-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SJiWSlOhLkgGFFv/ywy7mmsFLbmtj86GEAwZ7b9UlZLLB0AAVBWMWYPM+N0Dy7st PYnd8S3vPQ6+supC1Cjh+w== 0000912057-00-009322.txt : 20000307 0000912057-00-009322.hdr.sgml : 20000307 ACCESSION NUMBER: 0000912057-00-009322 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 24 FILED AS OF DATE: 20000301 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ZEBU CENTRAL INDEX KEY: 0001095271 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 943339273 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-31440 FILM NUMBER: 559196 BUSINESS ADDRESS: STREET 1: 595 MARKET STREET STREET 2: 6TH FLOOR CITY: SAN FRANCISCO STATE: CA ZIP: 95104 BUSINESS PHONE: 4155437338 MAIL ADDRESS: STREET 1: 595 MARKET STREET STREET 2: 6TH FLOOR CITY: SAN FRANCISCO STATE: CA ZIP: 95104 FORMER COMPANY: FORMER CONFORMED NAME: SELECTQUOTE INC DATE OF NAME CHANGE: 19990917 S-1 1 S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 1, 2000 REGISTRATION STATEMENT NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------ ZEBU (Exact name of registrant as specified in its charter) ------------------ DELAWARE 7374 94-3339273 (State or other jurisdiction (Primary Standard (I.R.S. Employer of Industrial Identification No.) incorporation or organization) Classification Code Number)
------------------ 595 MARKET STREET, 6TH FLOOR SAN FRANCISCO, CA 94105 (415) 543-7338 (Address, including zip code and telephone number, including area code, of registrant's principal executive offices) ------------------ STEVEN H. GERBER PRESIDENT ZEBU 595 MARKET STREET, 6TH FLOOR SAN FRANCISCO, CALIFORNIA 94105 (415) 543-7338 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------ COPIES TO: ALAN B. KALIN MICHAEL J. HALLORAN DANIEL D. MEYERS ROBERT E. SULLIVAN MCCUTCHEN, DOYLE, BROWN & ENERSEN, LLP PILLSBURY MADISON & SUTRO LLP 3150 PORTER DRIVE 50 FREMONT STREET PALO ALTO, CALIFORNIA 94304 SAN FRANCISCO, CALIFORNIA 94105
------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: AS SOON AS PRACTICABLE FOLLOWING THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT. ------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, please check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / CALCULATION OF REGISTRATION FEE
TITLE OF EACH CLASS OF SECURITIES PROPOSED MAXIMUM AGGREGATE BEING REGISTERED OFFERING PRICE(1) AMOUNT OF REGISTRATION FEE Common stock, par value $0.01 per share.......... $64,000,000.00 $17,152.00
(1) Estimated solely for purposes of calculating the registration fee, pursuant to Rule 457(o). THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. Subject to Completion, Dated , 2000 [ZEBU LOGO] ZEBU Shares Common Stock This is the initial public offering of Zebu. We are offering [ ] shares of common stock. We have applied to list our common stock on the Nasdaq National Market under the symbol "ZEBU." Investing in our common stock involves risk. See "Risk Factors" beginning on page 8. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Per Share Total --------- ----- Public offering price $ $ Underwriting discounts and commissions $ $ Proceeds, before expense, to Zebu
We have granted the underwriters the right to purchase up to additional shares of common stock to cover any over-allotments. Deutsche Banc Alex. Brown U.S. Bancorp Piper Jaffray Cochran, Caronia & Co. The date of this prospectus is , 2000 [INSIDE FRONT COVER ARTWORK] [to be added by amendment] PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD CAREFULLY READ THE ENTIRE PROSPECTUS, INCLUDING "RISK FACTORS" AND THE FINANCIAL STATEMENTS, BEFORE MAKING AN INVESTMENT DECISION. IN THIS PROSPECTUS, THE TERMS "ZEBU," "WE," "US," AND "OUR" REFER TO ZEBU, AND OUR WHOLLY OWNED SUBSIDIARY, SELECTQUOTE INSURANCE SERVICES. THE TERM "SELECTQUOTE" REFERS TO OUR WHOLLY OWNED SUBSIDIARY, SELECTQUOTE INSURANCE SERVICES, BY ITSELF. THE TERM "SELECTTECH" REFERS TO SELECTTECH, WHICH WE RECENTLY ACQUIRED. Our Business We believe that we provide the most effective business-to-business infrastructure solution to the application processing and information-connectivity problems of the insurance industry. We believe that our state-of-the-art technology provides significant time and cost savings and other efficiencies to insurance carriers, data providers and distributors in this increasingly competitive marketplace by using a common, Internet-based platform that facilitates the standardization and transfer of insurance application information. We use our technology solutions in our retail business to further our position as one of the largest independent direct marketers of term life insurance in the United States and to prove the efficacy of our technology solutions prior to deploying them to the rest of the industry. We intend to license our technology to as many insurance carriers, agents and information providers as possible, thereby standardizing the sale and processing of insurance. Through our business-to-business and business-to-consumer services, we aspire to "touch" every life insurance policy, either by selling products directly to consumers or by processing every insurance application. Our Market Opportunity Most insurance carriers utilize traditional paper- and labor-intensive processing for both Internet-generated and traditional agency-sourced applications at high cost and with substantial delays. We believe there are significant competitive advantages to insurance marketers and carriers that implement recent technological developments, including the Internet. To capitalize on the benefits of Internet-based technology and compete effectively, we believe that life insurance marketers and carriers must achieve -- - a faster, more efficient application and policy issuance process; - lower origination and application processing costs; - more opportunities for consumers to access and compare insurance product information; - more choices of insurance products and prices; and - a consumer-friendly method for obtaining the best coverage at the lowest possible price. In attempting to achieve these objectives, insurance businesses face serious data processing obstacles because their diverse computing environments and legacy systems are unable to share information easily among insurance carriers, information providers and general agencies. Our Solution Our automated insurance management, or AIM, system solution is based on a unique, open database architecture that permits: - improved management of information; 3 - an advanced data synchronization process which allows data to be moved between remote work sites faster, more efficiently and in real time; and - advanced applications utilizing our data distribution process. The core of our technology solution, our AIM Central Communications System, or Hub, is a system of hardware, software and modern relational database technology that facilitates and manages workflow between multiple remote users in real time. Our AIMSuite software products connect insurance carriers, their agents and other participants in the life insurance policy application, underwriting and issuance process to the Hub. We believe that this technology offers an end-to-end solution to the information processing problems facing life insurance carriers and agents. We connected the first insurance carrier to our Hub in April 1998. Today, over 1,000 general agencies and more than 30 insurance carriers have adopted our technology. Each business day, they collectively transmit more than 1,000,000 data transactions through our Hub. The number of new policy applications processed using the Hub currently exceeds 30,000 per month. Our Strategy We aspire to become the acknowledged agent of change for the entire insurance industry by transforming the way insurance policies are sold, processed and issued. We intend to become the dominant provider of technology solutions to the insurance industry, and to strengthen our position as a leading independent marketer of term life insurance. The key elements of our strategy include -- - establishing the AIMSuite as the technology standard for the insurance industry; - streamlining our operations and increasing our sales efficiency; - using our technology to process insurance policies for the insurance industry; - reducing policy acquisition costs; - expanding brand awareness and presence; - expanding our lines of business; and - expanding the application of the Hub. Our Company SelectQuote began business in 1985 as an independent insurance agency, and markets term life insurance products to consumers in most of the United States. SelectTech was founded in September 1995 by SelectQuote and two of our current officers, Steven Gerber and Michael Feroah, to develop data movement and integration solutions to address insurance industry-wide infrastructure inefficiencies in the processing of applications and issuance of policies. Zebu was founded in August 1999. We did not conduct any operations until December 23, 1999, on which date SelectQuote acquired SelectTech and Zebu acquired SelectQuote through its merger with Zebu's wholly owned subsidiary. In these transactions, the shareholders of SelectTech and SelectQuote exchanged their stock for shares of Zebu stock, and Zebu replaced options and other securities convertible into shares of SelectTech or SelectQuote stock with options or convertible securities to acquire shares of Zebu stock. 4 Our principal executive offices are located at 595 Market Street, 6th Floor, San Francisco, California 94105, and our telephone number is (415) 543-7338. Our web sites are located at WWW.AIMSUITE.COM AND WWW.SELECTQUOTE.COM. The information contained on our web sites does not constitute a part of this prospectus. ------------------------ UNLESS OTHERWISE INDICATED, THIS PROSPECTUS ASSUMES -- - THAT THE UNDERWRITERS HAVE NOT EXERCISED THEIR OPTION TO EXERCISE THEIR OVERALLOTMENT OPTION; AND - ALL SHARES OF PREFERRED STOCK HAVE BEEN CONVERTED INTO 3,139,961 SHARES OF COMMON STOCK AND ALL CONVERTIBLE DEBENTURES HAVE BEEN CONVERTED INTO 731,420 SHARES OF COMMON STOCK UPON OR IMMEDIATELY PRIOR TO THE CLOSING OF THIS OFFERING. Zebu-TM-, SelectQuote-TM-, SelectTech-TM-, AIMSuite-TM-, AIM Quickview-TM-, AIM GA-TM- and AIM ITS-TM- are our trademarks, service marks and trade names. This prospectus also includes trademarks, service marks and trade names other than those identified in this paragraph, each of which is the property of its respective holder. The Offering Common stock offered by Zebu................ shares Common stock to be outstanding after the offering.................................. shares Use of proceeds............................. We intend to use the proceeds of this offering to expand our technology installation efforts, to develop new technology products and services, to expand our sales and marketing efforts and for general corporate purposes, including working capital. Proposed Nasdaq National Market symbol...... ZEBU
The outstanding share information is based on our shares outstanding as of December 31, 1999. This information excludes -- - 6,510,635 shares of common stock subject to outstanding options granted under our 1999 Stock Option Plan as of December 31, 1999 at a weighted average exercise price of $3.92 per share; - 3,489,365 shares of common stock reserved for future issuance under our 1999 Stock Option Plan as of December 31, 1999; - 1,000,000 additional shares of common stock reserved for issuance under our 1999 Employee Stock Purchase Plan; and - 2,041,845 shares of common stock issuable upon conversion of shares of Series E preferred stock that we have agreed to issue in March 2000 under the terms of an investment agreement dated February 29, 2000. 5 Summary and Pro Forma Condensed Combined Financial and Operating Data
Six Months Ended December 31, 1999 ------------------------------------------------------- Zebu Pro Forma Zebu SelectTech Zebu Pro Forma Combined As Actual Actual Combined Adjusted -------- ---------- -------------- -------------- (in thousands, except per share data) Statement of Operations Data: Revenues................................................... $10,344 $ 1,444 $ 11,307 $ Total operating expenses................................... $11,331 $ 3,808 $ 25,272 $ Net loss................................................... $ (570) $(2,625) $(14,032) $ Basic and diluted net loss per share....................... $ (1.08) $ -- $ (1.35) $ Shares used in computation of basic and diluted net loss per share................................................ 5,222 -- 10,498 Shares used in computation of basic and diluted net loss per share assuming conversion of preferred stock and convertible debentures into 3,139,961 shares and 731,420 shares of common stock, respectively..................... -- 14,369 Unaudited pro forma basic and diluted loss per share, as converted................................................ -- $ (1.33) Consolidated Balance Sheet Data: Cash and cash equivalents.................................. $ 2,845 $ 56 $ Working capital (deficiency) 4,275 (6,222) Goodwill and other intangible assets....................... 63,009 -- Total assets............................................... 75,130 946 Current liabilities........................................ 6,073 6,826 Long-term liabilities...................................... 845 1,016 Mandatorily redeemable convertible preferred............... 4,744 1,000 Total shareholders' equity (deficit)....................... $63,469 $(7,896) $
As of December 31, 1999 ----------------- Other Operating Data: SELECTTECH AIM QuickView software licenses--carriers................... 33 AIM QuickView software installations--general agencies...... 1,134 AIM GA software installations--general agencies............. 23 SELECTQUOTE Cumulative policies sold.................................... 253,600 Licensed agents............................................. 39
Six Months Ended December 31, 1999 ------------------ SELECTTECH Applications submitted to the Hub........................... 204,044 SELECTQUOTE Leads....................................................... 93,194 Applications................................................ 25,831 Policies sold............................................... 19,131
See Notes 2 and 3 of Notes to Zebu Consolidated Financial Statements for an explanation of the determination of the number of shares and share equivalents used in computing pro forma per share amounts. The Summary and Selected Financial and Operating Data for SelectTech reflects actual results through December 23, 1999. The Summary Financial and Operating Data for SelectQuote and the Pro Forma Combined Financial and Operating Data set forth above includes all our operating results through December 31, 1999, including the operating results of the acquired SelectTech business for the last week of December 1999. 6 The foregoing information gives effect to the following: - The pro forma combined operating data as of December 31, 1999 accounts for SelectQuote's acquisition of SelectTech, completed on December 23, 1999, using the purchase method of accounting and the conversion of preferred stock as if it had occurred on December 31, 1999; and - The as adjusted data above reflects the application of the net proceeds from the sale of shares of common stock offered by us at an assumed initial public offering price of $ per share, after deducting estimated underwriting discounts and commissions and offering expenses. 7 RISK FACTORS THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS PROSPECTUS BEFORE DECIDING TO INVEST IN OUR STOCK. ANY OF THE FOLLOWING RISKS COULD CAUSE THE TRADING PRICE OF OUR COMMON STOCK TO DECLINE SUBSTANTIALLY. On a combined basis, our operations have lost money and we expect to continue to generate substantial operating losses for the next several years. Although our retail insurance products and services business has been profitable historically, we currently lose money on our operations overall and expect to continue to incur substantial operating losses. As we continue to incur costs to implement new technology in our insurance products and services operations, increase our marketing expenses to promote market awareness of our products and services and increase our expenditures for the development of new software products and services, we expect to have substantial negative cash flow and to sustain significant operating losses. We may never achieve profitability. Even if we achieve profitability, we may not be able to sustain it. SelectTech incurred net losses of $6.0 million from its inception through June 30, 1999, $3.6 million for the year ended June 30, 1999 and $2.6 million for the six months ended December 31, 1999. We expect that the recently acquired SelectTech technology operations will continue to contribute net losses to our results of operations for the foreseeable future and will generate negative cash flow from operations for at least the next several years. We expect to incur substantial expenses to promote the adoption of our Hub technology and AIMSuite software and continue our development efforts to apply the same technology to other insurance products and financial services businesses, which could adversely affect our business, results of operations and financial condition. In addition, charges for goodwill and other intangible assets resulting from our acquisition of SelectTech, which total $63.5 million, will be amortized over the next three years and will result in substantial net losses for us during each of these years, regardless of other operating results. We might fail to successfully integrate SelectTech. We have recently combined SelectQuote and SelectTech. The success of the combined company will depend, in part, on our ability to fully integrate the operations and management of both companies. A successful integration will require, among other things, the integration of SelectTech's technology products and services into SelectQuote's operations and the coordination of their research and development, sales and marketing and financial reporting efforts. We cannot assure you that we will accomplish this integration smoothly or successfully or that we will realize the anticipated benefits of the SelectTech acquisition. The success of the integration will require the dedication of management and other personnel resources which could temporarily distract their attention from our day-to-day operations. This integration effort may result in a substantial and unexpected increase in our operating expenses, which could adversely affect our business, results of operations and financial condition. A substantial part of our anticipated revenue and net income growth depends on adoption of our technology by key insurance carriers. We anticipate that we will earn a substantial amount of our future revenue from license fees and transaction fees paid by insurance carriers and general agents who license our AIMSuite software and use our Hub technology. This strategy will succeed only if we induce the key insurance carriers and service providers involved in the application process to transfer data using our system. A failure to achieve widespread market acceptance and adoption of our technology could 8 have a material adverse effect on our business, financial condition and results of operations, and cause the market price of our common stock to decline substantially. We may fail to achieve widespread adoption of our technology for a variety of reasons, including the following-- - our technologies may not provide reliable data movement; - our products may not perform up to industry expectations; - we may fail to develop, test and ship new software products quickly enough to address our customers' changing needs; - companies that view us as a competitor may refuse to license our software; - other companies may offer superior products; - our products may deliver an insufficient economic benefit to our prospective customers; and - the industry may continue to favor traditional methods of sales, processing and issuance of insurance policies. Our operating results might fluctuate significantly and remain uncertain, which could negatively affect the value of your investment. Our quarterly and annual operating results, particularly the historical quarterly operating results from our technology products and services, have varied greatly. As we increase our sales of insurance policies and our reliance on technology products and services for significant revenue growth, our operating results are likely to continue to vary as a result of a variety of factors. Many of our current and future costs are fixed. If our revenues fall short of expectations, we may be unable to adjust our fixed expenses to compensate for this shortfall on a timely basis, and our results of operations could be harmed. Further, in order to remain competitive, we might have to make various pricing, service or marketing decisions that could have a material adverse effect on our business, results of operations and financial condition. Because of the fluctuation in operating results that could occur as a result of these and other factors, period-to-period comparisons of our revenues and operating results are not necessarily meaningful. Therefore, you should not rely on these types of comparisons as indicators of our future performance. In addition, our operating results in future periods might be below the expectations of securities analysts and investors. Each of these factors could materially and adversely affect the market price of our common stock. For a further discussion of the impact of these factors on our operating results, please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations--Factors Affecting Operating Results." To substantially increase revenues and profits from the sale of insurance policies, we must implement new software and systems that are still in development. We intend to make our SelectQuote sales personnel and insurance products and services operations more efficient through the implementation of automated rate calculator, or ARC, software, and a new general agency management system that will connect our insurance carrier clients and other insurance information providers through our Hub. A failure to develop and successfully operate this new software, or to obtain the desired efficiencies, could have a material adverse effect on our business, financial condition and results of operations. 9 A lack of quality leads may inhibit growth in commission-based revenues. We believe that SelectQuote's advertising and marketing techniques for term life insurance policies historically have generated quality leads, which have enabled it to maintain a high rate of conversion of leads to policies sold. As we attempt to substantially increase SelectQuote's sales of term life insurance policies by implementing new technology and by using SelectQuote's web site as a sales tool, the quality of leads may decline. Such a decline could inhibit the growth of our commission-based revenues, reduce our efficiency and increase our costs, and could have a material adverse effect on our business, financial condition and results of operations. Our commission-based revenues and our receivables are highly concentrated among a small number of carriers, and our business will be harmed if we fail to maintain or replace revenues from those carriers or fail to collect receivables from them. We generate a significant portion of our revenues from commissions paid to SelectQuote on policies offered by a limited number of carriers. Based on commissions received, the top five insurance carriers represented by SelectQuote accounted for 77% of commission-based revenues during the six months ended December 31, 1999 and 67% during the six months ended December 31, 1998. Of the top five insurance carriers in the six months ended December 31, 1998, two were not in the top five in the six months ended December 31, 1999. As we change the ways in which SelectQuote processes applications and distributes insurance policies, the number of policies sold on behalf of any of these carriers may decline. The identity of the five carriers who have accounted for a significant portion of SelectQuote's revenues has varied in each of the last three years based on factors that are beyond our control, such as policy price, terms and underwriting criteria. To maintain or increase our commission-based revenues, we must continue to represent a sufficient number of carriers who offer policies that appeal to consumers and who will fulfill our application requests. As the volume for any particular carrier declines, SelectQuote must increase the volume of business for other carriers or we must increase revenues from other sources. A failure to do so could have a material adverse effect on our business, financial condition and results of operations. Our credit risk for receivables collections is also concentrated among a few carriers. As of December 31, 1999, four carriers accounted for 63% of total receivables, including receivables acquired from SelectTech, each of whom accounted for at least 10% of the total. As of June 30, 1999, three carriers accounted for 51% of total commissions receivable at year end, each of whom represented at least 10% of the total. Our failure to collect receivables from any carrier that represents a large percentage of receivables on a timely basis, or at all, could adversely affect our cash flow or results of operations and might cause our stock price to fall. For more information, please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview--SelectQuote." The unpredictability of our commission-based and bonus revenues could cause fluctuations in our operating results. We have no control over the commission or bonus rates paid to SelectQuote by insurance carriers, which represent a significant portion of our revenues. Each individual insurance carrier controls its own commission and bonus rates. The mix of products offered by SelectQuote and the carriers that it represents may vary from time to time. If these variations result in sales of products with lower commission and bonus rates, our revenues could be adversely affected. Furthermore, bonus rates increase with the number of premiums paid for new insurance policies to each individual insurance carrier. In general, if SelectQuote's customers purchase policies from a smaller number of insurance carriers, SelectQuote's per policy bonus commissions will be 10 higher than if its customers purchase the same number of policies from a larger number of insurance carriers. A consumer's decision to purchase a policy from a particular insurance carrier typically depends on factors over which we have no control, including the price and terms of the policy and the rating of the insurance carrier. Insurance companies change their prices often, for a variety of reasons. Price increases by an insurance carrier may reduce the number of policies we place for that carrier, which in turn may reduce the size of our bonus commission from that carrier. As a result of these factors, we are unable to control the amount of bonus commissions we receive in any particular quarter or year. These amounts could fluctuate significantly. We could experience a substantial drop in our revenues if quality insurance companies marketing competitive products refuse to appoint us as their agent. We conduct all of our commission-based business pursuant to agency contracts with insurance carriers rated "A" or higher by A.M. Best. We cannot assure you that the carriers with whom SelectQuote currently has agreements will continue to appoint it as an agent to offer insurance, or that any other insurance carriers will do so. In addition, agency contracts can be terminated by the insurance carriers with or without cause and with little or no notice to us. The loss of agency contracts with SelectQuote's insurance carriers could have a material adverse effect on our business, financial condition and results of operations. We face intense competition in the insurance application processing industry and the insurance sales industry. The markets for our current and planned products and services are intensely competitive and characterized by rapidly changing technology, regulatory requirements and customer demands. We compete in the market for software and services used for insurance application processing with companies providing business-to-business information processing solutions aimed at the insurance industry, such as ChannelPoint, Intuit and the CyberTech division of Policy Management Systems, Inc., and will face competition from other information processing and outsourcing services aimed at the insurance industry. The retail term life insurance business of SelectQuote has thousands of insurance sales competitors, both local and national. Some of our competitors and potential competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing, technical and other resources than we do. These competitors might be able to devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing policies and devote substantially more resources to technology and systems development than we can. New technologies and the expansion of existing technologies could also increase the competitive pressures on us by enabling our competitors to offer lower-cost or superior products or service. Increased competition could diminish the value of our products and services and result in reduced operating margins and loss of market share. We cannot assure you that we will be able to compete successfully against current or future competitors. For more information, please refer to "Business--Competition." We might be unable to manage rapid growth. We have expanded our operations rapidly and intend to continue this expansion after the completion of the offering. In addition to the effects of the acquisition of SelectTech by SelectQuote, our anticipated growth rate will place a significant demand on our managerial and operational resources. To manage our anticipated expansion effectively, we must -- - implement and improve our operating systems, procedures and controls on a timely basis; - hire additional key management personnel; 11 - expand, train and manage our workforce and, in particular, our software development, sales, marketing and support organizations; - open offices in other geographic areas; - implement and manage new distribution channels to penetrate different and broader markets; and - manage an increasing number of complex relationships with consumers, co-marketers and other third parties. We cannot be certain that our systems, procedures or controls will be adequate to support our current or future operations, or that our management will be able to simultaneously manage the desired expansion of our business and achieve the growth necessary to exploit fully the markets for our products and services. Failure to manage our growth effectively could have a material adverse effect on our business, financial condition and results of operations. Our product and software development efforts are inherently difficult to manage and keep on schedule, and development delays could increase our costs. On occasion, we have experienced development delays and related cost overruns. We cannot be certain that we will not encounter these problems in the future. We may be unable to meet our new product development schedules if we cannot readily obtain skilled programmers. A delay of this nature could slow the growth of our revenues and increase our costs, which could have a material adverse effect on our business, financial condition and results of operations. In addition, we cannot be certain that we will successfully develop and market new products or product enhancements that respond to changes in technology, industry standards or consumer requirements, or that any product innovations will achieve the market penetration or price stability necessary for profitability. We utilize substantial offshore contract software programming and development services provided by related parties. In developing our software products and the Hub, we procure substantial software programming and testing services from a programmer-based business in Eastern Europe. This corporation is controlled by two of our executive officers, Steven H. Gerber and Michael Feroah. The programmers are not U.S. citizens or residents. We do not own these corporations and cannot direct the activities of these programmers. Their lack of legal residence status in the U.S. may prevent us from obtaining critical development, debugging and maintenance services when needed by us or our licensees. As a result, we may be exposed to revenue losses and liability to our licensees or their customers. We utilize substantial third-party contract software programming and development services that we do not control. In developing our software products and the Hub, we procure substantial software programming and testing services from third-party contractors that we do not control. Although these services are performed under contracts that specify the required work product and delivery schedules, we cannot directly control the quality or timing of these services. In addition, if any of these third-party contractors ceases to provide services to us, we might not be able to replace the contractor on the same terms, or at all. A failure of these contractors to perform as expected, or our failure to replace these contractors if they cease to provide services to us, could have a material adverse effect on our business, financial condition and results of operations. 12 If we fail to respond adequately to rapid technological changes, our existing software products and services will become obsolete or unmarketable. The market for our technology products and services is characterized by rapid technological change, which leads to frequent new product and service introductions and enhancements, uncertain product life cycles, changes in consumer demands and evolving industry standards. New products and services based on new technologies or new industry standards could render our existing products obsolete and unmarketable. We believe that, in order to succeed, we must continually enhance our current products and develop new products on a timely basis to keep pace with technological developments and to satisfy the ever-changing requirements of our customers. We cannot assure you that we will be successful in meeting these requirements. Our products might contain defects that could inhibit their market acceptance and subject us to liability in excess of insurance limitations. Our software products are complex and might contain undetected errors or result in system failures. Despite extensive testing, errors might be found in any of our current or future product offerings. Any errors in our software products could result in loss of or delay in revenues, loss of market share, failure to achieve market acceptance, diversion of development resources, injury to our reputation or damage to our efforts to build brand awareness. Moreover, we cannot be certain that limitations of liability contained in our customer contracts will be enforceable, or that insurance coverage will continue to be available on reasonable terms or in amounts sufficient to cover one or more large claims, or that our insurer will not disclaim coverage as to any future claim. Either the successful assertion of one or more large claims that exceed available insurance coverage or changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could cause our expenses to increase and could have a material adverse effect on our business, results of operations and financial condition. Revenues and gross margins from our consulting services business are uncertain. Substantially all of SelectTech's historical revenues came from custom software development and consulting services provided to insurance carriers. SelectTech's provision of these services was not, and is not expected to be, the focus of its business, but was undertaken to provide needed revenue to SelectTech and to help build relationships with significant insurance carriers. Due to the complex nature of these services and the present allocation of skilled programmers and other technical services personnel to SelectQuote, we cannot assure you that we will generate significant revenue from custom software development and consulting services in the foreseeable future. System failures could interrupt our business and cause revenue losses or liability. Our success depends, in part, on the efficient and uninterrupted operation of computer and communications systems which make the Hub available to our licensees and operate our management and sales systems. Any failure of these systems could impede the processing of data, customer orders and the day-to-day management of our business and permanently damage our business reputation and goodwill. Such a failure could have a material adverse effect on our business, financial condition and results of operations. Our systems and operations are vulnerable to damage or interruption from-- - natural disasters, including earthquakes; - telecommunication failures; - power losses; 13 - fires; - physical and electronic break-ins; and - sabotage, intentional acts of vandalism or similar events. We do not presently have fully redundant systems. Despite any precautions we take, a natural disaster or other unanticipated problem leading to the corruption or loss of data at the facilities that house our systems could result in interruptions in the services we provide. The occurrence of any such event could also lead to systems failure or to a corruption of our data, either of which could have a material adverse effect on our business, financial condition and results of operations. The loss of key personnel or the failure to hire additional personnel could harm our business. We depend on the continued services of our key personnel. We expect that we will need to hire additional personnel in all areas of our operations. The competition for personnel throughout our industry is intense, particularly in the San Francisco area, where our headquarters are located. Any of our personnel, including our management, could terminate their employment with us at any time for any reason. Currently, we are substantially dependent upon the services of Charan J. Singh, our Chief Executive Officer, Steven H. Gerber, our President, David L. Paulsen, our Chief Financial Officer and Chief Operating Officer-Insurance Products and Services, and Michael L. Feroah, our Chief Operating Officer-Software Products and Services. The loss of the services of any of these key executives would materially impede the operation and growth of our business. Furthermore, our failure to attract new personnel or retain and motivate our current personnel could have a material adverse effect on our business, financial condition and results of operations. We might not be able to protect and enforce our intellectual property rights. We rely on a combination of copyright, trademark, service mark and trade secret laws and contractual restrictions to establish and protect our intellectual property rights. We cannot assure you that these contractual arrangements or the various other steps we have taken will be sufficient to protect our intellectual property from infringement or misappropriation. Due to differences between the legal systems in the U.S. and in some foreign countries, we may experience difficulties in enforcing our agreements and rights against foreign contractors and employees of the third-party developers of much of our software. We believe that we have taken steps necessary to establish our ownership of any intellectual property developed by these programmers and to protect our intellectual property in the jurisdictions where they work. However, we cannot assure you that the laws of these jurisdictions will provide adequate protection, or that we will be able to enforce our rights adequately in any jurisdiction. We have sought and will continue to seek to obtain the registration of our trademarks and service marks in the United States. We cannot assure you that trademark registrations will be issued with respect to pending or future applications or that our trademarks will be upheld if challenged. Effective trademark, service mark, copyright and trade secret protection may not be available in every country in which our services are offered. Third parties might claim that our intellectual property rights infringe their proprietary rights. We expect that the number of infringement claims in our market will increase with further adoption of our software and Hub technology. These claims, whether meritorious or not, could -- - be time consuming; - result in costly litigation; or - require that we enter into royalty or licensing agreements with the claimants. 14 Royalty or licensing agreements might not be available on terms we find acceptable, or might not be available at all. Any infringement claim could have a material adverse effect on our business, financial condition and results of operations. Due to our small size, limited operations and the difficulty of hiring personnel in our industry, any further acquisitions could strain our managerial, operational and financial resources. In the future, we might make acquisitions of, or large investments in, businesses that offer products, services and technologies that we believe would help us better provide insurance policy distribution, processing and fulfillment services. Although historically we have not made acquisitions of, or investments in, other companies, other than the acquisition of SelectTech, which was an affiliate of SelectQuote at the time, future acquisitions or investments could become an important part of our strategy. Any future acquisitions or investments would present risks, such as difficulty in integrating the technology, operations or workforce of the acquired business with our own, disruption of our ongoing businesses and difficulty in realizing the anticipated financial or strategic benefits of the transaction. In the event we were to make such an acquisition or large investment, we might use cash, common stock or a combination of cash and common stock. Our use of common stock in an acquisition could further dilute the equity interests of existing stockholders. Amortization of goodwill or other intangible assets resulting from an acquisition could materially impair our operating results and financial condition. Furthermore, there can be no assurance that we would be able to attain acquisition financing, or that any acquisition, if consummated, would be smoothly integrated into our business. A failure to successfully manage the risks associated with acquisitions or large investments could have a material adverse effect on our business, financial condition and results of operations. Our success depends on the strength of the term life insurance market. Because we currently derive nearly all of our revenues from commissions paid to SelectQuote on consumer purchases of term life insurance and service fees for transmitting policy application data, our business depends on the strength of the term life insurance industry generally and consumer demand for term life insurance policies in particular. If sales of term life insurance policies decline, our business could be harmed substantially. Further, a decline in premiums would reduce the size of our commissions. A failure to offset this reduction by cutting our costs and/or substantially increasing the number of policies sold by SelectQuote could have a material adverse effect on our business, financial condition and results of operations. If the purchase of insurance over the Internet achieves widespread consumer acceptance and we are unable to develop further our Internet-based retail capability, our business could be harmed. We intend to implement a fully integrated, interactive web site for SelectQuote that will allow consumers to provide biographical and health information and complete policy applications on-line. The on-line marketing of insurance policies is a recent phenomenon. The market revenue potential and profitability of on-line sales of term life insurance policies are highly uncertain. No firm yet processes term life insurance applications to policy issuance entirely over the Internet, and we cannot assure you that our efforts will succeed. However, if consumer demand for Internet-based sales and distribution of term life insurance policies increases, our failure to develop further our Internet-based retail capability to meet such demand could have a material adverse effect on our business, financial condition and results of operations. 15 If we become subject to legal liability for any inaccuracy in the information we disseminate, our business could be harmed. SelectQuote's retail insurance customers rely upon information we publish regarding insurance quotes, coverages, exclusions, limitations and ratings. We might face liability for information we supply to consumers if the information is inaccurate. The information in SelectQuote's databases, like that in any database, might contain inaccuracies. Any dissatisfaction by our retail customers with SelectQuote's methodologies or databases could have a material adverse effect on our ability to attract new and retain existing customers. To the extent that any information we provide is inaccurate, we could be liable for to from both consumers and insurance carriers. In the past, these types of claims have been brought, sometimes successfully, against on-line services and print publications. These types of claims also could be time-consuming and expensive to defend, could divert management's attention and could cause consumers to lose confidence in our services. As a result, these types of claims, whether or not successful, could have a material adverse effect on our business, financial condition and results of operations. We operate in a heavily regulated industry. We must comply with the complex rules and regulations of the insurance department of each jurisdiction in which SelectQuote does business, many of which impose strict and burdensome guidelines on us regarding our activities as an insurance agency company and on SelectQuote's individually licensed agents. Compliance with these rules and regulations can be very costly. Each jurisdiction's insurance department typically has the power, among other things, to -- - authorize how, by which personnel, and under what circumstances an insurance premium can be quoted and published and an insurance policy may be sold; - approve which entities can be paid commissions from insurance companies; - license insurance agents and brokers; - approve policy forms and regulate some premium rates; and - regulate advertising, including Internet website content. Due to the complexity, periodic modification and differing statutory interpretations of these laws, SelectQuote may not have been, and we might not be in the future, in compliance with all of these laws at all times. Failure to comply with these numerous laws could result in fines, additional licensing requirements or the revocation of our license and/or the license of any of our agents in any particular jurisdiction. An adverse disciplinary action in any one jurisdiction generally is required to be reported by the licensee and the National Association of Insurance Commissioners to the other jurisdictions and, as a result, could lead to additional compliance investigations and further disciplinary proceedings. These types of penalties could significantly increase our general operating expenses, negatively impact our revenues and harm our business. In addition, even if allegations against us and/or any of our agents in a regulatory action are determined to be false, negative publicity relating to the allegations could result in a loss of consumer confidence and significant damage to our brand. For more information, please refer to "Business--Regulation." Authorities might impose limits on the use of personal information gathered using the Internet. The privacy of personal information has received much recent attention in various legislative and regulatory arenas-- - The Financial Services Modernization Act of 1999 requires many federal agencies to adopt regulations protecting the privacy of consumer data in both the general business and Internet 16 context. The Federal Reserve Board has proposed Regulation P, which would be applicable to a broad range of financial transactions by banks, brokers and insurers. That proposed regulation could increase our costs of doing business by requiring additional procedures in collecting and storing customer data, including transmitting periodic privacy notices and "opt-out" election documents to customers with respect to their personal data. The Act also reinforces existing regulations that require on-line services and web site owners to establish privacy policies. Other federal agencies are in the process of preparing proposed regulations under the Act that could impose even stricter substantive and procedural requirements. - The Federal Trade Commission has taken an aggressive position in proceedings against several on-line services, alleging unfair or deceptive practices in the manner in which these services collected personal information from users and shared it with third parties. The FTC is currently conducting studies which may lead to regulations on fair information practices for Internet businesses, which could restrict the flow of consumer data over the Internet and impact our business. - At least 17 states have adopted insurance privacy protection legislation based on the National Association of Insurance Commissioners Insurance Information and Privacy Protection Model Act. The Model Act provides for a fine for knowing violations of the act, and for damage claims by aggrieved consumers. Because all of SelectQuote's policy applicants consent to the retrieval of their personal data, to date these existing regulations and proceedings have not impacted our operations directly. We cannot assure you, however, that these legislative and regulatory restrictions will not have a material adverse effect on our business, financial condition and results of operations in the future. Several states have proposed legislation that would limit the use of personal information gathered using the Internet. Any additional changes in existing laws or the passage of new laws intended to address these issues could, among other effects-- - create uncertainty in the marketplace that could reduce demand for our products and services; - limit our ability to collect and use data from our applicants; - increase the cost of doing business as a result of litigation costs or increased service delivery costs; or - decrease the efficacy of Internet commerce. These and other potential effects of changes in the Internet's regulatory framework could have a material adverse effect on our business, financial condition and results of operations. Legislation or judicial action relating to the Internet could have a negative impact on our business. Due to the increasing popularity and use of the Internet, laws or regulations could be adopted in the United States or abroad with particular applicability to the Internet. Governments may enact legislation applicable to us in areas such as network security, encryption, the use of key escrow, electronic authentication or digital signatures, illegal and harmful content, access charges and retransmission activities. Moreover, the applicability to the Internet of existing laws governing issues such as property ownership, content, taxation, defamation and personal privacy is uncertain. Any new legislation, regulation or governmental enforcement of existing regulations could limit the growth of the Internet, increase our cost of doing business or increase our legal exposure, any of which could have a material adverse effect on our business, financial condition and results of operations. 17 We face risks related to the storage of personal information about our insurance policy applicants. We obtain personal information regarding policy applicants, including family history and medical information, which we retain and transmit via data processing systems which are designed to be secure and confidential. If someone penetrates our network security or otherwise misappropriates sensitive data about our applicants, we could be subject to liability. This liability could include claims for unauthorized purchases with credit card information, impersonation or other similar fraud claims, libel, invasion of privacy, misuse of personal information, such as unauthorized marketing, or other tort claims, including claims based on injury to personal reputation. Any of these claims could result in litigation and could have a material adverse effect on our business, financial condition and results of operations. In addition, the Financial Services Modernization Act of 1999, discussed above, could result in the imposition of regulations regarding the storage of personal information. Any new tax on the sale of our products, the licensing of our technology or our provision of services could harm our financial condition. We currently do not collect sales or similar taxes with respect to the sale of products, the licensing of technology or the provision of services in states and countries other than states in which we have offices. In October 1998, the Internet Tax Freedom Act, or ITFA, was signed into law. Among other things, ITFA imposes a three-year moratorium on discriminatory taxes on e-commerce. Nonetheless, following the moratorium, one or more states might seek to impose sales or other tax obligations on companies that engage in on-line commerce within their jurisdictions. Legislation by one or more states requiring us to collect sales or other taxes on the sale of products, the licensing of technology or the provision of services, or requiring that we remit payment of sales or other taxes for prior periods, could have a material adverse effect on our business, financial condition and results of operations. Our stock price might experience wide fluctuations. The market price of our common stock is likely to be highly volatile and could be subject to wide fluctuations. Recently, the stock market has experienced significant price and volume fluctuations, and the market prices of securities of technology companies, particularly Internet-related companies, have been highly volatile. Market prices for stocks of Internet-related and technology companies, particularly following an initial public offering, frequently reach levels that bear no relationship to the operating performance of such companies. These market prices generally are not sustainable and are subject to wide variations. If our common stock trades to unsustainably high levels following this offering, it is likely that the market price of our common stock will thereafter experience a material decline. In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. We could be the target of similar litigation in the future. Securities litigation could cause us to incur substantial costs, divert management's attention and resources and harm our financial condition and results of operations. The future sale of common stock could negatively affect our stock price. If our stockholders sell substantial amounts of our stock in the public market following the offering, including shares issued upon the exercise of outstanding options and warrants, the market price of our stock could decline. These sales also might make it more difficult for us to sell equity securities in the future at a time and price that we deem appropriate. After the offering, shares of our common stock will be outstanding, assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options or warrants. Of those 18 shares, the shares sold in the offering will be freely tradable. The remaining shares are "restricted securities," as that term is defined in Rule 144, and may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 or Rule 701 under the Securities Act. All officers, directors and all of our stockholders owning 1% or more of our common stock have agreed not to sell any shares of common stock, or any securities convertible into or exercisable or exchangeable for common stock, for 180 days after the offering without the prior written consent of Deutsche Bank Securities Inc. Deutsche Bank Securities Inc. may, in its sole discretion, release all or any portion of the shares subject to these lockup agreements. For a more detailed description of shares that could be sold following the offering, please refer to "Shares Eligible for Future Sale." Investors in the offering will suffer immediate and substantial dilution. Investors purchasing shares in the offering will incur immediate and substantial dilution in net tangible book value per share. To the extent outstanding options to purchase common stock are exercised, there will be further dilution. For a more detailed description of this dilution, please see "Dilution." Our principal stockholders, executive officers and directors have substantial control over our affairs. Our executive officers and directors and entities affiliated with them will, in the aggregate, beneficially own approximately % of our common stock following this offering. These stockholders acting together will have the ability to exert substantial influence over all matters requiring approval by our stockholders, including the election and removal of directors and any proposed acquisition, consolidation or sale of all or substantially all of our assets. In addition, they could dictate the management of our business and affairs. This concentration of ownership could have the effect of delaying, deferring or preventing a change in control, or impeding an acquisition or consolidation, takeover or other business combination. We might spend a substantial portion of the net proceeds in ways with which you might not agree. We have not designated any specific use for a significant amount of net proceeds from the sale of the common stock offered under this prospectus. We intend to use the proceeds of this offering to expand our technology installation efforts, develop new technology products and services, expand our sales and marketing efforts and for general corporate purposes, including working capital. Accordingly, management will have significant flexibility in applying the remaining net proceeds of the offering. The failure of management to apply the remaining net proceeds effectively could have a material adverse effect on our business, financial condition and results of operations. 19 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA This prospectus contains "forward-looking statements." These forward-looking statements include, without limitation, statements about the market opportunity for sales of term life insurance policies and providing processing and fulfillment services to insurance carriers, our strategy, competition, expected expense levels and the adequacy of our available cash resources. Our actual results could differ materially from those expressed or implied by these forward-looking statements as a result of various factors, including the risk factors described above and elsewhere in this prospectus. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. This prospectus contains statistical data regarding insurance industry and Internet usage that we obtained from industry publications, including reports generated by Life Industry Market Research Association and Forrester Research. These industry publications generally indicate that they have obtained their information from sources believed to be reliable, but do not guarantee the accuracy and completeness of their information. Although we believe that the publications are reliable, we have not independently verified their data. USE OF PROCEEDS We estimate that our net proceeds from the sale of the shares of common stock in the offering will be approximately $ million, after deducting estimated underwriting discounts and commissions and other offering expenses. If the underwriters' over-allotment option is exercised in full, our net proceeds will be approximately $ million. We intend to use the proceeds of this offering to expand our technology installation efforts, develop new technology products and services, expand our sales and marketing efforts and for general corporate purposes, including working capital. We also might use a portion of the net proceeds, currently intended for general corporate purposes, to acquire, invest in or enter into strategic alliances with complementary businesses, technologies, products or services. We have no present understandings, commitments or agreements with respect to any material acquisition of, investment in or strategic alliance with third parties. Pending use of the net proceeds for the above purposes, we intend to invest the net proceeds in interest bearing, investment grade securities. DIVIDEND POLICY Following the completion of this offering, we intend to retain any future earnings for the development and operations of our business. Accordingly, we do not anticipate paying cash dividends on our capital stock in the foreseeable future. SelectQuote paid dividends on its common stock in the amounts of $378,922, or $0.25 per share, during fiscal 1997, $285,502, or $0.19 per share, during fiscal 1998, $378,917, or $0.25 per share, during fiscal 1999 and $94,703, or $0.0625 per share, during the six months ended December 31, 1999. SelectQuote paid dividends on its preferred stock in the amounts of $199,805 during fiscal 1997, $161,225 during fiscal 1998, $199,805 during fiscal 1999 and $84,066 during the six months ended December 31, 1999. SelectQuote's existing line of credit with LaSalle Bank prohibits the payment of dividends to us, except under certain circumstances. We have not drawn on this line of credit and expect to terminate it as soon as possible following completion of this offering. In the event this line of credit is not terminated, the restriction on the payment of SelectQuote dividends to us effectively limits our ability to pay dividends. 20 CAPITALIZATION The following table sets forth our capitalization: - On an actual basis as of December 31, 1999; - On a pro forma basis to reflect the conversion of all outstanding shares of convertible preferred stock into 3,139,961 shares of our common stock, and the conversion of all convertible debentures into 731,420 shares of our common stock; and - On an as adjusted pro forma basis to reflect the sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, less underwriting discounts and commissions and our estimated offering expenses.
Pro Forma Actual Pro Forma As Adjusted -------- --------- ----------- Long-term convertible debt, including current portion........................................... $ 1,900 $ -- $ -- ------- ------- ------- Mandatorily redeemable convertible preferred stock, $0.01 par value, 50,000 shares issued and outstanding (actual); no shares issued and outstanding (pro forma and pro forma as adjusted)......................................... 4,744 -- Stockholders' equity: Preferred stock, $0.01 par value, 10,000,000 shares authorized; 2,028,850 issued and outstanding, (actual); no shares issued and outstanding (pro forma and pro forma as adjusted)........................................ 20 Common stock, $0.01 par value, 50,000,000 shares authorized; 10,497,974 issued and outstanding, (actual); 14,369,355 shares issued and outstanding, (pro forma and pro forma as adjusted)........................................ 105 144 Additional capital.................................. 64,650 71,275 Deferred stock compensation......................... (862) (862) Retained earnings (deficit)......................... (444) (444) ------- ------- ------- Total stockholders' equity.......................... 63,469 70,113 ------- ------- ------- Total capitalization................................ $70,113 $70,113 $ ======= ======= =======
The outstanding share information in this table, and in the table set forth under "Dilution" below, is based on our shares outstanding as of December 31, 1999 and excludes: - 6,510,635 shares of common stock subject to outstanding options granted under our 1999 Stock Option Plan and outstanding as of December 31, 1999 at a weighted average exercise price of $3.92 per share; - 3,489,365 shares of common stock reserved for future issuance under our 1999 Stock Option Plan as of December 31, 1999; - 1,000,000 additional shares of common stock reserved for issuance under our 1999 Employee Stock Purchase Plan; and - 2,041,845 shares of common stock issuable upon conversion of shares of Series E preferred stock that we have agreed to issue in March 2000 under the terms of an investment agreement dated February 29, 2000. 21 DILUTION Our pro forma net tangible book value as of December 31, 1999, was approximately $7.1 million, or $0.49 per share of common stock. Pro forma net tangible book value per share is equal to our tangible net assets, less total liabilities, divided by the number of shares of common stock outstanding, after giving effect to the conversion of all outstanding shares of preferred stock and convertible debentures into common stock. Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the net tangible book value per share of common stock immediately after completion of this offering. After giving effect to the sale of shares at the initial offering price of $ per share and the application of the net proceeds from this offering, our pro forma net tangible adjusted book value at December 31, 1999 would have been approximately $ million, or $ per share of common stock. This amount represents an immediate increase in net tangible book value of $ per share to existing stockholders and an immediate dilution in net tangible book value 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 at December 31, 1999........................................ $ Increase per share attributable to new investors.......... $ Pro forma adjusted net tangible book value per share after the offering.............................................. ------- Dilution per share to new investors......................... $
The following table summarizes, on a pro forma basis as of December 31, 1999, the total number of shares of common stock purchased from us, assuming the conversion of all shares of preferred stock and all convertible debentures into shares of common stock, the total cash consideration paid to us, and the average price per share paid by our existing stockholders and to be paid by new investors purchasing shares from us in this offering, before deducting underwriting discounts and commissions and the estimated offering expenses payable by us:
Shares Purchased Total Consideration ----------------------- ---------------------- Average Price Number Percent Amount Percent per Share ------------ -------- ----------- -------- ------------- Existing stockholders..... 14,369,355 % $9,154,497 % $0.637 New investors............. ----------- ------- ---------- ------- ------ Total................... % $ % $
If the underwriters exercise their over-allotment option in full, the number of shares of common stock held by existing stockholders will be reduced to % of the total number of shares of common stock to be outstanding after this offering. In addition, the number of shares of common stock held by the new investors will be increased to , or % of the total number of shares of common stock to be outstanding immediately after this offering. 22 SELECTED FINANCIAL AND OPERATING DATA (in thousands, except per share amounts) Zebu The summary and selected Zebu (formerly SelectQuote) historical financial data as of June 30, 1998 and 1999 and for the years ended June 30, 1997, 1998 and 1999 are calculated from Zebu's audited financial statements, which are included in this prospectus. The Zebu summary and selected financial data as of December 31, 1999 and for the six months ended December 31, 1998 and 1999 are calculated from unaudited financial statements that are included in this prospectus. The summary and selected Zebu financial data as of June 30, 1995, 1996 and 1997 and for the years ended June 30, 1995 and 1996 are calculated from unaudited financial statements, that are not included in this prospectus. The unaudited financial statements have been prepared by us on a basis consistent with the audited financial statements and include, in the opinion of our management, all adjustments consisting only of normal recurring adjustments necessary for a fair presentation of our results of operations and financial position for those years. You should read the following data with the more detailed information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the notes to the financial statements, each of which is included in this prospectus.
Six Months Ended Year Ended June 30, December 31, ------------------------------------------------------------------- ------------------------- 1995 1996 1997 1998 1999 1998 1999 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Consolidated Statement of Operations Data: Revenues: Commissions................... $ 10,330 $ 12,482 $ 14,821 $ 18,992 $ 19,941 $ 9,347 $ 10,311 Other revenues................ -- -- -- -- -- -- 33 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total revenues.................. 10,330 12,482 14,821 18,992 19,941 9,347 10,344 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Expenses: Marketing and sales........... 7,027 9,188 13,484 12,709 13,867 7,041 8,151 General and administrative.... 1,242 1,407 1,715 1,650 1,908 1,003 1,260 Software development and consulting services.......... -- -- -- -- -- -- 108 Amortization of goodwill and other intangible assets...... -- -- -- -- -- -- 487 Stock-based compensation(*)... -- -- -- -- -- -- 1,325 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total operating expenses........ 8,269 10,595 15,199 14,359 15,775 8,044 11,331 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Operating income (loss)......... 2,061 1,887 (378) 4,633 4,166 1,303 (987) Interest income (expense)....... (15) 52 15 12 42 20 40 Other income (expense).......... 11 115 (28) 36 5 5 1 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) before income tax........................... 2,057 2,054 (391) 4,681 4,213 1,328 (946) Income tax (benefit)............ 830 803 (162) 1,863 1,685 552 (376) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income (loss)............... $ 1,227 $ 1,251 $ (229) $ 2,818 $ 2,528 $ 776 $ (570) ========== ========== ========== ========== ========== ========== ========== Income (loss) attributable to common stockholders........... $ 1,182 $ 1,206 $ (429) $ 2,657 $ 2,328 $ 653 $ (5,654) ========== ========== ========== ========== ========== ========== ========== Net income (loss) per common share: Basic......................... $ 0.24 0.21 (0.09) 0.53 0.47 0.13 (1.08) Diluted....................... $ 0.18 0.18 (0.09) 0.40 0.36 0.11 (1.08) Weighted average common shares outstanding: Basic......................... 4,982 4,982 4,982 4,982 4,982 4,982 5,222 Diluted....................... 7,011 7,011 4,982 7,011 7,011 7,011 5,222 (*) Stock-based compensation: Marketing and sales....... $ -- $ -- $ -- $ -- $ -- $ -- $ 681 General and administrative........... -- -- -- -- -- -- 644 ---------- ---------- ---------- ---------- ---------- ---------- ---------- $ -- $ -- $ -- $ -- $ -- $ -- $ 1,325 ========== ========== ========== ========== ========== ========== ==========
As of As of June 30, December 31, ---------------------------------------------------- -------------- 1995 1996 1997 1998 1999 1999 -------- -------- -------- -------- -------- -------------- Consolidated Balance Sheet Data: Cash and cash equivalents................................. $ 818 $ 689 $ 439 $1,267 $ 790 $ 2,845 Working capital........................................... 2,397 2,664 1,656 3,860 5,981 4,275 Goodwill and other intangible assets...................... -- -- -- -- -- 63,009 Total assets.............................................. 4,797 6,192 6,407 8,255 10,208 75,130 Current liabilities....................................... 1,818 2,091 3,197 2,823 2,848 6,073 Long-term liabilities..................................... 240 472 390 239 218 845 Mandatorily redeemable convertible preferred stock........ -- -- -- -- -- 4,744 Stockholders' equity...................................... 2,739 3,629 2,820 5,192 7,142 63,469
23 SelectTech The SelectTech summary and selected financial data as of June 30, 1998 and 1999 and for the years ended June 30, 1997, 1998 and 1999 are calculated from SelectTech's audited financial statements, which are included in this prospectus. The SelectTech summary and selected data as of December 31, 1999 and for the six months ended December 31, 1998 and 1999 are calculated from unaudited financial statements, which are included in this prospectus. The summary and selected financial data as of June 30, 1997 is calculated from SelectTech's unaudited balance sheet, which is not included in this prospectus. The unaudited financial statements have been prepared by us on a basis consistent with our audited financial statements and include, in the opinion of our management, all adjustments consisting only of normal recurring adjustments necessary for a fair presentation of our financial position as of June 30, 1997. You should read the following data with the more detailed information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the notes to the financial statements, each of which is included in this prospectus.
Six Months Ended Year Ended June 30, December 31, ------------------------------ ------------------- 1997 1998 1999 1998 1999 -------- -------- -------- -------- -------- Statement of Operations Data: Revenues: Consulting services................................... $1,427 $ 1,361 $ 2,376 $ 1,208 $ 936 License and maintenance............................... -- 16 299 27 142 Transactional services................................ -- 55 297 69 366 ------ ------- ------- ------- ------- Total revenues.......................................... 1,427 1,432 2,972 1,304 1,444 ------ ------- ------- ------- ------- Expenses: Software development and consulting services.......... 1,350 2,344 4,759 2,164 3,076 Marketing and sales................................... 138 223 496 250 240 General and administrative............................ 509 850 1,036 465 492 ------ ------- ------- ------- ------- Total operating expenses................................ 1,997 3,417 6,291 2,879 3,808 ------ ------- ------- ------- ------- Operating loss.......................................... (570) (1,985) (3,319) (1,575) (2,364) Interest expense........................................ (9) (20) (259) (71) (261) ------ ------- ------- ------- ------- Loss before income tax.................................. (579) (2,005) (3,578) (1,646) (2,625) Income tax.............................................. 3 -- 1 1 -- ------ ------- ------- ------- ------- Net loss................................................ $ (582) $(2,005) $(3,579) $(1,647) $(2,625) ====== ======= ======= ======= =======
As of June 30, As of December 31, ------------------------------ ------------------- 1997 1998 1999 1999 -------- -------- -------- ------------------- Balance Sheet Data: Cash and cash equivalents............................... $ 7 $ 106 $ 36 $ 56 Working capital......................................... (520) (1,103) (3,569) (6,222) Total assets............................................ 363 798 1,238 946 Current liabilities..................................... 758 1,732 4,526 6,826 Long-term liabilities................................... 11 477 983 1,016 Mandatorily redeemable convertible preferred stock...... -- 1,000 1,000 1,000 Shareholders' equity (deficit).......................... $(406) $(2,411) $(5,271) $(7,896)
24 PRO FORMA CONDENSED COMBINED AND ACTUAL DATA The following unaudited pro forma condensed combined statement of operations of Zebu reflect SelectQuote's acquisition of SelectTech on December 23, 1999, and Zebu's acquisition of SelectQuote in a simultaneous transaction, as if both acquisitions had occurred on July 1, 1998. The SelectTech acquisition was accounted for using the purchase method of accounting, and the acquired assets and liabilities of SelectTech were recorded at their fair values. Accordingly, the pro forma combined statement of operations has been prepared assuming the following: - The total purchase price, including assumed liabilities of approximately $7.2 million, is $63.5 million; - The purchase price has been allocated to the tangible and intangible assets acquired and liabilities assumed based on their respective fair values as follows (in thousands): Goodwill.................................................. $56,387 Purchased software........................................ 6,170 Assembled work force...................................... 864 Customer list............................................. 75 Liabilities............................................... (7,209) Value of SelectTech stock options assumed................. 5,744
- Intercompany transactions for consulting services of $90,000 for the year ended June 30, 1999 and $481,000 for the six months ended December 31, 1999 have been eliminated. - Intercompany transactions for other revenue of $39,000 for the year ended June 30, 1999 and $0 for the six months ended December 31, 1999 have been eliminated. - Amortization of goodwill and other intangible assets totaling $22.2 million for the year ended June 30, 1999 and $10.6 million for the six months ended December 31, 1999 has been reflected as a result of the acquisition of SelectTech. - Income tax benefits of $1.4 million for the year ended June 30, 1999 and $223,000 for the six months ended December 31, 1999, reflect the offset of SelectQuote's income with SelectTech losses. - The pro forma diluted net loss per share for the year ended June 30, 1999 and the six months ended December 31, 1999 were computed using the weighted average number of common shares outstanding, including shares issued in conjunction with the acquisition as if these shares were outstanding from July 1, 1998. - The pro forma operating data include the conversion of preferred stock and exclude the conversion of convertible debentures. The pro forma statements of operations are not necessarily indicative of what the actual financial results would have been had the acquisition taken place on July 1, 1998 and do not purport to indicate the results of future operations. 25 The actual as adjusted data below reflect the application of the net proceeds from the sale of shares of common stock offered by us at an assumed initial public offering price of $ per share, after deducting estimated underwriting discounts and commissions and offering expenses.
