Exhibit 4.02



 



Exhibit 4.02


THE FLAGSHIP GROUP, INC.

NOTICE OF GRANT OF STOCK OPTION


     Notice is hereby given of the following option grant (the “Option”) to
purchase shares of the Common Stock of The Flagship Group, Inc. (the
“Corporation”):




	 	 	 	 	 
	Optionee:	 	 	 	 
	 
	Grant Date:	 	 	 	 
	 
	Vesting Commencement Date:	 	 	 	 
	 
	Exercise Price:	 	 	 	 
	 
	Number of Option Shares:	 	 	 	 
	 
	Expiration Date:	 	 	 	 
	 
	Type of Option:	 	 



	 	Incentive Stock Option
	 	 	 



	 	Non-Statutory Stock
        Option
	 
	Date Exercisable:	 	 	 	 
	 
	Vesting Schedule:	 	 	 	 




     Optionee understands and agrees that the Option is granted subject to and
in accordance with the terms of The Flagship Group, Inc. 1999 Stock
Option/Stock Issuance Plan (the “Plan”). Optionee further agrees to be bound
by the terms of the Plan and the terms of the Option as set forth in the Stock
Option Agreement attached hereto asExhibit A. Optionee understands that any
Option Shares purchased under the Option will be subject to the terms set forth
in the Stock Purchase Agreement attached hereto asExhibit B. Both the Company
and Optionee agree and acknowledge that the Option Shares are granted solely in
consideration for future services to be provided by Optionee subsequent to the
date hereof.



     Optionee hereby acknowledges receipt of a copy of the Plan in the form
attached hereto asExhibit C.



 








 



     REPURCHASE RIGHTS. OPTIONEE HEREBY AGREES THAT ALL OPTION SHARES ACQUIRED
UPON THE EXERCISE OF THE OPTION SHALL BE SUBJECT TO CERTAIN REPURCHASE RIGHTS
AND RIGHTS OF FIRST REFUSAL EXERCISABLE BY THE CORPORATION AND ITS ASSIGNS.
THE TERMS OF SUCH RIGHTS ARE SPECIFIED IN THE ATTACHED STOCK PURCHASE
AGREEMENT.



     No Employment or Service Contract. Nothing in this Notice or in the
attached Stock Option Agreement or Plan shall confer upon Optionee any right to
continue in Service for any period of specific duration or interfere with or
otherwise restrict in any way the rights of the Corporation (or any Parent or
Subsidiary employing or retaining Optionee) or of Optionee, which rights are
hereby expressly reserved by each, to terminate Optionee’s Service at any time
for any reason, with or without cause.



     Definitions. All capitalized terms in this Notice shall have the meaning
assigned to them in this Notice or in the attached Stock Option Agreement.




	 	 	 	 	 
	     Dated:  	

        
	 	THE FLAGSHIP GROUP, INC.
	 	 	 	By:	
	 	 	 	 	



        
[Title]
	 
	 	 	 	OPTIONEE
	 
	 	

	 	 	 	Address:	

        

	 
	 	





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Exhibit A


THE FLAGSHIP GROUP, INC.

STOCK OPTION AGREEMENT


RECITALS


A. The Board has adopted the Plan for the purpose of retaining the services of
selected Employees, non-employee members of the Board or the board of directors
of any Parent or Subsidiary and consultants and other independent advisors who
provide services to the Corporation (or any Parent or Subsidiary).



B. Optionee is to render valuable services to the Corporation (or a Parent or
Subsidiary), and this Agreement is executed pursuant to, and is intended to
carry out the purposes of, the Plan in connection with the Corporation’s grant
of an option to Optionee.



C. All capitalized terms in this Agreement shall have the meaning assigned to
them in the attached Appendix.



AGREEMENT


     NOW, THEREFORE, it is hereby agreed as follows:



     1. Grant of Option. The Corporation hereby grants to Optionee, as of the
Grant Date, an option to purchase up to the number of Option Shares specified
in the Grant Notice. The Option Shares shall be purchasable from time to time
during the option term specified in Paragraph 2 at the Exercise Price.



     2. Option Term. This option shall have a term of ten (10) years measured
from the Grant Date and shall accordingly expire at the close of business on
the Expiration Date, unless sooner terminated in accordance with Paragraph 5 or
17.



     3. Limited Transferability. This option shall be neither transferable nor
assignable by Optionee other than by will or by the laws of descent and
distribution following Optionee’s death and may be exercised, during Optionee’s
lifetime, only by Optionee.



     4. Dates of Exercise. This option shall become exercisable for the Option
Shares in one or more installments as specified in the Grant Notice. As the
option becomes exercisable for such installments, those installments shall
accumulate and the option shall remain exercisable for the accumulated
installments until the Expiration Date or sooner termination of the option term
under Paragraph 5 or 17.



     5. Cessation of Service. The option term specified in Paragraph 2 shall
terminate (and this option shall cease to be outstanding) prior to the
Expiration Date should any of the following provisions become applicable:



          (a) Should Optionee cease to remain in Service for any reason (other than
death or Permanent Disability) while this option is outstanding, then Optionee
shall have a



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period of three (3) months (commencing with the date of such cessation of
Service) during which to exercise this option, but in no event shall this
option be exercisable at any time after the Expiration Date.



          (b) Should Optionee die while this option is outstanding, then the
personal representative of Optionee’s estate or the person or persons to whom
the option is transferred pursuant to Optionee’s will or in accordance with the
laws of descent and distribution shall have the right to exercise this option.
Such right shall lapse and this option shall cease to be outstanding upon the
earlier of (i) the expiration of the twelve (12)-month period measured from
the date of Optionee’s death or (ii) the Expiration Date.



          (c) Should Optionee cease Service by reason of Permanent Disability while
this option is outstanding, then Optionee shall have a period of twelve (12)
months (commencing with the date of such cessation of Service) during which to
exercise this option. In no event shall this option be exercisable at any time
after the Expiration Date.



          (d) During the limited period of post-Service exercisability, this option
may not be exercised in the aggregate for more than the number of vested Option
Shares for which the option is exercisable at the time of Optionee’s cessation
of Service. Upon the expiration of such limited exercise period or (if
earlier) upon the Expiration Date, this option shall terminate and cease to be
outstanding for any vested Option Shares for which the option has not been
exercised. To the extent Optionee is not vested in the Option Shares at the
time of Optionee’s cessation of Service, this option shall immediately
terminate and cease to be outstanding with respect to those shares.



          (e) In the event of a Corporate Transaction, the provisions of Paragraph 6
shall govern the period for which this option is to remain exercisable
following Optionee’s cessation of Service and shall supersede any provisions to
the contrary in this paragraph.



     6. Corporate Transaction.



          (a) In the event of any Corporate Transaction, this option shall be (i)
assumed by the successor corporation (or parent thereof) or (ii) replaced with
a comparable option to purchase shares of the capital stock of the successor
corporation (or parent thereof) or with a cash incentive program of the
successor corporation which preserves the spread existing on the unvested
option shares at the time of the Corporate Transaction and provides for
subsequent payout in accordance with the same vesting schedule applicable to
such option. However, to the extent the successor corporation (or parent
thereof) does not effect such assumption or replacement, this option shall
automatically accelerate, and the Corporation’s repurchase rights with respect
to the unvested Option Shares shall terminate, so that each such option shall,
immediately prior to the effective date of the Corporate Transaction, become
fully exercisable for all of the shares of Common Stock at the time subject to
such option and may be exercised for any or all of those shares as fully-vested
shares of Common Stock.



