We have never declared or paid any cash dividends on our capital stock and
currently intend to retain all available earnings generated by our operations
for the development and growth of our business. Accordingly, we do not currently
anticipate paying any cash dividends in the foreseeable future.
13
CAPITALIZATION
The following table describes our capitalization as of December 31, 1999:
- On an actual basis;
- On a pro forma basis to reflect the conversion of all outstanding shares
of our convertible preferred stock into 11,300,570 shares of common stock
immediately prior to completion of this offering; and
- On a pro forma as adjusted basis to reflect the sale of
shares of common stock offered by us at an assumed initial public
offering price of $ per share, after deducting underwriting discounts
and commissions and estimated offering expenses payable by us.
You should read this table together with "Use of Proceeds," "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and the related notes included elsewhere in this prospectus.
AS OF DECEMBER 31, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
Cash and cash equivalents................................... $ 16,404 $ 16,404 $
======== ======== ========
Capitalized lease obligations, excluding current
installments.............................................. $ 467 $ 467 $
-------- -------- --------
Stockholders' equity:
Series A convertible preferred stock, $.01 par value,
2,220,000 shares authorized, 1,649,634 shares
outstanding, actual; no shares outstanding, pro forma
and pro forma as adjusted.............................. 16 --
Series B convertible preferred stock, $.01 par value,
7,823,740 shares authorized, 6,144,270 shares
outstanding, actual; no shares outstanding, pro forma
and pro forma as adjusted.............................. 61 --
Series C convertible preferred stock, $.01 par value,
3,777,778 shares authorized, 3,506,666 shares
outstanding, actual; no shares outstanding, pro forma
and pro forma as adjusted.............................. 35 --
Undesignated preferred stock, $.01 par value, 6,178,482
shares authorized, no shares outstanding, actual, pro
forma and pro forma as adjusted........................ -- --
Common stock, $.01 par value, 100,000,000 shares
authorized, 21,542,806 shares issued (including
treasury shares) and outstanding, actual; 32,843,376
shares outstanding, pro forma; shares
outstanding, pro forma as adjusted..................... 216 328
Additional paid-in capital................................ 39,418 39,418
Treasury stock -- common shares at cost, 143,592 shares... (239) (239)
Stock subscriptions receivable............................ (1,327) (1,327)
Accumulated other comprehensive loss...................... (9) (9)
Accumulated deficit....................................... (22,196) (22,196)
-------- -------- --------
Total stockholders' equity................................ 15,975 15,975
-------- -------- --------
Total capitalization................................... $ 16,442 $ 16,442 $
======== ======== ========
Share numbers in the table exclude:
- 11,139,212 shares of common stock issuable upon the exercise of stock
options outstanding as of December 31, 1999, at a weighted average
exercise price of $3.36 per share; and
- 5,757,798 shares of common stock issuable upon the exercise of warrants
outstanding as of December 31, 1999, of which 4,743,824 are exercisable
at the initial public offering price and the balance of which have a
weighted average exercise price of $1.14 per share.
14
DILUTION
If you invest in our common stock, your ownership interest will be diluted
by the difference between the initial public offering price per share of our
common stock and the pro forma as adjusted net tangible book value per share of
our common stock immediately after this offering. Our pro forma net tangible
book value as of December 31, 1999 was approximately $13.9 million, or $0.42 per
share. Pro forma net tangible book value per share represents the amount of our
total tangible assets less the amount of our total liabilities, divided by the
number of shares of common stock outstanding after giving pro forma effect to
the conversion of all outstanding shares of our convertible preferred stock into
11,300,570 shares of common stock immediately prior to completion of this
offering. Dilution in pro forma net tangible book value per share represents the
difference between the amount per share paid by investors in this offering and
the pro forma net tangible book value per share of our common stock immediately
after the completion of this offering. After giving effect to our sale of
shares of common stock offered by us at an assumed initial public
offering price of $ per share, and after deducting underwriting discounts
and commissions and estimated offering expenses payable by us, our pro forma as
adjusted net tangible book value at December 31, 1999 would have been
$ , or $ per share. This represents an immediate increase in pro
forma net tangible book value of $ per share to existing stockholders and an
immediate dilution of $ per share to new investors. The following table
illustrates this per share dilution:
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share as of December
31, 1999............................................... $ 0.42
Increase per share attributable to new investors..........
-------
Pro forma as adjusted net tangible book value per share
after this offering....................................
-------
Dilution per share to new investors....................... $
=======
The following table sets forth, on a pro forma as adjusted basis as of
December 31, 1999, the differences between existing stockholders and new
investors with respect to the total number of shares purchased from us, the
total consideration paid to us and the average price per share paid to us before
deducting underwriting discounts and commissions and estimated offering
expenses:
SHARES PURCHASED TOTAL CONSIDERATION
------------------ --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------- ------- ---------- ------- -------------
Existing stockholders......... % $ % $
New investors.................
------- ----- ---------- -----
Total....................... 100.0% $ 100.0%
======= ===== ========== =====
The foregoing table assumes no exercise of options or warrants outstanding
as of December 31, 1999. As of December 31, 1999, there were 11,139,212 shares
of common stock issuable upon the exercise of stock options at a weighted
average exercise price of $3.36 and 5,757,798 shares of common stock issuable
upon the exercise of outstanding warrants, of which 4,743,824 are exercisable at
the initial public offering price and the balance of which have a weighted
average exercise price of $1.14 per share.
15
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data and selected pro forma
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements and related notes included elsewhere in this prospectus. The 1999 pro
forma consolidated statement of operations data gives effect to the acquisitions
of ActionWare and EMT in November 1999 as if these acquisitions had been
completed on January 1, 1999. Each acquisition was accounted for under the
purchase method of accounting. The consolidated financial statements as of and
for the year ended December 31, 1999 have been audited by KPMG LLP, independent
certified public accountants. The consolidated financial statements as of
December 31, 1998, and for the two year period then ended, have been audited by
PricewaterhouseCoopers LLP, independent accountants. The consolidated financial
statements as of December 31, 1999 and 1998, and for each of the years in the
three-year period ended December 31, 1999, and the reports thereon, are included
elsewhere in this prospectus.
FROM
SEPTEMBER 1,
1995 (INCEPTION)
THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, -----------------------------------------
1995 1996 1997 1998 1999 PRO FORMA
---------------- ------- ------- ------- -------- 1999(2)
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
HISTORICAL CONSOLIDATED
STATEMENTS OF OPERATIONS DATA:
Revenues:
Franchise...................... $ -- $ 452 $ -- $ 260 $ 4,669 $ 4,669
Product and related services... 40 339 221 350 1,793 4,744
------ ------- ------- ------- -------- --------
Total revenues.......... 40 791 221 610 6,462 9,413
Cost of revenues............... 44 150 82 560 1,200 1,694
------ ------- ------- ------- -------- --------
Gross profit (loss).............. (4) 641 139 50 5,262 7,719
------ ------- ------- ------- -------- --------
Operating expenses:
Research and development....... 90 999 890 993 3,146 4,452
Sales and marketing............ -- 449 629 2,156 9,915 10,438
General and administrative..... 104 202 283 2,119 4,449 5,584
In-process research and
development.................. -- -- -- -- 1,304 --
------ ------- ------- ------- -------- --------
Total operating
expenses.............. 194 1,650 1,802 5,268 18,814 20,474
------ ------- ------- ------- -------- --------
Operating loss................... (198) (1,009) (1,663) (5,218) (13,552) (12,755)
Interest expense, net............ -- 46 222 149 87 138
------ ------- ------- ------- -------- --------
Net loss before income taxes..... (198) (1,055) (1,885) (5,367) (13,639) (12,893)
Provision for income taxes....... -- -- -- -- 4 4
------ ------- ------- ------- -------- --------
Net loss......................... (198) (1,055) (1,885) (5,367) (13,643) (12,897)
Preferred stock dividend......... -- -- 49 -- -- --
------ ------- ------- ------- -------- --------
Net loss applicable to common
stockholders................... $ (198) $(1,055) $(1,934) $(5,367) $(13,643) (12,897)
====== ======= ======= ======= ======== ========
Basic and diluted net loss per
share.......................... $(0.03) $ (0.18) $ (0.23) $ (0.33) $ (0.73) (0.68)
====== ======= ======= ======= ======== ========
Shares used to compute basic and
diluted net loss per share..... 6,000 6,000 8,342 16,072 18,570 19,082
====== ======= ======= ======= ======== ========
Pro forma basic and diluted net
loss per share
(unaudited)(1)................. $ (0.46)
========
Shares used to compute pro forma
basic and diluted net loss per
share (unaudited)(1)........... 29,870
========
(1) The pro forma basic and diluted net loss per share (unaudited) reflects the
conversion of all outstanding shares of our convertible preferred stock into
11,301 shares of common stock as if the shares had been issued and converted
at the beginning of 1999. See Note 1 to our consolidated financial
statements.
(2) Includes adjustments directly attributable to the acquisitions, including
the amortization of goodwill and other intangibles of $453 attributable to
the acquisitions, amortized on a straight line basis over three to five-year
periods, and the reversal of the in-process research and development charge
recorded in connection with the acquisition of ActionWare.
16
AS OF DECEMBER 31,
---------------------------------------------
1995 1996 1997 1998 1999
---- ----- ------ ------- -------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 40 $ 43 $ 14 $ 1,594 $16,404
Working capital (deficit)............................... 351 (845) (913) (1,303) 11,834
Total assets............................................ 502 648 1,618 2,685 27,319
Notes payable to stockholder, less current
installments.......................................... -- -- 60 30 --
Capitalized lease obligations, excluding current
installments.......................................... -- 65 53 89 467
Convertible preferred stock............................. -- -- 1 38 112
Total stockholders' equity (deficit).................... 430 (722) 304 (728) 15,975
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and
results of operations in conjunction with our consolidated financial statements
and related notes appearing elsewhere in this prospectus. This discussion
contains forward-looking statements that involve risks and uncertainties. Our
actual results may differ materially from those anticipated in these
forward-looking statements as a result of factors including those discussed in
"Risk Factors" and elsewhere in this prospectus.
OVERVIEW
We are a leading applications service provider, or ASP, offering
proprietary Web-based software applications that enable small and mid-sized
businesses to cost-effectively take their operations online and automate their
business processes. Our ZLand.com product line of software applications together
with related services provide e-business solutions for our customers. We offer
our software applications to our customers on a rental basis and deliver our
products and services through a franchise network.
We were organized in September 1995. From September 1995 to the end of
1998, our efforts were principally devoted to the development of our franchise
distribution model and our ZLand.com product line. We also sold custom Web site
development services during this period. We commenced sales of our current
ZLand.com product line in April 1998. During 1999, we significantly expanded our
corporate infrastructure, our ZLand.com product line and our U.S. franchise
network, and initiated operations in Australia, Canada, Egypt, Germany and the
United Kingdom. In November 1999, we launched our first brand building campaign
through print advertising in major publications.
Recent Acquisitions
In November 1999, we acquired all of the outstanding stock of Appintec
Corp., dba ActionWare, or ActionWare, a California corporation, for 475,000
shares of our common stock valued at $4.50 per share and $320,000 in cash. The
aggregate purchase price was $2.5 million. ActionWare develops and markets
customer relationship management software and provides related maintenance and
programming services. The acquisition has been accounted for using the purchase
method of accounting and, accordingly, the results of operations of ActionWare
have been included in our consolidated financial statements since the date of
the acquisition.
In November 1999, we also acquired all of the outstanding stock of Emerging
Market Technologies, Inc., or EMT, a Delaware corporation, for 85,000 shares of
our common stock valued at $4.50 per share and $180,000 in cash. The aggregate
purchase price was $563,000. EMT markets and sells software and provides
consulting services. The acquisition has been accounted for using the purchase
method of accounting and, accordingly, the results of operations of EMT have
been included in our consolidated financial statements since the date of
acquisition.
In January 2000, we acquired substantially all of the assets of Central
Technologies, Inc., a California corporation, for 322,222 shares of our common
stock valued at $4.50 per share. The aggregate purchase price was $1.4 million
net of cash acquired. Central Technologies provides products and services to
serve the needs of accountants, including financial management and reporting
software applications for small to mid-sized businesses. The acquisition will be
accounted for using the purchase method of accounting.
Revenues
Our revenues consist of franchise fees and fees for product rental and
related services. In 1999, a substantial portion of our revenues consisted of
franchise fees generated as a result of the rapid expansion of our franchise
network during that period. We expect that our product and related services
revenues will constitute an increasing percentage of our total revenues in the
future as these franchises expand operations.
18
Franchise revenues are derived from the sale of territory licenses under
our franchise agreements. All franchises are granted for a seven year period,
and are renewable for an additional seven years at the election of the
franchisee and upon payment of a renewal fee. Generally, we receive the
franchise fee at the time the franchise agreement is executed. In 1999, we
granted payment terms of up to 12 months to several franchisees who purchased
large multi-territory franchises.
We recognize franchise revenues in three stages based upon the value of the
services we provide to the franchisees during each stage. We recognize
approximately 50% of the franchise fee upon completion of the franchisee's
initial franchisee training, which represents the point at which a franchisee is
able to commence operations and the franchise fee becomes nonrefundable. We
recognize approximately 25% of the franchise fee, representing our estimate of
the value of the additional training and assistance required to be provided to
the franchisee in the initial year of operations, ratably over the first year of
the franchise agreement. We recognize approximately 25% of the franchise fee,
representing our estimate of the value provided by us to the franchisee over the
term of the franchise agreement, ratably over its seven-year term. In those
instances in which we granted payment terms, we recognize the unpaid fee in
accordance with the above policy only when we believe that collection is
probable. Our franchise revenue recognition policy is in accordance with
Statement of Financial Accounting Standards (SFAS) No. 45, "Accounting for
Franchise Fee Revenue," and the Securities and Exchange Commission's Staff
Accounting Bulletin No. 101 (SAB 101).
Our product and related services revenues is composed of an upfront design
and development fee, a monthly rental fee and fees for related services. We
recognize the upfront design and development fees when design and development is
complete and the product is available for customer use. We recognize product and
related services revenues from sales of our proprietary software and related
services sold through our franchises and company-owned sales offices. We
recognize product rental and related services revenues ratably over the one year
service period. Our product and related services revenue policies follow the
guidance of American Institute of Certified Public Accountants Statements of
Position 97-2 and 98-9, "Software Revenue Recognition."
Historically, our franchisees acted as the principal contracting parties
with, and we supplied the product to, our customers. Although we billed the
customer and collected the revenues, franchisees bore collection risk. We
remitted 60% of the fees to the franchisees and retained the balance. As a
result, through 1999, we recognized revenues on a net basis, representing 40% of
the total transaction value. Beginning in 2000, our contracts provide that we
are the principal contracting party with our customers and we establish pricing
and bear the risk of loss.
Costs and Expenses
Cost of revenues consists primarily of network operating center costs,
personnel expenses related to services provided to customers and those
franchisees with which we have operating assistance agreements, and costs of
franchisee training. In 1997, we capitalized software development costs related
to products that had reached technological feasibility. These costs were
amortized to cost of revenues over the two years ended December 31, 1999.
Research and development expenses consist primarily of compensation and
related costs for research and development personnel, including independent
contractors and consultants, and operating expenses for facilities and equipment
relating to research and development functions.
Sales and marketing expenses consist of personnel and related costs
primarily for our direct sales force and marketing staff, commissions on sales
of our franchises and marketing programs, including trade shows, advertisements,
promotional activities and media events.
General and administrative expenses consist primarily of personnel and
related costs for corporate functions, including finance, accounting, legal,
human resources, facilities, fees for professional services, and amortization of
goodwill and other intangibles.
19
Years Ended December 31, 1997, 1998 and 1999
Revenues
Revenues increased from $221,000 in 1997 to $610,000 in 1998 and $6.5
million in 1999. Our 1997 revenues consisted mainly of sales of custom Web site
development services. Revenues in 1998 included $350,000 in product and related
services revenues and $260,000 of franchise fee revenues. Product and related
services revenues increased to $1.8 million in 1999, following the release of
version 2.0 of our ZLand.com product line in October of that year. Franchise fee
revenues increased to $4.7 million in 1999 due to substantial expansion of our
U.S. and international franchise network.
Three franchisees represented approximately 41% of our total revenues in
1999. We recognized approximately $615,000 of franchise fee revenues from the
licensing of a franchise with Dorado Resources Corp., of which approximately
$465,000 is payable in 2000. We believe that collection of the unpaid portion of
the fee is probable. We recognized approximately $2.1 million of franchise fee
revenues from the licensing of franchises with two different eGlobal
partnerships, all of which was paid during 1999.
Cost of Revenues
Cost of revenues totaled $82,000 in 1997, $560,000 in 1998 and $1.2 million
in 1999. Cost of revenues in each of 1998 and 1999 included $441,000 of
amortization of software development costs that were capitalized in 1997.
Excluding the $441,000 amortization charge in 1998, cost of revenues increased
$37,000 from 1997 to 1998. The increase of $640,000 from 1998 to 1999 resulted
primarily from increased franchisee training and cost of higher product and
related services revenues.
Research and Development
Research and development expenses increased from $890,000 in 1997 to
$993,000 in 1998 and $3.1 million in 1999. The increase during 1999 was
primarily related to the addition of software engineers and development activity
associated with version 2.0 of the ZLand.com product line released in October
1999. We believe that investments in research and development are essential to
our future success and expect that research and development expenses will
increase in future periods.
Sales and Marketing
Sales and marketing expenses increased from $629,000 in 1997 to $2.2
million in 1998 and $9.9 million in 1999. The increase in 1998 was primarily
attributable to costs associated with the opening of our first company-owned
sales office and the introduction of the ZLand.com product line. The increase in
1999 was related to the addition of sales and marketing employees during the
year to support our rapidly expanding franchise distribution model, the costs
associated with the launch of our brand building campaign, which commenced in
November 1999, and $1.2 million in commissions payable in connection with the
licensing of franchises. We expect that our sales and marketing expenses will
continue to increase due to the planned growth of our sales force, expansion of
our franchise network, and the establishment of company-owned sales offices in
U.S. and international locations. We also expect increases in marketing programs
and other promotional activities.
General and Administrative
General and administrative expenses increased from $283,000 in 1997 to $2.1
million in 1998 and $4.4 million in 1999. The increases are primarily
attributable to increases in personnel to support the internal growth in our
operations, expansion of our facilities and other increased infrastructure costs
as we have concentrated on building our management team and establishing our
administrative infrastructure. We expect general and administrative expenses to
increase as we add personnel and incur additional costs related to the
anticipated growth of our operations, our continuing expansion into
international markets and our operation as a public company.
20
In-Process Research and Development
In connection with our acquisition of ActionWare in 1999, we incurred a
charge for in-process research and development of $1.3 million in 1999, which
represents the portion of the purchase price for ActionWare that was allocated
to technology-in-process for which there is no alternative future use. This
amount was written off to operations at the time of acquisition.
ActionWare had, at the time of acquisition, one major in-process research
and development project that was approximately 20% complete. We acquired
ActionWare to obtain completed technology as well as to complete the development
effort on this in-process project, as we believed the project in process had
economic value but had not yet reached technological feasibility and had no
alternative future uses. We are continuing development efforts and estimate that
the cost to complete development will be approximately $5 million. We expect the
first new products to be developed by ActionWare to be available for marketing
within one year.
Interest Expense, Net
Interest expense, net was $222,000 in 1997, $149,000 in 1998 and $87,000 in
1999. Interest expense relates primarily to capitalized lease obligations and
other short-term borrowings. The decrease in interest expense in 1998 and 1999
is attributable to repayments of our short-term borrowings with the proceeds of
equity financings.
QUARTERLY OPERATING RESULTS
The following table presents our historical unaudited consolidated
quarterly results of operations data for our most recent four quarters ended
December 31, 1999. This data is unaudited and derived from our audited annual
consolidated financial statements and notes included elsewhere in this
prospectus. In the opinion of management, this quarterly financial information
has been prepared on the same basis as our annual financial statements and
includes all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial results included in the table below.
This statement of operations data should be read in conjunction with the
consolidated financial statements and related notes included in this prospectus.
Our results of operations have fluctuated and are likely to continue to
fluctuate in the future. Results of operations for any previous periods are not
necessarily comparable to future periods.
THREE MONTHS ENDED
-----------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999
------------ --------- ------------- -------------
(IN THOUSANDS)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Franchise............................... $ 592 $ 976 $ 1,131 $ 1,970
Product and related services............ 178 204 394 1,017
------- ------- ------- -------
Total revenues.................. 770 1,180 1,525 2,987
Cost of revenues.......................... 175 279 311 435
------- ------- ------- -------
Gross profit.............................. 595 901 1,214 2,552
------- ------- ------- -------
Operating expenses:
Research and development................ 324 510 840 1,472
Sales and marketing..................... 738 1,077 3,458 4,642
General and administrative.............. 655 513 1,275 2,006
In-process research and development..... -- -- -- 1,304
------- ------- ------- -------
Total operating expenses........ 1,717 2,100 5,573 9,424
------- ------- ------- -------
Operating loss............................ $(1,122) $(1,199) $(4,359) $(6,872)
======= ======= ======= =======
21
Our revenues have increased in each period presented. These increases have
been due to the implementation and expansion of our franchise model, yielding
increasing franchise fees, and subsequent product and related services revenues
as our customer base has grown. Total cost of revenues has increased more slowly
than revenues, resulting in gross profit margin expansion due to the
efficiencies involved with selling a growing number of franchises. Total
operating expenses have increased in absolute dollars in each period presented
as we have expanded our infrastructure to support our growing operations.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations to date primarily through the sale of equity
securities. Through December 31, 1999, we raised approximately $45 million
through equity financings. At December 31, 1999, we had $16.4 million in cash
and cash equivalents.
Cash used in operating activities totaled $686,000 in 1997, $3.7 million in
1998, and $8.6 million in 1999. The increase in 1998 was primarily due to net
losses in the period. The increase in 1999 was primarily due to net losses in
the period and increases in accounts receivable and prepaid expenses and other
current assets, partially offset by increases in deferred revenues and accrued
expenses, as well as in-process research and development and equity instruments
issued for services.
Cash used in investing activities totaled $973,000 in 1997, $87,000 in
1998, and $2.4 million in 1999. The decrease from 1997 to 1998 was primarily due
to capitalization of software development costs in 1997. The increase in 1999
was primarily due to the purchase of property and equipment.
Cash provided by financing activities totaled $1.6 million in 1997, $5.4
million in 1998 and $25.8 million in 1999. The increases in each period resulted
primarily from the net proceeds from issuances of common and convertible
preferred stock and borrowings on our leasing credit lines.
We have credit agreements with three leasing companies that provide lines
of credit for capital equipment purchases. The aggregate amount available under
these facilities at December 31, 1999 was $1.2 million, and the aggregate amount
outstanding was $725,000. The interest rates on these lines of credit at
December 31, 1999 ranged from 8.99% to 11.75%. Expenditures for property and
equipment, including those subsequently financed under capitalized lease
obligations, are primarily for purchases of computer hardware and software used
in our operations, including expenditures for management information systems,
telecommunications systems and hosting of customer applications.
We used cash for capital expenditures of $67,000 in 1997, $87,000 in 1998,
and $1.6 million in 1999. Historically, capital expenditures have been used to
make leasehold improvements to our leased office space and to purchase computer
hardware and software, telecommunications equipment, and furniture and fixtures
to support our growth. We expect our capital expenditures to continue to
increase significantly and anticipate spending approximately $8 million in 2000
as we expand our operations in the United States and abroad. We do not at
present have any material commitments for capital expenditures.
We believe that the net proceeds from this offering, combined with current
cash balances and borrowings under our leasing lines of credit, will be
sufficient to fund our requirements for working capital and capital expenditures
for at least the next 12 months. Thereafter, we may sell additional equity or
debt securities or seek additional credit lines. We may need to raise additional
funds sooner in order to support more rapid expansion, develop new or enhanced
services and products, respond to competitive pressures, acquire complementary
businesses or technologies or take advantage of unanticipated opportunities. Our
future liquidity and capital requirements will depend upon numerous factors,
including the success of our existing and new service offerings and competing
technological and market developments.
YEAR 2000 READINESS
Computer systems and software must accept four digit entries to distinguish
21st century dates from 20th century dates. As a result, many software and
computer systems that accepted only two digit entries needed to be upgraded in
order to accept dates beginning January 1, 2000. To date, we have not
experienced any date related problems with our software. In addition, we have
not been made aware of,
22
nor have we experienced, date related problems with any third-party software. We
have tested our software and our internal systems for potential problems
relating to the leap year that occurred in 2000 and have not experienced any
date related problems resulting from leap year dates. In addition, we do not
believe that we will incur material costs in the future because of date related
problems.
FOREIGN CURRENCY EXCHANGE RATE RISK
To date, substantially all of our recognized revenues have been denominated
in U.S. dollars and our exposure to foreign currency exchange rate changes has
been immaterial. We expect, however, that a significant portion of future
product and related services revenues and franchise revenues will be derived
from our international operations and will be denominated in foreign currencies.
As a result, our future operating results may be subject to significant
fluctuations based upon changes in the exchange rates of certain currencies in
relation to the U.S. dollar.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 is effective for all fiscal quarters or fiscal years beginning after June
15, 1999. In August 1999, the FASB issued SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133. This statement defers the effective date of SFAS No.
133 to all fiscal quarters or fiscal years which begin after June 15, 2000. SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments embedded in other contracts and for hedging activities. Application
of this standard is not expected to have a material impact on our consolidated
financial position or results of operations.
23
BUSINESS
OVERVIEW
We are a leading applications service provider, or ASP, offering
proprietary Web-based software applications and related services that enable
small and mid-sized businesses to cost-effectively take their operations online
and automate their business processes. Our ZLand.com e-business solutions
optimize business functions throughout the enterprise, such as e-commerce, sales
force automation, supply-chain management, customer support, human resources and
financial management. Our software applications are fully scalable, platform
independent and are hosted in secure, third party data centers. Our applications
are deployed rapidly through the Internet to our customers on a rental basis and
are integrated easily with their business processes and existing information
technology systems.
We offer our ZLand.com product line to our customers on a rental basis
through a network of local sales offices staffed by e-business experts. We
employ a unique franchise distribution model to target what we believe is an
under-serviced market consisting of small and mid-sized businesses, or
businesses with between one and 1,000 employees. Our typical customer has
between 20 and 100 employees. We believe that our franchise distribution
strategy is the only cost effective method to penetrate and service our target
market successfully.
As of March 2000, we offered our solutions throughout the United States
from 37 sales offices. We also have offices in Australia, Canada, Egypt, Germany
and the United Kingdom. Our customer base has grown to over 700 customers as of
March 2000 from approximately 190 customers as of January 1999.
INDUSTRY BACKGROUND
Rapid Growth in Business Use of the Internet
An increasing number of businesses are using the Internet to enable fast
and efficient communications with their customers, vendors and employees. For
example, companies are increasingly requiring their vendors to order, invoice
and pay through the Internet. IDC projects that the market for business-to-
business e-commerce will grow from $97 billion in 1999 to $1.4 trillion in 2003.
In comparison, IDC projects that the market for business-to-consumer e-commerce
will grow from $34 billion to $209 billion over the same period.
In the last several years, many businesses have emerged with operating
models that are exclusively dependent on the Internet, while traditional
businesses of all sizes are working quickly to Web-enable their businesses on an
enterprise-wide level. Many traditional businesses seek to establish their
initial Web presence with a simple, static, online marketing brochure. As these
businesses become more familiar with the Internet as a communications platform,
an increasing number are seeking to automate more complex, mission-critical
functions on the Web.
Increasing Trend Toward Outsourcing
While businesses are facing competitive pressure to Web-enable their
business processes, many of them -- particularly small and mid-sized
businesses -- lack the necessary expertise or resources to do so and therefore
seek to outsource such services. Reasons for the growth in outsourcing include:
- the desire of companies to focus on their core businesses;
- the increased costs that businesses experience in developing and
maintaining their networks and software applications;
- the rapid pace of technological change that shortens time to obsolescence
and increases capital expenditures as companies attempt to capitalize on
leading-edge technologies;
- the challenges faced by companies in hiring, motivating and retaining
qualified software engineers and IT employees; and
- the desire of companies to reduce deployment time and risk.
24
The Competitive Needs of Small and Mid-Sized Businesses to Automate Key Business
Processes
According to IDC, there are currently approximately 7.5 million businesses
in the United States with less than 100 employees and such businesses will
devote more IT dollars to the Web than any other segment with the exception of
the government. IT spending by these businesses is projected by IDC to grow from
$20 billion in 1999 to $85 billion in 2003. Additionally, according to country
census data for 1998 and 1999, there are more than 40 million businesses with
between one and 500 employees located in Europe and Asia.
Small and mid-sized businesses generally lag their large company
counterparts in adopting comprehensive or enterprise-wide e-business solutions
due to lack of technical resources, ill-defined or unquantified objectives,
budgetary constraints and cost-of-solution barriers to entry. We believe that
these businesses need integrated software applications that take advantage of
the Internet to improve core business processes, thereby reducing costs for
these businesses and enhancing their competitive position.
OUR OPPORTUNITY
We believe that many of the software products and services currently
offered by IT providers are too complex and costly to be effective for small and
mid-sized businesses. To date, many small and mid-sized businesses seeking to
Web-enable their operations have acquired "boxed" software from different
vendors for a variety of business functions, resulting in patchwork solutions
that are poorly integrated. Moreover, the infrastructure required to support
these packages, which may include hiring specialized IT personnel and investing
in costly hardware systems, is beyond the capabilities and financial resources
of many small and mid-sized businesses.
In addition, many small and mid-sized businesses have had to seek IT
implementation solutions from multiple providers, including local system
integrators, independent Web site designers and hardware and software vendors.
Dealing with multiple suppliers can be costly as each supplier provides its own
product or service and has limited knowledge of the bundle of products and
services required to provide a customer with a complete e-business solution. As
a result, many small and mid-sized businesses delay their acquisition of
Web-based e-business software applications or forego implementation of the
applications altogether.
We believe that a significant market opportunity exists for a single-source
provider of Web-based business software applications to small and mid-sized
businesses. These businesses require a scalable, cost effective, end-to-end
solution that is easy to implement and rapidly automates their mission critical
business operations throughout the enterprise.
THE ZLAND.COM SOLUTION
Our proprietary ZLand.com e-business software applications are specifically
tailored to the needs of small and mid-sized businesses, providing a fully
integrated and scalable suite of front- and back-office software solutions. We
believe that by automating the critical business operations of small and
mid-sized businesses, our ZLand.com solutions enable our customers to achieve
significant cost savings and productivity enhancements. We believe that our
solutions provide small and mid-sized businesses with many of the online
capabilities that Fortune 500 companies enjoy when interacting with their
vendors, customers, employees and other constituencies.
We provide the following key competitive advantages and benefits to our
customers:
One-Stop, End-to-End Solution
Our solutions enable small and mid-sized businesses to automate critical
business operations throughout the enterprise. Our proprietary ZLand.com product
line consists of more than 160 software applications grouped into 20 solution
sets. These solution sets address a broad range of business functions, from
establishing a basic Web presence, to selling products over the Internet, to
automating business processes, including sales force and supply-chain
automation, customer support, human resources and
25
financial management. By offering an enterprise-wide solution, our customers are
able to use ZLand.com as their single source provider of e-business software
applications.
Rapid Time to Value
Time to market and the ability to quickly recognize measurable value in
e-business initiatives are critical factors for small and mid-sized businesses.
We believe that our customers can deploy our solution much more rapidly than
alternative approaches. Our templated solution allows most customers to begin
using standard ZLand.com e-business software applications within a relatively
short period of time. Incorporation of a customer's data, text and graphical
images enables us to provide each of our customers with an individualized
solution, while still maintaining rapid delivery and the low cost benefits of a
standard product. Our customers can implement those applications that fit their
immediate needs, and can add applications as their businesses expand. We believe
that our customers incur significantly lower capital investment and operating
expenses compared to alternative approaches, and therefore can recognize a
meaningful return on investment quickly.
High-Value Delivery Model
Our proprietary ZLand.com software applications are hosted in secure, third
party network operating centers and delivered to our customers through the
Internet. This ASP model allows customers to rent our products without incurring
significant up-front costs. Our customers benefit from integrated e-business
capabilities without the cost of acquiring additional hardware and employing
dedicated IT personnel. This approach also enables our customers to receive
reliable performance and secure computing resources on a 24 x 7 basis. We
believe that our ASP delivery model is ideally suited for small and mid-sized
businesses and enables non-technical customers to easily deploy our products.
Scalable, Flexible Solutions
Our proprietary ZLand.com software applications are designed to deploy
rapidly throughout the enterprise and integrate easily with our customers'
business processes and existing IT systems. Our solutions are scalable and
flexible, enabling our customers to implement additional applications in a cost
effective manner as their business needs evolve. For example, a customer
initially might choose only to have a Web site to promote its products or
services. The customer later may add applications enabling e-commerce (e.g.,
online catalogs and product fulfillment), or add a complete solution that
integrates many of its back-office business processes with its Web site. The
scalability of our solutions helps our customers minimize their costs by
permitting them to rent and use only those functions they currently need, while
providing the flexibility to continually and easily add functions as the
enterprise expands. In addition, we have designed our ZLand.com suite of
e-business software applications so that we can deploy the same solution
internationally using local language and business rules.
Unique Network of Local e-Business Experts
Many small and mid-sized businesses that seek to implement an e-business
strategy are unable to stay abreast of the latest Internet and software
technology. These businesses require access to on-site e-business expertise. We
believe that our franchise network of local sales offices staffed by e-business
experts provides the only effective means of servicing these businesses. Our
local e-business experts help our customers identify the solutions of the most
immediate value to them and develop an e-business strategy that meets their
needs.
26
STRATEGY
Our objective is to become the leading worldwide provider of Web-based
business software applications for small and mid-sized businesses. Key elements
of our strategy to achieve this objective include:
Build a Global ZLand.com Brand
We believe that building a strong brand is critical to attracting and
expanding a broad and diverse customer base of small and mid-sized businesses.
In November 1999, we launched our first brand building campaign through print
advertising in major publications targeted at small and mid-sized businesses. We
intend to launch a more extensive and global brand-building campaign in 2000,
which will include print, radio, Internet advertising and other programs to
further develop our brand. Our brand-building programs will leverage our
corporate positioning statement, "e-business for everyone."
Rapidly Expand Through Our Unique Franchise Distribution Model
We believe that we acquire our customers at a low cost by delivering our
e-business solutions through a distribution system composed primarily of
franchise sales offices. Because the majority of small and mid-sized businesses
are not located in major metropolitan areas, we believe that our franchise
distribution model is the only cost effective means to penetrate and service our
target market successfully on a large scale. Because we have invested
significant time and resources to develop and test our franchise system and
distribution model, we believe that we are poised to expand rapidly and
efficiently.
Continue to Enhance Our End-to-End Solutions
Our e-business software solutions enable our customers to link their
front-end Web presence with their back-end enterprise systems efficiently and
cost-effectively. When we identify a product that we believe should be added to
our product line, we either develop it internally, acquire or license it. To
date, we have internally developed the majority of our software products. In
November 1999, we acquired ActionWare, a company that had already developed a
sales force automation application, after we determined that market demand for
such a product existed. In January 2000, we acquired Central Technologies, Inc.,
a company that had developed financial management and reporting software
applications for small to mid-sized businesses. We are integrating these
applications into our ZLand.com product line. As we expand our product line, we
intend to continue to enhance our platform technology so that we can maintain a
leading solution.
Continue Our International Expansion
We intend to continue to target small and mid-sized businesses worldwide
and expand our global presence. We currently have sales offices in the United
States, Australia, Canada, Egypt, Germany and the United Kingdom. We intend to
expand our operations in these countries using a localized version of the
software and enter additional foreign markets. We believe that we can replicate
the infrastructure and processes that support our distribution model in most
countries.
Leverage Our Community of Customers and Enter into Strategic Partnerships
We currently provide our solutions to more than 700 customers and intend to
aggressively expand our customer base. We believe that we have a significant
opportunity to leverage a large customer base of small and mid-sized businesses.
We believe that our customer base will be extremely attractive to vendors that
seek to offer their products and services to this market. We intend to take
advantage of other revenue opportunities that we may derive from our community
of customers by entering into strategic partnerships.
27
PRODUCTS AND RELATED SERVICES
Our product line currently consists of more than 160 software applications
organized into 20 solution sets. These solutions sets contain bundles of
applications that address different combinations of our customers' e-business
needs. Additional solution sets can be employed to further expand and tailor a
customer's solution, either at the time of original deployment or at a later
date as the customer's needs evolve. Our product line spans a wide range of
e-business activities including:
- e-marketing -- communicating company and product information through the
Internet.