Six Months Ended December 31, 1999 -------------------------------------------------------------- Zebu SelectTech Actual Actual Adjustments Pro Forma Combined -------- ----------- ------------- --------------------- (in thousands) -------------------------------------------------------------- Statement of Operations Data: Revenues: Commissions............................................... $10,311 $ -- $ -- $ 10,311 Other revenues............................................ 33 1,444 (481) 996 ------- ------- -------- -------- Total revenues.............................................. 10,344 1,444 (481) 11,307 ------- ------- -------- -------- Expenses: Marketing and sales....................................... 8,151 240 (226) 8,165 General and administrative................................ 1,260 492 -- 1,752 Software development and consulting services.............. 108 3,076 (255) 2,929 Amortization of goodwill and other intangible assets...... 487 -- 10,614 11,101 Stock-based compensation.................................. 1,325 -- -- 1,325 ------- ------- -------- -------- Total operating expenses.................................... 11,331 3,808 10,133 25,272 ------- ------- -------- -------- Operating loss.............................................. (987) (2,364) (10,614) (13,965) Interest income (expense)................................... 40 (261) -- (221) Other income (expense)...................................... 1 -- -- 1 ------- ------- -------- -------- Loss before income tax...................................... (946) (2,625) (10,614) (14,185) Income tax (benefit)........................................ (376) -- 223 (153) ------- ------- -------- -------- Net loss.................................................... $ (570) $(2,625) $(10,837) $(14,032) ======= ======= ======== ======== Pro forma diluted net loss per share........................ $ (1.12) ======== Shares used to compute pro forma diluted net loss per common share..................................................... 12,575 ========
As of December 31, 1999 ------------------------------ Actual Actual, As Adjusted -------- ------------------- Balance Sheet Data: Cash and cash equivalents................................... $ 2,845 $ Working capital............................................. 4,275 Goodwill and other intangible assets........................ 63,009 Total assets................................................ 75,130 Current liabilities......................................... 6,073 Long-term liabilities....................................... 845 Mandatorily redeemable convertible preferred stock.......... 4,744 Stockholders' equity........................................ $63,469 $
Year Ended June 30, 1999 ------------------------------------------------------------------ Zebu SelectTech Actual Actual Adjustments Pro Forma Combined -------- ----------- ------------- ------------------------- (in thousands) ------------------------------------------------------------------ Statement of Operations Data: Revenues: Commissions............................................. $19,941 $ -- $ -- $ 19,941 Other revenues.......................................... -- 2,972 (90) 2,882 ------- ------- -------- -------- Total revenues............................................ 19,941 2,972 (90) 22,823 ------- ------- -------- -------- Expenses: Marketing and sales..................................... 13,867 496 (80) 14,283 General and administrative.............................. 1,908 1,036 (10) 2,934 Software development and consulting services............ -- 4,759 -- 4,759 Amortization of goodwill and other intangible assets.... -- -- 22,202 22,202 Stock-based compensation................................ -- -- -- -- ------- ------- -------- -------- Total operating expenses.................................. 15,775 6,291 22,112 44,178 ------- ------- -------- -------- Operating income (loss)................................... 4,166 (3,319) (22,202) (21,355) Interest income (expense)................................. 42 (259) -- (217) Other income.............................................. 5 -- -- 5 ------- ------- -------- -------- Income (loss) before income tax........................... 4,213 (3,578) (22,202) (21,567) Income tax................................................ 1,685 1 (1,426) 260 ------- ------- -------- -------- Net income (loss)......................................... $ 2,528 $(3,579) $(20,776) $(21,827) ======= ======= ======== ======== Pro forma diluted net loss per share...................... $ (1.74) ======== Shares used to compute pro forma diluted net loss per common share............................................ 12,527 ========
26
Six Months Ended Year Ended June 30, December 31, --------------------------------------------------------- -------------- 1995 1996 1997 1998 1999 1999 --------- --------- --------- --------- --------- -------------- Other Operating Data: SELECTQUOTE Leads............................................ 232,228 206,199 296,254 212,045 170,704 93,194 Applications..................................... 27,448 28,862 40,517 47,239 42,470 25,831 Policies sold.................................... 23,127 25,297 33,175 39,875 35,132 19,131 Licensed agents (average)........................ 12 17 16 21 27 35 SELECTTECH Applications submitted to the Hub: Variable fee contracts......................... 23,951 137,704 163,010 Fixed fee contract............................. 9,256 35,955 41,034 -------- -------- -------- Total.......................................... 33,207 173,659 204,044
As of ------------------------------------ June 30, December 31, ------------------- -------------- 1998 1999 1999 -------- -------- -------------- SELECTQUOTE Cumulative policies sold..................... 100,990 126,287 159,462 199,337 234,469 253,600 SELECTTECH AIM QuickView software licenses--carriers.... -- -- -- 17 28 33 AIM QuickView software installations--general agencies.................................... -- -- -- 180 418 1,134 AIM GA software installations--general agencies.................................... -- -- -- -- -- 23
27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ TOGETHER WITH "SELECTED FINANCIAL AND OPERATING DATA" AND "PRO FORMA CONDENSED COMBINED AND ACTUAL DATA" AND OUR FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS DISCUSSION AND ANALYSIS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS, UNCERTAINTIES AND ASSUMPTIONS. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY AS A RESULT OF MANY FACTORS, INCLUDING BUT NOT LIMITED TO THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. Overview Zebu was formed as a holding company for SelectQuote and SelectTech, which merged on December 23, 1999. We are accounting for the acquisition of SelectTech by SelectQuote as a purchase for financial accounting purposes. We are the successor to SelectQuote, on a consolidated basis, for financial accounting purposes. Prior to December 23, 1999, Zebu did not have business operations or activities, and our historical financial data and operating results are those of SelectQuote and SelectTech on a separate-company basis for all prior periods. SelectTech has been an early-growth stage company, and accordingly this discussion and analysis emphasizes the historical results of our retail insurance operation. SELECTQUOTE SelectQuote began business in 1985 as an independent insurance agency, and is one of the largest independent marketers of term life insurance products sold to consumers in the United States. SelectQuote sells term life insurance through direct-response marketing and the Internet. Growth and profitability in SelectQuote's retail insurance agency business depends primarily on cost-effectively generating leads and hiring and training qualified sales agents to convert the leads to applications and process those applications efficiently to policy issuance. The growth and profitability of this business also depend on insurance carriers' ability to process large numbers of applications on a timely basis. From inception through fiscal 1997, SelectQuote's policies sold and revenues grew steadily as it built the foundation of its retail business. In fiscal 1997, SelectQuote substantially increased its operating expenses in order to grow the business more rapidly. SelectQuote's profits did not increase as expected, however, because its sales process could not convert the additional leads in a cost-effective manner. In addition, the carriers' policy applications processing capacity did not expand adequately to meet the increased volume of applications that SelectQuote generated. As a result of this experience, SelectQuote changed its sales process and applied technology provided by SelectTech to enhance its operating efficiency. The SelectQuote retail term life insurance business generates revenue in the form of commissions. Commissions, which are based on the size of policy premiums, consist of first-year, bonus and renewal commissions that vary by carrier and product. SelectQuote recognizes full first-year commission revenues after an insurance carrier's underwriter approves the policy and the customer has made an initial premium payment. At the time SelectQuote recognizes revenue, it estimates an allowance, based on historical information, for uncollectible commissions. SelectQuote can earn annual production bonuses by exceeding targets for new business premiums and existing-business retention, based on individual criteria set by each carrier. Production bonuses are paid by the carriers based on premiums generated during the calendar year and are generally greater in the fourth calendar quarter. SelectQuote recognizes these bonus revenues when it receives notification from insurance carriers. SelectQuote recognizes revenue for renewal commissions when the 28 insurance carrier notifies SelectQuote that it has received payment for a renewal premium. Renewal commission rates are significantly less than first-year commission rates and are not offered by every insurance carrier. Variations in the amount of time between the submission of a new policy application and SelectQuote's recognition of commission revenue can significantly impact our quarterly and annual operating results. The amount of time between the submission of the consumer's application to the insurance carrier and underwriting approval has varied, and currently ranges from 29 to 78 days, and currently averages 48 days. The premium amount of insurance sold and a particular insurance carrier's backlog and processing procedures impact this time lag significantly and directly. Also, consumers' policy purchases vary by season. By strategically managing our advertising expenditures, we endeavor to maintain a level volume of sales activity per sales agent throughout the year. Nevertheless, our commission revenues will vary with the number of policies sold from quarter to quarter. SelectQuote currently offers products from 19 carriers rated in the "A" categories by A.M. Best Company, that we believe provide the best combination of price, products and service. The number and composition of these carriers can vary from period to period. Based on commissions received, the top five insurance carriers accounted for 77% of commission-based revenues during the six months ended December 31, 1999 and 67% during the six months ended December 31, 1998. Of the top five insurance carriers in the six months ended December 31, 1998, two were not in the top five in the six months ended December 31, 1999. The top insurance carrier for the six months ended December 31, 1999 accounted for 23% of the policies SelectQuote delivered that year, but only accounted for 5% in the six months ended December 31, 1998. For more information, please refer to "Risk Factors--Our commission-based revenues and receivables are highly concentrated among a small number of carriers, and our business will be harmed if we fail to maintain or replace revenues from those carriers or fail to collect receivables from them." Operating expenses for SelectQuote's retail term life insurance sales business consist of both variable and semi-variable expenses, including wages, benefits and expenses associated with generating leads, selling insurance and processing insurance applications and maintaining our database and web site. SelectQuote incurs most of its variable expenses prior to a carrier's approval of an application and its receipt of any premium on a policy. Selling and marketing expenses consist primarily of direct advertising and payroll costs to sell and process life insurance policies. During the past three fiscal years, SelectQuote's operating expenses also included payments to SelectTech for software development and computer management services. For more information, please refer to "Related Party Transactions." General and administrative expenses for SelectQuote's retail term life insurance sales business consist primarily of executive and employee compensation and benefits, professional fees and office expenses, principally for rent, utilities and equipment. We are expanding our facilities to prepare for projected growth, and anticipate an increase in rental expense of approximately 256% in fiscal 2000 compared with fiscal 1999. SELECTTECH SelectTech was founded in September 1995 by SelectQuote, Steven H. Gerber and Michael L. Feroah to develop data movement and integration solutions to address insurance industry-wide infrastructure inefficiencies in the processing of applications and issuance of policies. These inefficiencies impeded the growth of SelectQuote's business and have plagued the life insurance industry in general. 29 For all periods prior to the SelectTech acquisition, SelectQuote provided substantial services and overhead to SelectTech, which was obligated to reimburse SelectQuote at cost. At the same time, SelectTech provided software development and consulting services at hourly rates to SelectQuote. For more information, please refer to "Related Party Transactions--Shared Operations and Ownership." In prior periods, SelectTech earned revenues from three sources: software licenses, Hub transactions processing and custom software development, consulting and maintenance services. We anticipate that SelectTech's revenues from Hub processing transactions will continue to grow and will constitute a substantial part of our revenues in the future. We also anticipate that we will earn service revenues associated with the installation and maintenance of AIMSuite software products and from contract projects in which we will assist insurance carriers and general agents in modifying their data processing systems to more efficiently process applications and issue policies. We intend to deploy a substantial percentage of our technical and engineering personnel in the development of our internal general agency management and new policy application processing systems, as well as our website. Accordingly, we do not expect that revenues from custom software development and consulting services will generate significant revenue in the foreseeable future. We recognize revenues from software licenses when software revenue recognition criteria have been met in accordance with American Institute of Certified Public Accountants Statement of Position, or SOP, 97-2, SOFTWARE REVENUE RECOGNITION. Under SOP 97-2, software revenue is recognized when a non-cancelable license agreement has been signed, the product has been shipped, there are no uncertainties surrounding product acceptance, the fees are fixed and determinable and collection is probable. The portion of revenues from new license agreements that relate to our obligations to provide customer support are deferred and recognized ratably over the contract support period, which is generally one to four years. Our software maintenance contracts are renewable on an annual basis. Revenues from maintenance contract renewals are deferred and recognized ratably over the terms of the agreements. Revenues from software usage, consulting and other services are recognized as the related services are provided or as the milestones are completed. SelectTech's historical expenses have consisted primarily of personnel expenses and contract services to develop software for SelectQuote and for SelectTech's insurance carrier customers. During the last three fiscal years, SelectTech paid a total of $5.8 million to third-party software developers, of which SelectTech paid $1.8 million to Innovative Information Group, Inc., or IIG, a firm owned by Steven H. Gerber and Michael L. Feroah, two of our executive officers and directors. For the same period, SelectTech also paid a total of $266,740 to Mr. Gerber's consulting company and a total of $500,500 to Mr. Feroah's consulting company for software development and marketing and administrative services. SelectTech did not pay wages to Messrs. Gerber and Feroah until August 1999. As part of our expansion, we expect to continue to contract with third-party providers, including IIG, for software development services at a similar level for the foreseeable future. Over the past three fiscal years, SelectTech paid $1.6 million to SelectQuote as reimbursement for management services and overhead. For more information, please refer to "Related Party Transactions--Shared Operations and Overhead." Since its inception, SelectTech has incurred significant losses, and as of June 30, 1999, had an accumulated deficit of $6.0 million. These losses and this accumulated deficit have resulted primarily from the costs incurred in the development of the AIMSuite software and the Hub. We intend to continue to invest heavily in product development, sales and marketing of AIMSuite software products and believe that our technology business will continue to contribute net losses to 30 our results of operations for the foreseeable future. We also expect this portion of our technology business to generate negative cash flow from operations for at least the next several years. In addition, charges for goodwill and other intangible assets resulting from our acquisition of SelectTech, which total $57.3 million, will be amortized over the next three years and charges for other identifiable intangible assets, which total $6.2 million, will be amortized over the next two years. These charges will result in substantial net losses for us during each of these years. Factors Affecting Operating Results Our total revenues will fluctuate from quarter to quarter due to many factors. We expect that revenues from SelectQuote's retail term life insurance sales will vary with conversion rates from consumers' life insurance applications, insurance carriers' ability to process applications in a timely manner and the number of licensed agents that we employ. We have a limited operating history in the business of providing consulting services and licensing software and transaction services to life insurance carriers and their agents, and the markets for these services and software products evolve rapidly. As a result, we are unable to forecast our revenues accurately. Revenues from the technology products and services business that we recently acquired from SelectTech have resulted primarily from insurance carriers' requests for custom software development and information technology consulting services. We anticipate a substantial decline in consulting services revenues for the foreseeable future, as most of our technical personnel currently are focused on the development and implementation of our general agency sales and plan administration software and on the integration of SelectTech's historical operations with our own. Our failure to complete this development, implementation and integration would have a material adverse effect on our future revenue growth, business and financial condition. In addition, continued growth will require that we develop new software products and offer insurance processing services to the industry. Although our license and maintenance fees and transaction service fees have grown rapidly, total revenues from these sources have been insubstantial to date. We also must further increase the efficiency and scope of our retail insurance sales business, hire and train more agents and attract more insurance carrier clients to the AIMSuite software. Failure to do so will materially affect the amount and timing of our future revenues and could have a material adverse effect on our business, results of operations and financial condition, and may cause the market price of our common stock to decline substantially. Although our expense levels are based in part on our expectations with regard to future revenues, a substantial portion of our current and future costs is fixed. We might be unable to adjust spending in a timely manner to compensate for any unexpected shortfall in revenues. As a result, any significant shortfall in demand for our products and services relative to our expectations would harm our business and cause our revenues to decrease. Further, in order to remain competitive, we might have to make various pricing, service or marketing decisions that could have a material adverse effect on our business, results of operations and financial condition. See "Risk Factors--Our operating results might fluctuate significantly and remain uncertain, which could negatively affect the value of your investment." After the offering, we expect to experience significant fluctuations in our future quarterly operating results due to a variety of factors, many of which are outside our control, including-- - the number of transactions processed through our Hub; - technical difficulties or service interruptions; - our ability to hire or obtain the services of skilled programmers and consultants; 31 - our ability to implement technology to improve our application processing and accommodate our growth; - the number of insurance policies we sell; - the ability of insurance companies to process applications and issue policies on a timely basis; - the conversion and policy issuance rates of consumers' applications; - our ability to renew and maintain policies in force; - our ability to attract and retain a sufficient number of qualified insurance agents; - the amount and timing of operating costs, capital expenditures and possible acquisitions relating to expansion of our business; - our ability to retain our current executive officers; - the announcement or introduction of new products and services by us or our competitors; - price competition; and - the timing, cost and availability of advertising. Based on the foregoing, we believe that our quarterly revenues, expenses and operating results could vary significantly in the future, and that period-to-period comparisons should not be relied upon as indications of future performance. Due to these and other factors, it is likely that in some future quarters our operating results will fall below the expectations of securities analysts and investors, which would cause our stock price to decline. See "Risk Factors--Our operating results might fluctuate significantly and remain uncertain, which could negatively affect the value of your investment." 32 Results of Operations SELECTQUOTE The following table sets forth SelectQuote's historical results of operations expressed as a percentage of revenues:
Six Months Ended Year Ended June 30, December 31, ------------------------------------ ---------------------- 1997 1998 1999 1998 1999 -------- -------- -------- -------- -------- Revenues: Commissions............................. 100.0 % 100.0% 100.0% 100.0% 99.7 % Other revenues.......................... -- -- -- 0.0 0.3 ------ ------ ------ ------ ------ Total revenues............................ 100.0 100.0 100.0 100.0 100.0 ------ ------ ------ ------ ------ Expenses: Marketing and sales..................... 91.0 66.9 69.5 75.3 78.8 General and administrative.............. 11.5 8.7 9.6 10.7 12.2 Software development and consulting services............................... -- -- -- -- 1.0 Amortization of goodwill and other intangibles............................ -- -- -- -- 4.7 Stock-based compensation................ -- -- -- -- 12.8 ------ ------ ------ ------ ------ Total operating expenses.................. 102.5 75.6 79.1 86.0 109.5 ------ ------ ------ ------ ------ Operating income (loss)................... (2.5) 24.4 20.9 14.0 (9.5) Interest income........................... 0.1 0.1 0.2 0.2 0.4 Other income (expense).................... (0.2) 0.2 -- -- -- ------ ------ ------ ------ ------ Income (loss) before income tax........... (2.6) 24.7 21.1 14.2 (9.1) Income tax (benefit)...................... (1.1) 9.9 8.4 5.9 (3.6) ------ ------ ------ ------ ------ Net income (loss)......................... (1.5)% 14.8% 12.7% 8.3% (5.5)% ====== ====== ====== ====== ======
SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999 REVENUES. Revenues increased 11% from $9.3 million in the first half of fiscal 1999 to $10.3 million in the first half of fiscal 2000 primarily reflecting increases in first-year commissions, renewal commissions and production bonuses. First-year commissions rose in proportion to an increase in new policies sold. Renewal commissions increased modestly while production bonuses rose 19%, faster than SelectQuote's growth in new policies added reflecting SelectQuote's insurance carriers' preferences for production bonuses over long-term renewal commissions. Policies sold increased almost 11% while new leads declined from 94,300 during the six months ended December 31, 1998 to 93,200 in the six-months ended December 31, 1999. The improved relationship between leads generated and policies sold reflects the benefit of using sales agents to handle most initial customer telephone and Internet inquiries under SelectQuote's new sales approach, which was fully implemented by November 1999. We anticipate that revenues will be higher than usual during the rest of fiscal 2000 because consumers applied to purchase a greater number of additional policies in the six months ended December 31, 1999 compared to the six months ended December 31, 1998. We believe that this increase in applications resulted from consumers' motivation to avoid the effects of new insurance regulations, known as "Triple X," that raised longer-guarantee life insurance prices of many policies issued after January 1, 2000. 33 MARKETING AND SALES EXPENSES. Marketing and sales expenses rose 16% from $7.0 million in the six months ended December 31, 1998 to $8.2 million in the six months ended December 31, 1999. Although advertising expense remained almost flat during the latter period, other marketing and sales expenses increased $1.2 million primarily because of increased personnel costs to manage significantly increased application and sales volumes and because of increased emphasis on SelectQuote's website and internal technology. New policies in process rose 35% in response to better conversions of leads to applications and consumer response to the Triple X deadline. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased 26% from $1.0 million in the first half of fiscal 1999 to $1.3 million in the first half of fiscal 2000 primarily because of increased payroll costs. SOFTWARE DEVELOPMENT AND CONSULTING SERVICES EXPENSES. These expenses increased because of the acquisition of SelectTech by SelectQuote in late December 1999. STOCK-BASED COMPENSATION EXPENSE. In connection with the grant of stock options during the six months ended December 31, 1999, SelectQuote recorded an aggregate deferred compensation expense of $2.2 million, representing the difference between the estimated fair market value of the common stock and the option exercise price at the date of grant. This amount is presented as a reduction of stockholder's equity and is amortized over the vesting period of the applicable options. These valuations resulted in a charge to operations of $1.3 million for the six months ended December 31, 1999 and will result in charges of the remaining $900,000 over the next three years. YEARS ENDED JUNE 30, 1997, 1998, AND 1999 REVENUES. Commission revenues increased from $14.8 million in fiscal 1997 to $19.0 million in fiscal 1998, and to $19.9 million in fiscal 1999. During 1997, first-year commissions increased substantially in response to significantly increased advertising. The increased advertising expense also led to an increase in new policy sales of 31% in 1997, although average commissions per policy declined and cost per lead increased significantly. Production bonus revenues were flat in fiscal 1997 due to lower policy production in calendar 1996 compared to calendar 1997. SelectQuote's total commission revenues increased 28% in fiscal 1998 because of increases in commission and production bonus revenues. A significant percentage of the first-year commissions resulted from new leads generated by increased advertising during the second half of fiscal 1997. Total first-year commissions increased substantially during fiscal 1998 because of an increase in new policies approved and an increase in average commissions resulting from better targeting of advertising. Production bonuses also increased significantly because of the trailing effects of record premium production in calendar 1997 in response to the substantially increased advertising in the last half of fiscal 1997. Revenues increased 5% from fiscal 1998 to fiscal 1999, reflecting an increase in all three of SelectQuote's commission components: first-year commissions, renewal commissions and production bonuses. First-year and renewal commissions increased slightly during the year. Production bonuses increased significantly from fiscal 1998 to fiscal 1999 because of record sales during the first six months of calendar 1998. The total number of policies sold during fiscal 1999 declined, while the average commission earned per policy increased from the prior year. Leads declined from 212,000 in fiscal 1998 to 170,700 in fiscal 1999, as SelectQuote reduced its advertising expenditures and increased the percentage of licensed agents taking prospective customers' initial calls. Notwithstanding fewer leads and policies sold in fiscal 1999, SelectQuote maintained its first-year commission revenues at the same level as fiscal 1998. MARKETING AND SALES EXPENSES. SelectQuote's marketing and sales expenses declined from $13.5 million in fiscal 1997 to $12.7 million in fiscal 1998, and increased to $13.9 million in 1999. 34 Marketing and sales expenses decreased 6% in fiscal 1998 primarily because of a $2.4 million reduction in advertising expense. This reduction was offset by an increase in other selling and marketing expenses of $1.6 million from fiscal 1997 to fiscal 1998, primarily as SelectQuote increased staff in response to record activity levels and added higher-paid licensed sales agents as SelectQuote began changing its sales process. Marketing and sales expenses increased 9% in fiscal 1999. Although advertising expense decreased by $200,000 for the year, other marketing and sales expenses rose $1.4 million, primarily because of increased costs attributable to adding licensed agents and support staff in connection with the change in SelectQuote's sales approach. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were $1.7 million in fiscal 1997, $1.7 million in fiscal 1998 and $1.9 million in fiscal 1999 and represented 11.3%, 11.5% and 12.1% of total operating expenses in fiscal 1997, 1998 and 1999, respectively. Generally, these expenses have fluctuated in proportion to SelectQuote's total operating expenses. SELECTTECH The following table sets forth SelectTech's historical results of operations expressed as a percentage of revenues:
Six Months Ended Year Ended June 30, December 31, ------------------------------------ ---------------------- 1997 1998 1999 1998 1999 -------- -------- -------- -------- -------- Revenues: Consulting services..................... 100.0 % 95.0 % 80.0 % 92.6 % 64.8 % License and maintenance................. -- 1.1 10.0 2.1 9.9 Transactional services.................. -- 3.9 10.0 5.3 25.3 ------ ------ ------ ------ ------ Total revenues............................ 100.0 100.0 100.0 100.0 100.0 ------ ------ ------ ------ ------ Expenses: Software development and consulting services............................... 94.6 163.6 160.1 166.0 213.0 Marketing and sales..................... 9.7 15.6 16.7 19.2 16.6 General and administrative.............. 35.6 59.4 34.9 35.7 34.1 ------ ------ ------ ------ ------ Total operating expenses.................. 139.9 238.6 211.7 220.9 263.7 ------ ------ ------ ------ ------ Operating loss............................ (39.9) (138.6) (111.7) (120.9) (163.7) Interest expense.......................... (0.7) (1.4) (8.7) (5.4) (18.1) ------ ------ ------ ------ ------ Loss before income tax.................... (40.6) (140.0) (120.4) (126.3) (181.8) ------ ------ ------ ------ ------ Income tax................................ 0.2 -- -- 0.1 -- ------ ------ ------ ------ ------ Net loss.................................. (40.8)% (140.0)% (120.4)% (126.4)% (181.8)% ====== ====== ====== ====== ======
SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999 REVENUES. SelectTech's revenues increased 11% from $1.3 million in the six months ended December 31, 1998 to $1.4 million in the six months ended December 31, 1999. Revenues from consulting services dropped from $1.2 million to $936,000 reflecting a shift away from providing consulting and installation and integration services to outside parties to enhancing SelectQuote's internal systems to improve processing and sales techniques. During the six months ended December 31, 1999, SelectQuote accounted for $481,000 of consulting-services revenues. License and maintenance revenues increased from $27,000 in the half-year ended December 31, 1998 to 35 $142,000 indicating increased usage of SelectTech's AIM Suite software products. These revenues reflect the amortization of deferred licensing fees that are amortized ratably over the expected term of the license once the software has been accepted by the licensee. Transaction service revenues increased from $69,000 in the earlier period to $366,000 in the latter period. This increase represents a 433% increase in revenues and a 199% increase in transactions processed through the Hub. SOFTWARE DEVELOPMENT AND CONSULTING SERVICES EXPENSES. Software development and consulting services expenses increased from $2.2 million during the six months ended December 31, 1998 to $3.1 million during the six months ended December 31, 1999, including $1.4 million and $920,000 paid to third-party developers in the six months ended December 31, 1998 and 1999, respectively, of which $580,000 and $365,000 was paid to IIG, Mr. Gerber's consulting company and Mr. Feroah's consulting company. The decline in amounts paid to related parties during the first six months of the current fiscal year resulted from Messrs. Gerber and Feroah becoming full-time employees. For more information, please refer to "Related Party Transactions--Research and Development Arrangements." This increase reflects increased AIMSuite software development, AIMSuite software installation and integration efforts, and the provision of software development and management services to SelectQuote. MARKETING AND SALES EXPENSES. Marketing and sales expenses remained relatively constant for the six months ended December 31, 1998 and the six months ended December 31, 1999 because of a limited marketing budget. SelectTech continued to focus its marketing efforts on attending and participating in important industry trade shows and on developing marketing and advertising materials. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expense increased 6% from $465,000 in the six months ended December 31, 1998 to $492,000 in the six months ended December 31, 1999, due to higher personnel costs. INTEREST EXPENSE. Net interest expense increased from $71,000 in the six months ended December 31, 1998 to $261,000 in the six months ended December 31, 1999, reflecting a substantial increase in total debt under 12% senior secured convertible debentures, notes and bridge loans subsequent to December 31, 1998. YEARS ENDED JUNE 30, 1997, 1998, AND 1999 REVENUES. SelectTech's revenues were $1.4 million in both fiscal 1997 and fiscal 1998 and increased to $3.0 million in fiscal 1999 as SelectTech's business expanded from developing custom software and providing consulting services to developing and licensing AIM Suite software products. Fiscal 1997 revenues and the bulk of fiscal 1998 revenues came from custom software development and consulting projects for a few large insurance carriers. During fiscal 1999, SelectTech's consulting services revenues shifted from custom and consulting work to installing and integrating AIMSuite products. License and maintenance fees increased from $16,000 in fiscal 1998 to $299,000 in fiscal 1999 and related primarily to SelectTech's obligations to provide customer support during contract periods. License fees are initially deferred and then amortized ratably over the expected term of the license agreement. Transactional services revenues increased substantially from $55,000 in fiscal 1998 to $297,000 in fiscal 1999, as more insurance carriers and existing customers expanded their use of the Hub. SOFTWARE DEVELOPMENT AND CONSULTING SERVICES EXPENSES. Software development and consulting services, expenses more than doubled from $2.3 million during fiscal 1998 to $4.8 million during fiscal 1999, including $1.3 million and $2.5 million paid to third-party developers in fiscal 1998 36 and 1999, respectively, of which $639,000 and $1.1 million was paid in fiscal 1998 and 1999, respectively, to IIG, Mr. Gerber's consulting company and Mr. Feroah's consulting company. This increase reflected an effort by SelectTech to launch the full line of AIMSuite products and to install and integrate those products in the customer's existing computing environments. MARKETING AND SALES EXPENSES. SelectTech's marketing and sales expenses increased from $138,000 in fiscal 1997 to $223,000 in fiscal 1998 and to $496,000 in fiscal 1999, due primarily to SelectTech's increased emphasis on marketing its AIMSuite products, including adding marketing staff, attending important industry trade shows and developing marketing and advertising materials. GENERAL AND ADMINISTRATIVE EXPENSES. SelectTech's general and administrative expenses increased during the preceding three fiscal years commensurate with its growth from a staff of eight at the beginning of fiscal 1997 to 44 at the end of fiscal 1999. INTEREST EXPENSE. Net interest expense increased from $9,000 in fiscal 1997 to $20,000 in fiscal 1998 and to $259,000 in fiscal 1999. Most of the increase for fiscal 1999 arose from the issuance of $2.5 million of convertible debentures. Liquidity and Capital Resources Upon the acquisition of SelectTech by SelectQuote on December 23, 1999, all intercompany investments were canceled and all intercompany receivables and loans were forgiven. As part of the transaction, Zebu issued $2.5 million of debentures in exchange for the 12% senior secured convertible debentures issued by SelectTech in October 1998, repaid one of the three outstanding debentures in the face amount of $600,000, and modified the terms of the two remaining debentures in the face amount of $950,000 each. These debentures are convertible into an aggregate of 731,420 shares of our common stock. After the earlier of July 1, 2000 or the completion of the offering, we may prepay these debentures in full on 30 days' notice. After the acquisition, Zebu also repaid $750,000 of 12% promissory notes owed by SelectTech. On December 27, 1999, Zebu sold 50,000 shares of Series D mandatorily redeemable convertible preferred stock at $100.00 per share, which provided proceeds of $4.7 million to us, net of a fee paid to Cochran, Caronia & Co. and legal expenses. These shares will automatically convert into 1,111,111 shares of our common stock at the closing of this offering. SELECTQUOTE Since SelectQuote's formation in 1984, its primary sources of operating funds have been commissions and bonus revenues and bank and private borrowings. Through private placements of preferred stock and common stock to individual investors and conversion of convertible debt, SelectQuote raised $1.8 million. Net cash provided by operations was $1.3 million in fiscal 1999 and $2.4 million in fiscal 1998. In each period, cash provided by net income was partially offset by increases in commissions and other receivables. Net cash used in operations was $625,000 in fiscal 1997, as SelectQuote had a net operating loss. Net cash used in investing activities was $1.1 million in fiscal 1999 and $777,000 in fiscal 1998. Investment activity consisted primarily of the purchase of equipment and marketable securities, leasehold improvements, and investments in SelectTech. Net cash provided by investing activities was $746,000 in fiscal 1997, primarily due to the sale of marketable securities. 37 Net cash used in financing activities was $686,000 in fiscal 1999, $839,000 in fiscal 1998 and $372,000 in fiscal 1997. SelectQuote paid dividends on its preferred and common stock of $579,000 in fiscal 1999, $447,000 in fiscal 1998, and $579,000 in fiscal 1997. SelectQuote also borrowed $300,000 from an insurance carrier in fiscal 1997 and repaid that amount in fiscal 1998. SELECTTECH SelectTech has received all of its funding through the sale of securities to insurance carrier investors and from SelectQuote-- - In February 1997, SelectQuote provided SelectTech a $200,000 line of credit bearing 10% annual interest, which was secured by future revenues earned on existing consulting contracts, rights to any software developed and a maintenance contract with one insurance carrier. The outstanding loan balance and the line of credit were canceled in connection with SelectQuote's acquisition of SelectTech. - In August and November 1997, SelectTech issued 450,000 shares of mandatorily redeemable convertible Series A preferred stock for $750,000 to three insurance carriers that also have licensed the AIMSuite software. In April 1998, SelectQuote purchased 150,000 shares of Series A preferred stock for $250,000. Each share of the Series A preferred stock other than SelectQuote's shares, which were canceled, was exchanged for .703455 shares of our common stock in SelectQuote's acquisition of SelectTech. - During 1998, SelectTech issued promissory notes totaling $425,000 to four insurance carriers at annual interest rates ranging from 10.0% to 15.0%. These promissory notes were repaid in October 1998. - In October 1998, SelectTech entered into a debenture purchase agreement with three insurance carriers which enabled SelectTech to borrow up to $2.5 million upon the issuance of 12% senior secured convertible debentures. The debentures were secured by all of SelectTech's assets and were convertible into shares of SelectTech common stock. By June 30, 1999, SelectTech had issued the full $2.5 million of the debentures. In addition, the debenture holders received warrants to purchase common stock at $.01 per share for 5.0% of SelectTech's fully diluted capital. In SelectQuote's acquisition of SelectTech, Zebu issued 498,142 shares of our common stock in exchange for shares of SelectTech common stock issued upon exercise of these warrants. On December 27, 1999, we paid off one debenture holder in full with $600,000. We believe that the debenture holders will convert their debentures, which represent the right to acquire 731,420 shares of our common stock, upon the completion of this offering. - In June, October and November of 1999, SelectQuote loaned an aggregate of $750,000 to SelectTech under three promissory notes of $250,000 each bearing interest at 9.0% annually. All three notes were canceled upon SelectQuote's acquisition of SelectTech. - In July 1999, SelectQuote loaned $50,000 to SelectTech, which was repaid in August 1999. - In July and August 1999, SelectTech borrowed $750,000 from the three debenture holders under new notes at a 12.0% annual interest rate. Net cash used in SelectTech's operations was $2.4 million in fiscal 1999, $895,000 in fiscal 1998, and $136,000 in fiscal 1997. SelectTech incurred operating losses with substantial non-cash charges for depreciation and amortization. Accounts payable and accrued expenses, including payables to SelectQuote and other related parties, increased in each year, as did software license fees classified as deferred revenues. Net cash used in investing activities was applied to capital 38 expenditures in all three fiscal years. Net cash provided by financing activities was $2.5 million in fiscal 1999, $1.1 million in fiscal 1998 and $190,000 in fiscal 1997 from the issuance of our 12% senior secured convertible debentures and Series A preferred stock. Anticipated Cash Requirements We currently expect that the cash proceeds we receive from this offering, together with our existing cash balances and projected revenues, will be sufficient to meet our anticipated cash requirements at least until the end of our 2001 fiscal year. We may need to raise additional capital in order to meet competitive pressures, support more rapid expansion, develop new lines of business, acquire related or complementary businesses or technologies and/or take advantage of unforeseen opportunities. The timing and amounts of working capital expenditures are difficult to predict, and if they vary materially, we may require additional financing sooner than anticipated. If we require additional equity financing, it may be dilutive to our stockholders, and the equity securities issued in a subsequent offering may have rights or privileges senior to the holders of our common stock. If debt financing is available, it may require, as is the case with SelectQuote's existing line of credit, restrictive covenants with respect to dividends, raising capital and other financial and operational matters, which could impact or restrict our operations. If we cannot obtain adequate financing on acceptable terms, we may be required to reduce the scope of our marketing or operations, which could harm our business, results of operations and our financial condition. Market Risk We do not believe that we have any significant exposure to market risk related to changes in interest rates, foreign currency exchange rates and equity prices. Recent Developments In February 2000, SelectQuote, our wholly owned subsidiary, obtained a one-year, $3.0 million line of credit from LaSalle Bank. SelectQuote may borrow against that line, provided it meets certain financial and other covenants and conditions. Any borrowings under the line of credit will bear interest at SelectQuote's election at LaSalle Bank's prime rate or at an interest rate determined by a formula based upon LIBOR. The line of credit is secured by a pledge of all of the assets of SelectQuote, including intellectual property rights, which is senior to the security interest of the holders of our convertible debentures. It is also guaranteed by four of our principal stockholders, and that guaranty is secured by a pledge of their Zebu stock, which represents 35% of Zebu's outstanding stock. We have not drawn on this line of credit and expect to terminate it as soon as possible after the completion of the offering. SelectQuote does not currently intend to borrow against the line before the offering. In February 2000, we entered into an agreement for the sale of 2,041,845 shares of Series E mandatorily redeemable convertible preferred stock at $5.15 per share a group of accredited investors, including to High Ridge Capital Partners II, L.P. and several entities controlled by Marsh & McLennan GP I, Inc. and Marsh & McLennan GP II, Inc. These investors have committed irrevocably to purchase these shares, subject only to the satisfaction of closing conditions outside their control. The sale of these shares will provide proceeds of approximately $10.0 million to us, net of a fee paid to Cochran, Caronia & Co. and legal expenses. Each share of Series E preferred stock will convert automatically into one share of our common stock upon the completion of this offering. 39 Year 2000 Matters Many existing software programs are coded to accept only two digit entries in their date fields. As a result, these programs are unable to distinguish whether "00" means the year 1900 or the year 2000, which could result in system failures or miscalculations causing disruptions to operations. Because our AIMSuite software may interact with external databases for purposes of data storage, the ability of applications integrated with the AIMSuite software to comply with Year 2000 requirements is largely dependent on whether any databases underlying the application are Year 2000 ready. To date, neither Zebu, SelectQuote nor SelectTech has incurred significant costs in identifying or evaluating Year 2000 compliance issues. Most of our expenses have related to the indirect operating costs associated with time spent by employees in the evaluation process and Year 2000 compliance matters generally. Although we do not anticipate that these expenses will be material, these expenses, if higher than anticipated, could adversely affect out operating results. We are not currently aware of any significant Year 2000 compliance problems relating to our software for our product offerings or our information technology or non-information technology systems. Although we consider Year 2000 problems with our software and systems to be unlikely to occur at this stage, there can be no assurance that we will not discover Year 2000 compliance problems in our software for our product offerings that will require substantial revisions or replacements which could be time-consuming and expensive. Recently Issued Accounting Pronouncement SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Under SFAS No. 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. This Statement, as amended, is effective for fiscal years beginning after June 15, 2000. The Company has not fully evaluated the impact of this Statement, but does not expect it to have a material impact on the Company's net operating results. 40 BUSINESS Overview We believe that we provide the most effective business-to-business infrastructure solution to the application processing and information-connectivity problems of the insurance industry. Using our Internet-based technology, insurance carriers, general agencies, financial institutions, marketing organizations, medical service and data providers, and others involved in processing insurance applications and policies, can connect to our single site and exchange all relevant information for the insurance application process in real time. Our unique solution creates a common platform that interconnects the computer systems of all of these users, including their legacy systems, and simultaneously updates each user's database. This real-time data synchronization occurs regardless of the number of remote locations involved in the process. We connected the first insurance carrier to our Hub in April 1998. Today, over 1,000 general agencies and over 30 insurance carriers have adopted our technology. Each day, they collectively transmit more than 1,000,000 data transactions through our Hub. The number of new policy applications processed using the Hub currently exceeds 30,000 per month. Insurance carriers face an increasingly price competitive marketplace and continually seek data processing solutions that help to reduce customer acquisition cost and improve processing efficiency. We believe that our state-of-the-art technology provides significant time and cost savings and other efficiencies to insurance carriers in this increasingly competitive marketplace by using a common, Internet-based platform that facilitates the standardization and transfer of insurance application information. We intend to license our technology to as many insurance carriers, agents and information providers as possible, thereby standardizing the sale and processing of insurance. Our customers include AIG Life Insurance Company, Allstate Insurance Company, GE Financial Assurance Holdings Inc. and American General Corporation. For a complete list of our customers, please refer to "--Technology Products and Services." By licensing our software, we also enable our business clients, including insurance carriers, general agencies, financial institutions, marketing organizations, medical service and data providers, to improve the effectiveness of their insurance operations and to reduce their customer acquisition and policy processing costs. We believe that this platform is extendable into other segments of the insurance industry, such as healthcare and property and casualty, as well as other industries. We use our technology solutions in our retail business to further our position as one of the largest independent direct marketers of term life insurance in the United States. Our technology, in addition to our Internet- and telephone-based insurance sales techniques, enables us to offer consumers a faster, more convenient and less expensive way to purchase life insurance than traditional methods. Our retail insurance business also provides us the opportunity to prove the efficacy of our technology solutions prior to deploying them to the rest of the industry. We are able to build upon our fifteen years experience in the term life insurance industry to promote our insurance industry technology solutions. We offer the insurance industry the opportunity to reduce significantly the processing time between application submission and policy issuance, which we believe will provide increased satisfaction and better prices for consumers as well as improved profitability for our business clients. We believe that the unique combination of our national general agency appointments, our licensed agents and our technology provides our customers with a high level of service and the lowest cost products available from the insurance carriers that we represent. Through our business-to-business and business-to-consumer services, we aspire to "touch" every life insurance policy, either by selling products directly to consumers or by processing every insurance application. 41 Industry Background THE UNITED STATES LIFE INSURANCE MARKET According to Life Industry Marketing Research Association, or LIMRA, U.S. consumers paid an estimated $10.3 billion in new individual life insurance premiums in 1998. New individual term life insurance premiums during the same period were approximately $2.1 billion, or 20% of the total, up from 13% in 1993. Based on data provided by LIMRA, of the approximately 11.5 million new individual life insurance policies issued during 1998, we estimate that approximately 4.1 million were term life policies, up 17% from 1997. The structure of the traditional life insurance market presents significant challenges to insurance carriers and consumers: CHALLENGES TO THE INSURANCE CARRIER. Traditionally, insurance carriers incur substantial costs in acquiring new policyholders, supporting general agencies, processing applications and issuing and administering policies. Each of these steps currently involves inefficiencies and delays related to the manual and often repetitive collection and transfer of application information from multiple independent parties. The insurance industry lacks standard underwriting data requirements and standard formats for the collection and submission of data, making the traditional application process inefficient. Insurance underwriting usually involves input from multiple independent parties, which often results in significant costs, many inefficiencies and delays. In addition, many applicants fail to complete the underwriting process, which often results in the insurance carriers incurring significant expense without receiving any revenue. We believe that the combination of these costs and inefficiencies make term life insurance a high-cost, low-margin product for the insurance carrier. CHALLENGES TO THE CONSUMER. The purchase of insurance is often a difficult and frustrating process for consumers. The fragmentation of the insurance industry, which includes more than 1,000,000 licensed agents and numerous distribution channels, including captive agents, independent agents, banks and brokerage firms, direct marketers and, more recently, web site operators, has historically made comparison shopping across a broad range of insurance carriers extremely difficult and time consuming. The process is further complicated by the participation of more than 1,700 insurance carriers offering life insurance products, each with its own policy features, prices and qualifying criteria. The purchase of life insurance can also involve dealing with unfamiliar information or high-pressure sales tactics. Additionally, the process requires the consumer to provide sensitive personal health and family medical history information, which in the traditional process is provided in a face-to-face meeting. Finally, applying for life insurance is a time-consuming, paper-and labor-intensive process, resulting in consumer frustration. Because of these factors, consumers often regard the purchase of insurance as a negative experience, and many fail to complete the process. OUR MARKET OPPORTUNITY Most insurance carriers utilize traditional paper- and labor-intensive processing for both Internet-generated and traditional agency-sourced applications at high cost and with substantial delays. Without broadly based technology that allows low-cost and efficient data sharing solutions, insurance carriers, agents, banks and other financial institutions cannot compete effectively in the insurance marketplace. We believe that there are significant competitive advantages to insurance marketers and carriers who take advantage of recent technological developments, including the Internet. To capitalize on the benefits of Internet-based technology and compete effectively, we believe that life insurance marketers and carriers must achieve-- - a faster, more efficient application and policy issuance process; 42 - lower origination and application processing costs; - more opportunities for consumers to access and compare insurance product information; - more choices of insurance products and prices; and - a consumer-friendly method for obtaining the best coverage at the lowest possible price. In attempting to achieve these objectives, insurance businesses face serious data processing obstacles. Diverse computing environments are unable to share existing information easily among insurance carriers, information providers and general agencies. Differences among computer systems have been a major impediment to business-to-business data movement and integration among these parties. Most existing applications were not designed to communicate outside of the enterprise. Older data movement and integration approaches have been costly, ineffective and unable to share information. Traditional electronic data interchange, or EDI, is inflexible, based on pre-defined, fixed data formats that are not easily adjusted, and often requires difficult point-to-point integration. EDI is also batch processed, cumbersome, requires expensive private networks and does not offer real time processing. First-generation Web sites based on hypertext mark-up language, or HTML, also do not address the requirements of business-to-business data movement and integration. HTML is designed chiefly for presentation of data and does not directly support data exchange between applications. Because these Web sites were designed primarily for human-to-system communication, they are difficult to incorporate into shared multi-company business processes that require system-to-system communication. HTML-based Web systems typically require that data be re-keyed to each new system. Newer processes, such as extensible mark-up language, or XML, provide a universal communications mechanism, but require the transmission of large amounts of unnecessary data because they fail to extract and transmit only the relevant data. Thus, these processes require substantial customization at each site and have a high initial cost and maintenance expense. These packages integrate systems within a single trading partner group, but typically cannot provide the open-ended, scalable inter-company integration that is critical to business-to-business data processing among the myriad, diverse and disparate users engaged in processing insurance policies. We believe that in order for a system to be effective, it must not only allow a variety of systems to exchange data, it must interface with legacy systems, and provide bi-directional data communication without requiring the information providers to standardize their data. To accomplish these objectives, the system must-- - be usable by trading partners and business competitors alike; - be compatible with any data format; - be fully scalable; - interconnect a large number of users simultaneously; and - enable process automation. Such a system would allow for wide industry acceptance, provide a common format for data to be exchanged without substantial point-to-point engineering, be sufficiently flexible to allow the expansion or changing of distribution channels easily and provide the basis to solve the processing problems of the insurance industry. Our Solution We believe that we provide the most effective business-to-business solution to the application processing problems of the insurance industry. Our automated insurance management, or AIM, system solution is based on a unique, open database architecture that permits improved 43 management of information, an advanced data synchronization process which allows data to be moved between remote work sites faster, more efficiently and in real time, and advanced applications utilizing our data distribution process. Our system can transfer electronic data generated by any user's data processing system, regardless of hardware configuration, operating system, database management software or system protocols. It does not require substantial conversion cost or effort on the part of insurance carriers to adopt this system, allowing for the carrier and consumer to benefit immediately. For the sales distribution process, electronic application data can be transmitted to the insurance carrier or other information providers in a matter of seconds instead of days. Application status information moves just as quickly. Our solution eliminates the need to reduce information to paper again and again in the application process. There is no practical limit to the number or size of sites that can send or receive information because the Internet can be used in all cases. Our system can be connected to any information provider's system for most insurance applications. It can be modified to provide similar standardized data transfer and communications connections for most industries. Our technology, experience and expertise position us to change dramatically the way insurance is sold and processed. In our 15 years of term life insurance sales experience with SelectQuote, we have searched for ways to respond to the significant challenges posed by our growth and by the inefficiencies of the term life insurance industry in general. In particular, we have witnessed and experienced the significant information management and paper processing problems faced by the insurance industry. As a result, we have developed effective marketing and processing techniques from which we have seen substantial benefits. In addition, we have become a leader in the application of technology to the term life insurance industry. In response to the inefficiencies inherent in the paper- and labor-intensive application processing methods that pervade the insurance industry, we have developed a comprehensive, integrated, Internet-based solution to the substantial information management problems faced both by us and by the life insurance industry generally. Our Strategy We aspire to become the acknowledged agent of change for the entire insurance industry by transforming the way insurance policies are sold, processed and issued. We intend to become the dominant provider of technology solutions to the insurance industry, and to strengthen our position as a leading independent marketer of term life insurance. The key elements of our strategy include-- - ESTABLISH THE AIMSUITE AS THE TECHNOLOGY STANDARD FOR THE INSURANCE INDUSTRY. Our AIMSuite, with a flexible, open and scalable architecture, makes the benefits of our key technology available to insurance carriers and their general agencies, regardless of their internal legacy systems. Furthermore, we intend for our AIMSuite brand to become synonymous with the standard for processing technologies in the life insurance industry. Our technology is platform independent and can be applied to most business data movement and connectivity needs. - STREAMLINE OPERATIONS AND INCREASE OUR SALES EFFICIENCY. We believe that our technology will streamline quotation and application processing and enable our agents to sell a greater number of policies more profitably, matching the lead generation capability of our direct marketing expertise. - USE OUR TECHNOLOGY TO PROCESS INSURANCE POLICIES FOR THE INSURANCE INDUSTRY. Our goal is to offer insurance carriers and other financial institutions a compelling alternative to in-house processing of life insurance marketing, sales, processing and policy delivery by giving them the opportunity to outsource to us all of their new business processing, reporting requests and policy updating. This is possible using our system and technology as they exist today. Our goal is to have our technology used to process every life insurance policy. 44 - REDUCE POLICY ACQUISITION COSTS. We believe the insurance carriers whose policies we sell can continue to reduce their policy acquisition costs through the use of our technology. We believe this cost reduction will enable us to offer a competitive product at a lower price. - EXPAND BRAND AWARENESS AND PRESENCE. We have established ourselves as a leading independent distributor of term life insurance products. We will continue to use our direct-response advertising techniques to enhance consumer recognition of our SelectQuote brand name. We also intend to make strategic use of Internet advertising and establish relationships with on-line companies that are a likely source of consumers for our products. - EXPAND OUR LINES OF RETAIL BUSINESS. Our sales experience and technology is readily applicable to other forms of insurance and other financial products. To date, we have focused exclusively on term life insurance products, but we believe that our processes, technology and ability to hire appropriately licensed agents will allow us to offer a variety of insurance products to new and existing consumers. - EXPAND THE SCOPE OF USE OF THE HUB. We believe that the Hub technology is adaptable to other segments of the insurance industry, such as healthcare or property and casualty, as well as other industries that require complex data movement solutions. Our Products and Services The core of our technology solution, our Hub, is a system that facilitates and manages workflow between remote users in real time. Our AIMSuite software products connect insurance carriers, their agents and other participants in the life insurance policy application, underwriting and issuance process to the Hub. The Hub is an application of hardware, software and modern relational database technology. Insurance carriers, agents or service providers can send or receive data in seconds, as opposed to the days required by the traditional, paper-based process. Required application information is entered only once and then made available to the other participants in the application process as needed, thereby reducing duplicate entries and mistakes, saving processing time and providing better service to the consumer. We also have developed the Insurance Tele-Information System, or ITS, that makes information gathered through telephone interviews with prospective insurance purchasers available to AIMSuite licensees. We offer ITS licenses to insurance carriers directly, as well as through our strategic alliance with Intellisys, Inc., a ChoicePoint subsidiary. We also offer our licensees consulting services to assist them in integrating the AIMSuite software or to provide custom features. We provide installation, maintenance and support services to users of AIM QuickView and AIM GA. To individual consumers, we offer a full range of high quality term life insurance products. Through our consultative sales process, which we are enhancing through the development of our automated rate calculation, or ARC, software, we help the consumer to comparison shop and select the appropriate policy. We are developing new features to enable applicants to track the status of their applications with any carrier that has installed the AIMSuite software. TECHNOLOGY PRODUCTS AND SERVICES The AIMSuite consists of integrated software programs that enable insurance carriers, agencies, agents and information providers to process insurance policy applications, transfer critical applicant data, facilitate policy issuance, service policies, manage the carrier-agent relationship and manage general agency operations. All users of AIMSuite software can connect to our Hub data processing service via the public Internet or virtual private networks, or VPNs. Our Hub servers run 45 our Hub software, which converts data transmitted to the Hub into standard transfer protocols, stores the data and identifies their proper destination. The Hub is located at our San Francisco, California headquarters. Only the AIMSuite software can utilize the Hub's real-time data synchronization capability for application processing and policy issuance and administration. We license the AIMSuite software to insurance carriers and authorize them to distribute general agency software components to their authorized agents. We currently offer new licenses for an AIMSuite system consisting of the following basic components-- - AIM QuickView, the primary application for data movement via the Hub; - AIM GA, a full-featured contact management general agency management system; and - AIM ITS, a tele-interviewing system that can send and receive data from the Hub. Once the carrier and associated information providers have installed the essential AIMSuite components, utilities convert all data entered into the Hub's secure storage databases from each information provider's computer systems and other non-AIMSuite applications into the same life insurance industry standard NAILBA format. The AIM-standard NAILBA-compliant data allows for the automation of the application process without the need for modifying legacy systems or rewriting existing "expert" underwriting systems. The standardized data can then be distributed securely through the Hub to any site that has been approved for access to the data. AIM ITS is a critical part of the AIM Suite processing solution. After the initial insurance application is submitted to a general agency or insurance company, the medical information section of every life insurance application form must be completed for the applicant. AIM ITS provides a platform for the collection of this information through a telephone interview process. This information can be combined with all other application information, which is sent to the telephone interviewing site electronically, and relayed to an insurance carrier or underwriter for review and approval. An applicant's disclosure of a health condition will prompt follow-up questions designed to elicit additional information that the insurance carrier will require to process the application. This feature reduces the need for additional requests for information and attending physicians' statements, thus saving time and expense for all parties. We have licensed AIM ITS to IntelliSys, which specializes in gathering information to support life and health insurance underwriting decisions through telephone call-in centers. IntelliSys makes AIM ITS service available to carriers who have licensed the complete AIMSuite of software. We receive a fee from IntelliSys for each new policy application containing AIM ITS data that is transferred through the Hub. 46 The following diagram shows how the AIM/Hub solution connects the parties involved in the life insurance sales cycle: AIM Hub Internet-based Data Distribution Process [graphic depicting the parties and software applications that can access the Hub, and the intelligent distribution of data through the Hub and among these parties] We license the AIMSuite software products to insurance carriers that pay us a license fee payable in two installments: upon execution of the agreement and upon the customer's acceptance of the software. We also receive a transaction fee for each life insurance application submitted for processing through the Hub. Generally, the transaction fee becomes payable when the licensed carrier's agent connects to the Hub and initially receives the application or submits data to the Hub. A single fee covers all data processed through the Hub for that application. We charge our customers an additional fee for each application for which data is transmitted using AIM ITS, and intend to charge a fee for other data services that we might provide to the carrier or its agents and agencies. Our license terms grant the carrier a perpetual, non-exclusive right to use the software and allow the carriers to distribute copies of the software components to agents and agencies who are licensed and appointed to sell its life insurance products. With one exception, we have never licensed the Hub software to any insurance carrier. We have licensed one complete AIMSuite system, including a version of the Hub software in executable form, to Allstate Insurance Company solely for use with its captive agency system, which helped us demonstrate the feasibility of the Hub technology in external environments. To date, we have licensed the AIMSuite software to over 30 insurance carriers that, in turn, have authorized a total of more than 1,000 general agents and information providers to install the AIM Agency QuickView software component. We have installed the AIM General Agency software component for 23 general agents. We have current AIMSuite license agreements with the 16 individual carriers identified in the table below. Under some of these license agreements, we also process transactions for the subsidiaries of the carrier licensee. These carriers and their subsidiaries are listed below. 47 - ------------------------------------------------------------------------------------ AIMSuite Products Carriers Covered Under License Covered(1) - ----------------------------------------------------------------- ----------------- AIG Life Insurance Company GA, QV Allstate Insurance Company GA, QV - Allstate New York - Glenbrook Life - Lincoln Benefit Life - Northbrook Life - Surety Life American Express Financial Corporation: QV - American Enterprise Life American General Corporation GA, QV - US Life Corporation - All American Life - American General Life Brokerage Group - Old Line Life American National Insurance Company QV Federal Kemper Life Assurance Company GA, QV First-Penn Pacific Life Insurance GA, QV GE Financial Assurance Holdings, Inc. QV - American Mayflower - First Colony Life of Virginia Legal & General America, Inc. QV - Banner Life Lincoln National QV The Midland Life Insurance Company GA, QV North American Company for Life and Health Insurance GA, QV - North American Company for Life and Health Insurance New York Protective Life Insurance Corporation GA, QV - Empire General Life Assurance Corporation - West Coast Life Insurance Company Prudential Insurance Company of America QV Security-Connecticut Life Insurance Company GA, QV United of Omaha Life Insurance Company GA, QV - Companion Life - Mutual of Omaha
- --------------- (1) GA--AIM General Agency QV--AIM QuickView Once a carrier and its agents have installed the QuickView software component, they can instantly begin sharing data through the Hub. Our objective is to disseminate the AIMSuite software as widely as possible. For this reason, we have been licensing this software and providing related services for fees that we consider low by comparison to other business-to-business applications. As the number of licenses and installed AIM GA and QuickView sites increase, we expect our Hub 48 processing fees to increase significantly. We further believe that, once carriers and agents begin processing their policy data through the Hub, they will require additional services from us, including fee-based outsourcing services that we intend to provide at a price significantly lower than their current processing costs. 49 The components of the AIMSuite, which are briefly described in the following table, offer a wide array of standard and premium, or additional cost, features and benefits to insurance carriers and their appointed agencies.
- ----------------------------------------------------------------------------------------------------------------- Product Features Benefits - ----------------------------------------------------------------------------------------------------------------- AIM QUICKVIEW Automates and integrates the seamless Eliminates redundant data entry, - AIM WEB QUICKVIEW movement of application, case and agent speeds up data movement, increases - AIM AGENCY QUICKVIEW data throughout the insurance data accuracy and reduces paper. - AIM CARRIER QUICKVIEW application process. - Displays all pending case data for - Dramatically reduces case status numerous carriers. calls from agencies to carriers, as well as from agents to agencies. - Creates one source for all carriers' pending information, eliminating the need to access multiple web sites - Reduces paper, mailing costs and reduces delivery time. - Tracks pending application cases - Eliminates most status calls; provides real time case updates and links field offices to tele- interviewers and paramedical firms - Prints policies on-site - Eliminates 2-5 days of policy issuance time, reduces shipping costs and shipping delays - Develops on-line commission reports - Enables instant access to using open SQL database commission reports; reduces data entry and improves accuracy - Substantially improves analysis of sales data and review of existing policy data for additional sales - Retains policy data on-site - Offers data accessibility 24 hours a day and makes its data available for use with other software packages - Integrates with AIM GA, AIM ITS and - Eliminates duplicate data entry AIM Carrier QuickView and automates data movement - Links all carrier new business, - Allows carriers to access their policy issue and commission systems data in an open environment for to open SQL database better data review and statistical analysis - Standardizes policy data - Consolidates data from multiple legacy systems into an insurance industry standard for easier export to web sites, and provides field office integration - Prepares custom reports - Serves as an executive management report system with enhanced analytical and graphical capabilities - Displays pending data by carrier - Allows management to view pending data on a single system - Generates error report - Catches improper data before it is sent to the field
50
- ----------------------------------------------------------------------------------------------------------------- Product Features Benefits - ----------------------------------------------------------------------------------------------------------------- AIM GA Completely integrated and scalable Allows general agency to store all agency management system, including agency data in one database for plan administration and system reporting and tracking new administration integrated with a business, in-force policies, contact management system licensing and commissions administration. - Manages data for unlimited carriers - Allows agencies to contract with and policies multiple carriers, as well as market and sell multiple product lines. - Cross checks carrier limits during - Improves accuracy of application entry process applications, reduces returns and rejections - Updates policies electronically - Streamlines policy administration - Automatically stores and checks all - Speeds policy issuance by showing company policy requirements during exact requirements needed to application entry process process a case. - Improves placement ratio with carriers due to thoroughness of application at receipt - Customizes activities - Automates work flows; reduces overhead - Integrates word processing, - Reduces typing and allows faster automatically inserts data into form communication through automation letters and reports - Reduces redundant data entry by field - Increases accuracy and office offices productivity - Tracks applications through entire - Allows access to policy status process and information on demand - Tracks agent leads, contracts, - Increases efficiency of agency commissions, cases, appointments, operations and legal compliance licenses and NASD requirements - Assigns a unique code to every agent - Increases ability to target and every marketing program provided market, and use advertising and to the agent sales dollars more efficiently. - Moves data from the agency's web page - Enables agencies to share data or other software to an open SQL created by other applications database - Reduces multiple data entry - ----------------------------------------------------------------------------------------------------------------- AIM ITS Insurance application tele-interview Improves interview results and software with customizable interview accelerates application process templates; integrated with AIM QuickView - Allows carrier-specific application - Improves data entry by following data entry and processing. forms exactly as written - Facilitates detailed interviews - Substantially reduces the need for attending physician statements - Prompts follow up automatically - Accelerates underwriting process
51 SALES AND MARKETING We currently market our technology products and services through our Vice President of Software Sales and Marketing. Following the offering, we intend to expand our sales and marketing efforts by hiring sales representatives, account managers, product managers and marketing managers. We expect that this additional marketing and sales staff will allow us to expand our current business to meet our sales objectives. SERVICE, MAINTENANCE AND CUSTOMER PROJECTS We provide consulting services and support services performed under maintenance and support agreements with clients who have custom or standard products. We provide free maintenance for software defects and charge our carrier licensees for other services, such as installing AIM GA Software components at the general agencies. We also can provide our customers with documentation, training facilities and help desks. In the past, SelectTech has provided custom software development services to insurance carriers pursuant to project development contracts. We may offer such services in the future after we have completed the development and implementation of new technology at SelectQuote, and if we have additional engineering capacity that is not needed for continued development, installation, service and support of our AIMSuite software. We do not expect, however, that revenues from custom software development and consulting services will generate significant revenue in the future. RETAIL INSURANCE SALES SelectQuote is one of the largest independent marketers of term life insurance products sold to individuals in the United States. Since 1985, we have sold more than 250,000 term life insurance policies. SelectQuote's operating philosophy and strategy from the outset have been to provide the best service and the lowest cost term life insurance in the shortest possible time from among America's top life insurance companies. Approximately 80% of the applications that we have submitted have resulted in the issuance of a policy. We believe that our conversion rate is higher than that generally applicable to the term life insurance industry. SelectQuote has long-standing agency relationships with the 19 insurance companies it currently represents, each of which has an A.M. Best Company "A" category rating or better. We have carefully selected these 19 carriers based on our belief that these companies have consistently offered the best combination of competitive pricing, product innovation, breadth of products, high-quality service and reliability. Each of these carriers has appointed us as its general agent on a national basis. The companies we currently represent include-- - American Mayflower Life Insurance Company of New York (a GE Financial Assurance company) - Banner Life Insurance Co. (a Legal & General America company) - Companion Life (a United of Omaha Life Insurance Company company) - Continental Assurance Company (a CNA Life company) - Federal Kemper Life Assurance Company (a CNA Life company) - Fidelity Life Association, a Mutual Legal Reserve Company (a Zurich Kemper Life company) - First Colony Life Insurance Company (a GE Financial Assurance company) - First Penn-Pacific Life Insurance Company (a Lincoln National Corporation company) - Jackson National Life Insurance Company (a Prudential plc company) - Jackson National of New York - The Midland Life Insurance Company - North American Company for Life and Health - North American Company for Life and Health of New York (a Sammons Group company) 52 - Protective Life Insurance Company - The Travelers Insurance Company - Travelers Life & Annuity (a member of CitiGroup) - United of Omaha Life Insurance Company (a Mutual of Omaha company) - Valley Forge Life Insurance Company (a CNA Life company) - William Penn Life Insurance Company of New York (a Legal and General America company) We sell policies in 48 states and the District of Columbia through licenses held by our company, an associated corporation or one or more of our employees in accordance with the requirements of each jurisdiction's insurance department. We help the consumer comparison shop and then select the appropriate policy. We have developed or acquired computer software that we employ in generating comparative quotations for term life insurance. This software also comprises part of the systems which we have used to gather and transmit applicant data, track application status and service term life insurance policies for our consumers. We have installed AIM QuickView internally to facilitate data transmission and communications during the application process. We are developing technology designed to allow us to increase our sales efficiency and lead-to-policy conversion rates, improve our services to consumers and reduce policy application processing time. We are developing an agency management system similar to the AIM General Agency management system. With this system, data from web leads will be entered automatically into the SelectQuote production database, and applications will be uploaded electronically to insurance companies or tele-interviewing centers. This new system will move pending, tracking, commission and other business information downloaded from insurance carriers or other sites to the SelectQuote production database and provide application status information directly to the consumer through the Internet. We intend to implement this new agency management system in stages during the first nine months of calendar year 2000. LEAD GENERATION. To operate efficiently, we try to achieve the highest attainable ratio of commission revenues to advertising and other new business expenses. Our leads are generated by national radio and television advertising, the Internet and "word of mouth" referrals. In the year ended June 30, 1999, SelectQuote generated 170,700 leads, of which 61% came from advertising, 10% came from the Internet and 29% came from other sources, mainly word of mouth. In SelectQuote's two most recent quarters, Internet leads increased to 23% and 30%, respectively, of total leads. Controlling lead costs is a significant factor in achieving profitability, and controlling lead volumes allows us to match leads to internal and external processing capacities. In the past, SelectQuote experienced periods of rapid growth when it could not process all leads profitably. With the integration of new technology solutions, we expect to increase our capacity for profitable growth. LEAD PROCESSING. We receive our leads by telephone or e-mail through our website. We use an automated call distribution system to route our calls. Whenever possible, calls or e-mails are routed to one of our insurance agents who is licensed in the jurisdiction of the caller. That agent will obtain from the consumer the more detailed information that the insurance carrier will need in order to determine whether or not to issue a policy. Using our database and the agent's knowledge of the underwriting criteria of the insurance carriers we represent, the agent is able to determine the lowest cost policy available from the carriers we represent to meet the consumer's needs. During this process, the agent, with the consumer's assistance, completes as much of an application form as possible. The application is then mailed to the consumer for review, correction, completion and signature. The completed application is then returned to us. If no agent is initially available, calls are routed to an unlicensed telephone representative, who collects basic data such as name, date of birth, address and coverage requirements. Overflow calls or calls received outside of normal business hours are routed to an outside service center, which 53 collects the same basic data from the consumer. That data is entered into our computer system. Our software will match the consumer's requirements to the lowest cost policies offered by the carriers we represent. A computer-generated report is then mailed to the consumer, and is usually accompanied by an informational videotape. During this process, we maintain contact with the consumer through a series of customized letters. Calls received from consumers who have received a quotation package are connected to a licensed agent. In response to the dramatic increase in Internet leads, we have established a group of agents who specialize in responding to these leads. We also have developed and are continuing to expand our technology to assist these agents. POLICY ISSUANCE. After review, we send the application to the insurance carrier, which will gather whatever additional information, such as medical records and blood tests, is necessary for it to complete its review process. We assist the insurance carrier in this process by scheduling paramedical appointments and following up on requests for attending physicians' statements. We use AIM QuickView to expedite this process. After receipt of all necessary information, the carrier then determines whether to issue a policy to the consumer. If the insurance carrier decides not to issue a policy as requested, the agent will work with the consumer to obtain a different policy from the same or a different insurance carrier. The agent's goal is again to obtain the lowest cost and most suitable policy available. Technology and Development We believe that we have been able to leverage our understanding of the insurance market as well as our staff and software development processes to build robust, open solutions for the insurance industry. The Hub is a configuration of software, primary and back-up servers, uninterruptible power supplies, redundant data storage equipment, security firewalls, network products and standard Internet and VPN connections. Our technology operates in a Windows environment with most standard client server operating systems, including Novell, NT, Unix or Linux. The applications software has been written in 32 bit C++ program language using ODBC to Sybase, Oracle or Microsoft SQL servers. Users of our technology must obtain licenses from Microsoft for some or all of the following products: Microsoft Windows NT 4.0, Windows 95 or Windows 98, Microsoft Exchange, Microsoft Word, Microsoft NT Server, Microsoft SQL Server or Microsoft Access. We devote substantial resources to the development of innovative software products for the insurance market. We invested approximately $390,000 in fiscal 1997, $780,000 in fiscal 1998, $2.6 million in fiscal 1999 and $1.6 million in the six months ended December 31, 1999 on research and development activities. This investment included approximately $6,000, $200,000 and $1.1 million in fiscal 1997, 1998 and 1999, respectively, and $486,000 and $987,000 in the six months ended December 31, 1998 and 1999, respectively, for customer-sponsored research and development activities related to the development of new products or services, or the improvement of existing products or services for the customer. We intend to continue to devote substantial resources to research and development for the foreseeable future. In developing our software products and the Hub, our technology products and services business has relied extensively on third-party developers, including operations conducted in Eastern Europe by corporations directly or indirectly controlled by two of our executive officers and directors, Steve Gerber and Michael Feroah. Under written software development agreements, all of these third-party developers, including our related parties, have provided these services on a project-by-project basis and have been paid for their time and materials at agreed rates that we consider arm's length. All intellectual property developed for us by these third-party developers, including our related parties, and their employees or consultants is assigned to us under these 54 agreements. The corporations controlled by Messrs. Gerber and Feroah employ and have employed programmers who are not U.S. citizens or residents, however. See "Risk Factors--We utilize substantial offshore contract programming and development services that we do not control." Most of our technical and research and development engineers who are focused on our core products currently are based at our San Francisco offices. We rely more on our own staff engineers and local consultants than on these foreign corporations for our development outsourcing needs. Intellectual Property Our success and ability to compete are substantially dependent upon our technology and intellectual property. While we rely on copyright, trade secret and trademark law to protect our technology and intellectual property, we believe that factors such as the technological and creative skills of our personnel, new product and service developments, frequent product and service enhancements and reliable product and service maintenance are more essential to establishing and maintaining an intellectual property leadership position. We have no patents or patent applications pending. Others may develop products and services that are similar or superior to ours. We generally enter into confidentiality or license agreements with our employees, consultants and corporate partners and generally control access to and distribution of our products, documentation and other proprietary information. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products, services or technology. Policing unauthorized use of our proprietary information is difficult, and the steps we have taken might not prevent misappropriation of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as do the laws of the United States. Substantial litigation regarding intellectual property rights exists in the technology industry. From time to time, third parties may assert exclusive patent, copyright, trademark and other intellectual property rights to technologies and related standards that are important to us. We expect that we may increasingly be subject to infringement claims as the number of competitors in our industry segments grows and the functionality of products in different industry segments overlaps. In addition, we believe that many of our competitors have filed or intend to file patent applications covering aspects of their technology that they may claim our intellectual property infringes. Although we have not been party to any litigation asserting claims that allege infringement of intellectual property rights, we cannot assure you that we will not be a party to litigation in the future. Any third party claims, with or without merit, could be time-consuming to defend, result in costly litigation, divert management's attention and resources, cause product shipment delays or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to us, if at all. Competition The market for our current and planned products and services is intensely competitive. We compete with companies providing business-to-business information processing solutions aimed at the insurance industry, such as ChannelPoint, Intuit and the CyberTek division of Policy Management Systems, Inc. We believe that the principal competitive factors include-- - real-time data synchronization; - completeness of the software solution; - ease of integration and connectivity with existing and legacy computer systems; - data standardization; - pricing; - scalability; - service and support; 55 - ease of use; - time to market; and - acceptance by insurance carriers and their agents and general agencies. Considering these factors, we believe that we compete favorably with our competitors. Some of our competitors have substantially greater financial and marketing resources, and their products have better known brands. In addition to pressure from our competitors, other barriers to the success and growth of our business-to-business processing solution for the insurance industry are the reluctance of carriers, their agents and other information providers to alter their present ways of doing business, the resistance of technology and information officers to implementing our complete solution, and the perception of some carriers and agencies that we are or may become a competitor that they are unwilling to support. If we are unable to successfully surmount these barriers and establish the AIMSuite system as the dominant approach to business-to-business data movement and integration for the insurance industry, our business, operations and financial condition will be affected adversely and the market price of our stock is likely to decline substantially. In SelectQuote's retail business, we compete with traditional insurance distribution channels, including thousands of insurance agency companies, agents and brokers, new non-traditional channels, such as commercial banks and savings and loan associations, and a growing number of direct distributors, including on-line services such as Quicken InsureMarket, InsWeb Corporation and Quotesmith.com. Some of our competitors have substantially greater financial and marketing resources, and their products have better known brands. We believe that the principal competitive factors in the insurance sales business are customer service, breadth and geographical penetration of products and service offerings, efficiency of operations, agent quality and training and the effectiveness of marketing efforts. We believe that we presently compare favorably with our competitors in these areas. However, the markets for insurance sales and information processing are evolving, and we cannot be certain that we will compete successfully in the future. We anticipate additional competition in both businesses from other established insurance and technology enterprises, as well as emerging companies. See "Risk Factors--We face intense competition in the insurance sales industry." Regulation The future regulation of insurance sales via the Internet as a part of the new and rapidly growing electronic e-commerce business sector is unclear. We believe that SelectQuote is currently in compliance with all applicable laws and regulations. We are currently in the process of evaluating whether our acquisition of SelectQuote requires us to be licensed in any state and, if so, to obtain such licenses. However, state or federal regulators may interpret aspects of our business to be in violation of current laws or regulations. Also, additional state or federal regulations may be adopted, which could have an adverse impact on us. The U.S. insurance industry and the marketers of insurance products are subject to extensive regulation by state and federal governments and by the District of Columbia. This regulation extends to the operations of insurance companies, agency companies, agents and brokers and to our service. We sell policies in 48 states and the District of Columbia through licenses held by our company, an associated corporation or one or more of our employees in accordance with the requirements of each jurisdiction's insurance department. In general, state insurance laws establish supervisory agencies with broad administrative and supervisory powers to-- - grant and revoke licenses to transact insurance business; 56 - impose continuing education requirements; - regulate trade practices; - require statutory financial statements of insurance companies; - approve individuals and entities to whom commissions can be paid; - regulate methods of transacting business and advertising; and - approve policy forms, and regulate premium rates for some forms of insurance. Moreover, existing state insurance laws and regulations require that an agency company, or an individual within that company, be licensed in the applicable state in order to quote an insurance premium. State insurance regulatory authorities regularly make inquiries, hold investigations and administer market conduct examinations with respect to compliance with applicable insurance laws and regulations by insurance companies and their agents. In recent years, a number of insurance agents and the life insurance companies they represent have been the subject of regulatory proceedings and litigation relating to alleged improper life insurance pricing and sales practices. Some of these agents and insurance companies have incurred or paid substantial amounts in connection with the resolution of these matters. We do not currently sell the types of life insurance--primarily cash value life insurance policies such as universal life--which are the usual subjects of these actions. In addition, licensing laws applicable to insurance marketing activities and the receipt of commissions vary by jurisdiction and are subject to interpretation as to their application to specific activities or transactions. Our company, an associated corporation, or one or more of our employees is currently licensed to sell insurance in each of 48 states and the District of Columbia. We do not permit any of our other, unlicensed employees who have contact with consumers to provide services which we understand to require an agent's license. We monitor the regulatory compliance of our sales, marketing and advertising practices and the related activities of our employees. We also provide continuing education and training to our staff in an effort to ensure compliance with applicable insurance laws and regulations. We cannot assure you, however, that a state insurance department will not make a determination that one or more of the activities performed by an unlicensed employee constitutes the transaction of insurance and, thus determine that these activities must be performed only by licensed personnel, that the company or any of its agents are liable for fines or penalties, or that we or any of our agents should have our licenses suspended or revoked. See "Risk Factors--We operate in a heavily regulated industry." The federal government currently does not directly regulate the marketing of most insurance products. However, some products, such as variable life insurance, must be registered under federal securities laws and the entities selling these products must be registered with the NASD. We do not currently sell any federally regulated insurance products. If we elect to sell these federally regulated products in the future, we would be required to qualify for and obtain the required licenses and registrations. Further, we are subject to various federal laws and regulations affecting matters such as pensions, age and sex discrimination, financial services, securities and taxation. Recently, the Office of the Comptroller of the Currency has issued a number of rulings that have expanded the ability of banks to issue insurance products. The recently enacted Financial Services Modernization Act of 1999 eliminates many restrictions on the affiliation of insurance companies, banks and securities firms and addresses various consumer protection and privacy matters. This legislation and other future federal or state legislation, if enacted, could result in increased regulation of our business. 57 Employees As of January 31, 2000, we had 226 full-time employees, including 39 licensed insurance agents. None of our employees is subject to a collective bargaining agreement, and we believe that our relations with our employees are good. We believe that our future success will depend in part on our continued ability to attract, integrate, retain and motivate highly qualified sales, technical, professional services and managerial personnel, and upon the continued service of our current personnel. We also use independent contractors to supplement our work force. None of our personnel is bound by an employment agreement that prevents the person from terminating his or her relationship with us at any time for any reason. Properties Our executive offices are located in San Francisco, California, in an office building in which, as of January 31, 2000, we lease an aggregate of approximately 64,600 square feet. Our lease for approximately 5,300 square feet expires on April 5, 2000; our lease for approximately 27,600 square feet expires on November 30, 2002; and our lease for approximately 31,700 square feet expires on March 31, 2005. In addition, we lease approximately 3,800 square feet of storage space in a nearby building, under a lease that expires on December 31, 2002. Legal Proceedings From time to time, we are subject to legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of third-party trademarks and other intellectual property rights by us and our licensees and claims related to insurance sales and claims. These claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources. We are not aware of any legal proceedings or claims that we believe would materially harm our business or cause our revenues or stock price to fall. 58 MANAGEMENT Directors and Executive Officers Each of the current executive officers of Zebu named below began active service on December 23, 1999.
Name Age Position - ---- -------- -------- Charan J. Singh...................... 51 Chairman of the Board of Directors, Chief Executive Officer Steven H. Gerber..................... 53 President, Director David L. Paulsen..................... 55 Chief Operating Officer--Insurance Products and Services, Chief Financial Officer, Director Michael L. Feroah.................... 53 Chief Operating Officer--Software Products and Services, Chief Technical Officer, Director Hernan E. Reyes...................... 65 Vice President, Operations--Software Products and Services Steven J. Tynan (1), (2)............. 46 Director Randall J. Wolf (3).................. Director
- ------------------------ (1) Compensation committee member. (2) Audit committee member. (3) Director nominee. CHARAN J. SINGH founded SelectQuote in 1984 and has been Chief Executive Officer, President and director since its inception. Before founding SelectQuote, Mr. Singh worked at Charles Schwab & Company. Mr. Singh also served as the Chairman of the Board of Directors of SelectTech until the recent acquisition. STEVEN H. GERBER co-founded SelectTech and served as its President and Chief Executive Officer and as a director until its acquisition by SelectQuote. Mr. Gerber has acted as SelectQuote's Chief Information Officer since 1993. Mr. Gerber is President of Innovative Information Systems, a technology consulting company and has 25 years of experience in the information systems and strategic technology consulting industry. DAVID L. PAULSEN has been SelectQuote's Executive Vice President and Chief Operating Officer and has served as Chief Financial Officer for both SelectQuote and SelectTech and a director of SelectTech. Since 1986, he has managed all phases of SelectQuote's financial, administrative, advertising, human resources, shareholder relations and other non-sales operations. Mr. Paulsen was employed from 1973 to 1984 by the accounting firm of Deloitte & Touche in audit and human resources. MICHAEL L. FEROAH co-founded SelectTech and has served as its Executive Vice President, Chief Technology Officer and director until its acquisition by SelectQuote. From 1992 until his co-founding of SelectTech, Mr. Feroah served as a software development and technology consultant through his wholly owned corporation, Zebu International. HERNAN E. REYES joined SelectTech in 1996 as Vice President of Operations. From 1994 to 1996, he worked as a consultant and information technology director at Cirrus Logic. Mr. Reyes has over 38 years of experience in the information technology business, including more than 20 years at IBM. 59 STEVEN J. TYNAN was elected a director of Zebu on January 16, 2000. Mr. Tynan has been a managing member of High Ridge Capital LLC, an investment advisory firm that manages several private equity funds that invest in insurance companies and related financial services businesses, since 1999. RANDALL J. WOLF will become a director of Zebu on completion of the offering. Mr. Wolf has been a principal of Marsh & McLennan Capital, Inc., an investment advisory firm that manages private equity funds that invest in financial services companies and related financial services businesses. From 1993 to 1998, Mr. Wolf served in various positions in the Investment Banking Division of Goldman, Sachs & Co., most recently as Vice President in the High Technology Group. Number, Term, Election and Compensation of Directors Our bylaws provide that the board of directors will consist of between three and seven directors, and currently fixes the number of directors at six until changed by approval of our stockholders or a majority of the directors. Each director is elected to serve until the next annual meeting of stockholders and until the election and qualification of his or her successor or his or her earlier resignation or removal. Our directors do not receive cash compensation for their services as directors or members of committees of the board of directors. Board Committees We have established an audit committee and a compensation committee effective as of the closing of this offering. The audit committee will consist of Messrs. Tynan and Wolf. The functions of the audit committee are to make recommendations to the board of directors regarding the selection of independent auditors, review the results and scope of the audit and other services provided by our independent auditors and evaluate our internal controls. The compensation committee will consist of Messrs. Tynan, Wolf and a third director to be appointed to this committee prior to the closing of this offering. The functions of the compensation committee are to review and approve the compensation and benefits for our executive officers, administer our stock option and employee stock purchase plans and make recommendations to the board of directors regarding these matters. Compensation Committee Interlocks and Insider Participation As of the end of our last fiscal year, we did not have a compensation committee, and all decisions regarding compensation of our executive officers were made by the board of directors. No executive officer currently serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or our compensation committee, which was established during fiscal year 2000. Executive Compensation and Management Changes The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to the Chief Executive Officer and the next most highly compensated executive officer who earned at least $100,000 for services rendered to our predecessor, SelectQuote, during the fiscal year ended June 30, 1999. 60 Summary Compensation Table
Annual Compensation ------------------------ Name and Principal Position Salary Bonus - --------------------------- --------- --------- Charan J. Singh Chief Executive Officer................................... $180,000 -- David L. Paulsen Chief Financial Officer................................... 202,500 --
Compensation of Officers and Management Bonus Plan In January 1998, we entered into an at-will employment agreement with Hernan E. Reyes. In February 2000, we entered into at-will employment agreements with Charan J. Singh, Steven H. Gerber, David L. Paulsen and Michael L. Feroah. These agreements are automatically renewed for successive one-year periods unless terminated by either party upon ninety days written notice. The agreements provide for the minimum salaries and initial bonuses described below and set out participation in benefit plans available to our executives. Upon termination of employment without cause or after a change of control, except for a termination for cause, the executives will receive a severance benefit equal to three years salary, bonus earned for the position of the portion of the year before termination, employee benefits for two years and full vesting of all options. No severance is payable after termination for cause or upon death or disability, but employee benefits are payable and all options fully vest upon a termination upon death or disability. The minimum salaries and bonuses for each of these employees for the fiscal year ending June 30, 2000, the aggregate number of shares of common stock subject to options held by each of these employees and the weighted average exercise prices of these options are listed below:
Shares of Common Weighted Average Stock Subject to Exercise Price Base Salary Guaranteed Bonus Options of Options ------------ ----------------- ---------------- ---------------- Mr. Singh..................... $275,000 $100,000 731,080 $3.3865 Mr. Gerber.................... 275,000 100,000 699,060 5.3693 Mr. Paulsen................... 250,000 75,000 1,547,262 3.3610 Mr. Feroah.................... 250,000 75,000 716,807 5.5019 Mr. Reyes..................... 225,000 25,000 800,000 4.0531 --------- ------- Total....................... 4,494,209 $4.1422 ========= =======
Limitation of Liability and Indemnification Matters Our restated certificate of incorporation and bylaws limit the liability of directors to the maximum extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except liability for any breach of their duty of loyalty to the corporation or its stockholders, acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, unlawful payments of dividends or unlawful stock repurchases or redemptions, or any transaction from which the director derived an improper personal benefit. This limitation of liability does not apply to liabilities arising under the federal securities laws and does not affect the availability of equitable remedies such as injunctive relief or rescission. Our bylaws provide that we will indemnify our directors and officers and may indemnify our employees and other agents to the fullest extent permitted by law. The bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising 61 out of his or her actions in that capacity, regardless of whether the bylaws would permit indemnification. We have obtained officer and director liability insurance with respect to liabilities arising out of specific matters, including matters arising under the Securities Act. We have entered into agreements with our directors and executive officers that, among other things, will indemnify them for specific expenses, including attorneys' fees, judgments, fines and approved settlement amounts incurred by them in any action or proceeding, including any action by us or on our behalf, arising out of the person's services as a director or officer of us or any of our subsidiaries or any other company or enterprise to which the person provides services at our request. We are obligated to advance expenses incurred by the indemnified person prior to the conclusion of any such action or proceeding, in the absence of a determination, as provided in the agreement, that indemnification would not be permitted under applicable law. We believe that these provisions and agreements are necessary, to attract and retain qualified directors and officers. These agreements also provide officers with the same limitation of liability for monetary damages that Delaware corporate law and our restated certificate of incorporation provide to directors. Benefit Plans 1999 STOCK OPTION PLAN Our 1999 Stock Option Plan, or the 1999 Plan, which was approved by our board of directors and stockholder in August 1999, provides for the issuance of incentive stock options under the Internal Revenue Code of 1986 and nonstatutory stock options to purchase common stock to employees, non-employee directors or consultants. A total of 10,000,000 shares of common stock has been authorized for issuance under the 1999 Plan. The fair market value of the common stock for purposes of option grants is the closing price of the common stock on the national securities exchange or market on which it is traded or quoted, or if it is not traded or quoted on a national securities exchange or market, is determined by the board of directors. In connection with the transactions in which SelectTech was acquired by SelectQuote and SelectQuote became Zebu's wholly owned subsidiary, we assumed all options outstanding under the SelectTech 1997 Stock Option Plan and the SelectQuote 1999 Stock Option Plan. The exercise price of each assumed option and the number of shares subject to the Option Plan were adjusted in accordance with the terms of the amended and restated agreement and plan of reorganization. However, the vesting schedules of all assumed options remained unchanged. Options currently outstanding generally vest one-third at the end of the first year and then monthly on a pro rata basis over the next two years. At January 31, 2000, 6,510,635 shares of common stock were subject to outstanding options, and 3,489,365 shares of common stock were available for future option grants, under the 1999 Plan. 1999 EMPLOYEE STOCK PURCHASE PLAN Our 1999 Employee Stock Purchase Plan, or ESPP, was adopted by our board of directors and our stockholder in August 1999 and will take effect upon the closing of this offering. We have reserved 1,000,000 shares of common stock for issuance under the ESPP. The ESPP is intended to qualify for favorable tax treatment under Section 423 of the Internal Revenue Code. Generally, the ESPP will be implemented through a series of offering periods of six months' duration, with new offering periods commencing on the first trading day after January 1 and July 1 of each year. However, the first offering period will commence on the first trading day after the closing of the offering and will expire on December 31, 2000. Generally, shares may be purchased at the end of each offering period. The ESPP will be administered by the compensation committee of our board of directors. Each of our employees and each employee of any majority-owned subsidiary of ours who has been employed continuously by us or a majority-owned subsidiary for at least 5 days prior to commencement of the offering period and who is customarily employed for more than 20 hours per week and more than five months per year will be eligible to participate in the ESPP. The ESPP 62 permits an eligible employee to purchase common stock through payroll deductions, which may not exceed 10% of his or her compensation, at a price equal to 85% of the lesser of the fair market value of the common stock on the first business day of the offering period and the fair market value of the common stock on the last business day of the purchase period. Employees may terminate their participation in the ESPP at any time during the offering period, but they may not change their level of participation in the ESPP at any time during the offering period. Participation in the ESPP terminates automatically on the participant's termination of employment with us. 63 RELATED PARTY TRANSACTIONS Shared Operations and Ownership Prior to the acquisition of SelectTech by SelectQuote on December 23, 1999, SelectQuote shared with SelectTech significant common management interests. Charan J. Singh, SelectQuote's president and a director, also was chairman of the board of directors of SelectTech. David L. Paulsen, SelectQuote's executive vice president, was a director of SelectTech and served as its Chief Financial Officer and Secretary. Immediately prior to SelectQuote's acquisition of SelectTech, the directors and executive officers of SelectQuote collectively owned 18% of SelectTech's outstanding equity securities, taking into account all rights to acquire capital stock. Furthermore, SelectQuote shareholders held approximately 64% of the issued and outstanding capital stock of SelectTech prior to the acquisition. In addition, SelectQuote directly held 150,000 shares of SelectTech Series A preferred stock, 67 shares of SelectTech common stock and a promissory note convertible into approximately 120,000 shares of SelectTech common stock. In connection with the acquisition of SelectTech by SelectQuote, and the related merger of SelectQuote with Zebu's wholly owned subsidiary, we issued 5,516,125 shares of our common stock in exchange for all of the outstanding shares of capital stock of SelectTech, options under our 1999 Stock Option Plan to purchase 3,388,822 shares of our common stock in substitution for outstanding options to purchase SelectTech common stock, and $2.5 million principal of 12% senior secured convertible debentures in exchange for like debentures issued by SelectTech. We also issued 5,031,805 shares of our common stock and 2,028,850 shares of our convertible preferred stock in exchange for outstanding shares of common stock and preferred stock of SelectQuote, and issued options under our 1999 Stock Option Plan to purchase 3,121,813 shares of our common stock in substitution for outstanding options to purchase common stock of SelectQuote. From SelectTech's formation in September 1995 until December 23, 1999, SelectQuote provided SelectTech with operating support, including management and administrative services (such as the services of Messrs. Singh and Paulsen), telephone and office facilities and other miscellaneous items. SelectQuote leased $38,000 of computer equipment to SelectTech under a 36-month capital lease that expired in March 1999 at an implicit interest rate of 9.0%. SelectQuote also charged SelectTech for services on a cost reimbursement basis. Total fees for the services provided by SelectQuote were $338,393 in fiscal 1997, $527,009 in fiscal 1998, $708,132 in fiscal 1999, and $903,526 for the six months ended December 31, 1999. These fees included sublease rental income of $24,214 in fiscal 1997, $85,302 in fiscal 1998, $134,892 in fiscal 1999, and $171,348 in the six months ended December 31, 1999. SelectQuote also provided a substantial portion of SelectTech's working capital through equity investments, loans and guaranties. See "Management's Discussion and Analysis of Financial Condition--Liquidity and Capital Resources." All outstanding amounts due to SelectQuote by SelectTech were forgiven and all equity interests of SelectTech owned by SelectQuote were canceled in the merger in which SelectQuote acquired SelectTech. Research and Development Arrangements Steven H. Gerber and Michael L. Feroah, two of our executive officers and directors and former directors and executive officers of SelectTech, are the sole shareholders of IIG. Effective as of June 1997, SelectTech entered into a contracting relationship with IIG pursuant to which IIG performed substantially all of the research and development and consulting work on behalf of SelectTech until December 23, 1999. IIG utilizes a network of other companies as subcontractors for the work. Messrs. Gerber and Feroah have an equity interest in several of these subcontracting companies as well. Under these contracts, IIG billed SelectTech $285,100, $544,700 and $1,010,300 64 for fiscal years 1997, 1998 and 1999, respectively. We have assumed SelectTech's contracts with IIG and outstanding payables of $779,044 at December 31, 1999 on the acquisition of SelectTech. See "Business--Technology and Development." Under written agreements with IIG, the various subcontracting companies and their employees and consultants who performed work for SelectTech assigned all of the work product and associated intellectual property to SelectTech. We acquired these rights in the acquisition. However, we cannot assure you that we will be able to enforce these assignments and our rights to the intellectual property. In addition, some of the subcontracting companies, employees and consultants are not U.S. residents and performed the work abroad. Enforcing our rights against non-U.S. persons could be expensive and difficult. For more information, please refer to "Risk Factors--We utilize substantial offshore contract software programming and development services that we do not control." Employment and Consulting Agreements During fiscal years 1997, 1998 and 1999, IIG provided software programming and technical services to SelectQuote to develop new software and modify existing systems and databases. The amounts paid to IIG were $265,000, $327,000 and $116,000 in fiscal 1997, 1998 and 1999, respectively. During the same three fiscal years, Mr. Gerber provided consulting services to SelectQuote as its chief information officer through his personal consulting company and was paid $130,000 in each of those years. Equity Investments On December 27, 1999, we sold 50,000 shares of Series D mandatorily redeemable convertible preferred stock to High Ridge Capital Partners II, L.P. for $5.0 million. In connection with this private placement, Steven J. Tynan, a member of High Ridge, became a member of our board of directors. In February 2000, we agreed to sell 2,041,845 shares of Series E mandatorily redeemable convertible preferred stock to a group of accredited investors, including High Ridge Capital Partners II, L.P. and several entities controlled by Marsh & McLennan GP I, Inc. and Marsh & McLennan GP II, Inc., for an aggregate purchase price of approximately $10.5 million. In connection with this private placement, Randall J. Wolf, a member of Marsh & McLennan Capital, Inc., has agreed to become a member of our board of directors following the completion of this offering. We believe that the foregoing transactions were in our best interests. These transactions were negotiated on an arm's length basis and entered into on terms no less favorable to us than could have been obtained from unaffiliated third parties and in connection with our bona fide business purposes. As a matter of policy, all future transactions with related parties will be approved by a majority of the independent and disinterested members of our Board of Directors. 65 PRINCIPAL STOCKHOLDERS The following table sets forth information regarding the beneficial ownership of our common stock as of January 31, 2000, by: (1) each person known to beneficially own more than 5% of our common stock; (2) each of our directors; (3) each executive officer named in the summary compensation table; and (4) all executive officers and directors as a group. All persons listed have sole voting and investment power with respect to their shares unless otherwise indicated. Unless indicated otherwise, the address of each person listed in the table is c/o Zebu, 595 Market Street, 6th floor, San Francisco, California 94105. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to the securities. Shares of common stock issuable pursuant to options, to the extent those options are currently exercisable or convertible within 60 days of January 31, 2000, are treated as outstanding for computing the percentage of the person holding those securities, but are not treated as outstanding for computing the percentage of any other person. Unless otherwise noted, each person or group identified possesses sole voting and investment power with respect to shares, subject to applicable community property laws. This table does not give effect to the pending sale of 2,032,136 shares of our Series E preferred stock to High Ridge Capital Partners II, L.P. and several entities controlled by Marsh & McLennan GP I, Inc. and Marsh & McLennan GP II, Inc., which will close in March 2000.