          (b) All outstanding repurchase rights shall also be assigned to the
successor corporation (or parent thereof) in the event of any Corporate
Transaction. However, to the extent the successor corporation (or parent
thereof) does not accept such assignment, the outstanding



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repurchase rights shall terminate automatically, and the shares of Common Stock
subject to those terminated rights shall immediately vest in full, upon the
consummation of the Corporate Transaction, except to the extent such
accelerated vesting is precluded by other limitations imposed by the Plan
Administrator at the time the repurchase right is issued.



          (c) Immediately following the consummation of the Corporate Transaction,
all outstanding options shall terminate and cease to be outstanding, except to
the extent assumed by the successor corporation (or parent thereof).



          (d) If this option is assumed in connection with a Corporate Transaction,
then this option shall be appropriately adjusted, immediately after such
Corporate Transaction, to apply to the number and class of securities which
would have been issuable to Optionee in consummation of such Corporate
Transaction had the option been exercised immediately prior to such Corporate
Transaction, and appropriate adjustments shall also be made to the Exercise
Price,provided the aggregate Exercise Price shall remain the same.



          (e) Upon an Involuntary Termination of Optionee’s Service within twelve
(12) months following a Corporate Transaction in which this option is assumed
or replaced and the Corporation’s repurchase rights with respect to the
unvested Option Shares are assigned, all the Option Shares at the time subject
to this option but not otherwise vested shall automatically vest and the
Corporation’s repurchase rights with respect to those shares shall terminate so
that this option shall immediately become exercisable for all such Option
Shares as fully-vested shares of Common Stock and may be exercised for any or
all of those shares at any time prior to the earlier of (i) the Expiration Date
or (ii) the expiration of the one (l)-year period measured from the date of the
Involuntary Termination.



          (f) This Agreement shall not in any way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital
or business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.



     7. Adjustment in Option Shares. Should any change be made to the Common
Stock by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation’s receipt of
consideration, appropriate adjustments shall be made to (i) the total number
and/or class of securities subject to this option and (ii) the Exercise Price
in order to reflect such change and thereby preclude a dilution or enlargement
of benefits hereunder.



     8. Shareholder Rights. The holder of this option shall not have any
Shareholder rights with respect to the Option Shares until such person shall
have exercised the option, paid the Exercise Price and become a holder of
record of the purchased shares.



     9. Manner of Exercising Option.



          (a)  In order to exercise this option with respect to all or any part of
the Option Shares for which this option is at the time exercisable, Optionee
(or any other person or persons exercising the option) must take the following
actions:



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	 	     (i) Execute and deliver to the Corporation a Purchase
Agreement for the Option Shares for which the option is
exercised.
	 
	 	     (ii) Pay the aggregate Exercise Price for the purchased
shares in one or more of the following forms:


	          	
	 	     (1) cash or check made payable to the Corporation; or
	 
	 	     (2) a promissory note that constitutes valid
consideration under applicable state law payable to the
Corporation, but only to the extent authorized by the Plan
Administrator in accordance with Paragraph 14.



          (b) Should the Common Stock be registered under Section 12(g) of the 1934
Act at the time the option is exercised, then the Exercise Price may also be
paid as follows:


	     	
	 	     (i) in shares of Common Stock held by Optionee (or any
other person or persons exercising the option) for the
requisite period necessary to avoid a charge to the
Corporation’s earnings for financial reporting purposes and
valued at Fair Market Value on the Exercise Date; or
	 
	 	     (ii) to the extent the option is exercised for vested
Option Shares, through a special sale and remittance
procedure pursuant to which Optionee (or any other person or
persons exercising the option) shall concurrently provide
irrevocable written instructions (a) to a
Corporation-designated brokerage firm to effect the
immediate sale of the purchased shares and remit to the
Corporation, out of the sale proceeds available on the
settlement date, sufficient funds to cover the aggregate
Exercise Price payable for the purchased shares plus all
applicable Federal, state and local income and employment
taxes required to be withheld by the Corporation by reason
of such exercise and (b) to the Corporation to deliver the
certificates for the purchased shares directly to such
brokerage firm in order to complete the sale.



          (c) Except to the extent the sale and remittance procedure is utilized in
connection with the option exercise, payment of the Exercise Price must
accompany the Purchase Agreement delivered to the Corporation in connection
with the option exercise and the Optionee must:


	     	
	 	     (i) furnish to the Corporation appropriate
documentation that the person or persons exercising the
option (if other than Optionee) have the right to exercise
this option.
	 
	 	     (ii) execute and deliver to the Corporation such
written representations as may be requested by the
Corporation in order for it to comply with the applicable
requirements of Federal and state securities laws.



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	 	     (iii) make appropriate arrangements with the
Corporation (or Parent or Subsidiary employing or retaining
Optionee) for the satisfaction of all Federal, state and
local income and employment tax withholding requirements
applicable to the option exercise.



          (d) As soon as practical after the Exercise Date, the Corporation shall
issue to or on behalf of Optionee (or any other person or persons exercising
this option) a certificate for the purchased Option Shares, with the
appropriate legends affixed thereto.



          (e) In no event may this option be exercised for any fractional shares.



     10. REPURCHASE RIGHTS. ALL OPTION SHARES ACQUIRED UPON THE EXERCISE OF
THIS OPTION SHALL BE SUBJECT TO CERTAIN RIGHTS OF THE CORPORATION AND ITS
ASSIGNS TO REPURCHASE THOSE SHARES IN ACCORDANCE WITH THE TERMS SPECIFIED IN
THE PURCHASE AGREEMENT.



     11. Compliance with Laws and Regulations.



          (a) The exercise of this option and the issuance of the Option Shares upon
such exercise shall be subject to compliance by the Corporation and Optionee
with all applicable requirements of law relating thereto and with all
applicable regulations of any stock exchange (or the Nasdaq National Market, if
applicable) on which the Common Stock may be listed for trading at the time of
such exercise and issuance.



          (b) The inability of the Corporation to obtain approval from any
regulatory body having authority deemed by the Corporation to be necessary to
the lawful issuance and sale of any Common Stock pursuant to this option shall
relieve the Corporation of any liability with respect to the non-issuance or
sale of the Common Stock as to which such approval shall not have been
obtained. The Corporation, however, shall use its best efforts to obtain all
such approvals.



     12. Successors and Assigns. Except to the extent otherwise provided in
Paragraphs 3 and 6, the provisions of this Agreement shall inure to the benefit
of, and be binding upon, the Corporation and its successors and assigns and
Optionee, Optionee’s assigns and the legal representatives, heirs and legatees
of Optionee’s estate.



     13. Notices. Any notice required to be given or delivered to the
Corporation under the terms of this Agreement shall be in writing and addressed
to the Corporation at its principal corporate offices. Any notice required to
be given or delivered to Optionee shall be in writing and addressed to Optionee
at the address indicated below Optionee’s signature line on the Grant Notice.
All notices shall be deemed effective upon personal delivery or upon deposit in
the U.S. mail, postage prepaid and properly addressed to the party to be
notified.



     14. Financing. The Plan Administrator may, in its absolute discretion and
without any obligation to do so, permit Optionee to pay the Exercise Price for
the purchased Option Shares by delivering a promissory note that constitutes
valid consideration under applicable state law. The terms of any such
promissory note (including the interest rate, the requirements for



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collateral and the terms of repayment) shall be established by the Plan
Administrator in its sole discretion.1



     15. Construction. This Agreement and the option evidenced hereby are made
and granted pursuant to the Plan and are in all respects limited by and subject
to the terms of the Plan. All decisions of the Plan Administrator with respect
to any question or issue arising under the Plan or this Agreement shall be
conclusive and binding on all persons having an interest in this option.



