option is exercised or has lapsed, Purchaser further agrees not to make any disposition of any of the Stock in any event unless and until: (a) There is then in effect a registration statement under the Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (b) (i) Purchaser shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (ii) Purchaser shall have given the Company an opinion of counsel, which opinion and counsel shall be satisfactory to the Company, to the effect that such disposition will not require registration of the Stock under the Act. 8. As security for his faithful performance of the terms of this Agreement and to insure the availability for delivery of Purchaser's Stock upon exercise of the Purchase Option herein provided for, Purchaser agrees, at the closing hereunder (or as soon thereafter as practicable), to deliver (or have the Company deliver on the Purchaser's behalf) to and deposit with the Secretary of the Company ("Escrow Agent"), as Escrow Agent in this transaction, two (2) stock assignments duly endorsed (with date and number of shares left blank) in the form attached hereto as Exhibit B, together with a certificate or certificates evidencing all of the Stock subject to the Purchase Option; said documents are to be held by the Escrow Agent and delivered by said Escrow Agent pursuant to the Joint Escrow Instructions of the Company and Purchaser set forth in Exhibit C attached hereto and incorporated herein by this reference, which instructions shall also be delivered to the Escrow Agent at the closing hereunder (or as soon thereafter as practicable). 9. Purchaser shall not sell or transfer any of the Stock subject to the Purchase Option or any interest therein so long as such Stock is subject to the Purchase Option. In addition, the Purchaser agrees that the Company (or a representative of the underwriters) may, in connection with the first underwritten registration of the offering of any securities of the Company under the Act, require that Purchaser not sell, dispose of, transfer, make any short sale of, grant any option for the purchase of, or enter into any hedging or similar transaction with the same economic 4 5 effect as a sale, any of the Stock or other securities of the Company held by you, for a period of time specified by the underwriter(s) (not to exceed one hundred eighty (180) days) following the effective date of the registration statement of the Company filed under the Act. 10. The Company shall not be required (a) to transfer on its books any shares of Stock of the Company which shall have been sold or transferred in violation of any of the provisions set forth in this Agreement or (b) to treat as owner of such shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such shares shall have been so transferred. 11. Subject to the provisions of paragraphs 9 and 10 above, Purchaser (but not any unapproved transferee) shall, during the term of this Agreement, exercise all rights and privileges of a stockholder of the Company with respect to the Stock. 12. The shares of Stock purchased under the terms of this Agreement are subject to the right of first refusal provided for in the Bylaws of the Company. 13. The parties agree to execute such further instruments and to take such further action as reasonably may be necessary to carry out the intent of this Agreement. 14. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in any United States Post Office Box, by registered or certified mail with postage and fees prepaid, addressed to the other party hereto at his address hereinafter shown below his signature or at such other address as such party may designate by ten (10) days' advance written notice to the other party hereto. 15. This Agreement shall bind and inure to the benefit of the successors and assigns of the Company and, subject to the restrictions on transfer herein set forth, inure to the benefit of and be binding upon Purchaser, his heirs, executors, administrators, successors, and assigns. Without limiting the generality of the foregoing, the Purchase Option of the Company hereunder shall be assignable by the Company at any time or from time to time, in whole or in part. 5 6 IN WITNESS WHEREOF, the parties hereto have executed this Stock Purchase Agreement as of the day and year first set forth above. LANDA MANAGEMENT SYSTEMS CORPORATION /s/ EUGENE SANTA CATTARINA By: Eugene Santa Cattarina -------------------------------- Its: CEO ------------------------------- Address: 1072 Marauder Street, Suite A Chico, CA 95973 /s/ STEPHEN P. KAY ----------------------------------- STEPHEN P. KAY Address: 14540 Camaren Park Drive Chico, CA 95973 ATTACHMENTS: Exhibit A Vesting Schedule Exhibit B Assignment Separate from Certificate Exhibit C Joint Escrow Instructions Exhibit D Promissory Note Exhibit E Pledge Agreement 6 7 EXHIBIT A VESTING SCHEDULE
IF CONTINUOUS SERVICE NUMBER OF UNVESTED SHARES TERMINATES: SUBJECT TO PURCHASE OPTION: Before 28th February 1999 300,000.0 shares After 28th February 1999 but before 31st March 1999 225,000.0 shares After 31st March 1999 but before 30th April 1999 218,750.0 shares After 30th April 1999 but before 31st May 1999 212,500.0 shares After 31st May 1999 but before 30th June 1999 206,250.0 shares After 30th June 1999 but before 31st July 1999 200,000.0 shares After 31st July 1999 but before 31st August 1999 193,750.0 shares After 31st August 1999 but before 30th September 1999 187,500.0 shares After 30th September 1999 but before 31st October 1999 181,250.0 shares After 31st October 1999 but before 30th November 1999 175,000.0 shares After 30th November 1999 but before 31st December 1999 168,750.0 shares
1 8 EXHIBIT A (CONTINUED) VESTING SCHEDULE
IF CONTINUOUS SERVICE NUMBER OF UNVESTED SHARES TERMINATES: SUBJECT TO PURCHASE OPTION: After 31st December 1999 but before 31st January 2000 162,500.0 shares After 31st January 2000 but before 28th February 2000 156,250.0 shares After 28th February 2000 but before 31st March 2000 150,000.0 shares After 31st March 2000 but before 30th April 2000 143,750.0 shares After 30th April 2000 but before 31st May 2000 137,500.0 shares After 31st May 2000 but before 30th June 2000 131,250.0 shares After 30th June 2000 but before 31st July 2000 125,000.0 shares After 31st July 2000 but before 31st August 2000 118,750.0 shares After 31st August 2000 but before 30th September 2000 112,500.0 shares After 30th September 2000 but before 31st October 2000 106,250.0 shares
2 9 EXHIBIT A (CONTINUED) VESTING SCHEDULE
IF CONTINUOUS SERVICE NUMBER OF UNVESTED SHARES TERMINATES: SUBJECT TO PURCHASE OPTION: After 31st October 2000 but before 30th November 2000 100,000.0 shares After 30th November 2000 but before 31st December 2000 93,750.0 shares After 31st December 2000 but before 31st January 2001 87,500.0 shares After 31st January 2001 but before 28th February 2001 81,250.0 shares After 28th February 2001 but before 31st March 2001 75.000.0 shares After 31st March 2001 but before 30th April 2001 68,750.0 shares After 30th April 2001 but before 31st May 2001 62,500.0 shares After 31st May 2001 but before 30th June 2001 56,250.0 shares After 30th June 2001 but before 31st July 2001 50,000.0 shares After 31st July 2001 but before 31st August 2001 43,750.0 shares
3 10 EXHIBIT A (CONTINUED) VESTING SCHEDULE
IF CONTINUOUS SERVICE NUMBER OF UNVESTED SHARES TERMINATES: SUBJECT TO PURCHASE OPTION: After 31st August 2001 but before 30th September 2001 37,500.0 shares After 30th September 2001 but before 31st October 2001 31,250.0 shares After 31st October 2001 but before 30th November 2001 25,000.0 shares After 30th November 2001 but before 31st December 2001 18,750.0 shares After 31st December 2001 but before 31st January 2002 12,500.0 shares After 31st January 2002 but before 28th February 2002 6,250.0 shares After 28th February 2002 0.0 shares
4 11 EXHIBIT B ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED and pursuant to that certain Stock Purchase Agreement dated as of 17th March 1999, (the "Agreement") Stephen P. Kay hereby sells, assigns and transfers unto Landa Management Systems Corporation __________________________ (________) shares of common stock of Landa Management Systems Corporation, a California corporation, standing in the undersigned's name on the books of said corporation represented by Certificate No._______ herewith, and does hereby irrevocably constitute and appoint ________________ attorney to transfer the said stock on the books of the said corporation with full power of substitution in the premises. This Assignment may be used only in accordance with and subject to the terms and conditions of the Agreement, in connection with the repurchase of shares of Common Stock issued to the undersigned pursuant to the Agreement, and only to the extent that such shares remain subject to the Company's Purchase Option under the Agreement. Dated: ------------------- /s/ STEPHEN P. KAY ----------------------------- [Signature] Stephen P. Kay ----------------------------- [INSTRUCTION: Please do not fill in any blanks other than the signature line. The purpose of this Assignment is to enable the Company to exercise its repurchase option set forth in the Agreement without requiring additional signatures on the part of Purchaser.] 12 EXHIBIT B ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED and pursuant to that certain Stock Purchase Agreement dated as of 17th March 1999, (the "Agreement") Stephen P. Kay hereby sells, assigns and transfers unto Landa Management Systems Corporation _______________________________ (__________) shares of common stock of Landa. Management Systems Corporation, a California corporation, standing in the undersigned's name on the books of said corporation represented by Certificate No. _______ herewith, and does hereby irrevocably constitute and appoint ____________________________ attorney to transfer the said stock on the books of the said corporation with full power of substitution in the premises. This Assignment may be used only in accordance with and subject to the terms and conditions of the Agreement, in connection with the repurchase of shares of Common Stock issued to the undersigned pursuant to the Agreement, and only to the extent that such shares remain subject to the Company's Purchase Option under the Agreement. Dated: ------------------- /s/ STEPHEN P. KAY ----------------------------- [Signature] Stephen P. Kay ----------------------------- [INSTRUCTION: Please do not fill in any blanks other than the signature line. The purpose of this Assignment is to enable the Company to exercise its repurchase option set forth in the Agreement without requiring additional signatures on the part of Purchaser.] 13 EXHIBIT C JOINT ESCROW INSTRUCTIONS Stephen P. Kay, Company Secretary Landa Management Systems Corporation 1072 Marauder, Suite A Chico, CA 95973 Dear Sir: As Escrow Agent for both Landa Management Systems Corporation, a California corporation ("Company"), and the undersigned purchaser of stock of the Company ("Purchaser"), you are hereby authorized and directed to hold the documents delivered to you pursuant to the terms of that certain Stock Purchase Agreement ("Agreement"), dated 17TH MARCH 1999, to which a copy of these Joint Escrow Instructions is attached as Exhibit C in accordance with the following instructions: 1. In the event the Company or an assignee shall elect to exercise the Purchase Option set forth in the Agreement, the Company or its assignee will give to Purchaser and you a written notice specifying the number of shares of stock to be purchased, the purchase price, and the time for a closing hereunder at the principal office of the Company. Purchaser and the Company hereby irrevocably authorize and direct you to close the transaction contemplated by such notice in accordance with the terms of said notice. 