Common Stock ----------------------------------------------------- Percent Ownership Number of Shares -------------------------------- Name Beneficially Owned Before Offering After Offering - ---- ------------------ --------------- -------------- Five-Percent Stockholders Edward and Rose Gamrin(1)............................ 1,817,271 13.3% % High Ridge Capital Partners II, L.P.................. 1,111,111 8.2 20 Liberty Street Chester, Connecticut 06412 Burton Petersen...................................... 704,256 5.2 340 Sundance Circle Palm Desert, California 92211 Directors and Executive Officers Charan J. Singh(2)................................... 2,149,997 15.6 Steven H. Gerber(3).................................. 1,302,867 9.5 Michael L. Feroah(4)................................. 1,291,699 9.5 Steven J. Tynan(5)................................... 1,111,111 8.2 c/o High Ridge Capital Partners II, L.P. 20 Liberty Street Chester, Connecticut 06412 David L. Paulsen(6).................................. 931,352 6.6 All directors and executive officers as a group (seven persons)(7)................................. 7,014,669 47.8
- -------------------------- (1) Includes 4,000 shares held by the 1999 Irrevocable Trust for the Benefit of Thomas Elias Gamrin, for which Edward and Rose Gamrin disclaim beneficial ownership. (2) Includes 97,826 shares held by Sylvia Hajek Singh and options to purchase 281,076 shares of our common stock which are exercisable within 60 days of January 31, 2000. (3) Includes 3,207 shares held by Brian Scott Gerber and 9,621 shares held by Gerber minor children, for which Steven H. Gerber disclaims beneficial ownership. Includes 8,505 shares of common stock held by Innovative Information Group, Inc., of which Mr. Gerber is a director and shareholder. Mr. Gerber disclaims beneficial ownership of the shares of common stock held by IIG, except to the extent of his pecuniary interest therein. Also includes options to purchase 20,452 shares of our common stock which are exercisable within 60 days of January 31, 2000. (4) Includes 8,505 shares of common stock held by Innovative Information Group, Inc. of which Mr. Feroah is a director and shareholder. Mr. Feroah disclaims beneficial ownership of the shares of common stock held by IIG except to the extent of his pecuniary interest therein. (5) All shares are owned by High Ridge Capital Partners II, L.P. Mr. Tynan is president of the corporation that controls the general partner of High Ridge Capital Partners II, L.P., and could be deemed to be the beneficial owner of all of its shares. Mr. Tynan disclaims beneficial ownership of the shares of common stock that it holds except to the extent of his pecuniary interest therein. (6) Includes options to purchase 478,615 shares of our common stock which are exercisable within 60 days of January 31, 2000. (7) Includes options to purchase 1,016,290 shares of our common stock which are exercisable within 60 days of January 31, 2000. 66 DESCRIPTION OF CAPITAL STOCK The following description of our capital stock and provisions of our restated certificate of incorporation and bylaws is a summary only and is not a complete description. The descriptions of the common stock and preferred stock reflect changes to our capital structure that will occur on or immediately prior to the closing of the offering under the terms of our restated certificate of incorporation, including the automatic conversion of all outstanding preferred stock into common stock, assuming the conversion of all convertible debentures into common stock, and including the deletion of references to Series A, Series B, Series C, Series D and Series E preferred stock from our certificate of incorporation. Upon completion of the offering, our authorized capital stock will consist of 100,000,000 shares of common stock, par value $0.01 per share, and 10,000,000 shares of preferred stock, par value $0.01 per share. Common Stock As of January 31, 2000, 10,497,974 shares of our common stock were outstanding and held of record by 136 stockholders. Each holder of our common stock is entitled to-- - one vote per share; - dividends as may be declared by our board of directors out of funds legally available for that purpose, subject to the rights of any preferred stock that may be outstanding; and - his, her or its pro rata share in any distribution of our assets after payment or providing for the payment of liabilities and the liquidation preference of any outstanding preferred stock in the event of liquidation. Holders of common stock have no cumulative voting rights, preemptive rights or redemption rights to purchase or subscribe for any shares of our common stock or other securities. All the outstanding shares of common stock are fully paid and nonassessable. As of January 31, 2000, options to purchase 6,510,635 shares of common stock were outstanding, at a weighted average exercise price of $3.92 per share. Preferred Stock Our board of directors has the authority, subject to any limitations prescribed by Delaware law, to issue shares of preferred stock in one or more series and to fix and determine the relative rights and preferences of the shares constituting any series to be established without any further vote or action by the stockholders. Any shares of preferred stock so issued may have priority over the common stock with respect to dividend, liquidation and other rights. On the closing of the offering, no shares of preferred stock will be outstanding. We have no current intention to issue any shares of preferred stock. The board of directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of common stock. Although the issuance of preferred stock could provide flexibility in connection with possible acquisitions and other corporate purposes, it could also, under some circumstances, have the effect of delaying, deferring or preventing a change of control. Antitakeover Effects of Provisions of our Restated Certificate of Incorporation and Bylaws Special meetings of the stockholders may be called only by a majority of the entire board of directors, the Chairman of the board of directors, the Chief Executive Officer or any individual holder of at least 25% of our outstanding common stock. The bylaws provide that stockholders seeking to 67 bring business before, or to nominate directors at, an annual meeting of stockholders must provide timely notice in writing. To be timely, a stockholder's notice must be received by our Secretary not less than 120 calendar days nor more than 150 calendar days before the date of our proxy statement sent to stockholders for the prior year's annual meeting. The bylaws also contain specific requirements for the form of a stockholder's notice. These provisions may preclude or deter some stockholders from bringing matters before the annual meeting or from making nominations of directors, and may have the effect of delaying, deferring or preventing a change in control of our company. Waiver of Delaware Antitakeover Statute Section 203 of the DGCL generally prohibits a publicly held Delaware corporation from engaging in an acquisition, asset sale or other transaction resulting in a financial benefit to any person who, together with affiliates and association, owns, or within three years, did own, 15% or more of a corporation's voting stock. The prohibition continues for a period of three years after the date of the transaction in which the person became an owner of 15% or more of the corporation's voting stock unless the business combination is approved in a prescribed manner. The statute could prohibit or delay, defer or prevent a change in control of our company. We have waived the provisions of Section 203 in our certificate of incorporation. Registration Rights The registration rights agreement we have entered into with several of our security holders, including High Ridge Capital Partners II, L.P. and, upon the closing of the sale of Series E preferred stock, entities controlled by Marsh & McLennan GP I, Inc. and Marsh & McLennan GP II, Inc., provides the security holders with conditional rights to cause us to register the security holders' shares of our common stock under the Securities Act. Under the terms of this agreement, the security holders acting as a group, or High Ridge or the Marsh & McLennan parties acting alone, may require us to use our diligent best efforts to file a registration statement under the Securities Act, at our expense, with respect to shares of common stock held by such security holders, High Ridge or the Marsh & McLennan parties, as applicable. We are not required to effect more than two demand registrations requested by the security holders or one demand registration requested by High Ridge or the Marsh & McLennan parties. Also, if we propose to register any of our securities under the Securities Act in a secondary registration, the security holders, including High Ridge and the Marsh & McLennan parties, may require us to include their shares of our common stock in the registration, subject to any limitation set by the underwriters on the number of shares included in the registration. The agreement also provides that, following this offering, the security holders may require us to use our best efforts to file registration statements on Form S-3, at their expense, provided that the aggregate price to the public for each registration is not less than $500,000. Such stockholders may assign their registration rights to any person to whom it transfers at least 32,000 shares of our common stock. The foregoing registration rights will terminate as to a specific stockholder if, after the offering, the stockholder will own less than 2% of the shares of our capital stock, on a fully diluted basis, and can sell all of its shares under Rule 144 of the Securities Act of 1933, as amended, within a period 90 days. It appears that few, if any, of the stockholders party to the agreement will retain registration rights after the offering. Pursuant to lockup agreements delivered to us by each of the security holders, these security holders may make no demand for registration of the shares subject to the registration rights agreement for 180 days following the closing of this offering. 68 SHARES ELIGIBLE FOR FUTURE SALE If our stockholders sell substantial amounts of our stock in the public market following the offering, then the market price of our stock could fall. After the offering, shares of our common stock will be outstanding, assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options or warrants. Of those shares, the shares sold in the offering will be freely tradable, except for any shares purchased by our "affiliates," as defined in Rule 144 under the Securities Act. The remaining shares are "restricted securities," as that term is defined in Rule 144, and may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 or Rule 701, which rules are summarized below. All of our officers and directors and almost all of our stockholders owning more than 1% of outstanding securities prior to the offering have signed lockup agreements pursuant to which they have agreed not to sell any shares of common stock, or any securities convertible into or exercisable or exchangeable for common stock, for 180 days after the offering without the prior written consent of Deutsche Banc Securities Inc. Deutsche Banc Securities Inc. may, in its sole discretion, release all or any portion of the shares subject to the lockup agreements. The following table depicts securities eligible for future sale:
Total shares outstanding.................................... Total restricted securities................................. Shares that are freely tradable after the date of this prospectus under Rule 144(k), subject to the 180-day lockup agreement.......................................... Shares that are freely tradable 90 days after the date of this prospectus under Rule 144 or Rule 701, subject to the 180-day lockup agreement.................................. Shares that are freely tradable 180 days after the date of this prospectus under Rule 144 (subject, in some cases, to volume limitations), under Rule 144(k) or pursuant to a registration statement to register for resale shares of common stock issued on exercise of stock options..........
Following the offering, we intend to file a registration statement under the Securities Act covering shares of common stock reserved for issuance under our 1999 stock option plan and our employee stock purchase plan. Upon expiration of the lockup agreements, at least shares of common stock will be subject to vested options, based on options outstanding as of January 31, 2000. The registration statement is expected to be filed and become effective prior to expiration of the lockup agreements; accordingly, shares registered under the registration statement will, subject to Rule 144 volume limitations applicable to affiliates, be available for sale in the open market immediately after the lockup agreements expire. In general, Rule 144 provides that any person who has beneficially owned shares for at least one year, including an affiliate, is generally entitled to sell, within any three-month period, a number of shares that does not exceed the greater of 1% of the shares of common stock then outstanding, which will be approximately shares immediately after the offering, or the reported average weekly trading volume of the common stock during the four calendar weeks immediately preceding the date on which notice of the sale is sent to the Commission. Sales under Rule 144 are subject to manner of sale restrictions, notice requirements and availability of current public information concerning us. A person who is not our affiliate and who has not been our affiliate within three months prior to the sale generally may sell shares without regard to the limitations of Rule 144, provided that the person has held the shares for at least one year. Under Rule 144(k), a person who is not deemed to have been our affiliate at any time during the 90 days preceding a 69 sale and who has beneficially owned the shares proposed to be sold for at least two years, is entitled to sell the shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Any of our employees, directors, officers or consultants holding shares purchased pursuant to a written compensatory plan or contract, including options, entered into prior to the offering is entitled to rely on the resale provisions of Rule 701, which permit nonaffiliates to sell shares without having to comply with the public information, holding period, volume limitation or notice requirements of Rule 144 and permit affiliates to sell their Rule 701 shares without having to comply with the holding period restrictions of Rule 144, in each case beginning 90 days after the date of this prospectus. REGISTRATION RIGHTS After this offering, the holders of shares of our common stock, or their transferees, will be entitled to certain rights with respect to the registration of those shares under the Securities Act. See "Description of Capital Stock--Registration Rights." After any registration of these shares, these shares will become freely tradable without restriction under the Securities Act. These sales could have a material adverse effect on the trading price of our common stock. 70 UNDERWRITING Under the underwriting agreement dated the date of this prospectus, the underwriters named below, through their representatives Deutsche Bank Securities Inc., U.S. Bancorp Piper Jaffray Inc. and Cochran, Caronia Securities LLC have severally agreed to purchase from us the following respective numbers of shares of common stock at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus.
Number Underwriter of Shares - ----------- --------------- Deutsche Bank Securities Inc............................... U.S. Bancorp Piper Jaffray Inc............................. Cochran, Caronia Securities LLC............................ ------- Total.................................................. =======
The underwriting agreement provides that the obligations of the several underwriters to purchase the shares of common stock offered hereby are subject to the terms and conditions set forth in the underwriting agreement. The underwriters are obligated to purchase all of the shares of common stock offered hereby, other than those covered by the over-allotment option described below, if any of these shares are purchased. We have been advised that the underwriters propose to offer the shares of common stock to the public at the initial public offering price set forth on the cover page of this prospectus and to dealers at a price that represents a concession not in excess of $ per share under the public offering price. The underwriters may allow, and these dealers may re-allow, a concession not in excess of $ per share to other dealers. After the initial public offering, the offering price and other selling terms may be changed by the representatives of the underwriters. We have granted to the underwriters an option, exercisable not later than 30 days after the date of this prospectus, to purchase up to additional shares of common stock at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus. The underwriters may exercise this option only to cover over-allotments made in connection with the sale of the common stock that we are offering in this prospectus. To the extent that the underwriters exercise the option, each of the underwriters will become obligated, subject to conditions, to purchase approximately the same percentage of additional shares of common stock as the number of shares of common stock to be purchased by it in the above table bears to. We will be obligated, under the option, to sell these shares to the underwriters to the extent the option is exercised. If any additional shares of common stock are purchased, the underwriters will offer additional shares on the same terms as those on which the shares are being offered. We have agreed to indemnify the underwriters with respect to certain liabilities, including liabilities under the Securities Act. Each of our officers and directors and certain of our stockholders has agreed not to offer, sell, contract to sell or otherwise dispose of, or enter into any transaction that is designed to, or could be expected to, result in the disposition of any portion of, any common stock for a period of 180 days after the date of this prospectus without the prior written consent of Deutsche Bank Securities Inc. This consent may be given at any time without public notice. We have entered into a similar agreement. When determining whether to consent to any release of shares from these lockup agreements, Deutsche Bank Securities Inc. will consider the reason for requesting the release, the number of shares for which the release is being requested and the market conditions prevailing at the time. 71 The representatives of the underwriters have advised us that the underwriters do not intend to confirm sales to any account over which they exercise discretionary authority. In order to facilitate the offering of the common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the market price of the common stock. Specifically, the underwriters may over-allot shares of the common stock in connection with this offering, thus creating a short position in the common stock for their own account. Additionally, to cover these over-allotments or to stabilize the market price of the common stock, the underwriters may bid for, and purchase, shares of the common stock in the open market. Finally, the representatives, on behalf of the underwriters, also may reclaim selling concessions allowed to an underwriter or dealer if the underwriting syndicate repurchases shares distributed by that underwriter or dealer. Any of these activities may maintain the market price of the common stock at a level above that which might otherwise prevail in the open market. The underwriters are not required to engage in these activities and, if commenced, may end any of these activities at any time. Cochran, Caronia Securities LLC, one of the representatives of the underwriters, was organized and registered as a broker-dealer in July 1998. Since July 1998, Cochran Caronia has acted as a syndicate member in several public offerings of equity securities; however, it has not acted as a lead or co-manager prior to this offering. Cochran Caronia does not have any material relationship with us or any of our officers, directors or other controlling persons, except with respect to (1) investment banking services it rendered to SelectTech in connection with the acquisition and a subsequent sale of our preferred stock, (2) investment banking services rendered to us in connection with the sale of Series D preferred stock to High Ridge Capital Partners II, L.P. and Series E preferred stock sold to High Ridge Capital Partners II, L.P. and certain limited partnerships of which Marsh & McLennan GP I, Inc. and Marsh & McLennan GP II, Inc. are general partner, and (3) its contractual relationship with us under the underwriting agreement entered into in connection with this offering. At our request, the underwriters have reserved for sale, at the initial public offering price, up to shares for our employees, family members of employees and other third parties. The number of shares of common stock available for sale to the general public will be reduced to the extent these reserved shares are purchased. Any reserved shares that are not purchased will be offered by the underwriters to the general public on the same basis as the other shares offered by this prospectus. We estimate that the total expenses of the offering, excluding underwriting discounts and commissions, will be approximately $ . Pricing of this Offering Prior to this offering, there has been no public market for our common stock. Consequently, the initial public offering price for our common stock will be determined by negotiation among us and the representatives of the underwriters. Among the factors to be considered in determining the public offering price will be: - prevailing market conditions; - our results of operations in recent periods; - the present stage of our development; - the market capitalizations and stages of development of other companies that we and the representatives of the underwriters believe to be comparable to us; and - estimates of our business potential. The estimated initial public offering price range set forth on the cover of this preliminary prospectus is subject to change as a result of market conditions and other factors. 72 LEGAL MATTERS The validity of the common stock being offered hereby will be passed upon for Zebu by McCutchen, Doyle, Brown & Enersen, LLP, Palo Alto, California. McCutchen, Doyle, Brown & Enersen, LLP has irrevocably committed to purchase 9,708 shares of our Series E preferred stock in March 2000. Pillsbury Madison & Sutro LLP, San Francisco, California, is acting as counsel for the underwriters in connection with certain legal matters relating to the shares of common stock offered by this prospectus. Chapin Shea McNitt & Carter advises us with respect to insurance licensing and regulatory matters and has reviewed such statements in this prospectus. EXPERTS The consolidated financial statements of Zebu included in this prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The financial statements of SelectTech included in this prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein, and are included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. WHERE YOU CAN FIND ADDITIONAL INFORMATION We have filed with the SEC a registration statement on Form S-1 with respect to the common stock in this offering. This prospectus, which constitutes a part of the registration statement, does not contain all the information set forth in the registration statement. For further information about us and the shares of common stock to be sold in the offering, please refer to the registration statement and the exhibits and schedules thereto. The registration statement and exhibits may be inspected, without charge, and copies may be obtained at prescribed rates, at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The registration statement and other information filed with the SEC is also available at the web site maintained by the SEC at http://www.sec.gov. 73 INDEX TO FINANCIAL STATEMENTS
Zebu Consolidated Financial Statements (formerly SelectQuote Insurance Services) Independent Auditors' Report................................ F-2 Consolidated Balance Sheets................................. F-3 Consolidated Statements of Operations....................... F-4 Consolidated Statements of Stockholders' Equity............. F-5 Consolidated Statements of Cash Flows....................... F-6 Notes to Consolidated Financial Statements.................. F-7 SelectTech Financial Statements Independent Auditors' Report................................ F-25 Balance Sheets.............................................. F-26 Statements of Operations.................................... F-27 Statements of Shareholders' Equity (Deficit)................ F-28 Statements of Cash Flows.................................... F-29 Notes to Financial Statements............................... F-30
F-1 INDEPENDENT AUDITORS' REPORT To the Stockholders and Board of Directors of Zebu: We have audited the accompanying consolidated balance sheets of Zebu and its subsidiary, SelectQuote Insurance Services, as of June 30, 1998 and 1999, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Zebu and its subsidiary as of June 30, 1998 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1999 in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP San Francisco, California February 29, 2000 F-2 ZEBU CONSOLIDATED BALANCE SHEETS
Pro Forma Stockholders' June 30, Equity as of -------------------------- December 31, December 31, 1998 1999 1999 1999 ----------- ------------ ------------- ------------- (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $1,266,929 $ 789,920 $ 2,845,477 Investments available for sale at fair value.............. 300,000 900,000 -- Commissions and accounts receivable--net of allowance of $481,585, $542,412 and $635,214, respectively............ 4,231,821 5,325,855 6,016,001 Notes receivable from SelectTech.......................... 200,000 450,000 -- Other receivables from SelectTech......................... 370,174 808,109 -- Other current assets...................................... 314,050 555,181 1,486,443 ---------- ----------- ----------- Total current assets.................................... 6,682,974 8,829,065 10,347,921 ---------- ----------- ----------- LONG-TERM ASSETS: Property and equipment, net............................... 1,321,760 1,128,872 1,772,995 Investment in SelectTech.................................. 250,000 250,000 -- Goodwill and other intangible assets...................... -- -- 63,009,377 ---------- ----------- ----------- Total long-term assets.................................. 1,571,760 1,378,872 64,782,372 ---------- ----------- ----------- TOTAL ASSETS................................................ $8,254,734 $10,207,937 $75,130,293 ========== =========== =========== LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses..................... $1,344,022 $ 912,470 $ 1,793,527 Accrued compensation and benefits......................... 388,070 506,650 690,391 Deferred tax liability.................................... 953,747 1,301,804 497,097 Current portion of deferred rent.......................... 40,050 -- -- Current portion of capital lease obligations.............. 97,526 127,080 125,542 Payables to related party................................. -- -- 779,044 Current portion of deferred liability..................... -- -- 287,189 Senior secured convertible debentures..................... -- -- 1,900,000 ---------- ----------- ----------- Total current liabilities............................... 2,823,415 2,848,004 6,072,790 ---------- ----------- ----------- LONG-TERM LIABILITIES: Deferred compensation..................................... 82,195 64,195 40,195 Deferred rent, less current............................... -- 8,404 17,988 Capital lease obligations, less current................... 157,146 145,826 90,589 Deferred liability, less current.......................... -- -- 695,868 ---------- ----------- ----------- Total long-term liabilities............................. 239,341 218,425 844,640 ---------- ----------- ----------- Total liabilities....................................... 3,062,756 3,066,429 6,917,430 ---------- ----------- ----------- MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK, Series D, $0.01 par value, 50,000 shares authorized, issued and outstanding (aggregate liquidation preference $5,000,000) (None pro forma).......................................... -- -- 4,743,776 -- ---------- ----------- ----------- ----------- COMMITMENTS AND CONTINGENCIES (Note 10) STOCKHOLDERS' EQUITY: Convertible Series A preferred stock, $.01 par value, 2,500,000 shares authorized, 1,137,235 shares issued and outstanding at June 30, 1998 and 1999 and December 31, 1999 (aggregate liquidation preference $170,585) (None pro forma)............................................... 11,372 11,372 11,372 -- Convertible Series B preferred stock, $.01 par value, 1,250,000 shares authorized, 821,690 shares issued and outstanding at June 30, 1998 and 1999 and December 31, 1999 (aggregate liquidation preference $501,231) (None pro forma)............................................... 8,217 8,217 8,217 -- Convertible Series C preferred stock, $.01 par value, 750,000 shares authorized, 69,925 shares issued and outstanding at June 30, 1998 and 1999 and December 31, 1999 (aggregate liquidation preference $85,309) (None pro forma)................................................... 699 699 699 -- Preferred stock, $.01 par value, 5,450,000 shares authorized, no shares issued and outstanding............. -- -- -- -- Common stock, $.01 par value: 50,000,000 shares authorized; issued and outstanding: 4,981,849 (June 30, 1998 and 1999), 10,497,974 (December 31, 1999--unaudited), 13,637,935 (pro forma)................. 49,818 49,818 104,980 136,379 Additional capital........................................ 1,766,585 1,766,585 64,649,491 69,382,156 Deferred stock compensation............................... -- -- (861,772) (861,772) Retained earnings (deficit)............................... 3,355,287 5,304,817 (443,900) (443,900) ---------- ----------- ----------- ----------- Total stockholders' equity.............................. 5,191,978 7,141,508 63,469,087 68,212,863 ---------- ----------- ----------- ----------- TOTAL LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY.................. $8,254,734 $10,207,937 $75,130,293 $75,130,293 ========== =========== =========== ===========
See notes to the consolidated financial statements. F-3 ZEBU CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended For the Years Ended June 30, December 31, ------------------------------------------ --------------------------- 1997 1998 1999 1998 1999 ------------ ------------ ------------ ------------ ------------ (Unaudited) REVENUE: Commission revenue, net.......................... $11,821,938 $15,306,106 $15,559,257 $7,151,136 $ 7,702,819 Production bonuses............................... 2,999,533 3,686,287 4,381,300 2,196,070 2,608,278 Transactional services........................... -- -- -- -- 16,969 Consulting services.............................. -- -- -- -- 10,786 License and maintenance.......................... -- -- -- -- 4,818 ----------- ----------- ----------- ---------- ----------- Total revenue.................................. 14,821,471 18,992,393 19,940,557 9,347,206 10,343,670 ----------- ----------- ----------- ---------- ----------- OPERATING EXPENSES: Marketing and sales.............................. 13,483,732 12,709,450 13,866,680 7,040,905 8,151,458 General and administrative....................... 2,054,056 2,176,728 2,615,852 1,297,110 2,163,299 General and administrative expense reimbursement from SelectTech................................. (338,393) (527,009) (708,132) (294,145) (903,526) Software development and consulting services..... -- -- -- -- 107,744 Amortization of goodwill and other intangible assets.......................................... -- -- -- -- 486,623 Stock-based compensation(*)...................... -- -- -- -- 1,324,951 ----------- ----------- ----------- ---------- ----------- Total operating expenses....................... 15,199,395 14,359,169 15,774,400 8,043,870 11,330,549 ----------- ----------- ----------- ---------- ----------- INCOME (LOSS) FROM OPERATIONS...................... (377,924) 4,633,224 4,166,157 1,303,336 (986,879) INTEREST INCOME, NET............................... 14,580 11,563 42,246 20,144 39,839 OTHER INCOME (EXPENSE), NET........................ (28,434) 36,469 4,962 4,441 1,230 ----------- ----------- ----------- ---------- ----------- INCOME (LOSS) BEFORE INCOME TAXES.................. (391,778) 4,681,256 4,213,365 1,327,921 (945,810) INCOME TAX EXPENSE (BENEFIT)....................... (162,410) 1,863,003 1,685,113 552,277 (375,862) ----------- ----------- ----------- ---------- ----------- NET INCOME (LOSS).................................. $ (229,368) $ 2,818,253 $ 2,528,252 $ 775,644 $ (569,948) =========== =========== =========== ========== =========== INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS (Note 14)........................................ $ (429,173) $ 2,657,028 $ 2,328,447 $ 652,998 $(5,654,014) =========== =========== =========== ========== =========== NET INCOME (LOSS) PER COMMON SHARE:................ Basic............................................ $ (0.09) $ 0.53 $ 0.47 $ 0.13 $ (1.08) Diluted.......................................... $ (0.09) $ 0.40 $ 0.36 $ 0.11 $ (1.08) WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:........ Basic............................................ 4,981,849 4,981,849 4,981,849 4,981,849 5,221,681 Diluted.......................................... 4,981,849 7,010,699 7,010,699 7,010,699 5,221,681 PRO FORMA DILUTED NET INCOME (LOSS) PER COMMON SHARE (UNAUDITED)................................ $ (1.74) $ (1.12) =========== =========== SHARES USED TO COMPUTE PRO FORMA DILUTED NET INCOME (LOSS) PER COMMON SHARE (UNAUDITED).............. 12,526,824 12,575,133 =========== ===========
(*) Stock-based compensation: Marketing and sales.............................. -- -- -- -- $ 680,483 General and administrative....................... -- -- -- -- 644,468 ----------- ----------- ----------- ---------- ----------- $ -- $ -- $ -- $ -- $ 1,324,951 =========== =========== =========== ========== ===========
See notes to consolidated financial statements. F-4 ZEBU CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock ------------------------- Preferred Stock --------------------- Deferred Retained Par Value Par Value Additional Stock Earnings Shares Amount Shares Amount Capital Compensation (Deficit) ----------- ----------- --------- --------- ------------ ------------- ----------- BALANCE, JULY 1, 1996.... 4,981,849 $ 49,818 2,028,892 $ 20,288 $ 1,766,585 $ -- $ 1,791,856 NET LOSS................. (229,368) CASH DIVIDENDS PAID...... (578,727) ---------- ---------- --------- -------- ----------- --------- ----------- BALANCE, JUNE 30, 1997... 4,981,849 49,818 2,028,892 20,288 1,766,585 -- 983,761 NET INCOME............... 2,818,253 CASH DIVIDENDS PAID...... (446,727) ---------- ---------- --------- -------- ----------- --------- ----------- BALANCE, JUNE 30, 1998... 4,981,849 49,818 2,028,892 20,288 1,766,585 -- 3,355,287 NET INCOME............... 2,528,252 CASH DIVIDENDS PAID...... (578,722) ---------- ---------- --------- -------- ----------- --------- ----------- BALANCE, JUNE 30, 1999... 4,981,849 49,818 2,028,892 20,288 1,766,585 -- 5,304,817 SHARES AND OPTIONS ISSUED IN CONNECTION WITH SELECTTECH ACQUISITION (Unaudited)............ 5,516,125 55,162 57,882,906 NET LOSS (Unaudited)..... (569,948) DEFERRED STOCK COMPENSATION (Unaudited)............ (861,772) VALUE OF PREFERRED STOCK BENEFICIAL CONVERSION FEATURE (unaudited).... 5,000,000 (5,000,000) CASH DIVIDENDS PAID (Unaudited)............ (178,769) ---------- ---------- --------- -------- ----------- --------- ----------- BALANCE, DECEMBER 31, 1999 (Unaudited)....... 10,497,974 $ 104,980 2,028,892 $ 20,288 $64,649,491 $(861,772) $ (443,900) ========== ========== ========= ======== =========== ========= =========== Total Stockholders' Equity ------------- BALANCE, JULY 1, 1996.... $ 3,628,547 NET LOSS................. (229,368) CASH DIVIDENDS PAID...... (578,727) ----------- BALANCE, JUNE 30, 1997... 2,820,452 NET INCOME............... 2,818,253 CASH DIVIDENDS PAID...... (446,727) ----------- BALANCE, JUNE 30, 1998... 5,191,978 NET INCOME............... 2,528,252 CASH DIVIDENDS PAID...... (578,722) ----------- BALANCE, JUNE 30, 1999... 7,141,508 SHARES AND OPTIONS ISSUED IN CONNECTION WITH SELECTTECH ACQUISITION (Unaudited)............ 57,938,068 NET LOSS (Unaudited)..... (569,948) DEFERRED STOCK COMPENSATION (Unaudited)............ (861,772) VALUE OF PREFERRED STOCK BENEFICIAL CONVERSION FEATURE (unaudited).... -- CASH DIVIDENDS PAID (Unaudited)............ (178,769) ----------- BALANCE, DECEMBER 31, 1999 (Unaudited)....... $63,469,087 ===========
See notes to consolidated financial statements. F-5 ZEBU CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended For the Years Ended June 30, December 31, --------------------------------------- -------------------------- 1997 1998 1999 1998 1999 ----------- ----------- ----------- ----------- ------------ (Unaudited) CASH FLOW FROM OPERATING ACTIVITIES: Net income (loss).................................... $ (229,368) $2,818,253 $2,528,252 $ 775,644 $ (569,948) Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Depreciation....................................... 501,535 559,101 590,553 292,602 308,410 Amortization of goodwill and intangibles........... -- -- -- -- 486,623 Non-cash stock compensation........................ -- -- -- -- 1,324,951 Loss from SelectTech stock......................... 87,132 -- -- -- -- Deferred tax liability............................. 169,961 (31,556) 348,057 59,888 (804,707) Changes in operating assets and liabilities: Commissions and accounts receivable (net).......... (1,529,073) (544,983) (1,094,034) (245,037) (151,526) Other receivables from SelectTech.................. (119,109) (251,065) (437,935) (249,539) (865,843) Other.............................................. (100,361) (5,790) (241,131) (69,053) (1,207,399) Accounts payable and accrued expenses.............. 509,986 (175,717) (431,552) (211,849) 367,723 Accrued compensation and benefits.................. 101,796 116,828 118,580 (17,648) 183,741 Deferred compensation.............................. (4,000) (12,000) (18,000) 6,000 (24,000) Deferred rent...................................... (13,353) (28,446) (31,646) (19,256) 9,584 ----------- ---------- ---------- ---------- ----------- Net cash flow provided by (used in) operating activities...................................... (624,854) 2,444,625 1,331,144 321,752 (942,391) ----------- ---------- ---------- ---------- ----------- CASH FLOW FROM INVESTING ACTIVITIES: Property and equipment purchased................... (653,866) (327,074) (271,811) (156,490) (610,186) Purchases of investments........................... (300,000) (800,000) (1,100,000) -- -- Sales of investments............................... 1,900,000 600,000 500,000 -- 900,000 Investment in SelectTech........................... -- (250,000) -- -- -- Cash acquired in SelectTech acquisition............ -- -- -- -- 56,266 Loans to SelectTech................................ (200,000) -- (250,000) -- (500,000) ----------- ---------- ---------- ---------- ----------- Net cash flow provided by (used in) investing activities...................................... 746,134 (777,074) (1,121,811) (156,490) (153,920) ----------- ---------- ---------- ---------- ----------- CASH FLOW FROM FINANCING ACTIVITIES: Proceeds (repayments) of note payable to insurance company............................................. 300,000 (300,000) -- -- -- Repayment of senior secured convertible debentures... -- -- -- -- (1,350,000) Capital lease obligations repaid..................... (93,496) (92,442) (107,620) (48,050) (63,139) Issuance of Series D preferred stock (net of issuance costs).............................................. -- -- -- -- 4,743,776 Dividends paid....................................... (578,727) (446,727) (578,722) (312,102) (178,769) ----------- ---------- ---------- ---------- ----------- Net cash flow provided by (used in) financing activities...................................... (372,223) (839,169) (686,342) (360,152) 3,151,868 ----------- ---------- ---------- ---------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . (250,943) 828,382 (477,009) (194,890) 2,055,557 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR........... 689,490 438,547 1,266,929 1,266,929 789,920 ----------- ---------- ---------- ---------- ----------- CASH AND CASH EQUIVALENTS, END OF YEAR................. $ 438,547 $1,266,929 $ 789,920 $1,072,039 $ 2,845,477 =========== ========== ========== ========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:...... Cash paid for interest expense....................... $ 62,472 $ 63,589 $ 33,806 $ 25,675 $ 6,974 Cash paid for income taxes........................... $ 499,182 $1,737,445 $1,387,850 $ 257,800 $ 800 NONCASH INVESTING AND FINANCING ACTIVITY: Purchase of equipment under capital leases........... $ 51,737 $ -- $ 125,854 $ -- $ -- Issuance of common stock in SelectTech acquisition... $50,000,000 Value of SelectTech options assumed.................. $ 5,744,000 Assumption of liabilities of SelectTech.............. $ 7,209,000
See notes to consolidated financial statements. F-6 ZEBU NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1997, 1998 AND 1999 AND SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999 (UNAUDITED) 1. DESCRIPTION OF BUSINESS DESCRIPTION OF BUSINESS--Zebu (the "Company"), was incorporated in Delaware on August 18, 1999 as a holding company for SelectQuote Insurance Services ("SelectQuote"). SelectQuote commenced its activities in July 1984 as an independent insurance agency. Select Quote sells term life insurance through the use of direct-response advertising, the internet, mail techniques and toll-free telephone lines. Customers are provided with a free quote comparing rates from a variety of insurance companies. SelectQuote relies on a combination of proprietary and commercially available software to perform its quote service and to assist in all phases of policy issuance and service. On August 17, 1999, SelectQuote signed a definitive agreement to acquire SelectTech, a company that develops software for the insurance industry and provides related computer consulting. On December 23, 1999, SelectQuote acquired and merged with SelectTech. Subsequent to the merger, the Company continues to operate under the tradenames "SelectQuote Insurance Services" and "SelectTech." The Company's board of directors approved an exchange of 3.286852 Company shares for each common and preferred share of SelectQuote. Accordingly, all historical financial information has been restated as if the exchange had been in effect for all periods presented. The accompanying consolidated financial statements reflect the combination of Zebu and SelectQuote at the historical cost of SelectQuote. The combination is shown retroactively as if it had occurred at the beginning of the earliest period presented. The consolidated financial statements reflect the operating results of SelectQuote for all periods presented and the operating results of SelectTech for the period from December 23, 1999 through December 31, 1999. 2. SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION--All material intercompany transactions and balances have been eliminated in consolidation. CASH AND CASH EQUIVALENTS--The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. INVESTMENTS--The Company accounts for its short-term investments under Statement of Financial Accounting Standards ("SFAS") No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. SFAS No. 115 requires the classification of investments in debt and equity securities with readily determined fair values as "held-to-maturity," "available-for-sale," or "trading." Management determines the appropriate classification of its debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. The Company's debt securities are classified as available-for-sale and are carried at fair value based on quoted market prices, with unrealized gains and losses, if material, reported as a component of other comprehensive income (loss) in stockholders' equity. The difference between cost and fair value of the Company's debt securities was not material at June 30, 1999 and 1998. The cost of securities sold is based on the specific identification method. F-7 ZEBU NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED JUNE 30, 1997, 1998 AND 1999 AND SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999 (UNAUDITED) 2. SIGNIFICANT ACCOUNTING POLICIES (Continued) PROPERTY AND EQUIPMENT are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range generally from three to ten years. Amortization of leasehold improvements is computed using the straight-line method over the shorter of their estimated useful life or the term of the lease. INVESTMENT IN SELECTTECH represents investment in SelectTech's mandatorily redeemable convertible Series A preferred stock purchased in April 1998, and is accounted for by the cost method. Prior to April 1997, the Company owned 50% of SelectTech. In April 1997, SelectTech changed its status from a limited liability company to a C corporation. The Board of Directors subsequently approved the payment of a dividend-in-kind of all the Company's shares of SelectTech stock, which were written down to an estimated fair value of $0. Consequently, the Company recorded a realized loss of $87,132. See Note 3 regarding the SelectTech acquisition. SOFTWARE DEVELOPMENT COSTS--Costs for the development of new SelectTech software products and substantial enhancements to existing software products are expensed as incurred until technological feasibility has been established, at which time any additional costs would be capitalized in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED. The costs to develop such software have not been capitalized as SelectTech generally releases the software once technological feasibility has been established, and subsequent improvement costs have not been significant. Software development costs for SelectQuote software are reported in accordance with American Institute of Certified Public Accountants ("AICPA") Statement of Position ("SOP") 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE. REVENUE RECOGNITION--The Company's primary revenue source is commissions from the sale of term life insurance. Such commissions, which are based on a percentage of the premiums, are significantly higher in the first year of a policy compared with subsequent periods. In addition, the Company receives production bonuses from certain insurance companies for exceeding certain target levels during a specified bonus period. The Company recognizes annual first-year commissions as revenues when the policies have been approved by an insurance company underwriter and an initial premium payment (which may be annual, semiannual, quarterly or monthly) has been made by the policyholder. Revenues for renewal commissions and production bonuses are recognized when SelectQuote receives notification from the insurance companies that such commissions have been earned. An allowance is provided for estimated first-year and renewal commissions that will not be received due to nonpayment of premiums and policy cancellations by the policyholder (see Note 4). With the acquisition of SelectTech, the Company recognizes software related revenue in accordance with SOP 97-2, SOFTWARE REVENUE RECOGNITION as amended by Statement of Position 98-4 ("SOP 98-4"). Additionally, the AICPA issued SOP 98-9 in December 1998, which provides F-8 ZEBU NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED JUNE 30, 1997, 1998 AND 1999 AND SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999 (UNAUDITED) 2. SIGNIFICANT ACCOUNTING POLICIES (Continued) certain amendments to SOP 97-2, and was effective for transactions entered into by SelectTech beginning July 1, 1999. Adoption of these amendments did not have a material impact on financial position, results of operations or cash flows. Software license revenue is recognized upon meeting each of the following criteria: execution of a written license agreement or contract; delivery and implementation of software; the license fee is fixed and determinable; collectibility of the proceeds is assessed as being probable; and vendor specific objective evidence exists to allocate the total fee to elements of the arrangement. Vendor-specific objective evidence is based on the price generally charged when an element is sold separately, or if not yet sold separately, is established by authorized management. All elements of each order are valued at the time of revenue recognition. The portion of revenues from new license agreements which relate to SelectTech's obligations to provide customer support are deferred and recognized ratably over the contract support period, which is generally one to four years. Software maintenance contracts are renewable on an annual basis. Revenues from maintenance contract renewals are deferred and recognized ratably over the terms of the agreements. Revenues from transactional services, consulting and other services are recognized as the related services are provided or as the milestones are completed. CONCENTRATIONS OF CREDIT RISK--As of June 30, 1998, four insurance carriers accounted for 16%, 15%, 13%, and 13%, respectively, of total commissions and accounts receivable. As of June 30, 1999, three insurance carriers accounted for 28%, 13%, and 10%, respectively, of total commissions receivable. As of December 31, 1999, four insurance carriers accounted for 21%, 20%, 11% and 11%, respectively, of total commissions and accounts receivable. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of investments in fixed income securities and commissions receivable. The Company sells its products and services to companies in the insurance industry and generally does not require its customers to provide collateral to support accounts receivable. IMPAIRMENT OF LONG-LIVED ASSETS--The Company evaluates the recoverability of its long-lived assets in accordance with SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. SFAS No. 121 requires recognition of impairment losses related to long-lived assets in the event the net carrying value of such assets exceeds the future undiscounted cash flows attributable to such assets. The Company assesses the impairment of its long-lived assets when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. ADVERTISING EXPENSES--Direct costs related to marketing and advertising the Company's product are expensed in the periods incurred. Advertising expenses were $5,672,556, $3,310,103 and $3,099,351 for 1997, 1998 and 1999, respectively, and $1,793,424 and $1,849,214 for the six months ended December 31, 1998 and 1999, respectively. NET INCOME (LOSS) PER COMMON SHARE--Basic income (loss) per share excludes dilution and is computed by dividing net income (loss) less preferred dividends by the weighted-average number F-9 ZEBU NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED JUNE 30, 1997, 1998 AND 1999 AND SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999 (UNAUDITED) 2. SIGNIFICANT ACCOUNTING POLICIES (Continued) of common shares outstanding for the period. Diluted income (loss) per share reflects the potential dilution that could occur if the outstanding stock options, preferred stock and convertible debentures are converted into common stock. Common share equivalents are excluded from the computation in loss periods as their effect would be antidilutive. PRO FORMA NET INCOME (LOSS) PER COMMON SHARE (UNAUDITED)--Unaudited pro forma net loss per common share for the year ended June 30, 1999 and six months ended December 31, 1999 included in the statement of operations is computed using the weighted average number of common shares outstanding, adjusted to include the pro forma effects of the SelectTech acquisition and the conversion of Series A, B, C and D convertible preferred stock into common stock as if such conversion had occurred on July 1, 1998 for the year ended June 30, 1999 and on July 1, 1999 for the six months ended December 31, 1999, or at the date of original issuance, if later. PRO FORMA STOCKHOLDERS' EQUITY (UNAUDITED)--Effective upon the closing of the Company's proposed initial public offering, subject to certain conditions as described in Note 11, the outstanding shares of all series of convertible preferred stock will automatically convert into 3,139,961 shares of common stock. The unaudited pro forma amounts included on the balance sheet reflect these conversions as if they had occurred on December 31, 1999. STOCK-BASED COMPENSATION--The Company accounts for stock-based employee compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 ("APB 25"), ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. The Company reports non-employee stock-based compensation in accordance with SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. COMPREHENSIVE INCOME--There are no differences between comprehensive income and net income as reported in the Company's statements of operations. FINANCIAL INSTRUMENTS--The fair value of financial instruments, principally cash, receivables and accounts payable approximate their June 30, 1998 and 1999 carrying values because such items are primarily short-term in nature. INCOME TAXES--The Company records income taxes using the asset and liability method which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, generally all expected future events other than enactments or changes in the tax law or rates are considered. CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES--SelectTech operates in the software industry, and accordingly, can be affected by a variety of factors. For example, management of the Company believes that changes in any of the following areas could have a significant negative effect on the Company's future financial position, results of operations and cash flows: demand for performance availability and management software solutions; new product introductions by competitors; development of distribution channels; ability to implement and expand operational customer support and financial control systems to manage rapid growth, both domestically and internationally; the hiring, training and retention of key employees; fundamental changes in technology underlying software products; litigation or other claims against the Company. F-10 ZEBU NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED JUNE 30, 1997, 1998 AND 1999 AND SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999 (UNAUDITED) 2. SIGNIFICANT ACCOUNTING POLICIES (Continued) USE OF ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from those estimates. SEGMENT INFORMATION--The Company has adopted the provisions of SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes standards for the reporting by public business enterprises of information about operating segments, products and services, geographic areas, and major customers. Prior to the merger the Company operated in a single industry segment, sales of term life insurance policies. Subsequent to the merger, the Company may operate in more than one segment. The operations, tangible assets and capital expenditures of SelectTech are not significant from the date of acquisition to December 31, 1999. All of the Company's revenues are received from customers based primarily in the United States. See Note 15 for information on major customers. NEW ACCOUNTING PRONOUNCEMENT--SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Under SFAS No. 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. This Statement, as amended, is effective for fiscal years beginning after June 15, 2000. The Company has not yet evaluated the impact of this Statement. 3. SELECTTECH ACQUISITION (UNAUDITED) On December 23, 1999, SelectQuote acquired all of the outstanding shares and options of SelectTech in exchange for 5,516,125 shares of the Company's common stock. The acquisition has been accounted for under the purchase method of accounting. Acquisition costs and the preliminary determination of the unallocated excess of acquisition costs over net assets acquired are set forth below: Value of SelectTech stock acquired in the acquisition....... $50,000,000 Value of SelectTech options assumed......................... 5,744,000 Transaction costs........................................... 543,000 ----------- Purchase price.............................................. 56,287,000 Estimated fair value of net liabilities acquired............ 7,209,000 ----------- Purchase price including net liabilities acquired........... $63,496,000 ===========
The fair value of SelectTech acquired in the transaction consists of $7,209,000 in net liabilities assumed and $63,496,000 in intangible assets, including purchased software of $6,170,000, F-11 ZEBU NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED JUNE 30, 1997, 1998 AND 1999 AND SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999 (UNAUDITED) 3. SELECTTECH ACQUISITION (UNAUDITED) (Continued) assembled workforce of $864,000, customer list of $75,000, and goodwill of $56,387,000. The acquired intangible assets are being amortized over their estimated useful lives of two to three years. The preliminary allocation of the purchase price is based on current information and should not materially differ from the final determination. The following pro forma results of operations reflect the combined results of the Company and SelectTech for the year ended June 30, 1999 and for the six months ended December 31, 1999 and have been prepared as though the entities had been combined as of July 1, 1998. All intercompany accounts and balances have been eliminated.
Six Months Year Ended Ended June 30, December 31, 1999 1999 ------------ ------------- (unaudited) Revenues........................................ $ 22,823,334 $ 11,307,134 Net loss........................................ $(21,827,422) $(14,032,294) Net loss per share.............................. $ (2.10) $ (1.82) Shares used in computing net loss per share..... 10,497,974 10,497,974
4. COMMISSIONS AND ACCOUNTS RECEIVABLE, NET Commissions and accounts receivable, net, consists of the following:
June 30, ------------------------- December 31, 1998 1999 1999 ----------- ----------- ------------- Commissions receivable................ $4,297,992 $5,503,267 $5,321,727 Production bonus commissions receivable.......................... 415,414 365,000 690,000 Other accounts receivable............. -- -- 639,488 ---------- ---------- ---------- Total............................. 4,713,406 5,868,267 6,651,215 Less allowance........................ (481,585) (542,412) (635,214) ---------- ---------- ---------- Commissions and accounts receivable, net................................. $4,231,821 $5,325,855 $6,016,001 ========== ========== ==========
The Company estimates an allowance for receivables that will not be collected due to nonpayment of commissions and policy cancellations by the policy holder and nonpayment of accounts by insurance carriers. Such allowance is established based on management's evaluation of various factors, including historical write-off experience and industry trends. While management uses the information available to make evaluations, future adjustments to the allowances may be F-12 ZEBU NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED JUNE 30, 1997, 1998 AND 1999 AND SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999 (UNAUDITED) 4. COMMISSIONS AND ACCOUNTS RECEIVABLE, NET (Continued) necessary. Any such adjustments are reflected in current operations. Additions to the allowance are charged against revenue. Commissions receivable are written off against the allowance when commissions are deemed uncollectible. Changes in the allowance were as follows:
Six Months Ended Year Ended June 30, December 31, --------------------------------- --------------------- 1997 1998 1999 1998 1999 --------- --------- --------- --------- --------- Balance, beginning of period............. $ 508,264 $ 521,234 $ 481,585 $ 481,585 $ 542,412 Additions............ 385,332 620,463 875,656 418,251 675,988 Write-offs........... (372,362) (660,112) (814,829) (386,130) (583,186) --------- --------- --------- --------- --------- Balance, end of period............. $ 521,234 $ 481,585 $ 542,412 $ 513,706 $ 635,214 ========= ========= ========= ========= =========
5. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
June 30, ------------------------- December 31, 1998 1999 1999 ----------- ----------- ------------- Computers............................ $ 1,653,326 $ 1,782,276 $ 2,519,909 Equipment............................ 683,904 850,587 915,901 Furniture and fixtures............... 485,782 497,077 563,173 Leasehold improvements............... 416,467 419,654 459,162 Capitalized software................. -- -- 305,562 ----------- ----------- ----------- Total............................ 3,239,479 3,549,594 4,763,707 Less accumulated depreciation........ (1,917,719) (2,420,722) (2,990,712) ----------- ----------- ----------- Property and equipment, net.......... $ 1,321,760 $ 1,128,872 $ 1,772,995 =========== =========== ===========
Included in property and equipment at June 30, 1998 and 1999 and December 31, 1999 is equipment acquired under capital leases with a cost of $471,479, $597,333 and $650,309 and accumulated depreciation of $240,648, $358,904 and $476,321, respectively. Depreciation expense was $501,535, $559,101 and $590,553 during the years ended June 30, 1997, 1998 and 1999, respectively, and $292,602 and $308,410 for the six months ended December 31, 1998 and 1999, respectively. 6. TRANSACTIONS WITH SELECTTECH AND OTHER RELATED PARTIES Prior to the acquisition, certain shareholders of the Company were shareholders of SelectTech, and two officers of the Company participated in the management and direction of SelectTech, including serving on SelectTech's Board of Directors. The Company provided SelectTech with certain operating support, which included management and administrative services, telephone and office F-13 ZEBU NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED JUNE 30, 1997, 1998 AND 1999 AND SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999 (UNAUDITED) 6. TRANSACTIONS WITH SELECTTECH AND OTHER RELATED PARTIES (Continued) facilities, and other miscellaneous items and charged SelectTech for these benefits on a cost reimbursement basis. Receivables from SelectTech for such services were $344,074 and $761,084 at June 30, 1998 and 1999, respectively. Total fees for these services provided by the Company were approximately $338,393, $527,009 and $708,132 in fiscal 1997, 1998 and 1999, respectively, and $294,145 and $903,526 for the six months ended December 31, 1998 and 1999, respectively. Included in the total fees was sublease rental income (see Note 10). In February 1997, the Company loaned SelectTech $200,000 at an interest rate of 10% per annum due on July 31, 1998. However, payment on the note and related interest were deferred due to SelectTech's refinancing discussed in the following paragraph. Interest income recognized by the Company related to the note was $6,100, $20,000 and $20,000 in fiscal 1997, 1998 and 1999, respectively, and $10,000 and $10,000 for the six months ended December 31, 1998 and 1999, respectively. Receivables from SelectTech for accrued interest income were $26,100 and $46,100 at June 30, 1998 and 1999, respectively. On October 15, 1998, SelectTech entered into a Debenture Purchase Agreement (the "Agreement") which required the Company to agree to subordination of both the Company's $200,000 note receivable from SelectTech and $453,300 of the outstanding receivable for operating services from SelectTech. As a condition of the subordination, the note receivable from SelectTech was made convertible into shares of SelectTech's common stock at $1.67 per share. The Agreement also allowed SelectTech to repay the $453,300 other receivable balance in twelve monthly installments of $37,800 commencing in October 1998 and that subsequent charges for operating services be paid on a current basis. However, none of these installment payments were made, although certain operating costs charged by the Company to SelectTech were reimbursed subsequent to the Agreement date. All amounts due at December 23, 1999 were canceled concurrent with the merger. In June 1999, the Company loaned SelectTech an additional $250,000 in the form of a promissory note bearing interest at 9% per annum and due on December 31, 1999. The Company made two additional loans to SelectTech of $250,000 each in October and November 1999 under similar terms. All of these loans were canceled concurrent with the merger. During 1997, 1998 and 1999, two members of the Company's Board of Directors worked as consultants to the Company and provided software development, computer system management, and marketing and advertising assistance. The fees included in general and administrative expenses for these services were $179,850, $181,013 and $181,013 in 1997, 1998, and 1999, respectively. For the six months ended December 31, 1998 and 1999, such general and administrative expenses were $90,506 in each period. While working as a consultant for the Company, a current officer of the Company had a compensation agreement with the Company whereby he deferred a portion of his consulting fees until the Company reached and exceeded cash break-even from operations for three consecutive months and more senior obligations had been repaid. The balance was $82,195, $64,195 and $40,195 as of June 30, 1998 and 1999 and December 31, 1999, respectively. F-14 ZEBU NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED JUNE 30, 1997, 1998 AND 1999 AND SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999 (UNAUDITED) 7. INCOME TAXES Income tax expense (benefit) consists of the following components:
Six Months Ended Years Ended June 30, December 31, ------------------------------------- --------------------- 1997 1998 1999 1998 1999 --------- ----------- ----------- --------- --------- Current income taxes: Federal............. $(501,837) $1,447,782 $1,035,246 $367,805 $ 318,327 State............... (123,730) 383,245 301,759 124,584 110,468 --------- ---------- ---------- -------- --------- Total............. (625,567) 1,831,027 1,337,005 492,389 428,795 --------- ---------- ---------- -------- --------- Deferred income taxes: Federal............. 375,126 652 274,710 61,319 (611,694) State............... 88,031 31,324 73,398 (1,431) (192,963) --------- ---------- ---------- -------- --------- Total............. 463,157 31,976 348,108 59,888 (804,657) --------- ---------- ---------- -------- --------- Income tax expense (benefit)........... $(162,410) $1,863,003 $1,685,113 $552,277 $(375,862) ========= ========== ========== ======== =========
The difference between income tax expense (benefit) based on the federal tax rate and amounts reported in the statements of operations is as follows:
Six Months Ended Years Ended June 30, December 31, ------------------------------------ ---------------------- 1997 1998 1999 1998 1999 -------- -------- -------- -------- -------- Federal tax (benefit) at statutory rate................................... (34)% 34% 34% 34% 34% State taxes, net of federal benefit...... (6) 6 6 6 6 Other.................................... (2) -- -- 2 -- --- -- -- -- -- Income tax expense (benefit)............. (42)% 40% 40% 42% 40% === == == == ==
F-15 ZEBU NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED JUNE 30, 1997, 1998 AND 1999 AND SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999 (UNAUDITED) 7. INCOME TAXES (Continued) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities used for financial reporting and the amounts used for income tax purposes. The items comprising the Company's net deferred tax liability at June 30, 1998 and 1999 and December 31, 1999 are as follows:
June 30, ------------------------- December 31, 1998 1999 1999 ----------- ----------- ------------- Deferred tax assets: Revenue recognized for tax......... $ 294,947 $ 391,837 $ 431,672 Allowance for policy cancellations..................... 247,462 214,122 237,062 Accrued liabilities................ 107,965 140,139 151,293 Deferred stock compensation........ -- -- 527,786 Goodwill and other intangibles..... -- -- 193,843 Other.............................. 163,584 142,347 81,125 ----------- ----------- ----------- Total deferred tax assets........ 813,958 888,445 1,622,781 Deferred tax liability--commissions receivable......................... (1,767,705) (2,190,249) (2,119,878) ----------- ----------- ----------- Net deferred tax liability........... $ (953,747) $(1,301,804) $ (497,097) =========== =========== ===========
8. SENIOR SECURED CONVERTIBLE DEBENTURES As a result of the acquisition of SelectTech, the Company assumed SelectTech debentures issued under a Debenture Purchase Agreement with three insurance carriers that provided $2,500,000 at 12% interest. The Company also assumed $750,000 of short-term loans from the insurance carriers to SelectTech. On December 27, 1999, the $750,000 of short-term loans was repaid to the carriers. In addition, the Company repaid in full $600,000 to one debenture holder. The terms of the remaining $1,900,000 in debentures were modified to transfer the holders a security interest in the Company's assets and alter the prepayment terms. The principal amount of the debentures are convertible into common stock at approximately $2.60 per share. The Debenture Purchase Agreement requires quarterly interest-only payments through September 30, 2000; thereafter, outstanding principal shall be repaid in twelve equal quarterly installments, plus interest, from December 31, 2000 through September 30, 2003. 9. MANDATORILY REDEEMABLE CONVERTIBLE SERIES D PREFERRED STOCK (UNAUDITED) On December 23, 1999, the Company issued 50,000 shares of Mandatorily Redeemable Convertible Series D Preferred Stock for $5,000,000. Issuance costs were $256,224. Each share of the Mandatorily Redeemable Convertible Series D Preferred Stock is convertible at the option of the holder at any time into 22.2222 shares of common stock, subject to adjustment F-16 ZEBU NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED JUNE 30, 1997, 1998 AND 1999 AND SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999 (UNAUDITED) 9. MANDATORILY REDEEMABLE CONVERTIBLE SERIES D PREFERRED STOCK (UNAUDITED) (Continued) for certain anti-dilution provisions, and is automatically convertible into common stock upon a public offering of the Company's shares at a per share price which is at least $4.50 (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares) and the gross cash proceeds to the Company (before underwriting discounts, commissions and fees) are at least $25,000,000 or upon the consent of the holders of a majority of the shares outstanding. The Mandatorily Redeemable Convertible Series D Preferred Stock has voting rights equivalent to the number of common shares into which each share is convertible and has a liquidation preference of the original purchase price plus interest at 25% per annum, compounded annually. Additionally, on December 17, 2004 the Company must redeem all of the outstanding Mandatorily Redeemable Convertible Series D Preferred Stock at the greater of fair value (as defined) or the liquidation preference. The Mandatorily Redeemable Convertible Series D Preferred Stock has a beneficial conversion feature totaling $5,000,000, measured as the difference between the conversion price of $4.50 per share and the fair value of the underlying common stock at the time of issuance, limited to the amount of the proceeds received, and was accounted for as a Preferred dividend which was a reduction to income applicable to common shareholders at issuance. 10. COMMITMENTS AND CONTINGENCIES LEASES--The Company leases various office and computer equipment under capital leases that expire at various dates prior to June 2004. The leases also include noncancelable maintenance agreements for the office equipment. The Company also leases office facilities under operating leases that expire at various dates through March 2005 with options to renew. As of December 31, 1999, the minimum lease obligations are as follows:
Operating Capital ----------- --------- Six months ending June 30: 2000.............................................. $ 990,137 $ 82,822 Year ending June 30: 2001.............................................. 1,938,593 81,718 2002.............................................. 1,997,917 33,104 2003.............................................. 1,568,845 29,052 2004.............................................. 1,359,602 16,947 2005.............................................. 1,033,058 -- ---------- --------- Total lease obligations............................. $8,888,152 243,643 ========== Less amount representing interest................... (27,512) --------- Present value of minimum lease payments............. 216,131 Less current obligation under capital leases........ (125,542) --------- Long-term obligation under capital leases........... $ 90,589 =========
F-17 ZEBU NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED JUNE 30, 1997, 1998 AND 1999 AND SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999 (UNAUDITED) 10. COMMITMENTS AND CONTINGENCIES (Continued) Up until the acquisition, the Company subleased a portion of its office facilities to SelectTech. Monthly rental income varied based on usage and costs per square foot over the term of the lease. Rental income was $24,214, $85,302 and $134,892 during the years ended June 30, 1997, 1998 and 1999, respectively, and $50,563 and $171,348 for the six months ended December 31, 1998 and 1999, respectively. Rent expense was $433,545, $558,343 and $616,241 during the years ended June 30, 1997, 1998 and 1999, respectively, and $292,232 and $594,663 for the six months ended December 31, 1998 and 1999, respectively. LITIGATION--From time to time, the Company is subject to legal proceedings and claims in the ordinary course of business. The Company currently is not aware of any legal proceedings or claims that it believes will have, individually or in the aggregate, a material adverse effect on its business, prospects, consolidated financial condition and operating results. 11. STOCKHOLDERS' EQUITY Shares of common stock have been reserved for future issuance in connection with the conversion or exercise of the following securities as of December 31, 1999:
Common Shares Reserved ------------- Senior secured convertible debentures....................... 731,420 Series A Preferred Stock.................................... 1,137,235 Series B Preferred Stock.................................... 821,690 Series C Preferred Stock.................................... 69,925 Series D Preferred Stock.................................... 1,111,111 Stock options granted under the 1999 Stock Option Plan...... 6,510,635 Stock options available for issuance under the 1999 Stock Option Plan............................................... 3,489,365 1999 employee stock purchase plan........................... 1,000,000 ---------- Total....................................................... 14,871,381 ==========
CONVERTIBLE PREFERRED STOCK--In contemplation of the acquisition of SelectTech, the Company restated its Articles of Incorporation in August 1999 to increase the number of shares of preferred stock authorized from 5,000,000 to 10,000,000 and changed the par value from no par to $0.01 per share. F-18 ZEBU NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED JUNE 30, 1997, 1998 AND 1999 AND SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999 (UNAUDITED) 11. STOCKHOLDERS' EQUITY (Continued) Preferred Stock Series A, B and C information as of December 31, 1999 is as follows:
Liquidation Value Authorized Shares --------------------- Series Shares Outstanding Amount Per Share - ------ ---------- ----------- --------- --------- A............................... 2,500,000 1,137,235 $170,585 $0.15 B............................... 1,250,000 821,690 501,231 0.61 C............................... 750,000 69,925 85,309 1.22 --------- --------- -------- Total........................... 4,500,000 2,028,850 $757,125 ========= ========= ========
CONVERSION--Each share of preferred stock may be converted into shares of common stock on a one-for-one basis, subject to adjustments under specific circumstances. Conversion is: (i) at the option of the preferred stockholder, (ii) automatic upon the closing of an initial public offering of the Company's common stock. DIVIDENDS--The holders of the Series A, B and C preferred stock are entitled to receive in any fiscal year noncumulative dividends of $0.00913 per share, $0.0365 per share and $0.073 per share, respectively, when, and if, declared by the Company's Board of Directors. Such dividends, whether undeclared or unpaid, shall not bear or accrue interest. Preferred stock dividends declared and paid were $199,805, $161,225 and $199,805 during the years ended June 30, 1997, 1998 and 1999, respectively, and $122,646 and $84,066 for the six months ended December 31, 1998 and 1999, respectively. LIQUIDATION--In the event of any liquidation, dissolution or winding up of the Company either voluntary or involuntary, the assets of the Company available for distribution shall be distributed: (i) $0.15 per outstanding share of Series A, (ii) $0.61 per outstanding share of Series B and (iii) $1.22 per outstanding share of Series C. If the assets of the Company available for distribution are not sufficient to pay the full amount of this distribution, plus any dividends thereon declared but unpaid, such assets will be distributed ratably among the holders of the preferred stock based on the full preferential amount per share of the preferred stock that each such holder is entitled to receive. REDEMPTION--The Company may at any time, at the option of the Board of Directors, redeem all or part (selected pro rata among all of the preferred shares) of the outstanding shares of Series A preferred stock at $0.15 per share. Series B and C preferred stock is not redeemable. VOTING RIGHTS--Each share of Series A, B and C preferred stock has voting rights equal to the number of common stock shares into which shares of preferred stock are convertible. COMMON STOCK--In anticipation of the acquisition of SelectTech, the Company changed the par value of common stock from no par to $0.01 per share. Through August 17, 1999, the Company had a "phantom stock" employee compensation plan where each unit of phantom stock entitled the record holder to receive the same cash dividends per F-19 ZEBU NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED JUNE 30, 1997, 1998 AND 1999 AND SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999 (UNAUDITED) 11. STOCKHOLDERS' EQUITY (Continued) unit as a share of the Company's common stock. Phantom stock units terminate when the employee ceases to be an employee due to resignation, termination, retirement, or death. Phantom stock units: (a) have no voting rights (b) are not transferable or saleable to other parties (c) have no monetary value other than the right to receive payments equal to dividends earned on an equivalent number of shares of the Company's common stock as of the date of record of each dividend, provided that the record holder is an employee as of that date (d) are fully vested when granted. Prior to fiscal 1997, 24,500 phantom stock units had been granted. In fiscal 1998 and 1999 an additional 53,500 units and 163,557 units, respectively, were granted. No forfeitures of any units occurred. Compensation expense has been recognized by the Company with respect to cash dividends paid under the phantom stock plan. On August 17, 1999, all phantom stock units were converted into the Company stock option plan described in Note 13. 12. EMPLOYEE BENEFIT PLAN The Company has a pretax savings plan covering nearly all its employees that is intended to qualify under Section 401(k) of the Internal Revenue Code. Eligible employees may contribute up to 15 percent of their pretax salary, subject to certain limitations. The Company makes a discretionary profit sharing contribution and matches each employee's contributions up to $300 per plan year. The Company contributions were $21,450, $27,672 and $27,863 during the years ended June 30, 1997, 1998 and 1999, respectively, and $22,092 and $28,906 for the six months ended December 31, 1998 and 1999, respectively. 13. STOCK OPTION PLAN (UNAUDITED) On August 17, 1999, the Company authorized the 1999 Stock Option Plan (the "1999 Plan") under which the Board of Directors may grant options to purchase shares of common stock to employees, non-employee directors, and consultants. A total of 10,000,000 shares of common stock have been reserved for issuance under the 1999 Plan. Options generally vest one-third at the end of the first year and then monthly on a pro rata basis over the next two years. The options expire ten years from the date of grant. F-20 ZEBU NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED JUNE 30, 1997, 1998 AND 1999 AND SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999 (UNAUDITED) 13. STOCK OPTION PLAN (UNAUDITED) (Continued) In the period from August 17, 1999 through the date of acquisition of SelectTech, the Company granted options which were converted at the time of the merger based on a conversion formula. Options issued by SelectTech prior to the acquisition were also converted to Company options. The following table summarizes option activity using post-merger amounts.