     16. Governing Law. The interpretation, performance and enforcement of
this Agreement shall be governed by the laws of the State of Colorado without
resort to that State’s conflict-of-laws rules.



     17. Shareholder Approval.



          (a) The grant of this option is subject to approval of the Plan by the
Corporation’s Shareholders within twelve (12) months after the adoption of the
Plan by the Board. Notwithstanding any provision of this Agreement to the
contrary, this option may not be exercised in whole or in part until such
Shareholder approval is obtained. In the event that such Shareholder approval
is not obtained, then this option shall terminate in its entirety and Optionee
shall have no further rights to acquire any Option Shares hereunder.



          (b) If the Option Shares covered by this Agreement exceed, as of the Grant
Date, the number of shares of Common Stock which may without Shareholder
approval be issued under the Plan, then this option shall be void with respect
to such excess shares, unless Shareholder approval of an amendment sufficiently
increasing the number of shares of Common Stock issuable under the Plan is
obtained in accordance with the provisions of the Plan.



     18. Additional Terms Applicable to an Incentive Option. In the event this
option is designated an Incentive Option in the Grant Notice, the following
terms and conditions shall also apply to the grant:



          (a) This option shall cease to qualify for favorable tax treatment as an
Incentive Option if (and to the extent) this option is exercised for one or
more Option Shares: (i) more than three (3) months after the date Optionee
ceases to be an Employee for any reason other than death or Permanent
Disability or (ii) more than twelve (12) months after the date Optionee ceases
to be an Employee by reason of Permanent Disability.



          (b) This option shall not become exercisable in the calendar year in which
granted if (and to the extent) the aggregate Fair Market Value (determined at
the Grant Date) of the Common Stock for which this option would otherwise first
become exercisable in such calendar year would, when added to the aggregate
value (determined as of the respective date or dates of grant) of the Common
Stock and any other securities for which one or more other Incentive Options
granted to Optionee prior to the Grant Date (whether under the Plan or any







	 	 	1 Authorization of payment of the Exercise Price by a promissory note may,
under currently proposed Treasury Regulations, result in the loss of incentive
stock option treatment under the Federal tax laws.


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other option plan of the Corporation or any Parent or Subsidiary) first become
exercisable during the same calendar year, exceed One Hundred Thousand Dollars
($100,000) in the aggregate. To the extent the exercisability of this option
is deferred by reason of the foregoing limitation, the deferred portion shall
become exercisable in the first calendar year or years thereafter in which the
One Hundred Thousand Dollar ($100,000) limitation of this Paragraph 18(ii)
would not be contravened, but such deferral shall in all events end immediately
prior to the effective date of a Corporate Transaction in which this option is
not to be assumed, whereupon the option shall become immediately exercisable as
a Non-Statutory Option for the deferred portion of the Option Shares.



          (c) Should Optionee hold, in addition to this option, one or more other
options to purchase Common Stock which become exercisable for the first time in
the same calendar year as this option, then the foregoing limitations on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.



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APPENDIX


     The following definitions shall be in effect under the Agreement:



     A. Agreement shall mean this Stock Option Agreement.



     B. Board shall mean the Corporation’s Board of Directors.



     C. Code shall mean the Internal Revenue Code of 1986, as amended.



     D. Common Stock shall mean the Corporation’s common stock.



     E. Corporate Transaction shall mean any of the following transactions:


	     	
	 	     1. a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of
the Corporation’s outstanding securities are transferred to a
person or persons different from the persons holding those
securities immediately prior to such transaction,
	 
	 	     2. the sale, transfer or other disposition of all or
substantially all of the Corporation’s assets or capital stock, or
	 
	 	     3. a tender or exchange offer in which, after the consummation
of the offer, the offeror is the beneficial owner (as determined
pursuant to Section 13(d) of the Securities Exchange Act of 1934,
as amended), directly or indirectly, of at least 15 percent (15%)
of the outstanding Common Stock.



     F. Corporation shall mean The Flagship Group, Inc., a Delaware
corporation.



     G. Employee shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.



     H. Exercise Date shall mean the date on which the option shall have been
exercised in accordance with Paragraph 9 of the Agreement.



     I. Exercise Price shall mean the exercise price per share as specified in
the Grant Notice.



     J. Expiration Date shall mean the date on which the option expires as
specified in the Grant Notice.



     K. Fair Market Value per share of Common Stock on any relevant date shall
be determined in accordance with the following provisions:


	     	
	 	     1. If the Common Stock is at the time traded on the Nasdaq
National



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	 	Market, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question, as
the price is reported by the National Association of Securities
Dealers on the Nasdaq National Market or any successor system. If
there is no closing selling price for the Common Stock on the date
in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation
exists.
	 
	 	     2. If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question on the
Stock Exchange determined by the Plan Administrator to be the
primary market for the Common Stock, as such price is officially
quoted in the composite tape of transactions on such exchange. If
there is no closing selling price for the Common Stock on the date
in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation
exists.
	 
	 	     3. If the Common Stock is at the time neither listed on any
Stock Exchange nor traded on the Nasdaq National Market, then the
Fair Market Value shall be determined by the Plan Administrator
after taking into account such factors as the Plan Administrator
shall deem appropriate.



     L. Grant Date shall mean the date of grant of the option as specified in
the Grant Notice.



     M. Grant Notice shall mean the Notice of Grant of Stock Option
accompanying the Agreement, pursuant to which Optionee has been informed of the
basic terms of the option evidenced hereby.



     N. Incentive Option shall mean an option which satisfies the requirements
of Code Section 422.



     O. Involuntary Termination shall mean the termination of Optionee’s
Service which occurs by reason of:


	     	
	 	     (i) Optionee’s dismissal or discharge by the Corporation for
reasons other than Misconduct, or
	 
	 	     (ii) Optionee’s voluntary resignation following (A) a change
in Optionee’s position with the Corporation (or Parent or
Subsidiary employing Optionee) which materially reduces Optionee’s
level of responsibility, (B) a reduction in Optionee’s level of
compensation (including base salary, fringe benefits and
participation in corporate-performance based bonus or incentive
programs) by more than fifteen percent (15%) in the aggregate or
(C) a relocation of Optionee’s place of employment by more than
fifty (50) miles from Optionee’s place of employment immediately
prior to the Corporate Transaction, provided and only if such
change, reduction or relocation is effected by the Corporation
without Optionee’s consent.



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     P. Misconduct shall mean the commission of any act of fraud, embezzlement
or dishonesty by Optionee, any unauthorized use or disclosure by Optionee of
confidential information or trade secrets of the Corporation (or any Parent or
Subsidiary), or any other intentional misconduct by Optionee adversely
affecting the business or affairs of the Corporation (or any Parent or
Subsidiary) in a material manner. The foregoing definition shall not be deemed
to be inclusive of all the acts or omissions which the Corporation (or any
Parent or Subsidiary) may consider as grounds for the dismissal or discharge of
Optionee or any other individual in the Service of the Corporation (or any
Parent or Subsidiary).



     Q. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.



     R. Non-Statutory Option shall mean an option not intended to satisfy the
requirements of Code Section 422.



     S. Option Shares shall mean the number of shares of Common Stock subject
to the option.



     T. Optionee shall mean the person to whom the option is granted as
specified in the Grant Notice.



     U. Parent shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.



     V. Permanent Disability shall mean the inability of Optionee to engage in
any substantial gainful activity by reason of any medically determinable
physical or mental impairment which is expected to result in death or has
lasted or can be expected to last for a continuous period of twelve (12) months
or more.



     W. Plan shall mean the Corporation’s 1999 Stock Option/Stock Issuance
Plan.



     X. Plan Administrator shall mean either the Board or a committee of Board
members, to the extent the committee is at the time responsible for the
administration of the Plan.