2. At the closing you are directed (a) to date any stock assignments necessary for the transfer in question, (b) to fill in the number of shares being transferred, and (c) to deliver same, together with the certificate evidencing the shares of stock to be transferred, to the Company against the simultaneous delivery to you of the purchase price (which may include suitable acknowledgment of cancellation of indebtedness) of the number of shares of stock being purchased pursuant to the exercise of the Purchase Option. 3. Purchaser irrevocably authorizes the Company to deposit with you any certificates evidencing shares of stock to be held by you hereunder and any additions and substitutions to said shares as specified in the Agreement. Purchaser does hereby irrevocably constitute and appoint you as his attorney-in-fact and agent for the term of this escrow to execute with respect to such securities and other property all documents of assignment and/or transfer and an stock certificates necessary or appropriate to make all securities negotiable and complete any transaction herein contemplated. 4. This escrow shall terminate upon expiration or exercise in full of the Purchase Option, whichever occurs first. 1. 14 5. If at the time of termination of this escrow you should have in your possession any documents, securities, or other property belonging to Purchaser, you shall deliver all of same to Purchaser and shall be discharged of all further obligations hereunder; provided, however, that if at the time of termination of this escrow you are advised by the Company that the property subject to this escrow is the subject of a pledge or other security agreement, you shall deliver all such property to the pledgeholder or other person designated by the Company. 6. Except as otherwise provided in these Joint Escrow Instructions, your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto. 7. You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties or their assignees. You shall not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith and any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith. 8. You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law, and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree of any court, you shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction. 9. You shall not be liable in any respect on account of the identity, authority or rights of the parties executing or delivering or purporting to execute or deliver the Agreement or any documents or papers deposited or called for hereunder. 10. You &hall not be liable for the outlawing of any rights under any statute of limitations with respect to these Joint Escrow Instructions or any documents deposited with you. 11. Your responsibilities as Escrow Agent hereunder shall terminate if you shall cease to be Secretary of the Company or if you shall resign by written notice to each party. In the event of any such termination, the Company may appoint any officer or assistant officer of the Company as successor Escrow Agent and Purchaser hereby confirms the appointment of such successor or successors as his attorney-in-fact and agent to the full extent of your appointment. 12. If you reasonably require other or further instruments in connection with these Joint Escrow Instructions or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments. 13. It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the securities, you are authorized and 2. 15 directed to retain in your possession without liability to anyone all or any part of said securities until such dispute shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but you shall be under no duty whatsoever to institute or defend any such proceedings. 14. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery, including delivery by express courier or five days after deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to each of the other parties hereunto entitled at the following addresses, or at such other addresses as a party may designate by ten days' advance written notice to each of the other parties hereto: COMPANY: Stephen P. Kay, Company Secretary Landa Management Systems Corporation 1072 Marauder, Suite A Chico, CA 95973 PURCHASER: Stephen P. Kay 14540 Camaren Park Drive Chico, CA 95973 ESCROW AGENT: Stephen P. Kay, Company Secretary Landa Management Systems Corporation 1072 Marauder, Suite A Chico, CA 95973 15. By signing these Joint Escrow Instructions you become a party hereto only for the purpose of said Joint Escrow Instructions; you do not become a party to the Agreement. 16. You shall be entitled to employ such legal counsel and other experts (including without limitation the firm of Cooley Godward LLP) as you may deem necessary properly to advise you in connection with your obligations hereunder. You may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor. The Corporation shall be responsible for all fees generated by such legal counsel in connection with your obligations hereunder. 17. This instrument shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. It is understood and agreed that references to "you" or "your" herein refer to the original Escrow Agent and to any and all successor Escrow Agents. It is understood and agreed that the Corporation may at any time or from time to time assign its rights under the Agreement and these Joint Escrow Instructions in whole or in part. 18. This Agreement shall be governed by and interpreted and determined in accordance with the laws of the State of California, as such laws are applied by California courts to contacts made and to be performed entirely in California by residents of that state. 3. 16 Very truly yours, LANDA MANAGEMENT SYSTEMS CORPORATION /s/ STEPHEN P. KAY By: Stephen P. Kay, Chief Financial Officer --------------------------------------- PURCHASER: /s/ STEPHEN P. KAY Stephen P. Kay --------------------------------------- ESCROW AGENT: /s/ STEPHEN P. KAY - --------------------------------- Stephen P. Kay, Company Secretary 4. 17 EXHIBIT D FULL RECOURSE PROMISSORY NOTE $36,000.00 17TH MARCH 1999 FOR VALUE RECEIVED, the undersigned hereby unconditionally promises to pay to the order of Landa Management Systems Corporation, a California corporation (the "Company"), at Chico, California, or at such other place as the holder hereof may designate in writing, in lawful money of the United States of America and in immediately available funds, the principal sum of Thirty six thousand 00/100 Dollars ($36,000.00) together with interest accrued from the date hereof on the unpaid principal at the rate of 6.00% per annum, or the maximum rate permissible by law (which under the laws of the State of California shall be deemed to be the laws relating to permissible rates of interest on commercial loans), whichever is less, as follows: PRINCIPAL REPAYMENT. The outstanding principal amount hereunder shall be DUE AND PAYABLE IN FULL ON MARCH 16TH, 2006. INTEREST PAYMENTS. Interest shall be ACCRUED ANNUALLY and shall be calculated on the basis of a 360-day year for the actual number of days elapsed; provided, however, that in the event that the undersigned's employment by or association with the Company is terminated for any reason prior to payment in full of this Note, this Note shall be accelerated and all remaining unpaid principal and interest shall become due and payable immediately after such termination. Moreover, the Company may, in connection with the first underwritten registration of the offering of any securities of the Company under the Securities Act of 1933, as amended (the "Securities Act"), require that this Note shall be accelerated and all remaining unpaid principal and interest shall become due and payable within two hundred ten (210) days following the effective date of the registration statement of the Company filed under the Securities Act. If the undersigned fails to pay any of the principal and accrued interest when due, the Company, at its sole option, shall have the right to accelerate this Note, in which event the entire principal balance and all accrued interest shall become immediately due and payable, and immediately collectible by the Company pursuant to applicable law. This Note may be prepaid at any time without penalty. All money paid toward the satisfaction of this Note shall be applied first to the payment of interest as required hereunder and then to the retirement of the principal. This Note is a full recourse promissory note. The full amount of this Note is secured by a pledge of shares of Common Stock of the Company, and is subject to all of the terms and provisions of the Stock Purchase Agreement and the Pledge Agreement, each of even date herewith between the undersigned and the Company. 1. 18 The undersigned hereby represents and agrees that the amounts due under this Note are not consumer debt, and are not incurred primarily for personal, family or household purposes, but are for business and commercial purposes only. The undersigned hereby waives presentment, protest and notice of protest, demand for payment, notice of dishonor and all other notices or demands in connection with the delivery, acceptance, performance, default or endorsement of this Note. The holder hereof shall be entitled to recover, and the undersigned agrees to pay when incurred, all costs and expenses of collection of this Note, including without limitation, reasonable attorneys' fees. This Note shall be governed by, and construed, enforced and interpreted in accordance with, the laws of the State of California, excluding conflict of laws principles that would cause the application of laws of any other jurisdiction. Signed /s/ STEPHEN P. KAY ------------------------------------ Stephen P. Kay 2. 19 EXHIBIT E PLEDGE AGREEMENT 1. As collateral security for the payment of that certain $36,000.00 promissory note issued this date to Landa Management Systems Corporation ("Pledgee") by the undersigned (hereinafter called "indebtedness"), the undersigned hereby assigns, transfers to and pledges with the Pledgee the securities listed on Schedule 1 hereto which were this day delivered to be deposited with Pledgee, together with any stock rights, rights to subscribe, dividends paid in cash or other property in connection with the complete or partial liquidation of Pledgee, stock dividends, dividends paid in stock, new securities or other property except cash dividends other than liquidating dividends to which the undersigned is or may hereafter become entitled to receive on account of such property, and in the event that the undersigned receives any such, the undersigned will immediately deliver it to Pledgee to be held by Pledgee hereunder in the same manner as the property originally pledged hereunder. All property assigned, transferred to and pledged with Pledgee under this paragraph is hereinafter called "collateral." At any time, without notice, and at the expense of the undersigned, Pledgee in its name or in the name of its nominee or of the undersigned may, but shall not be obligated to: (a) collect by legal proceedings or otherwise all dividends (except cash dividends other than liquidating dividends), interest, principal payments and other sums now or hereafter payable upon or on account of said collateral; (b) enter into any extension, reorganization, deposit, merger, or consolidation agreement, or any agreement in any way relating to or affecting the collateral, and in connection therewith may deposit or surrender control