- e-commerce -- selling products and services through the Internet.
- e-operations -- using Web-based applications and databases to streamline
key front- and/or back-office business processes.
28
The following table identifies our software applications:
E-COMMERCE
E-MARKETING APPLICATIONS APPLICATIONS E-OPERATIONS APPLICATIONS
------------------------ ------------ ------------------------------------------------------------------
Customer About Page Auction Accounts Payable HQ Job Postings
Customer FAQ Customer Catalog Accounts Receivable Information Services Central
Customer Info Center Customer Financial Activity Manager Services
Customer Product Library Forms Budgets Information Services Company
Employee Advertising Customer Returns Checks Directory
Resources Customer Self Service Collections Manager Information Services Company
Employee FAQ Dealer Allocator Contact Manager Newsletter
Employee Web Resources Dealer Locator Customer Company Directory Information Services Reading File
Finance About Page Order Fulfillment Customer Suggestion Box Information Services Room &
Finance FAQ Integrator Customer Training Schedule Resource
HQ About Company Reseller Auction Employee Admin Forms Reservation
HQ About Page Reseller Catalog Employee Bulletin Board Inventory Manager
HQ Email Referral Reseller Financial Employee Central Services Investor Bulletin Board
HQ Homepage Forms Employee Classifieds Investor Company Directory
HQ Site Map Reseller Service Employee Company Directory Investor Financial Reports
HR About Page Request Employee Company Newsletter Investor News
HR FAQ Reverse Auction Employee Goal Tracker Investor Reading File
Information Services About Shopping Cart Employee President's Message Investor Suggestion Box
Page Employee Manual Invoicing
Information Services FAQ Employee Reading File Marketing Campaign Manager
Investor About Page Employee Suggestion Box Meeting Manager
Investor FAQ Employee Room & Resource Mfg Central Services
Mfg About Page Reservation Mfg Company Directory
Mfg FAQ Employee Union Notices Mfg Company Newsletter
Press About Page Finance Central Services Mfg Policy & Procedures Manual
Press Awards Finance Company Directory Mfg Reading File
Press Calendar Finance Company Newsletter Mfg Room & Resource Reservation
Press FAQ Finance Reading File Mfg Suggestion Box
Press Product Library Finance Room & Resource Mfg Technical Manual
Press Releases Reservation Mfg Union Notices
Press Testimonial Finance Suggestion Box Opportunity Manager
Reseller About Page General Ledger Order Entry
Reseller FAQ Group Calendaring Payroll Entry
Reseller Info Center Help Desk Manager Payroll Reporting
Reseller Product Library HR Admin Forms Press Relations Company Directory
Reseller Web Resources HR Applicant Tracking Project Tracker
Sales/Mktg About Page HR Benefits Administration Purchase Orders
Sales/Mktg Advertising HR Bulletin Board Reseller Bulletin Board
Resources HR Central Services Reseller Company Directory
Sales/Mktg FAQ HR Company Directory Reseller Lead Resources
Sales/Mktg Web Resources HR Company Newsletter Reseller Reading File
Trade Press HR Employee Classifieds Reseller Research Resources
Vendor About Page HR Employee Manual Reseller Suggestion Box
Vendor FAQ HR Job Postings Reseller Training Schedule
White Papers HR New Hire Processing Sales/Mktg Central Services
HR President's Message Sales/Mktg Company Directory
HR Reading File Sales/Mktg Company Newsletter
HR Room & Resource Sales/Mktg Lead Resources
Reservation Sales/Mktg Literature Library
HR Suggestion Box Sales/Mktg Manual
HR Training Manual Sales/Mktg Reading File
HR Training Schedule Sales/Mktg Research Resources
Sales/Mktg Room & Resource
Reservation
Sales/Mktg SFA
Sales/Mktg Suggestion Box
Sales/Mktg Training Schedule
Time Sheet Entry
Training Manual
Training Schedule
Vacation Scheduler
Vendor Bidding System
Vendor Bulletin Board
Vendor Company Directory
Vendor Freq Purchased Products
29
Templated Approach
Our product design employs a templated approach that enables our customers
to rapidly deploy a solution set and tailor it to achieve a unique look and
feel. Each customer's interaction with our applications is personalized using
standard definitions contained in our predefined templates. For example, our Web
site development application incorporates each customer's personal information
as part of the application set-up process using a simple fill-in-the-blank
online configuration questionnaire and the inclusion of customer-specific images
in a graphics library. With this technique, each customer determines the look
and feel of its Web site while the application infrastructure remains standard.
Our templated approach allows us to deliver and manage the ZLand.com product
line so that a large number of customers are able to tailor our standard
applications to their individual needs.
Product Attributes
ZLand.com's suite of e-business software applications has been designed to
achieve the following integration attributes:
Field-driven personalization............. Each customer can alter the look and feel
of its Web site, as well as certain
functions, within an otherwise standard
application.
Centralized security..................... Each authenticated user has a single user
identification and password that
specifies the resources and functions
that the user can access.
Uniform navigation....................... All of our applications share a common
navigation style, so that learning a new
application only requires understanding
its features.
Single logical database.................. All applications used by a customer share
common access to that customer's data,
ensuring consistency.
Services
We offer services, which are complementary to or included with our product
line, such as e-business consulting, site hosting and administration, product
support, integration of existing IT systems and application customization. When
combined with the ZLand.com product line, our services provide our customers
with a total e-business solution. These services include the following:
- E-business Consulting. Our e-business experts provide Internet-strategy
consulting, Internet-marketing enhancement, Web site audit and design,
and business process improvement services.
- Site Hosting and Administration. Our third-party network operating
centers provide Internet access via multiple T3 lines, with fully
redundant equipment, data backup and 24 x 7 support.
- Product Support. We offer a comprehensive customer assistance program
through our technical support staff that provides timely resolution of
customer technical inquiries through telephone, e-mail, and Web site
capabilities.
- Integration of Existing IT Systems. Our e-business experts help integrate
the customer's established existing IT systems with our suite of
e-business software applications.
- Customization of Applications. We offer custom development to enhance our
existing applications or develop new applications to meet a customer's
demands.
Alliances
We have implemented an alliance partnership program to provide our
customers with "point-and-click" access to the products and services of major
brand name companies through our suite of
30
e-business software applications. We believe that our alliances will assist us
in gaining broad market acceptance as well as enhance our marketing, sales and
distribution capabilities. In addition to increasing the value of our product
line to our customers, the program provides ZLand.com with an opportunity to
increase customer loyalty and build our brand. We believe the program provides
an effective sales channel for our alliance partners to build brand loyalty and
reach new small and mid-sized businesses.
CUSTOMERS
We target small and mid-sized businesses, which we characterize as
enterprises with between one and 1,000 employees. Our typical customer has
between 20 and 100 employees. Currently, we have more than 700 customers across
a wide range of industries. We provide our products and services to our
customers through renewable one-year contracts. Our customers typically pay a
one-time set-up fee for customer specific design and development and a recurring
monthly fee, which vary based on the scope of the customers' requirements.
The following provides representative examples of customer experiences in
the areas of e-marketing, e-commerce and e-operations:
E-Marketing: Trigon Electronics
Trigon's problem. Trigon Electronics sells high-end security products
through its dealer network to industrial customers nationwide, some of whom are
large and sophisticated. As a result, Trigon needed to continually educate and
update its dealer network. Trigon also needed to use the Internet to market to
prospective customers directly, providing leads to the dealer network.
ZLand.com's solution. Using our suite of ZLand.com e-business software
applications, we helped Trigon build a Web site that Trigon can continually
update. Trigon uses the Web site to make product literature available online for
immediate use by its dealer network, and as a central reference point for
dealers and OEM customers to find product descriptions, photos, specifications,
part numbers and even programming instructions. Trigon employs our Dealer
Locator e-marketing application in its dealer network. Using our proprietary
applications to Web-enable its marketing practices allows Trigon to better serve
its dealers and makes it possible for the dealers to more easily pursue sales
opportunities.
E-Commerce: Goldman Promotions
Goldman's problem. Goldman Promotions is in the highly competitive
promotional products and fulfillment services industry and needed to
differentiate itself from its competitors. Goldman has clients in a broad range
of industries that were seeking to use Goldman to manage their promotional
incentive programs which include product fulfillment. In order to efficiently
run its business, Goldman was seeking an online solution consisting of
centralized Web site stores that could be customized for its wide range of
clients.
ZLand.com's solution. We helped Goldman quickly and economically Web-enable
its business by building customized online stores and catalogs for its various
clients. Goldman's clients can now sell promotional merchandise on line through
these online stores.
31
E-Operations: Toastmasters International
Toastmasters International's problem. Communicating with present and
potential members through 9,000 chapters worldwide presented Toastmasters
International with the challenge of keeping both their extensive catalog of
items and listing of clubs current and constantly available.
ZLand.com's solution. We helped Toastmasters International establish a club
locator using our e-operations technology. Potential members are now able to
find a club in their area by entering their zip code. In addition, the ZLand.com
suite of e-business applications provides real-time pricing of freight on
shipments ordered from the site. The increased efficiency yields benefits in
member satisfaction, streamlined internal operations and cost reductions.
SALES AND MARKETING
Sales
We sell our e-business solutions through a network of local sales offices
staffed by e-business experts. A team consisting of sales and technical experts
from a local sales office typically will work with a prospect's senior
management team to identify the customer's service needs. Once a customer
implements our solutions, our local e-business experts provide ongoing support.
Our account management activities include recommending service extensions and
upgrades that are consistent with a customer's e-business strategy and budget.
Marketing
During 1999, we began testing several marketing programs designed to build
the ZLand.com brand while simultaneously generating sales leads. This first
brand building campaign, which was launched in November 1999, included print
advertising in major publications targeted at small and mid-sized businesses. We
intend to engage in a more extensive brand-building campaign in 2000, which may
include programs such as print, radio and Internet advertising, direct mail and
e-mail campaigns, outbound telemarketing, vertical market trade shows, local
business development seminar programs and a coordinated public relations
program. Our marketing programs are intended to present a consistent corporate
image and provide high quality materials for use by our local sales offices.
FRANCHISE OPERATIONS
We have divided our target markets into territories based upon the number
of businesses located within each defined area. Each territory contains, on
average, approximately 3,000 small to mid-sized businesses located within each
defined area. Our distribution network consists of:
- franchisee-owned and operated offices;
- franchisee-owned offices that are operated with the assistance of a
ZLand.com general manager typically for an additional fee; and
- ZLand.com owned and operated offices.
Of our 43 worldwide sales offices, 22 are franchisee-owned and operated, 16
are franchisee-owned but are assisted by a ZLand.com general manager and 5 are
owned and operated by ZLand.com. We intend to significantly increase the
proportion of sales offices that we own and operate.
Franchise Agreement
Our U.S. and most of our foreign franchisees enter into renewable seven
year franchise agreements with us which permit them to operate in a defined
territory, or block of territories, using the ZLand.com system of operations.
The current franchise fee per territory in the U.S. is $30,000, but may vary
from country to country. Franchisees are responsible for all capital
expenditures and other costs associated with the commencement of their
operations. Most franchisees are required to contribute 1% of gross sales (a
minimum of $500 per month) to a marketing cooperative fund, and are required to
spend a minimum of
32
$2,500 each month on local advertising during their first year of operation, and
thereafter spend the greater of 3% of gross sales or $1,000 per month on local
promotions.
Under the franchise agreement:
- franchisees must adhere strictly to ZLand.com system standards, which are
set forth in our Business Manual;
- franchisees may only sell products and services authorized by ZLand.com;
- franchisees must deliver periodic, financial and other reports to us;
- franchisees must maintain sales of at least 50% of the average sales of
similarly situated franchisees;
- we have broad inspection rights; and
- we have the right to terminate non-performing or non-compliant
franchisees.
Our agreements governing franchises located in foreign territories may
differ from our U.S. franchise agreements in order to comply with foreign laws
and regulations.
Sales Office Network
Our 38 franchisee-owned sales offices are licensed to operate in 388
territories. These franchisees hold options for an additional 443 territories.
In some cases, we license blocks of territories, typically contiguous within a
defined geographic region. Multiple-territory offices benefit from certain
economies of scale. We currently offer franchises in 48 states and are in the
process of completing the regulatory compliance requirements for the remaining
two states. We also offer franchises in Australia, Canada, Egypt, Germany and
the United Kingdom. We use a qualification profile that is intended to identify
franchise candidates with successful direct sales and direct sales management
experience who are interested in technology and who have a good working
knowledge of general business practices.
We have five company-owned sales offices located in Munich; Sydney; San
Jose, California; Atlanta, Georgia and at our corporate headquarters in Southern
California. We plan to add company-owned and operated sales offices in major
metropolitan areas in the U.S. in 2000. We expect company-owned and operated
sales offices to generate product and related services revenue and to provide a
controlled environment to test new product strategies and marketing campaigns.
CUSTOMER SUPPORT AND TRAINING
We believe that customer training and support are critical to the success
of our business model. The technical staff in our local sales offices provide
the first level of support to our customers. If the local technical staff cannot
resolve a customer support issue, they refer it to a ZLand.com support center.
Those support centers provide services on a 24 x 7 basis which customers can
access directly. We have deployed an incident tracking system to record and
manage support and feedback issues ranging from product improvement suggestions
to bug reporting. We provide local, hands-on site administrator training to each
of our customers as an important part of our end-to-end solution. This training
enables our customers to have full control over the data in their ZLand.com
software applications.
TECHNOLOGY
Product Development
Our product development group focuses on Web-based software applications.
Our applications are based on a variety of technologies that principally consist
of Dynamic HTML, XML, CGI, Java and Lotus Domino. This group develops new
applications and incorporates these applications into our product line. Our
product development group also identifies, selects and implements the various
technologies, including network storage and back-up, that provide the basic
infrastructure for both our internal network and the solutions that we offer our
customers.
33
Our software architecture consists of a presentation and security layer, a
business logic layer and a data storage layer. The user interacts exclusively
with the presentation layer, which formats the user's data for display in the
user's browser. The business logic layer performs all user requests for
modifying the data, maintains transactional integrity, and interacts with the
data storage layer for managing the permanent storage index that
cross-references the data. This architecture provides an industry
standards-based methodology without a significant dependence on a single
third-party vendor. It also provides an application environment that can be
easily adapted to include additional functions and modules.
Network Operating Centers
We currently lease network operating center capacity from Solid Technology,
Inc. We have entered into an agreement to lease additional capacity from Exodus
Communications, Inc. Our network infrastructure is specified and designed to
provide reliable storage of our Web-based applications and data. Our network
infrastructure also includes multi-level network redundancy to provide the
highest levels of network uptime, reliability and customized network security,
and fast, guaranteed response time and availability of customers' content. Our
infrastructure is also specified and designed to scale to support continued
growth.
When selecting our network operating centers, we consider the scope of
electronic tools that the facility has available to automate the customer
support function. To enhance customer data reliability, our network operating
centers use digital audio tape backups and writeable CD-ROMs to store
applications and data files. For system-wide reliability, RAID 5 storage
provides fault redundancy at the operating system level. For security, all
servers have SSL-enabled security levels within their operating systems. A
firewall is used to protect both the operations of the data center and the
contents of customer files and applications.
COMPETITION
Our competitors vary in size and in the scope and breadth of services that
they offer. We primarily encounter competition from the following types of
companies:
- custom software development firms and systems integrators and
consultants;
- interactive advertising agencies and graphic design firms;
- traditional enterprise resource planning firms;
- software tool makers, such as IBM and Microsoft, that target
"do-it-yourself" customers;
- value-added resellers of IBM and Microsoft products that sell software
services;
- e-commerce companies that focus on solutions for online sales;
- companies that focus on one or more business segments such as supply
chain management, procurement or human resources; and
- Internet service providers and ASPs that offer value-added hosting
services and applications for small and mid-sized businesses.
In addition, because there are relatively low barriers to entry in the
software applications rental market, we expect additional competition from other
established and emerging companies as the market continues to develop and
expand. We also expect competition to increase as a result of software industry
consolidations and formations of alliances among industry participants.
We believe that the principal competitive factors affecting our market
include a significant base of reference customers, breadth and depth of
solution, product quality and performance, customer service, core technology and
brand building. We believe that our focus on value and efficiency to small and
mid-sized businesses, our ASP delivery model, our broad, proprietary product
mix, and our local franchise distribution model position us to compete
effectively. Although we believe that our solutions currently compete favorably
with respect to these factors, our market is relatively new and is evolving
rapidly. We may not be able to maintain our competitive position against current
and potential competitors, especially those with significantly greater
financial, marketing, service, support, technical and other resources.
34
INTELLECTUAL PROPERTY RIGHTS
We have registered our logo and the name Z Land(R) as trademarks and
service marks with the U.S. Patent and Trademark Office, and have filed or are
in the process of filing trademark registration applications for the marks
ZLand.com and "e-business for everyone." ZLand.com and the ZLand.com logo and
service marks are in use in the U.S. In addition, the ZLand.com logo and the
ZLand.com and "e-business for everyone" trademarks and service marks are in use
in several foreign countries. We also are in the process of filing applications
to register these trademarks in several countries. Our franchisees are granted
the right to use the ZLand.com name and our other service marks in their
franchise license agreements with us.
We require our customers to enter into license agreements, which impose
restrictions on their ability to use our software. In addition, we require
persons with access to our proprietary information to execute confidentiality
agreements with us and restrict access to our source code. We seek to protect
our software, documentation and other written materials under trade secret and
copyright laws, which afford only limited protection.
We generally enter into confidentiality agreements with our employees and
consultants. Our confidentiality agreements require that our employees and
consultants not disclose any of our proprietary information. Despite these and
other efforts to protect our proprietary information, unauthorized parties may
attempt to obtain and use our proprietary information. Policing unauthorized use
of our proprietary information is difficult, and our efforts might not prevent
misappropriation, particularly in foreign countries where the laws may not
protect our proprietary rights as well as those of the United States.
GOVERNMENT REGULATION
Franchise Regulation
We must comply with regulations adopted by the Federal Trade Commission, or
the FTC, and with foreign and state laws that regulate the offer and sale of
franchises as well as the franchise relationship. The FTC's Trade Regulation
Rule on Franchising, or the FTC Rule, and certain state laws require that we
furnish prospective franchisees with a franchise offering circular containing
information prescribed by, and otherwise comply with, the FTC Rule and
applicable state laws and regulations at least 10 days before any sale can be
effected. Foreign laws and regulations may also require disclosure of specified
information to prospective franchisees, and in some jurisdictions, the
registration of the franchisor with a governmental or quasi-governmental agency,
prior to the offer or sale of franchises.
We also must comply with a number of state and foreign laws that regulate
substantive aspects of the franchisor-franchisee relationship. These laws may
limit a franchisor's ability to terminate or not renew a franchise without good
cause, prohibit interference with the right of free association among
franchisees, disapprove the transfer of a franchise or discriminate among
franchisees with regard to charges, royalties and other fees. To date, these
laws have not had an adverse effect on our operations. The failure to comply
with these laws may adversely affect us.
Bills intended to further regulate certain aspects of franchise
relationships have been introduced into the United States Congress on several
occasions during the last decade, but none have been enacted. Any changes to the
FTC Rule or state or foreign franchise laws, or future court or administrative
decisions could affect our franchise business.
Regulation of the Internet and E-Commerce
The United States Congress recently has passed legislation that regulates
certain aspects of the Internet, including online content, copyright
infringement, user privacy, taxation, access charges and liability for
third-party activities. The European Union also has recently enacted several
directives relating to the Internet, including directives that address the use
of personal data, e-commerce activities, security, commercial piracy, consumer
protection and taxation of e-commerce transactions. Governmental authorities in
the United States and abroad are considering, and may consider in the future,
other
35
legislative and regulatory proposals that would regulate the Internet. Areas of
potential regulation are uncertain but may include intellectual property
ownership, libel, privacy protection, consumer protection, including deceptive
advertising, pricing, quality of products and services. We cannot predict how
courts will interpret existing and new laws, and therefore are uncertain as to
how new laws or the application of existing laws will affect our business. In
addition, our business may be indirectly affected by legislation that affects
the ability of our customers to engage in e-commerce activities. Increased
regulation of the Internet may decrease the growth in the use of the Internet,
which could decrease the demand for our products and services, increase our cost
of doing business or otherwise harm our business, results of operations and
financial condition.
EMPLOYEES
As of March 15, 2000, ZLand.com had a total of 240 employees, consisting of
77 in research and development, 111 in sales and marketing, 20 in customer
support, professional services and training, and 32 in administration and
finance. Of these employees, 212 were located in the United States and 28 were
located outside of the United States. None of our employees are represented by a
collective bargaining agreement, nor have we experienced any work stoppage. We
consider our relations with our employees to be good.
FACILITIES
Our headquarters and our principal sales, marketing, research and
development and administrative office occupies approximately 67,000 square feet
in Aliso Viejo, California. This lease expires on February 28, 2005. In
addition, we also lease office space in Atlanta, Georgia, San Jose, Emeryville
and Moorpark, California, Munich, Germany and Sydney, Australia.
LEGAL PROCEEDINGS
From time to time we may be involved in litigation or arbitration that
arises in the normal course of business operations. In particular, we may from
time to time be involved in litigation or arbitration with franchisees who are
terminated for nonperformance or noncompliance with their franchise agreements.
We are not currently a party to any pending material legal proceedings.
36
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers, and their respective ages and
positions as of March 15, 2000, are as follows:
NAME AGE POSITION
---- --- --------
John W. Veenstra.......................... 55 Chairman of the Board, Chief Executive Officer and
Director
Glenn E. Abood............................ 38 President and Chief Operating Officer
Kevin S. Palatnik......................... 42 Chief Financial Officer and Senior Vice President,
Finance
Joan Nagelkirk............................ 54 President of North American Operations and Director
Jim Ensell................................ 38 Senior Vice President, Products and Services
Rich Wyckoff.............................. 40 Senior Vice President, Corporate Marketing
Gregg Amber............................... 43 Senior Vice President, General Counsel and Secretary
Hans Severiens(1)......................... 70 Director
Sidney Jansma, Jr.(1)(2).................. 56 Director
Jack Harding(1)(2)........................ 45 Director
Thomas Glasgow, Jr.(2).................... 53 Director
Wolfgang Hanrieder........................ 39 Director
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
JOHN W. VEENSTRA co-founded ZLand.com in September 1995 and has served as
the Chairman of the Board of Directors and Chief Executive Officer since that
time. In addition, Mr. Veenstra served as President from September 1995 to May
1999. Mr. Veenstra provided consulting services to us between September 1995 and
October 1, 1997, when he became an employee. Prior to founding ZLand.com, he was
the Chief Executive Officer of First Electronic Forms, Inc. from its formation
in 1991 until its sale to Wallace Computer Services, Inc. in 1993. Mr. Veenstra
served as Vice President and General Manager, Electronic Forms Division of
Wallace Computer Services from 1993 to January 1995. Mr. Veenstra is married to
Joan Nagelkirk, our President of North American Operations and a director. Mr.
Veenstra holds a B.A. in economics from Calvin College and an M.B.A. in finance
from Wayne State University.
GLENN E. ABOOD has served as our President and Chief Operating Officer
since June 1999. From January 1997 to June 1999, he was Vice President and
General Manager for the design and verification business unit of Cadence Design
Systems, a software and services provider for the electronic design automation
industry. Prior to joining Cadence, Mr. Abood was President and Chief Executive
Officer of Silicon Valley Research, Inc., from May 1995 to December 1996. From
February 1984 to April 1995, Mr. Abood held various sales and management
positions at Zycad Corp. Mr. Abood holds a B.S.E.E. from the University of
Delaware and an M.S. in electrical engineering from Worcester Polytechnic
Institute.
KEVIN S. PALATNIK joined us as Senior Vice President and Chief Financial
Officer in February 2000. From January 1999 to February 2000, he was Vice
President and General Manager for the Education Services business unit of
Cadence Design Systems. From July 1994 to January 1999, Mr. Palatnik held
several positions within Cadence including Vice President-Operations, Vice
President-Corporate Financial Planning and Analysis and Group Director-Finance.
Prior to joining Cadence Design Systems, Mr. Palatnik held various financial
positions with IBM Corporation, most recently as the Plant Controller for the
Storage Systems Division in San Jose, CA. Mr. Palatnik serves as a director of
usateetimes.com. Mr. Palatnik holds a B.S. in industrial engineering, a B.S. in
operations research and an M.B.A. from Syracuse University.
JOAN NAGELKIRK co-founded ZLand.com in September 1995 with her husband,
John Veenstra, our Chairman and Chief Executive Officer, and served as our Chief
Financial Officer from that time until
37
December 1998 and from April 1999 to February 2000. In February 2000, Ms.
Nagelkirk became President of North American Operations. In addition, she has
served as a director since September 1995. Ms. Nagelkirk provided consulting
services to us between September 1995 and October 1, 1997, when she became an
employee. Ms. Nagelkirk was Vice President of First Electronic Forms, Inc., from
1991 until its sale to Wallace Computer Services, Inc. in 1993. Ms. Nagelkirk
served as Director of Licensed Operations, Electronics Forms Division of Wallace
Computer from 1993 to January 1995. Ms. Nagelkirk holds a B.A. in psychology
from Calvin College and an M.A. in psychology from St. Francis College.
JIM ENSELL joined us as Vice President of Services Operations in July 1999
and was promoted to the position of Senior Vice President of Products and
Services in January 2000. Prior to joining us, Mr. Ensell served as Vice
President, Consulting Services for Cadence Design Systems and prior to that, as
Vice President, Marketing for Cadence DSM Business Unit. Until 1997, he was Vice
President and General Manager of Consulting Services and GateField Sales at
Zycad Corporation, where he also served as Vice President and General Manager of
the Zycad Services Division. Mr. Ensell holds a B.S. in electrical engineering
from Villanova University and an M.S. in electrical engineering and computer
science from the University of Pennsylvania.
RICH WYCKOFF joined us as Vice President of Marketing in September 1999 and
was promoted to the position of Senior Vice President of Corporate Marketing in
January 2000. Prior to joining us, Mr. Wyckoff served as Vice President of
Corporate Marketing with Cadence Design Systems from September 1995 to September
1999. From May 1995 through October 1995, Mr. Wyckoff was the principal and
founder of the Image Group. Mr. Wyckoff holds a B.A. in communications and an
M.A. in mass media from the University of California, Santa Barbara.
GREGG AMBER joined us as Senior Vice President, General Counsel and
Secretary in December 1999. From March 1998 through November 1999, Mr. Amber was
a partner with the law firm of Rutan & Tucker, LLP. Prior to that time, and
since January 1995, he was a partner with the law firm of Snell & Wilmer LLP. He
is also corporate secretary and a director of Litronic Inc. Mr. Amber holds a
B.A. in political science and mathematics from Principia College and a J.D. from
Stanford Law School.
HANS SEVERIENS joined our board of directors in January 1998. Since 1995,
Mr. Severiens has served as the coordinator of the "Band of Angels," a Silicon
Valley group of high-tech executives investing in high-tech start-ups, which he
founded, and has served as a general partner of Band of Angels Fund L.P. since
July 1999. Since 1968, Mr. Severiens has been actively involved in the venture
capital and investment banking business, having served as president of the U.S.
subsidiary of MIP Equity Fund, as a partner in Bay Ventures II, and as vice
president of Merrill Lynch, Morgan Stanley Dean Witter, and Mitchell Hutchins.
He is a Trustee of Golden Gate University (San Francisco), and a director of the
Enterprise Network (Cupertino, California). Mr. Severiens holds a B.A. in
physics from Harvard University and a Ph.D. in nuclear physics from Johns
Hopkins University.
SIDNEY JANSMA, JR. co-founded ZLand.com in September 1995, and has served
on our board of directors since 1997. Mr. Jansma has been President and Chief
Executive Officer of Wolverine Gas & Oil Company, Inc., an oil and gas
exploration and production company, for over 12 years. He is a director of the
American Petroleum Institute, past Chairman, President and Treasurer of the
Michigan Oil and Gas Association, and past Chairman of Bethany Christian
Services, a private adoption agency with operations in 29 states. Mr. Jansma
holds a B.A. in economics and philosophy from Calvin College and an M.B.A. in
corporate finance and accounting from the University of Michigan.
JACK HARDING joined our board of directors in August 1999. He is Chairman
and Chief Executive Officer of The Dorset Group, a venture management and
investment firm. From October 1997 to May 1999, he served as President and Chief
Executive Officer of Cadence Design Systems, the world's largest provider of
software and services for electronic design. From May 1997 to October 1997, Mr.
Harding served as Senior Vice President of the Strategic Business Group of
Cadence Design Systems. From December 1994 to May 1997, Mr. Harding was
President and Chief Executive Officer of Cooper and Chyan Technologies, which
was acquired by Cadence Design Systems in 1997. Mr. Harding is Chairman of the
Board of SafeCorp.com, an information security consulting firm. He also serves
as a director for
38
inSilicon, a provider of semiconductor intellectual property. He is a Senior
Fellow at the Institute for Development Strategies, Graduate School of Public
Policy, Indiana University. Mr. Harding holds a B.A. in Economics and Chemistry
from Drew University, where he is a member of the Board of Trustees.
THOMAS GLASGOW, JR. joined our board of directors in December 1999. From
1973 until 1998, Mr. Glasgow was employed in a number of management positions by
McDonald's Corporation, most recently as Executive Vice President and Chief
Operations Officer in charge of restaurant systems worldwide. In that position,
Mr. Glasgow was responsible for the operations, training, product development,
operations development, equipment development, supply chain management and
security departments. Mr. Glasgow is currently a director of NSF International,
Inc., Compliance Control, Inc. and First Union Bank -- Asheville, as well as
Memorial Mission Healthcare Foundation, University of North Carolina-Asheville
Foundation, and YMCA of Western North Carolina. Mr. Glasgow holds a B.A. in
business from Michigan State University.
DR. WOLFGANG HANRIEDER joined our board of directors in February 2000.
Since 1997, Dr. Hanrieder has been a partner of STAR Ventures Management, a
Munich, Germany based investment firm specializing in IT and healthcare
companies. Prior to that time, he was a Manager of Siemens from January 1990 to
May 1996 and a Manager of Siemens Nixdorf Information Systems from May 1996 to
September 1997. Dr. Hanrieder holds an M.B.A. from the Massachusetts Institute
of Technology and a M.S. and Ph.D. in physics from the Technical University of
Munich, Germany.
All directors hold office until the next annual meeting of stockholders or
the election and qualification of their successors. Officers are elected
annually by the board of directors and serve at its discretion.
DIRECTOR COMPENSATION AND INDEMNIFICATION
We reimburse our non-employee directors for out-of-pocket expenses incurred
in connection with attendance at stockholders', board and committee meetings. We
granted to each of Messrs. Glasgow, Harding, Jansma and Severiens an option to
purchase 100,000 shares of common stock at an exercise price equal to fair
market value on the date of their election to the board, vesting over a period
of two years. In addition, in recognition of their services on the board, in
December 1998 we granted Mr. Jansma an option to purchase 150,000 shares and Mr.
Severiens an option to purchase 100,000 shares, each at $0.50 per share, with
vesting over three years for Mr. Jansma and over two years for Mr. Severiens,
and in November 1999 we granted Mr. Jansma an option to purchase 100,000 shares
and Mr. Severiens an option to purchase 50,000 shares, each at $4.50 per share
with vesting over two years.
We have entered into indemnification agreements with each of our current
directors and executive officers to give them additional contractual assurances
regarding the scope of the indemnification set forth in our certificate of
incorporation and bylaws and to provide additional procedural protections. At
present, there is no pending litigation or proceeding involving any of our
directors, officers or employees for which indemnification is sought. We are not
aware of any threatened litigation that may result in claims for
indemnification.
BOARD COMMITTEES; COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The board of directors has established an audit committee and a
compensation committee. The audit committee, consisting of Messrs. Jansma,
Harding and Severiens, reviews the adequacy of our internal controls and the
results and scope of the audit and other services provided by our independent
auditors. The compensation committee, consisting of Messrs. Jansma, Harding and
Glasgow, establishes salaries and other forms of compensation for our executive
officers.
None of our executive officers has served as a director or member of the
compensation committee of any other entity whose executive officers served as
one of our directors or as a member of our compensation committee.
39
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning compensation
paid or accrued by us to our Chief Executive Officer and each of our other
executive officers who earned more than $100,000 in salary and bonus, for
services rendered to us in all capacities during the year ended December 31,
1999. These individuals will be referred to as the named executive officers in
this prospectus.
SUMMARY COMPENSATION TABLE
ANNUAL LONG TERM
COMPENSATION COMPENSATION AWARDS
---------------- ------------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS SHARES UNDERLYING OPTIONS COMPENSATION
--------------------------- -------- ----- ------------------------- ------------
John W. Veenstra(1)......................... $163,000 -- 2,100,000 --
Chief Executive Officer
Joan Nagelkirk(2)........................... $ 16,667 -- 585,200 --
President of North American Operations
Glenn E. Abood(3)........................... $136,308 -- 1,800,000 $21,200(4)
President and Chief Operating Officer
Richard Bjorkman(5)......................... $129,764 -- 30,000 --
(1) Includes $43,000 earned by Mr. Veenstra during fiscal 1999 but deferred for
payment until January 2000, at the election of Mr. Veenstra. Mr. Veenstra's
annual base salary beginning in June 1999 was increased to $240,000.
(2) Ms. Nagelkirk served as our Chief Financial Officer during 1999. Excludes
$220,000 paid to a consulting firm owned by the daughter of Mr. Veenstra and
Ms. Nagelkirk, for consulting services performed by Ms. Nagelkirk. See
"Related Party Transactions." Ms. Nagelkirk's annual base salary beginning
in December 1999 was established at $200,000.
(3) Reflects salary paid to Mr. Abood since he joined ZLand.com in June 1999.
Mr. Abood's annual base salary is $240,000.
(4) Represents an auto allowance and travel and living expenses paid by us in
fiscal 1999.
(5) Mr. Bjorkman served as our Chief Financial Officer from December 1998 to
April 1999. Between April 1999 and January 2000, when he left the company,
Mr. Bjorkman served as our Vice President, Finance.
OPTION GRANTS IN THE LAST FISCAL YEAR
The following table sets forth information regarding options granted to the
named executive officers during the fiscal year ended December 31, 1999.
OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1999
POTENTIAL REALIZABLE VALUE
NUMBER OF PERCENTAGE AT ASSUMED ANNUAL RATES
SECURITIES OF TOTAL EXERCISE OF STOCK PRICE APPRECIATION
UNDERLYING OPTIONS PRICE FOR OPTION TERM(4)
OPTIONS GRANTED TO PER EXPIRATION ----------------------------
NAME GRANTED(1) EMPLOYEES(2) SHARE(3) DATE 5% 10%
---- ---------- ------------ --------- ---------- ------------ -------------
John W. Veenstra............ 1,800,000 24.7% $4.50 (5) $5,094,000 $12,909,312
Glenn E. Abood.............. 1,800,000 24.7% $4.50 (5) $5,094,000 $12,909,312
Joan Nagelkirk.............. 400,000 5.5% $4.50 11/30/09 $1,132,000 $ 2,868,736
Richard Bjorkman............ 0 0% 0 N/A $ 0 $ 0
(1) Twenty-five percent of the shares subject to each of these options vest one
year after the grant date with remaining 75% vesting at a rate of 1/36 per
month thereafter, with the exception of options to purchase 200,000 shares
granted to each of Messrs. Veenstra and Abood which vested immediately upon
grant.
40
(2) Based on options to purchase 7,290,800 shares granted to employees during
the fiscal year ended December 31, 1999, including named executive officers.
(3) The stock option exercise price was established based on the fair market
value on the date of grant of the underlying common stock, as determined by
our board of directors.
(4) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock price appreciation of 5% and 10%
compounded annually from the date the respective options were granted to
their expiration date based upon the fair market value of our common stock
on December 31, 1999, $4.50 per share. These assumptions are not intended to
forecast future appreciation of our stock price. The potential realizable
value computation does not take into account federal or state income tax
consequences of option exercises or sales of appreciated stock.
(5) Expires as to 1,200,000 shares in June 2009 and as to 600,000 shares in
November 2009.
FISCAL YEAR END OPTION VALUES
There were no exercises of options by any named executive officers in the
fiscal year ended December 31, 1999. The following table sets forth, for each of
the named executive officers, the year-end value of unexercised options as of
December 31, 1999:
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1999 DECEMBER 31, 1999
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
John W. Veenstra................... 352,000 1,748,000 $608,000 $592,000
Glenn E. Abood..................... 200,000 1,600,000 0 0
Joan Nagelkirk..................... 127,600 457,600 $510,400 $230,400
Richard Bjorkman................... 4,708 25,292 $ 18,832 $101,168
These values are based on the deemed fair market value as of December 31,
1999, or $4.50 per share, minus the exercise price, multiplied by the number of
shares underlying the option.