     Y. Purchase Agreement shall mean the stock purchase agreement in
substantially the form of Exhibit B to the Grant Notice.



     Z. Service shall mean the Optionee’s performance of services for the
Corporation (or any Parent or Subsidiary) in the capacity of an Employee, a
non-employee member of the board of directors or a consultant or independent
advisor.



     AA. Stock Exchange shall mean the American Stock Exchange or the New York
Stock Exchange.



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     BB. Subsidiary shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at
the time of the determination, stock possessing fifty percent (50%) or more of
the total combined voting power of all classes of stock in one of the other
corporations in such chain.



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Exhibit B


THE FLAGSHIP GROUP, INC. 

  STOCK PURCHASE AGREEMENT 

          This STOCK PURCHASE AGREEMENT (this “Agreement”) is made as of this ___
day of _______________, _____________, by and among The Flagship Group, Inc., a Delaware
corporation, _____________________, an individual person (“Optionee”), and
________________________________, Optionee’s spouse.



          All capitalized terms in this Agreement shall have the meaning assigned to
them in this Agreement or in the attached Appendix.



     A. EXERCISE OF OPTION



          1. Exercise. Optionee hereby purchases _______ shares of Common Stock
(the “Purchased Shares”) pursuant to that certain option (the “Option”) granted
Optionee on the ___ day of _______________, __________ (the “Grant Date”) to
purchase up to _______ shares of Common Stock under the Plan (the “Purchased
Shares”) at the exercise price of $____ per share (the “Exercise Price”).



          2. Payment. Concurrently with the delivery of this Agreement to the
Corporation, Optionee shall pay the Exercise Price for the Purchased Shares in
accordance with the provisions of the Option Agreement and shall deliver
whatever additional documents may be required by the Option Agreement as a
condition for exercise.



          3. Shareholder Rights. Until such time as the Corporation exercises the
Repurchase Right or the First Refusal Right, Optionee (or any successor in
interest) shall have all the rights of a shareholder (including voting,
dividend and liquidation rights) with respect to the Purchased Shares, subject,
however, to the transfer restrictions of Articles B and C.



     B. SECURITIES LAW COMPLIANCE



          1. Restricted Securities. The Purchased Shares have not been registered
under the 1933 Act and are being issued to Optionee in reliance upon the
exemption from such registration provided by SEC Rule 701 for stock issuances
under compensatory benefit plans such as the Plan. Optionee hereby confirms
that Optionee has been informed that the Purchased Shares are restricted
securities under the 1933 Act and may not be resold or transferred unless the
Purchased Shares are first registered under the Federal securities laws or
unless an exemption from such registration is available. Accordingly, Optionee
hereby acknowledges that Optionee is prepared to hold the Purchased Shares for
an indefinite period and that Optionee is aware that SEC Rule 144 issued under
the 1933 Act which exempts certain resales of unrestricted securities is not
presently available to exempt the resale of the Purchased Shares from the
registration requirements of the 1933 Act.










 


          2. Restrictions on Disposition of Purchased Shares. Optionee shall make
no disposition of the Purchased Shares (other than a Permitted Transfer) unless
and until there is compliance with all of the following requirements:



               (a) Optionee shall have provided the Corporation with a written summary of
the terms and conditions of the proposed disposition.



               (b) Optionee shall have complied with all requirements of this Agreement
applicable to the disposition of the Purchased Shares.



               (c) Optionee shall have provided the Corporation with written assurances,
in form and substance satisfactory to the Corporation, that (a) the proposed
disposition does not require registration of the Purchased Shares under the
1933 Act or (b) all appropriate action necessary for compliance with the
registration requirements of the 1933 Act or any exemption from registration
available under the 1933 Act (including Rule 144) has been taken.



          The Corporation shallnot be required (i) to transfer on its books any
Purchased Shares which have been sold or transferred in violation of the
provisions of this Agreementor (ii) to treat as the owner of the Purchased
Shares, or otherwise to accord voting, dividend or liquidation rights to, any
transferee to whom the Purchased Shares have been transferred in contravention
of this Agreement.



          3. Restrictive Legends. The stock certificates for the Purchased Shares
shall be endorsed with the following restrictive legends:



               (a) “The shares represented by this certificate have not been registered
under the Securities Act of 1933. The shares may not be sold or offered for
sale in the absence of (a) an effective registration statement for the shares
under such Act, (b) a “no action” letter of the Securities and Exchange
Commission with respect to such sale or offer or (c) satisfactory assurances to
the Corporation that registration under such Act is not required with respect
to such sale or offer.”



               (b) “The shares represented by this certificate are subject to certain
repurchase rights and rights of first refusal granted to the Corporation and
accordingly may not be sold, assigned, transferred, encumbered, or in any
manner disposed of except in conformity with the terms of a written agreement
dated _________, _______ between the Corporation and the registered holder of
the shares (or the predecessor in interest to the shares). A copy of such
agreement is maintained at the Corporation’s principal corporate offices.”



     C. TRANSFER RESTRICTIONS



          1. Restriction on Transfer. Except for any Permitted Transfer, Optionee
shall not transfer, assign, encumber or otherwise dispose of any of the
Purchased Shares which are subject to the Repurchase Right. In addition,
Purchased Shares which are released from the Repurchase Right shall not be
transferred, assigned, encumbered or otherwise disposed of in contravention of
the First Refusal Right, the Market Stand-Off or the Repurchase Right.



2






 


          2. Transferee Obligations. Each person (other than the Corporation) to
whom the Purchased Shares are transferred by means of a Permitted Transfer
must, as a condition precedent to the validity of such transfer, acknowledge in
writing to the Corporation that such person is bound by the provisions of this
Agreement and that the transferred shares are subject to (i) the Repurchase
Right, (ii) the First Refusal Right and (iii) the Market Stand-Off, to the same
extent such shares would be so subject if retained by Optionee.



          3. Market Stand-Off.



               (a) In connection with any underwritten public offering by the Corporation
of its equity securities pursuant to an effective registration statement filed
under the 1933 Act, including the Corporation’s initial public offering, Owner
shall not sell, make any short sale of, loan, hypothecate, pledge, grant any
option for the purchase of, or otherwise dispose or transfer for value or
otherwise agree to engage in any of the foregoing transactions with respect to,
any Purchased Shares without the prior written consent of the Corporation or
its underwriters. Such restriction (the “Market Stand-Off”) shall be in effect
for such period of time from and after the effective date of the final
prospectus for the offering as may be requested by the Corporation or such
underwriters. In no event, however, shall such period exceed one hundred
eighty (180) days.



               (b) Owner shall be subject to the Market Stand-Offprovided and only if
the officers and directors of the Corporation are also subject to similar
restrictions.



               (c) Any new, substituted or additional securities which are by reason of
any Recapitalization or Reorganization distributed with respect to the
Purchased Shares shall be immediately subject to the Market Stand-Off, to the
same extent the Purchased Shares are at such time covered by such provisions.



               (d) In order to enforce the Market Stand-Off, the Corporation may impose
stop-transfer instructions with respect to the Purchased Shares until the end
of the applicable stand-off period.



     D. REPURCHASE RIGHT



               1. Grant. The Corporation is hereby granted the right (the “Repurchase
Right”), exercisable at any time during the ninety (90)-day period following
the date Optionee ceases for any reason to remain in Service or (if later)
during the ninety (90)-day period following the execution date of this
Agreement, to repurchase at the Exercise Price all or any portion of the
Purchased Shares in which Optionee is not, at the time of his or her cessation
of Service, vested in accordance with the Vesting Schedule (such shares to be
hereinafter referred to as the “Unvested Shares”).