of such collateral thereunder, accept other property in exchange for such collateral and do and perform such acts and things as it may deem proper, and any money or property received in exchange for such collateral shall be applied to the indebtedness or thereafter held by it pursuant to the provisions hereof; (c) insure, process and preserve the collateral; (d) cause the collateral to be transferred to its name or to the name of its nominee; (e) exercise as to such collateral all the rights, powers, and remedies of an owner, except that so long as the indebtedness is not in default the undersigned shall retain all voting rights as to the collateral. The undersigned agrees to pay prior to delinquency all taxes, charges, liens and assessments against the collateral, and upon the failure of the undersigned to do so Pledgee at its option may pay any of them and shall be the sole judge of the legality or validity thereof and the amount necessary to discharge the same. All advances, charges, costs and expenses, including reasonable attorneys' fees, incurred or paid by Pledgee in exercising any right, power or remedy conferred by this agreement, or in the enforcement thereof, shall become a part of the indebtedness secured hereunder and shall be paid to Pledgee by the undersigned immediately and without demand. At the option of Pledgee and without necessity of demand or notice, all or any part of the indebtedness of the undersigned shall immediately become due and payable irrespective of any agreed maturity, upon the happening of any of the following events: (a) failure to keep or perform any of the terms or provisions of this agreement; (b) default in the payment of principal or interest when due; (c) the levy of any attachment, execution or other process against the 1. 20 collateral; or (d) the insolvency, commission of an act of bankruptcy, general assignment for the benefit of creditors, filing of any petition in bankruptcy or for relief under the provisions of Title 11, United States Code, Bankruptcy, of, by, or against the undersigned. In the event of the nonpayment of any indebtedness when due, whether by acceleration or otherwise, or upon the happening of any of the events specified in the last preceding paragraph, Pledgee may then, or at any time thereafter, at its election, apply, set off, collect or sell in one or more sales, or take such steps as may be necessary to liquidate and reduce to cash in the hands of Pledgee in whole or in part, with or without any previous demands or demand of performance or notice or advertisement, the whole or any part of the collateral in such order as Pledgee may elect, and any such sale may be made either at public or private sale at its place of business or elsewhere, or at any broker's board or securities exchange, either for cash or upon credit or for future delivery; provided, however, that if such disposition is at private sale, then the purchase price of the collateral shall be equal to the public market price then in effect, or, if at the time of sale no public market for the collateral exists, then, in recognition of the fact that the sale of the collateral would have to be registered under the Securities Act of 1933 and that the expenses of such registration are commercially unreasonable for the type and amount of collateral pledged hereunder, Pledgee and the undersigned hereby agree that such private sale shall be at a purchase price mutually agreed to by Pledgee and the undersigned or, if the parties cannot agree upon a purchase price, then at a purchase price established by a majority of three independent appraisers knowledgeable of the value of such collateral, one named by the undersigned within 10 days after written request by the Pledgee to do so, one named by Pledgee within such 10 day period, and the third named by the two appraisers so selected, with the appraisal to be rendered by such body within 30 days of the appointment of the third appraiser. The cost of such appraisal, including all appraiser's fees, shall be charged against the proceeds of sale as an expense of such sale. Pledgee may be the purchaser of any or all collateral so sold and hold the same thereafter in its own right free from any claim of the undersigned or right of redemption. Demands of performance, notices of sale, advertisements and presence of property at sale are hereby waived, and Pledgee is hereby authorized to sell hereunder any evidence of debt pledged to it. Any sale hereunder may be conducted by any officer or agent of Pledgee. The proceeds of the sale of any of the collateral and all sums received or collected by Pledgee from or on account of such collateral shall be applied by Pledgee to the payment of expenses incurred or paid by Pledgee in connection with any sale, transfer or delivery of the collateral, to the payment of any other costs, charges, attorneys' fees or expenses mentioned herein, and to the payment of the indebtedness or any part hereof, all in such order and manner as Pledgee in its discretion may determine. Pledgee shall pay any balance to the undersigned. Pledgee shall be under no duty or obligation whatsoever to make or give any presentments, demands for performance, notices of non-performance, protests, notices of protest or notices of dishonor in connection with any obligations or evidences of indebtedness held by Pledgee as collateral, or in connection with any obligations or evidences of indebtedness which constitute in whole or in part the indebtedness secured hereunder. Pledgee may at any time deliver the collateral or any part thereof to the undersigned and the receipt of the undersigned shall be a complete and full acquittance for the collateral so delivered, and Pledgee shall thereafter be discharged from any liability or responsibility therefor. 2. 21 Upon the transfer of all or any part of the indebtedness Pledgee may transfer all or any part of the collateral and shall be fully discharged thereafter from all liability and responsibility with respect to such collateral so transferred, and the transferee shall be vested with all the rights and powers of Pledgee hereunder with respect to such collateral so transferred; but with respect to any collateral not so transferred Pledgee shall retain all rights and powers hereby given. Until all indebtedness shall have been paid in full the power of sale and all other rights, powers and remedies granted to Pledgee hereunder shall continue to exist and may be exercised by Pledgee at any time and from time to time irrespective of the fact that the indebtedness or any part thereof may have become barred by any statute of limitations, or that the personal liability of the undersigned may have ceased. Pledgee agrees that so long as the indebtedness is not in default, shares of Landa Management Systems Corporation common stock held hereunder as collateral for the indebtedness shall be released from pledge as the indebtedness is paid. Such releases shall be at the rate of one share for each $0.12 of principal amount of indebtedness paid. Release from pledge, however, shall not result in release from the provisions of those certain Joint Escrow Instructions, if any, of even date herewith among the parties to this Pledge Agreement and the Escrow Agent named therein or from the Repurchase Option of Landa Management Systems Corporation, set forth in the Stock Purchase Agreement dated 17th March 1999, if any, between the parties to this Pledge Agreement. The rights, powers and remedies given to Pledgee by this agreement shall be in addition to all rights, powers and remedies given to Pledgee by virtue of any statute or rule of law. Pledgee may exercise its Pledgee's lien or right of setoff with respect to the indebtedness in the same manner as if the indebtedness were unsecured. Any forbearance or failure or delay by Pledgee in exercising any right, power or remedy hereunder shall not be deemed to be a waiver of such right, power or remedy, and any single or partial exercise of any right, power or remedy hereunder shall not preclude the further exercise thereof; and every right, power and remedy of Pledgee shall continue in full force and effect until such right, power or remedy is specifically waived by an instrument in writing executed by Pledgee. Dated: 17th March 1999 /s/ STEPHEN P. KAY ----------------------------- Stephen P. Kay ATTACHMENT: SCHEDULE 1 3. 22 SCHEDULE 1 TO PLEDGE AGREEMENT 300,000 shares of Common Stock in Landa Management Systems Corporation. 23 [LANDACORP LETTERHEAD] 17th March 1999 Director of Internal Revenue Internal Revenue Service Center 1160 West 1200 South Street Ogden, UT 84201 RE: ELECTION UNDER SECTION 83(b) Gentlemen: The undersigned hereby elects, pursuant to the provisions of Sections 55-56 and 83(b) of the Internal Revenue Code of 1986, as amended (the "Code"), to include in alternative minimum taxable income for the undersigned's current taxable year, as compensation for services, the excess, if any, of the fair market value of the property described below at the time of transfer over the amount paid for such property. The undersigned also elects pursuant to Section 83(b) of the Code to include in gross income for the taxable year in which the undersigned disposes of some or all of the property described below in a transaction which fails to satisfy the requirements of Section 422(a)(1) of the Code (a "disqualifying disposition"), as compensation for services, the excess, if any, of the fair market value of the disposed property at the time of transfer to the undersigned over the amount paid for such property. Pursuant to Treasury Regulations Section 1.83-2, the following information is submitted: Name: Stephen P. Kay ("Purchaser") Address: 14540 Camaren Park Drive, Chico, CA 95973 Social Security No.: ###-##-#### Property Description: 300,000 shares of Common stock (the "Stock") of Landa Management Systems Corporation (the "Corporation"). The date on which the Stock was purchased is 17th March 1999. The taxable year for which the election is made is the calendar year 1999/the fiscal year ending 31st December 1999. Restrictions: "If, on or before 28th February 2002 the employment of the Purchaser by the Corporation terminates for any reason, the Corporation shall have the option to repurchase some or all of the Stock (depending upon the date of such termination) for a price equal to the cost of the Stock repurchased." The fair market value at the time of transfer of the Stock, determined without regard to any restriction other than a restriction which by its terms will never lapse, is $36,000 (300,000 shares having a fair market value of $0.12 per share). Purchase Price: $36,000 (300,000 shares at $O.12 per share). A copy of this statement has been furnished to the Corporation and the transferee of the Stock if different than Purchaser. Very truly yours, /s/ STEPHEN P. KAY ----------------------------- Stephen F. Kay EX-10.10 10 RESTRICTED STOCK PURCHASE AGREEMENT-BRYAN LANG 1 EXHIBIT 10.10 STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made this day 20th May 1999 by and between LANDA MANAGEMENT SYSTEMS CORPORATION, a California corporation (the "Company"), and Bryan H. Lang, ("Purchaser"). WITNESSETH: WHEREAS, Purchaser holds a stock option dated October 20th, 1998 to purchase shares of common stock of the Company (the "Option") pursuant to the Company's 1998 Equity Incentive Plan (the "Plan") which Purchaser desires to exercise; and WHEREAS, Purchaser wishes to take advantage of the early exercise provision of the Option, and therefore to enter into this Agreement. NOW, THEREFORE, IT IS AGREED between the parties as follows: 1. Purchaser hereby agrees to purchase from the Company, and the Company hereby agrees to sell to Purchaser, an aggregate of one hundred ninety five thousand (195,000) shares of the common stock (the "Stock") of the Company, for a purchase price of 12/100 US dollars ($0.12) per share (total purchase price: Twenty three thousand four hundred 00/100 US dollars ($23,400.00)), payable as follows: Cash at Closing $ 0.00 Promissory Note in the form of Exhibit D (the "Note") $ 23,400.00 ----------- Total Purchase Price $ 23,400.00 ===========