Number Average of Shares Exercise Price --------- -------------- Balance at July 1, 1999............................ -- $ -- Grants: SelectQuote plan................................. 3,121,813 4.350 SelectTech plan.................................. 3,388,822 3.521 --------- ------ Balance at December 31, 1999 (1,081,352 shares vested at a weighted average exercise price of $0.36)........................................ 6,510,635 $3.918 ========= ======
Options outstanding and currently exercisable by exercise price at December 31, 1999 are as follows:
Options Outstanding - ------------------------------------------------- Weighted Options Currently Average Exercisable -- Exercise Number Remaining Number Price Outstanding Contractual Life (Years) Outstanding - -------- ----------- ------------------------ ----------------- $0.0016 627,318 7.5 554,560 $ 0.26 513,278 8.2 325,339 $ 0.76 80,528 9.6 80,528 $ 1.98 175,847 9.6 120,925 $ 2.43 537,588 9.6 -- $ 2.60 60,952 9.2 -- $ 4.99 1,877,848 9.9 -- $ 5.00 797,703 9.6 -- $ 5.50 1,839,573 9.6 -- --------- --- --------- 6,510,635 9.3 1,081,352 ========= === =========
The Company accounts for employee and board of director stock options in accordance with APB 25. Under APB 25, compensation expense is recognized based on the amount by which the fair value of the underlying common stock exceeds the exercise price of the stock options at the measurement date, which in the case of employee stock options is typically the date of grant. For financial reporting purposes, the Company has determined that the fair market value on the date of grant of certain employee stock options associated with the conversion of the phantom stock compensation plan was in excess of the exercise price of the options. Such excess is recorded as deferred stock compensation and classified as a reduction of stockholders' equity, with a charge to F-21 ZEBU NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED JUNE 30, 1997, 1998 AND 1999 AND SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999 (UNAUDITED) 13. STOCK OPTION PLAN (UNAUDITED) (Continued) operations over the vesting period of the applicable options. Consequently, the Company recorded deferred stock compensation of $1,643,806 in the six-month period ended December 31, 1999 and amortized $1,240,403 during the same period. The fair value of stock options granted to consultants for future services to be performed for the Company was $542,917 for the six months ended December 31, 1999. This amount has been recorded as deferred stock compensation. Of this amount, $84,548 was amortized during the six months ended December 31, 1999. The weighted average fair value for options granted during the six months ended December 31, 1999 was $1.75. ADDITIONAL STOCK PLAN INFORMATION--SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires the disclosure of pro-forma net loss and loss per share had the Company adopted the fair value method since the Company's inception. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including expected time to exercise, which greatly affect the calculated values. The weighted average fair value of the Company's stock-based awards to employees was estimated using the minimum option pricing model with the following assumptions: Dividend yield--none Risk free interest rate--6% Expected term--3 years If the computed minimum values of the Company's stock-based awards to employees had been amortized to expense over the vesting period of the awards as specified under SFAS No. 123, net loss and basic and diluted loss per common share on a pro forma basis (as compared to such items as reported) would have been as follows for the six months ended December 31, 1999: Net loss: As reported............................................... $(569,948) Pro forma................................................. (896,285) Basic and diluted net loss per common share: As reported............................................... $ (1.08) Pro forma (1.14)
F-22 ZEBU NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED JUNE 30, 1997, 1998 AND 1999 AND SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999 (UNAUDITED) 14. NET INCOME (LOSS) PER COMMON SHARE The following is a reconciliation of the numerators and denominators used in computing basic and diluted net income (loss) per share:
Six Months Ended Years Ended June 30, December 31, ------------------------------------- ----------------------- 1997 1998 1999 1998 1999 --------- ----------- ----------- --------- ----------- Income (loss) attributable to common stockholders: Net income (loss)............ $(229,368) $2,818,253 $2,528,252 $ 775,644 $ (569,948) Preferred dividends......... (199,805) (161,225) (199,805) (122,646) (84,066) Value of preferred stock beneficial conversion........ -- -- -- -- (5,000,000) --------- ---------- ---------- --------- ----------- Income (loss) attributable to common stockholders...... $(429,173) $2,657,028 $2,328,447 $ 652,998 $(5,654,014) ========= ========== ========== ========= =========== Shares: Shares used in the computation of Basic EPS......... 4,981,849 4,981,849 4,981,849 4,981,849 5,221,681 Effect of conversion of preferred stock... -- 2,028,850 2,028,850 2,028,850 -- --------- ---------- ---------- --------- ----------- Shares used in the computation of Diluted EPS....... 4,981,849 7,010,699 7,010,699 7,010,699 5,221,681 ========= ========== ========== ========= ===========
For fiscal 1997 and the six months ended December 31, 1999, the Company had securities outstanding which could potentially dilute basic earnings per share in the future, but were excluded in the computation of diluted net loss per share in the periods presented, as their effect would have been antidilutive. Such outstanding securities consist of the following:
Year Ended Six Months Ended June 30, 1997 December 31, 1999 -------------- ------------------ Convertible debentures -- 731,420 Redeemable convertible preferred stock........ 2,028,850 3,139,961 Stock options................................. -- 447,352 --------- --------- Total..................................... 2,028,850 4,318,733 ========= =========
F-23 ZEBU NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED JUNE 30, 1997, 1998 AND 1999 AND SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999 (UNAUDITED) 15. MAJOR CUSTOMERS Revenue attributable to significant insurance carrier customers, representing approximately 10% or more of total revenue for at least one of the respective periods, is summarized as follows:
Six Months Ended Years Ended June 30, December 31, ------------------------------------ ---------------------- 1997 1998 1999 1998 1999 -------- -------- -------- -------- -------- Carrier A................................ --% --% 10% --% 22% Carrier B................................ 23 18 -- 13 -- Carrier C................................ 15 12 15 14 -- Carrier D................................ -- -- 12 -- 20 Carrier E................................ -- 17 13 16 10 Carrier F................................ 13 -- -- -- -- Carrier G................................ -- -- -- 13 15 Carrier H................................ -- -- -- 11 10
16. SUBSEQUENT EVENTS (UNAUDITED) During February 2000, SelectQuote obtained a one-year line of credit from LaSalle Bank. SelectQuote may borrow against that line, provided it meets certain financial and other covenants and conditions. Any borrowings under the line of credit will bear interest at a rate determined by reference to the prime rate or to LIBOR. The line of credit is secured by a pledge of all of the assets of SelectQuote, which is senior to the security interest of the holders of the convertible debentures. It is also guaranteed by four of the Company's principal stockholders, and that guaranty is secured by a pledge of their Company stock. On February 29, 2000, the Company increased the authorized number of shares of common stock to 100,000,000. On February 29, 2000, the Company and investors entered into a binding agreement for the purchase and sale of 2,041,845 shares of Mandatorily Redeemable Convertible Series E Preferred Stock for $10,515,502. The terms of this issuance are similar to the terms of the Series D issuance discussed in Note 9. F-24 INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors of SelectTech: We have audited the accompanying balance sheets of SelectTech as of June 30, 1998 and 1999, and the related statements of operations and shareholders' equity (deficit) and cash flows for each of the three years in the period ended June 30, 1999. These financial statements are the responsibility of SelectTech's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of SelectTech as of June 30, 1998 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1999 in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP San Francisco, California February 29, 2000 F-25 SELECTTECH BALANCE SHEETS
June 30, ------------------------- December 23, 1998 1999 1999 ----------- ----------- ------------- (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 105,823 $ 35,596 $ 56,266 Accounts receivable, net of allowance for doubtful accounts of $0, $40,095 and $40,095, respectively........ 507,815 886,346 538,620 Other..................................................... 14,905 35,898 9,096 ---------- ----------- ----------- Total current assets.................................... 628,543 957,840 603,982 PROPERTY AND EQUIPMENT, NET................................. 169,677 280,246 342,347 ---------- ----------- ----------- TOTAL ASSETS................................................ $ 798,220 $ 1,238,086 $ 946,329 ========== =========== =========== LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK, AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable and accrued expenses..................... $ 379,493 $ 467,898 $ 513,333 Payables to SelectQuote................................... 370,174 808,109 1,673,952 Payables to other related parties......................... 608,817 794,679 779,044 Deferred revenue.......................................... 56,096 231,131 327,295 Current portion of capital lease obligations.............. 17,370 5,146 5,409 Notes payable to SelectQuote.............................. 200,000 450,000 950,000 Promissory notes.......................................... 100,000 -- -- Senior secured convertible debentures..................... -- 1,769,398 2,576,860 ---------- ----------- ----------- Total current liabilities............................... 1,731,950 4,526,361 6,825,893 DEFERRED REVENUE............................................ 468,279 979,356 1,015,185 LONG-TERM PORTION OF CAPITAL LEASE OBLIGATIONS.............. 8,873 3,727 955 ---------- ----------- ----------- Total liabilities....................................... 2,209,102 5,509,444 7,842,033 ---------- ----------- ----------- MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK, Series A, $0.001 par value: 750,000 shares authorized; 600,000 shares issued and outstanding (aggregate liquidation preference $1,000,000).................................... 1,000,000 1,000,000 1,000,000 ---------- ----------- ----------- SHAREHOLDERS' EQUITY (DEFICIT): Preferred stock, $0.001 par value: 750,000 shares authorized; no shares issued and outstanding............. -- -- -- Common stock, $0.001 par value: 8,500,000 shares and 18,500,000 shares authorized, respectively; 6,500,000 shares issued and outstanding (June 30, 1998 and 1999) and 7,250,000 (December 23, 1999, unaudited)............. -- 718,294 719,044 Accumulated deficit....................................... (2,410,882) (5,989,652) (8,614,748) ---------- ----------- ----------- Total shareholders' equity (deficit).................... (2,410,882) (5,271,358) (7,895,704) ---------- ----------- ----------- TOTAL LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK, AND SHAREHOLDERS' EQUITY (DEFICIT)....... $ 798,220 $ 1,238,086 $ 946,329 ========== =========== ===========
See notes to financial statements. F-26 SELECTTECH STATEMENTS OF OPERATIONS
For the Period Six Months July 1, 1999 For the Years Ended June 30, Ended Through --------------------------------------- December 31, December 23, 1997 1998 1999 1998 1999 ----------- ----------- ----------- ------------ ------------- (Unaudited) REVENUES: Consulting services............... $1,426,661 $1,361,412 $2,375,791 $1,207,539 $ 936,132 License and maintenance........... -- 15,625 299,183 27,337 142,247 Transactional services............ -- 55,211 296,893 68,651 365,610 ---------- ---------- ---------- ---------- ---------- Total revenue................... 1,426,661 1,432,248 2,971,867 1,303,527 1,443,989 ---------- ---------- ---------- ---------- ---------- OPERATING EXPENSES: Software development and consulting services.............. 1,350,236 2,343,512 4,759,127 2,163,884 3,076,293 Marketing and sales............... 138,136 222,764 496,257 250,232 239,809 General and administrative........ 508,619 850,337 1,035,524 464,772 491,770 ---------- ---------- ---------- ---------- ---------- Total operating expenses........ 1,996,991 3,416,613 6,290,908 2,878,888 3,807,872 ---------- ---------- ---------- ---------- ---------- LOSS FROM OPERATIONS................ 570,330 1,984,365 3,319,041 1,575,361 2,363,883 INTEREST EXPENSE, NET............... 9,126 20,213 258,929 71,286 261,213 ---------- ---------- ---------- ---------- ---------- LOSS BEFORE INCOME TAXES............ 579,456 2,004,578 3,577,970 1,646,647 2,625,096 INCOME TAX EXPENSE.................. 3,100 800 800 800 -- ---------- ---------- ---------- ---------- ---------- NET LOSS............................ $ 582,556 $2,005,378 $3,578,770 $1,647,447 $2,625,096 ========== ========== ========== ========== ==========
See notes to financial statements. F-27 SELECTTECH STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
Retained Common Stock Earnings Total --------------------- (Accumulated Shareholders' Shares Amount Deficit) Equity (Deficit) --------- --------- ------------ ---------------- BALANCE, JULY 1, 1996...................... 6,500,000 $ -- $ 177,052 $ 177,052 NET LOSS................................... (582,556) (582,556) --------- -------- ----------- ----------- BALANCE, JUNE 30, 1997..................... 6,500,000 -- (405,504) (405,504) NET LOSS................................... (2,005,378) (2,005,378) --------- -------- ----------- ----------- BALANCE, JUNE 30, 1998..................... 6,500,000 -- (2,410,882) (2,410,882) WARRANTS ISSUED............................ 718,294 718,294 NET LOSS................................... (3,578,770) (3,578,770) --------- -------- ----------- ----------- BALANCE, JUNE 30, 1999..................... 6,500,000 718,294 (5,989,652) (5,271,358) OPTIONS EXERCISED (Unaudited).............. 750,000 750 750 NET LOSS (Unaudited)....................... (2,625,096) (2,625,096) --------- -------- ----------- ----------- BALANCE, DECEMBER 23, 1999 (Unaudited)..... 7,250,000 $719,044 $(8,614,748) $(7,895,704) ========= ======== =========== ===========
See notes to financial statements. F-28 SELECTTECH STATEMENTS OF CASH FLOWS
Period Six Months July 1, 1999 For the Years Ended June 30, Ended Through ------------------------------------- December 31, December 23, 1997 1998 1999 1998 1999 --------- ----------- ----------- -------------- -------------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss....................................... $(582,556) $(2,005,378) $(3,578,770) $(1,647,447) $(2,625,096) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of debt discount................ -- -- 82,253 24,192 57,462 Depreciation and amortization................ 26,386 62,600 122,954 54,022 84,591 Changes in assets and liabilities: Accounts receivable........................ 69,270 (241,008) (378,531) (458,460) 347,726 Other...................................... (10,582) (436) (19,015) (4,717) 26,802 Accounts payable and accrued expenses...... 88,383 216,806 88,405 197,636 45,435 Payables to SelectQuote and other related parties................................... 223,313 598,205 623,797 237,668 850,208 Deferred revenue........................... 50,000 474,375 686,112 590,201 131,993 --------- ----------- ----------- ----------- ----------- Net cash used in operating activities.... (135,786) (894,836) (2,372,795) (1,006,905) (1,080,879) --------- ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES - Property and equipment purchased............... (108,850) (92,376) (235,501) (163,636) (146,692) --------- ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of mandatorily redeemable convertible Series A preferred stock......................................... -- 1,000,000 -- -- -- Proceeds from promissory notes................. -- 100,000 325,000 -- -- Repayments of promissory notes................. -- -- (425,000) (100,000) -- Net proceeds from issuance of senior secured convertible debentures and warrants to purchase common stock (net of issuance costs)........................................ -- -- 2,405,439 1,330,439 750,000 Capital lease obligations repaid............... (9,766) (14,177) (17,370) (10,240) (2,509) Proceeds from exercise of options.............. -- -- -- -- 750 Proceeds from notes payable to related party... 200,000 -- 250,000 -- 500,000 --------- ----------- ----------- ----------- ----------- Net cash provided by financing activities.............................. 190,234 1,085,823 2,538,069 1,220,199 1,248,241 --------- ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................... (54,402) 98,611 (70,227) 49,658 20,670 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR..... 61,614 7,212 105,823 105,823 35,596 --------- ----------- ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, END OF YEAR........... $ 7,212 $ 105,823 $ 35,596 $ 155,481 $ 56,266 ========= =========== =========== =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest expense................. $ 2,315 $ 1,812 $ 164,948 $ 41,441 $ 186,050 Cash paid for income taxes..................... $ 2,300 $ 2,300 $ 1,600 $ 800 $ -- NONCASH INVESTING AND FINANCING ACTIVITIES: Purchase of equipment under capital leases..... $ -- $ 14,984 $ -- $ -- $ --
See notes to financial statements. F-29 SELECTTECH NOTES TO FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1997, 1998 AND 1999, SIX MONTHS ENDED DECEMBER 31, 1998 (Unaudited) AND PERIOD FROM JULY 1, 1999 THROUGH DECEMBER 23, 1999 (Unaudited) 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS--SelectTech ("SelectTech"), a Nevada Corporation, was established to develop custom software and to provide computer consulting services to the insurance industry. SelectTech derives its revenues from software licenses, software maintenance, software usage fees, custom software development and professional consulting services. Effective April 30, 1997, SelectTech changed its tax status from a limited liability company to a C corporation. Prior to the change in status, taxable income and losses of SelectTech were generally reportable on the income tax returns of the respective owners. Prior to the change in status, SelectQuote Insurance Services ("SelectQuote") owned 50% of SelectTech. Subsequent to April 30, 1997, SelectQuote distributed all of its shares to its shareholders. In October 1998, SelectTech increased authorized common stock to 18,500,000 shares. On December 23, 1999, SelectQuote acquired all the outstanding common and preferred stock (other than preferred stock which was converted concurrent with the transaction) of SelectTech. These financial statements reflect SelectTech's financial position immediately prior to the acquisition. CASH AND CASH EQUIVALENTS--SelectTech considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. PROPERTY AND EQUIPMENT are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from three years for computer equipment to five to ten years for other assets. SOFTWARE DEVELOPMENT COSTS--Costs for the development of new software products and substantial enhancements to existing software products are expensed as incurred until technological feasibility has been established, at which time any additional costs would be capitalized in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED. The costs to develop such software have not been capitalized as SelectTech generally releases the software once technological feasibility has been established, and subsequent improvement costs have not been significant. REVENUE RECOGNITION--Statement of Position 97-2, SOFTWARE REVENUE RECOGNITION ("SOP 97-2"), was issued in October 1997 by the American Institute of Certified Public Accountants ("AICPA") and was amended by Statement of Position 98-4 ("SOP 98-4"). SelectTech adopted SOP 97-2 effective July 1, 1997 and SOP 98-4 effective March 31, 1998. SelectTech believes its current revenue recognition policies and practices are consistent with SOP 97-2 and SOP 98-4. Additionally, the AICPA issued SOP 98-9 in December 1998, which provides certain amendments to SOP 97-2, and is effective for transactions entered into by SelectTech beginning July 1, 1999. Adoption of these amendments did not have a material impact on SelectTech's financial position, results of operations or cash flows. Software license revenue is recognized upon meeting each of the following criteria: execution of a written license agreement or contract; delivery and implementation of software; the license fee F-30 SELECTTECH NOTES TO FINANCIAL STATEMENTS (Continued) YEARS ENDED JUNE 30, 1997, 1998 AND 1999, SIX MONTHS ENDED DECEMBER 31, 1998 (Unaudited) AND PERIOD FROM JULY 1, 1999 THROUGH DECEMBER 23, 1999 (Unaudited) 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) is fixed and determinable; collectibility of the proceeds is assessed as being probable; and vendor specific objective evidence exists to allocate the total fee to elements of the arrangement. Vendor-specific objective evidence is based on the price generally charged when an element is sold separately, or if not yet sold separately, is established by authorized management. All elements of each order are valued at the time of revenue recognition. The portion of revenues from new license agreements which relate to SelectTech's obligations to provide customer support is deferred and recognized ratably over the contract support period, which is generally one to four years. Software maintenance contracts are renewable on an annual basis. Revenues from maintenance contract renewals are deferred and recognized ratably over the terms of the agreements. Revenues from transactional services, consulting and other services are recognized as the related services are provided or as the milestones are completed. CONCENTRATION OF CREDIT RISK--Financial instruments which potentially subject SelectTech to concentrations of credit risk consist principally of accounts receivable. SelectTech sells its products and services to companies in the insurance industry and generally does not require its customers to provide collateral to support accounts receivable. SelectTech maintains allowances for potential credit losses. DEBT WITH STOCK PURCHASE WARRANTS--SelectTech accounts for stock purchase warrants as a separate component of equity and as a discount on the associated debt based on the relative fair value of the stock purchase warrants at the time of issuance. The discount on debt is amortized, as interest expense, over the period that the debt is outstanding. ADVERTISING EXPENSES--Direct costs related to marketing and advertising SelectTech's product are expensed in the periods incurred. Advertising expenses were $6,490, $8,630 and $42,774 for fiscal 1997, 1998 and 1999, respectively, $43,798 for the six months ended December 31, 1998, and $20,559 for the period from July 1, 1999 through December 23, 1999. IMPAIRMENT OF LONG-LIVED ASSETS--SelectTech evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. FINANCIAL INSTRUMENTS--The fair value of financial instruments, principally cash, accounts receivable, accounts payable, notes payable and debentures approximate their June 30, 1998 and 1999 and December 23, 1999 carrying values because such items are primarily short-term in nature. F-31 SELECTTECH NOTES TO FINANCIAL STATEMENTS (Continued) YEARS ENDED JUNE 30, 1997, 1998 AND 1999, SIX MONTHS ENDED DECEMBER 31, 1998 (Unaudited) AND PERIOD FROM JULY 1, 1999 THROUGH DECEMBER 23, 1999 (Unaudited) 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES--SelectTech operates in the software industry, and accordingly, can be affected by a variety of factors. For example, management of SelectTech believes that changes in any of the following areas could have a significant negative effect on SelectTech's future financial position, results of operations and cash flows: demand for performance availability and management software solutions, including any adverse purchasing patterns caused by Year 2000 related concerns; new product introductions by competitors; development of distribution channels; ability to implement and expand operational customer support and financial control systems to manage rapid growth, both domestically and internationally; the hiring, training and retention of key employees; fundamental changes in technology underlying software products; litigation or other claims against SelectTech. USE OF ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INCOME TAXES--SelectTech records income taxes using the asset and liability method which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in SelectTech's financial statements or tax returns. In estimating future tax consequences, generally all expected future events other than enactments or changes in the tax law or rates are considered. STOCK-BASED COMPENSATION--SelectTech accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 ("APB 25"), ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. COMPREHENSIVE INCOME--There are no differences between comprehensive income and net income as reported in SelectTech's statements of operations. SEGMENT INFORMATION--SelectTech has adopted the provisions of SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes standards for the reporting by public business enterprises of information about operating segments, products and services, geographic areas, and major customers. SelectTech operates in a single industry segment encompassing application system software and the accompanying integration and solution consulting services applicable to the insurance industry. All of SelectTech's revenues are received from customers based primarily in the United States. See Note 12 for information on major customers. NEW ACCOUNTING PRONOUNCEMENT--SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts for hedging activities. Under SFAS No. 133, certain contracts that were not formerly considered derivatives may now meet the F-32 SELECTTECH NOTES TO FINANCIAL STATEMENTS (Continued) YEARS ENDED JUNE 30, 1997, 1998 AND 1999, SIX MONTHS ENDED DECEMBER 31, 1998 (Unaudited) AND PERIOD FROM JULY 1, 1999 THROUGH DECEMBER 23, 1999 (Unaudited) 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) definition of a derivative. As amended in June 1999 by SFAS No. 137, this Statement is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. SelectTech has not yet evaluated the impact of this Statement. 2. ALLOWANCE FOR DOUBTFUL ACCOUNTS Allowances for doubtful accounts are estimated and established based on historical experience and specific circumstances of each customer. Additions to the allowance are charged to general and administrative expenses. Accounts receivable are written off against the allowance for doubtful accounts when an account is deemed uncollectible. Recoveries on accounts receivable previously charged off as uncollectible are credited to the allowance for doubtful accounts. SelectTech provided $124,291 to the allowance for doubtful accounts and wrote off accounts receivable of $84,196 during 1999. 3. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
June 30, --------------------- December 23, 1998 1999 1999 --------- --------- ------------ Computer equipment....................... $238,170 $ 439,999 $ 532,746 Furniture and equipment.................. 14,984 45,465 83,927 Leasehold improvements................... 8,320 8,320 23,803 -------- --------- --------- Total................................ 261,474 493,784 640,476 Less accumulated depreciation............ (91,797) (213,538) (298,129) -------- --------- --------- Property and equipment, net.............. $169,677 $ 280,246 $ 342,347 ======== ========= =========
Included in property and equipment at June 30, 1998 and 1999 and December 23, 1999 is equipment acquired under capital leases with a cost of $52,976. Accumulated depreciation at June 30, 1998 and 1999 and December 23, 1999 was $29,102, $44,233 and $46,886, respectively, related to such equipment. 4. MANDATORILY REDEEMABLE CONVERTIBLE SERIES A PREFERRED STOCK In August and November 1997, SelectTech issued a total of 450,000 shares of Mandatorily Redeemable Convertible Series A Preferred Stock for $750,000 to three insurance companies under a Stock Purchase Agreement. In addition in April 1998 SelectTech issued 150,000 shares of Mandatorily Redeemable Convertible Series A Preferred Stock to SelectQuote for $250,000 under F-33 SELECTTECH NOTES TO FINANCIAL STATEMENTS (Continued) YEARS ENDED JUNE 30, 1997, 1998 AND 1999, SIX MONTHS ENDED DECEMBER 31, 1998 (Unaudited) AND PERIOD FROM JULY 1, 1999 THROUGH DECEMBER 23, 1999 (Unaudited) 4. MANDATORILY REDEEMABLE CONVERTIBLE SERIES A PREFERRED STOCK (Continued) the same agreement. This agreement provides stock registration rights, representation on SelectTech's steering committee to provide advice about product development, and priority access to SelectTech's development resources. Each share of the Mandatorily Redeemable Convertible Series A Preferred Stock is convertible at any time into one share of common stock, subject to adjustment for certain anti-dilution provisions, and is automatically convertible into common stock upon a public offering of SelectTech's share at a per share price which is at least $5.00 (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares) and the gross cash proceeds to SelectTech (before underwriting discounts, commissions and fees) are at least $7,500,000 or upon the consent of the holders of a majority of the shares outstanding. The Mandatorily Redeemable Convertible Series A Preferred Stock has voting rights equivalent to the number of common shares into which each share is convertible, has a liquidation preference of the original purchase price plus any declared but unpaid dividends, and has a noncumulative annual dividend preference of $0.10 per share. Additionally, any time after August 2000 holders of at least 50% of the then outstanding Mandatorily Redeemable Convertible Series A Preferred Stock have the right to redeem all of the outstanding Mandatorily Redeemable Convertible Series A Preferred Stock at the liquidation preference. 5. TRANSACTIONS WITH SELECTQUOTE AND OTHER RELATED PARTIES Certain shareholders of SelectTech are shareholders of SelectQuote, and two officers of SelectQuote participate in the management and direction of SelectTech, including serving on SelectTech's Board of Directors. SelectQuote provides SelectTech with certain operating support, which includes management and administrative services, telephone and office facilities, and other miscellaneous items and charges SelectTech for these benefits on a cost reimbursement basis. Payables to SelectQuote for such services are $344,074 and $761,084 at June 30, 1998 and 1999, respectively, and $1,599,270 at December 23, 1999. Total fees for these services provided by SelectQuote were approximately $338,393, $527,009 and $708,132 in fiscal 1997, 1998 and 1999, respectively, $294,145 for the six months ended December 31, 1998, and $903,526 for the period from July 1, 1999 through December 23, 1999. Included in the total fees was sublease rental expense of $24,214, $85,302 and $134,892 during fiscal 1997, 1998 and 1999, respectively, $50,563 for the six months ended December 31, 1998, and $171,348 for the period from July 1, 1999 through December 23, 1999. In February 1997, SelectQuote loaned SelectTech $200,000 at an interest rate of 10% per annum due on July 31, 1998. However, payment on the note and related interest were deferred due to SelectTech's refinancing discussed in the following paragraph. The note is secured by consulting contracts, rights to any software that has been developed, and a maintenance contract with one insurance company. Interest expense recognized by SelectTech related to the note was $6,100, $20,000 and $20,000 in fiscal 1997, 1998 and 1999, respectively, $10,000 for the six months ended F-34 SELECTTECH NOTES TO FINANCIAL STATEMENTS (Continued) YEARS ENDED JUNE 30, 1997, 1998 AND 1999, SIX MONTHS ENDED DECEMBER 31, 1998 (Unaudited) AND PERIOD FROM JULY 1, 1999 THROUGH DECEMBER 23, 1999 (Unaudited) 5. TRANSACTIONS WITH SELECTQUOTE AND OTHER RELATED PARTIES (Continued) December 31, 1998, and $10,000 for the period from July 1, 1999 through December 23, 1999. Payables to SelectQuote for accrued interest expense are $26,100 and $46,100 at June 30, 1998 and 1999, respectively, and $56,100 at December 23, 1999. On October 15, 1998, SelectTech entered into a Debenture Purchase Agreement (the "Agreement") (see Note 7) which required SelectQuote to agree to subordination of both its $200,000 note receivable from SelectTech and $453,300 of the outstanding receivable for operating services from SelectTech. As a condition of the subordination, the note payable to SelectQuote was made convertible into shares of SelectTech's common stock at $1.67 per share. The Agreement also allows SelectTech to repay the $453,300 other payables balance in twelve monthly installments of $37,800 commencing in October 1998 and that subsequent charges for operating services be paid on a current basis. However, none of these installment payments have been made, although certain operating costs charged by SelectQuote to SelectTech have been reimbursed subsequent to the Agreement date. In June 1999, SelectTech borrowed from SelectQuote an additional $250,000 in the form of a promissory note bearing interest at 9% per annum and due on December 31, 1999. SelectQuote made two additional loans to SelectTech of $250,000 each in October and November 1999 under similar terms. SelectTech leased $38,000 of computer equipment from SelectQuote under a 36-month capital lease that expired in March 1999. The rate of interest on this lease was 9.0%. In April 1998, SelectQuote purchased 150,000 shares of Mandatorily Redeemable Convertible Series A Preferred Stock for $250,000. During fiscal 1997, 1998 and 1999, two members of SelectTech's Board of Directors worked as officers and consultants for SelectTech. The consulting expenses related to these directors totaled $176,440, $307,900 and $282,900 in fiscal 1997, 1998 and 1999, respectively, and $137,700 for the six months ended December 31, 1998, and $16,700 for the period from July 1, 1999 through December 23, 1999. Total payable was $55,546 and $46,425 at June 30, 1998 and 1999, respectively, and $0 at December 23, 1999. Additionally, a corporation owned by these individuals provided programming resources. Total programming expense was $285,145, $544,700 and $1,010,269 in fiscal 1997, 1998 and 1999, respectively, and $552,940 for the six months ended December 31, 1998 and $367,052 for the period from July 1, 1999 through December 23, 1999. Total payable was $553,271 and $748,254 at June 30, 1998 and 1999, respectively, and $779,044 at December 23, 1999. 6. PROMISSORY NOTES During fiscal 1998 and 1999, SelectTech entered into promissory notes totaling $425,000 with four insurance companies. These promissory notes bore interest at rates ranging from 10% to 15% with principal and interest due on October 12, 1998. The notes were repaid with the proceeds from the sale of the Senior Secured Convertible Debentures (see Note 7). F-35 SELECTTECH NOTES TO FINANCIAL STATEMENTS (Continued) YEARS ENDED JUNE 30, 1997, 1998 AND 1999, SIX MONTHS ENDED DECEMBER 31, 1998 (Unaudited) AND PERIOD FROM JULY 1, 1999 THROUGH DECEMBER 23, 1999 (Unaudited) 7. SENIOR SECURED CONVERTIBLE DEBENTURES In October 1998 SelectTech entered into a Debenture Purchase Agreement with three insurance carriers that provides up to $2,500,000 at 12% interest. As of June 30, 1999, $2,500,000 had been borrowed under this agreement. Debentures are convertible to common stock at a rate of $1.67 per share. In addition, debenture holders receive warrants to purchase common stock at $.01 per share for 5% of SelectTech's fully diluted capital exercisable at the earlier of an initial public offering of common stock, sale, transfer, or disposition of substantially all assets, or October 15, 2005. The proceeds from the issuance of Senior Secured Convertible Debentures were allocated to the debt and the warrants based on their relative fair value. The resulting debt discount of $718,294 and financing costs of $94,561 are being recognized as interest expense over the life of the debentures. The Debenture Purchase Agreement requires eight quarterly interest-only payments from December 31, 1998 through September 30, 2000; thereafter, outstanding principal shall be repaid in twelve equal quarterly installments, plus interest, from December 31, 2000 through September 30, 2003. The agreement provides for stock registration rights, requires 20% representation by purchasers on SelectTech's Board of Directors, requires subordination of the Note Payable to SelectQuote and past-due payables to related parties, and grants security interests in SelectTech's assets, including source code, to all existing and future software while the debentures are outstanding. From July 22, 1999 through August 13, 1999, SelectTech received additional loans totalling $750,000 from the three insurance carriers. These loans were to be repaid in full on December 15, 1999 at 12% per annum interest; however, the insurance carriers extended the due date to the earlier of: (i) the date funds are received from a $5,000,000 preferred stock investment in SelectQuote or (ii) December 29, 1999. 8. INCOME TAXES Income tax expense for the years ended June 30, 1997, 1998 and 1999 and for the period July 1, 1999 through December 23, 1999 consisted solely of state franchise taxes. F-36 SELECTTECH NOTES TO FINANCIAL STATEMENTS (Continued) YEARS ENDED JUNE 30, 1997, 1998 AND 1999, SIX MONTHS ENDED DECEMBER 31, 1998 (Unaudited) AND PERIOD FROM JULY 1, 1999 THROUGH DECEMBER 23, 1999 (Unaudited) 8. INCOME TAXES (Continued) Deferred income taxes reflect the tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes, as well as operating losses and tax credit carryforwards. Significant components of SelectTech's deferred tax assets for federal and state income taxes are as follows:
June 30, ------------------------- December 23, 1998 1999 1999 ----------- ----------- ------------ Deferred tax assets: Net operating loss carryforwards... $ 753,531 $ 1,898,781 $ 2,486,752 Other--net......................... 261,720 547,876 1,018,733 ----------- ----------- ----------- Total............................ 1,015,251 2,446,657 3,505,485 Valuation allowance.................. (1,015,251) (2,446,657) (3,505,485) ----------- ----------- ----------- Net deferred tax asset............... $ -- $ -- $ -- =========== =========== ===========
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. SelectTech established a 100% valuation allowance at June 30, 1998 and 1999 and December 23, 1999 due to the uncertainty of realizing future tax benefits from its net operating loss carryforwards and other deferred tax assets. Federal and state net operating losses for tax purposes of approximately $4,700,000 and $2,900,000, respectively, begin to expire in the years 2012 and 2003 for federal and state purposes, respectively. Internal Revenue Code Section 382 places a limitation (the "Section 382 Limitation") on the amount of taxable income which can be offset by net operating loss ("NOL") carryforwards after a change in control (generally greater than 50% change in ownership) of a loss corporation. California has similar rules. Generally, after a control change, a loss corporation cannot deduct NOL carryforwards in excess of the Section 382 Limitation. Due to these "change in ownership" provisions, utilization of the NOL and tax credit carryforwards may be subject to an annual limitation regarding their utilization against taxable income in future periods. 9. CAPITAL LEASES SelectTech leased computer equipment from SelectQuote under a capital lease agreement that expired March 1999 (see Note 5). In addition, during 1998 SelectTech entered into another capital lease which expires in March 2001. F-37 SELECTTECH NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED JUNE 30, 1997, 1998 AND 1999 AND SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999 (UNAUDITED) 9. CAPITAL LEASES (Continued) Minimum lease payments under this lease for future years ending June 30 are as follows: 2000........................................................ $ 5,802 2001........................................................ 3,868 ------- Total minimum lease payments............................ 9,670 Less amount representing interest........................... 797 ------- Present value of minimum lease payments..................... 8,873 Less current portion of obligation under capital lease...... (5,146) ------- Long-term portion of obligation under capital lease......... $ 3,727 =======
10. STOCK OPTION PLAN SelectTech's 1997 Stock Option Plan (the "Plan") allows the Board of Directors to grant options to employees, directors and consultants of SelectTech to purchase shares of common stock either as incentive stock options ("ISO") or as nonqualified stock options ("NSO"). The Board of Directors has authorized 6,200,000 shares of common stock for the Plan, as amended in February 1998 and August 1999. The term of each option may not exceed ten years and ten years and one month for ISOs and NSOs, respectively. Options vest ratably over three years from the date of grant. Stock option activity was as follows:
Weighted Number Average of Shares Exercise Price --------- -------------- Balance at July 1, 1996............................ -- $ -- Granted............................................ 1,727,744 0.001 --------- ------ Balance at June 30, 1997 (no shares vested)........ 1,727,744 0.001 Granted............................................ 900,000 0.170 --------- ------ Balance at June 30, 1998 (671,900 shares vested at a weighted average exercise price of $0.001)..... 2,627,744 0.060 Granted............................................ 124,500 1.670 Canceled........................................... (2,500) 1.670 --------- ------ Balance at June 30, 1999........................... 2,749,744 0.130 Granted (unaudited)................................ 3,409,111 3.413 Exercised (unaudited).............................. (750,000) 0.001 Canceled (unaudited)............................... (117,000) 0.520 --------- ------ Balance at December 23, 1999 (unaudited)........... 5,291,855 $2.255 ========= ====== Available for grant at December 23, 1999 (unaudited)...................................... 908,145 =========
F-38 SELECTTECH NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED JUNE 30, 1997, 1998 AND 1999 AND SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999 (UNAUDITED) 10. STOCK OPTION PLAN (Continued) The weighted average minimum value per option as of the date of grant for options granted during 1997, 1998 and 1999 was $0.00, $0.04 and $0.41, respectively. Total exercisable shares were 671,900 and 1,676,982 at June 30, 1998 and 1999, respectively, and 1,850,974 at December 23, 1999. The following table summarizes information about outstanding and vested stock options at December 23, 1999:
Options Outstanding - ---------------------------------------------- Weighted Options Outstanding Average Vested at Exercise at December 23, Remaining December 23, Price 1999 Contractual Life 1999 - -------- ---------------- ---------------- ------------- $0.001 977,744 7.47 864,344 0.170 800,000 8.16 507,078 1.670 105,000 9.20 28,116 3.210 1,243,309 9.65 164,640 3.530 2,165,802 9.65 286,796 --------- --------- 5,291,855 9.01 1,850,974 ========= =========
ADDITIONAL STOCK PLAN INFORMATION--As discussed in Note 1, SelectTech accounts for its stock-based awards to employees using the intrinsic value method in accordance with APB No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and its related interpretations. SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires the disclosure of pro-forma net loss and loss per share had SelectTech adopted the fair value method since SelectTech's inception. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from SelectTech's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The weighted average fair value of SelectTech's stock-based awards to employees was estimated using the minimum option pricing model with the following assumptions:
Years Ended June 30, ------------------------------ 1997 1998 1999 -------- -------- -------- Dividend yield........................................ None None None Risk free interest rate............................... 5.6% 5.6% 5.6% Expected term, in years............................... 2 2 2
F-39 SELECTTECH NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED JUNE 30, 1997, 1998 AND 1999 AND SIX MONTHS ENDED DECEMBER 31, 1998 AND 1999 (UNAUDITED) 10. STOCK OPTION PLAN (Continued) If the computed minimum values of SelectTech's stock-based awards to employees had been amortized to expense over the vesting period of the awards as specified under SFAS No. 123, net loss on a pro forma basis (as compared to such items as reported) would have been:
Years Ended June 30, ------------------------------------- 1997 1998 1999 --------- ----------- ----------- Net loss: As reported........................... $582,556 $2,005,378 $3,578,770 Pro forma............................. $582,563 $2,009,966 $3,595,629
11. EMPLOYEE BENEFIT PLAN SelectTech has a pretax savings plan covering nearly all its employees that is intended to qualify under Section 401(k) of the Internal Revenue Code. Eligible employees may contribute up to 15 percent of their pretax salary, subject to certain limitations. SelectTech makes a discretionary profit sharing contribution and matches each employee's contributions up to $300 per plan year. SelectTech's contributions were zero, $203 and $2,029 during the years ended June 30, 1997, 1998 and 1999, respectively. 12. MAJOR CUSTOMERS Revenue attributable to significant customers, representing approximately 10% or more of total revenue for at least one of the respective periods, is summarized as follows:
Years Ended June 30, ------------------------------------ Sales 1997 1998 1999 - ----- -------- -------- -------- Company A.............................................. 59% 4% --% Company B.............................................. 40 23 -- Company C.............................................. -- 19 24 Company D.............................................. -- 19 2 Company E.............................................. -- 27 6 Company F.............................................. -- -- 30
At June 30, 1998, Company B, C, E and F accounted for 17%, 33%, 24% and 14%, respectively, of accounts receivable. At June 30, 1999, Company C and F accounted for 27% and 22%, respectively, of accounts receivable. F-40 You should rely only on the information contained in this Prospectus. We have not authorized anyone to provide information different from that contained in this Prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. TABLE OF CONTENTS
Page -------- Prospectus Summary.................... 3 Risk Factors.......................... 8 Special Note Re Forward-Looking Statements and Industry Data........ 20 Use of Proceeds....................... 20 Dividend Policy....................... 20 Capitalization........................ 21 Dilution.............................. 22 Selected Financial and Operating Data................................ 23 Pro Forma Condensed Combined and Actual Data......................... 25 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 28 Business.............................. 41 Management............................ 59 Related Party Transactions............ 64 Principal Stockholders................ 66 Description of Capital Stock.......... 67 Shares Eligible for Future Sale....... 69 Underwriting.......................... 71 Legal Matters......................... 73 Experts............................... 73 Where You Can Find Additional Information......................... 73 Index to Consolidated Financial Statements.......................... F-1
Dealer Prospectus Delivery Obligation: Until , 2000 (25 days after the date of this prospectus), all dealers that buy, sell or trade in these shares of common stock, whether or not participating in this offering, may be required to deliver a prospectus. Dealers are also obligated to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. [LOGO] Shares Common Stock Deutsche Banc Alex. Brown U.S. Bancorp Piper Jaffray Cochran, Caronia & Co. Prospectus , 2000 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the expenses payable by the Company (the "registrant") in connection with the offering of the securities being registered, other than the underwriting discounts and commissions. All of the amounts are estimates except for the SEC registration fee, the NASD filing fee and the Nasdaq National Market filing fee. SEC registration fee........................................ $17,152 NASD filing fee............................................. Nasdaq National Market filing fee*.......................... Blue Sky fees and expenses.................................. 1,000 Printing and engraving expenses*............................ Legal fees and expenses*.................................... Accounting fees and expenses*............................... Transfer agent and registrar fees and expenses*............. Directors' and Officers' insurance premiums*................ Miscellaneous expenses*..................................... ------- Total..................................................... $ =======
- ------------------------ * To be added by amendment Item 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the Delaware General Corporation Law (the DGCL) authorizes a court to award, or a corporation's board of directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the "Securities Act"). As permitted by the DGCL, the registrant's bylaws provide that the registrant shall indemnify its directors and officers, and may indemnify its employees and other agents, to the fullest extent permitted by law. The bylaws also permit the registrant to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in such capacity, regardless of whether the bylaws would permit indemnification. The registrant intends to obtain officer and director liability insurance with respect to liabilities arising out of certain matters, including matters arising under the Securities Act. The registrant also has entered into agreements with certain of its directors and executive officers and intends to enter into agreements with its remaining officers and directors that, among other things, indemnify them for certain expenses (including attorneys' fees), judgments, fines and settlement amounts incurred by them in any action or proceeding, including any action by or in the right of the registrant, arising out of such person's services as a director or officer of the registrant, any subsidiary of the registrant or any other company or enterprise to which the person provides services at the request of the registrant. Reference is made to Section 8 of the Underwriting Agreement, a copy of which is filed as Exhibit 1.1 hereto, which provides for indemnification by the Underwriters of the directors and officers of the registrant who sign the registration statement against certain liabilities, including those arising under the Securities Act, in certain circumstances. II-1 Item 15. RECENT SALES OF UNREGISTERED SECURITIES. (1) In December 1999, the registrant acquired SelectQuote as its wholly owned subsidiary in a merger transaction and simultaneously acquired SelectTech which merged into SelectQuote pursuant to the terms of an amended and restated agreement and plan of reorganization dated as of August 17, 1999. In connection with these two merger transactions, the registrant appeared at a fairness hearing conducted by the California Corporations Commissioner, which issued a permit for the offer and sale of securities in the merger. Pursuant to the permit the registrant issued the following securities to the shareholders and other security holders of SelectQuote and SelectTech which were exempt from registration under the Securities Act by reason of Section 3(a)(10) thereof: 10,497,974 shares of common stock; 1,137,235 shares of Series A preferred stock; 821,690 shares of Series B preferred stock; 69,925 shares of Series C preferred stock. In addition, the registrant issued debentures in the principal amount of $1.9 million convertible into 731,420 shares of common stock at $2.60 per share and options for the purchase of 6,510,635 shares of common stock, which were issued to the former holders of SelectQuote and SelectTech stock options. No underwriters were engaged in connection with these issuances and sales. (2) The registrant issued a total of 50,000 shares of Series D preferred stock in a private placement on December 27, 1999 to an accredited investor. These shares are convertible into 1,111,111 shares of Series D preferred stock. The total consideration received was $5.0 million. The exemption from registration relied upon for this transaction was Section 4(2). Cochran, Caronia Securities LLC provided investment banking services to the registrant in connection with this private placement. (3) The registrant entered into a binding agreement for the sale of 2,041,845 shares of Series E preferred stock in a private placement on February 29, 2000 to a group of accredited investors. These shares are convertible into 2,041,845 shares of common stock. The sale of these securities will be exempt from registration relied upon for this transaction was Section 4(2). Cochran, Caronia Securities LLC provided investment banking services to the registrant in connection with this private placement. Item 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits
Exhibit Number Description of Document - ------- ----------------------- 1.1 Form of Equity Underwriting Agreement. 2.1 Amended and Restated Agreement and Plan of Reorganization 2.1.1 Amendment to Amended and Restated Agreement and Plan of Reorganization 2.2 Merger Agreement 3.1 Restated Certificate of Incorporation of the Registrant in effect upon the date of this filing 3.2 Bylaws of the registrant in effect upon the date of this filing 4.1 * Specimen Stock Certificate 4.2 Amended and Restated Registration Rights Agreement 4.3 Amended and Restated Debenture Purchase Agreement 5.1 * Opinion of McCutchen, Doyle, Brown & Enersen, LLP 5.2 * Opinion of Chapin McNitt Fleming Shea & Carter 10.1 SelectQuote, Inc. 1999 Stock Option Plan 10.2 Form of Option Agreement
II-2
Exhibit Number Description of Document - ------- ----------------------- 10.3 SelectQuote, Inc. 1999 Employee Stock Purchase Plan 10.4 * Software License Agreement--Intellisys 10.5 Software Development Agreement with Innovative Information Group, Inc. 10.6 Software Development Agreement between Software Technology, Inc. and Innovative Information Group, Inc. 10.7 Software Development Agreement between Software Technology, Inc. and Client Server Programs, Inc. 10.8 Lease Agreement for 657 Mission Street, San Francisco, California 10.9 Lease Agreement for 595 Market Street, San Francisco, California (6th and 7th Floors) 10.10 Lease Agreement for 595 Market Street, San Francisco, California (7th, 9th and 10th Floors) 10.11 Form of Employment Agreement with executive officers 10.12 Form of Indemnity Agreement 10.13 Form of Affiliates Agreement 10.14 * Credit Agreement with LaSalle Bank National Association 21.1 * Subsidiaries of the Registrant 23.1 * Consent of McCutchen, Doyle, Brown & Enersen LLP (included in Exhibit 5.1 hereto) 23.2 Consent of Deloitte & Touche LLP 23.3 * Consent of Chapin Fleming McNitt Shea & Carter 23.4 Consent of Randall J. Wolf 24.1 Power of Attorney (contained on the signature page to this registration statement). 27.1 Financial Data Schedule
- ------------------------ * To be filed by amendment Item 17. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For the purpose of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 297(h) under the Securities Act shall be deemed to be part of this registration statement at the time it was declared effective. II-3 (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof. The undersigned registrant hereby undertakes to provide to the Underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. [Remainder of page intentionally left blank.] II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Amendment to the registration statement to be signed on its behalf of the undersigned, thereunto duly authorized, in the city of San Francisco, state of California on March 1, 2000. ZEBU By: /s/ CHARAN J. SINGH ----------------------------------------- Charan J. Singh CHIEF EXECUTIVE OFFICER
Power of Attorney KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Steven H. Gerber and David L. Paulsen, or either one of them, his true and lawful attorney-in-fact and agent for him and on his behalf and in his name, place and stead, and in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement and 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 (and any amendments thereto), and to file the same, with exhibits and any and all other documents filed with respect thereto, with the Securities and Exchange Commission (or any other governmental or regulatory authority), granting unto said attorney full power and authority to do and to perform each and every act and thing requisite and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he himself might or could do if personally present, hereby ratifying and confirming all that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
Name Title Date ---- ----- ---- /s/ CHARAN J. SINGH Chairman of the Board of Directors and --------------------------------- Chief Executive Officer (Principal March 1, 2000 Charan J. Singh Executive Officer) /s/ STEVEN H. GERBER --------------------------------- President and Director March 1, 2000 Steven H. Gerber Chief Operating Officer, Insurance /s/ DAVID L. PAULSEN Products and Services, Chief Financial --------------------------------- Officer (Principal Financial Officer March 1, 2000 David L. Paulsen and Principal Accounting Officer), and Director /s/ MICHAEL L. FEROAH --------------------------------- Director March 1, 2000 Michael L. Feroah /s/ STEVEN J. TYNAN --------------------------------- Director March 1, 2000 Steven J. Tynan
II-5 EXHIBIT INDEX
Exhibit Number Description of Document - ------- ----------------------- 1.1 Form of Equity Underwriting Agreement. 2.1 Amended and Restated Agreement and Plan of Reorganization 2.1.1 Amendment to Amended and Restated Agreement and Plan of Reorganization 2.2 Merger Agreement 3.1 Restated Certificate of Incorporation of the Registrant in effect upon the date of this filing 3.2 Bylaws of the registrant in effect upon the date of this filing 4.1 * Specimen Stock Certificate 4.2 Amended and Restated Registration Rights Agreement 4.3 Amended and Restated Debenture Purchase Agreement 5.1 * Opinion of McCutchen, Doyle, Brown & Enersen, LLP 5.2 * Opinion of Chapin McNitt Fleming Shea & Carter 10.1 SelectQuote, Inc. 1999 Stock Option Plan 10.2 Form of Option Agreement 10.3 SelectQuote, Inc. 1999 Employee Stock Purchase Plan 10.4 * Software License Agreement--Intellisys 10.5 Software Development Agreement with Innovative Information Group, Inc. 10.6 Software Development Agreement between Software Technology, Inc. and Innovative Information Group, Inc. 10.7 Software Development Agreement between Software Technology, Inc. and Client Server Programs, Inc. 10.8 Lease Agreement for 657 Mission Street, San Francisco, California 10.9 Lease Agreement for 595 Market Street, San Francisco, California (6th and 7th Floors) 10.10 Lease Agreement for 595 Market Street, San Francisco, California (7th, 9th and 10th Floors) 10.11 Form of Employment Agreement with executive officers 10.12 Form of Indemnity Agreement 10.13 Form of Affiliates Agreement 10.14 * Credit Agreement with LaSalle Bank National Association 21.1 * Subsidiaries of the Registrant 23.1 * Consent of McCutchen, Doyle, Brown & Enersen LLP (included in Exhibit 5.1 hereto) 23.2 Consent of Deloitte & Touche LLP 23.3 * Consent of Chapin Fleming McNitt Shea & Carter 23.4 Consent of Randall J. Wolf 24.1 Power of Attorney (contained on the signature page to this registration statement). 27.1 Financial Data Schedule
- ------------------------ * To be filed by amendment EX-1.1 2 EXHIBIT 1.1 _______________ SHARES ZEBU, INC. COMMON STOCK ($0.01 PAR VALUE) EQUITY UNDERWRITING AGREEMENT _______________, 2000 Deutsche Banc Securities Inc. U.S. Bancorp Piper Jaffray Inc. Cochran, Caronia Securities LLC As Representatives of the Several Underwriters c/o Deutsche Banc Securities Inc. One South Street Baltimore, Maryland 21202 Ladies and Gentlemen: Zebu, Inc., a Delaware corporation (the "Company"), proposes to sell to the several underwriters (the "Underwriters") named in Schedule I hereto for whom you are acting as representatives (the "Representatives") an aggregate of __________ shares of the Company's common stock, $0.01 par value (the "Firm Shares"). The respective numbers of Firm Shares to be purchased by the several Underwriters are set forth opposite their names in Schedule I hereto. The Company also proposes to sell at the Underwriters' option an aggregate of up to __________ additional shares of the Company's common stock (the "Option Shares") as set forth below. As the Representatives, you have advised the Company (a) that you are authorized to enter into this Agreement on behalf of the several Underwriters, and (b) that the several Underwriters are willing, acting severally and not jointly, to purchase the numbers of Firm Shares set forth opposite their respective names in Schedule I, plus their pro rata portion of the Option Shares if you elect to exercise the over-allotment option in whole or in part for the accounts of the several Underwriters. The Firm Shares and the Option Shares (to the extent the aforementioned option is exercised) are herein collectively called the "Shares." Deutsche Banc Securities Inc. ("Deutsche Banc") has agreed to reserve a portion of the Shares to be purchased by it under this Agreement for sale to the Company's directors, officers, employees and business associates and other parties related to the Company (collectively, "Participants"), as set forth in the Prospectus under the heading "Underwriters" (the "Directed Share Program"). The Shares to be sold by Deutsche Banc pursuant to the Directed Share Program are hereinafter referred to as the "Directed Shares." Any Directed Shares not orally confirmed for purchase by any Participants by the end of the business day on which this Agreement is executed will be offered to the public by the Underwriters as set forth in the Prospectus. In consideration of the mutual agreements contained herein and of the interests of the parties in the transactions contemplated hereby, the parties hereto agree as follows: 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to each of the Underwriters as follows: (a) A registration statement on Form S-1 (File No. 333-______) with respect to the Shares has been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Securities Act"), and the Rules and Regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder and has been filed with the Commission. The Company has complied with the conditions for the use of Form S-1. Copies of such registration statement, including any amendments thereto, the preliminary prospectuses (meeting the requirements of the Rules and Regulations) contained therein and the exhibits, financial statements and schedules, as finally amended and revised, have heretofore been delivered by the Company to you. Such registration statement, together with any registration statement filed by the Company pursuant to Rule 462(b) of the Securities Act, herein referred to as the "Registration Statement," which shall be deemed to include all information omitted therefrom in reliance upon Rule 430A and contained in the Prospectus referred to below, has become effective under the Securities Act and no post-effective amendment to the Registration Statement has been filed as of the date of this Agreement. "Prospectus" means the form of prospectus first filed with the Commission pursuant to Rule 424(b). Each preliminary prospectus included in the Registration Statement prior to the time it becomes effective is herein referred to as a "Preliminary Prospectus." Any reference herein to the Registration Statement, any Preliminary Prospectus or to the Prospectus shall be deemed to refer to and include any documents incorporated by reference therein, and, in the case of any reference herein to any Prospectus, also shall be deemed to include any documents incorporated by reference therein, and any supplements or amendments thereto, filed with the Commission after the date of filing of the Prospectus under Rules 424(b) or 430A, and prior to the termination of the offering of the Shares by the Underwriters. (b) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement. SelectQuote Insurance Services, a California corporation and -2- wholly-owned subsidiary of the Company ("SQIS"), has been duly organized and is validly existing as a corporation in good standing under the laws of the State of California, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement. SQIS is the only subsidiary, direct or indirect, of the Company. The Company and SQIS are duly qualified to transact business in all jurisdictions in which the conduct of their business requires such qualification. All of the outstanding shares of capital stock of SQIS have been duly authorized and validly issued, are fully paid and non-assessable and are owned by the Company free and clear of all liens, encumbrances and equities and claims; and no options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligations into shares of capital stock or ownership interests in SQIS are outstanding. (c) The outstanding shares of common stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable; the Shares to be issued and sold by the Company have been duly authorized and when issued and paid for as contemplated hereby will be validly issued, fully paid and non-assessable; and no preemptive rights of stockholders exist with respect to any of the Shares or the issue and sale thereof. Neither the filing of the Registration Statement nor the offering or sale of the Shares as contemplated by this Agreement gives rise to any rights, other than those which have been waived or satisfied, for or relating to the registration of any shares of common stock. (d) The Agreement and Plan of Merger, dated December 23, 1999, and the Agreement and Plan of Reorganization, dated August 17, 1999 (collectively, the "Merger Agreements"), by and among SQIS, SelectTech, Inc., a Nevada corporation ("SelectTech"), the Company and SelectQuote Acquisition Sub, a California corporation ("SQAS"), have been duly authorized by all necessary action by the board of directors and stockholders of each of the parties thereto and have been duly executed and delivered by each of the parties thereto. The execution and delivery of the Merger Agreements and the consummation of the merger contemplated thereby (the "Merger") did not contravene (i) any provision of applicable law, (ii) the Articles of Incorporation or By-laws of SQIS, (iii) the Articles of Incorporation or By-laws of SelectTech, (iv) the Certificate of Incorporation or By-laws of the Company, (v) the Articles of Incorporation or By-laws of SQAS (vi) any agreement or other instrument binding upon the Company, SelectTech or SQIS that is material to the Company, SelectTech or SQIS and that is set forth as an exhibit to the Registration Statement (vii) any judgment or decree of any governmental body, agency or court having jurisdiction over the Company, SelectTech or SQIS, except for any such contravention that would not have a material adverse effect on the condition (financial or otherwise), business, results of operation or prospects of the Company and SQIS, taken as a whole. No consent, approval, authorization or order of qualification with any governmental body or agency was required for the performance by the Company, SelectTech or SQIS of its obligations under the Merger Agreements except such as were obtained. The Merger is effective under the laws of the State of California, the State of Delaware and the State of Nevada. Pursuant to the Merger Agreements, SQIS succeeded to all rights, privileges and obligations of SelectTech. The offer and sale of the securities issued in connection with the Merger were in compliance with the applicable federal and state securities laws. Neither the Merger Agreements nor the exchange of shares consummated in connection therewith -3- (i) contravened, conflicted with or resulted in a material violation or breach of, or resulted in a default under, any provisions of any agreement or contract of SQIS, SelectTech, the Company or SQAS, except for any contravention, conflict, violation, breach or default which could not reasonably be expected to result in a material adverse effect on the Company and SQIS, taken as a whole; (ii) gave any person the right to (a) declare a default or exercise any remedy under any such agreement or contract, except where any such default or exercise of a remedy could not reasonably be expected to result in a material adverse effect on the Company and SQIS, taken as a whole, (b) accelerate the maturity or performance of any such agreement or contract, except where such acceleration could not reasonably be expected to result in a material adverse effect on the Company and SQIS, taken as a whole, or (c) cancel, terminate or modify any such contract, except where any such cancellation, termination or modification could not reasonably be expected to result in a material adverse effect on the Company and SQIS, taken as a whole; or (iii) resulted in the imposition or creation of any encumbrance upon or with respect to any of the shares of capital stock or the assets of the Company, except where such encumbrance would not result in a material adverse effect on the Company and SQIS, taken as a whole. (e) The information set forth under the caption "Capitalization" in the Prospectus is true and correct. All of the Shares conform to the description thereof contained in the Registration Statement. The form of certificates for the Shares conforms to the corporate law of the jurisdiction of the Company's incorporation. (f) The Commission has not issued an order preventing or suspending the use of any Prospectus relating to the proposed offering of the Shares nor instituted proceedings for that purpose. The Registration Statement contains, and the Prospectus and any amendments or supplements thereto will contain, all statements which are required to be stated therein by, and will conform to, the requirements of the Securities Act and the Rules and Regulations. The Registration Statement and any amendment thereto do not contain, and will not contain, any untrue statement of a material fact and do not omit, and will not omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus and any amendments and supplements thereto do not contain, and will not contain, any untrue statement of material fact and do not omit, and will not omit, to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no representations or warranties as to information contained in or omitted from the Registration Statement or the Prospectus, or any such amendment or supplement, in reliance upon, and in conformity with, written information furnished to the Company by or on behalf of any Underwriter through the Representatives, specifically for use in the preparation thereof. (g) The consolidated financial statements of each of SQIS and SelectTech, together with related notes and schedules as set forth in the Registration Statement, present fairly the financial position and the results of operations and cash flows of each of SQIS and SelectTech, at the indicated dates and for the indicated periods. Such financial statements and related schedules have been prepared in accordance with generally accepted principles of accounting, consistently applied throughout the periods involved, except as disclosed therein, and all adjustments necessary for a fair presentation of results -4- for such periods have been made. The summary financial, operating and other statistical data included in the Registration Statement presents fairly the information shown therein and such data has been compiled on a basis consistent with the financial statements presented therein and the books and records of each of SQIS and SelectTech. The pro forma financial statements and other pro forma financial information included in the Registration Statement and the Prospectus present fairly the information shown therein, have been prepared in accordance with the Commission's rules and guidelines with respect to pro forma financial statements, have been properly compiled on the pro forma bases described therein, and, in the opinion of the Company, the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions or circumstances referred to therein. (h) Deloitte & Touche LLP, who have certified certain of the financial statements filed with the Commission as part of the Registration Statement, are independent public accountants as required by the Securities Act and the Rules and Regulations. (i) There is no action, suit, claim or proceeding pending or, to the knowledge of the Company, threatened against the Company or SQIS before any court or administrative agency or otherwise which if determined adversely to the Company or SQIS might result in any material adverse change in the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and of SQIS taken as a whole or to prevent the consummation of the transactions contemplated hereby, except as set forth in the Registration Statement. (j) Each of the Company and SQIS has good and marketable title to all of the properties and assets reflected in the financial statements (or as described in the Registration Statement) hereinabove described, subject to no lien, mortgage, pledge, charge or encumbrance of any kind except those reflected in such financial statements (or as described in the Registration Statement) or which are not material in amount. Each of the Company and SQIS occupies its leased properties under valid and binding leases conforming in all material respects to the description thereof set forth in the Registration Statement. (k) Each of the Company, SQIS and SelectTech has filed all federal, state, local and foreign tax returns which have been required to be filed and have paid all taxes indicated by said returns and all assessments received by them or any of them to the extent that such taxes have become due. All tax liabilities have been adequately provided for in the financial statements of the Company, SQIS and SelectTech, and the Company does not know of any actual or proposed additional material tax assessments. (l) Since the respective dates as of which information is given in the Registration Statement, as it may be amended or supplemented, (i) there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise), or prospects of the Company and SQIS taken as a whole, whether or not occurring in the ordinary course of business, (ii) there -5- has not been any material transaction entered into or any material transaction that is probable of being entered into by the Company or SQIS, other than transactions in the ordinary course of business and changes and transactions described in the Registration Statement, as it may be amended or supplemented, (iii) there has not been any material adverse change or any development involving a prospective material adverse change in the capital stock or in the long-term debt of the Company or SQIS, and (iv) neither the Company nor SQIS has purchased any of its outstanding capital stock nor declared, paid or made any dividend or other distribution on its capital stock of any class or series. The Company and SQIS have no material contingent obligations which are not disclosed in the financial statements of SQIS and SelectTech which are included in the Registration Statement. (m) Neither the Company nor SQIS is or with the giving of notice or lapse of time or both, will be, in violation of or in default under its Certificate of Incorporation or Articles of Incorporation, as applicable, or its By-Laws or under any agreement, lease, contract, indenture or other instrument or obligation to which it is a party or by which it, or any of its properties, is bound and which default is of material significance in respect of the condition, financial or otherwise of the Company and SQIS, taken as a whole or the business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and SQIS taken as a whole. The execution, delivery and performance of this Agreement and the consummation of the transactions herein contemplated and the fulfillment of the terms hereof do not and will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust or other agreement or instrument to which the Company or SQIS is a party, or of the Certificate of Incorporation or Articles of Incorporation, as applicable, or the By-Laws of the Company or SQIS, or any order, rule or regulation applicable to the Company or SQIS of any court or of any regulatory body or administrative agency or other governmental body having jurisdiction over the Company or SQIS. (n) Each approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body necessary in connection with the execution and delivery by the Company of this Agreement and the consummation of the transactions herein contemplated (except such additional steps as may be required by the Commission, the National Association of Securities Dealers, Inc. (the "NASD") or such additional steps as may be necessary to qualify the Shares for public offering by the Underwriters under state securities or Blue Sky laws) has been obtained or made and is in full force and effect. (o) Each of the Company and SQIS holds all material licenses, certificates and permits from governmental authorities which are necessary to own or lease, as the case may be, and to operate its properties and to conduct its business as described in the Registration Statement; and, except as described in the Registration Statement (and any amendment or supplement thereto), neither the Company nor SQIS has to its knowledge infringed any patents issued prior to the Closing Date, trade names, trademarks or copyrights, which infringement is material to the business of the Company and SQIS, taken as a whole, as described in the Registration Statement. The Company knows of no material infringement by others of patents, -6- patent rights, trade names, trademarks or copyrights owned by or licensed to the Company or SQIS. Each of the Company and SQIS owns, or possesses adequate rights to use, all patents, patent rights, inventions, trade secrets, licenses, know-how, proprietary techniques, including processes and substances, trademarks, service marks, trade names and copyrights described or referred to in the Registration Statement as owned or used by it or which are necessary for the conduct of its business as described in the Registration Statement, except as otherwise disclosed in the Registration Statement. To the best knowledge of the Company, except as disclosed in the Registration Statement, all such patents, patent rights, licenses, trademarks, service marks and copyrights are (i) valid and enforceable and (ii) not being infringed by any third parties which infringement could, whether singly or in the aggregate, materially and adversely affect the business, properties, operations, condition (financial or otherwise), income, business prospects or results of operations of the Company and SQIS, taken as a whole, as presently being conducted or as proposed to be conducted in the Registration Statement. Except as disclosed in the Registration Statement, the Company has no knowledge of, nor has it received any notice of, infringement of or conflict with, asserted rights of others with respect to any patents issued prior to the Closing Date, inventions, trade secrets, licenses, know-how, proprietary techniques, including processes and substances, trademarks, service marks, trade names or copyrights which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding could materially and adversely affect the business, properties, operations, condition (financial or otherwise), income, business prospects or results of operations of the Company and SQIS, taken as a whole, as presently being conducted or as proposed to be conducted in the Registration Statement. (p) Neither the Company, nor to the Company's knowledge, any of its affiliates, has taken or may take, directly or indirectly, any action designed to cause or result in, or which has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of the shares of common stock to facilitate the sale or resale of the Shares. The Company acknowledges that the Underwriters may engage in passive market making transactions in the Shares on the Nasdaq National Market in accordance with Rule 10b-6A under the Exchange Act. (q) The Company has been advised concerning the Investment Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations thereunder; neither the Company nor SQIS is and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Registration Statement, neither the Company nor SQIS will be, an "investment company" as such term is defined in the 1940 Act; and each of the Company, SQIS and SelectTech has in the past conducted, and each of the Company and SQIS intends in the future to conduct, its affairs in such a manner as to ensure that it will not become an "investment company" or a company "controlled" by an "investment company" within the meaning of the 1940 Act and the rules and regulations thereunder. (r) Each of the Company and SQIS maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) -7- access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (s) Each of the Company and SQIS carries, or is covered by, insurance in such amounts and covering such risks as is adequate for the conduct of their respective businesses and the value of their respective properties and as is customary for companies engaged in similar business. (t) Each of the Company and SQIS is in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for which the Company or SQIS would have any liability; neither the Company nor SQIS has incurred nor expects to incur liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the "Code"); and each "pension plan" for which the Company or SQIS would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification. (u) To the Company's knowledge, there are no affiliations or associations between any member of the NASD and any of the Company's or SQIS's officers, directors or securityholders, except as set forth in the Registration Statement or previously disclosed on NASD questionnaires provided to counsel for the Representatives. (v) Neither the Company, SQIS nor SelectTech has violated any foreign, federal, state or local law or regulation relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), any provisions of the Employee Retirement Income Security Act of 1974, as amended, or any provisions of the Foreign Corrupt Practices Act, or the rules and regulations promulgated thereunder, except for such violations which, singly or in the aggregate, would not have a material adverse effect on the business, prospects, financial condition or results of operation of the Company and SQIS, taken as a whole. (w) Each of the Company and SQIS has such permits, licenses, consents, exemptions, franchises, authorizations and other approvals (each, an "Authorization") of, and has made all filings with and notices to, all governmental or regulatory authorities and self-regulatory organizations and all courts and other tribunals, including, without limitation, under any applicable Environmental Laws, as are necessary to own, lease, license and operate its properties and to conduct its business, except where the failure to have any such Authorization or to make any such filing or notice would not, singly or in -8- the aggregate, have a material adverse effect on the business, prospects, financial condition or results of operations of the Company and SQIS, taken as a whole. Each such Authorization is valid and in full force and effect and each of the Company and SQIS is in compliance with all the terms and conditions thereof and with the rules and regulations of the authorities and governing bodies having jurisdiction with respect thereto; and no event has occurred (including, without limitation, the receipt of any notice from any authority or governing body) which allows or, after notice or lapse of time or both, would allow, revocation, suspension or termination of any such Authorization or results or, after notice or lapse of time or both, would result in any other impairment of the rights of the holder of any such Authorization; and such Authorizations contain no restrictions that are burdensome to the Company or SQIS; except where such failure to be valid and in full force and effect or to be in compliance, the occurrence of any such event or the presence of any such restriction would not, singly or in the aggregate, have a material adverse effect on the business, prospects, financial condition or results of operations of the Company and SQIS, taken as a whole. (x) There are no costs or liabilities associated with Environmental Laws (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any Authorization, any related constraints on operating activities and any potential liabilities to third parties) which would, singly or in the aggregate, have a material adverse effect on the business, prospects, financial condition or results of operations of the Company and SQIS, taken as a whole. (y) This Agreement has been duly authorized, executed and delivered by the Company. (z) No relationship, direct or indirect, exists between or among the Company or SQIS on the one hand, and the directors, officers, stockholders, customers or suppliers of the Company or SQIS on the other hand, which is required by the Securities Act to be described in the Registration Statement or the Prospectus which is not so described. The statements in the Registration Statement describing any such relationship, including without limitation any description of Innovative Information Group, Inc., a California corporation, and any other entity controlled by any director, officer, stockholder, customer or supplier of the Company, are accurate, complete and fair. (aa) There is no (i) significant unfair labor practice complaint, grievance or arbitration proceeding pending or threatened against the Company or SQIS before the National Labor Relations Board or any state or local labor relations board, (ii) strike, labor dispute, slowdown or stoppage pending or threatened against the Company or SQIS, or (iii) union representation question existing with respect to the employees of the Company or SQIS, except for such actions specified in clause (i), (ii) or (iii) above which, singly or in the aggregate, would not have a material adverse effect on the business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company or SQIS, taken as a whole. To the best of the Company's knowledge, no collective bargaining organizing activities are taking place with respect to the Company or SQIS. -9- (ab) There are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees of indebtedness by the Company, SQIS or SelectTech to or for the benefit of any of the officers or directors of the Company or SQIS, or any of the members of the families of any of them, except as disclosed in the Registration Statement and the Prospectus. (ac) There are no issues related to the Company's or SQIS's preparedness for the Year 2000 that (i) are of a character required to be described or referred to in the Registration Statement or Prospectus by the Securities Act which have not been accurately described in the Registration Statement or Prospectus or (ii) might reasonably be expected to result in any material adverse change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and SQIS, taken as a whole, or that might materially affect their properties, assets or rights. All internal computer systems and each Constituent Component (as defined below) of those systems and all computer-related products and each Constituent Component of those products of the Company and SQIS, by December 31, 1999, fully complied with the Year 2000 Qualification Requirements. "Year 2000 Qualification Requirements" means that the internal computer systems and each Constituent Component (as defined below) of those systems and all computer-related products of each Constituent Component (as defined below) of those products of the Company and SQIS (i) have been reviewed to confirm that they store, process (including sorting and performing mathematical operations, calculations and computations), input and output data containing date and information correctly regardless of whether the date contains dates and times before, on or after January 1, 2000, (ii) have been designated to ensure date and time entry recognition and calculations, and date data interface values that reflect the century, (iii) accurately manage and manipulate data involving dates and times, including single century formulas and multi-century formulas, and will not cause an abnormal ending scenario within the application or generate incorrect values or invalid results involving such dates, (iv) accurately process any date rollover, and (v) accept and respond to two-digit year date input in a manner that resolves any ambiguities as to the century. "Constituent Component" means all software (including operating systems, programs, packages and utilities), firmware, hardware, networking components and peripherals provided as part of the configuration. Each of the Company and SQIS has inquired of material vendors as to their preparedness for the Year 2000 and has disclosed in the Registration Statement or Prospectus any issues that might reasonably be expected to result in any material adverse change. (ad) The Company's common stock has been approved for quotation on the Nasdaq National Market, subject to official notice of issuance. (ae) The Company has not distributed and will not distribute prior to the later of (i) the Closing Date, or any date on which Option Shares are to be purchased, as the case may be, and (ii) completion of the distribution of the Shares, any offering material in connection with the offering and sale of the Shares other than any preliminary prospectuses, the Prospectus, the Registration Statement and other materials, if any, permitted by the Securities Act. -10- (af) Each officer and director of the Company and SQIS and each beneficial owner of common stock of the Company listed on Schedule II hereto has agreed in writing that such person will not make any offering, sale, short sale or other disposition of any shares of common stock of the Company or other capital stock of the Company or other securities convertible, exchangeable or exercisable for common stock or derivative of common stock of the Company owned or hereafter acquired by such person or request the registration for the offer or sale of any of such shares of common stock (or as to which such person has the right to direct the disposition of), directly or indirectly, for a period of 180 days following the effective date of the Registration Statement, otherwise than (i) with the prior written consent of Deutsche Banc or (ii) in a distribution of shares of common stock to its respective partners, if a partnership, or by transfer to any affiliate of such person, including any trust, or to any other transferee in a private transaction not requiring registration under the Securities Act, or by any bona fide gift or pledge of such shares of common stock, provided that such partner, affiliate, trustee, donee or other transferee and/or lender or creditor acknowledges in writing that it is bound by these terms. Furthermore, each such person has also authorized the Company to cause the Company's transfer agent to decline to transfer and/or to note stop transfer restrictions on the transfer books and records of the Company with respect to any shares of common stock and any securities convertible into or exercisable or exchangeable for common stock for which such person is the record holder and, in the case of any such shares or securities for which such person is the beneficial but not the record holder, agrees to cause the record holder to cause the transfer agent to decline to transfer and/or to note stop transfer restrictions on such books and records with respect to such shares or securities. The Company has provided to counsel for the Underwriters a complete and accurate list of all securityholders of the Company, and of each of SQIS and SelectTech prior to the closing of the Merger, and the number and type of securities held by each securityholder. The Company has provided to counsel for the Underwriters true, accurate and complete copies of all of the agreements pursuant to which its officers, directors and the stockholders listed on Schedule II hereto have agreed to such or similar restrictions (the "Lock-up Agreements") presently in effect or effected hereby. The Company hereby represents and warrants that it will not release any of its officers, directors or stockholders from any Lock-up Agreements currently existing or hereafter effected without the prior written consent of Deutsche Banc. (ag) Each certificate signed by any officer of the Company and delivered to the Underwriters or counsel for the Underwriters shall be deemed to be a representation and warranty by the Company to the Underwriters as to the matters covered thereby. 