EMPLOYMENT AGREEMENTS, TERMINATION AND CHANGES OF CONTROL
In July and May 1999, we entered into at-will employment agreements with
each of John W. Veenstra and Glenn E. Abood, respectively. The minimum annual
base salary for each these individuals under their respective employment
agreements is $240,000. In December 1999, we entered into an at-will employment
agreement with Joan Nagelkirk, providing for a minimum base salary of $200,000.
In addition, each employment agreement provides for eligibility for
participation in our benefit plans and incentive compensation payments of
between 50% (40% in the case of Ms. Nagelkirk) and 75% of the employee's annual
base salary upon attainment of certain pre-defined goals that are determined by
the board of directors, the employee covered by the agreement and, in the case
of Mr. Abood, the Chief Executive Officer.
If the employee's employment with us is terminated "without cause," the
employee will be entitled to receive his or her annual base salary and benefits
for a period of 12 months following termination and a bonus equal to 50% (40% in
the case of Ms. Nagelkirk) of the employee's annual base salary. In the case of
a termination of employment due to voluntary resignation or if the employee is
terminated "for cause," the employee will be entitled to receive his or her
annual base salary and bonus pro-rated in accordance with the period of
employment with us during the applicable fiscal year, provided that
pre-determined goals were met. In the event of a termination of employment due
to death or disability or following a change of control of the company, the
employment agreements provide that the employee will be entitled to receive a
lump sum severance payment equal to two years of the employee's annual base
salary and a bonus equal to 50% (40% in the case of Ms. Nagelkirk) of his or her
annual base salary at the employee's
41
then current annual rate. Additionally, the employee will be entitled to
continue to receive full benefits for a period of 12 months following the
termination.
Pursuant to the employment agreements, we granted options to purchase
shares of our common stock to these employees. Messrs. Veenstra and Abood each
received an option to purchase 1,000,000 shares. Twenty-five percent of the
shares subject to these options will vest in July 2000 and the remaining shares
will vest at a rate of 2.0833% per month thereafter. In addition, under our
employment agreements with Messrs. Veenstra and Abood, we granted to each of
them, as a contract bonus, another option to purchase 200,000 shares of our
common stock at $4.50 per share. The shares subject to these options vested
immediately upon grant. Furthermore, in November 1999, our board of directors
granted options to purchase an additional 600,000 shares each to Messrs.
Veenstra and Abood, and 400,000 shares to Ms. Nagelkirk, on the same terms as
the 1,000,000 share options, but with vesting beginning in November 2000.
Upon termination of an employee's employment, the employment agreements
provide for specific treatment of outstanding options. In the event of a
resignation or termination by us "for cause," the employee will have one year
from the date of termination to exercise his or her vested options. If an
employee's employment is terminated "without cause," due to death or disability
or following a change in control of the company, the employee's outstanding
options will accelerate and become immediately exercisable for a period of one
year.
1997 STOCK PLAN
Our 1997 Stock Plan was approved by our stockholders in November 1997.
Amendments and restatements of that Plan were approved by our stockholders in
November 1998, May 1999 and December 1999. A maximum of 18,000,000 shares of
common stock are reserved for issuance under the Plan. The Plan gives broad
powers to our board to grant various kinds of stock-based incentives. As of the
date of this prospectus, the only awards granted under the Plan have been stock
bonuses, stock purchase grants and stock options.
Out of the 18,000,000 shares reserved for issuance under the Plan, we have
made stock bonus grants, stock purchase grants, or had stock options exercised,
for a total of 2,186,712 shares, which are included in the outstanding shares of
common stock as of March 15, 2000. We also have granted outstanding stock
options to purchase up to 12,617,090 shares, of which 3,156,740 have a $0.50 per
share exercise price, 2,870 have a $1.305 per share exercise price, 25,744 have
a $3.26 per share exercise price and 9,431,736 have a $4.50 per share exercise
price.
42
RELATED PARTY TRANSACTIONS
In August 1997, we sold 3,334,008 shares of our common stock at the then
fair market value of $0.05 per share to Grey Fox, Inc., a company wholly owned
by the Veenstra Farm Preservation Trust, which is beneficially owned by the
adult children of John W. Veenstra, our Chief Executive Officer and Chairman of
the Board, and Joan Nagelkirk, our President of North American Operations and
one of our directors, in exchange for cancellation of $166,700 owed to Grey Fox
by us.
Additionally, as of September 1997, we owed Grey Fox $398,000 which
consisted of $92,000 borrowed from Grey Fox and the remainder for consulting
services provided on behalf of Grey Fox by John W. Veenstra and Joan Nagelkirk
from January 1996 to September 1997. On October 1, 1997, the Grey Fox consulting
contract was terminated and both John W. Veenstra and Joan Nagelkirk became our
employees. On October 31, 1997, we sold 795,566 shares of our common stock at
the then fair market value of $0.50 per share to Grey Fox in exchange for our
obligations to Grey Fox.
During the three month period ending December 31, 1997, we paid to Quatt,
Inc., a consulting firm owned by the daughter of John W. Veenstra and Joan
Nagelkirk, $26,250 in fees for consulting services provided to us on behalf of
Quatt, Inc. by John W. Veenstra and Joan Nagelkirk. In 1998, we paid $70,000 to
Quatt, Inc. for consulting services provided by Mr. Veenstra and Ms. Nagelkirk,
$30,000 of which was attributable to services provided in 1997. In addition to
such compensation, we issued convertible promissory notes and common stock
warrants to each of Mr. Veenstra and Ms. Nagelkirk for their consulting services
in 1998, on identical terms as issued to other creditors of ours. The aggregate
amount of the convertible promissory notes was $140,000 (representing $132,000
for services provided by Mr. Veenstra and $8,000 for services provided by Ms.
Nagelkirk). In March, 1999, Mr. Veenstra converted a promissory note in the
amount of $81,493 (including accrued interest) into 81,492 shares of Series B
Preferred Stock (post-split). The remaining notes were repaid by us in full in
March 1999. In 1999, we paid to Quatt, Inc. $280,000 for services provided by
Ms. Nagelkirk, $60,000 of which was attributable to services provided in 1998.
In October 1999, we entered into a franchise agreement with Joan Nagelkirk
for two territories in California, for an aggregate initial franchise fee of
$60,000. The initial franchise fee is due within 30 days following the
expiration of the lock-up period in connection with the public offering of our
common stock.
In August 1999 and as amended in February 2000, we entered into a
consulting agreement with Jack Harding, one of our directors. Under this
agreement, during the year ended December 31, 1999, we paid Mr. Harding $72,000
in cash and options to purchase an aggregate of 492,000 shares of our common
stock at an exercise price of $4.50 per share.
In connection with the employment of Jim Ensell in July 1999, we entered
into a loan agreement with Mr. Ensell in the aggregate amount of $125,000 to
cover relocation expenses from his prior employer. The term of the loan is three
years, with no interest. The principal becomes due and payable within thirty
days of Mr. Ensell's voluntary termination of his employment with us. Pursuant
to the loan, $75,000 will be forgiven in $25,000 increments on each of the first
three anniversary dates of the loan.
43
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial ownership
of our common stock as of March 15, 2000 by:
- each person who is known by us to own beneficially more than five percent
of our common stock;
- each of our directors;
- each of our executive officers; and
- all directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules and
regulations of the Securities and Exchange Commission. In computing the number
of shares beneficially owned by a person and the percentage ownership of that
person, shares of common stock underlying options or warrants held by that
person that are currently exercisable or exercisable within 60 days of March 15,
2000 are deemed outstanding. These shares, however, are not deemed outstanding
for the purposes of computing the percentage ownership of any other person.
Except as indicated in the footnotes to this table and pursuant to applicable
community property laws, each stockholder named in the table has sole voting and
investment power with respect to the shares set forth opposite such
stockholder's name. Unless otherwise indicated, the address for each of the
following stockholders is c/o ZLand.com, Inc., 27081 Aliso Creek Road, Aliso
Viejo, California 92656.
PERCENTAGE OF OWNERSHIP
NUMBER OF SHARES ---------------------------------
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING
------------------------ ------------------ --------------- --------------
Veenstra Farm Preservation Trust(1).............. 8,672,844 26.08% %
Starwood Investments, L.P.(2).................... 3,000,000 8.78% %
Fortman Cline AG(3).............................. 1,781,554 5.14% %
Sidney Jansma, Jr.(4)............................ 659,142 1.97% %
Glenn E. Abood(5)................................ 410,000 1.22% *
John W. Veenstra(6).............................. 384,402 1.14% *
Hans Severiens(7)................................ 263,342 * *
Joan Nagelkirk(8)................................ 146,800 * *
Jack Harding(9).................................. 183,833 * *
Thomas Glasgow, Jr.(10).......................... 120,833 * *
Wolfgang Hanrieder(11)........................... 8,333 * *
Gregg Amber(12).................................. -- * *
Jim Ensell(13)................................... 61,988 * *
Rich Wyckoff..................................... 10,000 * *
Kevin S. Palatnik................................ -- * *
All Officers and Directors as a Group (12
persons)....................................... 2,248,673 6.5% %
* Less than 1%
(1) The address for Veenstra Farm Preservation Trust is 8161 South 200th
Avenue, Holton, Michigan 49425. The Veenstra Farm Preservation Trust is
beneficially owned by the adult children of John W. Veenstra and Joan
Nagelkirk, who disclaim any beneficial ownership of the shares. One of the
beneficiaries, Jennifer Veenstra, and the husband of another of the
beneficiaries, Peter Scharnell, are employed by us.
(2) Includes 910,000 shares underlying a warrant. The 910,000 shares underlying
this warrant may also be deemed to be beneficially owned by Robert Geist,
as trustee of the Robert A. Geist Revocable Trust dated October 13, 1993,
which is general partner of Starwood Investments, L.P.
44
(3) Includes 1,400,000 shares underlying a warrant and includes shares held by
Fortman Cline AG under its former name, Berrin Lord Holding AG. The address
of Fortman Cline AG is Farberstrasse 33, CH 8008 Zurich Switzerland.
(4) Includes 200,520 shares underlying options and warrants. Also includes
30,000 shares of which Mr. Jansma has beneficial ownership as manager of
Covenant Properties LLC.
(5) Includes 280,000 shares underlying options and warrants.
(6) Includes 382,666 shares underlying options.
(7) Includes 127,084 shares underlying options. Also includes 136,258 shares of
which Mr. Severiens has beneficial ownership as trustee of the C.T.
Severiens Trust dated October 21, 1990.
(8) Consists solely of 146,800 shares underlying options.
(9) Includes 163,833 shares underlying options. Also includes 20,000 shares of
which Mr. Harding has beneficial ownership as general partner of Harding
Partners, LP, a Pennsylvania limited partnership.
(10) Includes 20,833 shares underlying options.
(11) Consists solely of 8,333 shares underlying options.
(12) Excludes 14,000 shares held by Mr. Amber's wife as her sole and separate
property, and as to which Mr. Amber disclaims beneficial ownership.
(13) Includes 40,000 shares underlying a warrant.
45
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 100,000,000 shares of common
stock, $0.01 par value per share, and 20,000,000 shares of preferred stock,
$0.01 par value per share. As of March 15, 2000, we had outstanding:
- 21,949,628 shares of common stock;
- 11,300,570 shares of convertible preferred stock, which will be converted
into 11,300,570 shares of common stock immediately prior to completion of
this offering;
- options to purchase an aggregate of 12,617,090 shares of our common stock
at a weighted average per share exercise price of $3.50; and
- warrants to purchase up to 5,707,688 shares of our common stock, of which
4,743,824 are exercisable at the initial public offering price and the
balance of which have a weighted average exercise price of $1.19 per
share.
COMMON STOCK
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders. Subject to the rights of holders of
preferred stock, if any, holders of common stock are entitled to such dividends
as the board of directors may declare out of funds legally available for the
payment of dividends. In the event of our liquidation, dissolution or winding
up, the holders of common stock are entitled to share ratably in all assets
remaining after the payment of liabilities, subject to prior distribution rights
of holders of preferred stock, if any. The common stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the common stock.
PREFERRED STOCK
Our board of directors is authorized, subject to any limitations prescribed
by Delaware law, to provide for the issuance of the undesignated preferred stock
in one or more series. Our board of directors is also authorized to establish
from time to time the number of shares to be included in each such series, to
fix or alter the rights, preferences, privileges and restrictions, including
voting, conversion, liquidation, dividend and redemption, of the shares of each
wholly unissued series and any restrictions thereon, and to increase or decrease
the number of shares of any such series (but not below the number of shares of
such series then outstanding plus the number of shares reserved for issuance
upon the exercise of outstanding options, rights or warrants or the conversion
of any outstanding securities into shares of such series). Holders of common
stock will not be entitled to vote upon such matters.
JUNIOR PREFERRED STOCK AND RIGHTS AGREEMENT
Prior to the closing of this offering, we intend to file a certificate of
designation that provides for the issuance of up to 100,000 shares of Series A
Junior Participating Preferred Stock and contains the designations, preferences
and relative rights, qualifications and restrictions of the Series A Junior
Participating Preferred Stock created in connection with our rights plan, which
are described in general terms below. We refer to our Series A Junior
Participating Preferred Stock as Junior Preferred Stock.
On February 14, 2000, our board of directors adopted our rights plan, which
is commonly known as a poison pill and which expires ten years from the closing
of this offering. In connection with the adoption of our rights plan, our board
of directors declared, effective as of the closing of this offering, a dividend
of one stockholder right for each share of our common stock which is outstanding
as of the closing of this offering and a dividend of one stockholder right for
each share of our common stock that becomes outstanding between the closing of
this offering and the earlier of the expiration date and the distribution date.
The distribution date is the earlier to occur of the following:
46
- ten days after a public announcement that a person or group of affiliated
or associated persons have acquired beneficial ownership of 15% or more
of the outstanding shares of our common stock, or
- ten business days after the commencement or announcement of a tender
offer or exchange offer which would result in the beneficial ownership by
a person or group of 15% or more of the outstanding shares of our common
stock.
Each stockholder right entitles its holder to purchase one one-thousandth
of a share of Junior Preferred Stock at a price of $200, subject to adjustment
for stock splits and the like. Prior to the distribution date, our stockholder
rights will not be exercisable and will be transferable only with and
represented by the certificates for our common stock. After the distribution
date, separate right certificates will evidence our stockholder rights.
Shares of Junior Preferred Stock are not redeemable but will be entitled,
when, as and if declared, to a minimum preferential cumulative quarterly
dividend payment of $1.00 per share and an aggregate dividend and minimum
preferential liquidation payment of 1,000 times any dividend or liquidation
payment paid per share of our common stock. Upon any transaction in which shares
of our common stock are exchanged, each share of Junior Preferred Stock will be
entitled to receive 1,000 times the amount received for each share of our common
stock.
Subject to adjustments for stock splits and the like, each share of Junior
Preferred Stock will have 1,000 votes, voting together with our common stock
upon any matter submitted to our stockholders for a vote. In addition, the
affirmative vote of the holders of two-thirds of the outstanding shares of
Junior Preferred Stock is required to amend our certificate of incorporation so
as to adversely affect the rights of the Junior Preferred Stock. Also, if at the
time of any annual meeting of stockholders for the election of directors, six
quarterly dividends payable on any shares of Junior Preferred Stock are in
default, the number of directors constituting our board of directors will be
increased by two, and the holders of Junior Preferred Stock may elect two
directors who will hold office until removed by the holders of Junior Preferred
Stock or until the default in dividend payments is cured.
If we are acquired in a change of control transaction or there is a sale of
50% or more of our consolidated assets or earning power, each holder of a
stockholder right other than the acquiror may receive upon the exercise of the
stockholder right that number of shares of common stock of the acquiror having a
market value of two times the exercise price of the right. If any person or
group becomes a 15% beneficial owner before a change of control or sale
transaction, each holder of a stockholder right other than the acquiror could
purchase one one-thousandth of a share of Junior Preferred Stock or shares of
our common stock having a market value of two times the exercise price of the
right, or our board of directors may order the exchange of each stockholder
right not owned by the acquiror for one share of our common stock or one
one-thousandth of a share of Junior Preferred Stock.
Our stockholder rights have certain anti-takeover effects. Our stockholder
rights will cause substantial dilution to a person or group that attempts to
acquire our company on terms not approved by our board of directors, except for
an offer conditioned on a substantial number of stockholder rights being
acquired. The stockholder rights should not interfere with any merger or other
business combination approved by our board of directors because each stockholder
right may be redeemed by us for $.01 before the distribution date. For so long
as the stockholder rights are redeemable, we may amend them in any manner except
for the redemption price. After that time, we may amend them in any manner that
does not negatively affect the interests of holders of the stockholder rights.
WARRANTS
As of March 15, 2000, there were warrants outstanding to purchase 5,707,688
shares. Of these, warrants to purchase 101,238 shares at $0.485 per share will
expire in July 2001, warrants to purchase 10,300 shares at $0.50 per share will
expire in March 2003, warrants to purchase 455,000 shares at $1.00 per share
will expire between February 2003 and December 2003, warrants to purchase
329,546 shares at $1.00 per share will expire in March 2004, warrants to
purchase 67,780 shares at $4.50 per share will
47
expire between July 2004 and January 2005, warrants to purchase 1,985,824 shares
at a price equal to the initial public offering price per share will expire
between December 2003 and March 2004, and warrants to purchase 2,758,000 shares
at a price equal to the initial public offering price per share will expire in
one-third increments seven months, thirteen months and nineteen months from the
closing of this offering, respectively.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
Our certificate of incorporation includes a provision that eliminates the
personal liability of a director for monetary damages to us resulting from
breach of his or her fiduciary duty as a director, except for liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- under section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchases; or
- for any transaction from which the director derived an improper personal
benefit.
Our bylaws provide that:
- we are required to indemnify our directors and executive officers to the
fullest extent permitted by Delaware law, subject to limited exceptions;
and
- we are required to advance expenses, as incurred, to our directors and
executive officers in connection with a legal proceeding to the fullest
extent permitted by Delaware law, subject to limited exceptions.
We currently have liability insurance for our directors and officers and
intend to extend that coverage for public securities matters.
REGISTRATION RIGHTS
After the closing of this offering, the holders of 15,128,772 shares and
the holders of warrants to purchase 5,327,416 shares are entitled to
registration rights with respect to those shares. If we propose to register any
of our securities under the Securities Act of 1933, the holders of the
registration rights are entitled to notice and to include their shares in the
registration at our expense, subject to limitations or exclusions based on
marketing factors. In addition, certain of the registration rights holders may
require us, at our own expense, but on not more than two occasions and not
within six months following the effective date of any other registration
statement, to file a registration statement covering the resale of their shares,
and we are required to use our best efforts to effect the registration, subject
to certain conditions and limitations. Further, certain other registration
rights holders may require us to register their shares, at our expense, on Form
S-3 when that form becomes available to us, subject to certain conditions and
limitations.
CERTAIN ANTI-TAKEOVER PROVISIONS
Issuance of Preferred Stock
Subject to any limitations prescribed by Delaware law, our board of
directors is authorized by our certificate of incorporation to issue, without
stockholder approval, preferred stock with rights superior to the rights of the
holders of our common stock. As a result, preferred stock could be issued
relatively quickly and easily, could adversely affect the rights of holders of
common stock and could be issued with terms calculated to delay or prevent a
change of control of our company or make removal of management more difficult.
48
Poison Pill
Our board of directors has adopted a rights plan, which is commonly known
as a poison pill, and has declared, effective as of the closing of this
offering, a dividend of stockholder rights on shares of our common stock. These
stockholder rights have certain anti-takeover effects and generally will cause
substantial dilution to a person or group that attempts to acquire our company
on terms not approved by our board of directors. See "-- Junior Preferred Stock
and Rights Agreement."
Stockholder Meetings
Our bylaws provide that special meetings of stockholders for any purpose
may be called at any time by our board of directors but may not be called by any
other person or persons.
Advance Notification of Stockholder Nominations and Proposals
Our bylaws contain advance notice procedures with respect to stockholder
proposals and the nomination of candidates for election as directors.
Nominations and proposals may be made at an annual meeting of stockholders only
pursuant to our company's notice of meeting or any notice supplement, by or at
the direction of our board of directors, or by any stockholder who is a
stockholder of record of the company at the time the notice of meeting is
delivered to the Secretary of the company, who is entitled to vote at the
meeting and who complies with the notice procedures described in our bylaws.
Delaware Anti-Takeover Law
We are a Delaware corporation that may become subject to Section 203 of the
Delaware General Corporation Law as a result of or following the initial public
offering of common stock as described in this prospectus. Under Section 203,
certain "business combinations" between an "interested stockholder" and a
Delaware corporation that has a class of voting stock (i) listed on a national
securities exchange, (ii) authorized for quotation on the Nasdaq Stock Market or
(iii) held of record by more than 2,000 stockholders, are prohibited for a
three-year period following the date that such stockholder became an interested
stockholder, unless (i) the corporation has elected in its certificate of
incorporation not to be governed by Section 203 (we have not made such an
election), (ii) the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder was approved by the board of
directors of the corporation before such stockholder became an interested
stockholder, (iii) upon consummation of the transaction that made such
stockholder an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the commencement of
the transaction (excluding voting stock owned by directors who are also officers
or held in employee stock plans in which the employees do not have the right to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer) or (iv) the business combination is
approved by the board of directors of the corporation and authorized at a
meeting by two-thirds of the voting stock that the interested stockholder did
not own. The three-year prohibition also does not apply to certain business
combinations proposed by an interested stockholder following the announcement or
notification of certain extraordinary transactions involving the corporation and
a person who had not been an interested stockholder during the previous three
years or who became an interested stockholder with the approval of a majority of
the corporation's directors. The term "business combination" is defined
generally to include mergers or consolidations between a Delaware corporation
and an interested stockholder, transactions with an interested stockholder
involving the assets or stock of the corporation or transactions that increase
an interested stockholder's percentage ownership of stock. The term "interested
stockholder" is defined generally as those stockholders who became beneficial
owners of 15% or more of a Delaware corporation's voting stock, together with
the affiliates or associates of that stockholder.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company.
49
SHARES ELIGIBLE FOR FUTURE SALE
If our stockholders sell substantial amounts of common stock, including
shares issued upon the exercise of outstanding options, in the public market
following this offering, the market price of our common stock could fall. These
sales also might make it more difficult for us to sell equity or equity related
securities in the future and at a time and price that we consider appropriate.
Upon completion of this offering, we will have outstanding an aggregate of
shares of our common stock, assuming no exercise of outstanding
options or warrants. As of March 15, 2000, we had approximately 560 holders of
common stock. All of the shares sold in this offering will be freely tradeable
without restriction or further registration under the Securities Act, unless
these shares are purchased by our affiliates, or persons who directly or
indirectly control, are controlled by or are under common control with us.
Shares held by affiliates may generally only be sold in compliance with the
limitations of Rule 144 of the Securities Act described below. This leaves
shares eligible for sale in the public market as follows:
NUMBER OF SHARES DATE
---------------- ----
After 180 days from the date of this prospectus, subject, in
some cases, to volume limitations.
At various times after 181 days from the date of this
prospectus, subject, in some cases, to volume limitations.
LOCK-UP AGREEMENTS
We, our officers and directors and most of our existing stockholders and
option holders have agreed not to dispose of, or announce the intention to
dispose of, directly or indirectly, any additional shares of our common stock or
securities convertible into or exchangeable or exercisable for any shares of our
common stock, without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus.
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 our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 concerning that 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
ZLand.com, Inc.
RULE 144(k)
Under Rule 144(k) as currently in effect, 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,
including the holding period of any prior owner other than an affiliate, 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, Rule 144(k) shares may be sold immediately upon the
completion of this offering.
50
RULE 701
In general, under Rule 701 of the Securities Act as currently in effect,
any of our non-executive employees, consultants or advisors who purchases shares
of our common stock from us in connection with a compensatory stock or option
plan or other written agreement is eligible to resell those shares 90 days after
the effective date of this prospectus in reliance on Rule 144, but without
compliance with some of the restrictions, including the holding period,
contained in Rule 144.
51
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2000, we have agreed to sell to the
underwriters named below, for whom Credit Suisse First Boston Corporation,
FleetBoston Robertson Stephens Inc. and Friedman, Billings, Ramsey & Co., Inc.,
are acting as representatives, the following respective numbers of shares of
common stock:
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
Credit Suisse First Boston Corporation......................
FleetBoston Robertson Stephens Inc..........................
Friedman, Billings, Ramsey & Co., Inc.......................
--------
Total.............................................
========
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to additional shares of common stock at the initial
public offering price less the underwriting discounts and commissions. This
option may be exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and the selling group members may allow a discount of $ per
share on sales to other broker/dealers. After the initial public offering, the
public offering price and concession and discount to broker/dealers may be
changed by the representatives.
The following table summarizes the discounts and commissions and estimated
expenses of $ we will pay. The underwriting fee will be equal to the
public offering price per share of common stock less the amount paid by
underwriters to us per share of common stock. The underwriting discount per
share will be equal to % of the initial public offering price per share of
common stock.
PER SHARE TOTAL
------------------------------- -------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
Underwriting discounts and commissions paid
by us.................................... $ $ $ $
Expenses payable by us..................... $ $ $ $
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
In December 1999, affiliates of Credit Suisse First Boston Corporation and
FleetBoston Robertson Stephens Inc. purchased an aggregate of 133,332 shares of
our Series C Convertible Preferred Stock at a purchase price of $599,994 on the
same terms as those on which we offered these securities to other investors.
These shares will convert automatically into 133,332 shares of common stock
immediately prior to completion of this offering.
52
We, our officers and directors and most of our existing stockholders and
option holders have agreed not to dispose of, or announce the intention to
dispose of, directly or indirectly, any additional shares of our common stock or
securities convertible into or exchangeable or exercisable for any shares of our
common stock, without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus.
The underwriters have reserved for sale, at the initial public offering
price, up to shares of common stock for employees, directors and
other persons associated with us who have expressed an interest in purchasing
common stock in this offering. The number of shares available for sale to the
general public in this offering will be reduced to the extent that these 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.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act or contribute to payments that the underwriters may be required
to make in that respect.
We will apply to list the shares of common stock on The Nasdaq Stock
Market's National Market under the symbol "ZLND." Prior to this offering, there
has been no public market for the common stock.
The initial public offering price will be determined by negotiation between
us and the representatives, and does not reflect the market price for the common
stock following the offering. The principal factors considered in determining
the initial public offering price will be:
- the information in this prospectus and otherwise available to the
representatives;
- market conditions for initial public offerings;
- the history of and prospects for the industry in which we compete;
- our past and present operations;
- our past and present earnings and current financial position;
- the ability of our management;
- our prospects for future earnings;
- the present state of our development and our current financial condition;
- the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies; and
- the general condition of the securities markets at the time of this
offering.
We can offer no assurance that the initial public offering price will
correspond to the price at which the common stock will trade in the public
market subsequent to this offering or that an active trading market for the
common stock will develop and continue after this offering.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Exchange Act.
- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by that
syndicate member is purchased in a stabilizing transaction or syndicate
covering transaction to cover syndicate short positions.
53
These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of our common stock to be greater than it would otherwise be
in the absence of such transactions. These transactions may be effected on The
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the common stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that: (1) such purchaser is entitled under
applicable provincial securities laws to purchase such common stock without the
benefit of a prospectus qualified under such securities laws, (2) where required
by law, that such purchaser is purchasing as principal and not as agent, and (3)
such purchaser has reviewed the text above under "Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of our directors and officers as well as the experts named herein may
be located outside of Canada and, as a result, it may not be possible for
Canadian purchasers to effect service of process within Canada upon the issuer
or such persons. All or a substantial portion of the assets of the issuer and
such persons may be located outside of Canada and, as a result, it may not be
possible to satisfy a judgment against the issuer or such persons in Canada or
to enforce a judgment obtained in Canadian courts against such issuer or persons
outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one such report
must be filed in respect of common stock acquired on the same date and under the
same prospectus exemption.
54
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
LEGAL MATTERS
The validity of the shares of common stock offered in this prospectus will
be passed upon for us by Rutan & Tucker, LLP, Costa Mesa, California. Certain
legal matters relating to this offering will be passed upon for the underwriters
by Stoel Rives LLP. Partners of Rutan & Tucker, LLP own 128,444 shares of our
common stock.
EXPERTS
The consolidated financial statements of ZLand.com, Inc. and subsidiaries
as of and for the year ended December 31, 1999, have been included herein and in
the registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
The consolidated financial statements as of December 31, 1998 and for each
of the two years in the period ended December 31, 1998 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in accounting and auditing.
The financial statements of Appintec Corp., dba ActionWare, as of and for
the year ended June 30, 1999, have been included herein and in the registration
statement in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
CHANGE IN INDEPENDENT ACCOUNTANTS
Effective December 28, 1999, KPMG LLP was engaged as our independent
auditors and replaced PricewaterhouseCoopers LLP, who had previously served as
our independent auditors. The decision to change independent auditors was
approved by our Board of Directors. In the period from January 1, 1997 to
December 31, 1998, PricewaterhouseCoopers LLP issued no audit report that was
qualified or modified as to uncertainty, audit scope or accounting principles,
no adverse opinions or disclaimers of opinion on any of our financial
statements, and there were no disagreements with PricewaterhouseCoopers LLP on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which disagreements, if not
resolved to the satisfaction of PricewaterhouseCoopers LLP, would have caused
them to make reference thereto in their reports on the consolidated financial
statements for such years. Prior to December 28, 1999, we had not consulted with
KPMG LLP on items which involved our accounting principles or the form of audit
opinion to be issued on our financial statements.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the shares
offered by this prospectus. This prospectus does not contain all of the
information set forth in the registration statement and its exhibits and
schedules. For further information about ZLand.com and the shares offered by
this prospectus, please refer to the registration statement and its exhibits and
schedules. Statements contained in this prospectus concerning the content of any
contract or other document referred to are not necessarily complete, and, in
each instance, if such contract or documents is filed as an exhibit, we refer
you to the copy of such contract or document filed as an exhibit to the
registration statement. Each statement is qualified in all respects by
55
such reference to such exhibit. A copy of the registration statement, and its
exhibits and schedules, may be inspected without charge at the public reference
facilities maintained by the Commission in Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at the
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York
10048, and copies of all or any part of the registration statement may be
obtained from such offices upon the payment of the fees prescribed by the
Commission. The public may obtain information on the operation of the
Commission's public facilities by calling 1-(800)-SEC-0330. The Commission
maintains a Web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The address of the Commission's Web site is www.sec.gov.
When we complete this offering, we will be required to file annual,
quarterly and special reports, proxy statements and other information with the
Commission. We intend to furnish our stockholders with annual reports containing
audited financial statements and make available to our stockholders quarterly
reports for the first three quarters of each fiscal year containing unaudited
interim financial information.
56
ZLAND.COM, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
--------
Independent Auditors' Reports............................... F-2, F-3
Consolidated Balance Sheets as of December 31, 1998 and 1999
and December 31, 1999 Pro Forma (unaudited)............... F-4
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999.......................... F-5
Consolidated Statements of Stockholders' Equity (Deficit)
and Comprehensive Loss for the years ended December 31,
1997, 1998 and 1999....................................... F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and
1999...................................................... F-8
Notes to Consolidated Financial Statements.................. F-9
Schedule II -- Valuation and Qualifying Accounts............ S-1
APPINTEC CORP., DBA ACTIONWARE
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report................................ F-28
Balance Sheet as of June 30, 1999........................... F-29
Statement of Operations for the year ended June 30, 1999.... F-30
Statement of Stockholders' Deficit for the year ended June
30, 1999.................................................. F-31
Statement of Cash Flows for the year ended June 30, 1999.... F-32
Notes to Financial Statements............................... F-33
Unaudited Pro Forma Condensed Statement of Operations....... F-39
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
ZLand.com, Inc.:
We have audited the accompanying consolidated balance sheet of ZLand.com,
Inc. and subsidiaries as of December 31, 1999 and the related consolidated
statements of operations, stockholders' equity (deficit) and comprehensive loss
and cash flows for the year then ended. In connection with our audit of the
consolidated financial statements, we have also audited the consolidated
financial statement schedule as of and for the year ended December 31, 1999.
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ZLand.com,
Inc. and subsidiaries as of December 31, 1999 and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG LLP
Orange County, California
February 14, 2000
F-2
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
ZLand.com, Inc.:
In our opinion, the accompanying consolidated balance sheet as of December
31, 1998 and the related consolidated statements of operations, stockholders'
equity (deficit) and comprehensive loss and cash flows for each of the two years
in the period ended December 31, 1998 present fairly, in all material respects,
the financial position, results of operations and cash flows of ZLand.com, Inc.
at December 31, 1998 and for each of the two years in the period ended December
31, 1998, in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule 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. We have not audited the financial statements of
ZLand.com, Inc. for any period subsequent to December 31, 1998.
PRICEWATERHOUSECOOPERS LLP
Costa Mesa, California
April 19, 1999
F-3
ZLAND.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1999
1998 1999 PRO FORMA
------- -------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,594 $ 16,404 $ 16,404
Accounts receivable, net of allowance for doubtful
accounts of $125 and $124 at December 31, 1998 and 1999,
respectively............................................ 295 4,939 4,939
Prepaid expenses and other current assets................. 34 1,368 1,368
Current portion of stockholder note receivable............ 68 -- --
------- -------- --------
Total current assets............................... 1,991 22,711 22,711
Property and equipment, net................................. 239 1,774 1,774
Goodwill and other intangibles, net of accumulated
amortization of $41 at December 31, 1999.................. -- 2,047 2,047
Other assets................................................ 14 787 787
Software development costs, net of accumulated amortization
of $441 and $882 at December 31, 1998 and 1999,
respectively.............................................. 441 -- --
------- -------- --------
$ 2,685 $ 27,319 $ 27,319
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Convertible notes payable, net............................ $ 1,065 $ -- $ --
Note payable to former stockholder........................ 111 28 28
Current installments of notes payable to stockholder...... 63 -- --
Current installments of capitalized lease obligations..... 83 352 352
Accounts payable.......................................... 593 1,124 1,124
Accrued expenses.......................................... 780 3,224 3,224
Deferred revenue.......................................... 599 6,149 6,149
------- -------- --------
Total current liabilities.......................... 3,294 10,877 10,877
Notes payable to stockholder, less current installments..... 30 -- --
Capitalized lease obligations, excluding current
installments.............................................. 89 467 467
------- -------- --------
3,413 11,344 11,344
------- -------- --------
Commitments and contingencies (note 11)
Subsequent events (notes 7(f) and 12)
Stockholders' equity (deficit):
Series A convertible preferred stock, $.01 par value;
2,220,000 shares authorized; 1,605,226 and 1,649,634
shares issued and outstanding at December 31, 1998 and
1999, respectively; 0 shares issued and outstanding pro
forma (unaudited)....................................... 16 16 --
Series B convertible preferred stock, $.01 par value;
7,823,740 shares authorized; 2,171,000 and 6,144,270
shares issued and outstanding at December 31, 1998 and
1999, respectively; 0 shares issued and outstanding pro
forma (unaudited)....................................... 22 61 --
Series C convertible preferred stock, $.01 par value;
3,777,778 shares authorized; 0 and 3,506,666 shares
issued and outstanding at December 31, 1998 and 1999,
respectively; 0 shares issued and outstanding pro forma
(unaudited)............................................. -- 35 --
Undesignated preferred stock, 6,178,482 shares authorized;
0 shares issued and outstanding at December 31, 1998 and
1999 and pro forma (unaudited), respectively............ -- -- --
Common stock, $.01 par value; 100,000,000 shares
authorized; 17,782,230 and 21,542,806 shares issued
(including treasury shares) and outstanding at December
31, 1998 and 1999, respectively; 32,843,376 issued and
outstanding pro forma (unaudited)....................... 178 216 328
Additional paid-in capital................................ 7,609 39,418 39,418
Treasury stock -- common shares at cost; 0 and 143,592
shares at December 31, 1998 and 1999, respectively...... -- (239) (239)
Stock subscriptions receivable............................ -- (1,327) (1,327)
Accumulated other comprehensive loss...................... -- (9) (9)
Accumulated deficit....................................... (8,553) (22,196) (22,196)
------- -------- --------
Total stockholders' equity (deficit)............... (728) 15,975 15,975
------- -------- --------
$ 2,685 $ 27,319 $ 27,319
======= ======== ========
See accompanying notes to consolidated financial statements.