The closing hereunder shall occur at the offices of the Company on the date of this Agreement or at such other time and place as the parties may mutually agree upon in writing. At the closing, Purchaser shall deliver two (2) stock assignments in the form of Exhibit B, duly endorsed (with date and number of shares left blank), joint escrow instructions (the "Joint Escrow Instructions") in the form of Exhibit C, duly executed by Purchaser, and the total purchase price (including an executed Note in the form of Exhibit D if a portion of the total purchase price is to be paid by promissory note and an executed pledge agreement in the form of Exhibit E (the "Pledge Agreement") under which all shares of the Stock acquired by Note shall be pledged as collateral security for the payment of the indebtedness represented by the Note. At the closing or as soon thereafter as practicable, the Company shall deliver to the Escrow Agent (as defined in paragraph 8 below) shares certificates for all of the Stock that is to be subject to the Purchase Option (as defined in paragraph 2 below), and shall deliver share certificates to Purchaser for all of the Stock, if any, that is not to be subject to the Purchase Option or the Pledge 1 2 Agreement. The certificates for all of the Stock that is subject to the Pledge Agreement but not the Purchase Option shall be retained by the Company as security pursuant to the Pledge Agreement. 2. The Stock to be purchased by Purchaser pursuant to this Agreement shall be subject to the following option ("Purchase Option"): (a) In the event that Purchaser's Continuous Service (as that term is defined in the Plan) shall terminate for any reason (including Purchaser's death), or no reason, with or without cause, the Purchase Option may be exercised. The Company shall have the right at any time within ninety (90) days after such termination of Continuous Service, or such longer period as may determined by the Company if such later repurchase is deemed necessary by the Company for treatment of its stock as Qualified Small Business Stock under Section 1202 of the Internal Revenue Code of 1986, as amended, and regulations promulgated thereunder, to exercise its option to repurchase from Purchaser or his personal representative, as the case may be, at the price per share paid by Purchaser pursuant to this Agreement ("Option Price"), up to but not exceeding the number of unvested shares of the Stock set forth on Exhibit A hereto, which is incorporated herein by this reference. (b) In addition, and without limiting the foregoing Purchase Option, if at any time during the term of the Purchase Option there occurs a transaction described in Section 11(b) or 11(c) of the Plan (e.g., a dissolution, liquidation, asset sale, merger, consolidation or reverse merger of the Company), then: (i) the Company shall exercise the Purchase Option to the same extent that the unvested portion of the Option would have terminated pursuant to Section 11(b) or 11(c) of the Plan if the Option had not been exercised pursuant to this Agreement, (ii) the Purchase Option shall lapse to the same extent that the unvested portion of the Option would have automatically accelerated pursuant to Section 11(c) of the Plan if the Option had not been exercised pursuant to this Agreement or (iii) the Purchase Option may be assigned to any successor to the Company to the same extent that the unvested portion of the Option would have been assumed or substituted by such successor if the Option had not been exercised pursuant to this Agreement, in which case the Purchase Option shall apply on the same basis as set forth above to the Stock or to the consideration received for the Stock by the Purchaser in the transaction (as the case may be) if Purchaser's Continuous Service with such successor terminates for any reason. The continuing or surviving entity shall be deemed to be the successor to the Company for purposes of this Agreement, and references herein to the "Company" shall be deemed to refer to such successor. (c) The Company shall be entitled to pay for any of the Stock purchased pursuant to its Purchase Option at the Company's option in cash, by offset against any indebtedness owing to the Company by Purchaser including without limitation any note given in payment for the Stock, or a combination of both. (d) This Agreement is not an employment contract and nothing in this Agreement shall be deemed to create in any way whatsoever any obligation on the part of Purchaser to continue in the employ of the Company or any Affiliate (as defined in the Plan) thereof, or of the Company or any Affiliate thereof to continue Purchaser in its employ. In addition, nothing in this Agreement shall obligate the Company or any Affiliate thereof, their 2 3 respective stockholders, boards of directors, officers or employees to continue any relationship that you might have as a director or consultant for the Company or any Affiliate thereof. 3. The Purchase Option may be exercised by giving written notice of exercise delivered or mailed as provided in paragraph 14. Upon providing of such notice and payment or tender of the purchase price, the Company shall become the legal and beneficial owner of the Stock being purchased and all rights and interests therein or related thereto. 4. If from time to time during the term of the Purchase Option there is any stock dividend or liquidating dividend or distribution of cash and/or property, stock split or other change in the character or amount of any of the outstanding securities of the Company, then, in such event, any and all new, substituted or additional securities or other property to which Purchaser is entitled by reason of his ownership of Stock will be immediately subject to the Purchase Option and be included in the word "Stock" for all purposes of the Purchase Option with the same force and effect as the shares of Stock then subject to the Purchase Option. While the total Option Price shall remain the same after each such event, the Option Price per share of Stock upon exercise of the Purchase Option shall be appropriately adjusted. 5. All certificates representing any shares of Stock of the Company subject to the provisions of this Agreement shall have endorsed thereon legends in substantially the following form: (a) "The shares represented by this certificate are subject to an option set forth in an agreement between the Company and the registered holder, or registered holder's predecessor in interest, a copy of which is on file at the principal office of this Company. Any transfer or attempted transfer of any shares subject to such option is void without the prior express written consent of the issuer of these shares." (b) "These securities have not been registered under the Securities Act of 1933. They may not be sold, offered for sale, pledged or hypothecated in the absence of an effective registration statement as to the securities under said Act or an opinion of counsel satisfactory to the Company that such registration is not required." (c) The shares represented by this certificate are subject to a right of first refusal option in favor of the Company and/or its assignee(s) as provided in the Bylaws of the Company." (d) Any legend required to be placed thereon by the California Commissioner of Corporations. 6. Purchaser acknowledges that he or she is aware that the Stock to be issued to him or her by the Company pursuant to this Agreement has not been registered under the Securities Act of 1933, as amended (the "Act"), on the basis that no distribution or public offering of the Stock is to be effected, and in this connection acknowledges that the Company is relying on the following representations. In this connection, Purchaser warrants and represents to the Company that he or she is acquiring the Stock for investment and not with a view to or for sale in 3 4 connection with any distribution of the Stock or with any present intention of distributing or selling the Stock and he or she does not presently have reason to anticipate any change in circumstances or any particular occasion or event which would cause him or her to sell the Stock. Purchaser recognizes that the Stock must be held indefinitely unless it is subsequently registered under the Act or an exemption from such registration is available and, further, recognizes that the Company is under no obligation to register the Stock or to comply with any exemption from such registration. 7. Purchaser is aware that the Stock may not be sold pursuant to Rule 144 adopted under the Act unless certain conditions are met and until Purchaser has held the Stock for the applicable holding period set forth in Rule 144. Among the conditions for use of Rule 144 is the availability of specified current public information about the Company. Purchaser recognizes that the Company presently has no plans to make such information available to the public. Whether or not the Purchase Option is exercised or has lapsed, Purchaser further agrees not to make any disposition of any of the Stock in any event unless and until: (a) There is then in effect a registration statement under the Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (b) (i) Purchaser shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (ii) Purchaser shall have given the Company an opinion of counsel, which opinion and counsel shall be satisfactory to the Company, to the effect that such disposition will not require registration of the Stock under the Act. 8. As security for his faithful performance of the terms of this Agreement and to insure the availability for delivery of Purchaser's Stock upon exercise of the Purchase Option herein provided for, Purchaser agrees, at the closing hereunder (or as soon thereafter as practicable), to deliver (or have the Company deliver on the Purchaser's behalf) to and deposit with the Secretary of the Company ("Escrow Agent"), as Escrow Agent in this transaction, two (2) stock assignments duly endorsed (with date and number of shares left blank) in the form attached hereto as Exhibit B, together with a certificate or certificates evidencing all of the Stock subject to the Purchase Option; said documents are to be held by the Escrow Agent and delivered by said Escrow Agent pursuant to the Joint Escrow Instructions of the Company and Purchaser set forth in Exhibit C attached hereto and incorporated herein by this reference, which instructions shall also be delivered to the Escrow Agent at the closing hereunder (or as soon thereafter as practicable). 9. Purchaser shall not sell or transfer any of the Stock subject to the Purchase Option or any interest therein so long as such Stock is subject to the Purchase Option. In addition, the Purchaser agrees that the Company (or a representative of the underwriters) may, in connection with the first underwritten registration of the offering of any securities of the Company under the Act, require that Purchaser not sell, dispose of, transfer, make any short sale of, grant any option for the purchase of, or enter into any hedging or similar transaction with the same economic 4 5 effect as a sale, any of the Stock or other securities of the Company held by you, for a period of time specified by the underwriter(s) (not to exceed one hundred eighty (180) days) following the effective date of the registration statement of the Company filed under the Act. 10. The Company shall not be required (a) to transfer on its books any shares of Stock of the Company which shall have been sold or transferred in violation of any of the provisions set forth in this Agreement or (b) to treat as owner of such shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such shares shall have been so transferred. 