               2. Exercise of the Repurchase Right. The Repurchase Right shall be
exercisable by written notice delivered to each Owner of the Unvested Shares
prior to the expiration of the ninety (90)-day exercise period. The notice
shall indicate the number of Unvested Shares to be repurchased and the date on
which the repurchase is to be effected, such date to be not more than thirty
(30) days after the date of such notice. The certificates representing the
Unvested Shares to be repurchased shall be delivered to the Corporation prior
to



3






 


the close of business on the date specified for the repurchase.
Concurrently with the receipt of such stock certificates, the Corporation shall
pay to Owner, in cash or cash equivalents (including the cancellation of any
purchase-money indebtedness), an amount equal to the Exercise Price previously
paid for the Unvested Shares which are to be repurchased from Owner.



          3. Termination of the Repurchase Right. The Repurchase Right shall
terminate with respect to any Unvested Shares for which it is not timely
exercised under Paragraph D.2. In addition, the Repurchase Right shall
terminate and cease to be exercisable with respect to any and all Purchased
Shares in which Optionee vests in accordance with the Vesting Schedule. All
Purchased Shares as to which the Repurchase Right lapses shall, however, remain
subject to (i) the First Refusal Right and (ii) the Market Stand-Off.



          4. Aggregate Vesting Limitation. If the Option is exercised in more than
one increment so that Optionee is a party to one or more other Stock Purchase
Agreements (the “Prior Purchase Agreements”) which are executed prior to the
date of this Agreement, then the total number of Purchased Shares as to which
Optionee shall be deemed to have a fully-vested interest under this Agreement
and all Prior Purchase Agreements shall not exceed in the aggregate the number
of Purchased Shares in which Optionee would otherwise at the time be vested, in
accordance with the Vesting Schedule, had all the Purchased Shares (including
those acquired under the Prior Purchase Agreements) been acquired exclusively
under this Agreement.



          5. Recapitalization. Any new, substituted or additional securities or
other property (including cash paid other than as a regular cash dividend)
which is by reason of any Recapitalization distributed with respect to the
Purchased Shares shall be immediately subject to the Repurchase Right, but only
to the extent the Purchased Shares are at the time covered by such right.
Appropriate adjustments to reflect such distribution shall be made to the
number and/or class of Purchased Shares subject to this Agreement and to the
price per share to be paid upon the exercise of the Repurchase Right in order
to reflect the effect of any such Recapitalization upon the Corporation’s
capital structure;provided, however, that the aggregate purchase price shall
remain the same.



          6. Corporate Transaction.



               (a) The Repurchase Right shall be assigned to the successor entity in any
Corporate Transaction. However, to the extent the successor entity does not
accept such assignment, the Repurchase Right shall lapse immediately prior to
the consummation of the Corporate Transaction.



               (b) To the extent the Repurchase Right remains in effect following a
Corporate Transaction, such right shall apply to the new capital stock or other
property (including any cash payments) received in exchange for the Purchased
Shares in consummation of the Corporate Transaction, but only to the extent the
Purchased Shares are at the time covered by such right. Appropriate
adjustments shall be made to the price per share payable upon exercise of the
Repurchase Right to reflect the effect of the Corporate Transaction upon the
Corporation’s capital structure;provided, however, that the aggregate purchase
price shall remain the same.



4






 


               (c) The Repurchase Right shall automatically lapse in its entirety, and
all the Purchased Shares shall immediately vest in full, upon an Involuntary
Termination of Optionee’s Service within twelve (12) months following the
effective date of a Corporate Transaction in which the Repurchase Right has
been assigned.



     E. RIGHT OF FIRST REFUSAL



          1. Grant. The Corporation is hereby granted the right of first refusal
(the “First Refusal Right”), exercisable in connection with any proposed
transfer of the Purchased Shares in which Optionee has vested in accordance
with the Vesting Schedule. For purposes of this Article E, the term “transfer”
shall include any sale, assignment, pledge, encumbrance or other disposition of
the Purchased Shares intended to be made by Owner, but shall not include any
Permitted Transfer.



          2. Notice of Intended Disposition. In the event any Owner of Purchased
Shares in which Optionee has vested desires to accept a bona fide third-party
offer for the transfer of any or all of such shares (the Purchased Shares
subject to such offer to be hereinafter referred to as the “Target Shares”),
Owner shall promptly (i) deliver to the Corporation written notice (the
“Disposition Notice”) of the terms of the offer, including the purchase price
and the identity of the third-party offeror, and (ii) provide satisfactory
proof that the disposition of the Target Shares to such third-party offeror
would not be in contravention of the provisions set forth in Articles B and C.



          3. Exercise of the First Refusal Right.



               (a) The Corporation shall, for a period of forty-five (45) days following
receipt of the Disposition Notice, have the right to repurchase any or all of
the Target Shares subject to the Disposition Notice upon the same terms as
those specified therein or upon such other terms (not materially different from
those specified in the Disposition Notice) to which Owner consents. Such right
shall be exercisable by delivery of written notice (the “Exercise Notice”) to
Owner prior to the expiration of the forty-five (45)-day exercise period. If
such right is exercised with respect to all the Target Shares, then the
Corporation shall effect the repurchase of such shares, including payment of
the purchase price, not more than fifteen (15) business days after delivery of
the Exercise Notice; and at such time the certificates representing the Target
Shares shall be delivered to the Corporation.



               (b) Should the purchase price specified in the Disposition Notice be
payable in property other than cash or evidences of indebtedness, the
Corporation shall have the right to pay the purchase price in the form of cash
equal in amount to the value of such property. If Owner and the Corporation
cannot agree on such cash value within thirty (30) days after the Corporation’s
receipt of the Disposition Notice, the valuation shall be made by an appraiser
of recognized standing selected by Owner and the Corporation or, if they cannot
agree on an appraiser within forty-five (45) days after the Corporation’s
receipt of the Disposition Notice, each shall select an appraiser of recognized
standing and the two (2) appraisers shall designate a third appraiser of
recognized standing, whose appraisal shall be determinative of such value. The
cost of such appraisal shall be shared equally by Owner and the Corporation.
The closing shall then be held on the later of (i) the fifteenth (15th)
business day following delivery of the



5






 


Exercise Notice or (ii) the fifteenth (15th) business day after such
valuation shall have been made.



          4. Non-Exercise of the First Refusal Right. In the event the Exercise
Notice is not given to Owner prior to the expiration of the forty-five (45)-day
exercise period, Owner shall have a period of thirty (30) days thereafter in
which to sell or otherwise dispose of the Target Shares to the third-party
offeror identified in the Disposition Notice upon terms (including the purchase
price) no more favorable to such third-party offeror than those specified in
the Disposition Notice;provided, however, that any such sale or disposition
must not be effected in contravention of the provisions of Articles B and C.
The third-party offeror shall acquire the Target Shares free and clear of the
Repurchase Right and the First Refusal Right, but the acquired shares shall
remain subject to the provisions of Article B and Paragraph C.3. In the event
Owner does not effect such sale or disposition of the Target Shares within the
specified thirty (30)-day period, the First Refusal Right shall continue to be
applicable to any subsequent disposition of the Target Shares by Owner until
such right lapses.



          5. Partial Exercise of the First Refusal Right. In the event the
Corporation makes a timely exercise of the First Refusal Right with respect to
a portion, but not all, of the Target Shares specified in the Disposition
Notice, Owner shall have the option, exercisable by written notice to the
Corporation delivered within fifteen (15) business days after Owner’s receipt
of the Exercise Notice, to effect the sale of the Target Shares pursuant to
either of the following alternatives:



               (a) sale or other disposition of all the Target Shares to the third-party
offeror identified in the Disposition Notice, but in full compliance with the
requirements of Paragraph E.4, as if the Corporation did not exercise the First
Refusal Right; or



               (b) sale to the Corporation of the portion of the Target Shares which the
Corporation has elected to purchase, such sale to be effected in substantial
conformity with the provisions of Paragraph E.3. The First Refusal Right shall
continue to be applicable to any subsequent disposition of the remaining Target
Shares until such right lapses.