2. PURCHASE, SALE AND DELIVERY OF THE FIRM SHARES. (a) On the basis of the representations, warranties and covenants herein contained, and subject to the conditions herein set forth, the Company agrees to sell to the Underwriters and each Underwriter agrees, severally and not jointly, to purchase, at a price of $_____ per share, the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereof, subject to adjustments in accordance with Section 9 hereof. -11- (b) Payment for the Firm Shares to be sold hereunder is to be made in New York Clearing House funds by federal (same day) funds against delivery of certificates therefor to the Representatives for the several accounts of the Underwriters. Such payment and delivery are to be made through the facilities of the Depository Trust Company, New York, New York at 10:00 a.m., New York time, on the third business day after the date of this Agreement or at such other time and date not later than five business days thereafter as you and the Company shall agree upon, such time and date being herein referred to as the "Closing Date." (As used herein, "business day" means a day on which the New York Stock Exchange is open for trading and on which banks in New York are open for business and are not permitted by law or executive order to be closed.) (c) In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company hereby grants an option to the several Underwriters to purchase the Option Shares at the price per share set forth in the first paragraph of this Section 2. The option granted hereby may be exercised in whole or in part by giving written notice (i) at any time before the Closing Date and (ii) only once thereafter within 30 days after the date of this Agreement, by you, as Representatives of the several Underwriters, to the Company setting forth the number of Option Shares as to which the several Underwriters are exercising the option, the names and denominations in which the Option Shares are to be registered and the time and date at which such certificates are to be delivered. The time and date at which certificates for Option Shares are to be delivered shall be determined by the Representatives but shall not be earlier than 3 nor later than 10 full business days after the exercise of such option, nor in any event prior to the Closing Date (such time and date being herein referred to as the "Option Closing Date"). If the date of exercise of the option is three or more days before the Closing Date, the notice of exercise shall set the Closing Date as the Option Closing Date. The number of Option Shares to be purchased by each Underwriter shall be in the same proportion to the total number of Option Shares being purchased as the number of Firm Shares being purchased by such Underwriter bears to __________, adjusted by you in such manner as to avoid fractional shares. The option with respect to the Option Shares granted hereunder may be exercised only to cover over-allotments in the sale of the Firm Shares by the Underwriters. You, as Representatives of the several Underwriters, may cancel such option at any time prior to its expiration by giving written notice of such cancellation to the Company. To the extent, if any, that the option is exercised, payment for the Option Shares shall be made on the Option Closing Date in federal (same day) funds through the facilities of the Depository Trust Company in New York, New York. 3. OFFERING BY THE UNDERWRITERS. It is understood that the several Underwriters are to make a public offering of the Firm Shares as soon as the Representatives deem it advisable to do so. The Firm Shares are to be initially offered to the public at the initial public offering price set forth in the Prospectus. The Representatives may from time to time thereafter change the public offering price and other selling terms. To the extent, if at all, that any Option Shares are purchased pursuant to Section 2 hereof, the Underwriters will offer them to the public on the foregoing terms. -12- It is further understood that you will act as the Representatives for the Underwriters in the offering and sale of the Shares in accordance with a Master Agreement Among Underwriters entered into by you and the several other Underwriters. 4. COVENANTS OF THE COMPANY. The Company covenants and agrees with the several Underwriters that: (a) The Company will (A) use its best efforts to cause the Registration Statement to become effective or, if the procedure in Rule 430A of the Rules and Regulations is followed, to prepare and timely file with the Commission under Rule 424(b) of the Rules and Regulations a Prospectus in a form approved by the Representatives containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A of the Rules and Regulations, (B) not file any amendment to the Registration Statement or supplement to the Prospectus of which the Representatives shall not previously have been advised and furnished with a copy or to which the Representatives shall have reasonably objected in writing or which is not in compliance with the Rules and Regulations and (C) file on a timely basis all reports and any definitive proxy or information statements required to be filed by the Company with the Commission subsequent to the date of the Prospectus and prior to the termination of the offering of the Shares by the Underwriters. (b) The Company will advise the Representatives promptly (A) when the Registration Statement or any post-effective amendment thereto shall have become effective, (B) of receipt of any comments from the Commission, (C) of any request of the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information, and (D) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the use of the Prospectus or of the institution of any proceedings for that purpose. The Company will use its best efforts to prevent the issuance of any such stop order preventing or suspending the use of the Prospectus and to obtain as soon as possible the lifting thereof, if issued. (c) The Company will cooperate with the Representatives in endeavoring to qualify the Shares for sale under the securities laws of such jurisdictions as the Representatives may reasonably have designated in writing and will make such applications, file such documents, and furnish such information as may be reasonably required for that purpose, provided the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction where it is not now so qualified or required to file such a consent. The Company will, from time to time, prepare and file such statements, reports, and other documents, as are or may be required to continue such qualifications in effect for so long a period as the Representatives may reasonably request for distribution of the Shares. (d) The Company will deliver to, or upon the order of, the Representatives, from time to time, as many copies of any Preliminary Prospectus as the Representatives may reasonably request. The Company will deliver to, or upon the order of, the -13- Representatives during the period when delivery of a Prospectus is required under the Securities Act, as many copies of the Prospectus in final form, or as thereafter amended or supplemented, as the Representatives may reasonably request. The Company will deliver to the Representatives at or before the Closing Date, four signed copies of the Registration Statement and all amendments thereto including all exhibits filed therewith, and will deliver to the Representatives such number of copies of the Registration Statement (including such number of copies of the exhibits filed therewith that may reasonably be requested), and of all amendments thereto, as the Representatives may reasonably request. (e) The Company will comply with the Securities Act and the Rules and Regulations, and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations of the Commission thereunder, so as to permit the completion of the distribution of the Shares as contemplated in this Agreement and the Prospectus. If during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, any event shall occur as a result of which, in the judgment of the Company or in the reasonable opinion of the Underwriters, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances existing at the time the Prospectus is delivered to a purchaser, not misleading, or, if it is necessary at any time to amend or supplement the Prospectus to comply with any law, the Company promptly will prepare and file with the Commission an appropriate amendment to the Registration Statement or supplement to the Prospectus so that the Prospectus as so amended or supplemented will not, in the light of the circumstances when it is so delivered, be misleading, or so that the Prospectus will comply with the law. (f) The Company will make generally available to its security holders, as soon as it is practicable to do so, but in any event not later than 15 months after the effective date of the Registration Statement, an earning statement (which need not be audited) in reasonable detail, covering a period of at least 12 consecutive months beginning after the effective date of the Registration Statement, which earning statement shall satisfy the requirements of Section 11(a) of the Securities Act and Rule 158 of the Rules and Regulations and will advise you in writing when such statement has been so made available. (g) Prior to the Closing Date, the Company will furnish to the Underwriters, as soon as they have been prepared by or are available to the Company, a copy of any unaudited interim financial statements of the Company for any period subsequent to the period covered by the most recent financial statements appearing in the Registration Statement and the Prospectus. (h) No offering, sale, short sale or other disposition of any shares of common stock of the Company or other securities convertible into or exchangeable or exercisable for shares of or derivative of common stock of the Company (or agreement for such) will be made for a period of 180 days after the date of this Agreement, directly or indirectly, by the Company otherwise than hereunder or with the prior written consent of Deutsche Banc. -14- (i) The Company will use its best efforts to list, subject to notice of issuance, the Shares on the Nasdaq National Market. (j) The Company has caused each officer and director of the Company and each stockholder of the Company listed on Schedule II hereto to furnish to you, on or prior to the date of this Agreement, a letter or letters (a "Lockup Agreement"), in form and substance satisfactory to the Underwriters, pursuant to which each such person shall agree not to offer, sell, sell short or otherwise dispose of any shares of common stock of the Company or other capital stock of the Company, or any other securities convertible, exchangeable or exercisable for or derivative of the Company's common stock owned by such person (or as to which such person has the right to direct the disposition of) or request the registration for the offer or sale of any of the foregoing for a period of 180 days after the date of this Agreement, directly or indirectly, except with the prior written consent of Deutsche Banc. (k) The Company shall apply the net proceeds of its sale of the Shares as set forth in the Prospectus and shall file such reports with the Commission with respect to the sale of the Shares and the application of the proceeds therefrom as may be required in accordance with Rule 463 under the Securities Act. (l) The Company shall not invest, or otherwise use the proceeds received by the Company from its sale of the Shares in such a manner as would require the Company to register as an investment company under the 1940 Act. (m) The Company will maintain a transfer agent and, if necessary under the laws of the State of Delaware, a registrar for the Common Stock. (n) The Company will not take, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any securities of the Company. (o) The Company will not take, directly or indirectly, any action designated to cause or result in the filing of a registration statement on Form S-8 under the Securities Act relating to shares of its common stock reserved for issuance under the Company's employee benefit plans for a period of 180 days after the date of this Agreement. 5. COSTS AND EXPENSES. The Company will pay all costs, expenses and fees incident to the performance of the obligations of the Company under this Agreement, including, without limiting the generality of the foregoing, the following: accounting fees of the Company; the fees and disbursements of counsel for the Company; the cost of printing and delivering to, or as requested by, the Underwriters copies of the Registration Statement, Preliminary Prospectuses, the Prospectus, this Agreement, the Underwriters' Invitation Letter, the Listing Application, the Blue Sky Survey and any supplements or amendments thereto; the filing fees of the Commission; the filing fees and expenses (including legal fees and disbursements) incident to securing any required review by the National Association of Securities Dealers, Inc. (the "NASD") of the terms of the sale of the Shares; the Listing Fee of The Nasdaq Stock Market; and the expenses, including the fees -15- and disbursements of counsel for the Underwriters, incurred in connection with the qualification of the Shares under State securities or Blue Sky laws. The Company agrees to pay all costs and expenses of the Underwriters, including the fees and disbursements of counsel for the Underwriters, incident to the offer and sale of the Directed Shares. The Company shall not, however, be required to pay for any of the Underwriters' expenses (other than those related to qualification under NASD regulation and State securities or Blue Sky laws) except that, if this Agreement shall not be consummated because the conditions in Section 6 hereof are not satisfied, or because this Agreement is terminated by the Representatives pursuant to Section 11 hereof, or by reason of any failure, refusal or inability on the part of the Company to perform any undertaking or satisfy any condition of this Agreement or to comply with any of the terms hereof on its part to be performed, unless such failure to satisfy said condition or to comply with said terms be due to the default or omission of any Underwriter, then the Company shall reimburse the several Underwriters for reasonable out-of-pocket expenses, including fees and disbursements of counsel, reasonably incurred in connection with investigating, marketing and proposing to market the Shares or in contemplation of performing their obligations hereunder; but the Company shall not in any event be liable to any of the several Underwriters for damages on account of loss of anticipated profits from the sale by them of the Shares. 6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS. The several obligations of the Underwriters to purchase the Firm Shares on the Closing Date and the Option Shares, if any, on the Option Closing Date are subject to the accuracy, as of the Closing Date or the Option Closing Date, as the case may be, of the representations and warranties of the Company contained herein, and to the performance by the Company of its covenants and obligations hereunder and to the following additional conditions: (a) The Registration Statement and all post-effective amendments thereto shall have become effective and any and all filings required by Rule 424 and Rule 430A of the Rules and Regulations shall have been made, and any request of the Commission for additional information (to be included in the Registration Statement or otherwise) shall have been disclosed to the Representatives and complied with to their reasonable satisfaction. No stop order suspending the effectiveness of the Registration Statement, as amended from time to time, shall have been issued and no proceedings for that purpose shall have been taken or, to the knowledge of the Company, shall be contemplated by the Commission and no injunction, restraining order, or order of any nature by a federal or state court of competent jurisdiction shall have been issued as of the Closing Date which would prevent the issuance of the Shares. (b) The Representatives shall have received on the Closing Date or the Option Closing Date, as the case may be, the opinion of McCutchen, Doyle, Brown & Enersen, LLP ("McCutchen"), counsel for the Company, dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Underwriters (and stating that it may be relied upon by counsel to the Underwriters) to the effect that: (i) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement; SQIS has been duly organized and is validly existing as a -16- corporation in good standing under the laws of the State of California, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement; each of the Company and SQIS is duly qualified to transact business in all jurisdictions in which the conduct of its business requires such qualification, or in which the failure to qualify would have a materially adverse effect upon the business of the Company and SQIS, taken as a whole; and all of the outstanding shares of capital stock of SQIS have been duly authorized and validly issued and are fully paid and non-assessable and are owned by the Company; and, to the best of such counsel's knowledge, all of the outstanding shares of capital stock of SQIS are owned by the Company free and clear of all liens, encumbrances and equities and claims, and no options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligations into any shares of capital stock or of ownership interests in SQIS are outstanding. (ii) The Company has authorized and outstanding capital stock as set forth under the caption "Capitalization" in the Prospectus; the authorized shares of the Company's common stock have been duly authorized; the outstanding shares of the Company's common stock have been duly authorized and validly issued and are fully paid and non-assessable; the outstanding shares of the Company's common stock have been issued in compliance with all applicable federal and state securities laws; the authorized capital stock of the Company and all of the Shares conform to the description thereof contained in the Prospectus; the certificates for the Shares, assuming they are in the form filed with the Commission, are in due and proper form; the shares of common stock, including the Option Shares, if any, to be sold by the Company pursuant to this Agreement have been duly authorized and will be validly issued, fully paid and non-assessable when issued and paid for as contemplated by this Agreement; and no preemptive rights of stockholders exist with respect to any of the Shares or the issue or sale thereof. (iii) Except as described in or contemplated by the Prospectus, to the knowledge of such counsel, there are no outstanding securities of the Company, SQIS or SelectTech convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of capital stock of the Company, SQIS or SelectTech and there are no outstanding or authorized options, warrants or rights of any character obligating any of the Company, SQIS or SelectTech to issue any shares of its capital stock or any securities convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of such stock; and except as described in the Prospectus, to the knowledge of such counsel, no holder of any securities of the Company, SQIS or SelectTech or any other person has the right, contractual or otherwise, which has not been satisfied or effectively waived, to cause the Company, SQIS or SelectTech to sell or otherwise issue to them, or to permit them to underwrite the sale of, any of the Shares or the right to have any common stock or other securities of the Company, SQIS or SelectTech included in the Registration Statement or the right, as a result of the filing of the Registration Statement, to require registration under the Securities Act of any shares of common stock or other securities of the Company, SQIS or SelectTech. -17- (iv) The Registration Statement has become effective under the Securities Act and, to the best of the knowledge of such counsel, no stop order proceedings with respect thereto have been instituted or are pending or threatened under the Securities Act. (v) The Registration Statement, the Prospectus and each amendment or supplement thereto comply as to form in all material respects with the requirements of the Securities Act and the applicable Rules and Regulations thereunder (except that such counsel need express no opinion as to the financial statements and related schedules therein). (vi) The statements under the captions "Description of Capital Stock," "Shares Eligible for Future Sale," "Management," "Certain Transactions," and "Underwriting" in the Prospectus, and Items 14 and 15 of Part II to the Registration Statement insofar as such statements constitute a summary of documents referred to therein or matters of law, accurately and fairly summarize in all material respects the information called for with respect to such documents and matters. (vii) Such counsel does not know of any contracts or documents required to be filed as exhibits to the Registration Statement or described in the Registration Statement or the Prospectus which are no so filed or described as required, and such contracts and documents as are summarized in the Registration Statement or the Prospectus are accurately and fairly summarized in all material respects. (viii) Such counsel knows of no material legal or governmental proceedings pending or threatened against the Company or SQIS except as set forth in the Prospectus. (ix) The execution, delivery and performance of this Agreement and the consummation of the transactions herein contemplated and the fulfillment of the terms hereof do not and will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust or other agreement or instrument to which the Company or SQIS is a party, or of the Certificate of Incorporation or Articles of Incorporation, as applicable, or By-Laws of the Company or SQIS or any order, rule or regulation applicable to the Company or SQIS of any court or of any regulatory body or administrative agency or other governmental body having jurisdiction over the Company or SQIS. (x) This Agreement has been duly authorized, executed and delivered by the Company. (xi) No approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body is necessary in connection with the execution and delivery of this Agreement and the consummation of the transactions herein contemplated (other than as may be required by the NASD or as required by State securities and Blue Sky laws as to which such counsel -18- need express no opinion) except such as have been obtained or made, specifying the same. (xii) Neither the Company nor SQIS is, and neither will become, as a result of the consummation of the transactions contemplated by this Agreement and application of the net proceeds therefrom as described in the Prospectus, required to register as an investment company under the 1940 Act. (xiii) The Merger Agreements have been duly authorized by all necessary action by the board of directors and stockholders of each of the parties thereto and have been duly executed and delivered by each of the parties thereto. The execution and delivery of the Merger Agreements and the consummation of the Merger did not contravene (i) any provision of applicable law, (ii) the Articles of Incorporation or By-laws of SQIS, (iii) the Articles of Incorporation or By-laws of SelectTech, (iv) the Certificate of Incorporation or By-laws of the Company, (v) the Articles of Incorporation or By-laws of SQAS (vi) any agreement or other instrument binding upon the Company, SelectTech or SQIS that is material to the Company, SelectTech or SQIS and that is set forth as an exhibit to the Registration Statement (vii) any judgment or decree of any governmental body, agency or court having jurisdiction over the Company, SelectTech or SQIS that is known to such counsel, except for any such contravention that would not have a material adverse effect on the condition (financial or otherwise), business, results of operation or prospects of the Company. No consent, approval, authorization or order of qualification with any governmental body or agency was required for the performance by the Company, SelectTech or SQIS of its obligations under the Merger Agreements except such as were obtained and except such consents, approvals, authorizations, orders or qualifications, which if not obtained, would not have a material adverse effect on the condition (financial or otherwise), business, results of operation or prospects of the Company and SQIS, taken as a whole. The Merger is effective under the laws of the State of California, the State of Delaware and the State of Nevada. Pursuant to the Merger Agreements, SQIS succeeded to all rights, privileges and obligations of SelectTech. The offer and sale of the securities issued in connection with the Merger were in compliance with the applicable federal and state securities laws. Neither the Merger Agreements nor the exchange of shares consummated in connection therewith (i) contravened, conflicted with or resulted in a material violation or breach of, or resulted in a default under, any provisions of any agreement or contract of SQIS, SelectTech, the Company or SQAS, except for any contravention, conflict, violation, breach or default which could not reasonably be expected to result in a material adverse effect on the Company and SQIS, taken as a whole; (ii) gave any person the right to (a) declare a default or exercise any remedy under any such agreement or contract, except where any such default or exercise of a remedy could not reasonably be expected to result in a material adverse effect on the Company and SQIS, taken as a whole, (b) accelerate the maturity or performance of any such agreement or contract, except where such acceleration could not reasonably be expected to result in a material adverse effect on the Company and SQIS, taken as a whole, or (c) cancel, terminate or modify any such contract, except where any such cancellation, termination or modification could not reasonably be expected to result in a material adverse effect on the Company and SQIS, taken as a whole; or (iii) resulted in the imposition or creation of any encumbrance upon or with respect to any of the shares of capital stock or the assets of the Company, SQIS or SelectTech, except where such encumbrance would not result in a material adverse effect on the Company and SQIS, taken as a whole. -19- In rendering such opinion, McCutchen may rely as to matters governed other than by the laws of the State of California or the State of Delaware, or federal law, on local counsel in such jurisdictions, provided that in each case McCutchen shall state that it believes that it and the Underwriters are justified in relying on such other counsel. In addition to the matters set forth above, such opinion shall also include a statement to the effect that nothing has come to the attention of such counsel which leads it to believe that (i) the Registration Statement, at the time it became effective under the Securities Act (but after giving effect to any modifications incorporated therein pursuant to Rule 430A under the Securities Act) and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (ii) the Prospectus, or any supplement thereto, on the date it was filed pursuant to the Rules and Regulations and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements, in the light of the circumstances under which they are made, not misleading (except that such counsel need express no view as to financial statements, schedules and statistical information therein). With respect to such statement, McCutchen may state that its belief is based upon the procedures set forth therein, but is without independent check and verification. (c) The Representatives shall have received from Chapin Fleming McNitt Shea & Carter, special regulatory counsel to the Company, an opinion dated the Closing Date or the Option Closing Date, as the case may be, to the effect that: (i) the Company and SQIS have all necessary authorizations, approvals, orders, consents, licenses, certificates, permits, registrations or qualifications of and from all insurance regulatory authorities to conduct their businesses as described in the Registration Statement, or are subject to no material liability or disability by reason of the failure to have authorizations, approvals, orders, consents, licenses, certificates, permits, registrations or qualifications; and neither the Company nor SQIS has received any notification from any insurance regulatory authority to the effect that any additional authorization, approval, order, consent, license, certificate, permit, registration or qualification is needed to be obtained by the Company or SQIS in any case where it could be reasonably expected that the failure to obtain such authorization, approval, order, consent, license, certificate, permit, registration or qualification or the limiting of such business would have a material adverse effect on the Company and SQIS, taken as a whole; (ii) to the best of such counsel's knowledge, each of the Company and SQIS is in compliance with the requirements of the insurance laws and regulations of its state of incorporation and the insurance laws and regulations of other jurisdictions which are applicable to the Company or SQIS, and has filed all notices, reports, documents or other information required to be filed thereunder (such counsel being entitled to rely in respect of the opinion in this clause upon opinions of local counsel and in respect of matters of fact upon certificates of officers of the Company, provided that such counsel shall state that it believes that both you and it are justified in relying upon such opinions and certificates); and (iii) the statements set forth in the Registration Statement addressing insurance licensing and regulatory issues, including without limitation, those under the caption ["Regulation"] and under the caption ["Risk Factors"], insofar as they purport to describe the laws and documents referred to therein, are accurate, complete and fair. Such counsel shall also state that although it does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus, except for -20- those referred to in the opinion in subsection (iii) of this Section 6(c), it has no reason to believe that, as of its effective date, the Registration Statement or any further amendment thereto made by the Company prior to the Closing Date or the Option Closing Date, as the case may be (other than the financial statements and related schedules therein, as to which such counsel need express no opinion), contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that, as of its date, the Prospectus or any further amendment or supplement thereto made by the Company prior to such Closing Date or Option Closing Date, as the case may be (other than the financial statements and related schedules therein, as to which such counsel need express no opinion), contained an untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading or that, as of such Closing Date or Option Closing Date, as the case may be, either the Registration Statement or the Prospectus or any further amendment or supplement thereto made by the Company prior to such Closing Date or Option Closing Date (other than the financial statements and related schedules therein, as to which such counsel need express no opinion) contains an untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and it does not know of any amendment to the Registration Statement required to be filed or of any contracts or other documents of a character required to be filed as an exhibit to the Registration Statement or required to be described in the Registration Statement or the Prospectus which are not filed or described as required. (d) The Representatives shall have received from Pillsbury Madison & Sutro LLP ("PM&S"), counsel for the Underwriters, an opinion dated the Closing Date or the Option Closing Date, as the case may be, with respect to the incorporation of the Company, the validity of the Shares, the Registration Statement and the Prospectus and such other related matters as it may reasonably request, and the Company shall have furnished to such counsel such documents as it may reasonably request for the purposes of enabling it to pass upon such matters. In rendering such opinion PM&S may rely as to all matters governed other than by the laws of the State of California or the State of Delaware, or federal law, on the opinion of counsel referred to in Paragraph (b) of this Section 6. In addition to the matters set forth above, such opinion shall also include a statement to the effect that nothing has come to the attention of such counsel which leads it to believe that (i) the Registration Statement, or any amendment thereto, as of the time it became effective under the Securities Act (but after giving effect to any modifications incorporated therein pursuant to Rule 430A under the Securities Act) as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (ii) the Prospectus, or any supplement thereto, on the date it was filed pursuant to the Rules and Regulations and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact, necessary in order to make the statements, in the light of the circumstances under which they are made, not misleading (except that such counsel need express no view as to financial statements, schedules and statistical information therein). With respect to such statement, PM&S may state that its belief is based upon the procedures set forth therein, but is without independent check and verification. -21- (e) The Representatives shall have received at or prior to the Closing Date from PM&S a memorandum or summary, in form and substance satisfactory to the Representatives, with respect to the qualification for offering and sale by the Underwriters of the Shares under the state securities laws or Blue Sky laws of such jurisdictions as the Representatives may reasonably have designated to the Company. (f) You shall have received, on each of the dates hereof, the Closing Date and the Option Closing Date, as the case may be, a letter dated the date hereof, the Closing Date or the Option Closing Date, as the case may be, in form and substance satisfactory to you, of Deloitte & Touche LLP confirming that they are independent public accountants within the meaning of the Securities Act and the applicable Rules and Regulations and stating that in their opinion the financial statements and schedules examined by them and included in the Registration Statement comply in form in all material respects with the applicable accounting requirements of the Securities Act and the related published Rules and Regulations; and containing such other statements and information as is ordinarily included in accountants' "comfort letters" to Underwriters with respect to the financial statements and certain financial and statistical information contained in the Registration Statement and Prospectus. (g) The Representatives shall have received on the Closing Date or the Option Closing Date, as the case may be, a certificate or certificates of the Chief Executive Officer and the Chief Financial Officer of the Company to the effect that, as of the Closing Date or the Option Closing Date, as the case may be, each of them severally represents as follows: (i) The Registration Statement has become effective under the Securities Act and no stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for such purpose have been taken or are, to his knowledge, contemplated by the Commission; (ii) The representations and warranties of the Company contained in Section 1 hereof are true and correct as of the Closing Date or the Option Closing Date, as the case may be; (iii) All filings required to have been made pursuant to Rules 424 or 430A under the Securities Act have been made; (iv) He has carefully examined the Registration Statement and the Prospectus and, in his or her opinion, as of the effective date of the Registration Statement, the statements contained in the Registration Statement were true and correct, and such Registration Statement and Prospectus did not omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading, and since the effective date of the Registration Statement, no event has occurred which should have been set forth in a supplement to or an amendment of the Prospectus which has not been so set forth in such supplement or amendment; and (v) Since the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the -22- condition, financial or otherwise, of the Company and SQIS, taken as a whole, or the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and SQIS, taken as a whole, whether or not arising in the ordinary course of business. (h) The Company shall have furnished to the Representatives such further certificates and documents confirming the representations and warranties, covenants and conditions contained herein and related matters as the Representatives may reasonably have requested. (i) The Firm Shares and Option Shares, if any, have been approved for designation upon notice of issuance on the Nasdaq National Market. (j) The Lockup Agreements described in Section 4(j) are in full force and effect. The opinions and certificates mentioned in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in all material respects satisfactory to the Representatives and to PM&S, counsel for the Underwriters. If any of the conditions hereinabove provided for in this Section 6 shall not have been fulfilled when and as required by this Agreement to be fulfilled, the obligations of the Underwriters hereunder may be terminated by the Representatives by notifying the Company of such termination in writing or by telegram at or prior to the Closing Date or the Option Closing Date, as the case may be. In such event, the Company and the Underwriters shall not be under any obligation to each other (except to the extent provided in Sections 5 and 8 hereof). 7. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY. The obligations of the Company to sell and deliver the portion of the Shares required to be delivered as and when specified in this Agreement are subject to the conditions that at the Closing Date or the Option Closing Date, as the case may be, no stop order suspending the effectiveness of the Registration Statement shall have been issued and in effect or proceedings therefor initiated or threatened. 8. INDEMNIFICATION. (a) The Company agrees: (i) To indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, against any losses, claims, damages or liabilities to which such Underwriter or any such controlling person may become subject under the Securities Act , the Exchange Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any alleged act or failure to act by any Underwriter in connection with, or relating -23- in any manner to, the Shares or the offering contemplated hereby, and which is included as part of or referred to in any loss, claim, damage, liability or action arising out of or based upon matters covered by clause (i) or (ii) above (PROVIDED, that the Company shall not be liable under this clause (iii) to the extent that it is determined in a final judgment by a court of competent jurisdiction that such loss, claim, damage, liability or action resulted directly from any such acts or failures to act undertaken or omitted to be taken by such Underwriter through its gross negligence or willful misconduct); provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement, or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representatives specifically for use in the preparation thereof. (ii) To reimburse each Underwriter and each such controlling person upon demand for any legal or other out-of-pocket expenses reasonably incurred by such Underwriter or such controlling person in connection with investigating or defending any such loss, claim, damage or liability, action or proceeding or in responding to a subpoena or governmental inquiry related to the offering of the Shares, whether or not such Underwriter or controlling person is a party to any action or proceeding. In the event that it is finally judicially determined that the Underwriters were not entitled to receive payments for legal and other expenses pursuant to this subparagraph, the Underwriters will promptly return all sums that had been advanced pursuant hereto. (iii) To indemnify and hold harmless Deutsche Banc, and each person, if any, who controls Deutsche Banc within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act (a "Deutsche Banc Entity"), against any losses, claims, damages or liabilities to which Deutsche Banc or any Deutsche Banc Entity may become subject under the Securities Act or the Exchange Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in any material prepared by or with the consent of the Company for distribution to Participants in connection with the Directed Share Program, (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, (iii) any act or failure to act caused by the failure of any Participant to pay for and accept delivery of Directed Shares that the Participant agreed to purchase or (iv) any alleged act or failure to act by Deutsche Banc or any Deutsche Banc Entity in connection with, or relating in any manner to, the Directed Share Program, other than any loss, claim, damage, liability or action that are finally judicially determined to have resulted from the bad faith or gross negligence of Deutsche Banc or a Deutsche Banc Entity. (iv) To reimburse Deutsche Banc and each Deutsche Banc Entity upon demand for any legal or other out-of-pocket expenses reasonably incurred by Deutsche Banc or such Deutsche Banc Entity in connection with investigating or defending any such loss, claim, damage or liability, action or proceeding or in responding to a subpoena or governmental inquiry related to the offering of the Directed Shares, whether or not -24- Deutsche Banc or such Deutsche Banc Entity is a party to any action or proceeding. In the event that it is finally judicially determined that Deutsche Banc or any Deutsche Banc Entity was not entitled to receive payments for legal and other expenses pursuant to this subparagraph, Deutsche Banc or any such Deutsche Banc Entity will promptly return all sums that had been advanced pursuant hereto. (b) Each Underwriter severally and not jointly will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the Registration Statement and each person, if any, who controls the Company within the meaning of the Securities Act, against any losses, claims, damages or liabilities to which the Company or any such director, officer, or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made; and will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, or controlling person in connection with investigating or defending any such loss, claim, damage, liability, action or proceeding; provided, however, that each Underwriter will be liable in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission has been made in the Registration Statement, any Preliminary Prospectus, the Prospectus or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representatives specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. (c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to this Section 8, such person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing. No indemnification provided for in Section 8(a) or 8(b) shall be available to any party who shall fail to give notice as provided in this Section 8(c) if the party to whom notice was not given was unaware of the proceeding to which such notice would have related and was materially prejudiced by the failure to give such notice, but the failure to give such notice shall not relieve the indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on account of the provisions of Section 8(a) or (b). In case any such proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party and shall pay as incurred the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel at its own expense. Notwithstanding the foregoing, the indemnifying party shall pay as incurred (or within 30 days of presentation) the fees and expenses of the counsel retained by the indemnified party in the event (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel, (ii) the named parties to any such proceeding (including any -25- impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them or (iii) the indemnifying party shall have failed to assume the defense and employ counsel acceptable to the indemnified party within a reasonable period of time after notice of commencement of the action. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm for all such indemnified parties. Such firm shall be designated in writing by Deutsche Banc in the case of parties indemnified pursuant to Section 8(a) and by the Company in the case of parties indemnified pursuant to Section 8(b). The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. In addition, the indemnifying party will not, without the prior written consent of the indemnified party, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding of which indemnification may be sought hereunder (whether or not any indemnified party is an actual or potential party to such claim, action or proceeding) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action or proceeding. (d) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under Section 8(a)(1), 8(a)(2) or 8(b) above in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 8(d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation -26- which does not take account of the equitable considerations referred to above in this Section 8(d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above in this Section 8(d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), (i) no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Shares purchased by such Underwriter, and (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this Section 8(d) to contribute are several in proportion to their respective underwriting obligations and not joint. (e) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless Deutsche Banc or a Deutsche Banc Entity under Section 8(a)(3) or (a)(4) above in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to therein, then the Company shall contribute to the amount paid or payable by Deutsche Banc or such Deutsche Banc Entity as a result of such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and Deutsche Banc or the Deutsche Banc Entity on the other from the offering of the Directed Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law then the Company shall contribute to such amount in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and Deutsche Banc or the Deutsche Banc Entity on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and Deutsche Banc or any Deutsche Banc Entity on the other shall be deemed to be in the same proportion as the total net proceeds from the offering of the Directed Shares (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by Deutsche Banc or the Deutsche Banc Entity in connection therewith. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or Deutsche Banc or the Deutsche Banc Entity on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, Deutsche Banc and each Deutsche Banc Entity agrees that it would not be just and equitable if contributions pursuant to this Section 8(e) were determined by pro rata allocation (even if Deutsche Banc and the Deutsche Banc Entities were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 8(e). The amount paid or payable by Deutsche Banc or a Deutsche Banc Entity as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above in this Section 8(e) shall be deemed to include any legal or other expenses reasonably incurred by Deutsche Banc or such Deutsche Banc Entity in connection with investigating or defending any such action or claim. -27- Notwithstanding the provisions of this subsection (e), (i) neither Deutsche Banc nor any Deutsche Banc Entity shall be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Directed Shares purchased by Deutsche Banc or such Deutsche Banc Entity, and (ii) neither Deutsche Banc nor any Deutsche Banc Entity guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. (f) In any proceeding relating to the Registration Statement, any Preliminary Prospectus, the Prospectus or any supplement or amendment thereto, each party against whom contribution may be sought under this Section 8 hereby consents to the jurisdiction of any court having jurisdiction over any other contributing party, agrees that process issuing from such court may be served upon him or it by any other contributing party and consents to the service of such process and agrees that any other contributing party may join him or it as an additional defendant in any such proceeding in which such other contributing party is a party. (g) Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 8 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred. The indemnity and contribution agreements contained in this Section 8 and the representations and warranties of the Company set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, the Company, its directors or officers or any persons controlling the Company, (ii) acceptance of any Shares and payment therefor hereunder, and (iii) any termination of this Agreement. A successor to any Underwriter, or to the Company, its directors or officers, or any person controlling the Company, shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 8. 9. DEFAULT BY UNDERWRITERS. If on the Closing Date or the Option Closing Date, as the case may be, any Underwriter shall fail to purchase and pay for the portion of the Shares which such Underwriter has agreed to purchase and pay for on such date (otherwise than by reason of any default on the part of the Company) you, as Representatives of the Underwriters, shall use your reasonable efforts to procure within 36 hours thereafter one or more of the other Underwriters, or any others, to purchase from the Company such amounts as may be agreed upon and upon the terms set forth herein, the Firm Shares or Option Shares, as the case may be, which the defaulting Underwriter or Underwriters failed to purchase. If during such 36 hours you, as such Representatives, shall not have procured such other Underwriters, or any others, to purchase the Firm Shares or Option Shares, as the case may be, agreed to be purchased by the defaulting Underwriter or Underwriters, then (a) if the aggregate number of shares with respect to which such default shall occur does not exceed 10% of the Firm Shares or Option Shares, as the case may be, covered hereby, the other Underwriters shall be obligated, severally, in proportion to the respective numbers of Firm Shares or Option Shares, as the case may be, which they are obligated to purchase hereunder, to purchase the Firm Shares or Option Shares, as the case may be, which such defaulting Underwriter or Underwriters failed to purchase, or (b) if the aggregate number of -28- shares of Firm Shares or Option Shares, as the case may be, with respect to which such default shall occur exceeds 10% of the Firm Shares or Option Shares, as the case may be, covered hereby, the Company or you as the Representatives of the Underwriters will have the right, by written notice given within the next 36-hour period to the parties to this Agreement, to terminate this Agreement without liability on the part of the non-defaulting Underwriters or of the Company except to the extent provided in Section 8 hereof. In the event of a default by any Underwriter or Underwriters, as set forth in this Section 9, the Closing Date or Option Closing Date, as the case may be, may be postponed for such period, not exceeding seven days, as you, as Representatives, may determine in order that the required changes in the Registration Statement or in the Prospectus or in any other documents or arrangements may be effected. The term "Underwriter" includes any person substituted for a defaulting Underwriter. Any action taken under this Section 9 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. 10. NOTICES. All communications hereunder shall be in writing and, except as otherwise provided herein, will be mailed, delivered, telecopied or telegraphed and confirmed as follows: if to the Underwriters, to Deutsche Banc Alex. Brown, One South Street, Baltimore, Maryland 21202, Attention: Thomas W. Johnson; [with a copy to Deutsche Banc Incorporated, One Bankers Trust Plaza, 130 Liberty Street, New York, New York 10006, Attention: General Counsel; and] with a copy to Pillsbury Madison & Sutro LLP, 50 Fremont Street, San Francisco, California 94105, Attention: Michael J. Halloran, Esq. 11. TERMINATION. (a) This Agreement may be terminated by you by notice to the Company at any time prior to the Closing Date if any of the following has occurred: (i) since the respective dates as of which information is given in the Registration Statement and the Prospectus, any material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, of the Company and SQIS taken as a whole or the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and SQIS taken as a whole, whether or not arising in the ordinary course of business, (ii) any outbreak or escalation of hostilities or declaration of war or national emergency or other national or international calamity or crisis or change in economic or political conditions if the effect of such outbreak, escalation, declaration, emergency, calamity, crisis or change on the financial markets of the United States would, in your reasonable judgment, make it impracticable or inadvisable to market the Shares or to enforce contracts for the sale of the Shares, or (iii) suspension of trading in securities generally on the New York Stock Exchange or the American Stock Exchange or limitation on prices (other than limitations on hours or numbers of days of trading) for securities on either such Exchange, (iv) the enactment, publication, decree or other promulgation of any statute, regulation, rule or order of any court or other governmental authority which in your opinion materially and adversely affects or may materially and adversely affect the business or operations of the Company, (v) declaration of a banking moratorium by United States or New York State authorities, (vi) any downgrading, or placement on any watch list for possible downgrading, in the rating of the Company's debt securities by any "nationally recognized statistical rating organization" (as -29- defined for purposes of Rule 436(g) under the Exchange Act); (vii) the suspension of trading of the Company's common stock by the Nasdaq Stock Market, the Commission, or any other governmental authority or (viii) the taking of any action by any governmental body or agency in respect of its monetary or fiscal affairs which in your reasonable opinion has a material adverse effect on the securities markets in the United States; or (b) as provided in Sections 6 and 9 of this Agreement. 12. SUCCESSORS. This Agreement has been and is made solely for the benefit of the Underwriters and the Company and their respective successors, executors, administrators, heirs and assigns, and the officers, directors and controlling persons referred to herein, and no other person will have any right or obligation hereunder. No purchaser of any of the Shares from any Underwriter shall be deemed a successor or assign merely because of such purchase. 13. INFORMATION PROVIDED BY UNDERWRITERS. The Company and the Underwriters acknowledge and agree that the only information furnished or to be furnished by any Underwriter to the Company for inclusion in any Prospectus or the Registration Statement consists of the information set forth in the last paragraph on the front cover page (insofar as such information relates to the Underwriters), legends required by Item 502(d) of Regulation S-K under the Securities Act and the information under the caption "Underwriting" in the Prospectus. 14. MISCELLANEOUS. The reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties and covenants in this Agreement shall remain in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Underwriter or controlling person thereof, or by or on behalf of the Company or its directors or officers and (c) delivery of and payment for the Shares under this Agreement. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. If the foregoing letter is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement among the Company and the several Underwriters in accordance with its terms. -30- Very truly yours, ZEBU, INC. By ------------------------------ Name ---------------------------- Title --------------------------- -31- The foregoing Equity Underwriting Agreement is hereby confirmed and accepted as of the date first above written. DEUTSCHE BANC SECURITIES INC. U.S. BANCORP PIPER JAFFRAY INC. COCHRAN, CARONIA SECURITIES LLC - ------------------------------------ As Representatives of the several Underwriters listed on Schedule I By: Deutsche Banc Securities Inc. By: --------------------------------- Authorized Officer -32- SCHEDULE I SCHEDULE OF UNDERWRITERS
Number of Firm Shares to Underwriter be Purchased - ------------ ------------- Deutsche Banc Securities Inc. --------------------------- U.S. Bancorp Piper Jaffray Inc. --------------------------- Cochran, Caronia Securities LLC --------------------------- Total ---------------------------
-33-
SCHEDULE II SCHEDULE OF STOCKHOLDERS SUBJECT TO LOCK-UP AGREEMENTS - ---------------------------------------- ------------------------------------- Name Number of Shares ---- ---------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- ------------------------------------- - ---------------------------------------- -------------------------------------
-34- EX-2.1 3 EXHIBIT 2.1 AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION This Amended and Restated Agreement and Plan of Reorganization (this "AGREEMENT") is effective as of August 17, 1999 by and among SelectQuote Insurance Services, a California corporation ("SQIS"), SelectTech, a Nevada corporation ("SELECTTECH"), SelectQuote, Inc., a Delaware corporation ("HOLDING COMPANY"), and SelectQuote Acquisition Sub, a California corporation and a wholly owned subsidiary of Holding Company ("SUB"). RECITALS A. The Boards of Directors of SQIS, SelectTech, Holding Company and Sub have approved the proposed merger of SelectTech and Sub with and into SQIS (the "MERGER") in accordance with the California General Corporation Law (the "CGCL") and pursuant to and subject to the terms of the Merger Agreement in the form attached hereto as EXHIBIT A and incorporated herein by reference (the "MERGER AGREEMENT") to be executed by SQIS, SelectTech, Holding Company and Sub prior to the Effective Time (as defined below) and which states, among other things, the manner and basis of converting (i) the shares of Common Stock of SelectTech outstanding at the Effective Time ("SELECTTECH COMMON"), the shares of Preferred Stock of SelectTech outstanding at the Effective Time ("SELECTTECH PREFERRED"), and the shares of Common Stock of SQIS outstanding at the Effective Time ("SQIS COMMON") into shares of Common Stock of Holding Company ("HOLDING COMPANY COMMON"); (ii) the shares of Preferred Stock of SQIS outstanding at the Effective Time ("SQIS PREFERRED") into shares of Preferred Stock of Holding Company ("HOLDING COMPANY PREFERRED"); and (iii) the shares of Common Stock of Sub outstanding at the Effective Time ("SUB COMMON") into shares of Common Stock of SQIS, as the surviving entity of the Merger (the "SURVIVING CORPORATION") (the "SURVIVING CORPORATION COMMON"), all as set forth in this Agreement. B. On August 17, 1999, the parties executed an Agreement and Plan of Reorganization (the "Original Agreement"), which is amended by this Agreement and restated in its entirety as set forth in this Agreement. C. The parties desire to enter into this Agreement for the purpose of setting forth certain representations, warranties and agreements in connection with the Merger, and also desire to prescribe various conditions precedent to the Merger not specifically set forth in the Merger Agreement. AGREEMENT NOW, THEREFORE, in consideration of the promises and the representations, warranties and agreements contained in this Agreement, the parties agree as follows: ARTICLE I DEFINITIONS "1933 ACT" means the Securities Act of 1933, as amended. "ADJUSTMENT EVENT" is defined in Section 2.10. "ADJUSTMENT RATIO" means the quotient of (a) the SQIS Deemed Owned Shares divided by (b) the sum of (i) the SelectTech Fully Diluted Shares plus (ii) the SQIS Deemed Owned Shares. "AFFILIATES" means "affiliates" of a person or entity within the meaning of Rule 144 under the 1933 Act. "AGGREGATE SELECTTECH MERGER SHARES" means the number of shares of Holding Company Common issuable in the Merger in exchange for the SelectTech Fully Diluted Shares, which is equal to difference between (a) 10,000,000, minus (b) the product of (i) 10,000,000 multiplied by (ii) the Adjustment Ratio. "AGGREGATE SQIS MERGER SHARES" means the aggregate number of shares of Holding Company Common and Holding Company Preferred issuable in the Merger in exchange for the SQIS Fully Diluted Shares, which is equal to the sum of (a) 10,000,000, plus (b) the product of (i) 10,000,000 multiplied by (ii) the Adjustment Ratio. "EFFECTIVE TIME" means the time and date on which the Merger Agreement and officers' certificates are filed as required in Sections 2.01 and 2.02. "HOLDING COMPANY OPTION PLAN" means the SelectQuote, Inc. 1999 Stock Option Plan. "HSR ACT" means the Act Hart Scott Rodino Antitrust Improvements Act of 1976. "INTELLECTUAL PROPERTY" means any or all of the following and all rights associated therewith: (i) all domestic and foreign patents and applications therefor and all reissues, divisions, renewals, extensions, continuations and continuations-in-part thereof; (ii) all inventions (whether patentable or not), invention disclosures, improvements, trade secrets, proprietary information, proprietary rights and processes, know how, technology rights and licenses, research and development in progress, technical data and customer lists, and all documentation relating to any of the foregoing; (iii) all copyrights, copyrights registration and applications therefor, and all other rights corresponding thereto throughout the world; (iv) all mask works, mask work registrations and applications therefore; (v) all industrial designs and any registrations and applications therefor; (vi) all trade names, logos, common law trademarks and service marks; trademark and service mark registrations and applications therefor and all goodwill associated therewith; and (vii) all computer software including all source code, object code, firmware, development tools, files, records and data, all media on which any of the foregoing is recorded, all documentation related to any of the foregoing. "INTERNAL REVENUE CODE" means the Internal Revenue Code of 1986, as amended. "JOINT SOLICITATION STATEMENT" means the joint solicitation statement of SelectTech and SQIS relating to the solicitation of approval by written consent of the shareholders of each of SQIS and SelectTech of this Agreement, the Merger and the transactions contemplated by this Agreement. "NGCL" means the Nevada General Corporation Law. "REFERENCE DATE" means August 18, 1999. "SELECTTECH ANTI-DILUTION ADJUSTMENT NUMBER" means the sum of (a) 6,500,000 (the number of shares of SelectTech Common outstanding on the date of the issuance of the SelectTech Warrants), plus (b) the SelectTech Warrant Number, plus (c) the SelectTech Debenture Number. "SELECTTECH CONVERSION NUMBER" means the quotient of (a) the Aggregate SelectTech Merger Shares divided by (b) the number of SelectTech Fully Diluted Shares. "SELECTTECH DEBENTURE AMOUNT" means the aggregate principal dollar amount of the SelectTech Debentures. "SELECTTECH DEBENTURE CONVERSION PRICE" means the quotient of (a) $1.67, divided by (b) the SelectTech Conversion Number. -2- "SELECTTECH DEBENTURE NUMBER" means the quotient of (a) the SelectTech Debenture Amount, divided by (b) $1.67. "SELECTTECH DEBENTURES" means the debentures issued by SelectTech on October 15, 1998. "SELECTTECH EXCHANGED OPTIONS" means SelectTech Options exchanged for options to purchase Holding Company Common, as provided in Section 2.03(c). "SELECTTECH FULLY DILUTED SHARES" means the sum of (a) the number of outstanding shares of SelectTech Common, plus (b) the SelectTech Preferred Adjusted Number, plus (c) the number of shares of SelectTech Common for which outstanding SelectTech Options are exercisable, plus (d) the SelectTech Debenture Number, plus (e) the SelectTech Warrant Number, minus (f) the SQIS Adjusted Share Ownership Number. "SELECTTECH PREFERRED ADJUSTED CONVERSION PRICE" means the product of (a) $1.67, multiplied by (b) the quotient of (i) the sum of (A) 6,500,000 (the number of shares of SelectTech Common outstanding on the date of the issuance of the SelectTech Warrants), plus (B) the SelectTech Warrant Price Adjustment Number, divided by (ii) the SelectTech Anti-Dilution Adjustment Number. "SELECTTECH PREFERRED ADJUSTED CONVERSION RATIO" means the quotient of (a) $1.67 divided by (b) the SelectTech Preferred Adjusted Conversion Price. "SELECTTECH PREFERRED ADJUSTED NUMBER" means the product of (a) the SelectTech Preferred Adjusted Conversion Ratio multiplied by (b) the number of outstanding shares of SelectTech Preferred. "SELECTTECH PREFERRED CONVERSION NUMBER" means the product of (a) the SelectTech Preferred Adjusted Conversion Ratio, multiplied by (b) the SelectTech Conversion Number. "SELECTTECH WARRANT NUMBER" means the product of (a) the quotient of (i) the sum of (A) the number of outstanding shares of SelectTech Common, plus (B) the number of outstanding shares of SelectTech Preferred, plus (C) the number of shares of SelectTech Common into which outstanding SelectTech Options are exercisable, plus (D) the SelectTech Debenture Number, plus (E) the number of shares of SelectTech Common obtainable by SQIS on conversion of the SQIS Convertible Note, divided by (ii) .95, multiplied by (b) .05. "SELECTTECH WARRANT PRICE ADJUSTMENT NUMBER" means the quotient of (a) the sum of (i) the aggregate dollar amount payable upon exercise of the SelectTech Warrants, plus (ii) the SelectTech Debenture Amount, divided by (b) $1.67. "SELECTTECH WARRANTS" means the warrants to purchase SelectTech Common issued by SelectTech in connection with the issuance and sale of the SelectTech Debentures. "SQIS ADJUSTED SHARE OWNERSHIP NUMBER" means the sum of (a) the number of shares of SelectTech Common owned by SQIS, plus (b) the product of (i) the number of shares of SelectTech Preferred owned by SQIS, multiplied by (ii) the SelectTech Preferred Adjusted Conversion Ratio. "SQIS CONVERSION NUMBER" means the quotient of (a) the Aggregate SQIS Merger Shares divided by (b) the number of SQIS Fully Diluted Shares. "SQIS CONVERTIBLE NOTE" means that certain convertible note, dated as of February 1, 1997 and as amended on October 15, 1998, issued by SelectTech to SQIS, in the principal amount of $200,000. -3- "SQIS DEEMED OWNED SHARES" means the sum of (a) the SQIS Adjusted Share Ownership Number, plus (b) the number of shares of SelectTech Common obtainable by SQIS on conversion of the SQIS Convertible Note. "SQIS EXCHANGED OPTIONS" means SQIS Options exchanged for options to purchase Holding Company Common, as provided in Section 2.04(e). "SQIS FULLY DILUTED SHARES" means the sum of (a) the number of outstanding shares of SQIS Common, plus (b) the number of outstanding shares of SQIS Preferred, plus (c) the number of shares of SQIS Common into which outstanding SQIS Options are exercisable "SQIS OPTIONS" means (a) options to purchase SQIS Common, issued pursuant to the SelectQuote Insurance Services 1999 Stock Option Plan and (b) options to purchase SQIS common granted in exchange for phantom stock rights issued by SQIS, which options were not granted pursuant to the SelectQuote Insurance Services 1999 Stock Option Plan. "SQIS PREFERRED" means the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock of SQIS, collectively. "SQIS SUBSIDIARIES" is defined in Section 3.03. "SURVIVING CORPORATION" means SQIS. ARTICLE II THE MERGER AND REORGANIZATION 2.01 MERGER OF SELECTTECH INTO SQIS. Subject to the terms and conditions of this Agreement and the Merger Agreement, SelectTech shall be merged with and into SQIS, the separate existence of SelectTech shall cease and SQIS shall be the Surviving Corporation in the Merger. The Merger shall be consummated when a properly executed and certified copy of the Merger Agreement, together with required officers' certificates, are filed with the Secretary of State of California and the Secretary of State of Nevada. 2.02 MERGER OF SUB INTO SQIS. Subject to the terms and conditions of this Agreement and the Merger Agreement, Sub shall be merged with and into SQIS, the separate existence of Sub shall cease and SQIS shall be the Surviving Corporation in the Merger. The Merger shall be consummated when a properly executed and certified copy of the Merger Agreement, together with required officers' certificates, are filed with the Secretary of State of California. 2.03 EFFECT OF THE MERGER ON SELECTTECH CAPITAL STOCK AND CONVERTIBLE INTERESTS. (a) SELECTTECH COMMON. At the Effective Time, each then outstanding share of SelectTech Common (other than shares held by shareholders who properly exercise any dissenters' rights available under applicable law), shall be converted into the right to receive the SelectTech Conversion Number of shares of Holding Company Common. Notwithstanding the foregoing, outstanding shares of SelectTech Common which are held by SQIS will not be so converted, but will be cancelled at the Effective Time. (b) SELECTTECH PREFERRED. At the Effective Time, each then outstanding share of SelectTech Preferred (other than shares held by shareholders who properly exercise any dissenters' rights available under applicable law), shall be converted into the right to receive the SelectTech Preferred Conversion Number of -4- shares of Holding Company Common. Notwithstanding the foregoing, outstanding shares of SelectTech Preferred which are held by SQIS will not be so converted, but will be cancelled at the Effective Time. (c) SELECTTECH OPTIONS. At the Effective Time, each outstanding SelectTech Option shall be exchanged for an option to purchase, in place of the purchase of each share of SelectTech Common previously covered by such SelectTech Option, the SelectTech Conversion Number of shares of Holding Company Common, at an exercise price for each such share of Holding Company Common equal to the previous option exercise price for each share of SelectTech Common divided by the SelectTech Conversion Number. Each such SelectTech Exchanged Option shall be granted under the Holding Company Option Plan and shall be subject to the terms and conditions of that plan, but shall continue to vest according to the vesting schedule applicable to the SelectTech Option. It is intended that the substitution of options pursuant to this paragraph be a tax-free transaction under Section 424 of the Internal Revenue Code. (d) SELECTTECH DEBENTURES. At the Effective Time, all outstanding SelectTech Debentures shall be assumed by Holding Company. The SelectTech Debentures shall be convertible into shares of Holding Company Common at a price per share of Holding Company Common equal to the SelectTech Debenture Conversion Price. (e) SELECTTECH WARRANTS. At the Effective Time, all SelectTech Warrants that remain unexercised shall terminate. 2.04 EFFECT OF THE MERGER ON SQIS CAPITAL STOCK AND CONVERTIBLE INTERESTS. (a) SQIS COMMON. At the Effective Time, each outstanding share of SQIS Common (other than shares held by shareholders who properly exercise any dissenters' rights available under applicable law), shall be converted into the right to receive the SQIS Conversion Number of shares of Holding Company Common. (b) SQIS SERIES A PREFERRED STOCK. At the Effective Time, each outstanding share of SQIS Series A Preferred Stock (other than shares held by shareholders who properly exercise any dissenters' rights available under applicable law) shall be converted into the right to receive the SQIS Conversion Number of shares of Holding Company Series A Preferred Stock. (c) SQIS SERIES B PREFERRED STOCK. At the Effective Time, each outstanding share of SQIS Series B Preferred Stock (other than shares held by shareholders who properly exercise any dissenters' rights available under applicable law) shall be converted into the right to receive the SQIS Conversion Number of shares of Holding Company Series B Preferred Stock. (d) SQIS SERIES C PREFERRED STOCK. At the Effective Time, each outstanding share of SQIS Series C Preferred Stock (other than shares held by shareholders who properly exercise any dissenters' rights available under applicable law) shall be converted into the right to receive the SQIS Conversion Number of shares of Holding Company Series C Preferred Stock. (e) SQIS OPTIONS. At the Effective Time, each outstanding SQIS Option shall be exchanged for an option to purchase, in place of the purchase of each share of SQIS Common previously covered by such SQIS Option, the SQIS Conversion Number of shares of Holding Company Common, at an exercise price for each such share of Holding Company Common equal to the previous option exercise price for each share of SQIS Common divided by the SQIS Conversion Number. Each such SQIS Exchanged Option shall be granted under the Holding Company Option Plan and shall be subject to the terms and conditions of that plan, but shall continue to vest according to the vesting schedule applicable to the SQIS Option. Notwithstanding the foregoing, it is intended that the substitution of options pursuant to this paragraph shall qualify as incentive stock options as defined in Section 422 of the Internal Revenue Code. -5- (f) SQIS CONVERTIBLE NOTE. At the Effective Time, all amounts due from SelectTech to SQIS pursuant to the SQIS Convertible Note shall be deemed to have been converted into shares of SelectTech Common, which shares will be cancelled in the Merger at the Effective Time. 2.05 EFFECT OF THE MERGER ON SUB COMMON. At the Effective Time, each then outstanding share of Sub Common shall be converted into the right to receive one share of Surviving Corporation Common. After the Effective Time, the shares of Surviving Corporation Common into which the Sub Common is converted shall be the only shares of capital stock of the Surviving Corporation outstanding. 2.06 EFFECT OF THE MERGER ON HOLDING COMPANY COMMON. At the Effective Time, each then outstanding share of common stock of Holding Company shall be cancelled. 2.07 FEDERAL INCOME TAX CONSEQUENCES. The parties intend that, for federal income tax purposes, the Merger shall constitute a tax-free reorganization within the meaning of Section 368 of the Internal Revenue Code. 2.08 ACCOUNTING TREATMENT. The parties intend that the Merger will be treated by SQIS as a purchase for accounting purposes. 2.09 EFFECTS OF THE MERGER. At the Effective Time of the Merger: (a) the Articles of Incorporation of the Surviving Corporation shall be the Articles of Incorporation attached as EXHIBIT B, which is the form of the Articles of Incorporation in effect immediately prior to the Effective Date as amended to reflect the change of the name of the Surviving Corporation to "Select Quote"; (b) the Bylaws of the Surviving Corporation shall be the Bylaws in effect immediately prior to the Effective Date; (c) the Board of Directors of SQIS shall consist of the following four (4) members at the Effective Time, in each case until their successors shall have been elected and qualified or until otherwise provided by law: Charan J. Singh Steven H. Gerber David L. Paulsen Michael L. Feroah (d) the Officers of SQIS shall be as follows: Charan J. Singh Chairman of the Board of Directors, Chief Executive Officer Steven H. Gerber President David L. Paulsen Chief Operating Officer - Insurance Products and Services, Chief Financial Officer, Assistant Secretary Michael L. Feroah Chief Operating Officer - Technology Products and Services Hernan E. Reyes Vice President of Operations - Technology Products and Services Duval McDaniel Vice President of Sales & Marketing - Technology Products and Services Nancy Malik Secretary -6- (e) the Surviving Corporation shall assume the obligations of SelectTech pursuant to the existing Registration Rights Agreement and Investor Rights Agreement among SelectTech and certain of its shareholders; and (f) the Merger shall, from and after the Effective Time, have all the effects provided by applicable law. 2.10 ADJUSTMENTS. If, between the date of this Agreement and the Effective Time, the outstanding shares of Holding Company Common, SelectTech Common, SelectTech Preferred, SQIS Common or SQIS Preferred shall have been changed into a different number of shares or a different class by reason of any reclassification, recapitalization, split-up, combination, exchange of shares or readjustment or a stock dividend thereon shall have been declared with a record date within such period (each, an "ADJUSTMENT EVENT"), the shares of Holding Company Common and Holding Company Preferred to be issued and delivered in the Merger in exchange for each outstanding share of SelectTech Common, SelectTech Preferred, SQIS Common and/or SQIS Preferred, as applicable, and the shares of Holding Company Common issuable on exercise of SelectTech Exchanged Options and the SQIS Exchanged Options as provided in this Agreement and the Merger Agreement, shall be appropriately adjusted to reflect such Adjustment Event. 2.11 AFFILIATE STOCK. All shares of Holding Company Common or Holding Company Preferred to be received by any SelectTech Affiliate or any SQIS Affiliate shall be subject to the restrictions imposed by the Securities Act of 1933, as amended, and Rule 145 promulgated thereunder, and the certificates evidencing such shares shall bear legends reflecting such restrictions. 2.12 FRACTIONAL SHARES. No fractional shares of Holding Company Common shall be issued pursuant to the Merger. In lieu of the issuance of any fractional share of Holding Company Common, cash adjustments will be paid to holders in respect of any fractional share of Holding Company Common that would otherwise be issuable, calculated at $5.00 per share. 2.13 EXCHANGE CERTIFICATES. As soon as practicable after the Effective Time, and after surrender to the Holding Company of any certificate which prior to the Effective Time represented shares of SelectTech Common Stock, SelectTech Preferred Stock, SQIS Common Stock or SQIS Preferred Stock, as applicable (the "CONVERTED SHARES"), the Holding Company shall cause to be distributed to the person in whose name such certificate is registered a certificate or certificates representing the Merger Consideration. Until surrendered as contemplated by the preceding sentence, each certificate which immediately prior to the Effective Time represented any Converted Shares, shall be deemed at and after the Effective Time to represent only the right to receive the Merger Consideration. If any certificate representing the Merger Consideration is to be issued to a person or entity ("PERSON") other than the Person in whose name the certificate representing Converted Shares surrendered in exchange therefor is registered, it will be a condition of the issuance thereof that the certificate so surrendered will be properly endorsed and accompanied by all documents reasonably required by the Holding Company to evidence and effect such transfer and to evidence that any applicable stock transfer taxes have been paid. If any certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Person claiming such certificate to be lost, stolen or destroyed and, if required by the Holding Company, the posting by such Person of a bond in such reasonable amount as the Holding Company may direct as indemnity against any claim that may be made against it with respect to such certificate, the Holding Company will cause the Merger Consideration to be issued in exchange for such lost, stolen or destroyed certificate. 2.14 DISSENTING SHARES. (a) Any shares of SQIS Common or SQIS Preferred issued and outstanding immediately prior to the Effective Time that are held by a shareholder who has exercised and perfected dissenters' rights for such shares in accordance with the CGCL and who as of the Effective Time has not effectively withdrawn or -7- lost such dissenters' rights shall not be converted into shares of Holding Company Common or SQIS Preferred at the Effective Time, and the holder thereof shall only be entitled to such rights as are granted to dissenting shareholders by the CGCL. (b) Any shares of SelectTech Common or SelectTech Preferred issued and outstanding immediately prior to the Effective Time that are held by a shareholder who has exercised and perfected dissenters' rights for such shares in accordance with the NGCL and who as of the Effective Time has not effectively withdrawn or lost such dissenters' rights shall not be converted into a right to receive Holding Company Common at the Effective Time, and the holder thereof shall only be entitled to such rights as are granted to dissenting shareholders by the NGCL. (c) Each of SQIS and SelectTech shall give all parties to this Agreement prompt notice of any demand for dissenters' rights received by it pursuant to the applicable provisions of the CGCL or the NGCL, as applicable, and shall give the other parties to this Agreement the opportunity to participate in all negotiations and proceedings with respect to such demand. ARTICLE III REPRESENTATIONS AND WARRANTIES OF SQIS Except as disclosed or excepted on a schedule delivered by SQIS to the other parties to this Agreement prior to the execution of this Agreement (the "SQIS SCHEDULE"), SQIS represents and warrants to the other parties to this Agreement as follows: 3.01 ORGANIZATION. SQIS is a corporation duly organized, validly existing and in good standing under the laws of the State of California and has the corporate power and authority to carry on its business as it is now being conducted. SQIS is duly qualified to do business and is in good standing in each jurisdiction in which the nature of its business or properties make such qualification necessary, except where the failure to be qualified will not have a material adverse effect on SQIS. 3.02 CAPITALIZATION. The authorized capital stock of SQIS consists of 5,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock. At the close of business on the Reference Date, there were outstanding: 1,515,690 shares of SQIS Common, 346,000 shares of Series A Preferred Stock, 250,000 shares of Series B Preferred Stock and 21,275 shares of Series C Preferred Stock. There are 965,000 shares of SQIS Common subject to SQIS Options. All outstanding shares of SQIS Common and SQIS Preferred are validly issued, fully paid and nonassessable and not subject to preemptive rights created by statute, SQIS's Articles of Incorporation or Bylaws or any agreement to which SQIS is a party or by which it is bound. Except as set forth above, there are no options, warrants, calls, rights, commitments or agreements of any character to which SQIS is a party or by which it is bound obligating SQIS to issue, deliver or sell or cause to be issued, delivered or sold, additional shares of its capital stock or obligating SQIS to grant, extend or enter into any such option, warrant, call, right, commitment or agreement. SQIS Phantom Shares have no rights of shares of stock, but only rights to certain income distributions, if available. 3.03 SQIS SUBSIDIARIES. The SQIS Schedule sets forth a true and complete list of all of the corporations, partnerships and joint ventures in which SQIS owns, directly or indirectly, any shares of capital stock or any partnership or joint venture interest (all of such entities being hereinafter referred to as the "SQIS SUBSIDIARIES"), together with a listing, as to each SQIS Subsidiary, of the nature and ownership of its capital stock or partnership or joint venture interests and of the other equity holders in such entities. All of the capital stock or partnership or joint venture interests of each SQIS Subsidiary owned by SQIS is owned by it free and clear of any liens, encumbrances, security agreements, options, claims, charges or restrictions of any -8- nature whatsoever. Each SQIS Subsidiary is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, has the corporate or partnership power and authority to carry on its business as it is now being conducted and is duly qualified to do business and is in good standing in each jurisdiction in which the nature of its business or properties make such qualification necessary, except where the failure to be qualified will not have a material adverse effect on the business of SQIS and the SQIS Subsidiaries, taken as a whole. 3.04 AUTHORITY RELATIVE TO THIS AGREEMENT. SQIS has the corporate power and authority to enter into and deliver this Agreement and the Merger Agreement and to carry out its obligations hereunder and thereunder. The execution and delivery of this Agreement and the Merger Agreement and the consummation of the transactions contemplated hereby and thereby have been duly authorized by the Board of Directors of SQIS and, except for the approval of its shareholders, no other corporate proceedings on the part of SQIS are necessary to authorize this Agreement, the Merger Agreement and the transactions contemplated hereby. Neither SQIS, nor any SQIS Subsidiary, nor any of their respective material assets is subject to or obligated under any charter or bylaw, or under any material contract, lease or other instrument or any license, franchise or permit, which would be defaulted, breached or terminated by or in conflict (or upon the failure to give notice or the lapse of time, or both, would result in a default, breach, termination or conflict) with its execution and performance of this Agreement and the Merger Agreement and the transactions contemplated hereby. Except as contemplated by this Agreement, no consent of any person not a party to this Agreement, and no consent of or filing with (including any waiting period) any governmental authority, is required to be obtained on the part of SQIS to permit the Merger or to permit the continuation by the Surviving Corporation following the Effective Time of the business activities of SQIS and the SQIS Subsidiaries as previously conducted, without material adverse change. This Agreement is, and the Agreement of Merger when executed and delivered will be, valid and binding obligations of SQIS, enforceable against it in accordance with their respective terms. 3.05 FINANCIAL STATEMENTS. The audited financial statements of SQIS and the SQIS Subsidiaries, on a consolidated basis, as of June 30, 1999 (the "SQIS FINANCIAL STATEMENTS") have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto) and fairly present the financial position of SQIS and the SQIS Subsidiaries as at the dates thereof and the results of its operations and changes in financial position for the periods then ended (subject, in the case of unaudited statements, to normal recurring audit adjustments, provided that the notes and accounts receivable are collectible in the amounts shown less any reserve shown thereon and inventories are not subject to write-down, except in either case in an amount not material). Except as contemplated by this Agreement or on account of the transactions contemplated hereby, since June 30, 1999, there has not been any material adverse change in the results of operations, financial condition, assets or business of SQIS and the SQIS Subsidiaries, taken as a whole, other than on account of matters which affect generally the economy or the industries in which SQIS and the SQIS Subsidiaries are engaged. 3.06 LIABILITIES. SQIS and the SQIS Subsidiaries, taken as a whole, have no material liabilities, obligations or loss contingencies that are required to be reflected in SQIS Financial Statements under generally accepted accounting principles, other than: (i) liabilities disclosed or provided for in SQIS Financial Statements including the notes thereto; and (ii) liabilities incurred in the ordinary course of business since June 30, 1999. 