11. Subject to the provisions of paragraphs 9 and 10 above, Purchaser (but not any unapproved transferee) shall, during the term of this Agreement, exercise all rights and privileges of a stockholder of the Company with respect to the Stock. 12. The shares of Stock purchased under the terms of this Agreement are subject to the right of first refusal provided for in the Bylaws of the Company. 13. The parties agree to execute such further instruments and to take such further action as reasonably may be necessary to carry out the intent of this Agreement. 14. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in any United States Post Office Box, by registered or certified mail with postage and fees prepaid, addressed to the other party hereto at his address hereinafter shown below his signature or at such other address as such party may designate by ten (10) days' advance written notice to the other party hereto. 15. This Agreement shall bind and inure to the benefit of the successors and assigns of the Company and, subject to the restrictions on transfer herein set forth, inure to the benefit of and be binding upon Purchaser, his heirs, executors, administrators, successors, and assigns. Without limiting the generality of the foregoing, the Purchase Option of the Company hereunder shall be assignable by the Company at any time or from time to time, in whole or in part. 5 6 IN WITNESS WHEREOF, the parties hereto have executed this Stock Purchase Agreement as of the day and year first set forth above. LANDA MANAGEMENT SYSTEMS CORPORATION By: /s/ STEPHEN P. KAY ---------------------------------- Its: COO/CFO --------------------------------- Address: 1072 Marauder Street, Suite A Chico, CA 95973 /s/ BRYAN H. LANG ------------------------------------- BRYAN H. LANG Address: 35 Covell Park Drive Chico, CA 95926 ATTACHMENTS: Exhibit A Vesting Schedule Exhibit B Assignment Separate from Certificate Exhibit C Joint Escrow Instructions Exhibit D Promissory Note Exhibit E Pledge Agreement 6 7 EXHIBIT A VESTING SCHEDULE
IF CONTINUOUS SERVICE NUMBER OF UNVESTED SHARES TERMINATES: SUBJECT TO PURCHASE OPTION: Before 28th February 1999 195,000.0 shares After 28th February 1999 but before 31st March 1999 146,250.0 shares After 31st March 1999 but before 30th April 1999 142,187.5 shares After 30th April 1999 but before 31st May 1999 138,125.0 shares After 31st May 1999 but before 30th June 1999 134,062.5 shares After 30th June 1999 but before 31st July 1999 130,000.0 shares After 31st July 1999 but before 31st August 1999 125,937.5 shares After 31st August 1999 but before 30th September 1999 121,875.0 shares After 30th September 1999 but before 31st October 1999 117,812.5 shares After 31st October 1999 but before 30th November 1999 113,750.0 shares After 30th November 1999 but before 31st December 1999 109,687.5 shares
1 8 EXHIBIT A (CONTINUED) VESTING SCHEDULE
IF CONTINUOUS SERVICE NUMBER OF UNVESTED SHARES TERMINATES: SUBJECT TO PURCHASE OPTION: After 31st December 1999 but before 31st January 2000 105,625.0 shares After 31st January 2000 but before 28th February 2000 101,562.5 shares After 28th February 2000 but before 31st March 2000 97,500.0 shares After 31st March 2000 but before 30th April 2000 93,437.5 shares After 30th April 2000 but before 31st May 2000 89,375.0 shares After 31st May 2000 but before 30th June 2000 85,312.5 shares After 30th June 2000 but before 31st July 2000 81,250.0 shares After 31st July 2000 but before 31st August 2000 77,187.5 shares After 31st August 2000 but before 30th September 2000 73,125.0 shares After 30th September 2000 but before 31st October 2000 69,062.5 shares
2 9 EXHIBIT A (CONTINUED) VESTING SCHEDULE
IF CONTINUOUS SERVICE NUMBER OF UNVESTED SHARES TERMINATES: SUBJECT TO PURCHASE OPTION: After 31st October 2000 but before 30th November 2000 65,000.0 shares After 30th November 2000 but before 31st December 2000 60,937.5 shares After 31st December 2000 but before 31st January 2001 56,875.0 shares After 31st January 2001 but before 28th February 2001 52,812.5 shares After 28th February 2001 but before 31st March 2001 48,750.0 shares After 31st March 2001 but before 30th April 2001 44,687.5 shares After 30th April 2001 but before 31st May 2001 40,625.0 shares After 31st May 2001 but before 30th June 2001 36,562.5 shares After 30th June 2001 but before 31st July 2001 32,500.0 shares After 31st July 2001 but before 31st August 2001 28,437.5 shares
3 10 EXHIBIT A (CONTINUED) VESTING SCHEDULE
IF CONTINUOUS SERVICE NUMBER OF UNVESTED SHARES TERMINATES: SUBJECT TO PURCHASE OPTION: After 31st August 2001 but before 30th September 2001 24,375.0 shares After 30th September 2001 but before 31st October 2001 20,312.5 shares After 31st October 2001 but before 30th November 2001 16,250.0 shares After 30th November 2001 but before 31st December 2001 12,187.5 shares After 31st December 2001 but before 31st January 2002 8,125.0 shares After 31st January 2002 but before 28th February 2002 4,062.5 shares After 28th February 2002 0.0 shares
4 11 EXHIBIT B ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED and pursuant to that certain Stock Purchase Agreement dated as of 20th May 1999, (the "Agreement") Bryan H. Lang hereby sells, assigns and transfers unto Landa Management Systems Corporation _____________(___) shares of common stock of Landa Management Systems Corporation, a California corporation, standing in the undersigned's name on the books of said corporation represented by Certificate No. _____ herewith, and does hereby irrevocably constitute and appoint _______________ attorney to transfer the said stock on the books of the said corporation with full power of substitution in the premises. This Assignment may be used only in accordance with and subject to the terms and conditions of the Agreement, in connection with the repurchase of shares of Common Stock issued to the undersigned pursuant to the Agreement, and only to the extent that such shares remain subject to the Company's Purchase Option under the Agreement. Dated: ---------- /s/ BRYAN H. LANG --------------------------------- [Signature] Bryan H. Lang --------------------------------- [INSTRUCTION: Please do not fill in any blanks other than the signature line. The purpose of this Assignment is to enable the Company to exercise its repurchase option set forth in the Agreement without requiring additional signatures on the part of Purchaser.] 12 EXHIBIT B ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED and pursuant to that certain Stock Purchase Agreement dated as of 20th May 1999, (the "Agreement") Bryan H. Lang hereby sells, assigns and transfers unto Landa Management Systems Corporation _____________(___) shares of common stock of Landa Management Systems Corporation, a California corporation, standing in the undersigned's name on the books of said corporation represented by Certificate No. _____ herewith, and does hereby irrevocably constitute and appoint _______________ attorney to transfer the said stock on the books of the said corporation with full power of substitution in the premises. This Assignment may be used only in accordance with and subject to the terms and conditions of the Agreement, in connection with the repurchase of shares of Common Stock issued to the undersigned pursuant to the Agreement, and only to the extent that such shares remain subject to the Company's Purchase Option under the Agreement. Dated: ---------- /s/ BRYAN H. LANG --------------------------------- [Signature] Bryan H. Lang --------------------------------- [INSTRUCTION: Please do not fill in any blanks other than the signature line. The purpose of this Assignment is to enable the Company to exercise its repurchase option set forth in the Agreement without requiring additional signatures on the part of Purchaser.] 13 EXHIBIT C JOINT ESCROW INSTRUCTIONS Stephen P. Kay, Company Secretary Landa Management Systems Corporation 1072 Marauder, Suite A Chico, CA 95973 Dear Sir: As Escrow Agent for both Landa Management Systems Corporation, a California corporation ("Company"), and the undersigned purchaser of stock of the Company ("Purchaser"), you are hereby authorized and directed to hold the documents delivered to you pursuant to the terms of that certain Stock Purchase Agreement ("Agreement"), dated 20TH MAY 1999, to which a copy of these Joint Escrow Instructions is attached as Exhibit C in accordance with the following instructions: 1. In the event the Company or an assignee shall elect to exercise the Purchase Option set forth in the Agreement, the Company or its assignee will give to Purchaser and you a written notice specifying the number of shares of stock to be purchased, the purchase price, and the time for a closing hereunder at the principal office of the Company. Purchaser and the Company hereby irrevocably authorize and direct you to close the transaction contemplated by such notice in accordance with the terms of said notice. 2. At the closing you are directed (a) to date any stock assignments necessary for the transfer in question, (b) to fill in the number of shares being transferred, and (c) to deliver same, together with the certificate evidencing the shares of stock to be transferred, to the Company against the simultaneous delivery to you of the purchase price (which may include suitable acknowledgment of cancellation of indebtedness) of the number of shares of stock being purchased pursuant to the exercise of the Purchase Option. 3. Purchaser irrevocably authorizes the Company to deposit with you any certificates evidencing shares of stock to be held by you hereunder and any additions and substitutions to said shares as specified in the Agreement. Purchaser does hereby irrevocably constitute and appoint you as his attorney-in-fact and agent for the term of this escrow to execute with respect to such securities and other property all documents of assignment and/or transfer and all stock certificates necessary or appropriate to make all securities negotiable and complete any transaction herein contemplated. 4. This escrow shall terminate upon expiration or exercise in full of the Purchase Option, whichever occurs first. 1. 14 5. If at the time of termination of this escrow you should have in your possession any documents, securities, or other property belonging to Purchaser, you shall deliver all of same to Purchaser and shall be discharged of all further obligations hereunder; provided, however, that if at the time of termination of this escrow you are advised by the Company that the property subject to this escrow is the subject of a pledge or other security agreement, you shall deliver all such property to the pledgeholder or other person designated by the Company. 6. Except as otherwise provided in these Joint Escrow Instructions, your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto. 7. You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties or their assignees. You shall not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith and any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith. 8. You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law, and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree of any court, you shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction. 