Failure of Owner to deliver timely notification to the Corporation shall be
deemed to be an election by Owner to sell the Target Shares pursuant to
alternative (i) above.



          6. Recapitalization/Reorganization.



               (a) Any new, substituted or additional securities or other property which
is by reason of any Recapitalization distributed with respect to the Purchased
Shares shall be immediately subject to the First Refusal Right, but only to the
extent the Purchased Shares are at the time covered by such right.



               (b) In the event of a Reorganization, the First Refusal Right shall remain
in full force and effect and shall apply to the new capital stock or other
property received in exchange for the Purchased Shares in consummation of the
Reorganization, but only to the extent the Purchased Shares are at the time
covered by such right.

6






 




          7. Lapse. The First Refusal Right shall lapse upon theearliest to occur
of (i) the first date on which shares of the Common Stock are held of record by
more than five hundred (500) persons, (ii) a determination is made by the Board
that a public market exists for the outstanding shares of Common Stock or (iii)
a firm commitment underwritten public offering, pursuant to an effective
registration statement under the 1933 Act, covering the offer and sale of the
Common Stock in the aggregate amount of at least ten million dollars
($10,000,000). However, the Market Stand-Off shall continue to remain in full
force and effect following the lapse of the First Refusal Right.



     F. SPECIAL TAX ELECTION



          The acquisition of the Purchased Shares may result in adverse tax
consequences which may be avoided or mitigated by filing an election under Code
Section 83(b). Such election must be filed within thirty (30) days after the
date of this Agreement. A description of the tax consequences applicable to
the acquisition of the Purchased Shares and the form for making the Code
Section 83(b) election are set forth in Exhibit II. OPTIONEE SHOULD CONSULT
WITH HIS OR HER TAX ADVISOR TO DETERMINE THE TAX CONSEQUENCES OF ACQUIRING THE
PURCHASED SHARES AND THE ADVANTAGES AND DISADVANTAGES OF FILING THE CODE
SECTION 83(b) ELECTION. OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE’S SOLE
RESPONSIBILITY, AND NOT THE CORPORATION’S, TO FILE A TIMELY ELECTION UNDER CODE
SECTION 83(b), EVEN IF OPTIONEE REQUESTS THE CORPORATION OR ITS REPRESENTATIVES
TO MAKE THIS FILING ON HIS OR HER BEHALF.



     G. GENERAL PROVISIONS



          1. Assignment.



               (a) The Corporation may assign the Repurchase Right, the First Refusal
Right and/or the Repurchase Right to any person or entity selected by the
Board, including (without limitation) one or more shareholders of the
Corporation.



               (b) If the assignee of the Repurchase Right is other than (i) a wholly
owned subsidiary of the Corporation or (ii) the parent corporation owning one
hundred percent (100%) of the Corporation’s outstanding capital stock, then
such assignee must make a cash payment to the Corporation, upon the assignment
of the Repurchase Right, in an amount equal to the excess (if any) of (i) the
Fair Market Value of the Purchased Shares at the time subject to the assigned
Repurchase Right over (ii) the aggregate repurchase price payable for the
Purchased Shares.



          2. No Employment or Service Contract. Nothing in this Agreement or in the
Plan shall confer upon Optionee any right to continue in Service for any period
of specific duration or interfere with or otherwise restrict in any way the
rights of the Corporation (or any Parent or Subsidiary employing or retaining
Optionee) or of Optionee, which rights are hereby expressly reserved by each,
to terminate Optionee’s Service at any time for any reason, with or without
cause.



7






 


          3. Notices. Any notice required to be given under this Agreement shall be
in writing and shall be deemed effective upon personal delivery or upon deposit
in the U.S. mail, registered or certified, postage prepaid and properly
addressed to the party entitled to such notice at the address indicated below
such party’s signature line on this Agreement or at such other address as such
party may designate by ten (10) days advance written notice under this
paragraph to all other parties to this Agreement.



          4. No Waiver. The failure of the Corporation in any instance to exercise
the Repurchase Right or the First Refusal Right shall not constitute a waiver
of any other repurchase rights and/or rights of first refusal that may
subsequently arise under the provisions of this Agreement or any other
agreement between the Corporation and Optionee or Optionee’s spouse. No waiver
of any breach or condition of this Agreement shall be deemed to be a waiver of
any other or subsequent breach or condition, whether of like or different
nature.



          5. Cancellation of Shares. If the Corporation shall make available, at
the time and place and in the amount and form provided in this Agreement, the
consideration for the Purchased Shares to be repurchased in accordance with the
provisions of this Agreement, then from and after such time, the person from
whom such shares are to be repurchased shall no longer have any rights as a
holder of such shares (other than the right to receive payment of such
consideration in accordance with this Agreement). Such shares shall be deemed
purchased in accordance with the applicable provisions hereof, and the
Corporation shall be deemed the owner and holder of such shares, whether or not
the certificates therefor have been delivered as required by this Agreement.



     H. MISCELLANEOUS PROVISIONS



          1. Optionee Undertaking. Optionee hereby agrees to take whatever
additional action and execute whatever additional documents the Corporation may
deem necessary or advisable in order to carry out or effect one or more of the
obligations or restrictions imposed on either Optionee or the Purchased Shares
pursuant to the provisions of this Agreement.



          2. Agreement is Entire Contract. This Agreement constitutes the entire
contract between the parties hereto with regard to the subject matter hereof.
This Agreement is made pursuant to the provisions of the Plan and shall in all
respects be construed in conformity with the terms of the Plan.



          3. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Colorado without resort to that
State’s conflict-of-laws rules.



          4. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.



          5. Successors and Assigns. The provisions of this Agreement shall inure
to the benefit of, and be binding upon, the Corporation and its successors and
assigns and upon Optionee, Optionee’s permitted assigns and the legal
representatives, heirs and legatees of



8






 


Optionee’s estate, whether or not any such person shall have become a
party to this Agreement and have agreed in writing to join herein and be bound
by the terms hereof.



9






 


SIGNATURES


     IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first indicated above.




  	 	 	 	 	 
	 	 	 	THE FLAGSHIP GROUP, INC.
	 	 	 	 	 
	 	 	 	 	 
	 	 	 	By:	 
	 	 	 

        	 	
        

        

        

        [Title]
	 	 	 	 	 
	 	 	 	OPTIONEE
	 	 	 	 	 
	 	 	 	 
	 	 	 	
        

      
	 	 	 	Name:	 
	 	 	 

        	Title:	 




10








 



EXHIBIT I


FEDERAL INCOME TAX CONSEQUENCES AND

SECTION 83(b) TAX ELECTION


     I. Federal Income Tax Consequences and Section 83(b) Election For Exercise
of Non-Statutory Option. If the Purchased Shares are acquired pursuant to the
exercise of a Non-Statutory Option, as specified in the Grant Notice, then
under Code Section 83, the excess of the Fair Market Value of the Purchased
Shares on the date any forfeiture restrictions applicable to such shares lapse
over the Exercise Price paid for such shares will be reportable as ordinary
income on the lapse date. For this purpose, the term “forfeiture restrictions”
includes the right of the Corporation to repurchase the Purchased Shares
pursuant to the Repurchase Right. However, Optionee may elect under Code
Section 83(b) to be taxed at the time the Purchased Shares are acquired, rather
than when and as such Purchased Shares cease to be subject to such forfeiture
restrictions. Such election must be filed with the Internal Revenue Service
within thirty (30) days after the date of the Agreement. Even if the Fair
Market Value of the Purchased Shares on the date of the Agreement equals the
Exercise Price paid (and thus no tax is payable), the election must be made to
avoid adverse tax consequences in the future. The form for making this
election is attached as part of this exhibit. FAILURE TO MAKE THIS FILING
WITHIN THE APPLICABLE THIRTY (30)-DAY PERIOD WILL RESULT IN THE RECOGNITION OF
ORDINARY INCOME BY OPTIONEE AS THE FORFEITURE RESTRICTIONS LAPSE.