F-4
ZLAND.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1998 1999
------- ------- --------
Revenues:
Franchise................................................. $ -- $ 260 $ 4,669
Product and related services.............................. 221 350 1,793
------- ------- --------
Total revenues.................................... 221 610 6,462
Cost of revenues............................................ 82 560 1,200
------- ------- --------
Gross profit...................................... 139 50 5,262
------- ------- --------
Operating expenses:
Research and development.................................. 890 993 3,146
Sales and marketing....................................... 629 2,156 9,915
General and administrative................................ 283 2,119 4,449
In-process research and development....................... -- -- 1,304
------- ------- --------
Total operating expenses.......................... 1,802 5,268 18,814
------- ------- --------
Operating loss.................................... (1,663) (5,218) (13,552)
Interest expense, net....................................... 222 149 87
------- ------- --------
Net loss before income taxes...................... (1,885) (5,367) (13,639)
Provision for income taxes.................................. -- -- 4
------- ------- --------
Net loss.......................................... (1,885) (5,367) (13,643)
Preferred stock dividend.................................... 49 -- --
------- ------- --------
Net loss applicable to common stockholders........ $(1,934) $(5,367) $(13,643)
======= ======= ========
Basic and diluted net loss per share........................ $ (.23) $ (.33) $ (.73)
======= ======= ========
Shares used to compute basic and diluted net loss per
share..................................................... 8,342 16,072 18,570
======= ======= ========
Pro forma basic and diluted net loss per share
(unaudited)............................................... $ (.46)
========
Shares used to compute pro forma basic and diluted net loss
per share (unaudited)..................................... 29,870
========
See accompanying notes to consolidated financial statements.
F-5
ZLAND.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE LOSS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
SERIES A SERIES B SERIES C
CONVERTIBLE CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK
------------------ ------------------ ------------------ -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------ --------- ------ --------- ------ ---------- ------
Balance at December 31, 1996...... -- $-- -- $-- -- $-- 6,000,000 $ 60
Issuance of Common Stock under
stock purchase agreement......... -- -- -- -- -- -- 3,334,008 34
Issuance of Common Stock in
exchange for services............ -- -- -- -- -- -- 340,000 3
Common Stock options exercised.... -- -- -- -- -- -- 325,992 3
Issuance of Common Stock for
cash............................. -- -- -- -- -- -- 2,000,000 20
Conversion of 10% convertible
promissory notes, plus accrued
interest, to Series A Convertible
Preferred Stock.................. 1,690,980 17 -- -- -- -- -- --
Common Stock issued in exchange
for license agreement............ -- -- -- -- -- -- 200,000 2
Common Stock issued for debt
conversion....................... -- -- -- -- -- -- 895,566 9
Issuance of Common Stock pursuant
to warrants exercise............. -- -- -- -- -- -- 800,876 8
Issuance of Series A Convertible
Preferred Stock pursuant to
warrants exercise................ 197,752 2 -- -- -- -- -- --
Issuance of warrants in
conjunction with convertible
notes............................ -- -- -- -- -- -- -- --
Amortization of deferred
compensation..................... -- -- -- -- -- -- -- --
Dividends......................... -- -- -- -- -- -- -- --
Net loss.......................... -- -- -- -- -- -- -- --
--------- --- --------- --- --------- --- ---------- ----
Balance at December 31, 1997...... 1,888,732 19 -- -- -- -- 13,896,442 139
Common Stock options exercised.... -- -- -- -- -- -- 1,157,460 12
Issuance of Common Stock pursuant
to warrants exercise............. -- -- -- -- -- -- 240,000 2
Issuance of common stock for cash,
net of issuance costs of
$97,100.......................... -- -- -- -- -- -- 2,695,000 27
Issuance of Series B Convertible
Preferred Stock.................. -- -- 2,171,000 22 -- -- -- --
Repurchase of Series A Convertible
Preferred Stock.................. (283,506) (3) -- -- -- -- -- --
Repurchase of Common Stock........ -- -- -- -- -- -- (206,672) (2)
Issuance of Common Stock warrants
in conjunction with convertible
notes............................ -- -- -- -- -- -- -- --
Issuance of Common Stock warrants
for services..................... -- -- -- -- -- -- -- --
Issuance of Common Stock warrants
in connection with equity
financing........................ -- -- -- -- -- -- -- --
Net loss.......................... -- -- -- -- -- -- -- --
--------- --- --------- --- --------- --- ---------- ----
Balance at December 31, 1998...... 1,605,226 16 2,171,000 22 -- -- 17,782,230 178
Common Stock options exercised.... -- -- -- -- -- -- 298,846 3
Issuance of Common Stock for cash
and notes........................ -- -- -- -- -- -- 459,134 4
Issuance of Common Stock for
services......................... -- -- -- -- -- -- 285,036 3
ACCUMULATED
ADDITIONAL TREASURY STOCK OTHER
PAID-IN ------------------- SUBSCRIPTIONS COMPREHENSIVE ACCUMULATED
CAPITAL SHARES AMOUNT RECEIVABLE LOSS DEFICIT
----------- --------- ------- ------------- ------------- -----------
Balance at December 31, 1996...... $ 470 -- $ -- $ -- $-- $ (1,252)
Issuance of Common Stock under
stock purchase agreement......... 132 -- -- -- -- --
Issuance of Common Stock in
exchange for services............ 14 -- -- -- -- --
Common Stock options exercised.... 13 -- -- -- -- --
Issuance of Common Stock for
cash............................. 980 -- -- -- -- --
Conversion of 10% convertible
promissory notes, plus accrued
interest, to Series A Convertible
Preferred Stock.................. 803 -- -- -- -- --
Common Stock issued in exchange
for license agreement............ 98 -- -- -- -- --
Common Stock issued for debt
conversion....................... 439 -- -- -- -- --
Issuance of Common Stock pursuant
to warrants exercise............. 53 -- -- -- -- --
Issuance of Series A Convertible
Preferred Stock pursuant to
warrants exercise................ 94 -- -- -- -- --
Issuance of warrants in
conjunction with convertible
notes............................ 137 -- -- -- -- --
Amortization of deferred
compensation..................... 50 -- -- -- -- --
Dividends......................... 49 -- -- -- -- (49)
Net loss.......................... -- -- -- -- -- (1,885)
------- --------- ------- ------- --- --------
Balance at December 31, 1997...... 3,332 -- -- -- -- (3,186)
Common Stock options exercised.... 567 -- -- -- -- --
Issuance of Common Stock pursuant
to warrants exercise............. 118 -- -- -- -- --
Issuance of common stock for cash,
net of issuance costs of
$97,100.......................... 1,234 -- -- -- -- --
Issuance of Series B Convertible
Preferred Stock.................. 2,149 -- -- -- -- --
Repurchase of Series A Convertible
Preferred Stock.................. (125) -- -- -- -- --
Repurchase of Common Stock........ (8) -- -- -- -- --
Issuance of Common Stock warrants
in conjunction with convertible
notes............................ 148 -- -- -- -- --
Issuance of Common Stock warrants
for services..................... 97 -- -- -- -- --
Issuance of Common Stock warrants
in connection with equity
financing........................ 97 -- -- -- -- --
Net loss.......................... -- -- -- -- -- (5,367)
------- --------- ------- ------- --- --------
Balance at December 31, 1998...... 7,609 -- -- -- -- (8,553)
Common Stock options exercised.... 714 -- -- (230) -- --
Issuance of Common Stock for cash
and notes........................ 2,062 -- -- (338) -- --
Issuance of Common Stock for
services......................... 1,160 -- -- -- -- --
TOTAL
STOCKHOLDERS' COMPREHENSIVE
EQUITY (DEFICIT) LOSS
---------------- -------------
Balance at December 31, 1996...... $ (722)
Issuance of Common Stock under
stock purchase agreement......... 166
Issuance of Common Stock in
exchange for services............ 17
Common Stock options exercised.... 16
Issuance of Common Stock for
cash............................. 1,000
Conversion of 10% convertible
promissory notes, plus accrued
interest, to Series A Convertible
Preferred Stock.................. 820
Common Stock issued in exchange
for license agreement............ 100
Common Stock issued for debt
conversion....................... 448
Issuance of Common Stock pursuant
to warrants exercise............. 61
Issuance of Series A Convertible
Preferred Stock pursuant to
warrants exercise................ 96
Issuance of warrants in
conjunction with convertible
notes............................ 137
Amortization of deferred
compensation..................... 50
Dividends......................... --
Net loss.......................... (1,885) $ (1,885)
-------- --------
Balance at December 31, 1997...... 304 $ (1,885)
========
Common Stock options exercised.... 579
Issuance of Common Stock pursuant
to warrants exercise............. 120
Issuance of common stock for cash,
net of issuance costs of
$97,100.......................... 1,261
Issuance of Series B Convertible
Preferred Stock.................. 2,171
Repurchase of Series A Convertible
Preferred Stock.................. (128)
Repurchase of Common Stock........ (10)
Issuance of Common Stock warrants
in conjunction with convertible
notes............................ 148
Issuance of Common Stock warrants
for services..................... 97
Issuance of Common Stock warrants
in connection with equity
financing........................ 97
Net loss.......................... (5,367) $ (5,367)
-------- --------
Balance at December 31, 1998...... (728) $ (5,367)
========
Common Stock options exercised.... 487
Issuance of Common Stock for cash
and notes........................ 1,728
Issuance of Common Stock for
services......................... 1,163
F-6
SERIES A SERIES B SERIES C
CONVERTIBLE CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK
------------------ ------------------ ------------------ -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------ --------- ------ --------- ------ ---------- ------
Issuance of Common Stock pursuant
to warrant exercise.............. -- -- -- -- -- -- 1,873,882 19
Conversion of Series A Convertible
Preferred Stock.................. (1,012) -- -- -- -- -- 1,012 --
Conversion of Series B Convertible
Preferred Stock.................. -- -- (11,554) -- -- -- 11,554 --
Repurchase of Series A Convertible
Preferred Stock.................. (181,672) (2) -- -- -- -- -- --
Repurchase of Common Stock........ -- -- -- -- -- -- -- --
Issuance of Series A Convertible
Preferred Stock pursuant to
warrant exercise................. 227,092 2 -- -- -- -- -- --
Issuance of Series B Convertible
Preferred Stock for cash......... -- -- 3,514,178 35 -- -- -- --
Conversion of convertible notes
payable to Series B Convertible
Preferred Stock.................. -- -- 470,646 4 -- -- -- --
Issuance of Series C Convertible
Preferred Stock for cash......... -- -- -- -- 3,777,778 38 -- --
Issuance of Common Stock for
purchase of Emerging Markets
Technologies..................... -- -- -- -- -- -- 85,000 1
Issuance of Common Stock for
purchase of ActionWare........... -- -- -- -- -- -- 475,000 5
Conversion of Series C Convertible
Preferred Stock.................. -- -- -- -- (271,112) (3) 271,112 3
Grant of Common Stock options for
services......................... -- -- -- -- -- -- -- --
Grant of Common Stock warrants for
services......................... -- -- -- -- -- -- -- --
Foreign currency translation
adjustment....................... -- -- -- -- -- -- -- --
Net loss.......................... -- -- -- -- -- -- -- --
--------- --- --------- --- --------- --- ---------- ----
Balance at December 31, 1999...... 1,649,634 $16 6,144,270 $61 3,506,666 $35 21,542,806 $216
========= === ========= === ========= === ========== ====
ACCUMULATED
ADDITIONAL TREASURY STOCK OTHER
PAID-IN ------------------- SUBSCRIPTIONS COMPREHENSIVE ACCUMULATED
CAPITAL SHARES AMOUNT RECEIVABLE LOSS DEFICIT
----------- --------- ------- ------------- ------------- -----------
Issuance of Common Stock pursuant
to warrant exercise.............. 5,031 -- -- -- -- --
Conversion of Series A Convertible
Preferred Stock.................. -- -- -- -- -- --
Conversion of Series B Convertible
Preferred Stock.................. -- -- -- -- -- --
Repurchase of Series A Convertible
Preferred Stock.................. (86) -- -- -- -- --
Repurchase of Common Stock........ -- (143,592) (239) -- -- --
Issuance of Series A Convertible
Preferred Stock pursuant to
warrant exercise................. 108 -- -- -- -- --
Issuance of Series B Convertible
Preferred Stock for cash......... 3,479 -- -- -- -- --
Conversion of convertible notes
payable to Series B Convertible
Preferred Stock.................. 466 -- -- -- -- --
Issuance of Series C Convertible
Preferred Stock for cash......... 16,218 -- -- (759) -- --
Issuance of Common Stock for
purchase of Emerging Markets
Technologies..................... 382 -- -- -- -- --
Issuance of Common Stock for
purchase of ActionWare........... 2,133 -- -- -- -- --
Conversion of Series C Convertible
Preferred Stock.................. -- -- -- -- -- --
Grant of Common Stock options for
services......................... 90 -- -- -- -- --
Grant of Common Stock warrants for
services......................... 52 -- -- -- -- --
Foreign currency translation
adjustment....................... -- -- -- -- (9) --
Net loss.......................... -- -- -- -- -- (13,643)
------- --------- ------- ------- --- --------
Balance at December 31, 1999...... $39,418 (143,592) $ (239) $(1,327) $(9) $(22,196)
======= ========= ======= ======= === ========
TOTAL
STOCKHOLDERS' COMPREHENSIVE
EQUITY (DEFICIT) LOSS
---------------- -------------
Issuance of Common Stock pursuant
to warrant exercise.............. 5,050
Conversion of Series A Convertible
Preferred Stock.................. --
Conversion of Series B Convertible
Preferred Stock.................. --
Repurchase of Series A Convertible
Preferred Stock.................. (88)
Repurchase of Common Stock........ (239)
Issuance of Series A Convertible
Preferred Stock pursuant to
warrant exercise................. 110
Issuance of Series B Convertible
Preferred Stock for cash......... 3,514
Conversion of convertible notes
payable to Series B Convertible
Preferred Stock.................. 470
Issuance of Series C Convertible
Preferred Stock for cash......... 15,497
Issuance of Common Stock for
purchase of Emerging Markets
Technologies..................... 383
Issuance of Common Stock for
purchase of ActionWare........... 2,138
Conversion of Series C Convertible
Preferred Stock.................. --
Grant of Common Stock options for
services......................... 90
Grant of Common Stock warrants for
services......................... 52
Foreign currency translation
adjustment....................... (9) (9)
Net loss.......................... (13,643) (13,643)
-------- --------
Balance at December 31, 1999...... $ 15,975 $(13,652)
======== ========
See accompanying notes to consolidated financial statements.
F-7
ZLAND.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
1997 1998 1999
------- ------- --------
Cash flows from operating activities:
Net loss.................................................. $(1,885) $(5,367) $(13,643)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 307 655 737
Amortization of deferred compensation................... 50 -- --
Amortization of discount on convertible notes payable... -- 47 --
Provision for doubtful accounts......................... 10 121 286
Equity instruments issued for services.................. -- 97 1,305
Impairment of long-lived assets......................... -- 128 --
Forgiveness of stockholder note receivable.............. -- -- 68
In-process research and development..................... -- -- 1,304
Changes in assets and liabilities, excluding effects of
acquisitions:
Accounts receivable................................... (66) (334) (4,709)
Prepaid expenses and other current assets............. (31) 29 (1,321)
Other assets.......................................... -- -- (319)
Accounts payable...................................... 352 70 425
Accrued expenses...................................... 613 336 2,017
Deferred revenue...................................... (36) 493 5,256
------- ------- --------
Net cash used in operating activities.............. (686) (3,725) (8,594)
------- ------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... (67) (87) (1,605)
Acquisitions of businesses, net of cash acquired.......... (24) -- (377)
Software development costs................................ (882) -- --
Cash paid for investments held under cost method.......... -- -- (450)
------- ------- --------
Net cash used in investing activities.............. (973) (87) (2,432)
------- ------- --------
Cash flows from financing activities:
Principal payments on capitalized lease obligations....... (47) (88) (171)
Proceeds from leasing lines of credit..................... -- 144 719
Collection of receivables from affiliates................. 47 -- --
Proceeds from note payable................................ 112 795 --
Proceeds from issuance of convertible debt and warrants... 361 1,165 --
Principal payments on notes payable....................... -- (713) (771)
Proceeds from issuance of Common Stock.................... 1,061 1,347 1,728
Proceeds from issuance of Preferred Stock and warrants.... 96 2,171 19,121
Exercise of stock options and warrants.................... -- 699 5,537
Repurchase of Common Stock................................ -- (128) (239)
Repurchase of Series A Convertible Preferred Stock........ -- -- (88)
------- ------- --------
Net cash provided by financing activities.......... 1,630 5,392 25,836
------- ------- --------
Net increase (decrease) in cash and cash
equivalents...................................... (29) 1,580 14,810
Cash and cash equivalents, beginning of year................ 43 14 1,594
------- ------- --------
Cash and cash equivalents, end of year...................... $ 14 $ 1,594 $ 16,404
======= ======= ========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest.................... $ 21 $ 17 $ 67
Cash paid during the year for income taxes................ 2 1 3
======= ======= ========
Supplemental disclosure of noncash investing and financing
activities:
Capitalized lease obligations incurred for purchase of
property and equipment.................................. $ 57 $ 144 --
Common Stock issued for acquisition of businesses......... -- -- 2,521
Conversion of convertible notes payable and related
accrued interest into Series B Convertible Preferred
Stock................................................... -- -- 470
See accompanying notes to consolidated financial statements.
F-8
ZLAND.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) THE COMPANY
ZLand.com, Inc. and subsidiaries (ZLand or the Company), founded in
September 1995, is an applications service provider, or ASP, offering
proprietary Web-based software applications that enable small and mid-sized
businesses to cost-effectively take their operations online and automate their
business processes. The Company provides solutions to its customers on a rental
basis through a franchise network of local e-business professionals.
The Company originally operated as Z Land LLC, a California limited
liability company (Z Land LLC) and Zavada LLC, a Nevada limited liability
company (Zavada), which were formed in September 1995. Z Land LLC and Zavada
were owned by the same members in the same proportions. In December 1996, Z Land
LLC and Zavada were merged into Z Land Acquisition, Inc., a California
corporation formed specifically for this purpose by the same members. Z Land
Acquisition, Inc. subsequently changed its name to ZLand, Inc. following the
dissolution of Z Land LLC and Zavada. The transaction was treated as a
combination of interests under common control. During 1999, the Company
reincorporated in the state of Delaware, and the Company's name was changed to
ZLand.com, Inc.
(B) PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the consolidated accounts of
the Company and its wholly owned subsidiaries, including subsidiaries in
Germany, Australia, Netherlands, Ireland and the Cayman Islands, as well as an
80%-owned subsidiary, Commercial Interiors Network, Inc. All significant
intercompany transactions and balances have been eliminated in consolidation.
Losses of majority-owned subsidiaries are not allocated to minority interests if
such allocation results in the minority interest becoming negative. Through
December 31, 1997, the Company's 80%-owned subsidiary incurred cumulative
operating losses, and no allocation of losses has been made in excess of the
original capital contribution of the minority interest. During 1998, Commercial
Interiors Network, Inc. ceased operations.
(C) PRO FORMA PRESENTATION
In accordance with the terms of the preferred stock, each of the shares of
preferred stock are converted into common stock upon the closing of an initial
public stock offering, as defined (see note 7). The accompanying unaudited pro
forma consolidated balance sheet reflects the conversion of all outstanding
Series A, Series B and Series C Convertible Preferred Stock into Common Stock.
Unaudited pro forma basic and diluted net loss per share for 1999 have been
computed assuming the conversion of all outstanding shares of convertible
preferred stock into common stock as if the shares had been converted at the
beginning of 1999.
(D) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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
respective reporting periods. Actual results could differ from those estimates.
(E) REVENUE RECOGNITION
The Company recognizes franchise revenues in three stages based upon the
value of the services provided to the franchisees during each stage. The Company
recognizes a portion of the franchise fee upon completion of initial franchisee
training, which represents the point at which a franchisee commences operations
and the franchise fee becomes nonrefundable. A portion of the franchise fee,
representing the
F-9
ZLAND.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Company's estimate of the value of the additional training and assistance
required to be provided to the franchisee in the initial year of operations, is
recognized ratably over the first year of the franchise agreement. A portion of
the franchise fee, representing the Company's estimate of the value provided by
the Company to the franchisee over the term of the franchise agreement, is
recognized ratably over the seven-year term of the franchise agreement.
Generally, the entire franchise fee for the initial franchise period is due upon
signing of the franchise agreement. In those instances in which payment terms
are granted, the unpaid fee is recognized in accordance with the above policy
only when management believes collection is probable. The Company's franchise
revenue recognition policy is in accordance with Statement of Financial
Accounting Standards (SFAS) No. 45, "Accounting for Franchise Fee Revenue," and
the Securities and Exchange Commission's Staff Accounting Bulletin No. 101.
With regard to product and related services revenues, the Company
recognizes all upfront design and development as revenue once design and
development is complete and the product is available for customer use, and
recognizes rental revenues ratably over the one year service period, following
the guidance of American Institute of Certified Public Accountants Statements of
Position 97-2 and 98-9, "Software Revenue Recognition." Revenue related to
operating assistance agreements is recognized as the services are performed.
(F) CASH AND CASH EQUIVALENTS
The Company considers all money market funds and other highly liquid
investments purchased with original maturities of three months or less to be
cash equivalents.
(G) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company applies the provisions of SFAS No. 107, Disclosures about Fair
Value of Financial Instruments. SFAS No. 107 requires all entities to disclose
the fair value of financial instruments, both assets and liabilities recognized
and not recognized on the balance sheet, for which it is practicable to estimate
fair value. SFAS No. 107 defines fair value of a financial instrument as the
amount at which the instrument could be exchanged in a current transaction
between willing parties. As of December 31, 1998 and 1999, management believes
that the fair value of all financial instruments approximated carrying value.
(H) FOREIGN CURRENCY TRANSLATION
The Company's non-U.S. subsidiaries use local currencies as their
functional currencies. Assets and liabilities of non-U.S. subsidiaries that
operate in a local currency environment are translated to U.S. dollars at
year-end rates. Income and expense items are translated at average rates of
exchange prevailing during the year. Translation adjustments are recorded in
accumulated other comprehensive loss. At December 31, 1999, $9 was included in
accumulated other comprehensive loss related to foreign currency translation
adjustments. The Company incurred no foreign currency transaction gain or loss
during the years presented.
(I) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Assets held under capitalized lease obligations are recorded
at the present value of the minimum lease payments at lease inception.
Depreciation and amortization is computed using the straight-line method over
the estimated useful lives of the assets, which is generally three years.
Leasehold improvements are amortized using the straight-line method over the
lesser of the useful life of the improvement or the term of the related lease.
F-10
ZLAND.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(J) CAPITALIZED SOFTWARE COSTS
The Company capitalizes costs incurred for the development of computer
software when projects reach technological feasibility, and continues to
capitalize such costs until the products are available for release to the
general public. Capitalized costs include direct labor and related expenses for
software produced by the Company and the costs of software purchased from third
parties. Software development costs incurred prior to technological feasibility
are expensed as incurred. The Company amortizes capitalized product development
costs based upon the greater of the amount using the rates that current gross
revenues for a product bears to the total of current and anticipated future
gross revenues for that product or the straight-line method over the remaining
estimated life of the product commencing the month after the date of product
release. The Company capitalized $882 of total software development costs in
1997. Technological feasibility for subsequent products developed was determined
to occur shortly prior to release and any software development costs to be
capitalized were considered insignificant. Therefore, no amounts were
capitalized in 1998 or 1999. Amortization expense for the years ended December
31, 1997, 1998 and 1999 totaled $0, $441 and $441, respectively.
(K) LONG-LIVED ASSETS
The Company applies the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
Under the provisions of SFAS No. 121, the recoverability of long-lived assets is
assessed by determining whether the carrying value of the asset can be recovered
through projected undiscounted future operating cash flows over its remaining
life. The amount of impairment, if any, is measured based upon projected
discounted future operating cash flows. Assets to be disposed of are reported at
the lower of the carrying amount or the fair value less costs to sell. During
1998, the Company wrote-down approximately $128 of impaired long-lived assets.
The write-down included the remaining goodwill related to an acquisition and
$100 related to another investment, which management deemed was no longer
recoverable.
(L) DEFERRED REVENUE
Deferred revenue relates to the portion of cash and notes received for
initial franchise fees relating to the Company's ongoing requirements under its
franchise agreements and proceeds received for product rentals recognized over
the term of the agreements.
(M) STOCK-BASED COMPENSATION
As described in note 7, the Company has elected to follow the accounting
provisions of Accounting Principles Board Opinion No. (APB) 25, Accounting for
Stock Issued to Employees, for stock-based compensation and to furnish the pro
forma disclosures required by SFAS No. 123, Accounting for Stock-Based
Compensation. Under APB 25, when the exercise price of the Company's employee
stock options equals the fair market value of the underlying stock on the date
of grant, no compensation expense is recorded.
Equity instruments issued to nonemployees are measured at the fair value of
the equity instruments using the stock price and other measurement assumptions
as of the earlier of the date at which a performance commitment to earn the
equity instruments is reached or the date at which the performance is complete.
F-11
ZLAND.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(N) INCOME TAXES
The Company accounts for income taxes pursuant to SFAS No. 109, Accounting
for Income Taxes. SFAS No. 109 uses the asset and liability method of accounting
for income taxes, which recognizes deferred tax assets and liabilities for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under SFAS
No. 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
(O) NET LOSS PER SHARE
The Company computes net loss per share in accordance with SFAS No. 128,
Earnings per Share. Under the provisions of SFAS No. 128, basic and diluted net
loss per share is computed by dividing the net loss available to common
stockholders for the period by the weighted average number of shares of common
stock outstanding during the period.
The calculation of diluted net loss per share excludes potential common
shares if the effect is antidilutive. Potential common shares are composed of
incremental shares of common stock issuable upon the exercise of stock options
and warrants and upon conversion of Series A, B and C convertible preferred
stock.
The following table sets forth potential common shares that are excluded
from the diluted net loss per share calculation for the years ended December 31,
1997, 1998 and 1999 because they are antidilutive for the periods indicated:
1997 1998 1999
--------- ---------- ----------
Series A convertible preferred stock............ 1,888,732 1,605,226 1,649,634
Series B convertible preferred stock............ -- 2,171,000 6,144,270
Series C convertible preferred stock............ -- -- 3,506,666
Warrants........................................ 617,630 3,973,714 5,757,798
Stock options................................... 297,000 3,257,100 11,139,212
--------- ---------- ----------
2,803,362 11,007,040 28,197,580
========= ========== ==========
(P) OTHER COMPREHENSIVE LOSS
The Company applies SFAS No. 130, Reporting Comprehensive Income. SFAS No.
130 establishes standards for reporting of comprehensive income (loss) and its
components. Other than the net loss and the $9 other comprehensive loss
associated with foreign currency translation adjustments in 1999, the Company
did not have any other components of comprehensive loss during 1999 or prior
years.
(Q) ADVERTISING COSTS
The cost of advertising is expensed as incurred. For the years ended
December 31, 1997, 1998 and 1999, the Company incurred advertising expense of
$101, $267 and $2,397, respectively.
(R) INTERNALLY DEVELOPED SOFTWARE
During 1999, the Company adopted the provisions of Statement of Position
(SOP) No. 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use, which provides
F-12
ZLAND.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
guidance concerning recognition and measurement of costs associated with
developing or acquiring software for internal use. The adoption of this SOP did
not have a material effect on the Company's consolidated financial position or
results of operations.
(S) SEGMENT REPORTING
The Company applies SFAS No. 131, Disclosure about Segments of a Business
Enterprise and Related Information, which requires entities to report financial
and descriptive information about its reportable operating segments. Operating
segments are defined as components of an enterprise for which separate financial
information is available that is evaluated regularly by the chief operating
decision maker(s) in deciding how to allocate resources and in assessing
performance. SFAS No. 131 also requires disclosures about products and services,
geographic areas and major customers. The Company operates in one business
segment -- the development and marketing of Web-based software applications that
enable small and mid-sized businesses to cost-effectively take their operations
online and automate their business processes.
(T) INVESTMENTS
The Company records investments in non-marketable equity securities at cost
if it does not exhibit significant influence over the investee, and if its
ownership percentage is less than 20%. These investments are reviewed
periodically for impairment, if any, and the carrying value is written down if
the Company determines that the investment is permanently impaired.
(U) CONCENTRATION OF CREDIT RISK
During the years ended December 31, 1997 and 1998, no customers or
franchisees accounted for more than 10% of total revenues or accounts
receivable. As of and for the year ended December 31, 1999, three franchisees
accounted for 17%, 15% and 9% and 24%, 0% and 58% of total revenues and accounts
receivable, respectively.
The Company performs ongoing credit evaluations of its customers' and
franchisees financial condition and limits the amount of credit extended when
deemed necessary, but generally does not require collateral. Management believes
that any risk of loss is significantly reduced due to the number of its
customers and varied geographic markets. The Company maintains a provision for
potential credit losses.
(V) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 was effective for all fiscal quarters or fiscal years beginning after June
15, 1999. In August 1999, the FASB issued SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133. This statement defers the effective date of SFAS No.
133 to all fiscal quarters or fiscal years which begin after June 15, 2000. SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments, including those embedded in other contracts, and for hedging
activities. Application of this standard is not expected to have a material
impact on the Company's consolidated financial position or results of
operations.
(W) RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 and 1998 consolidated
financial statements to conform to the 1999 presentation.
F-13
ZLAND.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(2) ACQUISITIONS
On November 24, 1999, the Company acquired all of the outstanding stock of
Appintec Corp., dba ActionWare, a California corporation (ActionWare) for
475,000 shares of the Company's Common Stock valued at $4.50 per share and $320
in cash. The aggregate purchase price was $2,458. ActionWare is based in
Emeryville, California, and develops and markets customer relationship
management software and provides related maintenance and programming services.
The acquisition has been accounted for using the purchase method of accounting,
and accordingly, the results of operations of ActionWare have been included in
the Company's consolidated financial statements since November 24, 1999.
ActionWare had, at the time of acquisition, one major in-process technology
project which was approximately 20% complete. The major project acquired relates
to the development of Java based software programs to replace ActionWare's
current AS 400 based software programs. The Company's purpose for the
acquisition was to obtain completed technology as well as to complete the
development effort on this in-process project, as the Company believed the
project in process had economic value though it had not yet reached
technological feasibility and had no alternative future uses. The Company is
continuing development efforts and expects to have available for sale the first
new products to be developed by ActionWare in November 2000. The Company
believes the costs to complete these development efforts will be approximately
$5,000 (unaudited). The primary risks and uncertainties associated with timely
completion of the project lie in the Company's ability to attract and retain
qualified software engineers in the current competitive environment. Should the
project not be completed on a timely basis, the Company's market advantages
would be reduced (e.g., lower revenues and/or margins), which could impact the
marketability of the Company's planned products. Should the project prove to be
unsuccessful, the impact on the fiscal 2000 results of operations will primarily
consist of the engineering and start up efforts incurred to complete the project
for which there would be no future value, plus the costs of any new efforts on
replacement projects and/or costs to unwind the infrastructure if a decision was
made not to pursue new efforts.
On November 24, 1999, the Company also acquired all of the outstanding
stock of Emerging Market Technologies, Inc., a Delaware corporation (EMT), for
85,000 shares of the Company's common stock valued at $4.50 per share and $180
in cash. The aggregate purchase price was $563. EMT is based near Atlanta,
Georgia, and is engaged in the marketing and sale of software and providing
consulting services which address the needs of a business interacting with its
customers. The acquisition has been accounted for using the purchase method of
accounting, and accordingly, the results of operations of EMT have been included
in the Company's consolidated financial statements since November 24, 1999.
F-14
ZLAND.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The purchase price of the acquisitions was allocated to the assets acquired
and liabilities assumed based on their estimated fair values at the date of
acquisition, as determined by a third-party appraisal. The purchased in-process
research and development was valued using the income approach, which includes an
analysis of the markets, cash flows and risks associated with achieving such
cash flows. This intangible asset, which had no tax benefit, was charged to
operations during the fourth quarter of 1999. The excess of the purchase price
over the fair value of the net identifiable tangible and intangible assets,
totaling approximately $308 and $23 for ActionWare and EMT, respectively, was
allocated to goodwill and is being amortized on a straight-line basis over five
years. Approximately $2,643 and $418 of the purchase price for ActionWare and
EMT, respectively, was allocated to identifiable intangible assets which, except
for in-process research and development, are being amortized on a straight-line
basis over periods ranging from three to five years. The total purchase price of
the acquisitions was allocated as follows:
Following are the summarized unaudited pro forma combined results of
operations for the years ended December 31, 1998 and 1999, assuming the
acquisitions had taken place at the beginning of each of those fiscal years. The
unaudited pro forma results are not necessarily indicative of future operations
or operations that would have been reported had the acquisitions been completed
when assumed:
YEAR ENDED DECEMBER 31,
-----------------------
1998 1999
-------- ---------
(UNAUDITED)
Net revenues................................................ $ 5,045 $ 9,413
======= ========
Net loss.................................................... $(5,483) $(14,201)
======= ========
Net loss per share.......................................... $ (.34) $ (.76)
======= ========
F-15
ZLAND.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(3) PROPERTY AND EQUIPMENT
Components of property and equipment are as follows:
YEAR ENDED DECEMBER
31,
-------------------
1998 1999
------ -------
Computer equipment.......................................... $ 457 $1,231
Office equipment and fixtures............................... 236 912
Leasehold improvements...................................... -- 299
----- ------
693 2,442
Less accumulated depreciation and amortization.............. (454) (668)
----- ------
$ 239 $1,774
===== ======
During 1997, the Company acquired office furniture and fixtures in exchange
for services provided during 1996. The fair market value of the furniture
acquired totaled $208 which is included in property and equipment, along with
related accumulated depreciation.
Assets acquired under capitalized lease obligations are included in
property and equipment and totaled $356 and $1,204, with related accumulated
amortization of $203 and $368 at December 31, 1998 and 1999, respectively.
(4) INVESTMENT
At December 31, 1999, other assets includes an investment in the Series A
Preferred Stock of Web Connect Company, Inc. (Web Connect), which is recorded at
its historical cost of $450, using the cost basis method of accounting as the
Company's ownership interest is less than 5% in the entity. Although the market
value of the investment is not readily determinable, management believes the
fair value of the investment does not materially differ from its carrying
amount.
During 1999, the Company entered into an agreement to provide custom
development services and ongoing support to Web Connect for $1,300, of which
$683 was performed and recognized in 1999 in product and related services
revenues.
(5) NOTES PAYABLE TO STOCKHOLDER
In November 1997, the Company entered into a $93 note payable for
consulting services with a shareholder. This note is non-interest bearing and is
due in equal monthly installments of $3 over three years beginning December
1997. The outstanding balance at December 31, 1998 was $93. The note was paid in
1999.
In September 1998, the Company repurchased 283,506 shares of Series A
Preferred stock from a former shareholder and issued a note for $125 at an
interest rate of 10% per annum. The note is payable with an initial payment of
$5 followed by monthly payments of $10, $15, and continuing payments of $20,
until paid in full. At December 31, 1998, the Company had recorded accrued
interest in the amount of $2 relating to this note. The outstanding balance at
December 31, 1998 and 1999 was $111 and $28, respectively.
(6) CONVERTIBLE NOTES PAYABLE
At various times throughout 1998, the Company issued convertible notes and
common stock warrants to various creditors and shareholders. The notes have a
stated interest rate of 10% per annum. The notes
F-16
ZLAND.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
are unsecured and mature at the earlier of an equity financing of at least
$5,000, or on June 30, 1999 and June 30, 2000. The notes can be converted at the
election of the note holders to preferred Series B shares at $1.00 per share. At
December 31, 1998, the outstanding balance was $1,065. The notes were retired in
1999 (see note 7).
The estimated fair value of the warrants of $148 was determined using an
option pricing model. As a result, the convertible notes payable of $1,165 were
recorded net of a discount of $148, which was accreted over approximately a one
year period. During the years ended December 31, 1998 and 1999, the accretion
was approximately $48 and $100, respectively. At December 31, 1998, the
unaccreted discount was $100. The warrants entitle the holders to purchase up to
582,600 shares of common stock at $1.00 per share on or before June 30, 2003.
The Company had accrued interest related to these notes of $40 at December
31, 1998. The entire principal amount was classified as current at December 31,
1998. The entire balance of these notes was either redeemed or converted into
Series B Convertible Preferred Stock in 1999 (see note 7).
(7) STOCKHOLDERS' EQUITY (DEFICIT)
(A) STOCK SPLIT AND REINCORPORATION
In December 1999, the Company completed a two-for-one stock split, effected
in the form of a stock dividend of one share of the Company's stock for each
share of stock outstanding to stockholders of record. All share, per share and
related data presented in the consolidated financial statements and footnotes
has been retroactively adjusted to reflect this stock split.