9. You shall not be liable in any respect on account of the identity, authority or rights of the parties executing or delivering or purporting to execute or deliver the Agreement or any documents or papers deposited or called for hereunder. 10. You shall not be liable for the outlawing of any rights under any statue of limitations with respect to these Joint Escrow Instructions or any documents deposited with you. 11. Your responsibilities as Escrow Agent hereunder shall terminate if you shall cease to be Secretary of the Company or if you shall resign by written notice to each party. In the event of any such termination, the Company may appoint any officer or assistant officer of the Company as successor Escrow Agent and Purchaser hereby confirms the appointment of such successor or successors as his attorney-in-fact and agent to the full extent of your appointment. 12. If you reasonably require other or further instruments in connection with these Joint Escrow Instructions or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments. 13. It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the securities, you are authorized and 2. 15 directed to retain in your possession without liability to anyone all or any part of said securities until such dispute shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but you shall be under no duty whatsoever to institute or defend any such proceedings. 14. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery, including delivery by express courier or five days after deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to each of the other parties hereunto entitled at the following addresses, or at such other addresses as a party may designate by ten days' advance written notice to each of the other parties hereto: COMPANY: Stephen P. Kay, Company Secretary Landa Management Systems Corporation 1072 Marauder, Suite A Chico, CA 95973 PURCHASER: Bryan H. Lang 35 Covell Park Drive Chico, CA 95926 ESCROW AGENT: Stephen P. Kay, Company Secretary Landa Management Systems Corporation 1072 Marauder, Suite A Chico, CA 95973 15. By signing these Joint Escrow Instructions you become a party hereto only for the purpose of said Joint Escrow Instructions; you do not become a party to the Agreement. 16. You shall be entitled to employ such legal counsel and other experts (including without limitation the firm of Cooley Godward LLP) as you may deem necessary properly to advise you in connection with your obligations hereunder. You may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor. The Corporation shall be responsible for all fees generated by such legal counsel in connection with your obligations hereunder. 17. This instrument shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. It is understood and agreed that references to "you" or "your" herein refer to the original Escrow Agent and to any and all successor Escrow Agents. It is understood and agreed that the Corporation may at any time or from time to time assign its rights under the Agreement and these Joint Escrow Instructions in whole or in part. 18. This Agreement shall be governed by and interpreted and determined in accordance with the laws of the State of California, as such laws are applied by California courts to contracts made to be performed entirely in California by residents of that state. 3. 16 Very truly yours, LANDA MANAGEMENT SYSTEMS CORPORATION By: /s/ STEPHEN P. KAY --------------------------------- Chief Financial Officer PURCHASER: /s/ BRYAN H. LANG ------------------------------------ ESCROW AGENT: /s/ STEPHEN P. KAY - --------------------------------- Stephen P. Kay, Company Secretary 4. 17 EXHIBIT D FULL RECOURSE PROMISSORY NOTE $23,400.00 20TH MAY 1999 FOR VALUE RECEIVED, the undersigned hereby unconditionally promises to pay to the order of Landa Management Systems Corporation, a California corporation (the "Company"), at Chico, California, or at such other place as the holder hereof may designate in writing, in lawful money of the United States of America and in immediately available funds, the principal sum of Twenty three thousand four hundred 00/100 Dollars ($23,400.00) together with interest accrued from the date hereof on the unpaid principal at the rate of 6.00% per annum, or the maximum rate permissible by law (which under the laws of the State of California shall be deemed to be the laws relating to permissible rates of interest on commercial loans), whichever is less, as follows: PRINCIPAL REPAYMENT. The outstanding principal amount hereunder shall be DUE AND PAYABLE IN FULL ON MAY 19TH, 2006. INTEREST PAYMENTS. Interest shall be ACCRUED ANNUALLY and shall be calculated on the basis of a 360-day year for the actual number of days elapsed; provided, however, that in the event that the undersigned's employment by or association with the Company is terminated for any reason prior to payment in full of this Note, this Note shall be accelerated and all remaining unpaid principal and interest shall become due and payable immediately after such termination. Moreover, the Company may, in connection with the first underwritten registration of the offering of any securities of the Company under the Securities Act of 1933, as amended (the "Securities Act"), require that this Note shall be accelerated and all remaining unpaid principal and interest shall become due and payable within two hundred ten (210) days following the effective date of the registration statement of the Company filed under the Securities Act. If the undersigned fails to pay any of the principal and accrued interest when due, the Company, at its sole option, shall have the right to accelerate this Note, in which event the entire principal balance and all accrued interest shall become immediately due and payable, and immediately collectible by the Company pursuant to applicable law. This Note may be prepaid at any time without penalty. All money paid toward the satisfaction of this Note shall be applied first to the payment of interest as required hereunder and then to the retirement of the principal. This Note is a full recourse promissory note. The full amount of this Note is secured by a pledge of shares of Common Stock of the Company, and is subject to all of the terms and provisions of the Stock Purchase Agreement and the Pledge Agreement, each of even date herewith between the undersigned and the Company. 1. 18 The undersigned hereby represents and agrees that the amounts due under this Note are not consumer debt, and are not incurred primarily for personal, family or household purposes, but are for business and commercial purposes only. The undersigned hereby waives presentment, protest and notice of protest, demand for payment, notice of dishonor and all other notices or demands in connection with the delivery, acceptance, performance, default or endorsement of this Note. The holder hereof shall be entitled to recover, and the undersigned agrees to pay when incurred, all costs and expenses of collection of this Note, including without limitation, reasonable attorneys' fees. This Note shall be governed by, and construed, enforced and interpreted in accordance with, the laws of the State of California, excluding conflict of laws principles that would cause the application of laws of any other jurisdiction. Signed /s/ BRYAN H. LANG ---------------------- Bryan H. Lang 2. 19 EXHIBIT E PLEDGE AGREEMENT 1. As collateral security for the payment of that certain $23,400.00 promissory note issued this date to Landa Management Systems Corporation ("Pledgee") by the undersigned (hereinafter called "indebtedness"), the undersigned hereby assigns, transfers to and pledges with the Pledgee the securities listed on Schedule 1 hereto which were this day delivered to be deposited with Pledgee, together with any stock rights, rights to subscribe, dividends paid in cash or other property in connection with the complete or partial liquidation of Pledgee, stock dividends, dividends paid in stock, new securities or other property except cash dividends other than liquidating dividends to which the undersigned is or may hereafter become entitled to receive on account of such property, and in the event that the undersigned receives any such, the undersigned will immediately deliver it to Pledgee to be held by Pledgee hereunder in the same manner as the property originally pledged hereunder. All property assigned, transferred to and pledged with Pledgee under this paragraph is hereinafter called "collateral." At any time, without notice, and at the expense of the undersigned, Pledgee in its name or in the name of its nominee or of the undersigned may, but shall not be obligated to: (a) collect by legal proceedings or otherwise all dividends (except cash dividends other than liquidating dividends), interest, principal payments and other sums now or hereafter payable upon or on account of said collateral; (b) enter into any extension, reorganization, deposit, merger, or consolidation agreement, or any agreement in any way relating to or affecting the collateral, and in connection therewith may deposit or surrender control of such collateral thereunder, accept other property in exchange for such collateral and do and perform such acts and things as it may deem proper, and any money or property received in exchange for such collateral shall be applied to the indebtedness or thereafter held by it pursuant to the provisions hereof; (c) insure, process and preserve the collateral; (d) cause the collateral to be transferred to its name or to the name of its nominee; (e) exercise as to such collateral all the rights, powers, and remedies of an owner, except that so long as the indebtedness is not in default the undersigned shall retain all voting rights as to the collateral. The undersigned agrees to pay prior to delinquency all taxes, charges, liens and assessments against the collateral, and upon the failure of the undersigned to do so Pledgee at its option may pay any of them and shall be the sole judge of the legality or validity thereof and the amount necessary to discharge the same. All advances, charges, costs and expenses, including reasonable attorneys' fees, incurred or paid by Pledgee in exercising any right, power or remedy conferred by this agreement, or in the enforcement thereof, shall become a part of the indebtedness secured hereunder and shall be paid to Pledgee by the undersigned immediately and without demand. At the option of Pledgee and without necessity of demand or notice, all or any part of the indebtedness of the undersigned shall immediately become due and payable irrespective of any agreed maturity, upon the happening of any of the following events: (a) failure to keep or perform any of the terms or provisions of this agreement; (b) default in the payment of principal or interest when due; (c) the levy of any attachment, execution or other process against the 1. 