     II. Federal Income Tax Consequences and Conditional Section 83(b) Election
For Exercise of Incentive Option. If the Purchased Shares are acquired
pursuant to the exercise of an Incentive Option, as specified in the Grant
Notice, then the following tax principles shall be applicable to the Purchased
Shares:


	     	
	 	     (i) For regular tax purposes, no taxable income will be
recognized at the time the Option is exercised.
	 
	 	     (ii) The excess of (a) the Fair Market Value of the Purchased
Shares on the date the Option is exercised or (if later) on the
date any forfeiture restrictions applicable to the Purchased
Shares lapse over (b) the Exercise Price paid for the Purchased
Shares will be included in Optionee’s taxable income for
alternative minimum tax purposes.
	 
	 	     (iii) If Optionee makes a disqualifying disposition of the
Purchased Shares, then Optionee will recognize ordinary income in
the year of such disposition equal in amount to the excess of (a)
the Fair Market Value of the Purchased Shares on the date the
Option is exercised or (if later) on the date any forfeiture
restrictions applicable to the Purchased Shares lapse over (b) the
Exercise Price paid for the Purchased Shares. Any additional gain
recognized upon the disqualifying disposition will be either
short-term or long-term capital gain depending upon the period for
which the Purchased Shares are held prior to the disposition.



11






 

	     	
	 	     (iv) For purposes of the foregoing, the term “forfeiture
restrictions” will include the right of the Corporation to
repurchase the Purchased Shares pursuant to the Repurchase Right.
The term “disqualifying disposition” means any sale or other
disposition1 of the Purchased Shares within two (2) years after
the Grant Date or within one (1) year after the exercise date of
the Option.
	 
	 	     (v) In the absence of final Treasury Regulations relating to
Incentive Options, it is not certain whether Optionee may, in
connection with the exercise of the Option for any Purchased
Shares at the time subject to forfeiture restrictions, file a
protective election under Code Section 83(b) which would limit (a)
Optionee’s alternative minimum taxable income upon exercise and
(b) Optionee’s ordinary income upon a disqualifying disposition to
the excess of the Fair Market Value of the Purchased Shares on the
date the Option is exercised over the Exercise Price paid for the
Purchased Shares. Accordingly, such election if properly filed
will only be allowed to the extent the final Treasury Regulations
permit such a protective election. Page 2 of the attached form
for making the election should be filed with any election made in
connection with the exercise of an Incentive Option.







	 	 	1 Generally, a disposition of shares purchased under an Incentive Option
includes any transfer of legal title, including a transfer by sale, exchange or
gift, but does not include a transfer to the Optionee’s spouse, a transfer into
joint ownership with right of survivorship if Optionee remains one of the joint
owners, a pledge, a transfer by bequest or inheritance or certain tax free
exchanges permitted under the Code.


12






 


SECTION 83(b) ELECTION


     This statement is being made under Section 83(b) of the Internal Revenue
Code, pursuant to Treas. Reg. Section 1.83-2.




	(1)	  	The taxpayer who performed the services is:
	 
	 	  	Name:

Address:

Taxpayer Ident. No.:
	 
	(2)	  	The property with respect to which the election is being made is
___________ shares of the common stock of The Flagship Group, Inc.
	 
	(3)	  	The property was issued on _____________, ____________.
	 
	(4)	  	The taxable year in
which the election is being made is the calendar year ______.
	 
	(5)	  	The property is subject to a repurchase right pursuant to which the issuer has the right to acquire the
property at the original purchase price if for any reason taxpayer’s employment with the issuer is
terminated. The issuer’s repurchase right lapses in a series of annual and monthly installments over a [four
(4)-year period ending on _____________, ___________].
	 
	(6)	  	The fair market value at the time of transfer (determined without regard
to any restriction other than a restriction which by its terms will never
lapse) is $_____________ per share.
	 
	(7)	  	The amount paid for such property is $___________ per share.
	 
	(8)	  	A copy of this statement was furnished to The Flagship Group, Inc. for
whom taxpayer rendered the services underlying the transfer of property.
	 
	(9)	  	This statement is executed on _______________________, __________________.




	 	 	 
	

Spouse (if any)	 	


Taxpayer




This election must be filed with the Internal Revenue Service Center with which
taxpayer files his or her Federal income tax returns and must be made within
thirty (30) days after the execution date of the Stock Purchase Agreement.
This filing should be made by registered or certified mail, return receipt
requested. Optionee must retain two (2) copies of the completed form for
filing with his or her Federal and state tax returns for the current tax year
and an additional copy for his or her records.



13






 


The property described in the above Section 83(b) election is comprised of
shares of common stock acquired pursuant to the exercise of an incentive stock
option under Section 422 of the Internal Revenue Code (the “Code”).
Accordingly, it is the intent of the Taxpayer to utilize this election to
achieve the following tax results:



     1. The purpose of this election is to have the alternative minimum taxable
income attributable to the purchased shares measured by the amount by which the
fair market value of such shares at the time of their transfer to the Taxpayer
exceeds the purchase price paid for the shares. In the absence of this
election, such alternative minimum taxable income would be measured by the
spread between the fair market value of the purchased shares and the purchase
price which exists on the various lapse dates in effect for the forfeiture
restrictions applicable to such shares. The election is to be effective to the
full extent permitted under the Code.



     2. Section 421(a)(1) of the Code expressly excludes from income any excess
of the fair market value of the purchased shares over the amount paid for such
shares. Accordingly, this election is also intended to be effective in the
event there is a “disqualifying disposition” of the shares, within the meaning
of Section 421(b) of the Code, which would otherwise render the provisions of
Section 83(a) of the Code applicable at that time. Consequently, the Taxpayer
hereby elects to have the amount of disqualifying disposition income measured
by the excess of the fair market value of the purchased shares on the date of
transfer to the Taxpayer over the amount paid for such shares. Since Section
421(a) presently applies to the shares which are the subject of this Section
83(b) election, no taxable income is actually recognized for regular tax
purposes at this time, and no income taxes are payable, by the Taxpayer as a
result of this election.



THIS PAGE 2 IS TO BE ATTACHED TO ANY SECTION 83(b) ELECTION FILED IN CONNECTION
WITH THE EXERCISE OF AN INCENTIVE STOCK OPTION UNDER THE FEDERAL TAX LAWS.



14






 


APPENDIX


     The following definitions shall be in effect under the Agreement:



     A. Agreement shall mean this Stock Purchase Agreement.



     B. Board shall mean the Corporation’s Board of Directors.



     C. Code shall mean the Internal Revenue Code of 1986, as amended.



     D. Common Stock shall mean the Corporation’s common stock.



     E. Corporate Transaction shall mean any of the following transactions:


	     	
	 	     1. a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power
of the Corporation’s outstanding securities are transferred to a
person or persons different from the persons holding those
securities immediately prior to such transaction,
	 
	 	     2. the sale, transfer or other disposition of all or
substantially all of the Corporation’s assets or capital stock, or
	 
	 	     3. a tender or exchange offer in which, after the
consummation of the offer, the offeror is the beneficial owner (as
determined pursuant to Section 13(d) of the Securities Exchange
Act of 1934, as amended), directly or indirectly, of at least
fifteen percent (15%) of the outstanding Common Stock.