Also in December 1999, the Company amended its certificate of incorporation
and increased its total authorized shares to 120,000,000, of which 100,000,000
shares are Common Stock, and 20,000,000 shares are Preferred Stock. Of the
20,000,000 shares designated as Preferred Stock, 2,220,000 shares are designated
as Series A Preferred Stock, 7,823,740 shares are designated as Series B
Preferred Stock, 3,777,778 shares are designated as Series C Preferred Stock and
6,178,482 shares are undesignated. The Common Stock, and the Series A, B and C
Preferred Stock each were changed to have a $.01 par value. This change in par
value has been retroactively adjusted throughout the consolidated financial
statements.
(B) CONVERTIBLE PREFERRED STOCK
During the period from July 1996 to January 1997, the Company issued $465
of 10% Convertible Promissory Notes ("10% Notes"). In September 1997, the 10%
Notes, with accrued interest thereon, were converted into 1,690,980 shares of
Series A Convertible Preferred Stock at $.485 per share. The holders of the 10%
Notes were granted warrants to purchase 526,082 shares of Series A Convertible
Preferred Stock at an exercise price of $.485 per share. The value of the
warrants at the time of issuance of $137 using the Black-Scholes pricing model
was amortized as interest expense over the period the 10% Notes were
outstanding. The warrants are exercisable at any time prior to June 2001. In
December 1997, holders of these warrants exercised their rights to purchase
197,752 shares of Series A Convertible Preferred Stock at an exercise price of
$.485 per share for aggregate proceeds of approximately $96.
In December 1997, the Company offered to the holders of its warrants, in
consideration for exercising their warrants to purchase Series A Convertible
Preferred or Common Stock, as applicable, prior to January 15, 1998, additional
shares of Common Stock at the rate of 50% of the number of shares exercised. In
consideration for exercising their warrants, these Series A Convertible
Preferred Stock warrant holders received 98,876 additional shares of Common
Stock in accordance with the Company's offer. The Company recognized a preferred
stock dividend and additional paid-in capital of approximately
F-17
ZLAND.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
$49 to reflect the inducement. The Company has reserved 328,330 shares of Series
A Convertible Preferred Stock for the exercise of the remaining warrants.
During the period from March 1997 to July 1997, the Company issued $306 of
10% Convertible Promissory Notes (the "Notes"). In September 1997, the Notes,
with accrued interest thereon, were mandatorily converted into 638,816 shares of
Series A Convertible Preferred Stock at $.485 per share. The holders of the
Notes were granted warrants to purchase 612,000 shares of Common Stock at an
exercise price of $.05 per share. These warrants were required to be exercised
upon the mandatory conversion of the promissory note. In September 1997, these
warrants were exercised for aggregate proceeds to the Company of $31. The value
of the warrants at issuance was not material.
In December 1998, the Company issued 2,171,000 shares of Series B
Convertible Preferred Stock at $1.00 per share totaling $2,171. With each share
purchased, a warrant was issued to purchase one share of Common Stock at the
price of the shares when the Company completes an initial public stock offering.
The value of the warrants at issuance was not material.
During the second quarter of 1999, the Company repurchased 181,672 shares
of Series A Convertible Preferred Stock for $88.
In February 1999, the Company completed the issuance of a second round of
3,514,178 shares of Series B Convertible Preferred Stock at $1.00 per share for
$3,514. This additional round of Series B Convertible Preferred Stock carries
the same rights and privileges as the first round described above. With each
share purchased, a warrant was issued to purchase one share of common stock at
the price of the shares when the Company completes an initial public stock
offering. The value of the warrants at issuance was not material.
During 1999, warrants to purchase 1,873,882 shares of common stock with
exercise prices ranging from $.50 to $4.50, were exercised for $5,050. Also
during 1999, warrants to purchase 227,092 shares of Series A Convertible
Preferred Stock, with an exercise price of $.50, were exercised for $110.
In March 1999, the Company was required as a result of the issuance of the
second round of Series B Convertible Preferred Stock, as described above, to
retire the outstanding convertible notes as described in note 6. The notes were
retired by repaying $719 to nonconverting note holders and issuing 446,000
shares of Series B Convertible Preferred Stock valued at $446 to converting note
holders. In addition, $26 was paid in accrued interest and 24,646 shares of
Series B Convertible Preferred Stock were issued for $25 of accrued interest
relating to the converted notes (see note 6).
In December 1999, the Company issued 3,777,778 shares of Series C
Convertible Preferred Stock at $4.50 per share totaling $16,218, net of
placement agent discount and commissions. Of this issuance 271,112 shares
immediately converted into shares of common stock. As of December 31, 1999, the
Company had not received $759 of the net proceeds and has recorded subscriptions
receivable of this amount.
CONVERSION RIGHTS
Each share of Series A, Series B and Series C Convertible Preferred Stock
outstanding is convertible at the option of the holder into one share of common
stock, subject to certain adjustments, and automatically converts immediately
prior to completion of an underwritten public offering of common stock with
gross proceeds of at least $5,000 and, for Series A and Series B, an offering
price of no less than $1.50 per share. During 1999, 1,012 shares and 11,554
shares of Series A and Series B Convertible Preferred Stock, respectively, were
converted into 12,566 shares of common stock. A total of 1,649,634,
F-18
ZLAND.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
6,144,270 and 3,777,778 shares of common stock has been reserved for issuance in
the event of the conversion of the remaining Series A, Series B and Series C
Convertible Preferred Stock, respectively.
DIVIDEND AND VOTING RIGHTS
Each share of Series A, Series B and Series C Convertible Preferred Stock
entitles its holder to one vote for each common share into which such shares
would convert. Dividends shall be paid, when and if declared by the Board of
Directors, at the rate of $.02425, $.06 and $.27 per share of the outstanding
Series A, Series B and Series C Convertible Preferred Stock, respectively, and
shall be payable out of funds legally available. No dividends have been declared
to date.
LIQUIDATION RIGHTS
The holders of the Series A, Series B and Series C Convertible Preferred
Stock are entitled to receive their original issuance price of $.485, $1.00 and
$4.50 per share, respectively, in liquidation, plus an amount equal to all
declared but unpaid dividends. Series A, Series B and Series C Convertible
Preferred Stock share parity liquidation rights, prior to and in preference to
any distribution to the holders of common stock. At December 31, 1999, the
aggregate liquidation preference of the Series A, Series B and Series C
Convertible Preferred Stock was approximately $800, $6,144 and $15,780,
respectively.
(C) COMMON STOCK WARRANTS
In September 1997, the Company issued warrants to purchase 109,300 shares
of common stock at $.50 per share in connection with a consulting agreement. The
warrants expire in September 2002. The Company recognized costs valued using the
Black-Scholes pricing model totaling $35 at the time of issuance, which was
charged to general and administrative expense. The Company has reserved 109,300
shares of Common Stock for the exercise of these warrants.
In September 1997, the Company issued warrants to purchase 240,000 shares
of common stock at an exercise price of $.50 per share in connection with
placement services of an investment banker. The warrants expire in September
2002. In December 1997, the holder of these warrants exercised its right to
purchase 60,000 shares of common stock and received an additional 30,000 shares
of common stock in accordance with the Company's agreement to issue additional
shares to warrant holders who exercised their warrants on or prior to January
15, 1998. The Company has reserved 180,000 shares of Common Stock for the
exercise of the remaining warrants.
In January 1998, the Company offered an additional 2,695,000 shares of
common stock in a private placement offering. Proceeds of $1,300 from this
offering were received between February and April 1998. In addition, warrants to
purchase 300,000 shares of common stock were issued to cover issuance costs in
connection with this financing. The Company valued such warrants using the
Black-Scholes pricing model at $97 at the time of issuance, which was recorded
net of issuance of common stock. The Company has reserved 300,000 shares of
common stock for the exercise of these warrants.
Between January and June 1998, the Company issued warrants to purchase
315,000 shares of Common Stock at a price ranging from $.50 to $1.00 per share,
primarily in connection with a consulting agreement. The warrants expire between
January and June 2003. The Company valued such warrants using the Black-Scholes
pricing model at $97 as the performance under the consulting agreement was
completed, which amount was charged to general and administrative expense. The
Company has reserved 315,000 shares of Common Stock for the exercise of these
warrants.
During 1999, the Company issued warrants to purchase 435,000 shares of
common stock at a price of $1.00 per share as commissions related to the
issuance of Series B Convertible Preferred Stock. The fair
F-19
ZLAND.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
value of the warrants at the time of issuance was approximately $100, which was
recorded within additional paid-in capital.
During 1999, the Company issued warrants to purchase 55,670 shares of
Common Stock at a price of $4.50 per share in connection with services provided.
The Company recognized costs valued, using the Black-Scholes pricing model, at
$52 at the time of completion of services, which was charged to operating
expenses. The Company has reserved 55,670 shares of Common Stock for the
exercise of these warrants.
(D) ISSUANCE OF COMMON STOCK AND STOCK OPTIONS FOR SERVICES
During 1999, the Company issued 29,776 shares of Common Stock for services
provided during 1999. The fair value of the shares at the time of issuance was
approximately $134, which was charged to general and administrative expense. In
addition, the Company issued 187,260 shares of Common Stock for services
provided during 1999. The fair value of the shares at the time of issuance was
approximately $723, and was charged to sales and marketing expense. In December
1999, the Company issued 68,000 shares of common stock to several franchisees in
connection with the establishment of franchises with the Company. The fair value
of the common stock of $306 was recorded as a reduction of revenue during 1999
in the accompanying consolidated statement of operations.
In August 1999, the Company issued options to purchase 492,000 shares of
Common Stock at an exercise price of $4.50 per share in connection with a
consulting agreement with a member of the board of directors for services to be
rendered through September 2001. The Company valued the options using the
Black-Scholes pricing model totaling approximately $494, of which approximately
$82 was charged to general and administrative expense in 1999. The agreement was
amended subsequent to December 31, 1999 to remove any future performance
requirements. As such, the Company plans to charge the remaining $412 to general
and administrative expense in the first fiscal quarter of 2000 (unaudited). The
Company also issued options to purchase 8,000 shares of Common Stock in
connection with the achievement of certain sales goals. The Company recognized
costs valued using the Black-Scholes pricing model totaling approximately $8 at
the time of issuance, which was charged to sales and marketing expense.
(E) 1997 STOCK OPTION PLAN
The Company has reserved an aggregate of 18,000,000 shares of Common Stock
for issuance under its 1997 Stock Plan (the Plan). The Plan provides for grants
of options to employees and consultants (including officers and directors) of
the Company. Options must be granted at not less than 85% of fair value (as
determined by the Board of Directors) at the date of grant (110% of fair value
if the option holder also holds 10% or more of the voting stock of the Company).
Except in the case of certain options granted to officers, directors and
consultants, options typically vest over 4 years at a rate of 25% after 12
months with the remainder vesting at 1/36 a month over the remaining 3 years.
Options granted to officers, directors and consultants vest over periods ranging
from upon issuance to 4 years.
In connection with the Plan, the Company also implemented an employee stock
purchase plan ("ESPP") in accordance with Section 423 of the Internal Revenue
Code whereby eligible employees may authorize payroll deductions of up to 10% of
their salary to purchase shares of the Company's Common Stock at the fair market
value of common stock on the exercise date. Approximately 290,732 shares were
issued under this plan during 1999 for total consideration of $713.
F-20
ZLAND.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Stock option activity is summarized as follows:
WEIGHTED-
AVERAGE
SHARES EXERCISE PRICE
---------- --------------
Outstanding at December 31, 1996........................... -- $ --
Granted.................................................. 963,992 .19
Exercised................................................ (665,992) .05
Canceled................................................. (1,000) .50
----------
Outstanding at December 31, 1997........................... 297,000 .50
Granted.................................................. 4,331,560 .50
Exercised................................................ (1,157,460) .50
Canceled................................................. (214,000) .50
----------
Outstanding at December 31, 1998........................... 3,257,100 .50
Granted.................................................. 8,439,032 4.37
Exercised................................................ (298,846) 2.40
Canceled................................................. (258,074) .50
----------
Outstanding at December 31, 1999........................... 11,139,212 3.36
==========
As of December 31, 1997, 1998 and 1999, the number of options exercisable
was 297,000, 500,036 and 1,862,522, respectively, and the weighted average
exercise price of those options was $.50, $.50 and $1.57, respectively.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- -------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
RANGE OF AS OF EXERCISE REMAINING AS OF EXERCISE
EXERCISE DECEMBER 31, PRICE PER CONTRACTUAL DECEMBER 31, PRICE PER
PRICES 1999 OPTION LIFE (YEARS) 1999 OPTION
------------- ------------ --------- ------------ ------------ ---------
$ .50.. 3,167,712 $ .50 8.56 1,363,080 $ .50
1.31......... 2,870 1.31 9.92 -- 1.31
3.26......... 24,112 3.26 9.92 -- 3.26
4.50......... 7,944,518 4.50 9.70 499,442 4.50
---------- ---------
$.50 to
$4.50...... 11,139,212 3.36 9.38 1,862,522 1.57
========== =========
In January 1997, the Company granted 325,992 Common Stock options at an
exercise price of $.05 per share to employees in lieu of a cash bonus. These
options vested and were exercised in 1997.
F-21
ZLAND.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option plans. Accordingly, with the exception of the
option grant discussed in the preceding paragraph, no compensation cost has been
recognized for stock options issued to employees in the consolidated financial
statements for the years ended December 31, 1997, 1998 and 1999 as all grants
were made at fair values as determined by the Board of Directors. Had the
Company determined compensation cost based upon the fair value at the grant date
for its stock options under SFAS No. 123, the Company's net loss would have
increased to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31
---------------------------
1997 1998 1999
------ ------ -------
Net loss applicable to common stockholders, as reported..... $1,934 $5,367 $13,643
Assumed stock compensation cost............................. 1 99 937
------ ------ -------
Pro forma net loss.......................................... $1,935 $5,466 $14,580
====== ====== =======
Basic and diluted net loss per share as reported............ $ (.23) $ (.33) $ (.73)
Pro forma diluted net loss per share........................ $ (.23) $ (.34) $ (.79)
====== ====== =======
The per share weighted-average fair value of stock options granted during
fiscal year 1999 was $0.90 on the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions:
YEAR ENDED DECEMBER 31
-----------------------------
1997 1998 1999
------- ------- -------
Dividend yield.............................................. 0.0% 0.0% 0.0%
Risk-free interest rate..................................... 6.3% 5.0% 5.46%
Average expected lives...................................... 5 years 4 years 4 years
======= ======= =======
The Black-Scholes model, as well as other currently accepted option
valuation models, was developed to estimate the fair value of freely-tradable,
fully-transferable options without vesting restrictions, which significantly
differ from the Company's stock option plans. These models also require highly
subjective assumptions, including future stock price volatility and expected
time until exercise, which greatly affect the calculated fair value on the grant
date.
The Company applied the minimum value method in determining the fair value
of the Company's employee stock options. The minimum value method is only
allowed for non-public entities, as public entities are required to include an
expected volatility factor in addition to the factors described above. As such,
the pro forma effect of applying SFAS No. 123 above is not likely to be
representative of the pro forma effects in future years.
(F) STOCKHOLDERS RIGHTS PLAN
On February 14, 2000, the Board of Directors adopted a rights plan, which
is commonly known as a poison pill, and which expires ten years from the closing
of the Company's proposed initial public offering. In connection with the
adoption of the rights plan, the Board of Directors declared, effective as of
the closing of the Company's proposed initial public offering, a dividend of one
stockholder right for each share of common stock which is outstanding as of the
closing of the Company's proposed initial public offering and a dividend of one
stockholder right for each share of common stock that becomes outstanding
between the closing of the Company's proposed initial public offering and the
earlier of the expiration date and the distribution date as defined.
F-22
ZLAND.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(8) INCOME TAXES
The components of net loss before income taxes are as follows for the years
ended December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
A reconciliation of the expected U.S. Federal tax expense (benefit)
attributable to income from continuing operations differed from the amounts
computed by applying the U.S. Federal statutory tax rate to pretax income from
continuing operations as follows:
1997 1998 1999
----- ----- -----
Expected U.S. Federal tax................................... (34.0)% (34.0)% (34.0)%
State taxes................................................. (8.8) (8.7) (7.0)
Change in valuation allowance............................... 42.1 42.0 31.8
Intangible assets........................................... -- -- 8.8
Other....................................................... 0.7 0.7 0.4
----- ----- -----
Actual effective tax rate................................. 0.0% 0.0% 0.0%
===== ===== =====
At December 31, 1999, the Company had net operating loss carry forwards for
income tax purposes of approximately $9,500 for both federal and state. These
losses are available to offset future taxable income, if any, through 2011 and
2004, respectively. The future utilization of the net operating loss carry
forwards may be subject to significant limitations under Internal Revenue Code
Section 382. Due to the uncertainty of whether the Company's future taxable
income will be sufficient to utilize its net deferred tax assets, the Company
has provided a full valuation allowance against the total net deferred tax
assets.
(9) RELATED PARTY TRANSACTIONS
(A) CONSULTING AGREEMENTS
In 1997, the Company entered into consulting agreements with a stockholder
and a relative of certain officers of the Company pursuant to which the Company
received consulting services valued at $36. In exchange for services provided,
the Company issued 340,000 options to purchase shares of common stock at an
exercise price of $.05 per share, with the remaining $15 paid in cash during
1998.
Also in 1997, the Company entered into an agreement for network operating
services with a stockholder, and recorded a total of $54 in expenses. In
addition, the Company received ongoing consulting services from stockholders
during 1997, 1998 and 1999. For the years ended December 31, 1997, 1998 and 1999
the total value of these consulting services was $261, $240 and $220,
respectively.
During the year ended December 31, 1999, the Company issued options to
purchase 492,000 shares of common stock to a member of the board of directors in
addition to paying this member $72 in connection with a consulting agreement
(see note 7).
(B) SALES AGREEMENT AND NOTE RECEIVABLE FROM STOCKHOLDER
In July 1996, the Company sold six franchise territories to a stockholder
in exchange for $39 in cash and a note receivable of $68. Interest was payable
at the rate of 6% per annum. Payment terms were extended to be received in equal
monthly installments beginning January 1999 through December 1999. In addition,
there was accrued interest of $10 at December 31, 1998. During 1999, the
stockholder returned the six territories to the Company. In return, the Company
forgave the $68 note receivable and $14 of accrued interest receivable.
Additionally, the Company issued 8,667 shares of Series C Convertible Preferred
Stock for the $39 previously paid. No amounts were recorded in franchise
revenues related to this transaction.
F-24
ZLAND.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(C) DEBT CONVERSION
In October 1997, the Company owed $448 for amounts loaned by stockholders.
This debt was converted into 895,566 shares of common stock at the then current
value of $.50 per share in 1997.
(D) EMPLOYEE LOAN AGREEMENT
In connection with the employment of an officer of the Company in July
1999, the Company entered into a $125 loan agreement. The agreement provides for
a nominal interest rate. The imputed interest associated with this loan
agreement was not material to the consolidated financial statements. The
remaining balance at December 31, 1999 was included in prepaid expenses and
other current assets in the accompanying balance sheet.
(10) INTERNATIONAL REVENUES AND SIGNIFICANT CUSTOMERS
The Company operates in one industry segment -- the development and
marketing of Web-based software applications that enable small and mid-sized
businesses to cost-effectively take their operations online and automate their
business processes. The Company provides solutions to its customers through a
franchise network of local e-business professionals.
The Company attributes sales to and revenues from customers in different
geographical areas on the basis of customer locations, as follows:
The long lived assets of the Company's foreign subsidiaries are not
material at December 31, 1999.
(11) COMMITMENTS AND CONTINGENCIES
(A) LEASES
The Company leases certain computer equipment and office furniture and
fixtures under long-term lease agreements which are reported as capitalized
lease obligations. The terms of the leases are three years, with purchase
options at the end of the respective lease terms. The Company intends to
exercise such purchase options, which require minimal payments. Capitalized
lease obligations at December 31, 1999 are at interest rates ranging from 8% to
17% and are payable at various dates through 2003. The borrowings are secured by
the equipment purchased.
The Company leases its facilities under two non-cancelable operating leases
which expire in November 2002 and 2004, with options to extend the leases for
five years at the then prevailing fair value. The Company leases its network
operating centers under two non-cancellable operating leases which expire in
fiscal year 2000. Rental expense is recorded using the straight-line method and
totaled $95, $110 and $310 for the years ended December 31, 1997, 1998 and 1999,
respectively.
F-25
ZLAND.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Future minimum lease payments under all non-cancelable capitalized and
operating leases as of December 31, 1999 are as follows:
CAPITALIZED OPERATING
LEASES LEASES
----------- ---------
Year ending December 31:
2000...................................................... $428 $1,344
2001...................................................... 378 1,014
2002...................................................... 129 993
2003...................................................... 18 754
2004...................................................... -- 710
Thereafter................................................ -- --
---- ------
Total minimum lease payments...................... 953 $4,815
======
Less amounts representing interest........................ 134
----
Present value of future minimum capitalized lease
obligations..................................... 819
Less current installments of capitalized lease
obligations............................................ 352
----
Capitalized lease obligations, excluding current
installments.................................... $467
====
(B) LEASING LINES OF CREDIT
The Company has three lines of credit in place at December 31, 1999 for
leasing of equipment. The first line of credit expires in April 2002. At
December 31, 1999, there was approximately $477 outstanding, and approximately
$273 available under this line of credit. The interest rate on this line of
credit was 11.75% at December 31, 1999. The second line of credit expires in
December 2002. At December 31, 1999, there was approximately $248 outstanding
and approximately $445 available under this line of credit. The interest rate on
this line of credit at December 31, 1999 was 8.99%. The third line expires in
October 2002. At December 31, 1999, no amounts were outstanding under this line
of credit, and approximately $450 was available. The interest rate on this line
of credit at December 31, 1999 was 10.75%.
(C) LITIGATION
The Company is engaged in pending or threatened legal actions arising in
the ordinary course of its business. With respect to these legal actions, the
Company, based on advice of legal counsel, believes that it has adequate legal
defenses and that the ultimate outcome will not have a material adverse effect
on the Company's consolidated financial position or results of operations.
Between October 1998 and March 2000, the Company sold franchises to ten
general partnerships organized by VentureLink Capital Corporation (VentureLink),
an unaffiliated company, pursuant to franchise agreements with the partnerships.
These general partnerships financed the acquisition and initial operation of
their franchises with funds raised from general partners. In March 1999, the
Company received subpoenas from the Securities and Exchange Commission (the
SEC), seeking testimony from its Chairman and Chief Executive Officer, and its
Vice President of Corporate Development, and production of documents relating
to, among other things, the Company's franchise program and its relationship
with VentureLink. After initial response to the subpoenas, the Company was
advised that no further action was required. In February 2000, the Company
received a new document subpoena to which they have responded. The Company has
been advised that the SEC is conducting a fact-finding investigation into, among
other things, the circumstances surrounding the organization of the general
partnerships, their structure, operations and membership, the solicitation of
investments in the general partnerships and the
F-26
ZLAND.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
subsequent conversion of these partnerships to limited liability companies and
the relationship between VentureLink and the Company. The Company has been
advised that the investigation is broad in scope, and continuing. The Company is
cooperating with the investigation fully. The Company believes that the
investigation pertains to (but may not be limited to) possible violations of the
securities laws arising from the offering and sales of the general partnership
interests.
The Company entered into a contract with VentureLink in October 1998, which
was renewed in October 1999 for one year, pursuant to which the Company agreed
to sell franchises to partnerships to be formed by VentureLink. In January 2000
the Company negotiated a termination and release of the contract with
VentureLink, effective March 31, 2000.
The Company cannot predict the outcome of the SEC investigation, the scope
of the investigation, its conclusions or when it might be completed. If the SEC
asserts and successfully prosecutes a claim against the Company or any of its
personnel for involvement with VentureLink or for any other aspect of its
operations, the Company could be liable for substantial damages and penalties
and could be subjected to injunctive remedies as well.
The Company does not believe that the outcome of this matter will have a
material adverse effect on its consolidated financial position, results of
operations or liquidity.
(12) SUBSEQUENT EVENT
In January 2000, the Company acquired substantially all of the assets of
Central Technologies, Inc., (Central) a California corporation for 322,222
shares of the Company's Common Stock valued at $4.50 per share. The aggregate
purchase price was $1,350 net of cash acquired. Central is based in Moorpark,
California and provides products and services to serve the needs of accountants,
including financial management and reporting software applications for small to
mid-sized businesses. The acquisition will be accounted for using the purchase
method of accounting.
F-27
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Appintec Corp., dba ActionWare:
We have audited the accompanying balance sheet of Appintec Corp., dba
ActionWare, as of June 30, 1999 and the related statements of operations,
stockholders' deficit and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Appintec Corp., dba
ActionWare, as of June 30, 1999 and the results of its operations and its cash
flows for the year then ended, in conformity with generally accepted accounting
principles.
KPMG LLP
Orange County, California
January 19, 2000
F-28
APPINTEC CORP., DBA ACTIONWARE
BALANCE SHEET
JUNE 30, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Current assets:
Cash...................................................... $ 13
Accounts receivable, net of allowance for doubtful
accounts of $22........................................ 196
Prepaid expenses and other current assets................. 16
-----
Total current assets.............................. 225
Property and equipment, net................................. 186
Other assets................................................ 10
-----
$ 421
=====
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Bank line of credit....................................... $ 197
Accounts payable.......................................... 71
Accrued expenses.......................................... 208
Current portion of capitalized lease obligations.......... 65
Deferred revenue.......................................... 221
-----
Total current liabilities......................... 762
Long-term portion of capitalized lease obligations.......... 93
-----
855
Commitments and contingencies (note 6)......................
Subsequent event (note 7)...................................
Stockholders' deficit:
Common stock, 25,000,000 shares authorized; 4,225,250
shares issued and outstanding.......................... 399
Accumulated deficit....................................... (833)
-----
Total stockholders' deficit....................... (434)
-----
$ 421
=====
See accompanying notes to financial statements.
F-29
APPINTEC CORP., DBA ACTIONWARE
STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1999
(IN THOUSANDS)
Revenue:
Software licenses......................................... $1,102
Services and maintenance.................................. 1,068
------
Total revenues.................................... 2,170
------
Cost of revenues:
Software licenses......................................... 94
Services and maintenance.................................. 352
------
Total cost of revenues............................ 446
------
Gross profit...................................... 1,724
------
Operating expenses:
Research and development.................................. 972
Sales and marketing....................................... 390
General and administrative................................ 508
------
Total operating expenses.......................... 1,870
------
Operating loss.............................................. (146)
Other expense, net.......................................... (55)
------
Net loss before income taxes...................... (201)
Provision for income taxes.................................. 12
------
Net loss.......................................... $ (213)
======
See accompanying notes to financial statements.
F-30
APPINTEC, CORP., DBA ACTIONWARE
STATEMENT OF STOCKHOLDERS' DEFICIT
YEAR ENDED JUNE 30, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK TOTAL
------------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT DEFICIT DEFICIT
--------- ------ ----------- -------------
Balance at June 30, 1998...................... 2,822,625 $ 33 $(620) $(587)
Common stock options exercised................ 225,959 22 -- 22
Issuance of common stock...................... 496,666 50 -- 50
Issuance of common stock for services
provided.................................... 680,000 294 -- 294
Net loss...................................... -- -- (213) (213)
--------- ---- ----- -----
Balance at June 30, 1999...................... 4,225,250 $399 $(833) $(434)
========= ==== ===== =====
See accompanying notes to financial statements.
F-31
APPINTEC CORP., DBA ACTIONWARE
STATEMENT OF CASH FLOWS
YEAR ENDED JUNE 30, 1999
(IN THOUSANDS)
Cash flows from operating activities:
Net loss.................................................. $(213)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 98
Issuance of common stock for services provided......... 294
Changes in assets and liabilities:
Accounts receivable.................................. (5)
Prepaid expenses and other assets.................... 4
Accounts payable..................................... 103
Accrued expenses and deferred revenue................ (92)
-----
Net cash provided by operating activities......... 189
-----
Cash flows from investing activities:
Purchases of property and equipment....................... (86)
-----
Net cash used in investing activities............. (86)
-----
Cash flows from financing activities:
Principal payments on capitalized lease obligations....... (242)
Proceeds from issuance of common stock.................... 72
Net borrowings on bank line of credit..................... 1
-----
Net cash used in financing activities............. (169)
-----
Net decrease in cash.............................. (66)
Cash, beginning of year..................................... 79
-----
Cash, end of year........................................... $ 13
=====
Supplementary disclosures of cash flow information:
Cash paid during the year for interest.................... $ 39
Cash paid during the year for income taxes................ 1
=====
See accompanying notes to financial statements.
F-32
APPINTEC CORP., DBA ACTIONWARE
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) THE COMPANY
Appintec Corp., a California corporation, dba ActionWare (the "Company" or
"ActionWare"), was founded in 1981 and is in the business of designing,
developing, producing and marketing software which addresses the needs of a
business interacting with its customers, including automating front office
operations in areas such as customer support, sales, field service, product
quality assurance and help desk.
(B) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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
respective reporting periods. Actual results could differ from those estimates.
(C) REVENUE RECOGNITION
The Company licenses software under noncancelable license agreements.
License fee revenues are recognized when a noncancelable license agreement is in
force, the product has been shipped, the license fee is fixed or determinable
and collectibility is reasonably assured. Maintenance and support revenue is
recognized ratably over the contract period, usually one year. The Company's
revenue recognition policies are in compliance with the American Institute of
Certified Public Accountants' Statements of Position 97-2 and 98-9, Software
Revenue Recognition.
(D) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Assets held under capitalized lease obligations are recorded at the lesser of
cost or the present value of the minimum lease payments at lease inception.
Depreciation and amortization is computed using the straight-line method over
the estimated useful lives of the assets, which range from three to seven years.
(E) CAPITALIZED SOFTWARE COSTS
Costs incurred in the research and development of new software products and
enhancements to existing software products are expensed as incurred until
technological feasibility has been established. After technological feasibility
is established, any additional costs are capitalized in accordance with
Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for the
Costs of Computer Software to Be Sold, Leased or Otherwise Marketed". Because
management believes that its current process for developing software is
essentially completed concurrently with the establishment of technological
feasibility, no internally generated software development costs were capitalized
as of June 30, 1999.
(F) LONG-LIVED ASSETS
The Company applies the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
Under the provisions of SFAS No. 121, the recoverability of long-lived assets is
assessed by determining whether the carrying value of the asset can be recovered
through projected undiscounted future operating cash flows over its remaining
life. The amount
F-33
APPINTEC CORP., DBA ACTIONWARE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
of impairment, if any, is measured based upon projected discounted future
operating cash flows. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.
(G) ACCOUNTING FOR STOCK OPTIONS
The Company accounts for its employee stock-based compensation plans in
accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, using the intrinsic value-based method of accounting,
as permitted by SFAS No. 123, Accounting for Stock-Based Compensation. The
Company has made the pro forma net loss disclosures for employee stock option
grants as if the fair-value-based method defined in SFAS No. 123 had been
applied.
Equity instruments issued to nonemployees are measured using the fair value
of the equity instruments using the stock price and other measurement
assumptions as of the earlier of the date at which a performance commitment to
earn the equity instruments is reached or the date at which the performance is
complete.
(H) INCOME TAXES
The Company accounts for income taxes using the asset and liability method
as prescribed by SFAS No. 109, Accounting for Income Taxes. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be "more likely than not" realized
in future tax returns.
(I) COMPREHENSIVE LOSS
The Company has adopted SFAS No. 130, Reporting Comprehensive Income. SFAS
No. 130 establishes the rules for the reporting of comprehensive loss and its
components. During 1999, the Company did not have any components of other
comprehensive income, and thus net loss equals comprehensive loss in the
accompanying financial statements.
(J) SEGMENT REPORTING
The Company has adopted SFAS No. 131, Disclosure about Segments of a
Business Enterprise and Related Information, which requires entities to report
financial and descriptive information about its reportable operating segments.
The Company operates in one segment -- the design, development, production, and
marketing of software which address the needs of a business interacting with its
customers.
(K) CONCENTRATION OF CREDIT RISK
The Company is in the business of designing, developing, producing and
marketing software which addresses the needs of a business interacting with its
customers, including automating front office operations in areas such as
customer support, sales, field service, product quality assurance and help desk.
This market is characterized by rapid technological developments, frequent new
product introductions and changes in end user requirements.
F-34
APPINTEC CORP., DBA ACTIONWARE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
During the year ended June 30, 1999 and at June 30, 1999, no customers
accounted for more than 10% of net revenues or net accounts receivable,
respectively.
The Company performs ongoing credit evaluations of its customers' financial
condition and limits the amount of credit extended when deemed necessary, but
generally does not require collateral. Management believes that any risk of loss
is significantly reduced due to the number of its customers and geographic sales
areas. The Company maintains a provision for potential credit losses, and
write-offs of accounts receivable were insignificant during the year ended June
30, 1999.
(L) NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 was effective for all fiscal quarters or fiscal years beginning after June
15, 1999. In August 1999, the FASB issued SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133. This statement defers the effective date of SFAS No.
133 to all fiscal quarters or fiscal years which begin after June 15, 2000. SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments embedded in other contracts and for hedging activities. Application
of this standard is not expected to have a material impact on the Company's
financial position or results of operations.
(2) PROPERTY AND EQUIPMENT
A summary of property and equipment at June 30, 1999, at cost, is as
follows:
Equipment................................................... $ 630
Furniture and fixtures...................................... 103
Equipment under capitalized lease obligations............... 196
Software.................................................... 76
Automobile.................................................. 31
Leasehold improvements...................................... 16
------
1,052
Less accumulated depreciation and amortization.............. (866)
------
$ 186
======
Assets acquired under capitalized lease obligations are included in
property and equipment and totaled $196, with related accumulated amortization
of $41 at June 30, 1999.
(3) STOCKHOLDER'S DEFICIT
(A) ISSUANCE OF COMMON STOCK FOR SERVICES
During fiscal year 1999, the Company issued 680,000 shares of common stock
for services performed during the year. Of this amount, 500,000 shares related
to services performed by a third party on the Company's Java software
development at a fair value of $281. The fair value of the services was expensed
to research and development during fiscal year 1999. The remaining 180,000
shares were issued for consulting services performed during the year. The fair
value of these services of $13 was expensed to general and administrative
expense during fiscal year 1999.
F-35
APPINTEC CORP., DBA ACTIONWARE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(B) STOCK OPTION PLAN
The Company granted 3,048,000 incentive stock options on March 1, 1997.
Long-term employees were granted fully vested options and those recently
employed were granted options that vested over a four-year period. The options
were granted with an exercise price at the then fair market value of the common
stock of $.10 per share. On June 1, 1998, an additional 1,222,500 options were
granted with an exercise price at the then fair market value of $.25 per share.
These options vested 20% on July 1, 1998 and thereafter one thirty-sixth on the
first of the month for 36 months. During the year ended June 30, 1999, an
additional 180,000 options were granted with an exercise price at the then fair
market value of $.25 per share. For these grants, 140,000 of the options were
fully vested when granted, and the remaining options vest ratably over 24
months. All of the options granted have 10-year terms.
Stock option activity for the year ended June 30, 1999 is summarized as
follows:
WEIGHTED-
AVERAGE
SHARES EXERCISE PRICE
--------- --------------
Outstanding at June 30, 1998................................ 2,829,875 $.16
Granted................................................... 180,000 .25
Exercised................................................. (225,959) .17
Cancelled................................................. (532,500) .21
---------
Outstanding at June 30, 1999................................ 2,251,416 .16
=========
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ------------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
EXERCISE OUTSTANDING AS OF CONTRACTUAL EXERCISE OUTSTANDING AS OF EXERCISE
PRICES JUNE 30, 1999 LIFE PRICE JUNE 30, 1999 PRICE
---------- ----------------- ----------- --------- ----------------- ---------
$ .10 1,356,875 7.7 $.10 1,313,750 $.10
.25 894,541 9.0 .25 505,709 .25
--------- ---------
.10 - .25 2,251,416 8.2 .16 1,819,459 .14
========= =========
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option plans. Accordingly, no compensation cost has
been recognized for stock options issued to employees in the financial
statements for the year ended June 30, 1999. Had the Company determined
compensation cost based upon the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net loss for the year ended June 30,
1999 would have increased to the pro forma amounts indicated below:
Net loss as reported........................................ $(213)
Assumed stock compensation cost............................. (9)
-----
Pro forma net loss.......................................... $(222)
=====
The fair value of each option grant is estimated on the date of grant using
the minimum value method as prescribed in SFAS No. 123. Assumptions used for
options granted during the year ended June 30, 1999 were as follows:
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The minimum value method requires input of highly subjective assumptions in
which changes in those assumptions could materially affect the fair value
estimate. In addition, the minimum value method is only allowed for non-public
entities as public entities are required to include an expected volatility
factor in addition to the factors described above. As such, the pro forma effect
of applying SFAS 123 above is not likely to be representative of the pro forma
effects in future years.