20 collateral; or (d) the insolvency, commission of an act of bankruptcy, general assignment for the benefit of creditors, filing of any petition in bankruptcy or for relief under the provisions of Title 11, United States Code, Bankruptcy, of, by, or against the undersigned. In the event of the nonpayment of any indebtedness when due, whether by acceleration or otherwise, or upon the happening of any of the events specified in the last preceding paragraph, Pledgee may then, or at any time thereafter, at its election, apply, set off, collect or sell in one or more sales, or take such steps as may be necessary to liquidate and reduce to cash in the hands of Pledgee in whole or in part, with or without any previous demands or demand of performance or notice or advertisement, the whole or any part of the collateral in such order as Pledgee may elect, and any such sale may be made either at public or private sale at its place of business or elsewhere, or at any broker's board or securities exchange, either for cash or upon credit or for future delivery; provided, however, that if such disposition is at private sale, then the purchase price of the collateral shall be equal to the public market price then in effect, or, if at the time of sale no public market for the collateral exists, then, in recognition of the fact that the sale of the collateral would have to be registered under the Securities Act of 1933 and that the expenses of such registration are commercially unreasonable for the type and amount of collateral pledged hereunder, Pledgee and the undersigned hereby agree that such private sale shall be at a purchase price mutually agreed to by Pledgee and the undersigned or, if the parties cannot agree upon a purchase price, then at a purchase price established by a majority of three independent appraisers knowledgeable of the value of such collateral, one named by the undersigned within 10 days after written request by the Pledgee to do so, one named by Pledgee within such 10 day period, and the third named by the two appraisers so selected, with the appraisal to be rendered by such body within 30 days of the appointment of the third appraiser. The cost of such appraisal, including all appraiser's fees, shall be charged against the proceeds of sale as an expense of such sale. Pledgee may be the purchaser of any or all collateral so sold and hold the same thereafter in its own right free from any claim of the undersigned or right of redemption. Demands of performance, notices of sale, advertisements and presence of property at sale are hereby waived, and Pledgee is hereby authorized to sell hereunder any evidence of debt pledged to it. Any sale hereunder may be conducted by any officer or agent of Pledgee. The proceeds of the sale of any of the collateral and all sums received or collected by Pledgee from or on account of such collateral shall be applied by Pledgee to the payment of expenses incurred or paid by Pledgee in connection with any sale, transfer or delivery of the collateral, to the payment of any other costs, charges, attorneys' fees or expenses mentioned herein, and to the payment of the indebtedness or any part hereof, all in such order and manner as Pledgee in its discretion may determine. Pledgee shall pay any balance to the undersigned. Pledgee shall be under no duty or obligation whatsoever to make or give any presentments, demands for performance, notices of non-performance, protests, notices of protest or notices of dishonor in connection with any obligations or evidences of indebtedness held by Pledgee as collateral, or in connection with any obligations or evidences of indebtedness which constitute in whole or in part the indebtedness secured hereunder. Pledgee may at any time deliver the collateral or any part thereof to the undersigned and the receipt of the undersigned shall be a complete and full acquittance for the collateral so delivered, and Pledgee shall thereafter be discharged from any liability or responsibility therefor. 2. 21 Upon the transfer of all or any part of the indebtedness Pledgee may transfer all or any part of the collateral and shall be fully discharged thereafter from all liability and responsibility with respect to such collateral so transferred, and the transferee shall be vested with all the rights and powers of Pledgee hereunder with respect to such collateral so transferred; but with respect to any collateral not so transferred Pledgee shall retain all rights and powers hereby given. Until all indebtedness shall have been paid in full the power of sale and all other rights, powers and remedies granted to Pledgee hereunder shall continue to exist and may be exercised by Pledgee at any time and from time to time irrespective of the fact that the indebtedness or any part thereof may have become barred by any statute of limitations, or that the personal liability of the undersigned may have ceased. Pledgee agrees that so long as the indebtedness is not in default shares of Landa Management Systems Corporation common stock held hereunder as collateral for the indebtedness shall be released from pledge as the indebtedness is paid. Such releases shall be at the rate of one share for each $0.12 of principal amount of indebtedness paid. Release from pledge, however, shall not result in release from the provisions of those certain Joint Escrow Instructions, if any, of even date herewith among the parties to this Pledge Agreement and the Escrow Agent named therein or from the Repurchase Option of Landa Management Systems Corporation, set forth in the Stock Purchase Agreement dated 20th May 1999, if any, between the parties to this Pledge Agreement. The rights, powers and remedies given to Pledgee by this agreement shall be in addition to all rights, powers and remedies given to Pledgee by virtue of any statute or rule of law. Pledgee may exercise its Pledgee's lien or right of setoff with respect to the indebtedness in the same manner as if the indebtedness were unsecured. Any forbearance or failure or delay by Pledgee in exercising any right, power or remedy hereunder shall not be deemed to be a waiver of such right, power or remedy, and any single or partial exercise of any right, power or remedy hereunder shall not preclude the further exercise thereof; and every right, power and remedy of Pledgee shall continue in full force and effect until such right, power or remedy is specifically waived by an instrument in writing executed by Pledgee. Dated: 20th May 1999 /s/ BRYAN H. LANG -------------------------------------------- Bryan H. Lang ATTACHMENT: Schedule 1 3. 22 SCHEDULE 1 TO PLEDGE AGREEMENT 195,000 shares of Common Stock in Landa Management Systems Corporation. 23 20th May 1999 [LANDACORP LETTERHEAD] Director of Internal Revenue Internal Revenue Service Center 1160 West 1200 South Street Ogden, UT 84201 RE: ELECTION UNDER SECTION 83(b) Gentlemen: The undersigned hereby elects, pursuant to the provisions of Sections 55-56 and 83(b) of the Internal Revenue Code of 1986, as amended (the "Code"), to include in alternative minimum taxable income for the undersigned's current taxable year, as compensation for services, the excess, if any, of the fair market value of the property described below at the time of transfer over the amount paid for such property. The undersigned also elects pursuant to Section 83(b) of the Code to include in gross income for the taxable year in which the undersigned disposes of some or all of the property described below in a transaction which fails to satisfy the requirements of Section 422(a)(1) of the Code (a "disqualifying disposition"), as compensation for services, the excess, if any, of the fair market value of the disposed property at the time of transfer to the undersigned over the amount paid for such property. Pursuant to Treasury Regulations Section 1.83-2, the following information is submitted: Name: Bryan H. Lang ("Purchaser") Address: 35 Covell Park Drive, Chico, CA 95926 Social Security No.: ###-##-#### Property Description: 195,000 shares of Common stock (the "Stock") of Landa Management Systems Corporation (the "Corporation"). The date on which the Stock was purchased is 20th May 1999. The taxable year for which the election is made is the calendar year 1999/the fiscal year ending 31st December 1999. Restrictions: "If, on or before 28th February 2002 the employment of the Purchaser by the Corporation terminates for any reason, the Corporation shall have the option to repurchase some or all of the Stock (depending upon the date of such termination) for a price equal to the cost of the Stock repurchased." The fair market value at the time of transfer of the Stock, determined without regard to any restriction other than a restriction which by its terms will never lapse, is $23,400 (195,000 shares having a fair market value of $0.12 per share). Purchase Price: $23,400 (195,000 shares at $0.12 per share). A copy of this statement has been furnished to the Corporation and the transferee of the Stock is different than Purchaser. Very truly yours, /s/ BRYAN H. LANG BRYAN H. LANG EX-10.11 11 VOTING RIGHTS AGREEMENT DATED FEB. 27, 1998 1 EXHIBIT 10.11 LANDA MANAGEMENT SYSTEMS CORPORATION VOTING AGREEMENT THIS VOTING AGREEMENT (the "Agreement") is made and entered into this 27th day of February, 1998, by and among LANDA MANAGEMENT SYSTEMS CORPORATION, a California corporation (the "Company"), those certain holders of the Company's Common Stock and options to purchase Common Stock listed on Exhibit A hereto (the "Key Shareholders") and the persons and entries listed on Exhibit B hereto (the "Investors"). WITNESSETH: WHEREAS, the Key Shareholders are the beneficial owners of an aggregate of seven hundred fifty-eight thousand four hundred seventy-seven and eighty-three one hundredths (758,477.83) shares of Common Stock and/or options to purchase three hundred sixty-eight thousand eight hundred forty-eight (368,848) shares of Common Stock and/or warrants to purchase three hundred fifty thousand (350,000) shares of Common Stock of the Company; and WHEREAS, the Company proposes to sell shares of its Series D Preferred Stock, (the "Series D Preferred Stock"), to the Investors pursuant to the Series D Preferred Stock Purchase Agreement (the "Purchase Agreement") of even date herewith (the "Financing"); WHEREAS, in connection with the consummation of the Financing, the Company, the Key Shareholders and the Investors have agreed to provide for the future voting of their shares of the Company's capital stock as set forth below; NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE 1 VOTING 1.1 COMMON SHARES; INVESTOR SHARES. 1.1.1 The Key Shareholders each agree to hold all shares of voting capital stock of the Company registered in their respective names or beneficially owned by them as of the date hereof, and any and all other securities of the Company legally or beneficially acquired by each of the Key Shareholders after the date hereof (including but not limited to all shares of Common Stock issued upon exercise of options and/or warrants to purchase Common Stock; hereinafter collectively referred to as the "Common Shares"), subject to, and to vote the Common Shares in accordance with, the provisions of this Agreement. 1.1.2 The Investors each agree to hold all shares of voting capital stock of the Company now owned or hereinafter acquired by them (including but not limited to all shares of Common Stock issued upon conversion of the Company's Series D Preferred Stock) registered in their respective 1. 2 names or beneficially owned by them as of the date hereof and any and all other securities of the Company legally or beneficially acquired by each of the Investors after the date hereof) (hereinafter collectively referred to as the "Investor Shares") subject to, and to vote the Investor Shares in accordance with, the provisions of this Agreement. 