     F. Corporation shall mean The Flagship Group, Inc., a Delaware
corporation.



     G. Disposition Notice shall have the meaning assigned to such term in
Paragraph E.2.



     H. Exercise Notice shall have the meaning assigned to such term in
Paragraph E.3.



     I. Exercise Price shall have the meaning assigned to such term in
Paragraph A.1.



     J. Fair Market Value of a share of Common Stock on any relevant date,
prior to the initial public offering of the Common Stock, shall be determined
by the Plan Administrator after taking into account such factors as it shall
deem appropriate.



     K. First Refusal Right shall mean the right granted to the Corporation in
accordance with Article E.



15






 


     L. Grant Date shall have the meaning assigned to such term in Paragraph A.1.



     M. Grant Notice shall mean the Notice of Grant of Stock Option pursuant to
which Optionee has been informed of the basic terms of the Option.



     N. Incentive Option shall mean an option which satisfies the requirements
of Code Section 422.



     O. Involuntary Termination shall mean the termination of Optionee’s
Service which occurs by reason of:


	     	
	 	     1. Optionee’s involuntary dismissal or discharge by the
Corporation for reasons other than Misconduct, or
	 
	 	     2. Optionee’s voluntary resignation following (A) a change in
his or her position with the Corporation which materially reduces
his or her level of responsibility, (B) a reduction in Optionee’s
level of compensation (including base salary, fringe benefits and
participation in corporate-performance based bonus or incentive
programs) by more than fifteen percent (15%) or (C) a relocation
of Optionee’s place of employment by more than fifty (50) miles,
provided and only if such change, reduction or relocation is
effected by the Corporation without Optionee’s consent.



     P. Market Stand-Off shall mean the market stand-off restriction specified
in Paragraph C.3.



     Q. Misconduct shall mean the commission of any act of fraud, embezzlement
or dishonesty by Optionee, any unauthorized use or disclosure by Optionee of
confidential information or trade secrets of the Corporation (or any Parent or
Subsidiary), or any other intentional misconduct by Optionee adversely
affecting the business or affairs of the Corporation (or any Parent or
Subsidiary) in a material manner. The foregoing definition shall not be deemed
to be inclusive of all the acts or omissions which the Corporation (or any
Parent or Subsidiary) may consider as grounds for the dismissal or discharge of
Optionee or any other person in the Service of the Corporation (or any Parent
or Subsidiary).



     R. 1933 Act shall mean the Securities Act of 1933, as amended.



     S. Non-Statutory Option shall mean an option not intended to satisfy the
requirements of Code Section 422.



     T. Option shall have the meaning assigned to such term in Paragraph A.1.



     U. Option Agreement shall mean all agreements and other documents
evidencing the Option.



     V. Optionee shall mean the person to whom the Option is granted under the
Plan.



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     W. Owner shall mean Optionee and all subsequent holders of the Purchased
Shares who derive their chain of ownership through a Permitted Transfer from
Optionee.



     X. Parent shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.



     Y. Permitted Transfer shall mean (i) a gratuitous transfer of the
Purchased Shares, provided and only if (A) Optionee obtains the Corporation’s
prior written consent to such transfer, (B) prior to the completion of the
transfer the transferee shall have executed documents assuming the obligations
of the Optionee under this Agreement with respect to the transferred securities
and (C) prior to the completion of the transfer the transferee shall have
executed an Irrevocable Proxy substantially in the form of Exhibit A attached
hereto appointing the transferring Optionee as the transferee’s proxy and
giving the transferring Optionee full power of substitution to vote all of the
shares of capital stock transferred pursuant to a gratuitous transfer, (ii) a
transfer of title to the Purchased Shares effected pursuant to Optionee’s will
or the laws of intestate succession following Optionee’s death or (iii) a
transfer to the Corporation in pledge as security for any purchase-money
indebtedness incurred by Optionee in connection with the acquisition of the
Purchased Shares.



     Z. Plan shall mean the Corporation’s 1999 Stock Option/Stock Issuance
Plan.



     AA. Plan Administrator shall mean either the Board or a committee of Board
members, to the extent the committee is at the time responsible for
administration of the Plan.



     BB. Prior Purchase Agreement shall have the meaning assigned to such term
in Paragraph D.4.



     CC. Purchased Shares shall have the meaning assigned to such term in
Paragraph A.1.



     DD. Recapitalization shall mean any stock split, stock dividend,
recapitalization, combination of shares, exchange of shares or other change
affecting the Corporation’s outstanding Common Stock as a class without the
Corporation’s receipt of consideration.



     EE. Reorganization shall mean any of the following transactions:


	     	
	 	     1. a merger or consolidation in which the Corporation is not
the surviving entity,
	 
	 	     2. a sale, transfer or other disposition of all or
substantially all of the Corporation’s assets,
	 
	 	     3. a reverse merger in which the Corporation is the surviving



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	 	entity but in which the Corporation’s outstanding voting
securities are transferred in whole or in part to a person or
persons different from the persons holding those securities
immediately prior to the merger, or
	 
	 	     4. any transaction effected primarily to change the state in
which the Corporation is incorporated or to create a holding
company structure.



     FF. Repurchase Right shall mean the right granted to the Corporation in
accordance with Article D.



     GG. SEC shall mean the Securities and Exchange Commission.



     HH. Service shall mean the provision of services to the Corporation (or
any Parent or Subsidiary) by a person in the capacity of an employee, subject
to the control and direction of the employer entity as to both the work to be
performed and the manner and method of performance, a non-employee member of
the board of directors or a consultant or independent advisor.



     II. Subsidiary shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at
the time of the determination, stock possessing fifty percent (50%) or more of
the total combined voting power of all classes of stock in one of the other
corporations in such chain.



     JJ. Target Shares shall have the meaning assigned to such term in
Paragraph E.2.



     KK. Vesting Schedule shall mean the vesting schedule specified in the
Grant Notice, subject to the acceleration provisions upon an Involuntary
Termination following a Corporate Transaction.



     LL. Unvested Shares shall have the meaning assigned to such term in
Paragraph D.1.



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EXHIBIT A


Irrevocable Proxy


     The undersigned agrees that he or she is obligated to execute an
Irrevocable Proxy under the definition of a “Permitted Transfer” of that
certain Stock Purchase Agreement (the “Agreement”) by and among The Flagship
Group, Inc. (the “Company”) and the transferring Optionee listed below.
Therefore, the undersigned hereby appoints the transferring Optionee listed
below as his or her proxy, with full power of substitution, to vote all of the
shares of capital stock of the Company held by the undersigned pursuant to a
Permitted Transfer under the Agreement and entitled to vote thereon, (whether
such vote is taken by written consent to or at a meeting of the shareholders)
with respect to any and all matters requiring the vote of the Company’s
shareholders. The proxy granted herein is irrevocable, to the extent provided
for under the Delaware General Corporation Law, and is granted in consideration
of the transfer of the capital stock of the Company to the undersigned. Such
proxy shall terminate on the termination of the Repurchase Right under the
Agreement.




  	 	 	 
	
         

      	 	 
        

        Signature  
        

      
	 	 	 
	
         

      	 	 
        

        Print Name  
        

      
	 	 	 
	
         

      	 	  Number of shares

        beneficially owned:

        
        

      
	
        
          

          Transferring Optionee Name

      	 	
        

         
        

      




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