(4) BANK LINE OF CREDIT
The bank line of credit is with a domestic commercial bank and provides for
borrowings up to $200. Interest is at the prime rate plus 4.5%, and the line of
credit is secured by substantially all assets of the Company and is guaranteed
by the Company's chief executive officer, who is also a shareholder. The line of
credit expired on March 10, 2000 and was repaid in full.
(5) INCOME TAXES
The provision for income tax expense for the year ended June 30, 1999
consists of the following:
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at June 30, 1999 are presented
below:
Net operating loss.......................................... $ 255
Accrued vacation............................................ 2
-----
Total deferred tax assets......................... 257
Less: valuation allowance................................... (257)
-----
Net deferred tax assets........................... $ --
=====
The expected U.S. Federal tax benefit attributable to loss from continuing
operations for the year ended June 30, 1999 differed from the amounts computed
by applying the U.S. Federal statutory tax rate to pretax loss from continuing
operations as follows:
Expected U.S. Federal tax................................... (34.0)%
State taxes................................................. 2.9
Change in valuation allowance............................... 33.8
Other....................................................... 3.2
-----
Actual effective tax rate................................... 5.9%
=====
At June 30, 1999, the Company had net operating loss carryforwards for
Federal and state income tax purposes of approximately $675 and $292,
respectively. These losses are available to offset taxable income,
F-37
APPINTEC CORP., DBA ACTIONWARE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
if any, through 2018 and 2003, respectively. The future utilization of the net
operating loss carryforwards is subject to significant limitations due to the
sale of the Company in November 1999 (see note 7). Due to uncertainty of whether
the Company's future taxable income will be sufficient to utilize these tax
benefits, the Company has provided a full valuation allowance against the
deferred tax assets.
(6) COMMITMENTS AND CONTINGENCIES
(A) COMMITMENTS
The Company leases certain computer equipment and office furniture and
fixtures under long-term lease agreements which are reported as capitalized
lease obligations. The terms of the leases are between three and five years,
with bargain purchase options at the end of the respective lease terms.
Capitalized lease obligations at June 30, 1999 are at interest rates ranging
from 8% to 17% and are payable at various dates through 2004. The borrowings are
secured by the assets leased.
The Company leases its facility under a non-cancelable operating lease
which expires in November 2000. Rent expense was approximately $155 for the year
ended June 30, 1999.
Future minimum lease payments under all non-cancelable capitalized lease
obligations and operating leases as of June 30, 1999 are as follows:
CAPITALIZED
LEASE OPERATING
OBLIGATIONS LEASES
----------- ---------
Year ending June 30:
2000...................................................... $ 61 $166
2001...................................................... 38 73
2002...................................................... 34 --
2003...................................................... 22 --
2004 and thereafter....................................... 8 --
---- ----
Total minimum payments............................ 163 $239
====
Amount representing interest.............................. 5
----
Present value of capitalized lease obligations.... 158
Less current portion...................................... 65
----
Noncurrent portion of capitalized lease
obligations..................................... $ 93
====
(B) CONTINGENCIES
From time to time the Company may be party to suits and other judicial and
administrative proceedings incidental to its business. Although occasional
adverse decisions may occur, the Company believes that the final disposition of
all such matters will not have a material adverse effect on the Company's
financial position, results of operations or liquidity.
(7) SUBSEQUENT EVENT
In November 1999, all of the Company's common stock was acquired by
ZLand.com, Inc., (ZLand) for 475,000 shares of ZLand common stock and $320 in
cash. ZLand is based in Aliso Viejo, California, and is an applications service
provider offering proprietary Internet software applications that enable small
and mid-sized businesses to cost-effectively take their operations online and
automate their business processes.
F-38
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following pro forma financial data is based upon data derived from
ZLand.com, Inc.'s historical consolidated financial statements and has been
prepared to illustrate the effects on this data of the acquisitions of
ActionWare and EMT. The unaudited pro forma statement of operations for the year
ended December 31, 1999 gives effect to the acquisitions as if these
transactions had occurred as of January 1, 1999. The acquisitions were recorded
using the purchase method of accounting.
The pro forma financial data are not necessarily indicative of the results
we would have obtained had these events occurred at the beginning of the period,
as assumed, or of our future results as a combined entity.
YEAR ENDED DECEMBER 31, 1999
----------------------------------------------------------
ACQUISITION
ADJUSTMENTS PRO FORMA
ZLAND ACTIONWARE EMT (A) COMBINED
-------- ---------- ------- ----------- ---------
Revenues:
Franchise revenues...................... $ 4,669 $ -- $ -- $ $ 4,669
Product and related services............ 1,793 2,102 849 4,744
-------- ------ ------- ------- --------
Total revenues............................ 6,462 2,102 849 9,413
Cost of revenues........................ 1,200 374 120 1,694
-------- ------ ------- ------- --------
Gross profit.............................. 5,262 1,728 729 7,719
-------- ------ ------- ------- --------
Operating expenses:
Research and development................ 3,146 924 382 4,452
Sales and marketing..................... 9,915 370 153 10,438
General and administrative.............. 4,449 483 199 453(B) 5,584
In-process research and development..... 1,304 -- -- (1,304)(C) --
-------- ------ ------- ------- --------
Total operating expenses.................. 18,814 1,777 734 (851) 20,474
-------- ------ ------- ------- --------
Operating loss............................ (13,552) (49) (5) 851 (12,755)
Interest expense, net..................... 87 56 (5) 138
-------- ------ ------- ------- --------
Net loss before income taxes.............. (13,639) (105) -- 851 (12,893)
Provision for income taxes................ 4 -- -- 4
-------- ------ ------- ------- --------
Net loss.................................. $(13,643) $ (105) $ -- $ 851 $(12,897)
======== ====== ======= ======= ========
Net loss per share: basic and diluted..... $ (0.73) $ (0.68)
======== ========
Shares used in per share computations:
basic and diluted....................... 18,570 19,082
======== ========
(A) Includes adjustments directly attributable to the acquisitions.
(B) Reflects the amortization of goodwill and other intangibles of $453
attributable to the acquisitions, amortized on a straight line basis over
three to five year periods.
(C) Reflects the reversal of the in-process research and development charge
recorded in connection with the acquisition of ActionWare.
F-39
ZLAND.COM, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
ADDITIONS
BALANCE AT CHARGED TO DEDUCTIONS --
BEGINNING COSTS AND AMOUNTS BALANCE AT
DESCRIPTION OF PERIOD EXPENSES WRITTEN OFF END OF PERIOD
----------- ---------- ---------- ------------- -------------
Year Ended December 31, 1997:
Allowance for doubtful accounts............ $ -- $ 10 $ -- $ 10
==== ==== ==== ====
Year Ended December 31, 1998:
Allowance for doubtful accounts............ $ 10 $121 $ 6 $125
==== ==== ==== ====
Year Ended December 31, 1999:
Allowance for doubtful accounts............ $125 $286 $287 $124
==== ==== ==== ====
S-1
[LOGO -- ZLAND.COM e-business for everyone(TM)]
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
It is estimated that the following expenses will be incurred in connection
with the proposed offering hereunder. All of such expenses will be borne by the
registrant:
AMOUNT
-------
Securities and Exchange Commission registration fee......... $13,200
Nasdaq National Market listing fee.......................... $
NASD filing fee............................................. $ 5,500
Legal fees and expenses..................................... $
Accounting fees and expenses................................ $
Blue sky qualification fees and expenses (including counsel
fees)..................................................... $
Transfer agent and registrar fees........................... $
Printing and engraving expenses............................. $
Miscellaneous............................................... $
-------
TOTAL............................................. $
=======
All amounts except the Securities and Exchange Commission registration fee,
the Nasdaq National Market listing fee and the NASD filing fee are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify any person who was or is a party to or is threatened
to be made a party to any threatened, pending or completed action or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that he or she is or was a director, officer, employee or agent of the
corporation or is or was serving at its request in such capacity in another
corporation or business association, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him or her in connection with such action, suit or proceeding if he
or she acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the best interests of the corporation, and with respect to
any criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful.
Section 107(b)(7) of the Delaware General Corporation Law permits a
corporation to provide in its certificate of incorporation that a director of
the corporation shall not be personally liable to the corporation or its
shareholders for monetary damages for breach of fiduciary duty as a director,
except for liability (a) for any breach of the director's duty of loyalty to the
corporation or its shareholders, (b) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (c) under
Section 174 of the Delaware General Corporation Law, or (d) for any transaction
from which the director derived an improper personal benefit.
Article IV of the registrant's second restated certificate of incorporation
provides for the elimination of personal liability for a director for breach of
fiduciary duty as permitted by 102(b)(7) of the Delaware General Corporation
Law. Article VI of the registrant's bylaws provide that the registrant shall
indemnify its directors, officers and employees to the full extent permitted by
Section 145 of the Delaware General Corporation Law.
The underwriting agreement (filed as Exhibit 1.1 hereto) provides for
indemnification by the underwriters of the registrant and its directors,
officers and controlling persons for certain liabilities arising under the
Securities Act or otherwise.
II-1
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since March 1997, we have sold the following unregistered securities:
(1) Pursuant to the merger of Z Land LLC and Zavada LLC into Z Land
Acquisition, Inc., we assumed an existing agreement with Technology
Strategies & Alliances, an independent consultant. Under the agreement, Z
Land LLC agreed to issue a warrant to purchase 1% of the total number of
shares of the company outstanding upon the close of our first round of
equity financing as a transaction fee for providing strategic advisory
services and assistance in raising capital. Accordingly, in September 1997,
we issued a warrant to Technology Strategies & Alliances to purchase
109,300 shares of our common stock at a price of $0.50 per share (the same
price per share paid by the investors participating in the round).
(2) In August 1997, we issued and sold 3,334,008 shares of our common
stock at the then fair market value of $0.05 per share to Grey Fox, Inc. in
exchange for cancellation of $166,700 owed to Grey Fox by us for unpaid
consulting fees. In October 1997, we sold 795,566 shares of our common
stock to Grey Fox for $0.50 per share in exchange for cancellation of an
outstanding debt of $398,000.
(3) In August 1997, in connection with the issuance of $306,000 of
convertible subordinated notes, we issued warrants to fourteen third-party
lenders to purchase an aggregate of 612,000 shares of common stock for
$0.05 per share. Pursuant to the terms of the notes, the unpaid principal
and accrued interest on the notes existing after the closing of a $1
million equity financing was automatically convertible into shares of
Series A Preferred Stock. Accordingly, in October 1997, we issued 638,816
shares of Series A Preferred Stock to the third-party lenders. In addition,
all warrant holders exercised their warrants to purchase the shares of
common stock in October 1997.
(4) Pursuant to our 1997 Stock Plan, we issued an aggregate of 665,992
shares of common stock on August 12, 1997 for $0.50 per share, as stock
bonuses to certain employees and directors in lieu of a cash bonus
otherwise due to each of the employees or directors.
(5) In September 1997, we issued 2,000,000 shares of our common stock
to various third-party investors located in Canada, Switzerland and
Guernsey for $1 million. We also issued two warrants to our Canadian-based
placement agent in the transaction, CanAccord Capital Corporation, to
purchase an aggregate of 240,000 shares of our common stock for $0.50 per
share.
(6) In October 1997, we issued 100,000 shares of our common stock to
Patricia Tyson, an employee of the company, in exchange for cancellation of
our $50,000 indebtedness to Ms. Tyson.
(7) In December 1997, we issued an aggregate of 200,000 shares of our
common stock to Solid Technology, Inc., Keith Buck, Craig Jones, James
Batman, Don Thomson and Vassili Jabin in exchange for the transfer of
certain intellectual property valued at $100,000.
(8) In January 1998, we issued a warrant to CanAccord Capital
Corporation to purchase 40,000 shares of common stock for $0.50 per share
in connection with a bridge loan of $200,000.
(9) During the period between February 1998 through April 1998, we
sold 1,710,000 shares of our common stock for $0.50 per share to investors
in the United States. We also sold an aggregate of 890,000 shares of common
stock at the same purchase price to investors located in Canada. In
connection with this financing, we issued warrants to purchase an aggregate
of 171,000 shares of our common stock for $0.50 per share to Meridian
Capital Holdings, Inc., our U.S. placement agent, and its designated
representatives. In addition, we issued a warrant for the purchase of
89,000 shares of our common stock for $0.50 per share to CanAccord Capital
Corporation, our Canadian placement agent.
(10) In December 1997, we offered a 50% common stock bonus to any
holder of preferred stock warrants or common stock warrants who agreed to
exercise some or all of each such holder's respective warrants prior to
December 31, 1997. As a result, in April 1998, we issued an aggregate of
128,876 shares of our common stock to three warrant holders who exercised
their warrants, providing
II-2
a bonus to each such holder of one share of common stock for every two
shares of preferred or common stock so exercised by each of the three
warrant holders.
(11) In May 1998, we issued a warrant to purchase 75,000 shares of our
common stock for $1.00 per share to El Camino Resources, Ltd. in connection
with an equipment lease of which El Camino was lessor. In July 1999, we
issued another warrant to El Camino to purchase 6,670 shares of common
stock at an exercise price of $4.50 per share.
(12) Between December 1998 and April 1999, we issued an aggregate of
5,685,178 shares of Series B Preferred Stock for $1.00 per share to various
accredited investors. In the same transaction, we also issued warrants to
purchase 5,685,178 shares of our common stock at a price equal to the
initial public offering price. In connection with this transaction, we
issued warrants to purchase 435,000 shares of our common stock for $1.00
per share to nine persons or entities as commissions.
(13) Between July 1998 and November 1998, we issued $1.2 million of
convertible bridge notes to various accredited investors. In connection
with this transaction, we issued warrants to purchase 610,100 shares of our
common stock for $1.00 per share. Upon conversion of certain of these notes
in March 1999, we issued an aggregate of 470,646 shares of Series B
Preferred Stock and warrants to purchase an aggregate of 470,646 shares of
our common stock at the initial public offering price.
(14) In October 1999, we issued two warrants to purchase up to an
aggregate of 40,000 shares of common stock at $4.50 per share to two
parties in connection with an agreement with Web Connect.
(15) In November 1999, we issued an aggregate of 85,000 shares of our
common stock, valued at $4.50 per share, to security holders of Emerging
Market Technologies, Inc.
(16) In December 1999, we issued an aggregate of 475,000 shares of our
common stock, valued at $4.50 per share, to security holders of Appintec
Corp., dba ActionWare, in connection with our acquisition of ActionWare.
(17) In December 1999 and January 2000, in connection with a financing
for $20.8 million, we issued an aggregate of 3,777,778 shares of Series C
Preferred Stock to accredited investors for $4.50 per share, and issued an
aggregate of 607,456 shares of our common stock to accredited investors for
$4.50 per share.
(18) In December 1999 and January 2000, pursuant to an incentive
program for certain of our franchisees, we issued an aggregate of 88,000
shares of our common stock at a value of $4.50 per share.
(19) In December 1999 and January 2000, we issued an aggregate of
133,660 shares of our common stock to certain individuals in connection
with an agreement with HotNet.
(20) In connection with certain equipment lease agreements, we issued
warrants to LINC Capital, MicroTech Leasing Corp. and Infuzion Capital.com
to purchase an aggregate of 21,110 shares of our common stock at an
exercise price of $4.50 per share.
(21) In January 2000, we issued an aggregate of 322,222 shares of our
common stock, valued at $4.50 per share, to the sole security holder of
Central Technologies, Inc. in connection with our acquisition of
substantially all of the assets used in that company's business.
(22) In January 2000, we issued a total of 80,000 shares of our common
stock, at a value of $4.50 per share, pursuant to an incentive program with
our original franchises.
(23) Pursuant to our Second Amended and Restated 1997 Stock Plan, we
have granted options to purchase an aggregate of 6,877,450 shares of common
stock to our employees, directors, consultants and franchisees. We have
granted to our executive officers options to purchase an aggregate of
6,065,200 shares of common stock. During the period between December 11,
1996 and April 16, 1999, all options granted, consisting of a total of
3,405,900 shares, had an exercise price of
II-3
$0.50. Between April 29, 1999 and March 15, 2000, we granted options to
purchase an aggregate of 9,508,135 shares exercisable at $4.50 per share.
During December 1999, we granted options to purchase 2,870 shares of common
stock at $1.305 and 25,744 options to purchase common stock at $3.26 in
connection with the acquisitions of Emerging Market Technologies, Inc. and
Appintec Corp., dba ActionWare, respectively.
(24) Between December 1997 and March 15, 2000, we granted stock
purchase rights under our Second Amended and Restated 1997 Stock Plan to
our employees, directors and consultants. Of these, 1,391,184 shares of
common stock were purchased for $0.50 per share prior to April 12, 1999,
and 112,008 shares of common stock were purchased for $4.50 per share
thereafter.
(25) In March 2000, we sold 250,000 shares of common stock to two
strategic partners for $6.00 per share.
There were no underwriters for any of the transactions described above.
None of the foregoing transactions involved any public offering. The
issuance of securities described in paragraphs (2), (3), (7), (9) and (11)-(22)
and (25) were deemed to be exempt from the registration requirements of the
Securities Act by virtue of Section 4(2) thereof or Regulation D promulgated
thereunder. There was no general solicitation by us or any of our officers or
directors in connection with the sale of any of these securities, and we believe
that each acquirer qualified as an accredited investor, as such term is defined
in Rule 501 of the Securities Act. In addition, 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 other instruments issued in such transactions. Prior to each
issuance of securities, each recipient had access to the kind of information
regarding the company that would have been disclosed had the securities been
registered under the Securities Act.
The sales of securities outside of the United States described in
paragraphs (5) and (8) were conducted under the exemption from registration
provided by Regulation S of the Securities Act. We did no engage in any directed
selling efforts in the United States and the offer and sale of the securities
was made only to persons located outside of the United States in offshore
transactions.
The sales of securities described in paragraphs (1) and (6) were conducted
under the exemption from registration provided by Section 3(a)(11) of the
Securities Act. We offered and sold the securities only to residents of the
State of California, our state of incorporation at the time of issuance.
The sale of securities described in paragraph (10) was conducted under the
exemption from registration provided by Section 3(a)(9) of the Securities Act.
The offer of securities was made only to existing security holders of the
company and no commission or other remuneration was paid or given directly or
indirectly to any party for soliciting the exchange of company securities.
The issuances of securities under our Second Amended and Restated 1997
Stock Option Plan described in paragraphs (4), (23) and (24) were exempt from
registration pursuant to Rule 701 of the Securities Act as an offer and sale of
securities under a compensatory benefit plan between us and our employees,
directors, consultants and franchisees at a time when we were not required to
report under the Securities Exchange Act of 1934. In addition, all stock options
granted to franchisees in reliance on the exemption provided by Rule 701 were
made prior to the amendments to Rule 701 effected on April 7, 1999. The
issuances of securities to our executive officers and to certain of our
franchisees described in paragraph (23) were exempt from registration under
Section 4(2) of the Securities Act, as discussed above.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
1.1 Form of Underwriting Agreement+
3.1 Second Restated Certificate of Incorporation of the
Registrant*
II-4
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.2 Form of Certificate of Designation of Series A Junior
Participating Preferred Stock*
3.3 Bylaws of the Registrant*
4.1 Specimen Stock Certificate+
4.2 Form of Rights Agreement*
5.1 Opinion of Rutan & Tucker, LLP+
10.1 Second Amended and Restated 1997 Stock Plan*
10.2 Form of Second Amended and Restated 1997 Stock Plan Stock
Option Agreement*
10.3 Form of Second Amended and Restated 1997 Stock Plan Notice
of Grant of Stock Purchase Right and Restricted Stock
Purchase Agreement*
10.4 Form of Indemnification Agreement*
10.5 Deferred Compensation Agreement dated December 27, 1999
between the Registrant and John Veenstra*
10.6 Lease dated February 26, 1999 between the Registrant and
CarrAmerica Realty Corporation, First Amendment thereto
dated July 21, 1999 and Second Amendment thereto dated as of
January 11, 2000*
10.7 Master Services Agreement dated December 28, 1999 between
the Registrant and Exodus Communications, Inc.*
10.8 Wholesale Service Agreement dated June 13, 1997 between the
Registrant and Solid Technology, Inc.*
10.9 Agreement to Purchase Franchise Territories dated November
29, 1999 between the Registrant and Dorado Resources Corp.*
10.10 Operating Assistance Agreement dated November 30, 1999
between the Registrant and Dorado Resources Corp.*
10.11 Form of Business Program Franchise Agreement (U.S.)*
10.12 Form of Business Program Franchise Agreement (Canada)*
10.13 Form of Business Program Franchise Agreement (Germany)*
10.14 Form of Franchise and Agency Agreement (Australia)*
10.15 Employment Agreement dated July 8, 1999 between the
Registrant and John Veenstra*
10.16 Employment Agreement dated May 20, 1999 between the
Registrant and Glenn E. Abood*
10.17 Employment Agreement dated December 1, 1999 between the
Registrant and Joan Nagelkirk*
10.18 Employment Agreement dated December 1, 1999 between the
Registrant and Gregg Amber*
10.19 Consulting Agreement dated August 30, 1999 between the
Registrant and Jack Harding*
21.1 Subsidiaries*
23.1 Consent of PricewaterhouseCoopers LLP*
23.2 Consent of KPMG LLP*
23.3 Consent of KPMG LLP*
27.1 Financial Data Schedule*
* Filed herewith.
+ To be filed by a subsequent amendment.
(b) FINANCIAL STATEMENT SCHEDULES.
The following financial statement schedules are filed herewith:
Report of Independent Public Accountants
Schedule II -- Valuation and qualifying accounts
Other schedules have been omitted because of the absence of conditions
under which they are required or because the required information is included in
the financial statements or notes thereto.
II-5
ITEM 17. UNDERTAKINGS
The registrant hereby undertakes:
(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
the form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) For purposes 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.
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 provisions described under Item 14 above, 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 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 a 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 of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Aliso Viejo, California,
on March 28, 2000.
By: /s/ JOHN W. VEENSTRA
------------------------------------
John W. Veenstra
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Glenn E.
Abood, Joan Nagelkirk and Gregg Amber his true and lawful attorneys-in-fact and
for him and in his name, place and stead, at any and all capacities, to sign any
and all amendments (including post-effective amendments) to this registration
statement, or any registration statement for the same offering that is to be
effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933,
as amended, and to file the same, with all exhibits thereto, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents full
power and authority to do and perform each and every act and thing requisite and
necessary in connection with such matters and hereby ratifying and confirming
that each of said attorneys-in-fact and agents, acting alone, or his substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
NAME TITLE DATE
---- ----- ----
/s/ JOHN W. VEENSTRA Chief Executive Officer and March 28, 2000
--------------------------------------------------- Director (Principal
John W. Veenstra Executive Officer)
/s/ KEVIN PALATNIK Chief Financial Officer March 28, 2000
--------------------------------------------------- (Principal Accounting
Kevin Palatnik Officer)
/s/ JOAN NAGELKIRK Director March 28, 2000
---------------------------------------------------
Joan Nagelkirk
/s/ HANS SEVERIENS Director March 28, 2000
---------------------------------------------------
Hans Severiens
/s/ SIDNEY JANSMA, JR. Director March 28, 2000
---------------------------------------------------
Sidney Jansma, Jr.
/s/ JACK HARDING Director March 28, 2000
---------------------------------------------------
Jack Harding
/s/ THOMAS GLASGOW, JR. Director March 28, 2000
---------------------------------------------------
Thomas Glasgow, Jr.
/s/ WOLFGANG HANRIEDER Director March 28, 2000
---------------------------------------------------
Wolfgang Hanrieder
II-7
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
1.1 Form of Underwriting Agreement+
3.1 Second Restated Certificate of Incorporation of the
Registrant*
3.2 Form of Certificate of Designation of Series A Junior
Participating Preferred Stock*
3.3 Bylaws of the Registrant*
4.1 Specimen Stock Certificate+
4.2 Form of Rights Agreement*
5.1 Opinion of Rutan & Tucker, LLP+
10.1 Second Amended and Restated 1997 Stock Plan*
10.2 Form of Second Amended and Restated 1997 Stock Plan Stock
Option Agreement*
10.3 Form of Second Amended and Restated 1997 Stock Plan Notice
of Grant of Stock Purchase Right and Restricted Stock
Purchase Agreement*
10.4 Form of Indemnification Agreement*
10.5 Deferred Compensation Agreement dated December 27, 1999
between the Registrant and John Veenstra*
10.6 Lease dated February 26, 1999 between the Registrant and
CarrAmerica Realty Corporation, First Amendment thereto
dated July 21, 1999 and Second Amendment thereto dated as of
January 11, 2000*
10.7 Master Services Agreement dated December 28, 1999 between
the Registrant and Exodus Communications, Inc.*
10.8 Wholesale Service Agreement dated June 13, 1997 between the
Registrant and Solid Technology, Inc.*
10.9 Agreement to Purchase Franchise Territories dated November
29, 1999 between the Registrant and Dorado Resources Corp.*
10.10 Operating Assistance Agreement dated November 30, 1999
between the Registrant and Dorado Resources Corp.*
10.11 Form of Business Program Franchise Agreement (U.S.)*
10.12 Form of Business Program Franchise Agreement (Canada)*
10.13 Form of Business Program Franchise Agreement (Germany)*
10.14 Form of Franchise and Agency Agreement (Australia)*
10.15 Employment Agreement dated July 8, 1999 between the
Registrant and John Veenstra*
10.16 Employment Agreement dated May 20, 1999 between the
Registrant and Glenn E. Abood*
10.17 Employment Agreement dated December 1, 1999 between the
Registrant and Joan Nagelkirk*
10.18 Employment Agreement dated December 1, 1999 between the
Registrant and Gregg Amber*
10.19 Consulting Agreement dated August 30, 1999 between the
Registrant and Jack Harding*
21.1 Subsidiaries*
23.1 Consent of PricewaterhouseCoopers LLP*
23.2 Consent of KPMG LLP*
23.3 Consent of KPMG LLP*
27.1 Financial Data Schedule*
* Filed herewith.
+ To be filed by a subsequent amendment.
EXHIBIT 3.1
SECOND RESTATED CERTIFICATE OF INCORPORATION
OF
ZLAND, INC.
ZLand, Inc., a corporation organized and existing under the laws of the
State of Delaware (the "Corporation"), hereby certifies as follows:
1. The present name of the Corporation is ZLand., Inc. ZLand, Inc. was
originally incorporated under the name ZLand, Inc., and the original Certificate
of Incorporation of the Corporation was filed with the Secretary of State of the
State of Delaware on July 29, 1999.
2. This Second Restated Certificate of Incorporation was duly adopted in
accordance with Sections 228, 242 and 245 of the General Corporation Law of the
State of Delaware and restates, integrates and further amends the provisions of
the Restated Certificate of Incorporation of the Corporation.
3. The text of the Restated Certificate of Incorporation as heretofore
amended or supplemented is hereby restated and further amended to read in its
entirety as follows:
I
1.1 Name. The name of the Corporation is ZLand.com, Inc.
1.2 Purpose and Duration. The purpose of the Corporation is to engage in
any lawful act or activity for which corporations may now or hereafter be
organized under the General Corporation Law of the State of Delaware. The
Corporation is to have perpetual existence.
II
2.1 Registered Office and Agent. The address of the Corporation's
registered office in the State of Delaware is 1013 Centre Road, Wilmington, New
Castle County, Delaware 19805-1297. The registered agent for service of process
at that address is Corporation Service Company.
2.2 Directors. The number of directors which shall constitute the whole
Board of Directors of the Corporation (the "Board of Directors") shall be fixed
by or in the manner provided in the Bylaws of the Corporation. Directors need
not be elected by written ballot.
2.3 Changes to Certificate of Incorporation and Bylaws. The Corporation
reserves the right to amend, alter, change or repeal any provision contained in
this Certificate of Incorporation, in the manner now or hereafter prescribed by
statute, and all rights conferred upon stockholders herein are granted subject
to this reservation. In furtherance and not in limitation of the powers
conferred by statute, the Board of Directors is expressly authorized to make,
alter, amend or repeal the Bylaws of the Corporation.
III
3.1 General. The authorized capital stock of the Corporation is as
follows:
3.1.1 Number and Class. The Corporation is authorized to issue
two classes of shares, designated "Common Stock" and "Preferred Stock." The
total number of shares which the Corporation shall have authority to issue is
120,000,000, of which 100,000,000 shares shall be Common Stock, $.01 par value
per share, and 20,000,000 shares shall be Preferred Stock, $.01 par value per
share. Of the 20,000,000 shares designated as Preferred Stock, 2,220,000 shares
shall be designated as "Series A Preferred Stock" (the "Series A Preferred"),
and shall have the rights, preferences, privileges and restrictions specified in
Section 3.2 below, 7,823,740 shares shall be designated as "Series B Preferred
Stock" (the "Series B Preferred"), and shall have the rights, preferences,
privileges and restrictions specified in Section 3.3 below, and 3,333,333 shall
be designated as "Series C Preferred Stock" (the "Series C Preferred"), and
shall have the rights, preferences, privileges and restrictions specified in
Section 3.4 below. Upon the amendment of this Section 3.1.1 to read as herein
set forth, each outstanding share of Common Stock, Series A Preferred and Series
B Preferred is split up and converted into 2 fully paid and nonassessable shares
of Common Stock, Series A Preferred or Series B Preferred, as the case may be;
provided, however, that any fractional shares resulting from such split up and
conversion shall be rounded to the nearest whole.
3.1.2 Rank. The Series A Preferred, the Series B Preferred and
the Series C Preferred shall rank (i) senior to the Common Stock of the
Corporation as to payment of dividends and distribution of assets upon
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, (ii) on a parity with one another as to payment of dividends and
distribution of assets upon liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, and (iii) on a parity with or
senior to any additional series of Preferred Stock of any class which the Board
of Directors or the stockholders may from time to time authorize, both as to
payment of dividends and as to distributions of assets upon liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary.
3.1.3 Undesignated Preferred Stock. The remaining 6,622,927
shares of the shares designated as Preferred Stock may be issued in one or more
series. The Board of Directors is hereby authorized, subject to any limitations
prescribed by the laws of the State of Delaware, (i) to determine or alter the
rights, preferences, privileges and restrictions granted to or imposed upon any
wholly unissued series of Preferred Stock consistent with the limitations of
this Certificate of Incorporation, (ii) to fix the number of shares comprising
any such series and the designation thereof, within the limits and restrictions
stated in any resolution or resolutions of the Board of Directors originally
fixing the number of shares constituting any series, and (iii) to increase or
decrease the number of shares of any such series subsequent to the issuance of
shares of that series (but not below the number of shares of such series then
outstanding plus the number of shares reserved for issuance upon the exercise of
outstanding options, rights or warrants or the conversion of any outstanding
securities issued by the Corporation into shares of such series).
3.2 Series A Preferred. A statement of the rights, preferences,
privileges and restrictions granted to or imposed on the Series A Preferred and
the holders thereof is as follows:
-2-
3.2.1 Dividends. The holders of Series A Preferred shall have
dividend rights as follows:
(a) The holders of the Series A Preferred, on a pari passu
basis with the holders of shares of any class or series of the Corporation's
capital stock ranking, as to dividends, on a parity ("Parity Dividend Stock")
with the Series A Preferred, shall be entitled to receive, out of any funds
legally available therefor, dividends at the rate of $.02425 per share, per
annum, payable in preference and priority to any payment of any dividend on
Common Stock or shares of any other class or series of the Corporation's capital
stock ranking, as to dividends, junior to the Series A Preferred, when and as
declared by the Board of Directors. The right to such dividends on the Series A
Preferred shall not be cumulative, and no right shall accrue to holders of
Series A Preferred by reason of the fact that dividends on such shares are not
declared or paid in any prior year. After payment of such dividends to the
holders of the Series A Preferred and any Parity Dividend Stock, any additional
dividends declared shall be distributed among holders of shares of any other
class or series of the Corporation's capital stock ranking, as to dividends,
senior to Common Stock, in accordance with the terms of such class or series,
and finally among all holders of Series A Preferred, Parity Dividend Stock,
Common Stock and shares of any other class or series of the Corporation's
capital stock having dividend rights, pro rata as if all shares of Series A
Preferred, Parity Dividend Stock and shares of such other class or series of the
Corporation's capital stock that are convertible into or exchangeable for shares
of Common Stock had been converted into or exchanged for Common Stock at such
time and the dividends were being distributed in equal shares among all shares
of Common Stock that would be outstanding in such case.
(b) No dividends shall be paid or declared and set apart
for payment on any Parity Dividend Stock for any period unless all accrued but
unpaid dividends have been, or contemporaneously are, paid or declared and set
apart for such payment on the Series A Preferred. No full dividends shall be
paid or declared and set apart for payment on the Series A Preferred for any
period, no purchase, redemption or other acquisition of Parity Dividend Stock
shall be made and no monies shall be paid or made available for a sinking fund
for the purchase, redemption or other acquisition of any Series A Preferred or
any Parity Dividend Stock unless all accrued but unpaid dividends have been, or
contemporaneously are, paid or declared and set apart for payment on the Parity
Dividend Stock for all dividend periods terminating on or prior to the date of
payment of such dividends. When dividends are not paid in full upon the Series A
Preferred and the Parity Dividend Stock, all dividends paid or declared and set
apart for payment upon shares of Series A Preferred and Parity Dividend Stock
shall be paid or declared and set apart for payment pro rata, so that the amount
of dividends paid or declared and set apart for payment per share on the Series
A Preferred and the Parity Dividend Stock shall in all cases bear to each other
the same ratio that accrued and unpaid dividends per share on the shares of
Series A Preferred and the Parity Dividend Stock bear to each other.
(c) If the Corporation has declared but unpaid dividends
outstanding immediately prior to, and in the event of, a conversion of the
Series A Preferred (as provided in Section 3.2.3), the Corporation shall,
subject to the availability of funds from which such dividends may lawfully be
paid, at the option of each holder, pay in cash to each holder of Series A
Preferred subject to conversion the full amount of any such dividends or allow
such dividends
-3-
to be converted into Common Stock in accordance with, and pursuant to the terms
specified in, Section 3.2.3.
3.2.2 Liquidation Preference. The holders of Series A Preferred
shall have a liquidation preference as follows:
(a) Relative Preferences. Upon any liquidation,
dissolution or winding up of the Corporation, either voluntary or involuntary,
the holders of the Series A Preferred shall be entitled to receive, on a pari
passu basis with holders of any other class or series of the Corporation's
capital stock having parity as to liquidation rights ("Parity Liquidation
Stock") with the Series A Preferred and prior and in preference to any
distribution of any of the assets or surplus funds of the Corporation to the
holders of the Common Stock or shares of any other class or series of the
Corporation's capital stock ranking, as to liquidation rights, junior to the
Series A Preferred, by reason of their ownership thereof, the amount of $.485
per share (as adjusted for stock splits, stock dividends, recapitalizations and
the like) for each share of Series A Preferred then held by them plus an amount
equal to all declared but unpaid dividends on such shares of Series A Preferred.
If, upon occurrence of such event, the assets and funds thus distributed among
the holders of the Series A Preferred and the Parity Liquidation Stock are
insufficient to permit the payment to the holders of the Series A Preferred the
full preferential amounts to which they are entitled pursuant to this Section
3.2.2(a), then the entire assets and funds of the Corporation legally available
for distribution shall be distributed ratably among the holders of the Series A
Preferred and the Parity Liquidation Stock in proportion to the full liquidation
preference to which such holder is entitled.
(b) Distribution. After payment has been made to the
holders of the Series A Preferred and the Parity Liquidation Stock of the
respective amounts to which they shall be entitled as provided in Section
3.2.2(a) above, the remaining assets of the Corporation available for
distribution to stockholders shall be distributed among holders of shares of any
other class or series of the Corporation's capital stock ranking, as to
liquidation rights, senior to the Common Stock, in accordance with the terms of
such class or series, and finally among the holders of Series A Preferred,
Parity Liquidation Stock, Common Stock and shares of any other class or series
of the Corporation's capital stock having liquidation rights, pro rata as if all
shares of Series A Preferred, Parity Liquidation Stock and shares of such other
class or series of the Corporation's capital stock that are convertible into or
exchangeable for shares of Common Stock had been converted into or exchanged for
Common Stock at such time and such assets were being distributed in equal shares
among all shares of Common Stock that would be outstanding in such case.