1.2 VOTING. (a) At each election of directors in which the holders of Common Stock and holders of Preferred Stock, voting together as a single class, are entitled to elect directors of the Company, the Key Shareholders and Investors shall consult each other and shall vote their respective shares of the Company's voting stock so that at least such directors will be nominees that are mutually acceptable to a majority in interest of the holders of Series D Preferred Stock. It is anticipated that one of the directors to be elected pursuant to this section will be Bryan Lang for so long as he remains an employee of the Company. (b) Each Key Shareholder and each Investor agrees to vote its voting stock in accordance with the voting of holders of a majority in interest of the Series D Preferred Stock with respect to (i) the approval of any proposed amendment to the Amended and Restated Articles of Incorporation of the Company (the "Restated Articles"), (ii) the approval of any proposed amendment to the Amended and Restated Bylaws of the Company, and (iii) any proposed Acquisition or Asset Transfer (as each such term is defined in the Restated Articles). 1.3 LEGEND. 1.3.1 Concurrently with the execution of this Agreement, there shall be imprinted or otherwise placed, on certificates representing the Common Shares and the Investor Shares, and such legend shall be imprinted on each Common Share issued upon exercise by a Key Shareholder of an option to purchase Common Stock, the following restrictive legend (the "Legend"): "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND CONDITIONS OF A VOTING AGREEMENT WHICH PLACES CERTAIN RESTRICTIONS ON THE VOTING OF THE SHARES REPRESENTED HEREBY. ANY PERSON ACCEPTING ANY INTEREST IN SUCH SHARES SHALL BE DEEMED TO AGREE TO AND SHALL BECOME BOUND BY ALL THE PROVISIONS OF SUCH AGREEMENT. A COPY OF SUCH VOTING AGREEMENT WILL BE FURNISHED TO THE RECORD HOLDER OF THIS CERTIFICATE WITHOUT CHARGE UPON WRITTEN REQUEST TO THE COMPANY AT ITS PRINCIPAL PLACE OF BUSINESS." 1.3.2 The Company agrees that, during the term of this Agreement, it will not remove, and will not permit to be removed (upon registration of transfer, reissuance of otherwise), the Legend from any such certificate and will place or cause to be placed the Legend on any new certificate issued to represent Common Shares or Investor Shares theretofore represented by a certificate carrying the Legend. 1.4 SUCCESSORS. The provisions of this Agreement shall be binding upon the successors in interest to any of the Common Shares or Investor Shares. The Company shall not permit the transfer of 2. 3 any of the Common Shares or Investor Shares on its books or issue a new certificate representing any of the Common Shares or Investor Shares unless and until the person to whom such security is to be transferred shall have executed a written Agreement, substantially in the form of this Agreement, pursuant to which such person becomes a party to this Agreement and agrees to be bound by all the provisions hereof as if such person were a Key Shareholder or Investor, as applicable. Notwithstanding the foregoing, upon any transfer effected pursuant to Section 2.3 of the Purchase Agreement, such transferee shall be deemed to be an Investor hereunder and the shares of voting capital stock of the Company then transferred to it and/or thereafter acquired by it shall be deemed "Investor Shares." 1.5 OTHER RIGHTS. Except as provided by this Agreement, each key Shareholder and Investor shall exercise the full rights of a shareholder with respect to the Common Shares and the Investor Shares, respectively. ARTICLE 2 TERMINATION 2.1 This Agreement shall continue in full force and effect from the date hereof through the earliest of the following dates, on which it shall terminate in its entirety: 2.1.1 the date of the closing of a firmly underwritten public offering of the Company's Common Stock pursuant to a registration statement filed with, and declared effective under the Securities Act of 1933, as amended; or 2.1.2 at such time as the Investors hold less than One Million (1,000,000) shares of Series D Preferred Stock (as adjusted for stock splits and the like); or 2.1.3 ten (10) years from the date of this Agreement; or 2.1.4 the date as of which the parties hereto terminate this Agreement by written consent of a majority in interest of the Investors and a majority in interest of the Key Shareholders. ARTICLE 3 MISCELLANEOUS 3.1 OWNERSHIP. Each Key Shareholder represents and warrants to the Investors that (a) he now owns the Common Shares and/or Options and/or Warrants to purchase Common Stock of the Company set forth opposite such person's name on Exhibit A hereto, free and clear of liens or encumbrances, and has not, prior to or on the date of this Agreement, executed or delivered any proxy or entered into any other voting agreement or similar arrangement other than on which has expired or terminated prior to the date hereof, and (b) such Key Shareholder has full power and capacity to execute, deliver and perform this Agreement, which has been duly executed and delivered by, and evidences the valid and binding obligation of, such Key Shareholder enforceable in accordance with its terms. 3.2 FURTHER ACTION. If and when the Common Shares are sold, each Key Shareholder (or the personal representative of any Key Shareholder) shall do all things and execute and deliver all documents and make all transfers, and cause any transferee of the Common Shares to do all things and 3. 4 execute and deliver all documents, as may be necessary to consummate such sale consistent with this Agreement. 3.3 SPECIFIC PERFORMANCE. The parties hereto hereby declare that it is impossible to measure in money the damages which will accrue to a party hereto or to their heirs, personal representatives, or assigns by reason of a failure to perform any of the obligations under this Agreement and agree that the terms of this Agreement shall be specifically enforceable. If any party hereto or his heirs, personal representatives, or assigns institutes any action of proceeding to specifically enforce the provisions hereof, any person against whom such action or proceeding is brought hereby waives the claim or defense therein that such party or such personal representative has an adequate remedy at law, and such person shall not offer in any such action or proceeding the claim or defense that such remedy at law exists. 3.4 GOVERNING LAW. This Agreement, and the rights of the parties hereto, shall be governed by and construed in accordance with the laws of the State of California as such laws apply to agreements among California residents made and to be performed entirely within the State of California. 3.5 AMENDMENT. This Agreement may be amended only by an instrument in writing signed by the Company, a majority in interest of the Investors and a majority in interest of the Key Shareholders. 3.6 SEVERABILITY. If any provision of this Agreement is held to be invalid or unenforceable, the validity and enforceability of the remaining provisions of this Agreement shall not be affected thereby. 3.7 SUCCESSORS. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, successors, assigns, administrators, executors and other legal representatives. 3.8 ADDITIONAL SHARES. In the event that subsequent to the date of this Agreement any shares or other securities (other than any shares or securities of another corporation issued to the Company's shareholders pursuant to a plan of merger) are issued on, or in exchange for, any of the Common Shares or Investor Shares by reason of any stock dividend, stock split, consolidation of shares, reclassification or consolidation involving the Company, such shares or securities shall be deemed to be Common Shares or Investor Shares, as the case may be, for purposes of this Agreement. 3.9 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which will be deemed an original but all of which together shall constitute one and the same agreement. 3.10 WAIVER. No waivers of any breach of this Agreement extended by any party hereto to any other party shall be construed as a waiver of any rights or remedies of any other party hereto or with respect to any subsequent breach. 3.11 ATTORNEY'S FEES. In the event that any suit or action is instituted to enforce any provision in this Agreement, the prevailing party shall be entitled to all costs and expenses of maintaining such suit or action, including reasonable attorneys' fees. 4. 5 3.12 ENTIRE AGREEMENT. This Agreement and the Exhibits hereto, along with the Purchase Agreement and each of the Exhibits thereto, constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof and no party shall be liable or bound to any other in any manner by any representations, warranties, covenants and agreements except as specifically set forth herein and therein. [THIS SPACE INTENTIONALLY LEFT BLANK] 5. 6 IN WITNESS WHEREOF, the parties hereto have executed this VOTING AGREEMENT as of the date first above written. COMPANY: INVESTORS: LANDA MANAGEMENT SYSTEMS CORPORATION BEDROCK CAPITAL PARTNERS, L.L.P. By: By: --------------------------------- ------------------------------------ President General Partner KEY SHAREHOLDERS: BEDROCK CAPITAL SIDE-BY-SIDE, L.P. By: - ------------------------------------ ------------------------------------ BRYAN LANG General Partner - ------------------------------------ GREYLOCK IX LIMITED PARTNERSHIP STEPHEN KAY By: Greylock IX GP Limited Partnership Its General Partner By: - ------------------------------------ ------------------------------------ SHAREHOLDER General Partner SEQUOIA CAPITAL VII, A CALIFORNIA LIMITED PARTNERSHIP By: SC VII-A Management, LLC A California Limited Liability Company, Its General Partner By: ------------------------------------ Managing Member SEQUOIA TECHNOLOGY PARTNERS VII A CALIFORNIA LIMITED PARTNERSHIP By: SC VII-A Management, LLC A California Limited Liability Company, Its General Partner By: ------------------------------------ Managing Member SIGNATURE PAGE TO VOTING AGREEMENT 7 SQP 1997 BY: SC VII-A MANAGEMENT, LLC A CALIFORNIA LIMITED LIABILITY COMPANY, ITS GENERAL PARTNER By: --------------------------- Managing Member SEQUOIA 1997 LLC BY: SC VII-A MANAGEMENT, LLC A CALIFORNIA LIMITED LIABILITY COMPANY, IT'S GENERAL PARTNER By: --------------------------- Managing Member SEQUOIA INTERNATIONAL PARTNERS BY: SC VII-A MANAGEMENT, LLC A CALIFORNIA LIMITED LIABILITY COMPANY, IT'S GENERAL PARTNER By: --------------------------- Managing Member ------------------------------ GENE CATTARINA ------------------------------ JOHN KARLEN SIGNATURE PAGE TO VOTING AGREEMENT EX-23.1 12 CONSENT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-1 of our report dated February 12, 1999, except Note 9 which is as of September 17, 1999, relating to the financial statements of Landa Management Systems Corporation, which appear in such Registration Statement. We also consent to the reference to us under the headings "Experts" in such Registration Statement. /s/ PRICEWATERHOUSECOOPERS LLP - --------------------------------------------- PricewaterhouseCoopers LLP San Jose, California September 17, 1999 EX-27.1 13 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AT JUNE 30, 1999 (UNAUDITED) AND STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 OF LANDA MANAGEMENT SYSTEMS CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH. 1,000 6-MOS YEAR DEC-31-1999 DEC-31-1998 JAN-01-1999 JAN-01-1998 JUN-30-1999 DEC-31-1998 2,371,000 2,032,000 0 0 1,327,000 1,291,000 (67,000) (87,000) 0 0 3,815,000 3,422,000 1,584,000 1,342,000 (1,053,000) (898,000) 4,346,000 3,866,000 3,352,000 2,967,000 0 0 0 0 7,000 7,000 3,000 1,000 984,000 891,000 4,346,000 3,842,000 4,651,000 6,217,000 4,651,000 6,217,000 1,674,000 2,663,000 1,674,000 2,663,000 3,930,000 5,539,000 0 0 49,000 75,000 (904,000) (1,910,000) 0 0 (904,000) (1,910,000) 0 0 0 0 0 0 (904,000) (1,910,000) (0.11) (0.28) (0.11) (0.28)
-----END PRIVACY-ENHANCED MESSAGE-----