3.07 LITIGATION. There is no private or governmental litigation or proceeding or, to the knowledge of SQIS, investigation or claim against SQIS or any SQIS Subsidiary pending or, to the knowledge of SQIS, threatened which, if determined adversely, may reasonably be expected to have a material adverse effect on its business, nor are there any judgments, decrees or orders enjoining SQIS or any SQIS Subsidiary in respect of, or the effect of which is to prohibit, any business practice or the acquisition of any property or the conduct of business in any area which is material to its business. 3.08 TAXES. Each of SQIS and each SQIS Subsidiary has filed all Federal and California tax returns and, to the best of SQIS's knowledge, all other state and foreign tax returns required to be filed, and has paid, or -9- has made adequate provision or set up an adequate accrual or reserve for the payment of all taxes required to be paid and has no material liability for taxes in excess of the amount so paid or accruals or reserves so established. Neither SQIS nor any SQIS Subsidiary is delinquent in the payment of any material tax, assessment or governmental charge and is not delinquent in the filing of any tax returns, and no material deficiencies for any tax assessment or governmental charge have been threatened, claimed, proposed or assessed against it. 3.09 ABSENCE OF VIOLATIONS. Neither SQIS nor any of the SQIS Subsidiaries is in violation of any applicable provision of United States, state, local or foreign laws, regulations, judgments or decrees, which violation may reasonably be expected to have a material adverse effect on SQIS. 3.10 INTELLECTUAL PROPERTY. (a) No person or entity has any rights to use any of the Intellectual Property of SQIS. (b) SQIS owns, or has the right pursuant to a valid contract to use or operate under, all Intellectual Property of SQIS. (c) The operation of the business of SQIS as it is currently conducted does not infringe the Intellectual Property of any other person or entity, and SQIS has not received notice of any claim concerning such infringement. (d) To the knowledge of SQIS, no person is infringing or misappropriating any of the Intellectual Property of SQIS and there are no claims asserted against SQIS related to any Intellectual Property of SQIS. 3.11 PROPERTIES, LIENS, ETC. Except as reflected in SQIS Financial Statements or in the notes thereto, and except for statutory mechanics and materialmen's liens, liens for current taxes not yet delinquent and liens or encumbrances which do not confer upon secured parties any rights to property which are material to SQIS and the SQIS Subsidiaries, on a consolidated basis, SQIS or one of the SQIS Subsidiaries owns, free and clear of any liens or other encumbrances, all of its tangible and intangible property, real and personal. 3.12 INSURANCE AGENCY LICENSES. SQIS possesses all licenses and permits in all jurisdictions which are required in order for SQIS to conduct its business as and where presently conducted ("PERMITS"), including without limitation all licenses and permits from all state insurance regulatory agencies. Neither the execution and delivery of this Agreement nor the consummation of the Merger will result in the termination or other loss of any Permit. 3.13 HART SCOTT RODINO. To the knowledge of SQIS, no filing will be required under the HSR in order to consummate the Merger. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SELECTTECH Except as disclosed or excepted on a schedule delivered by SelectTech to the other parties to this Agreement prior to the execution of this Agreement (the "SELECTTECH SCHEDULE"), SelectTech represents and warrants to the other parties to this Agreement as follows: 4.01 ORGANIZATION. SelectTech is a corporation duly organized, validly existing and in good standing under the laws of the State of Nevada and has the corporate power and authority to carry on its business as it is -10- now being conducted. SelectTech is duly qualified to do business and is in good standing in each jurisdiction in which the nature of its business or properties make such qualification necessary, except where the failure to be qualified will not have a material adverse effect on SelectTech. 4.02 CAPITALIZATION. The authorized capital stock of SelectTech consists of 18,500,000 shares of Common Stock, $0.001 par value, and 1,500,000 shares of Preferred Stock, $0.001 par value, of which 750,000 are designated Series A Preferred Stock. At the close of business on the Reference Date, there were outstanding 6,500,000 shares of SelectTech Common and 600,000 shares of Series A Preferred Stock, convertible into 657,848 shares of SelectTech Common. In addition, at the Reference Date, SelectTech had granted options to purchase 6,031,855 shares of SelectTech Common. At the Reference Date, SelectTech had sold Debentures in the aggregate principal amount of $2,500,000. The aggregate amount of principal of the Debentures is convertible into 1,500,000 shares of SelectTech Common. SelectTech has also issued to the debenture holders warrants to purchase SelectTech Common in an amount up to 5% of the shares of capital stock of SelectTech, calculated on a fully diluted basis, at an exercise price of $0.01 per share. Additionally, at the Reference Date, SelectTech has issued to SQIS a SQIS Convertible Note dated February 1, 1997, as amended on October 15, 1998, in the principal amount of $200,000; the aggregate amount of principal and interest of the SQIS Convertible Note is convertible into 120,00 shares of SelectTech Common. All outstanding shares of SelectTech Common and SelectTech Preferred are validly issued, fully paid and nonassessable and not subject to preemptive rights created by statute, SelectTech's Articles of Incorporation or Bylaws or any agreement to which SelectTech is a party or by which it is bound. Except as set forth above, there are no options, warrants, calls, rights, commitments or agreements of any character to which SelectTech is a party or by which it is bound obligating SelectTech to issue, deliver or sell, or cause to be issued, delivered or sold additional shares of its capital stock or obligating SelectTech to grant, extend or enter into any such option, warrant, call, right, commitment or agreement. 4.03 SELECTTECH SUBSIDIARIES. SelectTech has no direct or indirect equity interest in any corporation, partnership or other business entity. 4.04 AUTHORITY RELATIVE TO THIS AGREEMENT. SelectTech has the corporate power and authority to enter into and deliver this Agreement and the Merger Agreement and to carry out its obligations hereunder and thereunder. The execution and delivery of this Agreement and the Merger Agreement and the consummation of the transactions contemplated hereby and thereby have been duly authorized by the Board of Directors of SelectTech and, except for the approval of its shareholders, no other corporate proceedings on the part of SelectTech are necessary to authorize this Agreement, the Merger Agreement and the transactions contemplated hereby. Neither SelectTech nor any of its material assets is subject to or obligated under any charter or bylaw, or under any material contract, lease or other instrument or any license, franchise or permit, which would be defaulted, breached or terminated by or in conflict (or upon the failure to give notice or the lapse of time, or both, would result in a default, breach, termination or conflict) with its execution and performance of this Agreement and the Merger Agreement and the transactions contemplated hereby. Except as contemplated by this Agreement, no consent of any person not a party to this Agreement, and no consent of or filing with (including any waiting period) any governmental authority, is required to be obtained on the part of SelectTech to permit the Merger or to permit the continuation by the Surviving Corporation following the Effective Time of the business activities of SelectTech as previously conducted, without material adverse change. This Agreement is, and the Agreement of Merger when executed and delivered will be, valid and binding obligations of SelectTech, enforceable against it in accordance with their respective terms. 4.05 FINANCIAL STATEMENTS. The audited financial statements of SelectTech as of June 30, 1999 (the "SELECTTECH FINANCIAL STATEMENTS") have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto) and fairly present the consolidated financial position of SelectTech as at the dates thereof and the results of its operations and changes in financial position for the periods then ended (subject, in the case of -11- unaudited statements, to normal recurring audit adjustments, provided that the notes and accounts receivable are collectible in the amounts shown less any reserve shown thereon and inventories are not subject to write-down, except in either case in an amount not material). Except as contemplated by this Agreement or on account of the transactions contemplated hereby, since June 30, 1999, there has not been any material adverse change in the results of operations, financial condition, assets or business of SelectTech, other than on account of matters which affect generally the economy or the industries in which SelectTech is engaged. 4.06 LIABILITIES. SelectTech has no material liabilities, obligations or loss contingencies that are required to be reflected in SelectTech Financial Statements under generally accepted accounting principles, other than: (i) liabilities disclosed or provided for in SelectTech Financial Statements including the notes thereto; and (ii) liabilities incurred in the ordinary course of business since June 30, 1999. 4.07 LITIGATION. There is no private or governmental litigation or proceeding or, to the knowledge of SelectTech, investigation or claim against SelectTech pending or, to the knowledge of SelectTech, threatened which, if determined adversely, may reasonably be expected to have a material adverse effect on its consolidated business, nor are there any judgments, decrees or orders enjoining SelectTech in respect of, or the effect of which is to prohibit, any business practice or the acquisition of any property or the conduct of business in any area which is material to its business on a consolidated basis. 4.08 TAXES. SelectTech has filed all Federal and Nevada tax returns and, to the best of SelectTech's knowledge, all other state and foreign tax returns required to be filed, and has paid, or has made adequate provision or set up an adequate accrual or reserve for the payment of all taxes required to be paid and has no material liability for taxes in excess of the amount so paid or accruals or reserves so established. SelectTech is not delinquent in the payment of any material tax, assessment or governmental charge or in the filing of any tax returns, and no material deficiencies for any tax assessment or governmental charge have been threatened, claimed, proposed or assessed against it. 4.09 ABSENCE OF VIOLATIONS. SelectTech is not in violation of any applicable provision of United States, state, local or foreign laws, regulations, judgments or decrees, which violation may reasonably be expected to have a material adverse effect on SelectTech. 4.10 INTELLECTUAL PROPERTY. (a) No person or entity has any rights to use any of the Intellectual Property of SelectTech. (b) SelectTech owns, or has the right pursuant to a valid contract to use or operate under, all Intellectual Property of SelectTech. (c) The operation of the business of SelectTech as it is currently conducted does not infringe the Intellectual Property of any other person or entity, and SelectTech has not received notice of any claim concerning such infringement. (d) To the knowledge of SelectTech, no person is infringing or misappropriating any of the Intellectual Property of SelectTech and there are no claims asserted against SelectTech related to any Intellectual Property of SelectTech. 4.11 PROPERTIES, LIENS, ETC. Except as reflected in SelectTech Financial Statements or in the notes thereto, and except for statutory mechanics and materialmen's liens, liens for current taxes not yet delinquent and liens or encumbrances which do not confer upon secured parties any rights to property which are material to SelectTech, SelectTech owns, free and clear of any liens or other encumbrances, all of its tangible and intangible property, real and personal. -12- 4.12 HART SCOTT RODINO. To the knowledge of SelectTech, no filing will be required under the HSR Act in order to consummate the Merger. ARTICLE V REPRESENTATIONS AND WARRANTIES OF HOLDING COMPANY AND SUB Except as disclosed or excepted on a schedule delivered by Holding Company and Sub to the other parties to this Agreement prior to the execution of this Agreement (the "HOLDING COMPANY SCHEDULE"), each of Holding Company and Sub represents and warrants to the other parties to this Agreement as follows: 5.01 ORGANIZATION OF HOLDING COMPANY. Holding Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Holding Company has conducted no business prior to the execution and delivery of this Agreement. 5.02 ORGANIZATION OF SUB. Sub is a corporation duly organized, validly existing and in good standing under the laws of the State of California. Sub has conducted no business prior to the execution and delivery of this Agreement. 5.03 CAPITALIZATION. The authorized capital stock of Holding Company consists of 40,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock. At the close of business on the Reference Date, there were outstanding 100 shares of Holding Company Common. The authorized capital stock of Sub consists of 100 shares of Common Stock. At the close of business on the Reference Date, there were outstanding 100 shares of Sub Common. 5.04 HOLDING COMPANY SUBSIDIARIES. Other than Sub, Holding Company has no direct or indirect equity interest in any corporation, partnership or other business entity. Sub has no direct or indirect equity interest in any corporation, partnership or other business entity. 5.05 AUTHORITY RELATIVE TO THIS AGREEMENT. Each of Holding Company and Sub has the corporate power and authority to enter into and deliver this Agreement and the Merger Agreement and to carry out its respective obligations hereunder and thereunder. The execution and delivery of this Agreement and the Merger Agreement and the consummation of the transactions contemplated hereby and thereby have been duly authorized by the respective Boards of Directors of Holding Company and Sub and, except for the approval of their shareholders, no other corporate proceedings on the part of Holding Company or Sub are necessary to authorize this Agreement, the Merger Agreement and the transactions contemplated hereby. Neither Holding Company nor Sub is subject to or obligated under any charter or bylaw, or under any material contract, lease or other instrument or any license, franchise or permit, which would be defaulted, breached or terminated by or in conflict (or upon the failure to give notice or the lapse of time, or both, would result in a default, breach, termination or conflict) with its execution and performance of this Agreement and the Merger Agreement and the transactions contemplated hereby. Except as contemplated by this Agreement, no consent of any person not a party to this Agreement, and no consent of or filing with (including any waiting period) any governmental authority, is required to be obtained on the part of Holding Company or Sub to permit the Merger. This Agreement is, and the Agreement of Merger when executed and delivered will be, valid and binding obligations of Holding Company and Sub, enforceable against them in accordance with their respective terms. 5.06 LITIGATION. There is no private or governmental litigation or proceeding or, to the knowledge of Holding Company or Sub, investigation or claim against Holding Company or Sub pending or, to the knowledge of Holding Company or Sub, threatened which, if determined adversely, may reasonably be expected to have a material adverse effect on Holding Company or Sub, nor are there any judgments, decrees or -13- orders enjoining Holding Company or Sub in respect of, or the effect of which is to prohibit, any business practice or the acquisition of any property or the conduct of business in any area which is material to its business. 5.07 ABSENCE OF VIOLATIONS. Neither Holding Company nor Sub is in violation of any applicable provision of United States, state, local or foreign laws, regulations, judgments or decrees, which violation may reasonably be expected to have a material adverse effect on Holding Company or Sub. 5.08 HART SCOTT RODINO. To the knowledge of Holding Company and Sub, no filing will be required under the HSR Act in order to consummate the Merger. 5.09 SHARES OF HOLDING COMPANY COMMON. The shares of Holding Company Common to be issued pursuant to this Agreement and the Merger Agreement, when issued and delivered in accordance with the Merger Agreement, will be duly and validly authorized and issued, fully paid and nonassessable and issued in accordance with all applicable state and federal securities laws. 5.10 CERTIFICATE OF INCORPORATION AND BYLAWS OF HOLDING COMPANY. Attached as EXHIBIT C is a true and correct copy of the First Amended and Restated Certificate of Incorporation of Holding Company in effect on the date hereof. Attached as EXHIBIT D is a true and correct copy of the Bylaws of Holding Company in effect on the date hereof. ARTICLE VI CONDUCT OF BUSINESS PRIOR TO EFFECTIVE DATE 6.01 CONDUCT OF BUSINESS OF SELECTTECH AND SQIS. During the period from the date of this Agreement to the Effective Time, each of SelectTech and SQIS shall use reasonable efforts to maintain satisfactory relationships with licensors, suppliers, distributors and customers, all in accordance with its ordinary and usual course of business. Prior to the Effective Time, neither SelectTech nor SQIS shall, without the prior written consent of the other parties to this Agreement or except as specifically contemplated by this Agreement: (a) amend its Articles of Incorporation or Bylaws; (b) authorize for issuance, issue, deliver or sell any additional shares of its capital stock of any class, or securities convertible into shares of such stock, or issue or grant any rights, options or other commitments for the issuance of shares of such stock or such convertible securities (other than the issuance of shares of SelectTech Common upon (i) the exercise of SelectTech Options or SelectTech Warrants, (ii) the conversion of the Debentures or (iii) the conversion of SelectTech Preferred; and other than the issuance of shares of SQIS Common upon (x) the exercise of SQIS Options or (y) the conversion of SQIS Preferred); (c) split, combine or reclassify any shares of its capital stock or declare, set aside or pay any dividend (whether in cash, stock or property) in respect of its capital stock or redeem or otherwise acquire any of its capital stock other than the repurchase, at cost, of shares issued to employees pursuant to the terms of employee restricted stock purchase agreements; (d) dispose of or acquire any material properties or assets except in the ordinary course of business; (e) engage in any activities or transactions that are outside the ordinary course of SelectTech's business; or -14- (f) incur any indebtedness for borrowed money, other than amounts borrowed pursuant to and in accordance with the terms and conditions of its existing lines of credit. 6.02 CONDUCT OF BUSINESS OF HOLDING COMPANY AND SUB. During the period from the date of this Agreement to the Effective Time, neither Holding Company nor Sub shall conduct any business, other than as reasonably necessary to carry out the Merger and the transactions related thereto. Prior to the Effective Time, neither Holding Company nor Sub shall, without the prior written consent of the other parties to this Agreement or except as specifically contemplated by this Agreement: (a) amend its Certificate of Incorporation or Articles of Incorporation, as applicable, or Bylaws; or (b) authorize for issuance, issue, deliver or sell any additional shares of its capital stock of any class, or securities convertible into shares of such stock, or issue or grant any rights, options or other commitments for the issuance of shares of such stock or such convertible securities. ARTICLE VII ADDITIONAL AGREEMENTS 7.01 ACCESS AND INFORMATION. (a) SelectTech has previously afforded, and will afford, to SQIS and to its accountants, counsel and other representatives full access during normal business hours throughout the period prior to the Effective Time to all of its properties, books, contracts and records, and has furnished, and will furnish, to SQIS all information concerning its business, properties and personnel as SQIS has requested or might reasonably request, including proprietary and confidential information of SelectTech. (b) SQIS has previously afforded, and will afford, to SelectTech and to its accountants, counsel and other representatives full access during normal business hours throughout the period prior to the Effective Time to all of its properties, books, contracts and records, and has furnished, and will furnish, to SelectTech all information concerning its business, properties and personnel as SelectTech has requested or might reasonably request, including proprietary and confidential information of SQIS. (c) Neither SQIS nor SelectTech shall be obligated to disclose to the other any information which is subject to an obligation of confidentiality which would be breached by such disclosure; provided, however, that no refusal to make disclosure under this Section shall relieve the nondisclosing party of any obligation arising under any other representations or warranties contained herein. 7.02 SHAREHOLDERS' APPROVAL. SQIS and SelectTech shall each solicit the consent of their respective shareholders to approve the Merger as soon as reasonably possible. The Boards of Directors of SQIS and SelectTech (subject to their fiduciary responsibilities and obligations) shall recommend to their respective shareholders that the Merger be approved. 7.03 ISSUANCE OF SHARES. Holding Company shall, as and when required by the provisions of the Merger Agreement, issue and deliver certificates representing the number of shares of Holding Company Common for which SelectTech Common, SelectTech Preferred, SQIS Common and SQIS Preferred outstanding at the Effective Time shall be converted under the Merger Agreement. 7.04 CONSENTS AND APPROVALS. SelectTech shall use its best efforts to obtain any and all consents from other parties to contracts, leases and other instruments material to SelectTech's business, if necessary or appropriate to allow the consummation of the Merger and the continuance of SelectTech's business by SQIS after consummation of the Merger. Each party hereto shall use its best efforts to obtain any and all permits or -15- approvals of any governmental body or agency required by such party for the lawful consummation of the Merger. 7.05 EXPENSES. Each party to this Agreement will each pay all of their own costs and expenses incurred in connection with the transactions contemplated hereby including, without limitation, all fees and expenses of attorneys, accountants and financial advisors. 7.06 ACTIONS CONTRARY TO STATED INTENT. No party to this Agreement will, either before or after the consummation of the Merger, take any action which would prevent the Merger from qualifying as a tax-free reorganization under Section 368(a)(1)(A) of the Internal Revenue Code or from being eligible for pooling of interests accounting treatment. 7.07 NO NEGOTIATION. From the date hereof until the consummation or termination of this Agreement, no party to this Agreement will discuss or negotiate, or authorize any person or entity to discuss or negotiate on its behalf, with any other party, or entertain or consider any inquiries or proposals received from any other party, concerning the possible disposition of its business, assets or capital stock. 7.08 BEST EFFORTS. Each party to this Agreement shall use its best efforts to cause all conditions to closing to be satisfied, including without limitation the execution and delivery of such other instruments as may be reasonably necessary or convenient to consummate the Merger and the other transactions contemplated hereby. 7.09 FAIRNESS HEARING. Each party to this Agreement will use commercially reasonable efforts to qualify the issuance of Holding Company Common, Holding Company Preferred, options and debentures in the Merger under the exemption provided by Section 3(a)(10) of the Securities Act. The parties to this Agreement agree to cooperate with one another to prepare and file with the Commissioner of Corporations of the State of California an application for qualification of the Holding Company Common in the Merger pursuant to a "fairness hearing" procedure, and to take such other actions as may be reasonably necessary to perfect such exemption. 7.10 JOINT SOLICITATION STATEMENT. SQIS and SelectTech will jointly prepare the Joint Solicitation Statement. 7.11 INFORMATION SUPPLIED. Each party to this Agreement will promptly inform the other of the occurrence of any event which should be included in an amendment or supplement to the Joint Solicitation Statement or any other such filing, agreement or document and of any discovery that any information supplied as described in this Section 7.11 no longer conforms with the requirements of this Section 7.11. 7.12 RESTRICTIONS ON SALES BY AFFILIATES. SelectTech will use its best efforts to cause those shareholders of SelectTech identified on a list delivered to SQIS on or prior to the date of this Agreement, together with any other shareholders of SelectTech who in the opinion of counsel for SelectTech are or may be Affiliates to execute and deliver to SQIS the form of Affiliates Agreement attached hereto as EXHIBIT E. SQIS will use its best efforts to cause those shareholders of SQIS identified on a list delivered to SelectTech on or prior to the date of this Agreement, together with any other shareholders of SQIS who in the opinion of counsel for SQIS are or may be Affiliates to execute and deliver to SelectTech the form of Affiliates Agreement attached hereto as EXHIBIT E. 7.13 INVENTION ASSIGNMENT AND NONDISCLOSURE AGREEMENTS. SelectTech will use its best efforts to cause each of its employees and consultants to execute and deliver to the Surviving Corporation an Invention Assignment and Nondisclosure Agreement substantially in the form attached as EXHIBIT F. -16- 7.14 LOCK-UP AGREEMENTS. Each of SQIS and SelectTech will use its best efforts to cause each of their respective shareholders who will own one percent or more of the shares of Holding Company Common Stock after the Effective Time, calculated on a fully diluted, as-converted basis, to execute and deliver to SQIS, at or before the Effective Time, a Lockup Agreement substantially in the form attached as EXHIBIT G. 7.15 CONFIRMATION AGREEMENTS. SelectTech will use its best efforts to cause each of its officers and key employees and all technical personnel who hold SelectTech Common, SelectTech Preferred or SelectTech Options prior to the Effective Time of the Merger to execute and deliver to SQIS, at or before the Effective Time, a Confirmation Agreement and Assignment of Rights substantially in the form attached as EXHIBIT H. 7.16 COVENANT OF THE BOARDS OF DIRECTORS. The respective Boards of Directors of SQIS, SelectTech, Sub and Holding Company have each approved the Merger, and will each use its best efforts to cause the shareholders of SQIS and SelectTech, as applicable, to approve the Merger, this Agreement and the transactions contemplated hereby, subject to the satisfaction or waiver of the conditions precedent to the Merger and subject to the discharge of the directors' fiduciary responsibilities. ARTICLE VIII CONDITIONS PRECEDENT The respective obligation of each party to effect the Merger shall be, at the election of such party, subject to the fulfillment at or prior to the Effective Time of the following conditions: (a) This Agreement and the Merger Agreement shall have been approved and adopted by the shareholders of each party to this Agreement in the manner required under applicable law, and neither SQIS nor SelectTech shall have received demands for payment in accordance with Section 1301 of the California General Corporation Law or Section 92A.380 of the Nevada General Corporation Law, as applicable, from their respective shareholders with respect to 5% or more of the outstanding shares of Common Stock of SQIS or SelectTech, as the case may be. (b) No order shall have been entered, and not vacated, by a court or administrative agency of competent jurisdiction, in any action or proceeding which enjoins, restrains or prohibits consummation of the Merger. (c) SQIS and SelectTech shall have received a permit for the qualification of securities to be issued in the Merger from the Department of Corporations of California, or the transaction shall be exempt from registration or qualification under applicable securities laws in the opinion of legal counsel to the parties. (d) SQIS and SelectTech shall have received all permits, authorizations and qualifications from federal, state and local governmental agencies that are required for the consummation of the Merger. (e) SQIS shall have received an executed Confirmation Agreement and Assignment of Rights from each of SelectTech's officers and key employees and all technical personnel who hold SelectTech Common, SelectTech Preferred or SelectTech Options prior to the Effective Time of the Merger. ARTICLE IX TERMINATION, AMENDMENT AND WAIVER 9.01 TERMINATION. This Agreement may be terminated at any time prior to the Effective Time, whether before or after approval by the shareholders of SQIS or SelectTech: -17- (a) by mutual agreement of the Boards of Directors of SQIS and SelectTech; (b) by the Board of Directors of SelectTech if at the Effective Time any of the conditions specified in Article VIII has not been satisfied or waived by SelectTech on or prior to December 31, 1999; (c) by the Board of Directors of SQIS if at the Effective Time any of the conditions specified in Article VIII has not been satisfied or waived by SQIS on or prior to December 31, 1999; or (d) by the Board of Directors of either SQIS or SelectTech if (i) there shall be a nonappealable order of a federal or state court in effect preventing consummation of the Merger or (ii) there shall be any action taken, or any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the Merger by any governmental entity that would make consummation of the Merger illegal. 9.02 EFFECT OF TERMINATION. In the event of termination of this Agreement by either SQIS or SelectTech, as provided in Section 9.01, this Agreement shall forthwith become void and there shall be no liability or obligation on the part of either SQIS or SelectTech or their respective officers or directors and except to the extent that such termination results from the willful breach by a party hereto of any of its representations, warranties, covenants or agreements set forth in this Agreement. 9.03 AMENDMENT. This Agreement may be amended by the parties hereto at any time before or after approval hereof by the shareholders of SQIS or SelectTech, but, after any such shareholder approval, no amendment shall be made which by law requires the further approval of shareholders without such further approval having been obtained. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. 9.04 EXTENSION; WAIVER. At any time prior to the Effective Time, either party hereto may, to the extent allowed by law, (a) extend the time for the performance of any of the obligations or other acts of the other party, (b) waive any inaccuracies in the representations and warranties of the other party contained herein or in any document delivered pursuant hereto or (c) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid if set forth in an instrument in writing signed on behalf of such party. ARTICLE X GENERAL PROVISIONS 10.01 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. The agreements contained in Article I and Sections 7.05, 7.06, and 7.11 shall survive the consummation of the Merger. All other representations, warranties and agreements in this Agreement or in any instrument delivered pursuant to this Agreement shall be deemed to be conditions to the Merger and shall not survive the Merger. 10.02 CLOSING. The closing (the "CLOSING") of the transactions contemplated by this Agreement and the Merger Agreement shall take place at the offices of SQIS, on the day on which the last of the conditions set forth in Article VII are fulfilled or waived (the "CLOSING DATE"). Subject to the provisions of the Merger Agreement, as promptly as possible following the Closing, a fully executed copy of the Merger Agreement, along with certificates of SQIS and SelectTech meeting the requirements of Section 1103 of the California General Corporation Law and Section 92A.200 of the Nevada General Corporation Law, shall be filed with the Secretary of State of California and the Secretary of State of Nevada, in accordance with the provisions of the Merger Agreement. 10.03 NOTICES. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed effectively given upon personal delivery or on the day sent by facsimile -18- transmission if a true and correct copy is sent the same day by first class mail, postage prepaid, or by dispatch by an internationally recognized express courier service, and in each case addressed as follows: if to SQIS, Holding Company 595 Market Street, 6th Floor or Sub: San Francisco, CA 94105 Attn: President if to SelectTech: 595 Market Street, 6th Floor San Francisco, CA 94105 Attn: President 10.04 COUNTERPARTS. This Agreement may be executed in one or more counterparts. Delivery of executed signature pages by facsimile will be deemed valid execution and delivery of this Agreement for all purposes. 10.05 MISCELLANEOUS. This Agreement, including the Exhibits, (a) constitutes the entire agreement among the parties with respect to the subject matter hereof and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, (b) is not intended to confer upon any other person any rights or remedies hereunder, and (c) shall not be assigned by operation of law or otherwise except as otherwise specifically provided herein. 10.06 GOVERNING LAW. This Agreement shall be governed in all respects, including validity, interpretation and effect, by the laws of the State of California. 10.07 EXHIBITS. The following Exhibits are attached to this Agreement and made a part of this Agreement by this reference: EXHIBIT A Form of Merger Agreement EXHIBIT B Articles of Incorporation of SelectQuote EXHIBIT C Restated Certificate of Incorporation of SelectQuote, Inc. EXHIBIT D Bylaws of SelectQuote, Inc. EXHIBIT E Form of Affiliates Agreement EXHIBIT F Form of Invention Assignment and Nondisclosure Agreement EXHIBIT G Form of Lockup Agreement EXHIBIT H Form of Confirmation Agreement and Assignment of Rights * * * -19- IN WITNESS WHEREOF, the parties have duly executed this Agreement and Plan of Reorganization as of the date first written above. SELECTQUOTE INSURANCE SERVICES SELECTTECH - ---------------------------------- --------------------------------- - ---------------------------------- --------------------------------- By: Charan J. Singh By: Steven H. Gerber Title: President Title: President - ---------------------------------- --------------------------------- - ---------------------------------- --------------------------------- By: Nancy Malik By: David L. Paulsen Title: Secretary Title: Secretary SELECTQUOTE, INC. SELECTQUOTE ACQUISITION SUB - ---------------------------------- --------------------------------- - ---------------------------------- --------------------------------- By: Steven H. Gerber By: Charan J. Singh Title: President Title: President - ---------------------------------- --------------------------------- - ---------------------------------- --------------------------------- By: David L. Paulsen By: David L. Paulsen Title: Assistant Secretary Title: Secretary -20- EX-2.1(1) 4 EXHIBIT 2.1.1 AMENDMENT TO AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION This Amendment to Amended and Restated Agreement and Plan of Reorganization (this "AMENDMENT") is effective as of December 17, 1999 by and among SelectQuote Insurance Services, a California corporation ("SQIS"), SelectTech, a Nevada corporation ("SELECTTECH"), SelectQuote, Inc., a Delaware corporation ("HOLDING COMPANY"), and SelectQuote Acquisition Sub, a California corporation and a wholly owned subsidiary of Holding Company ("SUB"). RECITALS A. The Boards of Directors of SQIS, SelectTech, Holding Company and Sub have approved the proposed merger of SelectTech and Sub with and into SQIS (the "MERGER") in accordance with the California General Corporation Law (the "CGCL") and pursuant to and subject to the terms of the Merger Agreement (the "MERGER AGREEMENT") to be executed by SQIS, SelectTech, Holding Company and Sub prior to the effective time of the Merger. B. On August 17, 1999, the parties executed an Agreement and Plan of Reorganization, which was amended by an Amended and Restated Agreement and Plan of Reorganization (the "ORIGINAL AGREEMENT") dated as of August 17, 1999. C. The parties desire to enter into this Amendment for the purpose of setting forth changes regarding the assumption of certain agreements. AGREEMENT NOW, THEREFORE, in consideration of the promises and the representations, warranties and agreements contained in this Agreement, the parties agree as follows: 1. Section 2.09(e) shall be amended and restated to read in its entirety as follows: "(e) Holding Company shall assume the obligations of SelectTech pursuant to the existing Investor Rights Agreement among SelectTech and certain of its shareholders, and shall enter into a SelectQuote, Inc. Registration Rights Agreement with certain of the SelectTech shareholders and certain other stockholders of Holding Company, which agreement will supersede the existing Registration Rights Agreement among SelectTech and certain of its shareholders." 2. The General Provisions of Sections 10.01 through 10.06 of the Original Agreement are hereby incorporated into this Amendment by this reference. IN WITNESS WHEREOF, the parties have duly executed this Amendment to Agreement and Plan of Reorganization as of the date first written above. SELECTQUOTE INSURANCE SERVICES SELECTTECH By: Charan J. Singh By: Steven H. Gerber Title: President Title: President By: Nancy Malik By: David L. Paulsen Title: Secretary Title: Secretary SELECTQUOTE, INC. SELECTQUOTE ACQUISITION SUB By: Steven H. Gerber By: Charan J. Singh Title: President Title: President By: David L. Paulsen By: David L. Paulsen Title: Assistant Secretary Title: Secretary EX-2.2 5 EXHIBIT 2.2 MERGER AGREEMENT This Merger Agreement (the "MERGER AGREEMENT") is entered into as of December 21, 1999 by and among SelectQuote Insurance Services, a California corporation ("SQIS"), SelectTech, a Nevada corporation ("SELECTTECH"), SelectQuote, Inc., a Delaware corporation ("HOLDING COMPANY"), and SelectQuote Acquisition Sub, a California corporation and a wholly-owned subsidiary of Holding Company ("SUB;" together with SQIS, SelectTech and Holding Company, the "PARTIES"). RECITALS A. The Boards of Directors of the Parties deem it advisable and in the best interests of the Parties and their respective shareholders that SelectTech and Sub merge with and into SQIS (the "MERGER"). B. The Parties previously have entered into an Agreement and Plan of Reorganization dated as of August 17, 1999 as amended by an Amendment to Agreement and Plan of Reorganization dated as of December 17, 1999 (the "PLAN OF REORGANIZATION") setting forth certain representations, warranties and agreements in connection with the Merger and the transactions associated therewith. AGREEMENT NOW, THEREFORE, the parties do hereby agree as follows: ARTICLE I THE CONSTITUENT CORPORATIONS 1.1 SQIS. SQIS is incorporated under the laws of the State of California and will be the surviving corporation in the Merger. SQIS is authorized to issue an aggregate of 5,000,000 shares of Common Stock ("SQIS COMMON STOCK") and 5,000,000 shares of Preferred Stock, of which 600,000 shares are designated Series A Preferred Stock, 300,000 shares are designated Series B Preferred Stock and 200,000 shares are designated Series C Preferred Stock (the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, collectively, the "SQIS PREFERRED STOCK"). 1.2 SELECTTECH. SelectTech was incorporated under the laws of the State of Nevada on April 30, 1997. SelectTech is authorized to issue an aggregate of 18,500,000 shares of Common Stock, $0.001 par value ("SELECTTECH COMMON STOCK"), and 1,500,000 shares of Preferred Stock, $0.001 par value, of which 750,000 shares are designated Series A Preferred Stock ("SELECTTECH PREFERRED STOCK"). 1.3 HOLDING COMPANY. Holding Company was incorporated under the laws of the State of Delaware on August 19, 1999. Holding Company is authorized to issue an aggregate of 50,000,000 shares of Common Stock, $0.01 par value ("HOLDING COMPANY COMMON STOCK"), and 10,000,000 shares of Preferred Stock, $0.01 par value. 1.4 SUB. Sub was incorporated under the laws of the State of California on August 18, 1999. Sub is authorized to issue an aggregate of 100 shares of Common Stock, ("SUB COMMON STOCK"). ARTICLE II THE MERGER 2.1 CLOSING OF MERGER. After all conditions to the Merger have been satisfied, this Merger Agreement, along with certificates meeting the requirements of the California General Corporation Law and the Nevada General Corporation Law, shall be filed with the Secretary of State of California and the Secretary of State of Nevada. At the time such filings are both effected, the Merger shall become effective ("EFFECTIVE TIME"). 2.2 EFFECT OF MERGER. (a) At the Effective Time, SelectTech shall be merged into SQIS and the separate corporate existence of SelectTech shall thereupon cease. SQIS shall be the surviving corporation in the Merger and the separate corporate existence of SQIS, with all its purposes, objects, rights, privileges, powers, immunities and franchises, shall continue unaffected and unimpaired by the Merger. (b) At the Effective Time, Sub shall be merged into SQIS and the separate corporate existence of Sub shall thereupon cease. SQIS shall be the surviving corporation in the Merger (the "SURVIVING CORPORATION") and the separate corporate existence of SQIS, with all its purposes, objects, rights, privileges, powers, immunities and franchises, shall continue unaffected and unimpaired by the Merger. (c) SQIS, as the Surviving Corporation (the "Surviving Corporation"), shall succeed to all of the rights, privileges, powers, immunities and franchises of SelectTech and Sub, all of the properties and assets of SelectTech and Sub and all of the debts, choses in action and other interests due or belonging to SelectTech and Sub and shall be subject to, and responsible for, all of the debts, liabilities and obligations of SelectTech and Sub with the effect set forth in the California General Corporation Law and the Nevada General Corporation Law, as applicable. 2 ARTICLE III ARTICLES OF INCORPORATION AND BYLAWS OF THE SURVIVING CORPORATION 3.1 ARTICLES OF INCORPORATION. At the Effective Time, the Articles of Incorporation of the Surviving Corporation shall continue in the form in effect immediately prior to the Effective Time. 3.2 BYLAWS. At the Effective Time, the Bylaws of the Surviving Corporation shall continue in the form in effect immediately prior to the Effective Time. ARTICLE IV MANNER AND BASIS OF CONVERTING CAPITAL STOCK AND SECURITIES 4.1 CONVERSION OF STOCK. At the Effective Time, by virtue of the Merger and without any action on the part of the holders of any shares of stock of the Parties: (a) Each full share of SelectTech Common Stock which is outstanding immediately prior to the Effective Time shall be canceled and extinguished and will be converted into 0.641597 shares of Holding Company Common Stock upon surrender of the certificate representing such share of SelectTech Common Stock. (b) Each full share of SelectTech Preferred Stock which is outstanding immediately prior to the Effective Time shall be canceled and extinguished and will be converted into 0.703455 shares of Holding Company Common Stock upon surrender of the certificate representing such share of SelectTech Preferred Stock. (c) Each option for SelectTech Common Stock which is outstanding immediately prior to the Effective Time shall be canceled and extinguished and will be converted into an option to purchase 0.641597 shares of Holding Company Common Stock at an exercise price for each such share of Holding Company Common Stock equal to the previous option exercise price for each share of SelectTech Common Stock divided by 0.641597 ("SELECTTECH CONVERTED OPTIONS"). Each SelectTech Converted Option will be granted under the SelectQuote, Inc. 1999 Stock Option Plan and subject to the terms and conditions thereof. (d) Each debenture of SelectTech, convertible into shares of SelectTech Common Stock, which is outstanding immediately prior to the Effective Time shall be canceled and extinguished and will be converted into debentures of Holding Company, convertible into shares of Holding Company Common Stock at a conversion price equal to the previous debenture conversion price for each share of SelectTech Common Stock divided by 0.641597. (e) Each full share of SQIS Common Stock which is outstanding immediately prior to the Effective Time shall be canceled and extinguished and will be converted into 3 3.286852 shares of Holding Company Common Stock upon surrender of the certificate representing such share of SQIS Common Stock. (f) Each full share of SQIS Series A Preferred Stock which is outstanding immediately prior to the Effective Time shall be canceled and extinguished and will be converted into 3.286852 shares of Holding Company Series A Preferred Stock upon surrender of the certificate representing such share of SQIS Preferred Stock. (g) Each full share of SQIS Series B Preferred Stock which is outstanding immediately prior to the Effective Time shall be canceled and extinguished and will be converted into 3.286852 shares of Holding Company Series B Preferred Stock upon surrender of the certificate representing such share of SQIS Preferred Stock. (h) Each full share of SQIS Series C Preferred Stock which is outstanding immediately prior to the Effective Time shall be canceled and extinguished and will be converted into 3.286852 shares of Holding Company Series C Preferred Stock upon surrender of the certificate representing such share of SQIS Preferred Stock (the shares of Holding Company Common Stock into which shares described in clauses (a) through (g) are converted, the "MERGER CONSIDERATION"). (i) Each option for SQIS Common Stock which is outstanding immediately prior to the Effective Time shall be canceled and extinguished and will be converted into an option to purchase 3.286852 shares of Holding Company Common Stock at an exercise price for each such share of Holding Company Common Stock equal to the previous option exercise price for each share of SelectTech Common Stock divided by 3.286852 ("SQIS CONVERTED OPTIONS"). Each SQIS Converted Option will be granted under the SelectQuote, Inc. 1999 Stock Option Plan and subject to the terms and conditions thereof. (j) Each full share of Sub Common Stock which is outstanding immediately prior to the Effective Time shall be canceled and extinguished and will be converted into one share of SQIS Common Stock. (k) Each full share of Holding Company common which is outstanding immediately prior to the Effective Time shall be canceled and extinguished. (l) Notwithstanding the foregoing, any shares of SelectTech Common Stock, SelectTech Preferred Stock, SQIS Common Stock or SQIS Preferred Stock, as applicable (the "CONVERTED SHARES"), owned by Holding Company or SQIS shall not be converted as provided above but shall be cancelled. 4.2 DISSENTING SHARES. Notwithstanding the other provisions of this Article IV, no shares owned by any shareholder who dissents from the Merger pursuant to Section 92A.380 of the Nevada General Corporation Law or Section 1300 of the California General Corporation Law, as applicable, shall be converted into the Merger Consideration, but shall be converted into the right to receive such consideration as may be determined to be due with respect to such 4 dissenting shares pursuant to the law of the State of Nevada or the State of California, as applicable. 4.3 EXCHANGE CERTIFICATES. As soon as practicable after the Effective Time, and after surrender to the Holding Company of any certificate which prior to the Effective Time represented Converted Shares the Holding Company shall cause to be distributed to the person in whose name such certificate is registered a certificate or certificates representing the Merger Consideration. Until surrendered as contemplated by the preceding sentence, each certificate which immediately prior to the Effective Time represented any Converted Shares, shall be deemed at and after the Effective Time to represent only the right to receive the Merger Consideration. If any certificate representing the Merger Consideration is to be issued to a person or entity ("PERSON") other than the Person in whose name the certificate representing Converted Shares surrendered in exchange therefor is registered, it will be a condition of the issuance thereof that the certificate so surrendered will be properly endorsed and accompanied by all documents reasonably required by the Holding Company to evidence and effect such transfer and to evidence that any applicable stock transfer taxes have been paid. If any certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Person claiming such certificate to be lost, stolen or destroyed and, if required by the Holding Company, the posting by such Person of a bond in such reasonable amount as the Holding Company may direct as indemnity against any claim that may be made against it with respect to such certificate, the Holding Company will cause the Merger Consideration to be issued in exchange for such lost, stolen or destroyed certificate. ARTICLE V TERMINATION AND AMENDMENT 5.1 TERMINATION. This Merger Agreement shall terminate forthwith in the event that the Plan of Reorganization shall be terminated as therein provided. 5.2 AMENDMENT. This Merger Agreement may be amended by the Parties at any time before or after approval hereof by the shareholders of SelectTech, SQIS, Sub and or Holding Company, but, after any such approval, no amendment which by law requires the further approval of the shareholders of any of SelectTech, SQIS, Sub and/or Holding Company may be made without such approval having first been obtained. This Merger Agreement may not be amended except by an instrument in writing signed on behalf of each of the Parties. * * * 5 IN WITNESS WHEREOF, the parties have duly executed this Merger Agreement as of the date first written above. SELECTQUOTE INSURANCE SERVICES SELECTTECH - -------------------------------- ------------------------------- By: Charan J. Singh By: Steven H. Gerber Title: President Title: President - -------------------------------- ------------------------------- By: Nancy Malik By: David L. Paulsen Title: Secretary Title: Secretary SELECTQUOTE, INC. SELECTQUOTE ACQUISITION SUB - -------------------------------- ------------------------------- By: Steven H. Gerber By: Charan J. Singh Title: President Title: President - -------------------------------- ------------------------------- By: David L. Paulsen By: David L. Paulsen Title: Assistant Secretary Title: Secretary 6 EX-3.1 6 EXHIBIT 3.1 RESTATED CERTIFICATE OF INCORPORATION OF ZEBU ARTICLE I The name of the corporation is Zebu (the "CORPORATION"). ARTICLE II The address of the Corporation's registered office in the State of Delaware is: 1209 Orange Street, City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporate Trust Company. ARTICLE III The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. ARTICLE IV SECTION 1. The total number of shares of all classes of stock which the Corporation has authority to issue is One Hundred Ten Million (110,000,000) shares, consisting of two classes: One Hundred Million (100,000,000) shares of Common Stock, $0.01 par value per share, and Ten Million (10,000,000) shares of Preferred Stock, $0.01 par value per share, 2,500,000 shares of which are designated Series A Preferred Stock ("SERIES A PREFERRED"), 1,250,000 shares of which are designated Series B Preferred Stock ("SERIES B PREFERRED"), 750,000 shares of which are designated Series C Preferred Stock ("SERIES C PREFERRED"), 50,000 shares of which are designated Series D Preferred Stock ("SERIES D PREFERRED") and 2,041,845 shares of which are designated Series E Preferred Stock ("SERIES E PREFERRED"). The Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series E Preferred shall be known collectively as the "ORIGINAL PREFERRED STOCK." SECTION 2. The board of directors of the corporation ("BOARD OF DIRECTORS") is authorized, subject to any limitations prescribed by the law of the State of Delaware, to provide for the issuance of additional shares of Preferred Stock in one or more series by filing a certificate of designations pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, to fix the designations, powers, preferences and rights of the shares of each such series and any qualifications, limitations or restrictions thereof, 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). The number of authorized shares of Preferred Stock may also be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the stock of the Corporation entitled to vote, unless a vote of any other holders is required pursuant to a certificate or certificates establishing a series of Preferred Stock. 3 Except as otherwise expressly provided in any certificate of designations designating any series of Preferred Stock pursuant to the foregoing provisions of this Section 2 or by the General Corporation Law of Delaware, any new series of Preferred Stock may be designated, fixed and determined as provided herein by the Board of Directors without approval of the holders of Common Stock or the holders of Preferred Stock, or any series thereof, and any such new series may have powers, preferences and rights, including, without limitation, voting rights, dividend rights, liquidation rights, redemption rights and conversion rights, senior to, junior to or pari passu with the rights of the Common Stock, the existing classes of Preferred Stock or any future class or series of Preferred Stock or Common Stock. SECTION 3. The powers, preferences and rights of the Original Preferred Stock shall be as follows: 3.1 DIVIDEND RIGHTS. (a) SERIES A PREFERRED. The holders of the Series A Preferred shall be entitled to receive in any fiscal year, when and as declared by the Board of Directors, out of any assets at the time legally available therefor, dividends in cash at the rate of $0.00913 per share of Series A Preferred per annum, before any dividend is paid on shares of Common Stock, Series B Preferred, Series C Preferred, Series D Preferred or Series E Preferred. (b) SERIES B PREFERRED. The holders of the Series B Preferred shall be entitled to receive in any fiscal year, when and as declared by the Board of Directors, out of any assets at the time legally available therefor, dividends in cash at the rate of $0.0365 per share of Series B Preferred per annum, before any dividend is paid on shares of Common Stock, Series C Preferred, Series D Preferred or Series E Preferred. (c) SERIES C PREFERRED. The holders of Series C Preferred shall be entitled to receive in any fiscal year, when and as declared by the Board of Directors, out of any assets at the time legally available therefor, dividends in cash at the rate of $0.073 per share of Series C Preferred per annum, before any dividend is paid on shares of Common Stock, Series D Preferred or Series E Preferred. (d) SERIES D PREFERRED. The holders of Series D Preferred shall be entitled to receive in any fiscal year, when and as declared by the Board of Directors, out of any assets at the time legally available therefor, dividends payable in cash, for each share of Common Stock into which the holders' shares of Series D Preferred are then convertible pursuant to Section 3.5, equal to the quotient of (i) the aggregate amount of cash dividends declared and paid on the Series A Preferred, the Series B Preferred and the Series C Preferred (the "SENIOR PREFERRED") and any other class or series of stock, divided by (ii) the number of shares of Senior Preferred on which such dividends are declared and paid (calculated on an as-converted basis) per annum, before any dividend is paid on shares of Common Stock. (e) SERIES E PREFERRED. The holders of Series E Preferred shall be entitled to receive in any fiscal year, when and as declared by the Board of Directors, out of any assets at the time legally available therefor, dividends payable in cash, for each share of Common Stock into which the holders' shares of Series E Preferred are then convertible pursuant to Section 3.5, equal to the quotient of (i) the aggregate amount of cash dividends declared and paid on the Senior Preferred 4 and any other class or series of stock, divided by (ii) the number of shares of Senior Preferred on which such dividends are declared and paid (calculated on an as-converted basis) per annum, before any dividend is paid on shares of Common Stock. (f) TIMING OF DIVIDENDS. Dividends may be payable quarterly or otherwise as the Board of Directors may from time to time determine. The Board of Directors shall make no distributions to the holders of Common Stock in any fiscal year unless and until dividends have been paid to or declared and set apart upon all Original Preferred Stock at the rates set forth above for such fiscal year. (g) NO CUMULATIVE RIGHTS. The right to such dividends on Original Preferred Stock shall not be cumulative, and no rights shall accrue to the holder of the Original Preferred Stock by reason of the fact that dividends on said shares are not declared in any prior year, nor shall any undeclared or unpaid dividends bear or accrue interest. (h) SERIES D AND SERIES E DIVIDENDS. No dividends shall be declared with respect to either the Series D Preferred or the Series E Preferred (each series, individually and collectively, the "JUNIOR PREFERRED") unless an equivalent dividend is declared on each series of Junior Preferred. If dividends are declared on Junior Preferred in an amount less than that to which the holders thereof are entitled pursuant to this Section 3.1, then the holders of Junior Preferred shall share ratably in such dividends according to the respective amounts to which such holders are entitled. 3.2 REDEMPTION RIGHTS. (a) OPTIONAL REDEMPTION OF SERIES A PREFERRED. The Corporation may at any time at the option of the Board of Directors redeem all or part (selected pro rata among all shares of Series A Preferred) of the outstanding shares of the Series A Preferred at the Redemption Price set forth below, provided that the Corporation shall give written notice to the holders of the Series A Preferred to be redeemed at least sixty (60) days prior to the date specified for redemption ("REDEMPTION DATE"). During the period between the date of the notice and the Redemption Date, the rights under Section 3.5 shall continue to exist. (i) Subject to the terms of Section 3.2(a), the Series A Preferred may be redeemed at a cash price equal to $0.1377 per share, together with all declared and unpaid dividends to and including the redemption date ("REDEMPTION PRICE"); provided, however, that payment of the Redemption Price shall be made from any funds of the Corporation legally available therefor. (ii) From and after the Redemption Date (unless default shall be made by the Corporation in duly paying the Redemption Price) the holders of the shares of Series A Preferred called for redemption shall cease to have any rights as stockholders of the Corporation except the right to receive, without interest, the Redemption Price thereof upon surrender of Certificates representing the shares of the Series A Preferred, and such shares shall not thereafter be transferred (except with the consent of the Corporation) on the books of the Corporation and shall not be deemed outstanding for any purpose whatsoever. 5 (iii) There shall be no redemption of any shares of Series A Preferred where such action would be in violation of applicable law. (b) NO REDEMPTION OF SERIES B PREFERRED OR SERIES C PREFERRED. There shall be no mandatory or optional redemption of any shares of Series B Preferred or Series C Preferred. (c) MANDATORY REDEMPTION OF SERIES D PREFERRED AND SERIES E PREFERRED. On December 27, 2004 (the "MANDATORY REDEMPTION DATE"), the Corporation shall (unless otherwise prevented by law) redeem all of the shares of Series D Preferred and Series E Preferred then outstanding for a cash amount per share equal to the greater of (i) the fair market value of one share of Series D Preferred or Series E Preferred, as applicable, as determined pursuant to the valuation method set forth in Section 3.3(e), and (ii) the applicable Liquidation Amount calculated as of the Mandatory Redemption Date (the "MANDATORY REDEMPTION PRICE"). (i) At any time on or after the Mandatory Redemption Date, the holders of Series D Preferred and Series E Preferred shall be entitled to receive the Mandatory Redemption Price for each such share owned by such holder upon actual delivery to the Corporation or its transfer agent of the certificates representing such shares. (ii) If on the Mandatory Redemption Date less than all of the shares of Series D Preferred and Series E Preferred then outstanding may be legally redeemed by the Corporation, the Mandatory Redemption shall be made to the respective holders, PRO RATA based upon the respective amounts which would be payable on or with respect to such shares if all amounts payable on or with respect to such shares were paid in full. On or after the Mandatory Redemption Date, all rights in respect of the shares of Series D Preferred and Series E Preferred, except the right to receive the Mandatory Redemption Price as herein provided, shall cease and terminate (unless default shall be made by the Corporation in the payment of the Mandatory Redemption Price as herein provided, in which event such rights shall be exercisable until such default is cured), and such shares shall no longer be deemed to be outstanding, whether or not the certificates representing such shares have been received by the Corporation. (iii) Anything contained herein to the contrary notwithstanding, the holders of Series D Preferred and Series E Preferred shall have the right, exercisable at any time up to the close of business on the business day immediately preceding the Mandatory Redemption Date, to convert all or any part of such shares into shares of Common Stock. (d) OPTIONAL REDEMPTION OF SERIES D PREFERRED AND SERIES E PREFERRED. The Corporation (unless otherwise prevented by law) shall have the right (the "CALL RIGHT"), exercisable at any time on or after December 27, 2001 and prior to December 27, 2004 (the "OPTIONAL REDEMPTION DATE" of such series), to redeem all or any part of the shares of Series D Preferred and Series E Preferred then outstanding for a cash amount per share of Series D Preferred or Series E Preferred, as applicable, equal to the Liquidation Amount of such series, calculated as of the date on which the Corporation shall redeem such shares (as applicable, the "REDEMPTION AMOUNT" of such series). 6 (i) The Corporation shall exercise the Call Right by providing written notice of such exercise (the "CALL NOTICE") to the holders of Series D Preferred and Series E Preferred at least 30 days prior to the applicable Optional Redemption Date. The Call Notice shall set forth the Option Redemption Date, the Redemption Amount applicable to the Optional Redemption Date and the number of shares of Series D Preferred and Series E Preferred to be redeemed. (ii) At any time on or after the applicable Optional Redemption Date, the holders of Series D Preferred and Series E Preferred to be redeemed shall be entitled to receive the applicable Redemption Amount upon actual delivery to the Corporation or its transfer agent of the certificates representing such shares. (iii) If the Corporation elects to exercise the Call Right as to less than all shares of Series D Preferred and Series E Preferred then outstanding, the Corporation shall redeem such shares pursuant to the Call Right PRO RATA based upon the respective amounts which would be payable on or with respect to such shares if all shares of Series D Preferred and Series E Preferred were redeemed in full. On or after the Optional Redemption Date, all rights in respect of the shares which are the subject of the Call Notice, except the right to receive the applicable Redemption Amount as herein provided, shall cease and terminate (unless default shall be made by the Corporation in the payment of the Redemption Amount as herein provided, in which event such rights shall be exercisable until such default is cured), and such shares shall no longer be deemed to be outstanding, whether or not the certificates representing such shares have been received by the Corporation. (iv) Anything contained herein to the contrary notwithstanding, the holders of Series D Preferred and Series E Preferred shall have the right, exercisable at any time up to the close of business on the business day immediately preceding the applicable Optional Redemption Date, to convert all or any part of such shares which are the subject of the Call Notice into shares of Common Stock. 3.3 LIQUIDATION PREFERENCES. (a) RIGHTS AND PREFERENCES. In the event of any liquidation, dissolution or winding up of the Corporation; (i) The holders of Senior Preferred shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, whether from capital, surplus or earnings, before any payment shall be made in respect of the Common Stock, the Series D Preferred or the Series E Preferred, an amount equal to $0.15 per share of Series A Preferred, $0.61 per share of Series B Preferred and $1.22 per share of Series C Preferred, plus any dividends thereon declared but unpaid. (ii) The holders of the Series D Preferred shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, whether from capital, surplus or earnings, before any payment shall be made in respect of the Common Stock or any class or series of the Corporation's stock with liquidation rights junior to the Series D Preferred, an amount equal to the sum of (A) the original purchase price of the Series D Preferred, and (B) 7 interest on the daily weighted average of the excess of the purchase price of the Series D Preferred, over all dividends, distributions, and amounts paid in redemption of the Series D Preferred, whether in cash or in kind, at a rate of 25% per annum, compounded annually, from the original issue date of such shares until the date of such event. (iii) The holders of the Series E Preferred shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, whether from capital, surplus or earnings, before any payment shall be made in respect of the Common Stock or any class or series of the Corporation's stock with liquidation rights junior to the Series E Preferred, an amount equal to the sum of (A) the original purchase price of the Series E Preferred, and (B) interest on the daily weighted average of the excess of the purchase price of the Series E Preferred, over all dividends, distributions, and amounts paid in redemption of the Series E Preferred, whether in cash or in kind, at a rate of 25% per annum, compounded annually, from the original issue date of such shares until the date of such event. (iv) The amount specified in this Section 3.3(a), as of the date of determination, as applicable to each series of Original Preferred Stock, shall be referred to as the "LIQUIDATION AMOUNT" of such series. If upon liquidation, dissolution or winding up of the Corporation, the assets of the Corporation available for distribution to its shareholders as set forth in this Section 3.3(a) shall be insufficient to pay in full the holders of shares of the same rank with respect to the right to receive payments in the event of any liquidation, dissolution or winding up of the Corporation as set forth above, then the holders of such shares shall share ratably in any distribution of assets according to the respective amounts which would be payable in respect of such shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full. With respect to the right to receive payments in the event of any liquidation, dissolution or winding up of the Corporation under this Section 3.3(a), the shares of Series D Preferred and the shares of Series E Preferred shall be considered shares of the same rank. (b) DEEMED LIQUIDATION EVENT. (i) With respect to the Senior Preferred, a Deemed Liquidation Event (as defined below) shall not be deemed a liquidation, dissolution or winding up of the Corporation as those terms are used in Section 3.3(a). (ii) With respect to the Series D Preferred or the Series E Preferred, unless otherwise agreed by the holders of a majority of the shares of such series, as applicable, a Deemed Liquidation Event (as defined below) shall be deemed a liquidation, dissolution or winding up of the Corporation as those terms are used in Section 3.3(a). (iii) For the purposes of this Section 3.3(b), a "DEEMED LIQUIDATION EVENT" shall mean: (A) the Corporation's sale of all or substantially all of its assets, or (B) the acquisition of the Corporation by another entity by way of merger or consolidation (other than a merger or consolidation in which the holders of voting securities of the Corporation or their affiliates immediately before the merger or consolidation own, immediately after the merger or consolidation, voting securities of the surviving or acquiring corporation or of a parent party of such surviving or acquiring corporation, possessing more than fifty percent (50%) of the voting power of the surviving or acquiring corporation or parent party) resulting in the exchange of the outstanding 8 shares of capital stock of the Corporation for securities or consideration issued, or caused to be issued, by the acquiring corporation or its subsidiary. (c) NOTICE. In the event the Corporation shall propose to take any action of the types described in Sections 3.3(a) or 3.3(b)(iii), the Corporation shall, within ten (10) days after the date the Board of Directors of the Corporation approves such action or twenty (20) days prior to any shareholders' meeting called to approve such action, whichever is earlier, give each holder of Original Preferred Stock initial written notice of the proposed action. Such initial written notice shall describe the material terms and conditions of such proposed action, including a description of the stock, cash and property to be received by such holders upon consummation of the proposed action and the date of delivery thereof. If any material change in the facts set forth in the initial notice shall occur, the Corporation shall promptly give written notice to each holder of Original Preferred Stock of such material change. (d) WAITING PERIOD. The Corporation shall not consummate any proposed action of the type described in Sections 3.3(a) or 3.3(b)(iii) before the expiration of thirty (30) days after the mailing of the initial notice or ten (10) days after the mailing of any subsequent written notice, whichever is later; provided that any such 30-day or 10-day period may be shortened upon the written consent of all holders of Original Preferred Stock. (e) FAIR MARKET VALUE. In the event the Corporation shall propose to take any action of the types described in Section 3.3(a) or 3.3(b)(iii) which will involve the distribution of assets other than cash, the value of such assets will be deemed to be their fair market value. In the case of publicly traded securities, fair market value shall mean the closing market price for such securities on the date such event is consummated or the most recent closing market price if there was no closing market price on such date. If the consideration is in a form other than cash or publicly traded securities, its value will be determined by an independent investment banker or qualified appraiser promptly selected in good faith by the Board of Directors of the Corporation, which determination shall be binding on the Corporation and the holders of Original Preferred Stock. 3.4 VOTING RIGHTS. The holders of Original Preferred Stock shall have the following voting rights: (a) GENERAL. Except as otherwise required by law or as otherwise explicitly provided in Section 3.4(b) or (c), the shares of Original Preferred Stock shall be voted together with the Common Stock as a single class at any annual or special meeting of the shareholders of the Corporation, or may act by written consent in the same manner as the Common Stock and the other series of Original Preferred Stock. Each holder of Original Preferred Stock shall be entitled to such number of votes for the Original Preferred Stock held by him on the record date fixed for such meeting or on the effective date of such written consent as shall be equal to the whole number of shares of Common Stock into which his shares of Original Preferred Stock are convertible immediately after the close of business on the record date fixed for such meeting or on the effective date of such written consent. (b) SERIES D PREFERRED. The vote or written consent of the holders of not less than 67% of all shares of Series D Preferred then outstanding shall be required in order for the Corporation to undertake any action which (a) alters or changes the rights, preferences or privileges 9 of the Series D Preferred, (b) increases or decreases (other than by redemption pursuant to Section 3.2 or conversion pursuant to Section 3.5) the outstanding number of shares of Series D Preferred or Series E Preferred, (c) increases the number of shares of Senior Preferred or Series E Preferred outstanding, or (d) creates any new class of equity security having rights preferential to or PARI PASSU with the rights of the Series D Preferred with respect to voting, dividends, redemption or liquidation preference, or which amends the terms of any existing series of Preferred Stock with the same effect. (c) SERIES E PREFERRED. The vote or written consent of the holders of not less than 80% of all shares of Series E Preferred then outstanding shall be required in order for the Corporation to undertake any action which alters or changes the rights, preferences or privileges of the Series E Preferred. The vote or written consent of the holders of not less than 67% of all shares of Series E Preferred then outstanding shall be required in order for the Corporation to undertake any action which (a) increases or decreases (other than by redemption pursuant to Section 3.2 or conversion pursuant to Section 3.5) the outstanding number of shares of Series E Preferred, (b) increases the number of shares of Senior Preferred or Series D Preferred outstanding, or (c) creates any new class of equity security having rights preferential to or PARI PASSU with the rights of the Series E Preferred with respect to voting, dividends, redemption or liquidation preference, or which amends the terms of any existing series of Preferred Stock with the same effect. 3.5 CONVERSION RIGHTS. The holders of Original Preferred Stock shall have conversion rights as follows: (a) CONVERSION RATIOS. (i) Each holder of Senior Preferred may, at any time after the date of issuance, upon surrender of the certificates therefor at the principal office of the Corporation or the office of any transfer agent for the Senior Preferred, convert any or all of such holder's Senior Preferred into fully paid and non-assessable shares of Common Stock, at the rate of one (1) share of Common Stock for each share of Senior Preferred so surrendered (the "SENIOR PREFERRED CONVERSION RATIO"). (ii) Each share of Series D Preferred shall be convertible, without the payment of any additional consideration by the holder thereof and at the option of the holder thereof, at any time, at the office of the Corporation or any transfer agent for such share, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing One Hundred Dollars ($100.00) by the Series D Conversion Price (the "SERIES D CONVERSION RATIO"). The price at which shares of Common Stock will be deliverable upon conversion of Series D Preferred (the "SERIES D CONVERSION PRICE") shall initially be Four Dollars and Fifty Cents ($4.50) per share of Common Stock. The initial Series D Conversion Price shall be subject to adjustment as hereinafter provided. (iii) Each share of Series E Preferred shall be convertible, without the payment of any additional consideration by the holder thereof and at the option of the holder thereof, at any time, at the office of the Corporation or any transfer agent for such share, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing Five Dollars and Fifteen Cents ($5.15) by the Series E Conversion Price (the "SERIES E CONVERSION 10 RATIO;" each of the Senior Preferred Conversion Ratio, the Series D Conversion Ratio and the Series E Conversion Ratio, the "CONVERSION RATIO" of such series). The price at which shares of Common Stock will be deliverable upon conversion of Series E Preferred (the "SERIES E CONVERSION PRICE") shall initially be Five Dollars and Fifteen Cents ($5.15). The initial Series E Conversion Price shall be subject to adjustment as hereinafter provided. (b) AUTOMATIC CONVERSION. (i) Each share of Senior Preferred Stock shall automatically be converted into shares of Common Stock at the Senior Preferred Conversion Ratio immediately upon the closing of any public offering of shares of the corporation pursuant to a registration statement filed under the Securities Act of 1933, as amended. (ii) Each share of Series D Preferred and Series E Preferred shall automatically be converted into shares of Common Stock at the then effective Series D Conversion Ratio or Series E Conversion Ratio, as applicable, immediately upon the closing 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 on or before December 31, 2000 of Common Stock for the account of the Corporation to the public at a price of at least Ten Dollars ($10.00) per share (as adjusted for stock splits, reverse stock splits, stock dividends and the like), and resulting in gross proceeds to the Company of at least Twenty-Five Million Dollars ($25,000,000). (iii) In the event of the automatic conversion of the Original Preferred Stock as provided in clauses (i) or (ii) above, the person(s) entitled to receive the Common Stock issuable upon such conversion shall not be deemed to have converted such Original Preferred Stock until immediately prior to the closing of such sale of securities. All of the outstanding shares of Original Preferred Stock shall be automatically converted (without any action by the holder thereof) into fully paid and nonassessable shares of Common Stock. Any authorized and unissued shares of Original Preferred Stock shall be converted, without further action by the Corporation, into authorized and unissued shares of Preferred Stock subject to the provisions of Article IV, Section 2 hereof, and the provisions of Article IV, Section 3 shall expire and cease to have any force or effect thereafter. (c) NO FRACTIONAL SHARES. No fractional shares of Common Stock shall be issued upon conversion of the Original Preferred Stock. In lieu of any fractional shares to which the holder of Original Preferred Stock would otherwise be entitled (computing the number of shares of Common Stock to which such holder is entitled on an aggregate basis with respect to all shares to be converted by such holder at the time of such conversion), the corporation shall pay cash equal to such fraction multiplied by the fair market value of the Common Stock, determined by the Board of Directors in good faith. Before any holder of Original Preferred Stock shall be entitled to convert the same into Common Stock pursuant to Section 3.5(a), such holder shall surrender the certificate or certificates therefor, duly endorsed in blank or accompanied by proper instruments of transfer, at the office of the Corporation or of any transfer agent for the Original Preferred Stock, and, in the case of a conversion pursuant to Section 3.5(a), shall give written notice to the Corporation at such office that such holder elects to convert the same and shall state therein the name or names in which such holder wishes the certificate or certificates for Common Stock to be issued. The Corporation, as soon as practicable thereafter, shall issue and deliver to such holder or to such holder's nominee 11 or nominees, a certificate or certificates for the number of full shares of Common Stock to which such holder or nominees shall be entitled, together with cash in lieu of any fraction of a share as provided above. Such conversion shall be deemed to have been made as of the date of such surrender of the Original Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such Common Stock on said date. (d) ADJUSTMENTS FOR STOCK SPLITS, DIVIDENDS AND COMBINATIONS. In case the Corporation shall at any time effect a subdivision of the outstanding Common Stock, or shall fix a record date for determination of holders entitled to receive a dividend of Common Stock on its outstanding Common Stock, the conversion price for the Senior Preferred, the Series D Conversion Price or the Series E Conversion Price, as applicable (each a "CONVERSION PRICE" and, collectively, the "CONVERSION PRICES") then in effect immediately before such subdivision or as of such record date shall be proportionately reduced, and if the Corporation shall combine the outstanding shares of Common Stock, the respective Conversion Prices then in effect immediately before the combination shall be proportionately increased. Any adjustment under this Section 3.5(d) shall become effective at the close of business on the date the subdivision or combination becomes effective or on the record date for determining holders of any class of securities entitled to receive the dividend, provided that if such record date shall have been fixed and such dividend shall not have been fully paid on the date fixed therefor, the adjustment previously made in the respective Conversion Prices that became effective on such record date shall be canceled as of the close of business on such record date, and thereafter the respective Conversion Prices shall be adjusted pursuant to this Section 3.5(d) as of the date of the payment of such dividend. (e) ADJUSTMENTS FOR DIVIDENDS AND DISTRIBUTIONS. In the event the Corporation at any time or from time to time shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation other than shares of Common Stock, then and in each such event provision shall be made so that the holders of shares of Original Preferred Stock shall receive upon conversion thereof, in addition to the number of shares of Common Stock receivable thereupon, the amount of securities of the Corporation that they would have received had their shares of Original Preferred Stock been converted into shares of Common Stock on the date of such event, giving effect to all adjustments called for with respect to such securities during the period from the date of such event to and including the conversion date. (f) ADJUSTMENTS FOR RECLASSIFICATIONS, EXCHANGES OR SUBSTITUTIONS. If the Common Stock issuable upon the conversion of the shares of Original Preferred Stock shall be changed into the same or a different number of shares of any class or series of stock, whether by capital reorganization, reclassification or otherwise (other than a subdivision or combination of shares or stock dividend provided for in Sections 3.5(d) or 3.5(e), or a merger, consolidation, sale of assets or other transaction provided for in Section 3.5(g)), then and in each such event the holder of each share of Original Preferred Stock shall have the right thereafter to convert such share into the kind and amount of shares of stock and other securities and property receivable upon such reorganization, reclassification or other change by holders of the number of shares of Common Stock into which such share of Original Preferred Stock might have been converted immediately prior to such reorganization, reclassification or change, all subject to further adjustment as provided herein. 12 (g) ADJUSTMENTS FOR MERGERS OR REORGANIZATIONS. In the event of any merger or consolidation of the Corporation with or into another corporation or the conveyance of all or substantially all of the assets of the Corporation to another corporation in a transaction not deemed to be a liquidation pursuant to Section 3.3, each share of Original Preferred Stock shall thereafter be convertible into the number of shares of stock or other securities or property to which a holder of the number of shares of Common Stock of the Corporation deliverable upon conversion of such Original Preferred Stock would have been entitled upon such consolidation, merger or conveyance; and, in any such case, appropriate adjustment (as determined by the Board) shall be made in the application of the provisions herein set forth with respect to the rights and interests thereafter of the holders of Original Preferred Stock, to the end that the provisions set forth herein (including provisions with respect to changes in and other adjustments of the respective Conversion Prices) shall thereafter be applicable, as nearly as reasonably may be, in relation to any share of stock or other property thereafter deliverable upon the conversion of Original Preferred Stock. (h) NO IMPAIRMENT. The Corporation will not, by amendment of its Restated Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation but will at all times in good faith assist in the carrying out of all the provisions of this Section 3.5 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 Original Preferred Stock pursuant to this Section 3.5 against impairment. (i) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each adjustment or readjustment of any Conversion Price pursuant to this Section 3.5 or Section 3.6, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Original Preferred Stock, as the case may be, a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Original Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (a) such adjustments and readjustments, (b) the applicable Conversion Price for the applicable Original Preferred Stock at the time in effect, and (c) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of such holder's shares of Original Preferred Stock. (j) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation shall at all times reserve and keep available, out of its authorized but unissued Common Stock, solely for the purpose of effecting the conversion of the Original Preferred Stock, the full number of shares of Common Stock deliverable upon the conversion of all Original Preferred Stock from time to time outstanding. The Corporation shall from time to time take such corporate action as may be necessary, in the opinion of its counsel (including all necessary director and shareholder action) and in accordance with the laws of the State of Delaware, to increase the authorized amount of its Common Stock if at any time the authorized number of shares of Common Stock remaining unissued shall not be sufficient to permit the conversion of all of the shares of Original Preferred Stock at the time outstanding. 13 (k) REISSUANCE OF PREFERRED STOCK. Subject to the provisions of Section 3.4 hereof, upon any conversion of Original Preferred Stock pursuant to this Section 3.5, the shares of Original Preferred Stock which are converted can be reissued at the discretion of the Board of Directors as shares of the same or different series of Original Preferred Stock. 3.6 ADJUSTMENTS TO CONVERSION PRICE FOR DILUTIVE ISSUANCES. (a) SPECIAL DEFINITIONS. For purposes of this Section 3.6, the following definitions shall apply with respect to the Original Preferred Stock: (i) "OPTIONS" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities (as hereinafter defined); (ii) "CONVERTIBLE SECURITIES" shall mean any evidences of indebtedness, shares or other securities directly or indirectly convertible into or exchangeable for Common Stock; and (iii) "ADDITIONAL SHARES OF COMMON STOCK" shall mean all shares of Common Stock issued (or, pursuant to Section 3.6(c), deemed to be issued) by the Corporation after the original issue date of the applicable series of Original Preferred Stock, other than shares of Common Stock issued or issuable: (A) upon conversion of shares of any then outstanding series of Preferred Stock; (B) to officers, directors or employees of the Corporation in connection with, or as compensation for, their duties to or services for the Corporation, as approved by the Board; (C) as a dividend or distribution on the Original Preferred Stock; (D) in any event for which adjustment is made as provided in Section 3.5 hereof; or (E) 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) or (D), or on shares of Common Stock so excluded. (b) NO ADJUSTMENT OF CONVERSION PRICE. No adjustment in the number of shares of Common Stock into which the Series D Preferred Stock or the Series E Preferred Stock is convertible shall be made, by adjustment in the applicable Conversion Price, in respect of the issuance or deemed issuance of Additional Shares of Common Stock, unless the consideration per share for Additional Shares of Common Stock issued or deemed to be issued by the Corporation is less than the Series D Conversion Price or Series E Conversion Price, as applicable, in effect on the date of, and immediately prior to, the issue of such Additional Shares of Common Stock. 