3.2.3 Conversion. The holders of the Series A Preferred shall
have conversion rights as follows:
(a) Right to Convert. Each share of Series A Preferred
shall be convertible, at the option of the holder thereof, at any time after the
issuance of such share, into such number of fully paid and nonassessable shares
of Common Stock as is determined by dividing $.485 by the then applicable Series
A Conversion Price (as defined below), determined as hereinafter provided. The
price at which shares of Common Stock shall be deliverable upon conversion of
the Series A Preferred (the "Series A Conversion Price") shall initially be
$.485
-4-
per share of Common Stock. Such initial Series A Conversion Price shall be
subject to adjustment as hereinafter provided.
(b) Automatic Conversion. Each share of Series A Preferred
shall automatically be converted into shares of Common Stock at the then
effective Series A Conversion Price, as applicable, (i) upon the effectiveness
of a firm commitment underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended, covering
the offer and sale of Common Stock for the account of the Corporation to the
public at a price per share of at least $1.50 (as adjusted for stock splits,
reverse stock splits and the like) and an aggregate offering price to the public
of not less than $5,000,000, (ii) upon the affirmative vote of the holders of a
majority of the shares of Series A Preferred, voting as a single class,
outstanding at the time of such vote or (iii) upon the closing of an
underwritten public offering pursuant to approval of an application to list the
Corporation's Common Stock on the Neuer Markt of the Frankfurt Stock Exchange.
In the event of a public offering described in clauses (i) or (iii) of the
preceding sentence, the person(s) entitled to receive the Common Stock issuable
upon such conversion of Series A Preferred shall not be deemed to have converted
such Series A Preferred until immediately prior to the closing of such public
offering.
(c) Mechanics of Conversion. No fractional shares of
Common Stock shall be issued upon conversion of Series A Preferred. In lieu of
any fractional share to which a holder would otherwise be entitled, the
Corporation shall pay cash equal to such fraction multiplied by the per share
fair market value of the Common Stock as determined by the Board of Directors.
Before any holder of Series A Preferred shall be entitled to convert the same
into full shares of Common Stock, he shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the Corporation or of any
transfer agent for the Series A Preferred, and shall give written notice to the
Corporation at such office that he elects to convert the same. Such notice shall
also state whether the holder elects, pursuant to Section 3.2.1, to receive
declared but unpaid dividends on the Series A Preferred proposed to be converted
in cash, or to convert such dividends into shares of Common Stock at their fair
market value as determined by the Board of Directors. The Corporation shall, as
soon as practicable thereafter, issue and deliver at such office to such holder
of Series A Preferred, a certificate or certificates for the number of shares of
Common Stock to which he shall be entitled as aforesaid and a check payable to
the holder in the amount of any cash amounts payable as the result of a
conversion into a fractional share of Common Stock, and any declared but unpaid
dividends on the converted Series A Preferred which the holder elected to
receive in cash. Such conversion shall be deemed to have been made immediately
prior to the close of business on the date of such surrender of the shares of
Series A Preferred to be converted, and the person or persons entitled to
receive the shares of Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such shares of
Common Stock on such date. If the conversion is in connection with an
underwritten public offering of securities as described in clauses (i) or (iii)
of the preceding paragraph, the conversion shall be conditioned upon the closing
of such public offering, in which event the person(s) entitled to receive the
Common Stock issuable upon such conversion of the Series A Preferred shall not
be deemed to have converted such Series A Preferred until immediately prior to
such closing.
-5-
(d) Adjustments to Series A Conversion Price for Diluting
Issues.
(i) Special Definitions. For purposes of this
Section 3.2.3 and Section 3.3.3, the following definitions shall apply.
(1) "Options" shall mean rights, options or
warrants to subscribe for, purchase or otherwise acquire either Common Stock or
Convertible Securities.
(2) "Convertible Securities" shall mean any
evidences of indebtedness, shares (other than Common Stock, the Series A
Preferred and the Series B Preferred) or other securities convertible into or
exchangeable for Common Stock.
(3) "Series A Original Issue Date" shall
mean the date on which the first share of Series A Preferred was first issued by
the Corporation's predecessor, ZLand, Inc., a California corporation ("ZLand
California").
(4) "Series B Original Issue Date" means the
date on which the first share of Series B Preferred was first issued by ZLand
California.
(5) "Additional Shares of Common Stock"
shall mean all shares of Common Stock issued (or, pursuant to Section
3.2.3(d)(iii) or 3.3.3(d)(iii), deemed to be issued) by the Corporation or ZLand
California other than shares of Common Stock issued or issuable:
(A) upon conversion of shares of the
Series A Preferred or the Series B Preferred;
(B) to officers or employees or
directors of, or consultants to, the Corporation or ZLand California pursuant to
a stock grant, option plan or purchase plan or other employee stock incentive
program (collectively, the "Plans") approved by the Board of Directors of such
company;
(C) as a dividend or distribution on
the Series A Preferred or the Series B Preferred;
(D) upon exercise or conversion of
warrants to purchase shares of stock of the Corporation or ZLand California
issued in connection with equipment lease financing transactions, bank financing
transactions or real estate leasing transactions approved by the Board of
Directors of such company, where the issuance of such warrants is not
principally for the purpose of raising additional equity capital for such
company;
(E) upon exercise of warrants issued
by ZLand California in connection with the Series B Preferred, of existing
warrants issued by ZLand California to purchase up to 724,300 shares of Common
Stock, of existing warrants issued by ZLand California to purchase up to 328,330
shares of Series A Preferred and of existing warrants issued by ZLand California
to purchase up to 449,640 shares of Series B Preferred, and upon
-6-
conversion of convertible notes issued by ZLand California convertible into up
to 899,280 shares of Series B Preferred;
(F) by way of dividend or other
distribution on shares of Common Stock excluded from the definition of
Additional Shares of Common Stock by the foregoing clauses (A), (B), (C), (D)
and (E) or on shares of Common Stock so excluded; and
(G) pursuant to any transaction
effective after the Series A Original Issue Date or Series B Original Issue
Date, as the case may be, and with respect to which the holders of a majority of
the then outstanding Series A Preferred or the Series B Preferred, as the case
may be, consent in writing to the waiver of the adjustment provision of this
Section 3.2.3(d)(i)(5).
(ii) No Adjustment of Series A Conversion Price. No
adjustment in the Series A Conversion Price shall be made in respect of the
issuance of Additional Shares of Common Stock unless the consideration per share
for an Additional Share of Common Stock issued or deemed to be issued by the
Corporation or ZLand California is less than the Series A Conversion Price in
effect on the date of, and immediately prior to such issue. No adjustment in the
Series A Conversion Price pursuant to Section 3.2.3(d)(iv) shall be made as a
result of any stock dividend or subdivision which causes an adjustment in the
Series A Conversion Price pursuant to Section 3.2.3(e).
(iii) Deemed Issue of Additional Shares of Common
Stock. Subject to Section 3.2.3(d)(i)(5), if the Corporation at any time or from
time to time after the Series A Original Issue Date issues any Options or
Convertible Securities or fixes a record date for the determination of holders
of any class of securities entitled to receive any such Options or Convertible
Securities, then the maximum number of shares (as set forth in the instrument
relating thereto without regard to any provisions contained therein for a
subsequent adjustment of such number) of Common Stock issuable upon the exercise
of such Options or, in the case of Convertible Securities and Options therefor,
the conversion or exchange of such Convertible Securities, shall be deemed to be
Additional Shares of Common Stock issued as of the time of such issue or, in
case such a record date shall have been fixed, as of the close of business on
such record date, provided that Additional Shares of Common Stock shall not be
deemed to have been issued with respect to the Series A Preferred unless the
consideration per share (determined pursuant to Section 3.2.3(d)(v)) of such
Additional Shares of Common Stock would be less than the Series A Conversion
Price in effect on the date of and immediately prior to such issue, or such
record date, as the case may be, and provided further that in any case in which
Additional Shares of Common Stock are deemed to be issued:
(A) no further adjustment in the
Series A Conversion Price shall be made upon the subsequent issue of Convertible
Securities or shares of Common Stock upon the exercise of such Options or
conversion or exchange of such Convertible Securities;
(B) if such Options or Convertible
Securities by their terms provide, with the passage of time or otherwise, for
any increase or decrease in the
-7-
consideration payable to the Corporation, or increase or decrease in the number
of shares of Common Stock issuable, upon the exercise, conversion or exchange
thereof, the Series A Conversion Price, computed upon the original issue thereof
(or upon the occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon any such increase or decrease
becoming effective, be recomputed to reflect such increase or decrease insofar
as it affects such Options or the rights of conversion or exchange under such
Convertible Securities; and
(C) on the expiration or
cancellation of any Options or the termination of the right to convert or
exchange any Convertible Securities which have not been exercised, if the Series
A Conversion Price has been adjusted upon the original issuance thereof or has
been subsequently adjusted pursuant to clause (B) above, the Series A Conversion
Price shall be recomputed as if:
(1) in the case of
Convertible Securities or Options to purchase Common Stock, the only Additional
Shares of Common Stock issued were shares of Common Stock, if any, actually
issued upon the exercise of such Options or the conversion or exchange of such
Convertible Securities, and the consideration received therefor was the
consideration actually received by the Corporation for the issue of all such
Options, whether or not exercised, plus the consideration actually received by
the Corporation upon such exercise, or for the issue of all such Convertible
Securities which were actually converted or exchanged plus the consideration
actually received by the Corporation upon such conversion or exchange, if any,
and
(2) in the case of Options to
purchase Convertible Securities, only the Convertible Securities, if any,
actually issued upon the exercise thereof were issued at the time of issue of
such Options and the consideration received by the Corporation for the
Additional Shares of Common Stock deemed to have been then issued was the
consideration actually received by the Corporation for the issue of all such
Options, whether or not exercised, plus the consideration deemed to have been
received by the Corporation upon the issue of the Convertible Securities with
respect to which such Options were actually exercised;
(D) no readjustment pursuant to
clauses (B) and (C) above shall have the effect of increasing the Series A
Conversion Price to an amount which exceeds the lower of (i) the Series A
Conversion Price on the original adjustment date, or (ii) the Series A
Conversion Price that would have resulted from any issuance of Additional Shares
of Common Stock between the original adjustment date and such readjustment date.
(iv) Adjustment of Series A Conversion Price of
Series A Preferred Upon Issuance of Additional Shares of Common Stock. If after
the Series A Original Issue Date Additional Shares of Common Stock (including
Additional Shares of Common Stock deemed to be issued pursuant to Section
3.2.3(d)(iii)) are issued without consideration or for a consideration per share
less than the Series A Conversion Price in effect on the date of and immediately
prior to such issue, then and in such event, the Series A Conversion Price shall
be reduced, concurrently with such issue, to a price (calculated to the nearest
cent) determined by multiplying the Series A Conversion Price by a fraction, the
numerator of which shall be the
-8-
number of shares of Common Stock outstanding immediately prior to such issue
plus the number of shares of Common Stock which the aggregate consideration
received for the total number of Additional Shares of Common Stock so issued
would purchase at such Series A Conversion Price; and the denominator of which
shall be the number of shares of Common Stock outstanding immediately prior to
such issue plus the number of such Additional Shares of Common Stock so issued;
and provided further that, for the purposes of this Section 3.2.3(d)(iv) all
shares of Common Stock issuable upon conversion of outstanding Convertible
Securities, Options and the Series A Preferred shall be deemed to be
outstanding, and immediately after any Additional Shares of Common Stock are
deemed issued pursuant to Section 3.2.3(d)(iii), such Additional Shares of
Common Stock shall be deemed to be outstanding.
(v) Determination of Consideration. For purposes of
this Section 3.2.3(d), the consideration received by the Corporation for the
issue of any Additional Shares of Common Stock shall be computed as follows:
(1) Cash and Property. Such consideration
shall:
(A) insofar as it consists of cash,
be computed at the aggregate amount of cash received by the Corporation;
(B) insofar as it consists of
securities (i) if the securities are then traded on a national securities
exchange, the Nasdaq Stock Market or a similar national quotation system (or, if
the securities are not traded on a national securities exchange, the Nasdaq
Stock Market or a similar national quotation system but are traded on an
internationally recognized exchange), then the value shall be computed based on
the average of the closing prices of the securities on such exchange or system
over the 30-day period ending three days prior to receipt by the Corporation,
(ii) if the securities are actively traded over-the-counter, then the value
shall be computed based on the average of the closing bid prices over the 30-day
period ending three days prior to the receipt by the Corporation, and (iii) if
there is no active public market, then the value shall be computed based on the
fair market value thereof on the date of receipt by the Corporation, as
determined in good faith by the Board of Directors of the Corporation;
(C) insofar as it consists of
property other than cash and securities, be computed at the fair value thereof
at the time of such issue, as determined in good faith by the Board of
Directors; and
(D) if Additional Shares of Common
Stock are issued together with other shares or securities or other assets of the
Corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (A), (B) and (C)
above, as determined in good faith by the Board of Directors.
(2) Options and Convertible Securities. The
consideration per share received by the Corporation for Additional Shares of
Common Stock deemed to have been issued pursuant to Section 3.2.3(d)(iii),
relating to Options and Convertible Securities, shall be determined by dividing
-9-
(x) the total amount, if any,
received or receivable by the Corporation as consideration for the issue of such
Options or Convertible Securities, plus the minimum aggregate amount of
additional consideration (as set forth in the instruments relating thereto,
without regard to any provision contained therein for a subsequent adjustment of
such consideration) payable to the Corporation upon the exercise of such Options
or the conversion or exchange of such Convertible Securities, or in the case of
Options for Convertible Securities, the exercise of such Options for Convertible
Securities and the conversion or exchange of such Convertible Securities by
(y) the maximum number of shares of
Common Stock (as set forth in the instrument relating thereto, without regard to
any provision contained therein for a subsequent adjustment of such number)
issuable upon the exercise of such Options or the conversion or exchange of such
Convertible Securities.
(e) Adjustments for Stock Dividends, Subdivisions,
Combinations, or Consolidations. If the Corporation pays a stock dividend on the
Common Stock, or the outstanding shares of Common Stock are subdivided, combined
or consolidated, by reclassification, stock split or otherwise, into a greater
or lesser number of shares of Common Stock, the Series A Conversion Price in
effect immediately prior to such dividend, subdivision, combination or
consolidation shall, concurrently with the effectiveness of such dividend,
subdivision, combination or consolidation, be proportionately adjusted.
(f) No Impairment. The Corporation will not, by amendment
of its Certificate of Incorporation or through any reorganization, transfer of
assets, merger, dissolution, issue or sale of securities or any other voluntary
action, avoid or seek to avoid the observance or performance of any of the terms
to be observed or performed hereunder by the Corporation but will at all times
in good faith assist in the carrying out of all the provisions of this Section
3.2.3 and in the taking of all such action as may be necessary or appropriate in
order to protect the conversion rights of the holders of the Series A Preferred
against impairment.
(g) Notices of Record Date. If the Corporation shall
propose at any time:
(i) to declare any dividend or distribution upon
its Common Stock, whether in cash, property, stock or other securities, whether
or not a regular cash dividend and whether or not out of earnings or earned
surplus,
(ii) to offer for subscription pro rata to the
holders of any class or series of its stock any additional shares of stock of
any class or series or other rights,
(iii) to effect any reclassification or
recapitalization of its Common Stock outstanding involving a change in the
Common Stock; or
(iv) to merge with or into any other corporation
(other than a merger in which the holders of the outstanding voting equity
securities of the Corporation immediately prior to such merger hold more than
50% of the voting power of the surviving entity immediately following such
merger), or sell, lease or convey all or substantially all its property or
business, or to liquidate, dissolve or wind up;
-10-
then, in connection with each such event, the Corporation shall send to the
holders of the Series A Preferred:
(1) at least 20 days' prior written notice
of the date on which a record shall be taken for such dividend, distribution or
subscription rights (and specifying the date on which the holders of Common
Stock shall be entitled thereto) or for determining rights to vote in respect of
the matters referred to in subparagraphs (iii) and (iv) above; and
(2) in the case of the matters referred to
in subparagraphs (iii) and (iv) above, at least 20 days' prior written notice of
the date when the same shall take place (and specifying the date on which the
holders of Common Stock shall be entitled to exchange their Common Stock for
securities or other property deliverable upon the occurrence of such event).
Each such written notice shall be given by first class mail, postage prepaid,
addressed to the holders of Series A Preferred shares at the address for each
such holder as shown on the books of the Corporation.
(h) Recapitalization. If at any time or from time to time
there is a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this Section 3.2.3 or in Section 3.3.3) provision shall be made so that the
holders of the Series A Preferred shall thereafter be entitled to receive upon
conversion of the Series A Preferred the number of shares of stock or other
securities or property of the Corporation to which a holder of Common Stock
deliverable upon conversion of each share of such series would have been
entitled on such recapitalization. In any such case, appropriate adjustment
shall be made in the application of the provisions of this Section 3.2.3 with
respect to the rights of the holders of the Series A Preferred after the
recapitalization to the end that the provisions of this Section 3.2.3 (including
adjustment of the Series A Conversion Price then in effect and the number of
shares purchasable upon conversion of the Series A Preferred) shall be
applicable after that event as nearly equivalent as may be practicable.
3.2.4 Voting Rights. Except as otherwise required by law and as
provided in Section 3.2.5, the holders of Series A Preferred shall be entitled
to notice of any stockholders' meeting and to vote with the Common Stock and any
other series of Preferred Stock having the right to vote generally as a single
class upon any matter submitted to the stockholders for a vote. Each holder of
Series A Preferred shall have one vote for each full share of Common Stock into
which its respective shares of Series A Preferred would be convertible on the
record date for the vote.
3.2.5 Protective Provisions. In addition to any other rights
provided by law and except as provided by law, so long as any Series A Preferred
shall be outstanding, the Corporation shall not, without first obtaining the
affirmative vote or written consent of the holders of a majority of the
outstanding shares of Series A Preferred, voting as a separate class on an
as-converted basis:
-11-
(a) authorize or issue shares of any class of stock having
any preference or priority as to voting, dividends or upon liquidation superior
to or on a parity with any such preference or priority of the Series A
Preferred, or authorize or issue shares of stock of any class or any bonds,
debentures, notes or other obligations convertible into or exchangeable for, or
having option rights to purchase, any shares of stock of the Corporation having
any preference or priority as to voting, dividends or upon liquidation superior
to or on a parity with any such preference or priority of the Series A
Preferred;
(b) redeem or purchase any of the Common Stock; provided,
however, that this restriction shall not apply to the repurchase of shares of
Common Stock at the original cost paid for such shares (unless a repurchase
price other than such cost is unanimously approved by the Board of Directors)
from employees, officers, directors, consultants or other persons performing
services for the Corporation upon the termination of the employment, consulting
or other relationship between the Corporation and such persons;
(c) increase the total number of authorized shares of
Series A Preferred;
(d) amend or repeal any provision of, or add any provision
to, the Corporation's Certificate of Incorporation or Bylaws if such action
would alter or change the preferences, rights, privileges or powers of, or the
restrictions provided for the benefit of, the Series A Preferred so as to affect
them adversely;
(e) consummate a sale of all or substantially all of the
Corporation's assets or any transaction or series of related transactions
(including, without limitation, any reorganization, merger or consolidation)
which would result in the holders of the outstanding voting equity securities of
the Corporation immediately prior to such transaction holding less than 50% of
the voting power of the surviving entity immediately following such transaction.
3.2.6 Status of Converted Stock. If any shares of Series A
Preferred are converted into Common Stock pursuant to Section 3.2.3, the shares
of Series A Preferred so converted shall be canceled and shall not be issuable
by the Corporation, and the Certificate of Incorporation of the Corporation
shall be appropriately amended to effect the corresponding reduction in the
Corporation's authorized capital stock.
3.2.7 Residual Rights. All rights accruing to the outstanding
shares of the Corporation not expressly provided for to the contrary herein
shall be vested in the Common Stock.
3.3 Series B Preferred. A statement of the rights, preferences,
privileges and restrictions granted to or imposed on the Series B Preferred and
the holders thereof is as follows:
3.3.1 Dividends.
(a) The holders of the Series B Preferred, on a pari passu
basis with the holders of any Parity Dividend Stock, shall be entitled to
receive, out of any funds legally available therefor, dividends at the rate of
$.06 per share, per annum, payable in preference and priority to any payment of
any dividend on Common Stock or shares of any other class or series
-12-
of the Corporation's capital stock ranking, as to dividends, junior to the
Series B Preferred, when and as declared by the Board of Directors. The right to
such dividends on the Series B Preferred shall not be cumulative, and no right
shall accrue to holders of Series B Preferred by reason of the fact that
dividends on such shares are not declared or paid in any prior year. After
payment of such dividends to the holders of the Series B Preferred and any
Parity Dividend Stock, any additional dividends declared shall be distributed
among holders of shares of any other class or series of the Corporation's
capital stock ranking, as to dividends, senior to the Common Stock, in
accordance with the terms of such class or series, and finally among all holders
of Series B Preferred, Parity Dividend Stock, Common Stock and shares of any
other class or series of the Corporation's capital stock having dividend rights,
pro rata as if all shares of Series B Preferred, Parity Dividend Stock and
shares of such other class or series of the Corporation's capital stock that are
convertible into or exchangeable for shares of Common Stock had been converted
into or exchanged for Common Stock at such time and the dividends were being
distributed in equal shares among all shares of Common Stock that would be
outstanding in such case.
(b) No dividends shall be paid or declared and set apart
for payment on any Parity Dividend Stock for any period unless all accrued but
unpaid dividends have been, or contemporaneously are, paid or declared and set
apart for such payment on the Series B Preferred. No full dividends shall be
paid or declared and set apart for payment on the Series B Preferred for any
period, no purchase, redemption or other acquisition of Parity Dividend Stock
shall be made and no monies shall be paid or made available for a sinking fund
for the purchase, redemption or other acquisition of any Series B Preferred or
any Parity Dividend Stock unless all accrued but unpaid dividends have been, or
contemporaneously are, paid or declared and set apart for payment on the Parity
Dividend Stock for all dividend periods terminating on or prior to the date of
payment of such dividends. When dividends are not paid in full upon the Series B
Preferred and the Parity Dividend Stock, all dividends paid or declared and set
apart for payment upon shares of Series B Preferred and Parity Dividend Stock
shall be paid or declared and set apart for payment pro rata, so that the amount
of dividends paid or declared and set apart for payment per share on the Series
B Preferred and the Parity Dividend Stock shall in all cases bear to each other
the same ratio that accrued and unpaid dividends per share on the shares of
Series B Preferred and Parity Dividend Stock bear to each other.
(c) If the Corporation has declared but unpaid dividends
outstanding immediately prior to, and in the event of, a conversion of the
Series B Preferred (as provided in Section 3.3.3), the Corporation shall,
subject to the availability of funds from which such dividends may lawfully be
paid, at the option of each holder, pay in cash to each holder of Series B
Preferred subject to conversion the full amount of any such dividends or allow
such dividends to be converted into Common Stock in accordance with, and
pursuant to the terms specified in, Section 3.3.3.
3.3.2 Liquidation Preference. The holders of Series B Preferred
shall have a liquidation preference as follows:
(a) Relative Preferences. Upon any liquidation,
dissolution or winding up of the Corporation, either voluntary or involuntary,
the holders of the Series B Preferred shall be entitled to receive, on a pari
passu basis with the holders of any Parity Liquidation Stock and prior and in
preference to any distribution of any of the assets or surplus funds of the
Corporation
-13-
to the holders of the Common Stock or shares of any other class or series of the
Corporation's capital stock ranking, as to liquidation rights, junior to the
Series B Preferred, by reason of their ownership thereof, a liquidation
preference in the amount of $1.00 per share (as adjusted for stock splits, stock
dividends, recapitalizations and the like) for each share of Series B Preferred
then held by them plus an amount equal to all declared but unpaid dividends on
such shares of Series B Preferred. If, upon occurrence of such event, the assets
and funds thus distributed among the holders of the Series B Preferred and the
Parity Liquidation Stock are insufficient to permit the payment to the holders
of the Series B Preferred the full preferential amounts to which they are
entitled pursuant to this Section 3.3.2(a), then the entire assets and funds of
the Corporation legally available for distribution shall be distributed ratably
among the holders of the Series B Preferred and the Parity Liquidation Stock in
proportion to the full liquidation preference to which such holder is entitled.
(b) Distribution. After payment has been made to the
holders of the Series B Preferred and the Parity Liquidation Stock of the
respective amounts to which they shall be entitled as provided in Section
3.3.2(a), the remaining assets of the Corporation available for distribution to
stockholders shall be distributed among holders of shares of any other class or
series of the Corporation's capital stock ranking, as to liquidation rights,
senior to the Common Stock, in accordance with the terms of such class or
series, and finally among the holders of Series B Preferred, Parity Liquidation
Stock, Common Stock and shares of any other class or series of the Corporation's
capital stock having liquidation rights, pro rata as if all shares of Series B
Preferred, Parity Liquidation Stock and shares of such other class or series of
the Corporation's capital stock that are convertible into or exchangeable for
shares of Common Stock had been converted into Common Stock at such time and
such assets were being distributed in equal shares among all shares of Common
Stock that would be outstanding in such case.
3.3.3 Conversion. The holders of the Series B Preferred shall
have conversion rights as follows:
(a) Right to Convert. Each share of Series B Preferred
shall be convertible, at the option of the holder thereof, at any time after the
issuance of such share, into such number of fully paid and nonassessable shares
of Common Stock as is determined by dividing $1.00 by the then applicable Series
B Conversion Price (as defined below), determined as hereinafter provided. The
price at which shares of Common Stock shall be deliverable upon conversion of
the Series B Preferred ("Series B Conversion Price") shall initially be $1.00
per share of Common Stock. The initial Series B Conversion Price shall be
subject to adjustment as hereinafter provided.
(b) Automatic Conversion. Each share of Series B Preferred
shall automatically be converted into shares of Common Stock at the then
effective Series B Conversion Price, as applicable, (i) upon the effectiveness
of a firm commitment underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended, covering
the offer and sale of Common Stock for the account of the Corporation to the
public at a price per share of at least $1.50 (as adjusted for stock splits,
reverse stock splits and the like) and an aggregate offering price to the public
of not less than $5,000,000, (ii) upon the affirmative vote of the holders of a
majority of the shares of Series B Preferred, voting as a
-14-
single class, outstanding at the time of such vote or (iii) upon the closing of
an underwritten public offering pursuant to approval of an application to list
the Corporation's Common Stock on the Neuer Markt of the Frankfurt Stock
Exchange. In the event of a public offering described in clauses (i) or (iii) of
the preceding sentence, the person(s) entitled to receive the Common Stock
issuable upon such conversion of Series B Preferred shall not be deemed to have
converted such Series B Preferred until immediately prior to the closing of such
public offering.
(c) Mechanics of Conversion. No fractional shares of
Common Stock shall be issued upon conversion of Series B Preferred. In lieu of
any fractional share to which a holder would otherwise be entitled, the
Corporation shall pay cash equal to such fraction multiplied by the per share
fair market value of the Common Stock as determined by the Board of Directors.
Before any holder of Series B Preferred shall be entitled to convert the same
into full shares of Common Stock, he shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the Corporation or of any
transfer agent for the Series B Preferred, and shall give written notice to the
Corporation at such office that he elects to convert the same. Such notice shall
also state whether the holder elects, pursuant to Section 3.3.1, to receive
declared but unpaid dividends on the Series B Preferred proposed to be converted
in cash, or to convert such dividends into shares of Common Stock at their fair
market value as determined by the Board of Directors. The Corporation shall, as
soon as practicable thereafter, issue and deliver at such office to such holder
of Series B Preferred, a certificate or certificates for the number of shares of
Common Stock to which he shall be entitled as aforesaid and a check payable to
the holder in the amount of any cash amounts payable as the result of a
conversion into a fractional share of Common Stock, and any declared but unpaid
dividends on the converted Series B Preferred which the holder elected to
receive in cash. Such conversion shall be deemed to have been made immediately
prior to the close of business on the date of such surrender of the shares of
Series B Preferred to be converted, and the person or persons entitled to
receive the shares of Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such shares of
Common Stock on such date. If the conversion is in connection with an
underwritten public offering of securities as described in clauses (i) or (iii)
of the preceding paragraph, the conversion shall be conditioned upon the closing
of such public offering, in which event the person(s) entitled to receive the
Common Stock issuable upon such conversion of the Series B Preferred shall not
be deemed to have converted such Series B Preferred until immediately prior to
such closing.
(d) Adjustments to Series B Conversion Price for Diluting
Issues.
(i) No Adjustment of Series B Conversion Price. No
adjustment in the Series B Conversion Price shall be made in respect of the
issuance of Additional Shares of Common Stock unless the consideration per share
for an Additional Share of Common Stock issued or deemed to be issued by the
Corporation or ZLand California is less than the Series B Conversion Price in
effect on the date of, and immediately prior to such issue. No adjustment in the
Series B Conversion Price pursuant to Section 3.3.3(d)(iii) shall be made as a
result of any stock dividend or subdivision which causes an adjustment in the
Series B Conversion Price pursuant to Section 3.3.3(e) below.
(ii) Deemed Issue of Additional Shares of Common
Stock. Subject to Section 3.2.3(d)(i)(5), if the Corporation at any time or from
time to time after the
-15-
Series B Original Issue Date issues any Options or Convertible Securities or
fixes a record date for the determination of holders of any class of securities
entitled to receive any such Options or Convertible Securities, then the maximum
number of shares (as set forth in the instrument relating thereto without regard
to any provisions contained therein for a subsequent adjustment of such number)
of Common Stock issuable upon the exercise of such Options or, in the case of
Convertible Securities and Options therefor, the conversion or exchange of such
Convertible Securities, shall be deemed to be Additional Shares of Common Stock
issued as of the time of such issue or, in case such a record date shall have
been fixed, as of the close of business on such record date, provided that
Additional Shares of Common Stock shall not be deemed to have been issued with
respect to the Series B Preferred unless the consideration per share (determined
pursuant to Section 3.3.3(d)(iv)) of such Additional Shares of Common Stock
would be less than the Series B Conversion Price in effect on the date of and
immediately prior to such issue, or such record date, as the case may be, and
provided further that in any case in which Additional Shares of Common Stock are
deemed to be issued:
(A) no further adjustment in the
Series B Conversion Price shall be made upon the subsequent issue of Convertible
Securities or shares of Common Stock upon the exercise of such Options or
conversion or exchange of such Convertible Securities;
(B) if such Options or Convertible
Securities by their terms provide, with the passage of time or otherwise, for
any increase or decrease in the consideration payable to the Corporation, or
increase or decrease in the number of shares of Common Stock issuable, upon the
exercise, conversion or exchange thereof, the Series B Conversion Price,
computed upon the original issue thereof (or upon the occurrence of a record
date with respect thereto), and any subsequent adjustments based thereon, shall,
upon any such increase or decrease becoming effective, be recomputed to reflect
such increase or decrease insofar as it affects such Options or the rights of
conversion or exchange under such Convertible Securities; and
(C) on the expiration or
cancellation of any Options or the termination of the right to convert or
exchange any Convertible Securities which have not been exercised, if the Series
B Conversion Price has been adjusted upon the original issuance thereof or has
been subsequently adjusted pursuant to clause (B) above, the Series B Conversion
Price shall be recomputed as if:
(1) in the case of
Convertible Securities or Options to purchase Common Stock, the only Additional
Shares of Common Stock issued were shares of Common Stock, if any, actually
issued upon the exercise of such Options or the conversion or exchange of such
Convertible Securities, and the consideration received therefor was the
consideration actually received by the Corporation for the issue of all such
Options, whether or not exercised, plus the consideration actually received by
the Corporation upon such exercise, or for the issue of all such Convertible
Securities which were actually converted or exchanged plus the consideration
actually received by the Corporation upon such conversion or exchange, if any,
and
-16-
(2) in the case of Options to
purchase Convertible Securities, only the Convertible Securities, if any,
actually issued upon the exercise thereof were issued at the time of issue of
such Options and the consideration received by the Corporation for the
Additional Shares of Common Stock deemed to have been then issued was the
consideration actually received by the Corporation for the issue of all such
Options, whether or not exercised, plus the consideration deemed to have been
received by the Corporation upon the issue of the Convertible Securities with
respect to which such Options were actually exercised;
(D) no readjustment pursuant to
clauses (B) and (C) above shall have the effect of increasing the Series B
Conversion Price to an amount which exceeds the lower of (i) the Series B
Conversion Price on the original adjustment date, or (ii) the Series B
Conversion Price that would have resulted from any issuance of Additional Shares
of Common Stock between the original adjustment date and such readjustment date.
(iii) Adjustment of Series B Conversion Price Upon
Issuance of Additional Shares of Common Stock. If after the Series B Original
Issue Date Additional Shares of Common Stock (including Additional Shares of
Common Stock deemed to be issued pursuant to Section 3.3.3(d)(ii)) are issued
without consideration or for a consideration per share less than the Series B
Conversion Price in effect on the date of and immediately prior to such issue,
then and in such event, the Series B Conversion Price shall be reduced,
concurrently with such issue, to a price (calculated to the nearest cent)
determined by multiplying the Series B Conversion Price by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such issue plus the number of shares of Common Stock which
the aggregate consideration received for the total number of Additional Shares
of Common Stock so issued would purchase at such Series B Conversion Price; and
the denominator of which shall be the number of shares of Common Stock
outstanding immediately prior to such issue plus the number of such Additional
Shares of Common Stock so issued; and provided further that, for the purposes of
this Section 3.3.3(d)(iii), all shares of Common Stock issuable upon conversion
of outstanding Convertible Securities, Options and the Series B Preferred shall
be deemed to be outstanding, and immediately after any Additional Shares of
Common Stock are deemed issued pursuant to Section 3.3.3(d)(ii), such Additional
Shares of Common Stock shall be deemed to be outstanding.
(iv) Determination of Consideration. For purposes
of this Section 3.3.3(d) the consideration received by the Corporation for the
issue of any Additional Shares of Common Stock shall be computed as follows:
(1) Cash and Property. Such consideration
shall:
(A) insofar as it consists of cash,
be computed at the aggregate amount of cash received by the Corporation;
(B) insofar as it consists of
securities (i) if the securities are then traded on a national securities
exchange, the Nasdaq Stock Market or a similar national quotation system (or, if
the securities are not traded on a national securities exchange, the Nasdaq
Stock Market or a similar national quotation system but are traded on an
-17-
internationally recognized exchange), then the value shall be computed based on
the average of the closing prices of the securities on such exchange or system
over the 30-day period ending three days prior to receipt by the Corporation,
(ii) if the securities are actively traded over-the-counter, then the value
shall be computed based on the average of the closing bid prices over the 30-day
period ending three days prior to the receipt by the Corporation, and (iii) if
there is no active public market, then the value shall be computed based on the
fair market value thereof on the date of receipt by the Corporation, as
determined in good faith by the Board of Directors of the Corporation;
(C) insofar as it consists of
property other than cash and securities, be computed at the fair value thereof
at the time of such issue, as determined in good faith by the Board of
Directors; and
(D) if Additional Shares of Common
Stock are issued together with other shares or securities or other assets of the
Corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in paragraphs (A), (B) and (C)
above, as determined in good faith by the Board of Directors.
(2) Options and Convertible Securities. The
consideration per share received by the Corporation for Additional Shares of
Common Stock deemed to have been issued pursuant to Section 3.3.3(d)(ii),
relating to Options and Convertible Securities, shall be determined by dividing
(x) the total amount, if any,
received or receivable by the Corporation as consideration for the issue of such
Options or Convertible Securities, plus the minimum aggregate amount of
additional consideration (as set forth in the instruments relating thereto,
without regard to any provision contained therein for a subsequent adjustment of
such consideration) payable to the Corporation upon the exercise of such Options
or the conversion or exchange of such Convertible Securities, or in the case of
Options for Convertible Securities, the exercise of such Options for Convertible
Securities and the conversion or exchange of such Convertible Securities by
(y) the maximum number of shares of
Common Stock (as set forth in the instrument relating thereto, without regard to
any provision contained therein for a subsequent adjustment of such number)
issuable upon the exercise of such Options or the conversion or exchange of such
Convertible Securities.
(e) Adjustments for Stock Dividends, Subdivisions,
Combinations, or Consolidations. If the Corporation pays a stock dividend on the
Common Stock, or the outstanding shares of Common Stock are subdivided, combined
or consolidated, by reclassification, stock split or otherwise, into a greater
or lesser number of shares of Common Stock, the Series B Conversion Price in
effect immediately prior to such dividend, subdivision, combination or
consolidation shall, concurrently with the effectiveness of such dividend,
subdivision, combination or consolidation, be proportionately adjusted.
(f) No Impairment. The Corporation will not, by amendment
of its Certificate of Incorporation or through any reorganization, transfer of
assets, merger, dissolution,
-18-
issue or sale of securities or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms to be observed or
performed hereunder by the Corporation but will at all times in good faith
assist in the carrying out of all the provisions of this Section 3.3.3 and in
the taking of all such action as may be necessary or appropriate in order to
protect the conversion rights of the holders of the Series B Preferred against
impairment.