14 (c) DEEMED ISSUE OF ADDITIONAL SHARES OF COMMON STOCK. In the event the Corporation at any time or from time to time shall issue any Options or Convertible Securities or shall fix 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 of Options or Convertible Securities or, in case such a record date shall have been fixed, as of the close of business on such record date; provided that in any such case in which Additional Shares of Common Stock are deemed to be issued: (i) no further adjustment in the 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; (ii) 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 any increase or decrease in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the 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 equal the lesser of (A) a price that reflects such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities or (B) a price calculated as if such Options or Convertible Securities were excluded from the definition of "Additional Shares of Common Stock," such that the issuance of such Options or Convertible Securities, together with the foregoing adjustments in their terms, will not have the net effect of increasing the Conversion Price for the Original Preferred Stock; (iii) upon the expiration of any such Options or any rights of conversion or exchange under such Convertible Securities that shall not have been exercised, the 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 such expiration, be recomputed as if: (A) in the case of Convertible Securities or Options for Common Stock, the only Additional Shares of Common Stock issued were the shares of Common Stock, if any, actually issued upon the exercise of such Options or 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 that were actually converted or exchanged, plus the additional consideration, if any, actually received by the Corporation upon such conversion or exchange, and 15 (B) in the case of Options for 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 (determined pursuant to Section 3.6(e)) upon the issue of the Convertible Securities with respect to which such Options were actually exercised; (iv) in the case of any Options that expire by their terms not more than 30 days after the date of issue thereof, no adjustment of the Conversion Price shall be made until the expiration or exercise of all such Options, whereupon such adjustment shall be made in the same manner provided in clause (iii) above; and (v) if such record date shall have been fixed and such Options or Convertible Securities are not issued on the date fixed therefor, the adjustment previously made in the Conversion Price that became effective on such record date shall be canceled as of the close of business on such record date, and thereafter the Conversion Price shall be adjusted pursuant to this Section 3.6(c) as of the actual date of their issuance. (d) ADJUSTMENT OF CONVERSION PRICE UPON ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK. In the event the Corporation shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section 3.6(c)) without consideration or for a consideration per share less than the Series D Conversion Price or Series E Conversion Price, as applicable, in effect on the date of and immediately prior to such issue, then and in such event, the Series D Conversion Price and/or the Series E Conversion Price, as applicable, shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by dividing: (i) an amount equal to the sum of (A) the number of shares of Common Stock outstanding immediately prior to such issue multiplied by the applicable Conversion Price in effect immediately prior to such issue, plus (B) the aggregate consideration, if any, received by the Corporation for the issuance and sale of such Additional Shares of Common Stock by (ii) the sum of 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; provided that, for the purposes of this Section 3.6(d), all shares of Common Stock issuable upon conversion of outstanding Options and Convertible Securities (including the Original Preferred Stock) shall be deemed to be outstanding, and immediately after any Additional Shares of Common Stock are deemed issued pursuant to Section 3.6(c), such Additional Shares of Common Stock shall be deemed to be outstanding. 16 (e) DETERMINATION OF CONSIDERATION. For purposes of this Section 3.6, the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows: (i) Such consideration shall: (A) insofar as it consists of cash, be computed at the aggregate amount of cash received by the Corporation excluding amounts paid or payable for accrued interest or accrued dividends; (B) insofar as it consists of (1) property other than cash, or (2) services rendered, be computed at the fair value thereof at the time of such issue as determined in good faith by the Board of Directors; and (C) in the event 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) and (B) above. (ii) The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Section 3.6(c), relating to Options and Convertible Securities, shall be determined by dividing: (A) 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 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 (B) the maximum number of shares of Common Stock (as set forth in the instruments 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. 3.7 Any notice required by the provisions of this Section 3 to be given to the Holders of Original Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each Holder of record at its address appearing on the books of the Corporation. SECTION 4. All rights accruing to the outstanding shares of capital stock of the Corporation not expressly provided for to the contrary herein shall be vested in the Common Stock. 17 ARTICLE V 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. ARTICLE VI SECTION 1. To the fullest extent permitted by the General Corporation Law of Delaware as the same exists or as may hereafter be amended, no director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. SECTION 2. The Corporation shall, to the fullest extent permitted by Section 145 of the General Corporation Law of the State of Delaware, indemnify and hold harmless all directors of the Corporation. To the extent permitted by applicable law, this Corporation is also authorized to provide indemnification of (and advancement of expenses to) agents (and any other persons to which Delaware law permits this Corporation to provide indemnification) through bylaw provisions, agreements with such agents or other persons, vote of stockholders or disinterested directors or otherwise, in excess of the indemnification and advancement otherwise permitted by Section 145 of the Delaware General Corporation Law, subject only to limits created by applicable Delaware law (statutory or non-statutory) with respect to actions for breach of duty to the Corporation, its stockholders, and others. SECTION 3. Neither any amendment nor repeal of any of the foregoing provisions of this Article VI, nor the adoption of any provision of this Certificate of Incorporation inconsistent with this Article VI, shall eliminate, reduce or otherwise adversely affect any limitation on the personal liability of a director of the Corporation existing at the time of such amendment, repeal or adoption of such an inconsistent provision. ARTICLE VII The Corporation shall not be subject to or governed by the provisions of Section 203 of the General Corporation Law of Delaware, or any amendment or successor provisions thereto, with respect to business combinations between the Corporation and interested stockholders. ARTICLE VIII The Corporation reserves the right at any time, and from time to time, to amend, alter, change or repeal any provision contained in this Restated Certificate of Incorporation, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted, in the manner now or hereafter prescribed by law; and all rights, preferences and privileges of whatsoever nature conferred upon stockholders, directors or any other persons whomsoever by and pursuant to this Restated Certificate of Incorporation in its present form or as hereafter amended are granted subject to the rights reserved in this article. ARTICLE IX 18 The election of directors under the terms of the bylaws of the Corporation is not required to occur by written ballot. 19 EX-3.2 7 EXHIBIT 3.2 BYLAWS OF SELECTQUOTE, INC. A DELAWARE CORPORATION ADOPTED EFFECTIVE AS OF AUGUST 19, 1999 BYLAWS OF SELECTQUOTE, INC. A DELAWARE CORPORATION ARTICLE I CORPORATE OFFICES 1.1 REGISTERED OFFICE. The registered office of the Corporation shall be: 1209 Orange Street, City of Wilmington, County of Newcastle, State of Delaware. The name of the registered agent of the Corporation at such location is The Corporate Trust Company. 1.2 OTHER OFFICES. The Board of Directors may at any time establish other offices at any place or places where the Corporation is qualified to do business. ARTICLE II MEETINGS OF STOCKHOLDERS 2.1 PLACE OF MEETINGS. Meetings of stockholders shall be held at any place, within or outside the State of Delaware, designated by the Board of Directors. In the absence of any such designation, stockholders' meetings shall be held at the registered office of the Corporation. 2.2 ANNUAL MEETINGS. The annual meeting of stockholders shall be held each year on a date and at a time designated by the Board of Directors. At the meeting, directors shall be elected and any other proper business may be transacted. Notwithstanding the preceding sentence to the contrary, stockholders may act by written consent to elect directors; provided, however, that, if such consent is less than unanimous, such action by written consent may be in lieu of holding an annual meeting only if all of the directorships to which directors could be elected at an annual meeting held at the effective time of such action are vacant and are filled by such action. 2.3 SPECIAL MEETINGS. Special meetings of stockholders of the Corporation may be called only by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors, the Chairman of the Board of Directors, the Chief Executive Officer or any individual holder of twenty five percent (25%) of the outstanding shares of common stock of the Corporation. If a special meeting is called by any person or persons other than the Board of Directors, the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or facsimile telecommunication to the Chairman of the Board, the President or the Secretary of the Corporation. No business may be transacted at such special meeting otherwise than specified in such notice. The officer receiving the request shall cause notice to be promptly given to 1 the stockholders entitled to vote, in accordance with the provisions of Sections 2.4 and 2.5 of this Article II, that a meeting will be held at the time requested by the person or persons who called the meeting, not less than 60 nor more than 90 days after the receipt of the request. If the notice is not given within 20 days after the receipt of the request, the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 2.3 shall be construed as limiting, fixing, or affecting the time when a meeting of stockholders called by action of the Board of Directors may be held. 2.4 NOTICE OF STOCKHOLDERS' MEETINGS. All notices of meetings of stockholders shall be in writing and shall be sent or otherwise given in accordance with Section 2.5 of these Bylaws not less than 10 nor more than 60 days before the date of the meeting to each stockholder entitled to vote at such meeting. The notice shall specify the place, date, and hour of the meeting, and in the case of a special meeting, the purpose or purposes for which the meeting is called. 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Written notice of any meeting of stockholders, if mailed, is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the Corporation. Written notice may also be given by facsimile telecommunication, in which case notice shall be deemed given upon the earlier of receipt or 24 hours after transmission. Notice may also be given by such other means as may be authorized from time to time under the General Corporation Law of the State of Delaware. An affidavit of the Secretary or an Assistant Secretary or of the transfer agent of the Corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. 2.6 ITEMS OF BUSINESS AT MEETINGS. The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of business. Items of business at all meetings of the stockholders shall be, insofar as applicable, as follows: - Call to order; - Proof of notice of meeting or waiver thereof; - Appointment of inspectors of election, if necessary; - A quorum being present; - Reports; - Election of directors; - Other business specified in the notice of the meeting; - Voting; and - Adjournment. Any items of business not referred to in the foregoing may be taken up at the meeting as the chairman of the meeting shall determine. 2 No other business shall be transacted at any annual meeting of stockholders, except such business as may be: (i) specified in the notice of meeting (including stockholder proposals included in the Corporation's proxy materials under Rule 14a-8 of Regulation 14A under the Securities Exchange Act of 1934), (ii) otherwise brought before the meeting by or at the direction of the Board of Directors, or (iii) a proper subject for the meeting which is timely submitted by a stockholder of the Corporation entitled to vote at such meeting who complies with the notice requirements set forth below. For business to be properly submitted by a stockholder before any annual meeting under section (iii) of the preceding sentence, a stockholder must give timely notice in writing of such business to the Secretary of the Corporation. To be considered timely with respect to an annual meeting, a stockholder's notice must be received by the Secretary at the principal executive offices of the Corporation not less than 120 calendar days nor more than 150 calendar days before the date of the Corporation's proxy statement released to stockholders in connection with the prior year's annual meeting. However, if no annual meeting was held in the previous year, or if the date of the applicable annual meeting has been changed by more than 30 days from the date contemplated at the time of the previous year's proxy statement, a stockholder's notice must be received by the Secretary not later than 60 days before the date the Corporation commences mailing of its proxy materials in connection with the applicable annual meeting. A stockholder's notice to the Secretary to submit business to an annual meeting of stockholders shall set forth: (i) the name and address of the stockholder, (ii) the number of shares of stock held of record and beneficially by such stockholder, (iii) the name in which all such shares of stock are registered on the stock transfer books of the Corporation, (iv) a representation that the stockholder intends to appear at the meeting in person or by proxy to submit the business specified in such notice, (v) a brief description of the business desired to be submitted to the annual meeting, including the complete text of any resolutions intended to be presented at the annual meeting, and the reasons for conducting such business at the annual meeting, (vi) any personal or other material interest of the stockholder in the business to be submitted, and (vii) all other information relating to the proposed business which may be required to be disclosed under applicable law. In addition, a stockholder seeking to submit such business at the meeting shall promptly provide any other information reasonably requested by the Corporation. The chairman of the meeting shall determine all matters relating to the efficient conduct of the meeting, including, but not limited to, the items of business, as well as the maintenance of order and decorum. The chairman shall determine and declare that any putative business was not properly brought before the meeting in accordance with the procedures described by this Section 2.6, in which case such business shall not be transacted. Notwithstanding the foregoing provisions of this Section 2.6, a stockholder who seeks to have any proposal included in the Corporation's proxy materials shall comply with the requirements of Rule 14a-8 under Regulation 14A of the Securities Exchange Act of 1934, as amended. 2.7 QUORUM. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business, except as otherwise provided by statute. If, however, such quorum is not present or represented at any meeting of the stockholders, then either (i) the chairman of the meeting or (ii) the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without 3 notice other than announcement at the meeting, until a quorum is present or represented. At such adjourned meeting at which a quorum is present or represented, any business may be transacted that might have been transacted at the meeting as originally noticed. 2.8 ADJOURNED MEETING; NOTICE. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the Corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 2.9 VOTING. The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.12 of these Bylaws, subject to the provisions of Sections 217 and 218 of the General Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners of stock and to voting trusts and other voting agreements). Except as provided in the preceding sentence, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder. 2.10 WAIVER OF NOTICE. Whenever notice regarding a stockholder meeting is required to be given under any provision of the General Corporation Law of Delaware or of the Certificate of Incorporation or these Bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice. 2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action required by this article to be taken at any annual or special meeting of stockholders of the Corporation, or any action that may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice, and without a vote if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. If the action which is consented to is such as would have required the filing of a certificate under any section of the General Corporation Law of Delaware if such action had been voted on by stockholders at a meeting thereof, then the certificate filed under such section shall state, in lieu of any statement required by such section concerning any vote of stockholders, that written notice and written consent have been given as provided in Section 228 of the General Corporation Law of Delaware. 2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS. In order that the Corporation may determine the stockholders entitled to notice of or 4 to vote at any meeting of stockholders or any adjournment thereof, or entitled to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than 60 nor less than 10 days before the date of such meeting. If the Board of Directors does not so fix a record date: (i) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; (ii) The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is necessary, shall be the day on which the first written consent is expressed; and (iii) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. 2.13 PROXIES. Each stockholder entitled to vote at a meeting of stockholders (or to express consent or dissent to corporate action in writing without a meeting) may authorize another person or persons to act for him by a written proxy, signed by the stockholder and filed with the Secretary of the Corporation, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A proxy shall be deemed signed if the stockholder's name is placed on the proxy (whether by manual signature, typewriting, facsimile telecommunication or other means) by the stockholder or the stockholder's attorney-in-fact. Furthermore, the Secretary of the Corporation may determine in the interests of the Corporation to accept proxies granting authority by the methods approved by Section 212(c) of the General Corporation Law of Delaware. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(e) of the General Corporation Law of Delaware. 2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE. The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least 10 days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least 10 days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where 5 the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Such list shall presumptively determine the identify of the stockholders entitled to vote at the meeting and the number of shares held by each of them. ARTICLE III DIRECTORS 3.1 POWERS. Subject to the provisions of the General Corporation Law of Delaware and any limitation in the Certificate of Incorporation or these Bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the Corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board of Directors. 3.2 NUMBER, ELECTION. The Board of Directors shall consist of not less than three (3) nor more than seven (7) persons until changed by a proper amendment of this section. The exact number of directors shall initially be five, until changed by a resolution of the boards of directors or by an amendment to this Bylaw. All of the directors shall be of legal age. Directors need not be stockholders. Except as otherwise provided by statute or these Bylaws, the directors shall be elected at the annual meeting of the stockholders for the election of directors at which a quorum is present, and the persons receiving a plurality of the votes cast at such election shall be elected. Each director shall hold office until the next annual meeting of the stockholders and until his successor shall have been duly elected and qualified or until his death, or until he shall have resigned, or until he shall have been removed, as hereinafter provided in these Bylaws, or as otherwise provided by statute or the Certificate of Incorporation. 3.3 QUALIFICATION AND TERM OF OFFICE OF DIRECTORS. All of the directors shall be of legal age. Directors need not be stockholders. Each director, including a director elected to fill a vacancy, shall hold office until his successor is elected and qualified or until his earlier resignation or removal. 3.4 RESIGNATION AND VACANCIES. Any director may resign at any time upon written notice to the attention of the Secretary of the Corporation. When one or more directors so resigns and the resignation is effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in this section in the filling of other vacancies. Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the Certificate of Incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors 6 elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. If at any time, by reason of death or resignation or other cause, the Corporation should have no directors in office, then any officer or any stockholder or any executor, administrator, trust or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the provisions of the Certificate of Incorporation or these Bylaws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of the General Corporation Law of Delaware. If, at the time of filling any vacancy or any newly created directorship, the directors then in office constitute less than a majority of the whole board (as constituted immediately prior to any such increase), then the Court of Chancery may, upon application of any stockholder or stockholders holding at least twenty-five percent (25%) of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by the provisions of Section 211 of the General Corporation Law of Delaware as far as applicable. 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE. The Board of Directors of the Corporation may hold meetings, both regular and special, either within or outside the State of Delaware. Members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. 3.6 REGULAR MEETINGS. Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the board. 3.7 SPECIAL MEETINGS; NOTICE. Special meetings of the Board of Directors for any purpose or purposes may be called at any time by the Chairman of the Board, the president or any two directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telecommunications facsimile, charges prepaid, addressed to each director at that director's address as it is shown on the records of the Corporation. If the notice is mailed, it shall be deposited in the United States mail at least four days before the time of the holding of the meeting. If the notice is delivered personally or by telephone or by facsimile, it shall be delivered personally or by telephone or to the telecommunications facsimile telephone number at least 48 hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the Corporation. Notice also may be given by any other means authorized from time to time under the General Corporation Laws of Delaware. 7 3.8 QUORUM. At all meetings of the Board of Directors, a majority of the authorized number of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the Certificate of Incorporation. If a quorum is not present at any meeting of the Board of Directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. 3.9 WAIVER OF NOTICE. Whenever notice regarding a meeting of the Board of Directors is required to be given under any provision of the General Corporation Law of Delaware or of the Certificate of Incorporation or these Bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor other purpose of, any regular or special meeting of the directors, or members of a committee of directors, need be specified in any written waiver of notice. 3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the board or committee. 3.11 FEES AND COMPENSATION OF DIRECTORS. The Board of Directors shall have the authority to fix the compensation of directors. 3.12 APPROVAL OF LOANS TO OFFICERS. The Corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the Corporation or of its subsidiaries, including any officer or employee who is a director of the Corporation or its subsidiaries, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the Corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the Corporation. Nothing contained in this section shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the Corporation at common law or under any statute. 3.13 REMOVAL OF DIRECTORS. Unless otherwise restricted by statute, any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to elect such director. ARTICLE IV COMMITTEES 8 4.1 COMMITTEES OF DIRECTORS. The Board of Directors may, by resolution passed by a majority of the whole board, designate one or more committees, with each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors or in the Bylaws of the Corporation, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority to (i) approve or adopt, or recommend to the stockholders, any action or matter expressly required by this chapter to be submitted to stockholders for approval or (ii) adopt, amend or repeal any bylaw of the corporation. 4.2 COMMITTEE MINUTES. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. 4.3 MEETINGS AND ACTION OF COMMITTEES. Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these Bylaws, Section 3.5 (place of meetings and meetings by telephone), Section 3.6 (regular meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), and Section 3.10 (action without a meeting), with such changes in the context of those Bylaws as are necessary to substitute the committee and its members for the Board of Directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the Board of Directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the Board of Directors and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The Board of Directors may adopt rules for the government of any committee not inconsistent with the provisions of these Bylaws. ARTICLE V OFFICERS 5.1 OFFICERS. The officers of the Corporation shall be a Chief Executive Officer, a President, a Secretary, and a Chief Financial Officer. The Corporation may also have, at the discretion of the Board of Directors, a Chairman of the Board, one or more Vice Presidents, one or more assistant vice presidents, one or more assistant secretaries, and one or more Assistant Treasurers, and any such other officers as may be appointed in accordance with the provisions of Section 5.3 of these Bylaws. Any number of offices may be held by the same person. 5.2 APPOINTMENT OF OFFICERS. The officers of the Corporation, except such officers as may be appointed in accordance with the provisions of Sections 5.3 or 5.5 of these Bylaws, shall be appointed by the Board of Directors, subject to the rights, if any, of an officer under any contract of employment. 9 5.3 SUBORDINATE OFFICERS. The Board of Directors may appoint, or empower the President to appoint, such other officers as the business of the Corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these Bylaws or as the Board of Directors may from time to time determine. 5.4 REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by an affirmative vote of the majority of the Board of Directors at any regular or special meeting of the board or, except in the case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors. Any officer may resign at any time by giving written notice to the Corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the Corporation under any contract to which the officer is a party. 5.5 VACANCIES IN OFFICES. Any vacancy occurring in any office of the Corporation shall be filled by the Board of Directors. 5.6 CHAIRMAN OF THE BOARD. The Chairman of the Board, if such an officer be elected, shall, if present, preside at meetings of the Board of Directors and exercise and perform such other powers and duties as may from time to time be assigned to him by the Board of Directors or as may be prescribed by these Bylaws. If there is no President, then the Chairman of the Board shall also be the chief executive officer of the Corporation and shall have the powers and duties prescribed in Section 5.7 of these Bylaws. 5.7 CHIEF EXECUTIVE OFFICER. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there be such an officer, the Chief Executive Officer, or CEO, shall, subject to the control of the Board of Directors, have general supervision, direction, and control of the business and the officers of the Corporation. He shall preside at all meetings of the stockholders and, in the absence or nonexistence of a Chairman of the Board, at all meetings of the Board of Directors. 5.8 PRESIDENT. In the absence or disability of the CEO, the President shall (a) act as the Chief Executive Officer of the corporation, subject to the control of the Board of Directors, and have general supervision, direction and control of the business and affairs of the corporation, (b) preside at all meetings of the shareholders and, in the absence of the Chairman of the Board and the Chief Executive Officer, at all meetings of the Board of Directors, and (c) call meetings of the shareholders and also the Board of Directors to be held, subject to limitations prescribed by law or by these Bylaws, at such times and at such places as the President shall deem proper and shall have such other powers and duties as may be prescribed by the Board of Directors or these Bylaws. The President shall also affix the signature of the Corporation to all deeds, conveyances, mortgages, leases, obligations, bonds, certificates, and other papers and instruments in writing which have been authorized by the Board of Directors or which, in the judgment of the President, are to be executed on behalf of the Corporation, the signed certificates for shares of stock of the Corporation and, 10 subject to the direction of the Board of Directors, have general charge of the property of the Corporation and to supervise and control all officers, agents and employees of the Corporation. 5.9 VICE PRESIDENTS. In the absence or disability of the President, the Vice Presidents, if any, in order of their rank as fixed by the Board of Directors or, if not ranked, a Vice President designated by the Board of Directors, shall perform all the duties of the President and when so acting shall have all the powers of, and be subject to all the restrictions upon, the President. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors, these Bylaws, the President or the Chairman of the Board. 5.10 SECRETARY. The Secretary shall keep or cause to be kept, at the principal executive office of the Corporation or such other place as the Board of Directors may direct, a book of minutes of all meetings and actions of directors, committees of directors, and stockholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number of shares present or represented at stockholders' meetings, and the proceedings thereof. The Secretary shall keep, or cause to be kept, at the principal executive office of the Corporation or at the office of the Corporation's transfer agent or registrar, as determined by resolution of the Board of Directors, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors required to be given by law or by these Bylaws. He shall keep the seal of the Corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or by these Bylaws. 5.11 CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the Corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The Chief Financial Officer shall deposit all moneys and other valuables in the name and to the credit of the Corporation with such depositories as may be designated by the Board of Directors. He shall disburse the funds of the Corporation as may be ordered by the Board of Directors, shall render to the Chief Executive Officer, President and directors, whenever they request it, an account of all his transactions as Chief Financial Officer and of the financial condition of the Corporation, and shall have other powers and perform such other duties as may be prescribed by the Board of Directors or these Bylaws. The Chief Financial Officer shall be the treasurer of the Corporation, unless otherwise determined by the Board of Directors. 11 5.12 ASSISTANT SECRETARY. The Assistant Secretary, or, if there is more than one, the assistant secretaries in the order determined by the stockholders or Board of Directors (or if there be no such determination, then in the order of their election) shall, in the absence of the Secretary or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as may be prescribed by the Board of Directors or these Bylaws. 5.13 ASSISTANT TREASURER. The Assistant Treasurer, or, if there is more than one, the Assistant Treasurers, in the order determined by the stockholders or Board of Directors (or if there be no such determination, then in the order of their election), shall, in the absence of the Chief Financial Officer or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the Chief Financial Officer and shall perform such other duties and have such other powers as may be prescribed by the Board of Directors or these Bylaws. 5.14 REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The Chairman of the Board, the CEO, the President, any Vice President, the Chief Financial Officer, the Secretary or Assistant Secretary of the Corporation, or any other person authorized by the Board of Directors or the President or a Vice President, is authorized to vote, represent, and exercise on behalf of the Corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of the Corporation. The authority granted herein may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority. 5.15 AUTHORITY AND DUTIES OF OFFICERS. In addition to the foregoing authority and duties, all officers of the Corporation shall respectively have such authority and perform such duties in the management of the business of the Corporation as may be designated from time to time by the Board of Directors or the stockholders. ARTICLE VI INDEMNITY 6.1 THIRD PARTY ACTIONS. Subject to the provisions of this Article VI, the Corporation shall indemnify any 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 (other than an action by or in the right of the Corporation) 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 or employee of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement (if such settlement is approved in advance by the Corporation, which approval shall not be unreasonably withheld) actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests 12 of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. 6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION. Subject to the provisions of this Article VI, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer or employee of the Corporation, or is or was serving at the request of the Corporation as a director, officer or employee of another Corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Delaware Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Delaware Court of Chancery or such other court shall deem proper. Notwithstanding any other provision of this Article VI, no person shall be indemnified hereunder for any expenses or amounts paid in settlement with respect to any action to recover short-swing profits under Section 16(b) of the Securities Exchange Act of 1934, as amended. 6.3 SUCCESSFUL DEFENSE. To the extent that a director, officer or employee of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 6.1 and 6.2, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. 6.4 DETERMINATION OF CONDUCT. Any indemnification under Sections 6.1 and 6.2 (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that the indemnification of the director, officer or employee is proper in the circumstances because he has met the applicable standard of conduct set forth in Sections 6.1 and 6.2. Such determination shall be made (i) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding or (ii) if such quorum is not obtainable or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (iii) by the stockholders. Notwithstanding the foregoing, a director, officer or employee of the Corporation shall be entitled to contest any determination that the director, officer or employee has not met the applicable standard of conduct set forth in Sections 6.1 and 6.2 by petitioning a court of competent jurisdiction. 6.5 PAYMENT OF EXPENSES IN ADVANCE. Expenses incurred in defending a civil or criminal action, suit or proceeding, by an individual who may be entitled to indemnification pursuant to Section 6.1 or 6.2, shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director, officer or employee to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized in this Article VI. 13 6.6 INDEMNITY NOT EXCLUSIVE; EFFECT OF INDEMNIFICATION AGREEMENTS. The provisions of a written indemnification agreement between the Corporation and any person subject to indemnity under this Article VI shall control over the provisions of this Article VI, which shall not apply to the Corporation and the person subject to indemnity under the written agreement. The indemnification and advancement of expenses provided by or granted pursuant to the other sections of this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. 6.7 INSURANCE. The Corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer or employee of the Corporation, or is or was serving at the request of the Corporation, as a director, officer or employee of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against him and incurred by him in any such capacity or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article VI. 6.8 THE CORPORATION. For purposes of this Article VI, references to the "Corporation" shall include, in addition to the resulting Corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors and officers, so that any person who is or was a director, officer or employee of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer or employee of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under and subject to the provisions of this Article VI (including, without limitation, the provisions of Section 6.4) with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. 6.9 EMPLOYEE BENEFIT PLANS. For purposes of this Article VI, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer or employee of the Corporation which imposes duties on, or involves services by, such director, officer or employee with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this Article VI. 6.10 INDEMNITY FUND. Upon resolution passed by the Board, the Corporation may establish a trust or other designated account, grant a security interest or use other means (including, without limitation, a letter of credit), to ensure the payment of certain of its obligations arising under this Article VI and/or agreements which may be entered into between the Corporation and its officers and directors from time to time. 6.11 INDEMNIFICATION OF OTHER PERSONS. The provisions of this Article VI shall not be deemed to preclude the indemnification of any person who is not a director or officer of 14 the Corporation or is not serving at the request of the Corporation as a director, officer or employee of another corporation, partnership, joint venture, trust or other enterprise, but whom the Corporation has the power or obligation to indemnify under the provisions of the General Corporation Law of the State of Delaware or otherwise. The Corporation may, in its sole discretion, indemnify an employee, trustee or other agent as permitted by the General Corporation Law of the State of Delaware. The Corporation shall indemnify an employee, trustee or other agent where required by law. 6.12 SAVINGS CLAUSE. If this Article VI or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each person entitled to indemnification hereunder against expenses (including attorney's fees), judgments, fines and amounts paid in settlement with respect to any action, suit, proceeding or investigation, whether civil, criminal or administrative, and whether internal or external, including a grand jury proceeding and an action or suit brought by or in the right of the Corporation, to the full extent permitted by any applicable portion of this Article that shall not have been invalidated, or by any other applicable law. 6.13 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article VI shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer or employee and shall inure to the benefit of the heirs, executors and administrators of such a person. ARTICLE VII RECORDS AND REPORTS 7.1 MAINTENANCE AND INSPECTION OF RECORDS. The Corporation shall, either at its principal executive office or at such place or places as designated by the Board of Directors, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each stockholder, a copy of these Bylaws as amended to date, accounting books, and other records. A stockholder of record shall have such rights to inspect such records of the Corporation as are provided by the General Corporation Law of the State of Delaware, subject to such conditions and restrictions on inspection rights as are provided by law. 7.2 INSPECTION BY DIRECTORS. Any director shall have the right to examine the Corporation's stock ledger, a list of its stockholders, and its other books and records for a purpose reasonably related to his position as a director. The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The Court may summarily order the Corporation to permit the director to inspect any and all books and records, the stock ledger, and the stock list and to make copies or extracts therefrom. The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the Court may deem just and proper. ARTICLE VIII GENERAL MATTERS 15 8.1 CHECKS. From time to time, the Board of Directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the Corporation, and only the persons so authorized shall sign or endorse those instruments. 8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS. The Board of Directors, except as otherwise provided in these Bylaws, may authorize any officer or officers, to enter into any contract or execute any instrument in the name of and on behalf of the Corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the Board of Directors or within the agency power of an officer, no officer employee shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.3 STOCK CERTIFICATES; PARTLY PAID SHARES. The shares of the Corporation shall be represented by certificates, provided that the Board of Directors of the Corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation. Notwithstanding the adoption of such a resolution by the Board of Directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the Corporation by the Chairman or Vice-Chairman of the Board of Directors, or the President or Vice President, and by the Chief Financial Officer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the Corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. The Corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, upon the books and records of the Corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the Corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon. 8.4 SPECIAL DESIGNATION ON CERTIFICATES. If the Corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face of back of the certificate that the Corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the Corporation shall issue to represent such class or series of stock a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, the designations, the 16 preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 8.5 LOST CERTIFICATES. Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the Corporation and canceled at the same time. The Corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the Corporation may require the owner of the lost, stolen or destroyed certificate, or his legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares. 8.6 CONSTRUCTION; DEFINITIONS. Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Delaware General Corporation Law shall govern the construction of these Bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. 8.7 DIVIDENDS. The directors of the Corporation, subject to any restrictions contained in the General Corporation Law of Delaware, may declare and pay dividends upon the shares of its capital stock. Dividends may be paid in cash, in property, or in shares of the Corporation's capital stock. The directors of the Corporation may set apart out of any of the funds of the Corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. Such purposes shall include but not be limited to equalizing dividends, repairing or maintaining any property of the Corporation, and meeting contingencies. 8.8 FISCAL YEAR. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors and may be changed by the Board of Directors. 8.9 SEAL. The Corporation may adopt a corporate seal, which shall be adopted and which may be altered by the Board of Directors, and may use the same by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. 8.10 TRANSFER OF STOCK. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction in its books. 8.11 STOCK TRANSFER AGREEMENTS. The Corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the Corporation to restrict the transfer of shares of stock of the Corporation of any one or more classes owned by such stockholders in any manner not prohibited by the General Corporation Law of Delaware. 8.12 REGISTERED STOCKHOLDERS. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, shall be entitled to hold liable for calls and assessments the 17 person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of another person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. 8.13 DEEMED CALIFORNIA CORPORATION. If Section 2115 of the California General Corporation Law ("CGCL") applies to the Corporation, then the Corporation and these Bylaws shall be governed by the CGCL to the extent (and only to the extent) that Section 2115 applies and only until such time as Section 2115 no longer applies to the Corporation. ARTICLE IX AMENDMENTS The Bylaws of the Corporation may be adopted, amended or repealed by a vote of [60%] of the Board of Directors or by an affirmative vote of the holders of a majority of the outstanding shares of stock having voting rights, voting as a single class. * * * 18 CERTIFICATE OF ADOPTION OF BYLAWS OF SELECTQUOTE, INC. A DELAWARE CORPORATION Certificate by Secretary of Bylaws: The undersigned hereby certifies that he is the duly elected, qualified, and acting Secretary of SelectQuote, Inc., a Delaware corporation and that the foregoing Bylaws were adopted as the Bylaws of the Corporation to be effective as of August 19, 1999 by the stockholders of the Corporation. IN WITNESS WHEREOF, the undersigned has hereunto set her hand as of August 19, 1999. ------------------------------------ Nancy Malik, Secretary 19 EX-4.2 8 EXHIBIT 4.2 SELECTQUOTE, INC. AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT THIS AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT (the "AGREEMENT") is entered into as of February __, 2000, by and among SelectQuote, Inc., a Delaware corporation (the "COMPANY"), Marsh & McLennan Capital Technology Venture Fund, L.P., a Delaware limited partnership, Marsh & McLennan Capital Technology Professionals Venture Fund, L.P., a Delaware limited partnership, Trident II, L.P., a Cayman Islands exempted limited partnership, Marsh & McLennan Employees', Securities Company, L.P., a Cayman Islands exempted limited partnership, Marsh & McLennan Capital Professionals Fund, L.P., a Cayman Islands exempted limited partnership (collectively, the "MARSH PARTIES"); High Ridge Capital Partners II, L.P., a Delaware limited partnership ("HIGH RIDGE"); McCutchen, Doyle, Brown & Enersen, LLP ("MDBE") and each of the additional stockholders listed on Exhibit A (each, including the Marsh Parties and High Ridge, an "INVESTOR" and collectively with the Marsh Parties and High Ridge, the "INVESTORS"). This Agreement amends and restates, in its entirety, and replaces, the Registration Rights Agreement dated December 23, 1999, by and among the Company and the parties named therein (the "RIGHTS AGREEMENT"). RECITALS WHEREAS, the Investors own shares of Series D Preferred Stock and shares of Series E Preferred Stock of the Company (the "SHARES"); and WHEREAS, the Company, the Marsh Parties and High Ridge are parties to an Investment Agreement dated February ___, 2000 (the "INVESTMENT AGREEMENT"); and WHEREAS, as a condition of entering into the Investment Agreement, High Ridge and the Marsh Parties have requested that the Company extend to them registration rights and other rights as set forth below; and WHEREAS, the parties wish to provide the Investors with such registration rights with respect to the Series E Preferred Stock. NOW THEREFORE, in consideration of the mutual promises, representations, warranties, covenants and conditions set forth in this Agreement, the parties mutually agree that the Rights Agreement is hereby amended and restated in its entirety as follows: 1. GENERAL 1.1 DEFINITIONS. As used in this Agreement the following terms shall have the following respective meanings: "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "HOLDER" means any party hereto (other than the Company) owning of record Registrable Securities that have not been sold to the public or any assignee of record of such Registrable Securities in accordance with SECTION 2.10 hereof. "INITIAL OFFERING" means the Company's first firm commitment underwritten public offering registered under the Securities Act covering the offer and sale of its Common Stock for the account of the Company in which (i) the per share price is at least $5.00 (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares) and (ii) the gross cash proceeds to the Company (before underwriting discounts, commissions and fees) are at least $7,500,000. "REGISTER," "REGISTERED," and "REGISTRATION" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of effectiveness of such registration statement or document. "REGISTRABLE SECURITIES" means (i) Common Stock of the Company owned of record by the parties hereto; (ii) Common Stock of the Company issued or issuable upon conversion of the Shares; (iii) any Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right, or other security which is issued as) a dividend or other distribution with respect to, or in exchange for, or in replacement of, such above-described securities; and (iv) any Common Stock of the Company issued or issuable upon conversion of the Debentures (as that term is defined in the Debenture Agreement). Notwithstanding the foregoing, Registrable Securities shall not include any securities sold by a person to the public either pursuant to a registration statement or Rule 144 or sold in a private transaction in which the transferor's rights under SECTION 2 of this Agreement are not assigned. "REGISTRABLE SECURITIES THEN OUTSTANDING" shall be the number of shares determined by calculating the total number of shares of the Company's Common Stock that are Registrable Securities and either (l) are then issued and outstanding or (2) are issuable pursuant to then exercisable or convertible securities. "REGISTRATION EXPENSES" shall mean all expenses incurred by the Company in complying with SECTIONS 2.2, 2.3 and 2.4 hereof, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel for the Company, reasonable fees and disbursements of a single special counsel for the Holders, blue sky fees and expenses and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company which shall be paid in any event by the Company). "SECURITIES ACT" shall mean the Securities Act of 1933, as amended. -2- "SELLING EXPENSES" shall mean all underwriting discounts and selling commissions applicable to the sale of Registrable Securities. "FORM S-3" means such form under the Securities Act as in effect on the date hereof or any successor registration form under the Securities Act subsequently adopted by the SEC which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC. "SEC" or "COMMISSION" means the Securities and Exchange Commission. 2. REGISTRATION; RESTRICTION ON TRANSFER 2.1 RESTRICTIONS ON TRANSFER. 2.1.1. Each Holder agrees not to make any disposition of all or any portion of the Shares or Registrable Securities unless and until: 1. There is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or 2. (A) The transferee has agreed in writing to be bound by this SECTION 2.1 and Articles VI and VII of the Investment Agreement, (B) such Holder shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (C) such Holder shall have furnished the Company with an opinion of outside or in-house counsel, reasonably satisfactory to the Company, that such transfer or disposition without registration of such shares under the Securities Act will not constitute a violation of the Securities Act or any applicable state laws. It is agreed that the Company will not require opinions of counsel for transactions made pursuant to Rule 144 except in unusual circumstances. 3. Notwithstanding the provisions of paragraphs (1) and (2) above, no such registration statement or opinion of counsel shall be necessary for a transfer by a Holder which is (A) a partnership to its partners or former partners in accordance with partnership interests, (B) a corporation to its shareholders in accordance with their interests in the corporation, (C) a limited liability company to its members or former members in accordance with their interests in the limited liability company, (D) to the Holder's family member or trust for the benefit of an individual Holder, or (E) to an affiliate of the Holder, provided the transferee will be subject to the terms of this SECTION 2.1 to the same extent as if he were an original Holder hereunder. 2.1.2. Each certificate representing Shares or Registrable Securities shall (unless otherwise permitted by the provisions of the Agreement) be stamped or otherwise imprinted with a legend substantially similar to the following (in addition to any legend required under applicable state securities laws, the Company's bylaws, or as provided elsewhere in this Agreement): -3- THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. 2.1.3. The Company shall be obligated to reissue promptly unlegended certificates at the request of any Holder thereof if the Holder shall have obtained an opinion of outside or in-house counsel (which outside counsel may be counsel to the Company), reasonably acceptable to the Company to the effect that the securities proposed to be disposed of may lawfully be so disposed of without registration, qualification or legend. 2.1.4. Any legend endorsed on an instrument pursuant to applicable state securities laws and the stop-transfer instructions with respect to such securities shall be removed upon receipt by the Company of an order of the appropriate state securities authority authorizing such removal. 2.2 DEMAND REGISTRATION. 2.2.1. Subject to the conditions of this SECTION 2.2, if the Company shall receive a written request from (1) the Holders of more than fifty percent (50%) of the Registrable Securities then outstanding (the "INITIATING HOLDERS;" such request, the "GENERAL DEMAND"), (2) High Ridge (such request, the "HIGH RIDGE DEMAND"), or (3) the Marsh Parties (such request, the "MARSH PARTIES DEMAND") that the Company file a registration statement under the Securities Act covering the registration of Registrable Securities having an anticipated aggregate offering price (before any underwriting discounts and commissions) to the public in excess of $5,000,000 (or $7,500,000 if such requested registration is the initial public offering of securities of the Company made pursuant to a registration statement), then the Company shall promptly give written notice of such request to all Holders of Registrable Securities, and subject to the limitations of this SECTION 2.2, use its diligent best efforts to effect, as soon as practicable, the registration under the Securities Act of all Registrable Securities that the Holders request to be registered. 2.2.2. Unless the request under this Section 2.2 is made after the Company's Initial Offering, the Registrable Securities shall be distributed only by means of a firm commitment underwriting. If the Initiating Holders, the Marsh Parties or High Ridge, as appropriate, intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to this Section 2.2 and the Company shall include such information in the written notice referred to in Section 2.2.1. In such event, the right of any Holder to include its Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders, the Marsh Parties or High Ridge, as appropriate, and such Holder) to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by a majority in interest of the Initiating Holders, the Marsh Parties or High Ridge, as appropriate, (which underwriter or underwriters shall be reasonably acceptable to the -4- Company). Notwithstanding any other provision of this Section 2.2, if the underwriter advises the Company that marketing factors require a limitation of the number of securities to be underwritten (including Registrable Securities) pursuant to a General Demand, then the Company shall so advise all Holders of Registrable Securities which would otherwise be underwritten pursuant hereto, and the number of shares that may be included in the underwriting shall be allocated to the Holders of such Registrable Securities on a pro rata basis based on the number of Registrable Securities held by all such Holders (including the Initiating Holders, High Ridge and the Marsh Parties). Notwithstanding any other provision of this Section 2.2, if the required limitation of the number of securities to be underwritten is in connection with a High Ridge Demand or a Marsh Parties Demand, then none of the Registrable Securities held by High Ridge or the Marsh Parties shall be excluded from such registration until the number of shares that may be included in the underwriting by the other Holders, excluding High Ridge and the Marsh Parties, has been reduced to zero, and the number of shares of such other Holders to be included in the underwriting shall be determined on a pro rata basis, as provided above. If the required limitation of the number of securities to be underwritten in connection with a High Ridge Demand or a Marsh Demand is such that all Registrable Securities held by High Ridge and the Marsh Parties may not be included in the underwriting, then the number of shares that may be included in the underwriting shall be allocated to High Ridge and the Marsh Parties on a pro rata basis based upon the number of Registrable Securities held by each of them. Any Registrable Securities excluded or withdrawn from such underwriting shall be withdrawn from the registration. 2.2.3. The Company shall not be required to effect a registration pursuant to this Section 2.2: 1. prior to (A) August 26, 2000, or (B) six (6) months after the date of the Company's Initial Offering, whichever is earlier; or 2. pursuant to a General Demand, after the Company has effected two (2) registrations pursuant to General Demands, pursuant to a High Ridge Demand after the Company has effected one (1) registration pursuant to a High Ridge Demand and pursuant to a Marsh Parties Demand after the Company has effected one (1) registration pursuant to a Marsh Parties Demand as set forth in this Section 2.2, and such registrations have been declared or ordered effective; or 3. during the period starting with the date of filing of, and ending on the date ninety (90) days following the effective date of the registration statement pertaining to the Initial Offering, provided that the Company is making reasonable and good faith efforts to cause such registration statement to become effective; or 4. if within thirty (30) days of receipt of a written request from Initiating Holders, High Ridge or the Marsh Parties, as appropriate, pursuant to Section 2.2.1, the Company gives notice to the Holders of the Company's intention to make its Initial Offering within ninety (90) days; or 5. if the Company shall furnish to Holders requesting a registration statement pursuant to this Section 2.2, a certificate signed by the Chairman of the Board stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such registration statement to be effected at such time, in -5- which event the Company shall have the right to defer such filing for a period of not more than ninety (90) days after receipt of the request of the Initiating Holders, High Ridge or the Marsh Parties, as appropriate; provided that such right to delay a request shall be exercised by the Company no more than twice in any one-year period. 2.3 PIGGYBACK REGISTRATIONS. The Company shall notify all Holders of Registrable Securities in writing at least thirty (30) days prior to the filing of any registration statement under the Securities Act for purposes of a public offering of securities of the Company (including, but not limited to, registration statements relating to secondary offerings of securities of the Company, but excluding registration statements relating to employee benefit plans or with respect to corporate reorganizations or other transactions under Rule 145 of the Securities Act) and will afford each such Holder an opportunity to include in such registration statement all or part of such Registrable Securities held by such Holder. Each Holder desiring to include in any such registration statement all or any part of the Registrable Securities held by it shall, within fifteen (15) days after the above-described notice from the Company, so notify the Company in writing. Such notice shall state the intended method of disposition of the Registrable Securities by such Holder. If a Holder decides not to include all of its Registrable Securities in any registration statement thereafter filed by the Company, such Holder shall nevertheless continue to have the right to include any Registrable Securities in any subsequent such registration statement or registration statements as may be filed by the Company with respect to offerings of its securities, all upon the terms and conditions set forth herein. 2.3.1. UNDERWRITING. If the registration statement under which the Company gives notice under this SECTION 2.3 is for an underwritten offering, the Company shall so advise the Holders of Registrable Securities. In such event, the right of any such Holder to be included in a registration pursuant to this SECTION 2.3 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their Registrable Securities through such underwriting shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company. Notwithstanding any other provision of the Agreement, if the underwriter determines in good faith that marketing factors require a limitation of the number of shares to be underwritten, the number of shares that may be included in the underwriting shall be allocated, first, to the Company; second, to the Holders on a pro rata basis based on the total number of Registrable Securities held by the Holders; and third, to any stockholder of the Company (other than a Holder) on a pro rata basis. No such reduction shall reduce the securities being offered by the Company for its own account to be included in the registration and underwriting, and in no event shall the amount of securities of the selling Holders included in the registration be reduced below twenty-five percent (25%) of the total amount of securities included in such registration, unless such offering is the Initial Offering and such registration does not include shares of any other selling stockholders, in which event any or all of the Registrable Securities of the Holders may be excluded in accordance with the immediately preceding sentence. In no event will shares of any other selling stockholder be included in such registration where inclusion of such shares would reduce the number of shares which may be included by the Holders, without the written consent of Holders of more than fifty percent (50%) of the Registrable Securities proposed to be sold in the offering. -6- 2.3.2 RIGHT TO TERMINATE REGISTRATION. The Company shall have the right to terminate or withdraw any registration initiated or withdraw any registration initiated by it under this SECTION 2.3 prior to the effectiveness of such registration, whether or not any Holder has elected to include securities in such registration. The Registration Expenses of such withdrawn registration shall be borne by the Company in accordance with SECTION 2.5 hereof. 2.4 FORM S-3 REGISTRATION. Following the Initial Offering, the Company shall use its best efforts to qualify for registration on Form S-3 for secondary sales. In case the Company shall receive from any Holder or Holders of Registrable Securities a written request or requests that the Company effect a registration on Form S-3 (or any successor to Form S-3) or any similar short-form registration statement and any related qualification or compliance with respect to all or a part of the Registrable Securities owned by such Holder or Holders, the Company will: 2.4.1. promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders of Registrable Securities; and 2.4.2. as soon as practicable, effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holder's or Holders' Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holder or Holders joining in such request as are specified in a written request given within fifteen (15) days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to effect any such registration, qualification or compliance pursuant to this SECTION 2.4: 1. if Form S-3 (or any successor or similar form) is not available for such offering by the Holders; or 2. if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate price to the public of less than $500,000; or 3. if the Company shall furnish to the Holders a certificate signed by the Chairman of the Board of Directors of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such Form S-3 Registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement for a period of not more than ninety (90) days after receipt of the request of the Holder or Holders under this SECTION 2.4; provided, that such right to delay a request shall be exercised by the Company no more than twice in any one-year period; or 4. in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance. 2.4.3. Subject to the foregoing, the Company shall file a Form S-3 registration statement covering the Registrable Securities and other securities so requested to be registered as soon as practicable after receipt of the request or requests of the Holders. All Selling Expenses -7- incurred in connection with registrations requested pursuant to this SECTION 2.4 shall be paid by the selling Holders pro rata in proportion to the number of shares sold by each. 2.4.4. The rights of holders to require registration pursuant to this Section 2.4 shall be in addition to the rights granted under Section 2.2 hereof and no request made pursuant to this Section 2.4 shall be deemed a request under Section 2.2 hereof. 2.5 EXPENSES OF REGISTRATION. Except as specifically provided herein, all Registration Expenses incurred in connection with any registration, qualification or compliance pursuant to this SECTION 2 shall be borne by the Company. All Selling Expenses incurred in connection with any registrations hereunder, shall be borne by the holders of the securities so registered pro rata on the basis of the number of shares so registered. The Company shall not, however, be required to pay for expenses of any registration proceeding begun pursuant to SECTION 2.2, the request of which has been subsequently withdrawn by the Initiating Holders, High Ridge or the Marsh Parties, as appropriate, unless (a) the withdrawal is based upon material adverse information concerning the Company of which the Initiating Holders, High Ridge or the Marsh Parties, as appropriate, were not aware at the time of such request, or (b) the Holders of a majority of Registrable Securities, High Ridge or the Marsh Parties, as appropriate, agree to forfeit their right to one General Demand, one High Ridge Demand or one Marsh Parties Demand, as appropriate, pursuant to SECTION 2.2 in which event such right shall be forfeited by all Holders, High Ridge or the Marsh Parties, as appropriate. If the Holders are required to pay the Registration Expenses, such expenses shall be borne by the holders of securities (including Registrable Securities) requesting such registration in proportion to the number of shares for which registration was requested. If the Company is required to pay the Registration Expenses of a withdrawn offering pursuant to clause (a) above, then the Holders shall not forfeit their rights pursuant to SECTION 2.2 to a General Demand, a High Ridge Demand or a Marsh Parties Demand, as appropriate. 2.6 OBLIGATIONS OF THE COMPANY. Whenever required to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible: 2.6.1. Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use all reasonable efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to ninety (90) days or, if earlier, until the Holder or Holders have completed the distribution related thereto. 2.6.2. Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement. 2.6.3. Furnish to the Holders such number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. 2.6.4. Use all reasonable efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be -8- reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. 2.6.5. In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter(s) of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. 2.6.6. Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. 2.6.7. Furnish, at the request of a majority in interest of the Holders participating in the registration, on the date that such Registrable Securities are delivered to the underwriters for sale, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion, dated as of such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering and reasonably satisfactory to a majority in interest of the Holders requesting registration, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities, and (ii) a letter dated as of such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering and reasonably satisfactory to a majority in interest of the Holders requesting registration, addressed to the underwriters, if any, and if permitted by applicable accounting standards, to the Holders requesting registration of Registrable Securities. 2.7 TERMINATION OF REGISTRATION RIGHTS. A Holder's registration rights shall expire if (i) the Company has completed its Initial Offering and has a class of securities registered under the Exchange Act, (ii) such Holder (together with its affiliates, partners or members and former partners or members) holds less than 2% of the Company's outstanding Common Stock (treating all shares of convertible Preferred Stock on an as-if converted to Common Stock basis), and (iii) all Registrable Securities held by such Holder (and all affiliates, partners or members and former partners or members) may be sold under Rule 144 during any ninety (90) day period (without giving effect to the provisions of Rule 144(e)). 2.8 DELAY OF REGISTRATION; FURNISHING INFORMATION. 2.8.1. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this SECTION 2. -9- 2.8.2. It shall be a condition precedent to the obligations of the Company to take any action pursuant to SECTION 2.2, 2.3 or 2.4 that the selling Holders shall furnish to the Company such information regarding themselves, the Registrable Securities held by them and the intended method of disposition of such securities as shall be required to effect the registration of their Registrable Securities. 2.9 INDEMNIFICATION. In the event any Registrable Securities are included in a registration statement under SECTIONS 2.2, 2.3 or 2.4: 2.9.1. To the extent permitted by law, the Company will indemnify and hold harmless each Holder, the partners, members, officers, directors and legal counsel (including Holder's own in-house counsel) of each Holder, any underwriter (as defined in the Securities Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Exchange Act, against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "VIOLATION") by the Company: (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law in connection with the offering covered by such registration statement; and the Company will reimburse each such Holder, partner, member, officer or director, underwriter or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided however, that the indemnity agreement contained in this SECTION 2.9.1 shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company, which consent shall not be unreasonably withheld, nor shall the Company be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by such Holder, partner, member, officer, director, underwriter or controlling person of such Holder. 2.9.2. To the extent permitted by law, each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration qualifications or compliance is being effected, indemnify and hold harmless the Company, each of its directors, its officers, and legal counsel and each person, if any, who controls the Company within the meaning of the Securities Act, any underwriter and any other Holder selling securities under such registration statement or any of such other Holder's partners, members, directors or officers or any person who controls such Holder, against any losses, claims, damages or liabilities (joint or several) to which the Company or any such director, officer, controlling person, underwriter or other such Holder, or partner, member, director, officer or controlling person of such other Holder may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any -10- Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder under an instrument duly executed by such Holder and stated to be specifically for use in connection with such registration; and each such Holder will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, controlling person, underwriter or other Holder, or partner, member, officer, director or controlling person of such other Holder in connection with investigating or defending any such loss, claim, damage, liability or action if it is judicially determined that there was such a Violation; provided, however, that the indemnity agreement contained in this SECTION 2.9.2 shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; provided further, that in no event shall any indemnity under this SECTION 2.9 exceed the net proceeds from the offering received by such Holder. 2.9.3. Promptly after receipt by an indemnified party under this SECTION 2.9 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this SECTION 2.9, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party if the indemnified party shall have reasonably concluded that representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding, in which case the fees and expenses of counsel shall be at the expense of the indemnifying party. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if materially prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this SECTION 2.9 to the extent that such indemnified party is damaged by such failure. Any failure so to deliver such notice to the indemnifying party will not relieve such indemnifying party of any liability that it may have to any indemnified party otherwise than under this SECTION 2.9. 2.9.4. If the indemnification provided for in this SECTION 2.9 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any losses, claims, damages or liabilities referred to herein, the indemnifying party, in lieu of indemnifying such indemnified party thereunder, shall, to the extent permitted by applicable law contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the Violation(s) that resulted in such loss, claim, damage or liability, as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by a court of law by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission; provided, that in no event shall any contribution by a Holder hereunder exceed the proceeds from the offering received by such Holder. -11- 2.9.5. The obligations of the Company and Holders under this SECTION 2.9 shall survive completion of any offering of Registrable Securities in a registration statement and the termination of this Agreement. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. In the event any offering of Registrable Securities is underwritten, and the underwriting agreement provides for indemnification and/or contribution by the Company and the Holders offering securities thereunder, the indemnification and/or contribution obligations of the Company and the Holders hereunder shall in no event exceed the obligations of the parties set forth in such underwriting agreement. 2.10 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company to register Registrable Securities pursuant to this SECTION 2 may be assigned by a Holder to a transferee or assignee of Registrable Securities that acquires at least thirty-two thousand (32,000) shares of Registrable Securities (as adjusted for stock splits and combinations); provided, however, (A) the transferor shall, within ten (10) days after such transfer, furnish to the Company written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned and (B) such transferee shall agree to be subject to all restrictions set forth in this Agreement. 2.11 AMENDMENT OF REGISTRATION RIGHTS. Any provision of this SECTION 2 may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Holders of more than fifty percent (50%) of the outstanding Registrable Securities; provided, however, that any amendment or waiver which would discriminate among, or treat differently, Holders of the same class of Registrable Securities or affect the rights of High Ridge in connection with a High Ridge Demand or affect the rights of the Marsh Parties in connection with a Marsh Parties Demand, shall require the written consent of the parties so affected. Subject to the provisions of Section 2.12 hereof, the Company may include purchasers of other series of preferred stock of the Company as Investors hereunder, without the prior consent of the Investors. Any amendment or waiver effected in accordance with this SECTION 2.11 shall be binding upon each Holder and the Company. By acceptance of any benefits under this SECTION 2, Holders of Registrable Securities hereby agree to be bound by the provisions hereunder. 2.12 LIMITATION ON SUBSEQUENT REGISTRATION RIGHTS. After the date of this Agreement, the Company shall not, without the prior written consent of the Holders of more than fifty percent (50%) of the Registrable Securities, High Ridge or the Marsh Parties, as appropriate, enter into any agreement with any holder or prospective holder of any securities of the Company that would grant such holder registration rights that are not subordinate to those granted to the Holders, High Ridge or the Marsh Parties, as appropriate, hereunder. 2.13 "MARKET STAND-OFF" AGREEMENT. If requested by the Company and the representative of the underwriters of Common Stock (or other securities) of the Company, each Holder shall not sell or otherwise transfer or dispose of any shares of Common Stock (or other securities) of the Company held by such Holder (other than those included in the registration) for a period specified by the representative of the underwriters not to exceed one hundred eighty (180) -12- days following the effective date of a registration statement of the Company filed under the Securities Act, provided that: 1. such agreement shall apply only to the Company's Initial Offering; and 2. all officers and directors of the Company and holders of at least one percent (1%) of the Company's voting securities enter into similar agreements. The obligations described in this SECTION 2.13 shall not apply to a registration relating solely to employee benefit plans on Form S-1 or Form S-8 or similar forms that may be promulgated in the future, or a registration relating solely to a Commission Rule 145 transaction on Form S-4 or similar forms that may be promulgated in the future. The Company may impose stop-transfer instructions with respect to the shares of Common Stock (or other securities) subject to the foregoing restriction until the end of said one hundred eighty (180) day period. 2.14 RULE 144 REPORTING. With a view to making available to the Holders the benefits of certain rules and regulations of the SEC which may permit the sale of the Registrable Securities to the public without registration, the Company agrees to use its best efforts to: A. Make and keep public information available, as those terms are understood and defined in SEC Rule 144 or any similar or analogous rule promulgated under the Securities Act, at all times after the effective date of the first registration filed by the Company for an offering of its securities to the general public; B. File with the SEC, in a timely manner, all reports and other documents required of the Company under the Exchange Act; C. So long as a Holder owns any Registrable Securities, furnish to such Holder forthwith upon request: a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 of the Securities Act, and of the Exchange Act (at any time after it has become subject to such reporting requirements); a copy of the most recent annual or quarterly report of the Company; and such other reports and documents as a Holder may reasonably request in availing itself of any rule or regulation of the SEC allowing it to sell any such securities without registration. 3. MISCELLANEOUS 3.1 GOVERNING LAW. This Agreement is to be construed in accordance with and governed by the internal laws of the State of California (as permitted by Section 1646.5 of the California Civil Code or any similar successor provision) without giving effect to any choice of law rule that would cause the application of the laws of any jurisdiction other than the internal laws of the State of California to the rights and duties of the parties, except to the extent that United States federal law preempts California law, in which case United States federal law shall apply, without reference to conflict of law principles. 3.2 SURVIVAL. The representations, warranties, covenants, and agreements made herein shall survive any investigation made by any Holder and the closing of the transactions contemplated hereby. All statements as to factual matters contained in any certificate or other instrument -13- delivered by or on behalf of the Company pursuant hereto in connection with the transactions contemplated hereby shall be deemed to be representations and warranties by the Company hereunder solely as of the date of such certificate or instrument. 3.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, including without limitation Sections 2.10 and 3.6.3, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto and shall inure to the benefit of and be enforceable by each person who shall be a holder of Registrable Securities from time to time; provided, however, that prior to the receipt by the Company of adequate written notice of the transfer of any Registrable Securities specifying the full name and address of the transferee, the Company may deem and treat the person listed as the holder of such shares in its records as the absolute owner and holder of such shares for all purposes, including the payment of dividends or any redemption price. 3.4 ENTIRE AGREEMENT. This Agreement, the Exhibits and Schedules hereto, and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and no party shall be liable or bound to any other in any manner by any representations, warranties, covenants and agreements except as specifically set forth herein and therein. 3.5 SEVERABILITY. In case any provision of the Agreement shall be invalid, illegal, or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 3.6 AMENDMENT AND WAIVER. 3.6.1. Except as otherwise expressly provided, this Agreement may be amended or modified only upon the written consent of the Company and the holders of more than fifty percent (50%) of the Registrable Securities. 3.6.2. Except as otherwise expressly provided, the obligations of the Company and the rights of the Holders under this Agreement may be waived only with the written consent of the holders of more than fifty percent (50%) of the Registrable Securities. 3.6.3. Notwithstanding the foregoing, this Agreement may be amended only with the written consent of the Company to include additional purchasers of Shares as "Investors," "Holders" and parties hereto. 3.7 DELAYS OR OMISSIONS. It is agreed that no delay or omission to exercise any right, power, or remedy accruing to any Holder, upon any breach, default, or noncompliance of the Company under this Agreement shall impair any such right, power, or remedy, nor shall it be construed to be a waiver of any such breach, default, or noncompliance, or any acquiescence therein, or of any similar breach, default, or noncompliance thereafter occurring. It is further agreed that any waiver, permit, consent, or approval of any kind or character on any Holder's part of any breach, default, or noncompliance under the Agreement or any waiver on such Holder's part of any provisions or conditions of this Agreement must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement, by law, or otherwise afforded to Holders, shall be cumulative and not alternative. -14- 3.8 NOTICES. All notices required or pertained hereunder shall be in writing and shall be deemed effectively given: (i) upon personal delivery to the party to be notified, (ii) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient; if not, then on the next business day, (iii) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (iv) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the party to be notified at the address as set forth on the signature page hereof or at such other address as such party may designate by ten (10) days advance written notice to the other parties hereto. 3.9 ATTORNEYS' FEES. In the event that any dispute among the parties to this Agreement should result in litigation, the prevailing party in such dispute shall be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Agreement, including without limitation, such reasonable fees and expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and expenses of appeals. 