(g) Notices of Record Date. If the Corporation proposes at
any time:
(i) to declare any dividend or distribution upon
its Common Stock, whether in cash, property, stock or other securities, whether
or not a regular cash dividend and whether or not out of earnings or earned
surplus;
(ii) to offer for subscription pro rata to the
holders of any class or series of its stock any additional shares of stock of
any class or series or other rights;
(iii) to effect any reclassification or
recapitalization of its Common Stock outstanding involving a change in the
Common Stock; or
(iv) to merge with or into any other corporation
(other than a merger in which the holders of the outstanding voting equity
securities of the Corporation immediately prior to such merger hold more than
50% of the voting power of the surviving entity immediately following such
merger), or sell, lease or convey all or substantially all its property or
business, or to liquidate, dissolve or wind up;
then, in connection with each such event, the Corporation shall send to the
holders of the Series B Preferred:
(1) at least 20 days' prior written notice
of the date on which a record shall be taken for such dividend, distribution or
subscription rights (and specifying the date on which the holders of Common
Stock shall be entitled thereto) or for determining rights to vote in respect of
the matters referred to in paragraphs (iii) and (iv) above; and
(2) in the case of the matters referred to
in paragraphs (iii) and (iv) above, at least 20 days' prior written notice of
the date when the same shall take place (and specifying the date on which the
holders of Common Stock shall be entitled to exchange their Common Stock for
securities or other property deliverable upon the occurrence of such event).
Each such written notice shall be given by first class mail, postage prepaid,
addressed to the holders of Series B Preferred shares at the address for each
such holder as shown on the books of the Corporation.
(h) Recapitalization. If at any time or from time to time
there is a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this Section 3.3.3 or in Section 3.2.3) provision shall be made so that the
holders of the Series B Preferred shall thereafter be entitled to receive upon
conversion of the Series B Preferred the number of shares of stock or other
securities or
-19-
property of the Corporation to which a holder of Common Stock deliverable upon
conversion of each share of such series would have been entitled on such
recapitalization. In any such case, appropriate adjustment shall be made in the
application of the provisions of this Section 3.3.3 with respect to the rights
of the holders of the Series B Preferred after the recapitalization to the end
that the provisions of this Section 3.3.3 (including adjustment of the Series B
Conversion Price then in effect and the number of shares purchasable upon
conversion of the Series B Preferred) shall be applicable after that event as
nearly equivalent as may be practicable.
3.3.4 Voting Rights. Except as otherwise required by law and as
provided in Section 3.3.5, the holders of Series B Preferred and the holders of
Common Stock shall be entitled to notice of any stockholders' meeting and to
vote with the Common Stock and any other series of Preferred Stock having the
right to vote generally as a single class upon any matter submitted to the
stockholders for a vote. Each holder of Series B Preferred shall have one vote
for each full share of Common Stock into which its respective shares of Series B
Preferred would be convertible on the record date for the vote.
3.3.5 Protective Provisions. In addition to any other rights
provided by law and except as provided by law, so long as any Series B Preferred
shall be outstanding, the Corporation shall not, without first obtaining the
affirmative vote or written consent of the holders of a majority of the
outstanding shares of Series B Preferred, voting as a separate class on an
as-converted basis:
(a) authorize or issue shares of any class of stock having
any preference or priority as to voting, dividends or upon liquidation superior
to or on a parity with any such preference or priority of the Series B
Preferred, or authorize or issue shares of stock of any class of any bonds,
debentures, notes or other obligations convertible into or exchangeable for, or
having option rights to purchase, any shares of stock of the Corporation having
any preference or priority as to voting, dividends or upon liquidation superior
to or on a parity with any such preference or priority of the Series B
Preferred;
(b) redeem or purchase any of the Common Stock; provided,
however, that this restriction shall not apply to the repurchase of shares of
Common Stock at the original cost paid for such shares (unless a repurchase
price other than such cost is unanimously approved by the Board of Directors)
from employees, officers, directors, consultants or other persons performing
services for the Corporation upon the termination of the employment, consulting
or other relationship between the Corporation and such persons;
(c) increase the total number of authorized shares of
Series B Preferred;
(d) amend or repeal any provision of, or add any provision
to, the Corporation's Certificate of Incorporation or Bylaws if such action
would alter or change the preferences, rights, privileges or powers of, or the
restrictions provided for the benefit of, the Series B Preferred so as to alter
them adversely; or
(e) consummate a sale of all or substantially all of the
Corporation's assets or any transaction or series of related transactions
(including, without limitation, any
-20-
reorganization, merger or consolidation) which would result in the holders of
the outstanding voting equity securities of the Corporation immediately prior to
such transaction holding less than 50% of the voting power of the surviving
entity immediately following such transaction.
3.3.6 Status of Converted Stock. If any shares of Series B
Preferred are converted into Common Stock pursuant to Section 3.3.3, the shares
of Series B Preferred so converted shall be canceled and shall not be issuable
by the Corporation, and the Certificate of Incorporation of the Corporation
shall be appropriately amended to effect the corresponding reduction in the
Corporation's authorized capital stock.
3.3.7 Residual Rights. All rights accruing to the outstanding
shares of the Corporation not expressly provided for to the contrary herein
shall be vested in the Common Stock.
3.4 Series C Preferred. A statement of the rights, preferences,
privileges and restrictions granted to or imposed on the Series C Preferred and
the holders thereof is as follows:
3.4.1 Dividends. The holders of Series C Preferred shall have
dividend rights as follows:
(a) The holders of the Series C Preferred, on a pari passu
basis with the holders of any Parity Dividend Stock, shall be entitled to
receive, out of any funds legally available therefor, dividends at the rate of
$.27 per share, per annum, payable in preference and priority to any payment of
any dividend on Common Stock or shares of any other class or series of the
Corporation's capital stock ranking, as to dividends, junior to the Series C
Preferred, when and as declared by the Board of Directors. The right to such
dividends on the Series C Preferred shall not be cumulative, and no right shall
accrue to holders of Series C Preferred by reason of the fact that dividends on
such shares are not declared or paid in any prior year. After payment of such
dividends to the holders of the Series C Preferred and any Parity Dividend
Stock, any additional dividends declared shall be distributed among holders of
shares of any other class or series of the Corporation's capital stock ranking,
as to dividends, senior to Common Stock, in accordance with the terms of such
class or series, and finally among all holders of Series C Preferred, Parity
Dividend Stock, Common Stock and shares of any other class or series of the
Corporation's capital stock having dividend rights, pro rata as if all shares of
Series C Preferred, Parity Dividend Stock and shares of such other class or
series of the Corporation's capital stock that are convertible into or
exchangeable for shares of Common Stock had been converted into or exchanged for
Common Stock at such time and the dividends were being distributed in equal
shares among all shares of Common Stock that would be outstanding in such case.
(b) No dividends shall be paid or declared and set apart
for payment on any Parity Dividend Stock for any period unless all accrued but
unpaid dividends have been, or contemporaneously are, paid or declared and set
apart for such payment on the Series C Preferred. No full dividends shall be
paid or declared and set apart for payment on the Series C Preferred for any
period, no purchase, redemption or other acquisition of Parity Dividend Stock
shall be made and no monies shall be paid or made available for a sinking fund
for the purchase, redemption or other acquisition of any Series C Preferred or
any Parity Dividend Stock unless all accrued but unpaid dividends have been, or
contemporaneously are, paid or declared and set
-21-
apart for payment on the Parity Dividend Stock for all dividend periods
terminating on or prior to the date of payment of such dividends. When dividends
are not paid in full upon the Series C Preferred and the Parity Dividend Stock,
all dividends paid or declared and set apart for payment upon shares of Series C
Preferred and Parity Dividend Stock shall be paid or declared and set apart for
payment pro rata, so that the amount of dividends paid or declared and set apart
for payment per share on the Series C Preferred and the Parity Dividend Stock
shall in all cases bear to each other the same ratio that accrued and unpaid
dividends per share on the shares of Series C Preferred and the Parity Dividend
Stock bear to each other.
(c) If the Corporation has declared but unpaid dividends
outstanding immediately prior to, and in the event of, a conversion of the
Series C Preferred (as provided in Section 3.4.3), the Corporation shall,
subject to the availability of funds from which such dividends may lawfully be
paid, at the option of each holder, pay in cash to each holder of Series C
Preferred subject to conversion the full amount of any such dividends or allow
such dividends to be converted into Common Stock in accordance with, and
pursuant to the terms specified in, Section 3.4.3.
3.4.2 Liquidation Preference. The holders of Series C Preferred
shall have a liquidation preference as follows:
(a) Relative Preferences. Upon any liquidation,
dissolution or winding up of the Corporation, either voluntary or involuntary,
the holders of the Series C Preferred shall be entitled to receive, on a pari
passu basis with holders of any Parity Liquidation Stock and prior and in
preference to any distribution of any of the assets or surplus funds of the
Corporation to the holders of the Common Stock or shares of any other class or
series of the Corporation's capital stock ranking, as to liquidation rights,
junior to the Series C Preferred, by reason of their ownership thereof, the
amount of $4.50 per share (as adjusted for stock splits, stock dividends,
recapitalizations and the like) for each share of Series C Preferred then held
by them plus an amount equal to all declared but unpaid dividends on such shares
of Series C Preferred. If, upon occurrence of such event, the assets and funds
thus distributed among the holders of the Series C Preferred and the Parity
Liquidation Stock are insufficient to permit the payment to the holders of the
Series C Preferred the full preferential amounts to which they are entitled
pursuant to this Section 3.4.2(a), then the entire assets and funds of the
Corporation legally available for distribution shall be distributed ratably
among the holders of the Series C Preferred and the Parity Liquidation Stock in
proportion to the full liquidation preference to which such holder is entitled.
(b) Distribution. After payment has been made to the
holders of the Series C Preferred and the Parity Liquidation Stock of the
respective amounts to which they shall be entitled as provided in Section
3.4.2(a), the remaining assets of the Corporation available for distribution to
stockholders shall be distributed among holders of shares of any other class or
series of the Corporation's capital stock ranking, as to liquidation rights,
senior to the Common Stock, in accordance with the terms of such class or
series, and finally among the holders of Series C Preferred, Parity Liquidation
Stock, Common Stock and shares of any other class or series of the Corporation's
capital stock having liquidation rights, pro rata as if all shares of Series C
Preferred, Parity Liquidation Stock and shares of such other class or series of
the Corporation's capital stock that are convertible into or exchangeable for
shares of Common
-22-
Stock had been converted into or exchanged for Common Stock at such time and
such assets were being distributed in equal shares among all shares of Common
Stock that would be outstanding in such case.
3.4.3 Conversion. The holders of the Series C Preferred shall
have conversion rights as follows:
(a) Right to Convert. Each share of Series C Preferred
shall be convertible, at the option of the holder thereof, at any time after the
issuance of such share, into such number of fully paid and nonassessable shares
of Common Stock as is determined by dividing $4.50 by the then applicable Series
C Conversion Price (as defined below), determined as hereinafter provided. The
price at which shares of Common Stock shall be deliverable upon conversion of
the Series C Preferred ("Series C Conversion Price") shall initially be $4.50
per share of Common Stock. The initial Series C Conversion Price shall be
subject to adjustment as hereinafter provided.
(b) Automatic Conversion. Each share of Series C Preferred
shall automatically be converted into shares of Common Stock at the then
effective Series C Conversion Price, as applicable, (i) upon the closing of a
firm commitment underwritten public offering of Common Stock for the account of
the Corporation to the public at a price per share of at least $4.50 (as
adjusted for stock splits, reverse stock splits and the like) and an aggregate
offering price to the public of not less than $10,000,000 and net proceeds to
the Corporation of at least $8,000,000 or (ii) upon the affirmative vote of the
holders of at least 2/3 (66.67%) of the shares of Series C Preferred, voting as
a single class, outstanding at the time of such vote. In the event of an
offering described in clause (i) of the preceding sentence, the person(s)
entitled to receive the Common Stock issuable upon such conversion of Series C
Preferred shall not be deemed to have converted such Series C Preferred until
immediately prior to the closing of such underwritten public offering.
(c) Mechanics of Conversion. No fractional shares of
Common Stock shall be issued upon conversion of Series C Preferred. In lieu of
any fractional share to which a holder would otherwise be entitled, the
Corporation shall pay cash equal to such fraction multiplied by the fair market
value of the Common Stock as determined by the Board of Directors. Before any
holder of Series C Preferred shall be entitled to convert the same into full
shares of Common Stock, he shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the Corporation or of any transfer
agent for the Series C Preferred, and shall give written notice to the
Corporation at such office that he elects to convert the same. Such notice shall
also state whether the holder elects, pursuant to Section 3.4.1, to receive
declared but unpaid dividends on the Series C Preferred proposed to be converted
in cash, or to convert such dividends into shares of Common Stock at their fair
market value as determined by the Board of Directors. The Corporation shall, as
soon as practicable thereafter, issue and deliver at such office to such holder
of Series C Preferred, a certificate or certificates for the number of shares of
Common Stock to which he shall be entitled as aforesaid and a check payable to
the holder in the amount of any cash amounts payable as the result of a
conversion into a fractional share of Common Stock, and any declared but unpaid
dividends on the converted Series C Preferred which the holder elected to
receive in cash. Such conversion shall be deemed to have been made immediately
prior to the close of business on the date of such surrender of the shares of
Series C
-23-
Preferred to be converted, and the person or persons entitled to receive the
shares of Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of Common Stock on such
date. If the conversion is in connection with an underwritten public offering of
securities, the conversion shall be conditioned upon the closing of such public
offering, in which event the person(s) entitled to receive the Common Stock
issuable upon such conversion of the Series C Preferred shall not be deemed to
have converted such Series C Preferred until immediately prior to such closing.
(d) Adjustments to Series C Conversion Price for Diluting
Issues.
(i) Special Definitions. For purposes of this
Section 3.4.3, the following definitions shall apply.
(1) "Options" means rights, options or
warrants to subscribe for, purchase or otherwise acquire either Common Stock or
Convertible Securities.
(2) "Convertible Securities" means any
evidences of indebtedness, shares (other than Common Stock, the Series A
Preferred, the Series B Preferred and the Series C Preferred) or other
securities convertible into or exchangeable for Common Stock.
(3) "Original Issue Date" means the date on
which the first share of Series C Preferred was first issued.
(4) "Additional Shares of Common Stock"
means all shares of Common Stock issued (or, pursuant to Section 3.4.3(d)(iii),
deemed to be issued) by the Corporation other than shares of Common Stock issued
or issuable:
(A) upon conversion of shares of the
Series A Preferred, the Series B Preferred or the Series C Preferred;
(B) to officers or employees or
directors of, or consultants to, the Corporation pursuant to a stock grant,
option plan or purchase plan or other employee stock incentive program
(collectively, the "Plans") approved by the Board of Directors;
(C) as a dividend or distribution on
the Series A Preferred, the Series B Preferred or the Series C Preferred;
(D) upon exercise or conversion of
warrants to purchase shares of stock of the Corporation issued in connection
with equipment lease financing transactions, bank financing transactions or real
estate leasing transactions approved by the Board of Directors, where the
issuance of such warrants is not principally for the purpose of raising
additional equity capital for the Corporation;
(E) upon exercise of warrants to
purchase Common Stock of the Corporation and upon conversion of notes
convertible into Common Stock or any series of Preferred Stock of the
Corporation outstanding on the Original Issue Date;
-24-
(F) by way of dividend or other
distribution on shares of Common Stock excluded from the definition of
Additional Shares of Common Stock by the foregoing clauses (A), (B), (C), (D)
and (E) or on shares of Common Stock so excluded; and
(G) pursuant to any transaction
effective after the Original Issue Date and with respect to which the holders of
a majority of the then outstanding Series C Preferred consent in writing to the
waiver of the adjustment provision of this Section 3.4.3(d)(i)(4).
(ii) No Adjustment of Series C Conversion Price. No
adjustment in the Series C Conversion Price shall be made in respect of the
issuance of Additional Shares of Common Stock unless the consideration per share
for an Additional Share of Common Stock issued or deemed to be issued by the
Corporation is less than the Series C Conversion Price in effect on the date of,
and immediately prior to such issue. No adjustment in the Series C Conversion
Price pursuant to Section 3.4.3(d)(iv) shall be made as a result of any stock
dividend or subdivision which causes an adjustment in the Series C Conversion
Price pursuant to Section 3.4.3(e).
(iii) Deemed Issue of Additional Shares of Common
Stock. Subject to Section 3.4.3(d)(i)(4), if the Corporation at any time or from
time to time after the Original Issue Date issues any Options or Convertible
Securities or fixes a record date for the determination of holders of any class
of securities entitled to receive any such Options or Convertible Securities,
then the maximum number of shares (as set forth in the instrument relating
thereto without regard to any provisions contained therein for a subsequent
adjustment of such number) of Common Stock issuable upon the exercise of such
Options or, in the case of Convertible Securities and Options therefor, the
conversion or exchange of such Convertible Securities, shall be deemed to be
Additional Shares of Common Stock issued as of the time of such issue or, in
case such a record date shall have been fixed, as of the close of business on
such record date, provided that Additional Shares of Common Stock shall not be
deemed to have been issued with respect to the Series C Preferred unless the
consideration per share (determined pursuant to Section 3.4.3(d)(v) of such
Additional Shares of Common Stock would be less than the Series C Conversion
Price in effect on the date of and immediately prior to such issue, or such
record date, as the case may be, and provided further that in any case in which
Additional Shares of Common Stock are deemed to be issued:
(A) no further adjustment in the
Series C Conversion Price shall be made upon the subsequent issue of Convertible
Securities or shares of Common Stock upon the exercise of such Options or
conversion or exchange of such Convertible Securities;
(B) if such Options or Convertible
Securities by their terms provide, with the passage of time or otherwise, for
any increase or decrease in the consideration payable to the Corporation, or
increase or decrease in the number of shares of Common Stock issuable, upon the
exercise, conversion or exchange thereof, the Series C Conversion Price,
computed upon the original issue thereof (or upon the occurrence of a record
date with respect thereto), and any subsequent adjustments based thereon, shall,
upon any such
-25-
increase or decrease becoming effective, be recomputed to reflect such increase
or decrease insofar as it affects such Options or the rights of conversion or
exchange under such Convertible Securities; and
(C) on the expiration or
cancellation of any Options or the termination of the right to convert or
exchange any Convertible Securities which shall have not been exercised, if the
Series C Conversion Price shall have been adjusted upon the original issuance
thereof or shall have been subsequently adjusted pursuant to clause (ii) above,
the Series C Conversion Price shall be recomputed as if:
(1) in the case of
Convertible Securities or Options to purchase Common Stock, the only Additional
Shares of Common Stock issued were shares of Common, if any, actually issued
upon the exercise of such Options or the conversion or exchange of such
Convertible Securities, and the consideration received therefor was the
consideration actually received by the Corporation for the issue of all such
Options, whether or not exercised, plus the consideration actually received by
the Corporation upon such exercise, or for the issue of all such Convertible
Securities which were actually converted or exchanged plus the consideration
actually received by the Corporation upon such conversion or exchange, if any,
and
(2) in the case of Options to
purchase Convertible Securities, only the Convertible Securities, if any,
actually issued upon the exercise thereof were issued at the time of issue of
such Options and the consideration received by the Corporation for the
Additional Shares of Common Stock deemed to have been then issued was the
consideration actually received by the Corporation for the issue of all such
Options, whether or not exercised, plus the consideration deemed to have been
received by the Corporation upon the issue of the Convertible Securities with
respect to which such Options were actually exercised;
(D) no readjustment pursuant to
clauses (B) and (C) above shall have the effect of increasing the Series C
Conversion Price to an amount which exceeds the lower of (i) the Series C
Conversion Price on the original adjustment date, or (ii) the Series C
Conversion Price that would have resulted from any issuance of Additional Shares
of Common Stock between the original adjustment date and such readjustment date.
(iv) Adjustment of Series C Conversion Price Upon
Issuance of Additional Shares of Common Stock. If, after the Original Issue
Date, Additional Shares of Common Stock (including Additional Shares of Common
Stock deemed to be issued pursuant to Section 3.4.3(d)(iii)) are issued without
consideration or for a consideration per share less than the Series C Conversion
Price in effect on the date of and immediately prior to such issue, then and in
such event, the Series C Conversion Price shall be reduced, concurrently with
such issue, to a price (calculated to the nearest cent) determined by
multiplying the Series C Conversion Price by a fraction, the numerator of which
shall be the number of shares of Common Stock outstanding immediately prior to
such issue plus the number of shares of Common Stock which the aggregate
consideration received by the Corporation for the total number of Additional
Shares of Common Stock so issued would purchase at such Series C Conversion
Price; and the denominator of which shall be the number of shares of Common
Stock outstanding immediately
-26-
prior to such issue plus the number of such Additional Shares of Common Stock so
issued; and provided further that, for the purposes of this Section
3.4.3(d)(iv), all shares of Common Stock issuable upon conversion of outstanding
Convertible Securities, Options and the Series C Preferred shall be deemed to be
outstanding, and immediately after any Additional Shares of Common Stock are
deemed issued pursuant to Section 3.4.3(d)(iii), such Additional Shares of
Common Stock shall be deemed to be outstanding.
(v) Determination of Consideration. For purposes of
this Section 5.4, the consideration received by the Corporation for the issue of
any Additional Shares of Common stock shall be computed as follows:
(1) Cash and Property. Such consideration
shall:
(A) insofar as it consists of cash,
be computed at the aggregate amount of cash received by the Corporation;
(B) insofar as it consists of
securities (i) if the securities are then traded on a national securities
exchange, the Nasdaq Stock Market or a similar national quotation system (or, if
the securities are not traded on a national securities exchange, the Nasdaq
Stock Market or a similar national quotation system but are traded on an
internationally recognized exchange), then the value shall be computed based on
the average of the closing prices of the securities on such exchange or system
over the 30-day period ending three days prior to receipt by the Corporation,
(ii) if the securities are actively traded over-the-counter, then the value
shall be computed based on the average of the closing bid prices over the 30-day
period ending three days prior to the receipt by the Corporation, and (iii) if
there is no active public market, then the value shall be computed based on the
fair market value thereof on the date of receipt by the Corporation, as
determined in good faith by the Board of Directors of the Corporation;
(C) insofar as it consists of
property other than cash and securities, be computed at the fair value thereof
at the time of such issue, as determined in good faith by the Board of
Directors; and
(D) if Additional Shares of Common
Stock are issued together with other shares or securities or other assets of the
Corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in paragraphs (A), (B) and (C)
above, as determined in good faith by the Board of Directors.
(2) Options and Convertible Securities. The
consideration per share received by the Corporation for Additional Shares of
Common Stock deemed to have been issued pursuant to Section 3.4.3(d)(iii),
relating to Options and Convertible Securities, shall be determined by dividing
(x) the total amount, if any,
received or receivable by the Corporation as consideration for the issue of such
Options or Convertible Securities, plus the minimum aggregate amount of
additional consideration (as set forth in the instruments relating thereto,
without regard to any provision contained therein for a subsequent adjustment of
such consideration) payable to the Corporation upon the exercise of such Options
-27-
or the conversion or exchange of such Convertible Securities, or in the case of
Options for Convertible Securities, the exercise of such Options for Convertible
Securities and the conversion or exchange of such Convertible Securities by
(y) the maximum number of shares of
Common Stock (as set forth in the instrument relating thereto, without regard to
any provision contained therein for a subsequent adjustment of such number)
issuable upon the exercise of such Options or the conversion or exchange of such
Convertible Securities.
(e) Adjustments for Stock Dividends, Subdivisions,
Combinations, or Consolidations. If the Corporation pays a stock dividend on the
Common Stock, or the outstanding shares of Common Stock are subdivided, combined
or consolidated, by reclassification, stock split or otherwise, into a greater
or lesser number of shares of Common Stock, the Series C Conversion Price in
effect immediately prior to such dividend, subdivision, combination or
consolidation shall, concurrently with the effectiveness of such dividend,
subdivision, combination or consolidation, be proportionately adjusted.
(f) No Impairment. The Corporation will not, by amendment
of its Certificate of Incorporation or through any reorganization, transfer of
assets, merger, dissolution, issue or sale of securities or any other voluntary
action, avoid or seek to avoid the observance or performance of any of the terms
to be observed or performed hereunder by the Corporation but will at all times
in good faith assist in the carrying out of all the provisions of this Section
3.4.3 and in the taking of all such action as may be necessary or appropriate in
order to protect the conversion rights of the holders of the Series C Preferred
against impairment.
(g) Notices of Record Date. If the Corporation proposes at
any time:
(i) to declare any dividend or distribution upon
its Common Stock, whether in cash, property, stock or other securities, whether
or not a regular cash dividend and whether or not out of earnings or earned
surplus;
(ii) to offer for subscription pro rata to the
holders of any class or series of its stock any additional shares of stock of
any class or series or other rights;
(iii) to effect any reclassification or
recapitalization of its Common Stock outstanding involving a change in the
Common Stock; or
(iv) to merge with or into any other corporation
(other than a merger in which the holders of the outstanding voting equity
securities of the Corporation immediately prior to such merger hold more than
50% of the voting power of the surviving entity immediately following such
merger), or sell, lease or convey all or substantially all its property or
business, or to liquidate, dissolve or wind up;
then, in connection with each such event, the Corporation shall send to the
holders of the Series C Preferred:
(1) at least 20 days' prior written notice
of the date on which a record shall be taken for such dividend, distribution or
subscription rights (and
-28-
specifying the date on which the holders of Common Stock shall be entitled
thereto) or for determining rights to vote in respect of the matters referred to
in paragraphs (c) and (d) above; and
(2) in the case of the matters referred to
in paragraphs (c) and (d) above, at least 20 days' prior written notice of the
date when the same shall take place (and specifying the date on which the
holders of Common Stock shall be entitled to exchange their Common Stock for
securities or other property deliverable upon the occurrence of such event).
Each such written notice shall be given by first class mail, postage prepaid,
addressed to the holders of Series C Preferred shares at the address for each
such holder as shown on the books of this Corporation.
(h) Recapitalization. If at any time or from time to time
there is a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this Section 3.4.3 or in Section 3.4.2) provision shall be made so that the
holders of the Series C Preferred shall thereafter be entitled to receive upon
conversion of the Series C Preferred the number of shares of stock or other
securities or property of the Corporation to which a holder of Common Stock
deliverable upon conversion of each share of such series would have been
entitled on such recapitalization. In any such case, appropriate adjustment
shall be made in the application of the provisions of this Section 3.4.3 with
respect to the rights of the holders of the Series C Preferred after the
recapitalization to the end that the provisions of this Section 3.4.3 (including
adjustment of the Series C Conversion Price then in effect and the number of
shares purchasable upon conversion of the Series C Preferred) shall be
applicable after that event as nearly equivalent as may be practicable.
3.4.4 Voting Rights.
(a) Except as otherwise required by law and as provided in
Section 3.4.5, the holders of Series C Preferred and the holders of Common Stock
shall be entitled to notice of any stockholders' meeting and to vote with the
Common Stock and any other series of Preferred Stock having the right to vote
generally as a single class upon any matter submitted to the stockholders for a
vote, as follows: (i) each holder of Series C Preferred shall have one vote for
each full share of Common Stock into which its respective shares of Series C
Preferred would be convertible on the record date for the vote and (ii) the
holders of Common Stock shall have one vote per share of Common Stock.
(b) The holders of Series C Preferred, voting as a
separate class, shall be entitled to elect one (1) member of the Board of
Directors at each meeting or pursuant to each consent of the Corporation's
stockholders for the election of directors.
3.4.5 Protective Provisions. In addition to any other rights
provided by law and except as provided by law, so long as any Series C Preferred
is outstanding, the Corporation shall not, without first obtaining the
affirmative vote or written consent of the holders of a majority of the
outstanding shares of Series C Preferred, voting as a separate class on an
as-converted basis:
-29-
(a) authorize or issue shares of any class of stock having
any preference or priority as to voting, dividends or upon liquidation superior
to or on a parity with any such preference or priority of the Series C
Preferred, or authorize or issue shares of stock of any class or any bonds,
debentures, notes or other obligations convertible into or exchangeable for, or
having option rights to purchase, any shares of stock of this Corporation having
any preference or priority as to voting, dividends or upon liquidation superior
to or on a parity with any such preference or priority of the Series C
Preferred;
(b) redeem or purchase any of the Common Stock, provided,
however, that this restriction shall not apply to the repurchase of shares of
Common Stock at the original cost paid for such shares (unless a repurchase
price other than cost is unanimously approved by the Board of Directors) from
employees, officers, directors, consultants or other persons performing services
for the Corporation upon the termination of the employment, consulting or other
relationship between the Corporation and such persons;
(c) increase the total number of authorized shares of
Series C Preferred;
(d) amend or repeal any provision of, or add any provision
to, the Corporation's Certificate of Incorporation or Bylaws if such action
would alter or change the preferences, rights, privileges or powers of, or the
restrictions provided for the benefit of, the Series C Preferred so as to affect
them adversely;
(e) consummate a sale of all or substantially all of the
Corporation's assets or any transaction or series of related transactions
(including, without limitation, any reorganization, merger or consolidation)
which would result in the holders of the outstanding voting equity securities of
the Corporation immediately prior to such transaction holding less than 50% of
the voting power of the surviving entity immediately following such transaction.
3.4.6 Status of Converted Stock. If any shares of Series C
Preferred are converted into Common Stock pursuant to Section 3.4.3, the shares
of Series C Preferred so converted shall be canceled and shall not be issuable
by the Corporation, and the Certificate of Incorporation of the Corporation
shall be appropriately amended to effect the corresponding reduction in the
Corporation's authorized capital stock.
3.4.7 Residual Rights. All rights accruing to the outstanding
shares of the Corporation not expressly provided for to the contrary herein
shall be vested in the Common Stock.
IV
4.1 Limitation of Directors' Liability. A director shall not be
personally liable to the Corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director; provided that this Article IV shall
not eliminate or limit the liability of a director (i) for any breach of his
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of the law, (iii) under Section 174 of the General Corporation Law of
the State of Delaware, or (iv) for any transaction from which the director
derives an improper personal benefit.
-30-
4.2 Indemnification of Corporate Agents.
4.2.1 The Corporation shall, to the broadest and maximum extent
permitted by Delaware law, as the same exists from time to time indemnify each
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative by reason of the fact that he is or
was a director or officer of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding.
4.2.2 In addition, the Corporation shall, to the broadest and
maximum extent permitted by Delaware law, as the same may exist from time to
time, pay to such person any and all expenses (including attorneys' fees)
incurred in defending or settling any such action, suit or proceeding in advance
of the final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of the director or officer, to repay such amount if
it shall ultimately be determined by a final judgment or other final
adjudication that he is not entitled to be indemnified by the Corporation as
authorized in this Article.
4.2.3 Sections 4.2.1 and 4.2.2 to the contrary notwithstanding,
the Corporation shall not indemnify any such person with respect to any of the
following matters: (i) remuneration paid to such person if it shall be
determined by a final judgment or other final adjudication that such
remuneration was in violation of law; or (ii) any accounting of profits made
from the purchase or sale by such person of the Corporation's securities within
the meaning 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; or (iii) actions brought about or contributed to by the
dishonesty of such person, if a final judgment or other final adjudication
adverse to such person establishes that acts of active and deliberate dishonesty
were committed or attempted by such person with actual dishonest purpose and
intent and were material to the adjudication; or (iv) actions based on or
attributable to such person having gained any personal profit or advantage to
which he was not entitled, in the event that a final judgment or other final
adjudication adverse to such person establishes that such person in fact gained
such personal profit or other advantage to which he was not entitled; or (v) any
matter in respect of which a final decision by a court with competent
jurisdiction shall determine that indemnification is unlawful.
4.2.4 The rights to indemnification and to the advancement of
expenses conferred in this Article IV shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute, this
Certificate of Incorporation, the Bylaws of the Corporation, by agreement, vote
of stockholders, or disinterested directors or otherwise.
4.3 Repeal or Modification. Any repeal or modification of the foregoing
provisions of this Article IV by the stockholders of the Corporation shall not
adversely affect any right or protection of a director of the Corporation
existing at the time of such repeal or modification.
-31-
IN WITNESS WHEREOF, this Second Restated Certificate of Incorporation
has been executed by the undersigned duly authorized officer of the Corporation
on December 29, 1999.
A. They are the President and Secretary, respectively, of ZLand.com,
Inc., a Delaware corporation (the "Corporation").
B. Pursuant to authority given by the Corporation's Second Restated
Certificate of Incorporation and pursuant to Section 151 of the General
Corporation Law of the State of Delaware, the Board of Directors of the
Corporation adopted the following resolution on February 14, 2000 creating a
series of Preferred Stock designated as "Series A Junior Participating Preferred
Stock":
RESOLVED, that pursuant to the authority vested in the
Board of Directors of the Corporation in accordance with the
provisions of the Restated Certificate of Incorporation, a series
of Preferred Stock, par value $.01 per share, of the Corporation
be and hereby is created, and that the designation and number of
shares thereof and the voting and other powers, preferences and
relative, participating, optional or other rights of the shares
of such series and the qualifications, limitations and
restrictions thereof are as follows:
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
1. Designation, Amount and Ranking. There shall be a series of Preferred
Stock that shall be designated as "Series A Junior Participating Preferred
Stock," and the number of shares constituting such series shall be 100,000. Such
number of shares may be increased or decreased by resolution of the Board of
Directors; provided, however, that no decrease shall reduce the number of shares
of Series A Junior Participating Preferred Stock to less than the number of
shares then issued and outstanding plus the number of shares issuable upon
exercise of outstanding rights, options or warrants or upon conversion of
outstanding securities issued by the Corporation. The Series A Junior
Participating Preferred Stock shall rank junior to all other series of Preferred
Stock as to the payment of dividends and as to the distribution of assets upon
liquidation, dissolution or winding up, whether voluntary or involuntary, unless
the terms of any such series shall provide otherwise, and shall rank senior to
the common stock, par value $.01 per share ("Common Stock"), of the Corporation
as to such matters.
2. Dividends and Distribution.
(A) Subject to the prior and superior rights of the holders of any
shares of any class or series of stock of the Corporation ranking prior and
superior to the shares of Series A Junior Participating Preferred Stock with
respect to dividends, the holders of shares of Series A Junior Participating
Preferred Stock, in preference to the holders of shares of any class or series
of stock of the Corporation ranking junior to the Series A Junior Participating
Preferred Stock in respect thereof, shall be entitled to receive, when, as and
if declared by the Board of Directors out of funds legally available for the
purpose, quarterly dividends payable in cash on the last day of January, April,
July and October, in each year (each such date being referred to herein as a
"Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend
Payment Date after the first issuance of a share or fraction of a share of
Series A Junior Participating Preferred Stock, in an amount per share (rounded
to the nearest cent) equal to the greater of (a) $1.00 or (b) the Adjustment
Number (as defined below) times the aggregate per share amount of all cash
dividends, and the Adjustment Number times the aggregate per share amount
(payable in kind) of all non-cash dividends or other distributions other than a
dividend payable in shares of Common Stock or a subdivision of the outstanding
shares of Common Stock (by reclassification or otherwise), declared on the
Common Stock since the immediately preceding Quarterly Dividend Payment Date,
or, with respect to the first Quarterly Dividend Payment Date, since the first
issuance of any share or fraction of a share of Series A Junior Participating
Preferred Stock. The "Adjustment Number" shall initially be 1,000. If the
Corporation shall at any time after the record date for the initial dividend of
Series A Junior Participating Preferred Stock (i) declare and pay any dividend
on Common Stock payable in shares of Common Stock, (ii) subdivide the
outstanding Common Stock or (iii) combine the outstanding Common Stock into a
smaller number of shares, then in each such case the Adjustment Number in effect
immediately prior to such event shall be adjusted by multiplying such Adjustment
Number by a fraction the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.
(B) The Corporation shall declare a dividend or distribution on the
Series A Junior Participating Preferred Stock as provided in paragraph (A) above
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock).
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Junior Participating Preferred Stock from the Quarterly
Dividend Payment Date next preceding the date of issue of such shares of Series
A Junior Participating Preferred Stock, unless the date of issue of such shares
is prior to the record date for the first Quarterly Dividend Payment Date, in
which case dividends on such shares shall begin to accrue from the date of issue
of such shares, or unless the date of issue is a Quarterly Dividend Payment Date
or is a date after the record date for the determination of holders of shares of
Series A Junior Participating Preferred Stock entitled to receive a quarterly
dividend and before such Quarterly Dividend Payment Date, in either of which
events such dividends shall begin to accrue and be cumulative from such
Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear
interest. Di
Next Section
Previous Section