3.10 TITLES AND SUBTITLES. The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 3.11 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. * * * -15- IN WITNESS WHEREOF, the parties hereto have executed this Amended and Restated Registration Rights Agreement as of the date set forth in the first paragraph hereof. COMPANY: SELECTQUOTE, a Delaware corporation By: ------------------------------ Steven H. Gerber, President INVESTORS: AIG LIFE INSURANCE COMPANY, a ALLSTATE LIFE INSURANCE COMPANY, an Delaware corporation Illinois insurance company By: By: ------------------------------ ------------------------------ Title: Title: ---------------------------- ---------------------------- SECURITY CONNECTICUT LIFE INSURANCE NORTH AMERICAN COMPANY FOR LIFE AND COMPANY, a Connecticut corporation HEALTH INSURANCE, an Illinois corporation By: By: ------------------------------ ------------------------------ Title: Title: ---------------------------- ---------------------------- HIGH RIDGE CAPITAL PARTNERS II, L.P. PROTECTIVE LIFE INSURANCE COMPANY By: By: ------------------------------ ------------------------------ Title: Title: ---------------------------- ---------------------------- PROTECTIVE LIFE CORPORATION MARSH & MCLENNAN CAPITAL TECHNOLOGY VENTURE FUND, L.P. By: By: ------------------------------ ------------------------------ Title: Title: ---------------------------- ---------------------------- -16- MARSH & MCLENNAN CAPITAL TECHNOLOGY TRIDENT II, L.P. PROFESSIONALS VENTURE FUND, L.P. By: By: ------------------------------ ------------------------------ Title: Title: ---------------------------- ---------------------------- MARSH & MCLENNAN EMPLOYEES' MARSH & MCLENNAN CAPITAL PROFESSIONALS SECURITIES COMPANY, L.P. FUND, L.P. By: By: ------------------------------ ------------------------------ Title: Title: ---------------------------- ---------------------------- MCCUTCHEN, DOYLE, BROWN &ENERSEN, LLP By: ------------------------------ Title: ---------------------------- -17- EXHIBIT A INVESTORS AIG Life Insurance Company Allstate Life Insurance Company High Ridge Capital Partners II, L.P. Marsh & McLennan Capital Professionals Fund, L.P. Marsh & McLennan Capital Technology Professionals Venture Fund, L.P. Marsh & McLennan Capital Technology Venture Fund, L.P. Marsh & McLennan Employees' Securities Company, L.P. McCutchen, Doyle, Brown & Enersen, LLP North American Company for Life and Health Insurance Protective Life Insurance Company Protective Life Corporation Security Connecticut Life Insurance Company Trident II, L.P. -18- EX-4.3 9 EXHIBIT 4.3 [EXECUTION COPY] AMENDED AND RESTATED DEBENTURE PURCHASE AGREEMENT (12% SENIOR SECURED CONVERTIBLE DEBENTURES) THIS AMENDED AND RESTATED DEBENTURE PURCHASE AGREEMENT (this "Agreement") is made and entered into as of December 27, 1999 by and among SECURITY CONNECTICUT LIFE INSURANCE COMPANY, a Connecticut corporation ("Security Connecticut"), PROTECTIVE LIFE INSURANCE COMPANY, a Tennessee corporation ("Protective"), NORTH AMERICAN COMPANY FOR LIFE AND HEALTH INSURANCE, an Illinois corporation ("North American", and together with Security Connecticut and Protective, collectively, the "Purchasers" and individually, a "Purchaser"), and SELECTQUOTE INC., a Delaware corporation ("SelectQuote"). RECITALS WHEREAS, Purchasers, have heretofore purchased from SelectTech, a Nevada corporation ("SelectTech"), 12% Senior Secured Convertible Debentures (the "Debentures") in the aggregate principal amount of Two Million Five Hundred Thousand Dollars ($2,500,000), pursuant to that certain Debenture Purchase Agreement between the Purchasers, Protective and SelectTech, dated October 15, 1998 (the "Debenture Purchase Agreement"); and WHEREAS, each of Security Connecticut and North American hold Debentures with an outstanding principal balance of $950,000, and Protective holds Debentures with an Outstanding principal balance of $600,000, or $2,500,000 in the aggregate; and . WHEREAS, pursuant to the terms and conditions of that certain Amended and Restated Agreement and Restated Plan of Reorganization (the "Plan of Reorganization"), by and among SelectQuote Insurance Services, a California corporation ("SQIS"), SelectTech, SelectQuote, and SelectQuote Acquisition Sub, a California corporation and wholly owned subsidiary of SelectQuote ("Sub"), SelectTech has merged with and into SQIS, with SQIS assuming, by operation of law, the obligations of SelectTech with respect to the Debentures and the other documents and agreements delivered in connection therewith (the "Debenture Documents"); and WHEREAS, pursuant to the terms and conditions of the Plan of Reorganization, Sub has merged with and into SQIS, with the result being that SQIS is now a wholly owned subsidiary of SelectQuote; and WHEREAS, pursuant to the terms and conditions of the Plan of Reorganization, the obligations of SQIS with respect to the Debentures and the Debenture Documents have been assigned to, and assumed by, SelectQuote; and WHEREAS, SelectQuote and Purchasers have agreed to amend and restate the Debenture Purchase Agreement as set forth in this Agreement. AGREEMENT NOW, THEREFORE, in consideration of the foregoing recitals and of the mutual covenants, agreements, undertakings, representations and warranties contained herein, each of the Purchasers and SelectQuote hereby agree to amend and restate the Debenture Purchase Agreement in its entirety as follows: ARTICLE 1 RULES OF CONSTRUCTION; DEFINITIONS SECTION 1.1 RULES OF CONSTRUCTION. For all purposes of this Agreement, except as otherwise expressly provided herein: (a) The terms defined in this Article, whenever used in this Agreement (including in the Schedules), shall have the respective meanings indicated below for all purposes of this Agreement. Singular terms shall include the plural, as well as the singular, and vice versa. (b) All accounting terms not otherwise defined in this Article have the meaning assigned to them, and all computations herein provided for shall be made, in accordance with generally accepted accounting principles. All references to generally accepted accounting principles refer to such principles as they exist at the date thereof. (c) All references herein to a Section, Article or Schedule are to a Section, Article or Schedule of or to this Agreement, unless otherwise indicated. (d) The terms "herein," "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular article, section or other subdivision. SECTION 1.2 DEFINITIONS . The following terms shall have the following meanings for all purposes of this Agreement: AFFILIATE: of a Person means a Person that directly or through one or more intermediaries controls, is controlled by or is under common control with, the first Person. "Control" (including the terms "controlled by" and "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management policies of a Person, whether through the ownership of voting securities, by contract or credit arrangement, by trustee or executor, or otherwise. APPLICABLE LAW: all applicable provisions of all (i) constitutions, treaties, statutes, laws (including the common law), rules, regulations, ordinances, codes or orders of any Governmental Body, (ii) Governmental Approvals and (iii) orders, decisions, injunctions, judgments, awards and decrees of or agreements with any Governmental Body. AUTHORIZED REPRESENTATIVE: with respect to SelectQuote, its President, or such other officer of SelectQuote as may be designated in writing to each of the Purchasers by the Board of Directors of SelectQuote. COMMON STOCK: the common stock, $.01 par value, of SelectQuote. CONSENT: any consent, approval, authorization, waiver, permit, grant, franchise, concession, agreement, license, exemption or order of, registration, certificate, declaration or filing with, or report or notice to, any Person, including but not limited to any Governmental Body. CONTRACT: any agreement, contract, obligation, promise or undertaking (whether written or oral and whether express or implied) that is legally binding. CONVERSION PRICE: as defined in SECTION 7.1. CONVERTIBLE SECURITIES: as defined in SECTION 9.1. CORPORATE TRANSACTION: (a) sale, transfer or disposition of all or substantially all of SelectQuote's properties or assets; (b) a merger or consolidation in which SelectQuote is not the surviving entity, except for a transaction the principal purpose of which is to change the state of SelectQuote's incorporation; or (c) any reverse merger in which SelectQuote is the surviving entity and in which securities possessing more than fifty percent (50%) of the total combined voting power of SelectQuote's outstanding securities are transferred to a holder or holders different from those who held such securities immediately prior to such merger. DEBENTURES: as defined in the Recitals of this Agreement. DEBENTURE BALANCE: as defined in SECTION 2.1. EVENT: as defined in SECTION 7.5. EVENT NOTICE: as defined in SECTION 7.5. EVENT OF DEFAULT or EVENTS OF DEFAULT: as defined in SECTION 5.1. FINANCIAL STATEMENTS: as defined in SECTION 3.3. GAAP: generally accepted accounting principles as in effect in the United States. GOVERNMENTAL APPROVAL: any Consent of, with or to any Governmental Body. GOVERNMENTAL BODY: any nation or government, any state or other political subdivision thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, including without limitation any governmental authority, agency, department, board, commission or instrumentality of the United States, any State of the United States or any political subdivision thereof, and any tribunal or arbitrator(s) of competent jurisdiction, and any self-regulatory organization. INITIAL OFFERING: as defined in SECTION 6.2. KEY EMPLOYEES: shall include Steve Gerber, Charan Singh, David Paulsen and Mike Feroah. Knowledge or knowledge: an individual will be deemed to have knowledge of a particular fact or other matter if: (a) such individual is actually aware of such fact or other matter; or (b) a prudent individual could be expected to discover or otherwise become aware of such fact or other matter in the course of conducting a reasonably comprehensive investigation concerning the existence of such fact or other matter; PROVIDED, HOWEVER, such reasonably comprehensive investigation shall not require a patent search. A Person (other than an individual) will be deemed to have Knowledge of a particular fact or other matter if any individual who is serving, or who has at any time served, as a director, officer, partner, executor or trustee of such Persons (or in any similar capacity) has, or at any time had, Knowledge of such fact or other matter. LIEN: any mortgage, pledge, hypothecation, right of others, claim, security interest, encumbrance, lease, sublease, license, occupancy agreement, adverse claim or interest, easement, covenant, encroachment, burden, title defect, title retention agreement, voting trust agreement, interest, equity, option, lien, right of first refusal, charge or other restrictions or limitations of any nature whatsoever, including but not limited to such as may arise under any Contracts. MAJORITY-IN-INTEREST OF PURCHASERS: the Purchasers holding a majority-in-interest of the value of the outstanding Debenture Balances. MATURITY DATE: as defined in SECTION 2.1. NOTICE OF CONVERSION: as defined in Section 7.2. PERSON: any natural person, firm, partnership, association, corporation, company, trust, business trust, Governmental Body or other entity. PLEDGE AGREEMENT: as defined in SECTION 2.2. REGISTRABLE SECURITIES: all shares of Common Stock or shares of Common Stock issuable upon conversion of convertible securities held by Purchasers from time to time. REGISTRATION NOTICE: as defined in SECTION 7.2. REGISTRATION STATEMENT: shall mean any registration statement under the Securities Act which covers Common Stock, including the Prospectus, amendments and supplements to such Registration Statement post-effective amendments, and all exhibits and all material incorporated by reference in such Registration Statement. RESTRICTED STOCK: as defined in SECTION 8.1. SALE NOTICE: as defined in SECTION 9.1. SEC: the Securities and Exchange Commission. SECURITIES: as defined in SECTION 4.3. SECURITIES ACT: the Securities Act of 1933, as amended. SELLING STOCKHOLDER: as defined in SECTION 9.1. SUBSIDIARY: with respect to SelectQuote, any corporation or other Person of which securities or other interests are held by SelectQuote or one or more of its Subsidiaries, which securities or other interests (a) provide SelectQuote sufficient power to elect a majority of that corporation's or other Person's board of directors or similar governing body, or (b) otherwise provide SelectQuote sufficient power to direct the business and policies of that corporation or other Person (other than securities or other interests having such power only upon the happening of a contingency that has not occurred). TAKE-ALONG NOTICE: as defined in SECTION 9.1. TAX: any federal, state, provincial, local, foreign or other income, alternative, minimum, accumulated earnings, personal holding company, franchise, capital stock, net worth, capital, profits, windfall profits, gross receipts, value added, sales, use, goods and services, excise, customs, duties, transfer, conveyance, mortgage, registration, stamp, documentary, recording, premium, severance, environmental (including taxes under Section 59A of the Code), real property, personal property, ad valorem, intangibles, rent, occupancy, license, occupational, employment, unemployment, insurance, social security, disability, workers' compensation, payroll, health care, withholding, estimated or other similar tax, duty or other governmental charge or assessment or deficiencies thereof (including all interest and penalties thereon and additions thereto whether disputed or not). ARTICLE 2 DEBENTURES SECTION 2.1 INTEREST ON DEBENTURES; CONVERSION; REPAYMENT . (a) Interest on the outstanding principal balance of the Debentures and all accrued and unpaid interest thereon shall accrue from the original issue date at a rate of twelve percent (12%) per annum until payment in full of all amounts due under the Debentures. (b) From and after the date hereof and continuing so long as any of the Debentures remain outstanding, each Purchaser shall have the right, in its sole discretion, to convert any or all of the outstanding Debentures owned by it into shares of Common Stock in accordance with the provisions of ARTICLE 7 hereof. (c) Subject to each Purchaser's conversion rights set forth in SECTION 2.1(b) above, the outstanding principal balance of the Debentures, all accrued and unpaid interest thereon and any other fees or charges with respect thereto (collectively, the "Debenture Balance"), shall be repaid to Purchasers in twenty (20) consecutive quarterly installments, payable in arrears on the last day of each December, March, June and September in each year, beginning on December 31, 1998,1 and continuing to and including September 30, 2003 (the "Maturity Date") as follows: (i) payments for the first eight (8) quarterly installments, beginning December 31, 1998 and continuing to and including September 30, 2000, shall be interest only; and (ii) payments for the remaining twelve (12) quarterly installments shall include principal and interest, as follows: (A) principal shall be payable in eleven (11) consecutive quarterly principal installments in an amount equal to the Debenture Balance as of October 1, 2000 divided by twelve (12), plus (B) interest on the outstanding Debenture Balance, beginning December 31, 2000 and continuing to and including the Maturity Date. The last installment shall be in the amount of the entire Debenture Balance then remaining unpaid, and shall be due and payable on the Maturity Date. - -------------------- 1 SelectTech has made each quarterly payment due on the outstanding Debentures held by the Purchasers through September 30, 1999, with the next quarterly payment date being December 31, 1999. (iii) Three (3) business days prior to the date of any payment due pursuant to this Section 2.1, SelectQuote shall transmit a facsimile to each Purchaser setting forth the amount of principal and interest, including the computations related thereto, to be included in such payments. SECTION 2.2 SECURITY AGREEMENT. As security for the full and prompt payment when due of each and every liability of SelectQuote to pay amounts owed under the Debentures and the fulfillment of all other obligations of SelectQuote to Purchasers under this Agreement, SelectQuote shall cause SQIS to affirm the Security Agreement between SelectTech and the Purchasers dated October 15, 1998 (the "Security Agreement") and hereby agrees that it shall be collateralized by all of the assets of SQIS, subject to the Purchasers agreement to subordinate their lien and rights to repayment to the liens and obligations of SQIS to LaSalle Bank National Association ("LaSalle") upon such terms and conditions as shall be mutually agreed upon by LaSalle and Purchasers at such time as it extends a loan to SQIS. SECTION 2.3 DELIVERIES BY SELECTQUOTE. As a condition precedent to the effectiveness of this Agreement, SelectQuote shall deliver or cause to be delivered to Purchaser the following documents: (a) copies of minutes of the board of directors of SelectQuote authorizing this Agreement and the transactions provided for herein; (b) duly executed replacement certificates in the Form of EXHIBIT B attached hereto, in the name of SelectQuote evidencing the Debentures heretofore issued to Purchasers; (c) certified copy of SelectQuote's Articles of Incorporation; (d) an Officer's Certificate, duly executed by the President of SelectQuote, certifying that (A) SelectQuote has performed all agreements on its part required to be performed under this Agreement, and no breaches or defaults thereunder have occurred; (B) all representations and warranties contained in Article 3 shall (except as affected by the transactions provided for herein) are true on and as of the date hereof; and (C) no Event of Default or Default shall have occurred and be continuing. (e) good standing certificates for SelectQuote from the Secretary of State of Delaware; and (f) such other instruments as may be reasonably required to effect the purposes hereof. SECTION 2.4 TRANSFER TAXES. All transfer taxes (if any) arising in connection with the consummation of the transactions referred to in SECTIONS 2.1 THROUGH 2.3 above shall be paid by SelectQuote. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELECTQUOTE SelectQuote and SQIS hereby represent and warrant to Purchasers as follows: SECTION 3.1 ORGANIZATION AND AUTHORITY; CAPITALIZATION. (a) SelectQuote is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and it has all requisite power and authority to own or hold under lease the property it purports to own or hold under lease, to transact the business it currently transacts and as currently proposed to be transacted, to execute and deliver this Agreement, and to perform the provisions hereof and thereof; and SelectQuote has all requisite power and authority to deliver the Debentures in accordance with the provisions of this Agreement. SelectQuote is duly qualified as a foreign corporation and is in good standing in each jurisdiction in which the character of the properties owned or held under lease by it or the nature of the business transacted by it requires such qualification and where the failure to qualify as a foreign corporation would have a material adverse impact on it. (b) The authorized, issued and outstanding shares of capital stock of SelectQuote are set forth on SCHEDULE 3.1(b). Except as set forth on SCHEDULE 3.1(b), no options, warrants or other rights to purchase or otherwise acquire any unissued shares of Common Stock are outstanding on the date of this Agreement or will be outstanding on the date hereof. SCHEDULE 3.1(b) also contains a list of all of the stockholders of SelectQuote, showing the number of shares owned by each such holder. SECTION 3.2 SUBSIDIARIES. SCHEDULE 3.2 hereto sets forth a complete list of the Subsidiaries of SelectQuote, together with a list of the stockholders of each Subsidiary and their respective ownership interest therein. SECTION 3.3 FINANCIAL STATEMENTS. Attached as SCHEDULE 3.3 are copies of SelectTech's and SQIS's unaudited balance sheets as of June 30, 1999 and the related consolidated statements of income, changes in shareholders' equity and cash flow for the year then ended, and an interim balance sheet as of June 30, 1999 and the related consolidated statements of income, changes in shareholders' equity and cash flow for the three month period beginning July 1, 1999 and ending September 30, 1999, and the balance sheet of SelectQuote as of September 30, 1999, certified by the respective Presidents and Chief Financial Officers of SelectTech, SQIS and SelectQuote (the "Financial Statements"). The Financial Statements fairly present the respective financial positions of SelectTech, SQIS and SelectQuote as of September 30, 1999 and the results of their operations for the periods covered by said statements of income, changes in shareholders' equity and changes in cash flow, and have been prepared in accordance with GAAP consistently applied throughout the periods involved. There are no material liabilities, contingent or otherwise, of SelectTech, SQIS or SelectQuote as of September 30, 1999 not reflected in said balance sheets as of said date. Since September 30, 1999, there have been no changes in the assets, liabilities or financial positions of SelectTech, SQIS or SelectQuote from that set forth in said balance sheets as of said date, other than changes in the ordinary course of business which have not, either individually or in the aggregate, been materially adverse. SECTION 3.4 COMPLIANCE WITH OTHER INSTRUMENTS. The consummation of the transactions provided for in this Agreement and the performance of the terms and provisions of this Agreement will not result in any breach of, or constitute a default under, or result in the creation of any lien in respect of any property of SelectQuote or any Subsidiary under any indenture, mortgage, deed of trust, bank loan or credit agreement or other financing agreement, corporate charter, by-laws or other agreement or instrument to which SelectQuote or its Subsidiaries are a party or by which SelectQuote or its Subsidiaries or any of their properties may be bound or affected. SECTION 3.5 GOVERNMENTAL AUTHORIZATIONS, ETC. No consent, approval or authorization of, or registration, filing or declaration with, any Governmental Body is required for the validity of the execution and delivery or for the performance by SelectQuote or its Subsidiaries of any of the transactions provided for in this Agreement, except as may be required by state blue sky laws. SECTION 3.6 LITIGATION; OBSERVANCE OF STATUTES, REGULATIONS AND ORDERS. There are no actions, suits or proceedings pending or, to the Knowledge of SelectQuote or its Subsidiaries, threatened against or affecting SelectQuote or its Subsidiaries or any of their properties in any court or before any arbitrator of any kind or before or by any Governmental Body. Neither SelectQuote nor its Subsidiaries are in default under any order, writ, injunction, decree or judgment of any court, arbitrator or Governmental Body. To SelectQuote's Knowledge, neither SelectQuote nor its Subsidiaries are in violation of any Applicable Law. SECTION 3.7 NO MISLEADING INFORMATION. To the Knowledge of SelectQuote, neither this Agreement nor any other document, certificate or written statement furnished to Purchasers by or on behalf of SelectQuote in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading; and there is no fact known to SelectQuote that SelectQuote has not disclosed to Purchasers that materially adversely affects or, so far as SelectQuote can reasonably foresee, will materially adversely affect the properties, or financial or other condition of SelectQuote or the ability of SelectQuote to perform its obligations hereunder and under the other documents delivered in connection herewith. This representation does not apply to any draft registration statements provided to the Purchasers at their request; all of the contents of which are disclaimed by SelectQuote for purposes of this Agreement. ARTICLE 4COVENANTS Unless otherwise approved in writing by a Majority-in-Interest of the Purchasers, SelectQuote and SQIS covenant and agree that so long as any Debentures shall be outstanding: SECTION 4.1 PAYMENT OF PRINCIPAL AND INTEREST. SelectQuote will duly and punctually pay the principal and interest on the Debentures in accordance with the terms thereof and in this Agreement. SECTION 4.2 BOOKS AND RECORDS. SelectQuote and its Subsidiaries will keep proper books of record and account and set aside appropriate reserves, all in accordance with GAAP. SECTION 4.3 PAYMENT OF TAXES; CORPORATE EXISTENCE; MAINTENANCE OF PROPERTIES; COMPLIANCE WITH LAWS. SelectQuote and each of its Subsidiaries shall: (a) pay and discharge or cause to be paid and discharged all Taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or upon any of its property when due, as well as all lawful claims for labor, materials and supplies which, if unpaid, might by Applicable Law become a Lien upon its property; PROVIDED, HOWEVER, that SelectQuote and its Subsidiaries shall not be required to pay any such Tax, assessment, charge, levy or claim if the amount, applicability or validity thereof shall currently be contested in good faith by appropriate proceedings, and if a reserve or other appropriate provision (if any), as shall be required by GAAP, shall have been made and reflected on the appropriate SelectQuote financial statements; (b) do or cause to be done all things necessary to preserve and keep in full force and effect its existence, licenses, appointments, rights and franchises; and (c) maintain and keep, or cause to be maintained and kept, its properties and those of its Subsidiaries in good repair, working order and condition, and from time to time make or cause to be made all needful and proper repairs, renewals, replacements and improvements so that the business carried on in connection therewith may be conducted effectively in all material respect, at all times. SECTION 4.4 FINANCIAL STATEMENTS AND INFORMATIONSECTION. SelectQuote will furnish to each Purchaser: (a) as soon as available and in any event within 60 days after the end of each calendar quarter, copies of a consolidated balance sheet of SelectQuote as of the end of such quarter and of the related consolidated statements of income, stockholders' equity and changes in cash flow of SelectQuote for the portion of the fiscal year ended with the last day of such quarter, all in reasonable detail and stating in comparative form the respective consolidated figures for the corresponding date and period in the previous fiscal year and all certified by the President and Chief Financial Officer of SelectQuote to present fairly the information contained therein, subject to year-end and audit adjustments; and (b) as soon as available and in any event within 60 days after the end of each fiscal year for SelectQuote, unaudited copies of a consolidated balance sheet of SelectQuote as of the end of such fiscal year and of the related consolidated statements of income and stockholders' equity and statement of changes in cash flow of SelectQuote for such fiscal year, all in reasonable detail and stating in comparative form the respective consolidated figures as of the end of and for the previous fiscal year; and (c) as soon as available and in any event within 90 days after the end of each fiscal year for SelectQuote, audited copies of a consolidated balance sheet of SelectQuote as of the end of such fiscal year and of the related consolidated statements of income and stockholders' equity and statement of changes in cash flow of SelectQuote for such fiscal year, all in reasonable detail and stating in comparative form the respective consolidated figures as of the end of and for the previous fiscal year and all accompanied by a report thereon of independent public accountants of recognized standing reasonably acceptable to Purchasers; and (d) with the financial statements submitted under Sections 5.4(a), 5.4(b) and 5.4(c), a certificate signed by the party certifying said statement to the effect that no Event of Default, nor any event that, upon notice or lapse of time or both, would constitute an Event of Default, exists or, if any such Event of Default or event exists, specifying the nature and extent thereof; and (e) promptly upon receipt thereof, copies of all other reports, management letters and other documents submitted to it by independent accountants in connection with any annual or interim audit of its books made by such accountants; subject to Purchasers agreement to hold such information in confidence and to execute confidentiality agreements as may be reasonably requested; and (f) as soon as practical, from time to time, such other information regarding its operations, business affairs and financial condition as any Purchaser may reasonably request; subject to Purchasers agreement to hold such information in confidence and to execute confidentiality agreements as may be reasonably requested. SECTION 4.5 INSPECTION OF PROPERTIES AND BOOKS. Until the later of (i) such time as SelectQuote has discharged all obligations to Purchasers pursuant to this Agreement, including without limitation the payment in full of all outstanding Debentures, or (ii) such time as SelectQuote shall successfully consummate an Initial Offering of its Common Stock, each Purchaser shall have the right to visit and inspect any of the properties of SelectQuote, upon reasonable notice and during regular business hours and so long as such visits or inspections do not unduly interfere with SelectQuote's business operations, to examine the books of account and records of SelectQuote, to make copies and extracts therefrom, to discuss the affairs, finances and accounts of SelectQuote with, and to be advised as to the same by, its and their officers, and its and their independent public accountants (whose fees and expenses arising directly from such advice shall be paid by such Purchaser, except in such cases where such Purchaser's inspection discloses a variance from SelectQuote's reported results of ten percent (10%) or greater, in which case all fees and expenses shall be paid by SelectQuote), all at such reasonable intervals as each Purchaser may desire, subject to Purchasers agreements to hold such information in confidence and to execute confidentiality agreements as may be reasonably requested. SECTION 4.6 INSURANCE. SelectQuote and its Subsidiaries will insure and keep insured, with financially sound and reputable insurers, their respective properties, and such insurance shall be in such amounts (and with such deductibles), as companies engaged in a similar business in accordance with good business practice customarily insure properties of a similar character against loss by fire and from other causes. In addition, SelectQuote and its Subsidiaries will maintain with financially sound and reputable insurers public liability insurance against claims for personal injury, death or property damage suffered by others upon or in or about any premises occupied by it or occurring as a result of its ownership, maintenance or operation of any automobiles, trucks or other vehicles, aircraft or other facilities or as a result of the use of products manufactured, constructed or sold by it or services rendered by it, in such amounts (and with such deductibles) as such insurance is usually carried by companies engaged in a similar business and as is in accordance with good business practice. During the term of this Agreement, SelectQuote covenants and agrees to maintain not less than One Million Dollars ($1,000,000) in key man life insurance on the lives of each of the Key Employees, the sole beneficiary of which policies shall be SelectQuote. SECTION 4.7 TRANSACTIONS WITH AFFILIATES. Neither SelectQuote nor any of its Subsidiaries will engage in any transaction with an Affiliate on terms more favorable to the Affiliate than would have been obtainable in an arms' length dealing. SECTION 4.8 NOTICE OF DEFAULT. Immediately upon SelectQuote or any of its Subsidiaries obtaining Knowledge of any Event of Default under this Agreement, it shall notify Purchasers of such Event of Default. SECTION 4.9 ISSUANCE OF STOCK; RESERVES. Except as provided in Schedule 4.9 and the issuance of Common Stock at a price of not less than $4.00 per share, until July 1, 2000, SelectQuote shall not authorize or issue shares of any class of stock or any securities convertible into any class of stock without the prior written consent of each of the Purchasers, in its sole discretion. SelectQuote shall reserve for issuance an amount of shares of Common Stock sufficient to satisfy the number of shares due to Purchasers upon conversion of the Debentures. SECTION 4.10 OTHER INDEBTEDNESS. Neither SelectQuote nor SQIS shall create, assume, or permit to exist any indebtedness, except: (a) The Debentures; (b) the indebtedness described on SCHEDULE 4.10 hereto; and (c) subordinated indebtedness to any commercial bank(s), provided that such subordinated indebtedness shall not exceed an aggregate of One Million Dollars ($1,000,000) at any one time outstanding on terms acceptable to Purchasers and, provided further, that SelectQuote and SQIS and any such lender shall have executed a Subordination Agreement in the form attached hereto as EXHIBIT C; (d) trade indebtedness incurred in the ordinary course of business; and (e) equipment lease financing. SECTION 4.11 CONTINUATION OF CURRENT BUSINESS, OFFICES, NAME, ETC.. Neither SelectQuote nor its Subsidiaries shall (a) engage in any business other than the business now being conducted by it and other businesses directly related thereto; (b) remove its principal place of business or business records from the State of California, unless the removal is pursuant to a merger, consolidation or transfer of assets approved by the Purchasers; (c) change its name or conduct its business in any name other than its current name; or (d) enter into (1) any agreement whereby the management, supervision or control of its business is delegated to or placed in any person other than its current governing body and officers or (2) any contract or agreement whereby any of its principal functions are delegated to or placed in any agent or independent contractor. SECTION 4.12 SALE OF ASSETS, CONSOLIDATION, MERGER. SelectQuote shall not (a) sell, lease, transfer or otherwise dispose of all or a substantial part of its properties or assets to any Person; (b) permit any of its Subsidiaries to sell, lease, transfer or otherwise dispose of greater than 50% of the fair value of their properties or assets to any Person; or (c) consolidate with, merge into or participate in a statutory share exchange with any other Person, or permit another Person to merge into it, acquire all or substantially all the properties or assets of any other Person, or acquire all or substantially all the properties or assets relating to a line of business or a division of any other Person. SECTION 4.13 LITIGATION NOTICE. SelectQuote shall immediately notify Purchasers of any action, suit or proceeding at law or in equity or by or before any Governmental Body that, if adversely determined, might reasonably be expected to impair its ability to perform any of its obligations under this Agreement or any agreement delivered in connection herewith to Purchasers, might reasonably be expected to impair its right to carry on its business substantially as now conducted, or might reasonably be expected to materially and adversely affect its business, operations, properties or condition, financial or otherwise. SECTION 4.14 LIENSSECTION. Neither SelectQuote nor its Subsidiaries shall incur, create, assume or permit to exist any Lien on any of its properties, now or hereafter owned, other than: (a) Liens securing the payment of obligations to LaSalle and to Purchasers pursuant to this Agreement; (b) deposits under workmen's compensation, unemployment insurance and Social Security laws, or to secure the performance of bids, tenders, contracts (other than for the repayment of borrowed money) or leases or to secure statutory obligations or surety or appeal bonds, or to secure indemnity, performance or other similar bonds in the ordinary course of business; (c) Liens imposed by law, such as carriers', warehousemen's or mechanics' liens, incurred in good faith in the ordinary course of business and that are not delinquent or that are actively being contested in good faith by SelectQuote, and any Lien arising out of a judgment or award not exceeding $10,000 with respect to which an appeal is being prosecuted, a stay of execution pending such appeal having been secured; and (d) Liens for taxes, assessments or other governmental charges or levies that are not delinquent or that are being contested in good faith by SelectQuote. (e) purchase money Liens on equipment (arising substantially contemporaneously with the purchase of such equipment) acquired in the ordinary course of business to secure the purchase the acquisition of such equipment or to secure indebtedness incurred solely for the purpose of financing the acquisition of such equipment, or any Lien existing on the equipment at the time of its acquisition, provided that (A) the indebtedness secured by such Lien does not exceed the purchase price or fair market value, whichever is less, or the equipment so acquired at the time of its acquisition, (B) the equipment is used for useful in the ordinary course of business of the acquiring person, and (C) the Lien dose not cover and property other than the equipment so acquired; PROVIDED, HOWEVER, the aggregate principal amount secured by Liens described in this Section 4.14(e) shall not exceed Five Hundred Thousand Dollars ($500,000). SECTION 4.15 GUARANTIES. Neither SelectQuote nor its Subsidiaries shall guarantee, endorse, become surety for or otherwise in any way become or be responsible for the indebtedness, liabilities or obligations of any other Person, whether by agreement to purchase the indebtedness or obligations of any other Person, or agreement for the furnishing of funds to any other Person (directly or indirectly, through the purchase of goods, supplies or services or by way of stock purchase, capital contribution, working capital maintenance agreement, advance or loan) or for the purpose of paying or discharging the indebtedness or obligations of any other Person, or otherwise, except for the endorsement of negotiable instruments in the ordinary course of business for collection. SECTION 4.16 INVESTMENTS. Except for wholly-owned subsidiaries of SelectQuote, neither SelectQuote nor its Subsidiaries shall purchase or hold beneficially any stock, other securities or evidences of indebtedness of, make or permit to exist any loans or advances to, or make any investment or acquire any interest whatsoever in, any other Person; provided, however, that they may invest in (1) direct obligations of, or obligations unconditionally guaranteed by, the United States of America or any agency thereof maturing in less than one year from the date of purchase; (2) commercial paper issued by any Person organized and doing business under the laws of the United States of America or any state thereof rated in the highest category by Moody's Investors Services, Inc. or by Standard & Poor's Corporation and maturing in less than one year from the date of purchase; and (3) certificates of deposit maturing within one year of the date of acquisition thereof issued by any commercial bank, organized and doing business under the laws of the United States of America or any state thereof whose deposits are insured by the Federal Deposit Insurance Corporation, if the face amount of said certificate of deposit, when added to all other deposits of SelectQuote or such Subsidiary at such commercial bank, does not exceed the then-applicable limitation on the amount of federally insured deposits; and further provided that it may hold the stock of any subsidiaries to which the Purchasers have consented in writing. SECTION 4.17 FURTHER ASSURANCES. SelectQuote and its Subsidiaries shall at its expense, at any time and from time to time, promptly execute and deliver all further instruments and documents and take all further action that may be necessary or in accordance with good practice or that Purchasers may reasonably request in connection with this Agreement or the other transactions provided for herein. ARTICLE 5 EVENTS OF DEFAULT; REMEDIES SECTION 5.1 EVENTS OF DEFAULT DEFINED; ACCELERATION OF MATURITY. If any of the following events (individually an "Event of Default" and collectively "Events of Default") shall have occurred and be continuing: (a) any two (2) Key Employees cease to be actively involved in the day-to-day management of SelectQuote in accordance with their current level of participation therein PROVIDED, HOWEVER, the happening of the events described in this subsection (a) after the closing of an Initial Offering shall not constitute an Event of Default; or (b) any default or event of default shall occur under any document or agreement delivered in connection with the transactions provided for in this Agreement (after giving effect to any applicable notice, grace or cure period specified therein); or (c) any representation or warranty made in this Agreement shall prove to be false or misleading in any material respect as of the time made; or (d) any closing certificate or financial statement furnished in connection with this Agreement shall prove to be false or misleading in any material respect as of the time furnished; or (e) immediately upon a breach of Section 4.12 by SelectQuote or any of its Subsidiaries; or (f) default shall be made in the due observance or performance of any material covenant, condition or agreement on the part of SelectQuote or its Subsidiaries to be observed or performed pursuant to the terms of this Agreement (other than any covenant, condition or agreement, default in the observance or performance of which is elsewhere in this SECTION 5.1 specifically dealt with) or the Security Agreement and such default shall continue unremedied for a period of thirty (30) days; or (g) any default or event of default (including, but not limited to, the failure to make any payment of principal or interest thereunder when due) shall occur under the Debentures (after giving effect to any applicable notice, grace or cure period specified therein); or (h) any event shall occur or any condition shall exist in respect of any debt or obligation of SelectQuote or its Subsidiaries (other than under the Debentures), or under any agreement securing or relating to any of such debts or obligations, the effect of which is to cause the acceleration of the maturity of such debt or obligation, or any such debt shall not have been paid at the final maturity date thereof (as renewed or extended if it shall have been renewed or extended) and any applicable grace period shall have expired; or (i) either SelectQuote or any of its Subsidiaries shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property, (ii) be generally unable to pay its debts as such debts become due, (iii) make a general assignment for the benefit of its creditors, (iv) commence a voluntary case under the Federal Bankruptcy Code (as now or hereafter in effect), (v) file a petition seeking to take advantage of any other law providing for the relief of debtors, (vi) fail to controvert in a timely or appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under such Bankruptcy Code, (vii) take any action under the laws of its jurisdiction of incorporation analogous to any of the foregoing, or (viii) take any corporate action for the purpose of effecting any of the foregoing; or (j) with respect to SelectQuote or any of its Subsidiaries, a proceeding or case shall be commenced, without the application or consent of SelectQuote or such Subsidiaries in any court of competent jurisdiction, seeking (i) the liquidation, reorganization, dissolution, winding up, or composition or readjustment of its debts, (ii) the appointment of a trustee, receiver, custodian, liquidator or the like for all or any substantial part of its assets, or (iii) similar relief in respect of it, under any law providing for the relief of debtors, and such proceeding or case shall continue undismissed, or unstayed and in effect, for a period of sixty (60) days; or an order for relief shall be entered in an involuntary case under such Bankruptcy Code, against SelectQuote or any of its Subsidiaries; or action under the laws of the jurisdiction of incorporation of SelectQuote or any of its Subsidiaries analogous to any of the foregoing shall be taken with respect to SelectQuote or any of its Subsidiaries and shall continue unstayed and in effect for any period of sixty (60) consecutive days; or (k) final judgment for the payment of money shall be rendered by a court of competent jurisdiction against SelectQuote or any of its Subsidiaries and SelectQuote or such Subsidiary shall not discharge the same or provide for its discharge in accordance with its terms, or procure a stay of execution thereof within thirty (30) days from the date of entry thereof and within said period of thirty (30) days, or such longer period during which execution of such judgment shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal, and such judgment together with all other such judgments shall exceed in the aggregate an amount equal to or greater than five percent (5%) of SelectQuote's consolidated revenues for its previous fiscal year-end, or in any case where such judgment together with all other such judgments may materially adversely affect the business, prospects, financial condition or results of operations of SelectQuote; (l) if, at any time, SelectQuote or any of its Subsidiaries shall fail to own sufficient title and ownership of all intellectual property assets whereby such failure would be reasonably likely to have a material adverse effect on the business or operations of SelectQuote or such Subsidiary. (m) If the Bylaws or Articles of Incorporation of SelectQuote be altered or amended in any manner which results in restrictions on transferability of the securities owned by the Purchasers which are more restrictive than those existing as of the date hereof. (n) If the funding of the equity investment by High Ridge Capital Partners II, L.P. in SelectQuote (as described in that certain Consent to Merger dated December 16, 1999 by and between the Purchasers, SelectTech, SQIS and SelectQuote) shall not have occurred within five (5) business days subsequent to the merger of SelectTech with and into SQIS. (o) If all of the Debentures held by Protective have not been prepaid in full, including any and all interest and other charges accrued through the date of prepayment within five (5) business days subsequent to the merger of SelectTech with and into SQIS. Upon the occurrence of any Event of Default described in subsections (a), (b), (h) or (i) above, the unpaid principal amount of the Debentures together with any accrued and unpaid interest thereon, shall, at the election of the Purchaser, become immediately due and payable, without presentment, demand, protest or other requirements of any kind, all of which are hereby expressly waived by SelectQuote; or upon the occurrence of any other Event of Default, Purchasers may, by written notice to SelectQuote, declare the unpaid principal amount of the Debentures to be, and the same shall forthwith become, due and payable, together with any interest accrued on the Debentures. SECTION 5.2 SUITS FOR ENFORCEMENT. In addition to the remedies set forth above, if any Event of Default shall have occurred and be continuing, the holder of any Debentures may proceed to protect and enforce its rights, pursuant to Section 13.8, whether for the specific performance of any covenant or agreement contained in this Agreement or in aid of the exercise of any power granted in this Agreement, or the holder of any Debentures may proceed to enforce the payment of all sums due upon such Debentures or to enforce any other legal or equitable right of the holder of such Debentures. If SelectQuote shall default in the making of any payment due under any Debentures or in the performance or observance of any agreement contained in this Agreement, SelectQuote will pay to the holder thereof such further amounts, to the extent lawful, as shall be sufficient to pay the costs and expenses of collection or of otherwise enforcing such holder's rights, including reasonable counsel fees. SECTION 5.3 REMEDIES CUMULATIVE. No remedy herein conferred upon the holder of any Debenture is intended to be exclusive of any other remedy and each and every such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute or otherwise. SECTION 5.4 REMEDIES NOT WAIVED. No course of dealing between SelectQuote and the holder of any Debenture and no delay or failure in exercising any rights hereunder or under any Debenture in respect thereof shall operate as a waiver of any Purchaser's rights or the rights of any holder of such Debentures. ARTICLE 6 PREPAYMENT SECTION 6.1 PREPAYMENT. SelectQuote shall have no right to prepay any or all of the Debentures prior to July 1, 2000. Subject to each Purchaser's right of conversion as set forth in ARTICLE 7, at any time on or after July 1, 2000, SelectQuote shall have the right to prepay any or all of the Debentures, in principal amounts of not less than Five Hundred Thousand Dollars ($500,000), by giving notice of its intent to prepay specifying the date fixed for such prepayment, not less than thirty (30) days prior to the date of such intended prepayment; PROVIDED, HOWEVER, if at the time such prepayment notice is given, the Debentures are held by more than one Person and the intended prepayment is for less than all of the Debentures, such prepayment shall be made to all Debenture holders on a pro rata basis based on the total principal amount of Debentures held at the time by such holder. SECTION 6.2 INITIAL PUBLIC OFFERING. Upon the closing of an initial offering of its shares of Common Stock to the public pursuant to an underwritten offering registered with the SEC on Form S-1 or on a similar form (an "Initial Offering"), any holder that has not elected to convert the Debentures held by such holder pursuant to the provisions of SECTION 7.2 hereof prior to the completion of such Initial Offering, may be prepaid in full by SelectQuote, at its option, on the date of the closing of such offering. SelectQuote shall give the Debenture holders not less than fifteen (15) days notice prior to the date of the closing of the offering. SECTION 6.3 SURRENDER OF SECURITIES; NOTATION THEREON. SelectQuote may, as a condition of payment of the Debentures, require the holder to present such Debenture for notation of such payment and, if such Debenture be paid in full, require the surrender thereof. ARTICLE 7 CONVERSION The Debentures shall be convertible into shares of Common Stock as hereinafter set forth: SECTION 7.1 RIGHT OF CONVERSION; CONVERSION PRICE. The holder of any Debenture shall have the right, in its sole discretion, at any time, and from time to time, and prior to the Maturity Date, to convert any or all of the principal balance of such Debenture then outstanding in increments of $100,000 (unless the principal balance then outstanding is less than $100,000, in which case a Purchaser must convert the remaining principal balance) into such number of shares of Common Stock as is obtained by dividing (a) the principal balance to be converted, by (b) $1.67/.641597 (the "Conversion Price"). The holder of any Debenture shall exercise its right of conversion hereunder by delivering to SelectQuote the Notice of Conversion attached to the Debenture certificate before the earlier of (i) the date of prepayment or (ii) the Maturity Date. If SelectQuote subdivides or combines a larger or smaller number of shares of its outstanding shares of Common Stock, then the Conversion Price shall be proportionally decreased in the case of a subdivision and increased in the case of a combination, effective in either case at the close of business on the date that the subdivision or combination becomes effective. SECTION 7.2 INITIAL OFFERING; RIGHT OF CONVERSION. Notwithstanding anything contained in this Agreement to the contrary, if SelectQuote selects underwriters to prepare an Initial Offering, SelectQuote shall promptly, but in any case, not more than thirty (30) days after such selection, notify the holders of all Debentures of such proposed offering, which notice shall set forth the terms of such agreement and, to the extent then known, the terms of the Initial Offering (the "Registration Notice"), and such holders shall have the right, exercisable in their sole discretion, to convert any or all of the Debenture Balance into Common Stock as set forth in SECTION 7.1 above. The holder of any Debenture shall exercise its right of conversion hereunder by delivering to SelectQuote the Notice of Conversion attached to the Debenture certificate (the "Notice of Conversion") not later than 5:00 P.M. Central Standard Time, on the second business day immediately preceding the closing of the offering. SECTION 7.3 ISSUANCE OF SHARES OF COMMON STOCK ON CONVERSION. As promptly as practicable after the surrender of any Debenture for conversion, SelectQuote shall deliver or cause to be delivered to the Debenture holder certificates representing the number of fully paid and nonassessable shares of Common Stock into which such Debenture may be converted in whole or in part and a new Debenture for any unconverted portion of the surrendered Debenture. Such Conversion shall be deemed to have been made at the close of business on the date that such Debenture is surrendered for conversion. SECTION 7.4 FRACTIONAL SHARES. No fractional shares shall be issued upon the conversion of any Debenture. If the conversion of any Debenture results in a fraction, an amount equal to such fraction multiplied by the fair value of a share of Common Stock as determined by the Board in good faith on the day of conversion shall be paid in cash by SelectQuote to such holder. SECTION 7.5 RECLASSIFICATION OR CHANGE OF COMMON STOCK OR SELECTQUOTE'S CONSOLIDATION, MERGER OR SALE OF PROPERTY AS AN ENTIRETY. In the case of any proposed reclassification or change of outstanding shares of Common Stock, or any proposed consolidation of SelectQuote with or into another corporation (other than a merger with a Subsidiary in which merger SelectQuote is the continuing corporation and which does not result in any reclassification of or change in the number of outstanding shares of Common Stock) or any proposed sale or conveyance to another corporation of the assets of SelectQuote as an entirety or substantially as an entirety or any similar event (collectively, an "Event"), SelectQuote shall promptly, but in any case, not less than forty-five (45) days prior to the effective date of such Event, notify the holders of all Debentures of such proposed Event (the "Event Notice") and such holders shall have the right, exercisable in their sole discretion, to convert any or all of the Debentures into Common Stock in accordance with the ratio set forth in SECTION 7.1 above. The holder of any Debenture shall exercise its right of conversion hereunder by delivering to SelectQuote the Notice of Conversion attached to the Debenture certificate not later than 5:00 P.M. Central Standard Time, within thirty (30) days after the Debenture holder's receipt of the Event Notice. In the event that the holder of any Debenture does not elect to convert such Debenture in accordance with this SECTION 7.5, such holder shall have the right, exercisable in its sole discretion, to require SelectQuote to prepay in full all such Debentures immediately upon the consummation of such proposed Event. SECTION 7.6 RESERVATION OF SHARES OF COMMON STOCK FOR ISSUANCE ON CONVERSION. SelectQuote covenants that it will at all times reserve and keep available out of its authorized Common Stock, solely for the purpose of issuing upon conversion of the Debentures as herein provided, such number of shares of Common Stock as shall then be issuable upon the conversion of all outstanding Debentures. SelectQuote covenants that all shares of Common Stock which shall be so issuable shall, when issued, be duly and validly issued and fully paid and nonassessable. SECTION 7.7 TAXES ON CONVERSION. The issuance of certificates for shares of Common Stock upon the conversion of Debentures shall be made without charge to the converting holders of such Debentures for any tax in respect of the issuance of such certificates, and such certificates shall be issued in the respective names of, or in such names as may be directed by, the holders of the Debentures converted; PROVIDED, HOWEVER, SelectQuote shall not be liable for any income tax liabilities of any Purchaser arising from the conversion of the Debentures or the issuance of shares of stock in connection therewith. ARTICLE 8 COMPLIANCE WITH SECURITIES ACT; REGISTRATION None of the Debentures or the shares of Common Stock issuable upon conversion of the Debentures are transferable except upon the conditions specified in the following Sections. SECTION 8.1 RESTRICTIVE LEGEND. Each Debenture and each certificate for Common Stock issued on conversion shall (unless otherwise permitted by the provisions of this Article 8 be stamped or otherwise imprinted with a legend in substantially the following form (any such shares of Common Stock represented by a certificate so legended are referred to as "Restricted Stock"): THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE CONDITIONS SPECIFIED IN THAT CERTAIN AMENDED AND RESTATED DEBENTURE PURCHASE AGREEMENT DATED AS OF [ ], PROVIDING FOR THE ISSUE AND SALE OF THE 12% SENIOR SECURED CONVERTIBLE DEBENTURES OF SELECTQUOTE (THE "COMPANY"), AND NO TRANSFER OF SUCH SECURITIES SHALL BE VALID OR EFFECTIVE UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED. THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES REGULATOR AND, THEREFORE, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR AN OPINION OF COUNSEL THAT AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933 IS AVAILABLE. In addition, each such Debenture or certificate for Common Stock issued on conversion shall contain such legends as may be required by SelectQuote's Bylaws. SECTION 8.2 OPINION OF COUNSEL. No holder of any Debentures or Restricted Stock shall transfer such Debentures or Restricted Stock, unless (a) such Debentures or Restricted Stock have been registered with the SEC under the Securities Act for the purpose of such transfer or (b) such holder shall have caused to have been delivered to SelectQuote, prior to such transfer, an opinion of counsel satisfactory to SelectQuote to the effect that such transfer may be effected without registration. Upon delivery to SelectQuote of such opinion, the Debentures or Restricted Stock may be transferred in the manner contemplated by such opinion. SECTION 8.3 ACKNOWLEDGMENT OF REGISTRATION RIGHTS. Purchasers and Protective are parties to that certain Registration Rights Agreement, dated October 15, 1998. SelectQuote, Purchasers and Protective hereby acknowledge and affirm the terms, conditions and agreements set forth in the Registration Rights Agreement and agree that the Registration Rights Agreement shall be binding upon them in full upon its assumption by SelectQuote pursuant to the Plan of Reorganization. SelectQuote, Purchasers and Protective further acknowledge and agree that any and all references to "Company" (as that term is defined in the Registration Rights Agreement) shall mean SelectQuote and its successors and assigns. ARTICLE 9 TAKE-ALONG RIGHTS SECTION 9.1 TAKE-ALONG RIGHTS. If any of Steve Gerber, Charan Singh, Dave Paulsen or Mike Feroah (a "Selling Stockholder") proposes any sale (a "Sale") of Common Stock (or any securities, including without limitation option, warrants or other similar rights, convertible into or exercisable or exchangeable for Common Stock (collectively, the "Convertible Securities")) owned by him, then each Purchaser and Protective shall have the right (but not the obligation) to participate as a seller in such transaction such that Purchasers and Protective shall be entitled to sell the number of shares of Common Stock as calculated in subsection (c) below. (a) the Selling Stockholder shall give Purchasers and Protective written notice of the proposed Sale of Common Stock not less than thirty (30) Business Days before such sale is to take place. The notice ("Sale Notice") shall set forth: (i) the name and address of the proposed purchaser, (ii) the number of shares of Common Stock proposed to be transferred and the number of shares issuable upon conversion, exercise or exchange of any other Convertible Securities to be transferred by the Selling Stockholder(s), (iii) the proposed amount and form of consideration and terms and conditions of payment offered by such proposed purchaser, and (iv) the signed agreement of the proposed purchaser acknowledging that he or it has been informed of the terms and conditions of this Article 9 and (A) has agreed to purchase Common Stock in accordance with the terms hereof and (B) has agreed to be bound by the terms contained in this Article 9 of this Agreement as if he or it were an original signatory hereto. (b) The take-along rights provided in this Agreement may be exercised by any Purchaser and/or Protective by delivery of a written notice (the "Take-Along Notice") to the Selling Stockholder(s) within ten (10) business days after receipt of the Sale Notice. The Take-Along Notice shall state the amount of Common Stock which said Purchaser or Protective wishes to include in such sale to the proposed purchaser. (c) The proposed purchaser shall purchase from Purchasers and/or Protective the number of shares of Common Stock which shall be equal to the lesser of (i) the number of shares designated by Purchasers and/or Protective pursuant to SECTION 9.1(b) above or (ii) the number of shares of Common Stock derived by multiplying (A) the number of shares of Common Stock plus the number of shares issuable upon conversion, exercise or exchange of any other Convertible Securities to be purchased by the proposed purchaser by (B) a fraction, the numerator of which is the number of shares of Common Stock owned by Purchasers and Protective, and the denominator of which is the total number of all outstanding shares of Common Stock (assuming for purposes hereof full exercise or conversion of all Convertible Securities) owned by Purchasers, Protective and the Selling Stockholder. (d) Any shares purchased from Purchasers and/or Protective pursuant to this Article 9 shall be purchased at the same price per share and otherwise on the same terms and conditions as the proposed Sale (it being understood and agreed that such terms and conditions do not include the making of any representations and warranties, indemnities or other similar Agreements other than representations, warranties and indemnities as to the ownership of such shares and the due authority to sell such shares). SECTION 9.2 EXCEPTIONS. The restrictions set forth in Section 9.1 shall not apply in the following cases: (a) Each Selling Stockholder may transfer any shares to SelectQuote pursuant to the exercise of any right of first refusal to such shares held by SelectQuote or in connection with the repurchase by SelectQuote of any such shares at the original purchase price paid therefor. (b) Each Selling Stockholder may transfer any shares to a Permitted Transferee provided that such Permitted Transferee agrees to be bound by this Agreement. SECTION 9.3 PERMITTED TRANSFEREE. For purposes of this Section 9, Permitted Transferee shall mean a Selling Stockholder's spouse, siblings, ancestors and descendants (whether natural or adopted), any spouses of such siblings, ancestors or descendants, or any trust for the benefit of the Selling Stockholder or any of the foregoing, provided that such Permitted Transferee agrees to be bound by the terms of this Agreement. SECTION 9.4 TERMINATION OF TAKE-ALONG RIGHTS. The provisions of this Article 9 shall terminate upon the closing of an Initial Offering. ARTICLE 10 LOST, ETC., INSTRUMENTS Upon receipt by SelectQuote of an affidavit of an authorized officer of any Purchaser that any Debenture has been lost, stolen, destroyed or mutilated and the written agreement of such Purchaser to indemnify SelectQuote in the event of any loss caused by a lost or stolen instrument, and upon reimbursement to SelectQuote of all reasonable expenses incidental thereto and upon surrender and cancellation of such Debenture, if mutilated, SelectQuote will deliver in lieu of such Debenture a new Debenture in a like unpaid principal amount, dated as of the date to which interest has been paid thereon. ARTICLE 11 AMENDMENT AND WAIVER Any term, covenant, agreement or condition of this Agreement or of the Debentures may be amended, or compliance therewith may be waived (either generally or in a particular instance and either retroactively or prospectively), by one or more substantially concurrent written instruments executed by each of the parties hereto. ARTICLE 12 TAXES AND EXPENSES SelectQuote will pay all taxes, other than income taxes, (including interest and penalties) which may be payable in respect of the execution and delivery of this Agreement or of the execution and delivery of any of the Debentures or of any amendment of, or waiver or consent under or with respect to, this Agreement or of any of the Debentures. ARTICLE 13 MISCELLANEOUS SECTION 13.1 RELIANCE ON AND SURVIVAL OF REPRESENTATIVES. All agreements, representations and warranties of SelectQuote herein and in any certificates or other instruments delivered pursuant to this Agreement shall (a) be deemed to be material and to have been relied upon by Purchasers, notwithstanding any investigation heretofore or hereafter made by Purchasers or on their behalf, and (b) survive the execution and delivery of this Agreement and the delivery of the Debentures to Purchaser, and shall continue in effect so long as any Debenture is outstanding. SECTION 13.2 EXPENSES. (a) SelectQuote hereby agrees to pay the costs and expenses for the preparation of this Agreement and in connection with the transactions provided for herein; and (b) SelectQuote and Purchasers respectively agree to pay the costs and expenses (including reasonable attorney's fees) incurred by the other party or parties in successfully (i) enforcing any of the terms of this Agreement or (ii) proving that the other party breached any of the terms of this Agreement. SECTION 13.3 SUCCESSOR AND ASSIGNS. All covenants and agreements in this Agreement by or on behalf of the respective parties hereto shall bind and inure to the benefit of their respective successors and assigns. SECTION 13.4 PARTIES IN INTEREST. This Agreement is made solely for the benefit of SelectQuote and Purchasers, and where applicable, Protective, and no other person, partnership, trust association or corporation shall acquire or have any right under or by virtue of this Agreement. SECTION 13.5 PRESS RELEASES. SelectQuote and each of the Purchasers shall obtain the prior consent of the other Parties as to the form and substance of any press release or other public disclosure materially related to this Agreement or any other transaction provided for herein; provided, however, that nothing in this Section 13.5 shall be deemed to prohibit any party from making any disclosure which it deems necessary or advisable, with the advice of counsel, in order to satisfy such party's disclosure obligations imposed by law. SECTION 13.6 ENTIRE AGREEMENT. This Agreement, including Exhibits and Schedules attached hereto, constitutes the entire agreement among the parties with respect to the Debentures and supersedes all prior agreements and understandings of the parties in connection therewith. No covenant or condition not expressed in this Agreement shall affect or be effective to interpret, change or restrict this Agreement. The provisions of this Agreement may not be changed, modified or amended except in writing duly executed by each party hereto. In the event of any conflict between the terms of this Agreement and the Security Agreement the provisions of this Agreement shall control. SECTION 13.7 NOTICES. All notices, opinions and other communications provided for in this Agreement shall be in writing and delivered by hand or mailed certified mail, return receipt requested, or by overnight courier such as Federal Express: (a) if to Protective, addressed to: (I) Mr. Edmund P. Perry Protective Life Insurance Company P. O. Box 2606 Birmingham, Alabama 35202-2606 Telephone: 205/868-3040 Facsimile: 205/868-3023 (b) if to Purchasers, addressed to: (i) Jim Tobin Security Connecticut Life Insurance Company c/o ReliaStar Investment Research, Inc. 100 Washington Avenue South Suite 800 Minneapolis, MN 55401-2121 Telephone: (612)/342-3204 Facsimile: (612)/372-5368 (ii) John Fromelt North American Company for Life and Health Insurance 1 Midland Plaza Sioux Falls, South Dakota 57193 Telephone: (605) 373-8600 Facsimile: (605) 335-1429 (c) if to SelectQuote, addressed to: David Paulsen SelectQuote 595 Market Street, 6th Floor San Francisco, CA 94105 Telephone: (800) 343-1985 ext. 2220 Facsimile: (415) 546-7154 All notices sent by Federal Express or other overnight courier shall be deemed received two (2) business days after delivery to such courier postage prepaid or four (4) business days after being mailed, postage prepaid by certified mail. Notices delivered otherwise shall be deemed received when actually received by the addressee thereof. SECTION 13.8 DISPUTE RESOLUTION; ARBITRATION. (a) BASIS FOR ARBITRATION. The parties hereto agree that the subject matter of this Agreement and any agreement that may be entered in connection herewith both involve and affect interstate commerce within the meaning of the commerce clause of the United States Constitution. This Agreement shall be irrevocable and is binding upon the parties and is subject to being specifically enforced. (b) MANDATORY ARBITRATION OF DISPUTES. Any action, dispute, claim, counterclaim or controversy ("Dispute" or "Disputes"), between or among the parties, including, without limitation, any claim based on, or arising from, an alleged tort or contract, shall be resolved by arbitration as set forth below. As used herein, Disputes shall include all actions, disputes, claims, counterclaims or controversies arising in connection with any extension of or commitment set forth in this Agreement or in any other agreement entered by the parties in connection with this Agreement, any action taken (or any omission to take any action) in connection with any of the foregoing, any past, present and future agreements between or among the parties, including, without limitation, this Agreement, or any agreement entered in connection with this Agreement. All Disputes shall be resolved by binding arbitration in accordance with Title 9 of the U.S. Code and the Commercial Arbitration Rules of the American Arbitration Association ("AAA"). Defenses based on statutes of limitation, estoppel, waiver, laches and similar doctrines, that would otherwise be applicable to an action brought by a party, shall be applicable in any such arbitration proceeding, and the commencement of an arbitration proceeding with respect to this Agreement shall be deemed the commencement of an action for such purposes. (c) SELECTION OF ARBITRATOR. Whenever an arbitration is required under subsection (b), the arbitrators shall be selected, except as otherwise provided, in accordance with the Commercial Arbitration rules of the AAA. The panel of arbitrators shall determine the resolution of the Dispute. (d) PLACE OF ARBITRATION. Whenever an arbitration is required under subsection (b), such arbitration shall be conducted in Denver, Colorado. (e) MISCELLANEOUS. Any arbitration questions arising under this Agreement shall be governed in accordance with Title 9 of the U.S. Code. This section constitutes the entire agreement of the parties with respect to its subject matter and supersedes all prior discussions, arrangements, negotiations and other communications on dispute resolutions. The provisions of this section shall survive any termination, amendment or expiration of the Agreement in which this section is contained, unless the parties otherwise expressly agree in writing. In the event of any Dispute governed by this section, each of the parties shall pay all of its own expenses, and, subject to the award of the arbitrator, shall pay an equal share of the arbitrators' fees. The arbitrator shall have the power to award recovery of all costs and fees (including attorneys' fees, administrative fees, arbitrators' fees and court costs) to the prevailing party. This section may be amended, changed or modified only by the express provisions of a writing which specifically refers to this section and which is signed by all the parties hereto. SECTION 13.9 LAW GOVERNING. This Agreement and the Debentures shall be governed by and construed in accordance with the laws of the State of Alabama. SECTION 13.10 HEADINGS. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect any of the terms hereof. SECTION 13.11 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which shall be considered one and the same instrument. SECTION 13.12 CONSENT TO ASSIGNMENT AND ASSUMPTION. Purchasers and Protective hereby consent to the assignment to, and the assumption by, SelectQuote of the obligations of SQIS, as the surviving entity of the merger between SelectTech and SQIS, set forth in the Debenture Documents. SelectQuote hereby acknowledges and affirms the terms, conditions and agreements set forth in the Debenture Documents and assumes the obligations of SQIS with respect to the Debenture Documents. [Remainder of Page Intentionally Left Blank] IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date and year first above written. SELECTQUOTE Attest: By: By: ------------------------------- ------------------------------- Its: Its: ---------------------------- ------------------------- SELECTQUOTE INSURANCE SERVICES Attest: By: By: ------------------------------- ------------------------------- Its: Its: ---------------------------- ------------------------- SECURITY CONNECTICUT LIFE INSURANCE COMPANY Attest: By: By: ------------------------------- ------------------------------- Its: Its: ---------------------------- ------------------------- NORTH AMERICAN COMPANY FOR LIFE AND HEALTH INSURANCE Attest: By: By: ------------------------------- ------------------------------- Its: Its: ---------------------------- ------------------------- PROTECTIVE LIFE INSURANCE COMPANY Attest: By: By: ------------------------------- ------------------------------- Its: Its: ---------------------------- ------------------------- (Signature Page to Amended and Restated Debenture Purchase Agreement) 2 AS TO ARTICLE 9 OF THE AGREEMENT: ---------------------------------- Steve Gerber ---------------------------------- Charan Singh ---------------------------------- Mike Feroah ---------------------------------- Dave Paulsen 3 EXHIBIT B FORM OF DEBENTURES THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE CONDITIONS SPECIFIED IN THAT CERTAIN AMENDED AND RESTATED DEBENTURE PURCHASE AGREEMENT DATED AS OF DECEMBER __, 1999, PROVIDING FOR THE ISSUE AND SALE OF THE 12% SENIOR SECURED CONVERTIBLE DEBENTURES OF SELECTQUOTE, INC. (THE "COMPANY"), NO TRANSFER OF SUCH SECURITIES SHALL BE VALID OR EFFECTIVE UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED. THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ISSUED IN EXCHANGE FOR A 12% SENIOR SECURED CONVERTIBLE DEBENTURE OF SELECTTECH DATED OCTOBER 15, 1998 PURSUANT TO THE EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") PROVIDED BY SECTION 3(a)(10) OF THE ACT AND HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES REGULATOR AND, THEREFORE, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR AN OPINION OF COUNSEL THAT AN EXEMPTION FROM REGISTRATION UNDER THE ACT IS AVAILABLE. SELECTQUOTE, INC. 12% SENIOR SECURED CONVERTIBLE DEBENTURE San Francisco, California December __, 1999 FOR VALUE RECEIVED, the undersigned, SelectQuote, Inc., a Delaware corporation (SelectQuote), hereby promises to pay to SECURITY CONNECTICUT LIFE INSURANCE COMPANY, a Connecticut corporation (the "holder"), or its registered assigns, the principal sum of Nine Hundred Fifty Thousand Dollars ($950,000.00) together with interest (computed on the basis of a 360-day year of twelve 30-day months) from the date hereof on the unpaid principal balance at an annual rate of 12% in accordance with the terms and conditions of that certain Amended and Restated Debenture Purchase Agreement, dated as of December __, 1999, among SelectQuote, Security Connecticut Life Insurance Company, Protective Life Insurance Company and North American Company for Life and Health Insurance (hereinafter the "Purchase Agreement"). This Debenture is to be governed by an entitled to the benefits of the Purchase Agreement. Payments of principal and interest are to be made at the registered address of the holder in lawful money of the United States of America. As provided in the Purchase Agreement, this Debenture is subject to prepayment in whole or in part, as specified in the Purchase Agreement. 1 Upon surrender of this Debenture for registration or transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder thereof or such holder's attorney duly authorized in writing, a new Debenture for alike principal amount will be issued to, and, at the option of the holder, registered in the name of, the transferee. SelectQuote may deem and treat the person in whose name this Debenture is registered as the holder and owner hereof for the purpose of receiving payments and for all other purposes whatsoever, and SelectQuote shall not be affected by any notice to the contrary. In case an Event of Default (as defined in said Purchase Agreement) shall occur and be continuing, the principal of this Debenture may become or be declared due and payable in the manner and with the effect provided in said Purchase Agreement. This Debenture is convertible at the option of the holder hereof into Common Stock of SelectQuote upon the terms provided in said Purchase Agreement. Each holder hereof, whether upon original issue or upon transfer or assignment hereof, accepts and agrees to be bound by such provisions. Said Purchase Agreement contains conditions restricting and limiting the transfer of the shares of Common Stock issuable upon the conversion of this Debenture, all relating to compliance with the Securities Act of 1933 or any similar Federal statute or state securities laws at the time in effect. SELECTQUOTE, INC. By: -------------------------- Its: ------------------------- ATTEST: By: ---------------------------- Its: --------------------------- 2 NOTICE OF CONVERSION [Letterhead of Debenture Holder] [date] SelectQuote, Inc. - ----------------------------------- - ----------------------------------- Re: Election to Convert Debenture Ladies and Gentlemen: Reference is hereby made to that certain Amended and Restated Debenture Purchase Agreement dated [___________, 1999], by and among SelectQuote, Inc. (the "Company"), Security Connecticut Life Insurance Company and North American Company for Life and Health Insurance (the "Purchase Agreement"). Capitalized terms not defined herein shall have the meaning given them in the Purchase Agreement. The undersigned hereby irrevocably elects to exercise the right of conversion represented by the within Debenture Certificate as provided for in Section 7.1 (2.1 or 7.2) of the Purchase Agreement. If such election is being made pursuant to Section 2.1 of the Purchase Agreement, the undersigned elects to convert $_______________ of the outstanding principal of the Debenture into shares of Common Stock in accordance with the terms of the Purchase Agreement. If such election is being made pursuant to Section 7.2 of the Purchase Agreement, the undersigned elects to convert $_______________ of the outstanding principal of the Debenture into shares of Common Stock in accordance with the terms of the Purchase Agreement. Please issue a certificate or certificates for such shares of Common Stock in the name of, and pay any cash for any fractional shares to: Name: ------------------------------------------ Address: --------------------------------------- Taxpayer ID No.: ------------------------------- (Please print Name, Address and Taxpayer ID No.) --------------------------------------- By: ---------------------------- Its: --------------------- 3 EX-10.1 10 EXHIBIT 10.1 SELECTQUOTE, INC. 1999 STOCK OPTION PLAN 1. PURPOSES OF THE PLAN. The purposes of this Stock Option Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentives to Employees, Directors and Consultants of the Company and its Subsidiaries, and to promote the success of the Company's business. Options granted hereunder may be either Incentive Stock Options or Nonstatutory Stock Options at the discretion of the Committee. 2. DEFINITIONS. As used herein, and in any Option granted hereunder, the following definitions shall apply: "AFFILIATE" shall mean any corporation or other entity (including, but not limited to, partnerships and joint ventures) controlling, controlled by, or under common control with, the Company. "BOARD" shall mean the Board of Directors of the Company. "CODE" shall mean the Internal Revenue Code of 1986, as amended. "COMMON STOCK" shall mean the Common Stock of the Company. "COMMITTEE" shall mean the Committee appointed by the Board in accordance with Section 4(a) of the Plan. If the Board does not appoint or ceases to maintain a Committee, the term "COMMITTEE" shall refer to the Board. "COMPANY" shall mean SelectQuote Insurance Services. "CONSULTANT" shall mean any independent contractor retained to perform services for the Company. "CONTINUOUS EMPLOYMENT" shall mean the absence of any interruption or termination of service as an Employee, Director or Consultant by the Company or any Subsidiary. Continuous Employment shall not be considered interrupted during any period of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company and any Parent, Subsidiary or successor of the Company. A leave of absence approved by the Company shall include sick leave, military leave or any other personal leave approved by an authorized representative of the Company. For purposes of Incentive Stock Options, no such leave may exceed ninety (90) days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. "CORPORATE TRANSACTION" shall mean any of the following stockholder-approved transactions to which the Company is a party: (i) a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the state in which the Company is incorporated; (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Company (including the capital stock of the Company's subsidiary corporations) in connection with the complete liquidation or dissolution of the Company; or (iii) any reverse merger in which the Company is the surviving entity but in which securities possessing fifty percent (50%) or more of the total combined voting power of the Company's outstanding securities are transferred to a person or persons different from those who held such securities immediately prior to such merger. "COVERED EMPLOYEE" shall mean any individual whose compensation is subject to the limitations on tax deductibility provided by Section 162(m) of the Code and any Treasury Regulations promulgated thereunder in effect at the close of the taxable year of the Company in which an Option has been granted to such individual. "DIRECTOR" shall mean a director of the Company. "EFFECTIVE DATE" shall mean the date on which the Plan is initially approved by the stockholders in accordance with Section 19 of the Plan. "EMPLOYEE" shall mean any person, including officers (whether or not they are directors), employed by the Company or any Subsidiary. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended. "FAIR MARKET VALUE" shall mean (i) the closing price of a Share on the national securities exchange on which the Shares are traded, or (ii) if the Shares are not traded on a national securities exchange but are quoted on a Market, the closing price on such Market, or (iii) if the Shares are not traded on a national securities exchange or quoted on a Market, the fair market value of a Share as determined by the Company's Board of Directors in good faith, based upon such factors as they deem relevant. Notwithstanding the preceding, for federal, state, and local income tax reporting purposes, fair market value shall be determined by the Committee in accordance with uniform and nondiscriminatory standards adopted by it from time to time. Such determination shall be conclusive and binding on all persons. "GRANT DATE" shall mean, with respect to an Option, the date that the Option is granted by the Committee. "INCENTIVE STOCK OPTION" shall mean any option granted under this Plan and any other option granted to an Employee in accordance with the provisions of Section 422 of the Code and the Treasury Regulations promulgated thereunder. 2 "MARKET" shall mean the NASDAQ SmallCap Market or a regional stock exchange or an automated quotation system or over-the-counter market. "NON-EMPLOYEE DIRECTOR" shall mean a director of the Company who qualifies as a Non-Employee Director as such term is defined in Section 240.16b-3(b)(3) of the General Rules and Regulations promulgated under the Exchange Act (the "GENERAL RULES AND REGULATIONS"). "NONSTATUTORY STOCK OPTION" shall mean an Option granted under the Plan that is subject to the provisions of Section 1.83-7 of the Treasury Regulations promulgated under Section 83 of the Code. "OPTION" shall mean a stock option granted pursuant to the Plan. "OPTION AGREEMENT" shall mean a written agreement between the Company and the Optionee regarding the grant and exercise of Options to purchase Shares and the terms and conditions thereof as determined by the Committee pursuant to the Plan. "OPTIONED SHARES" shall mean the shares of Common Stock subject to an Option. "OPTIONEE" shall mean an Employee, Non-Employee Director or Consultant who receives an Option. "OUTSIDE DIRECTOR" shall mean a director of the Company who qualifies as an Outside Director as such term is used in Section 162(m) of the Code and defined in any applicable Treasury Regulations promulgated thereunder. "PARENT" shall mean a parent corporation of the Company, whether now or hereafter existing, as defined by Section 424(e) of the Code. "PLAN" shall mean this 1999 Stock Option Plan. "REGISTRATION DATE" shall mean the effective date of the first registration of any class of the Company's equity securities pursuant to Section 12 of the Exchange Act. "SECTION 162(m) EFFECTIVE DATE" shall mean the first date as of which the limitations on the tax deductibility of certain compensation provided by Section 162(m) of the Code and any Treasury Regulations promulgated thereunder are applicable to Options granted under the Plan. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended. "SECTION 16 PERSON" shall mean a person who, with respect to the Shares, is subject to Section 16 of the Exchange Act. "SHARE" shall mean a share of the Common Stock subject to an Option, as adjusted in accordance with Section 12 of the Plan. "SUBSIDIARY" shall mean a subsidiary corporation of the Company, whether now or hereafter existing, as defined in Section 424(f) of the Code. 3 "TERMINATION OF SERVICE" shall mean (a) in the case of an Employee, a cessation of the employee-employer relationship between the Employee and the Company or a Parent or Subsidiary for any reason, including, but not by way of limitation, a termination by resignation, discharge, death, disability, or the disaffiliation of a Parent or Subsidiary, but excluding any such termination where there is a simultaneous reemployment by the Company or a Parent or Subsidiary; (b) in the case of a Consultant, a cessation of the service relationship between the Consultant and the Company or a Parent or Subsidiary for any reason, including, but not by way of limitation, a termination by resignation, discharge, death, disability, or the disaffiliation of a Parent or Subsidiary, but excluding any such termination where there is a simultaneous re-engagement of the Consultant by the Company or a Parent or Subsidiary; and (c) in the case of a Director, a cessation of the Director's service on the Board or on the board of directors of a Parent or Subsidiary for any reason, including, but not by way of limitation, a termination by resignation, removal, death, disability, expiration of the term of directorship, or the disaffiliation of a Parent or Subsidiary, but excluding any such termination where there is a simultaneous reemployment by the Company or a Parent or Subsidiary. "VESTING COMMENCEMENT DATE" shall mean, with respect to an Option, the date, determined by the Board, on which the vesting of the Option shall commence, which may be the Grant Date or a date prior to or after the Grant Date. 3. SHARES SUBJECT TO THE PLAN. Subject to the provisions of Section 12 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 10,000,000 Shares. The Shares may be authorized but unissued or reacquired shares of Common Stock. If an Option expires or becomes unexercisable for any reason without having been exercised in full, or is surrendered pursuant to an Option exchange program, or if any unissued Shares are retained by the Company upon exercise of an Option in order to satisfy the exercise price for such Option or any withholding taxes due with respect to such Option, such unissued or retained Shares shall become available for other Option grants under the Plan, unless the Plan shall have been terminated. 4. ADMINISTRATION OF THE PLAN. (a) PROCEDURE. The Plan shall be administered by the Board. The Board may appoint a Committee consisting of not less than two (2) members of the Board to administer the Plan, subject to such terms and conditions as the Board may prescribe. Once appointed, the Committee shall continue to serve until otherwise directed by the Board. From time to time, the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies, however caused, and remove all members of the Committee and, thereafter, directly administer the Plan. Members of the Board or Committee who are either eligible for Options or have been granted Options may vote on any matters affecting the administration of the Plan or the grant of Options pursuant to the Plan, except that no such member shall act upon the granting of an Option to himself, but any such member may be counted in determining the existence of a quorum at any meeting of the Board or the Committee during which action is taken with respect to the granting of an Option to him or her. The Committee shall meet at such times and places and upon such notice as the chairperson determines. A majority of the Committee shall constitute a quorum. Any acts by the 4 Committee may be taken at any meeting at which a quorum is present and shall be by majority vote of those members entitled to vote. Additionally, any acts reduced to writing or approved in writing by all of the members of the Committee shall be valid acts of the Committee. (b) PROCEDURE AFTER REGISTRATION DATE. Notwithstanding subsection (a) above, after the Registration Date, (i) the Plan shall be administered by either: (A) the full Board; (B) a Committee of two (2) or more directors, each of whom is a Non-Employee Director; or (ii) all Options granted to Optionees who are officers or directors for purposes of Section 16(a) of the Exchange Act shall prohibit the sale of the underlying Optioned Shares within six (6) months of the date of grant. After such date, the Board shall take all action necessary to administer the Plan so that all transactions involving Options and Shares issued pursuant to the Plan shall be exempt from Section 16(b) of the Exchange Act in accordance with the then effective provisions of Section 240.16b-3 et. seq. of the General Rules and Regulations; provided that any amendment to the Plan required for compliance with such provisions shall be made consistent with the provisions of Section 14 of the Plan and the General Rules and Regulations. (c) PROCEDURE AFTER SECTION 162(m) EFFECTIVE DATE. Notwithstanding subsections (a) and (b) above, after the Section 162(m) Effective Date, the Plan and all Option grants shall be administered and approved by a Committee comprised solely of two or more Outside Directors; or if the Committee consists of members in addition to the Outside Directors, such additional members must abstain from voting on or recuse themselves with respect to all option grants and other compensation matters submitted to the Committee with respect to any Covered Employee. (d) POWERS OF THE COMMITTEE. Subject to the provisions of the Plan, and except as otherwise provided by the Board, the Committee shall have the authority: (i) to select the Employees, Directors and Consultants to whom Options may be granted from time to time hereunder; (ii) to determine whether and to what extent Options are granted hereunder; (iii) determine, upon review of relevant information, the Fair Market Value of the Common Stock; (iv) to determine the exercise price of Options to be granted, the number of Shares to be represented by each Option and the vesting schedule for such Option; (v) to approve Option Agreements for use under the Plan, and to authorize the execution and delivery of Option Agreements on behalf of the Company; (vi) to interpret the Plan; (vii) to prescribe, amend, add and rescind rules and regulations relating to the Plan; (viii) to determine the terms and provisions of each Option granted under the Plan (which need not be identical) and, with the consent of the holder thereof, to modify or amend any Option; (ix) to authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Option previously granted by the Committee; (x) to accelerate or (with the consent of the Optionee) defer an exercise date of any Option, subject to the provisions of Section 9(a) of the Plan; (xi) to determine whether Options granted under the Plan will be Incentive Stock Options or Nonstatutory Stock Options; and (xii) to make all other determinations deemed necessary or advisable for the administration of the Plan and take such other action not inconsistent with the terms of the Plan as the Committee deems appropriate. (e) EFFECT OF COMMITTEE'S DECISION. All decisions, determinations and interpretations of the Committee shall be final and binding on all persons. 5. ELIGIBILITY. 5 (a) PERSONS ELIGIBLE FOR OPTIONS. Nonstatutory Stock Options under the Plan may be granted to Employees, Directors or Consultants whom the Committee, in its sole discretion, may designate from time to time. Incentive Stock Options may be granted only to Employees. An Employee, Director or Consultant who has been granted an Option, if he or she is otherwise eligible, may be granted an additional Option or Options. However, the aggregate Fair Market Value of the Shares subject to one or more Incentive Stock Options that are exercisable for the first time by an Optionee during any calendar year (under all stock option plans of the Company and its Parents and Subsidiaries) shall not exceed $100,000 (determined as of the grant date). As of the Section 162(m) Effective Date, Options under the Plan shall be granted to Covered Employees upon satisfaction of the conditions to such grants provided pursuant to Section 162(m) and any Treasury Regulations promulgated thereunder. In addition, after the Section 162(m) Effective Date, the maximum number of Shares with respect to which Options may be granted during any [YEAR] to any Employee shall not exceed 750,000 Shares. (b) NO RIGHT TO CONTINUING EMPLOYMENT, CONSULTING OR DIRECTOR RELATIONSHIP. Neither the establishment nor the operation of the Plan shall confer upon any Optionee or any other person any right with respect to continuation of employment or other service with the Company or any Parent or Subsidiary, nor shall the Plan interfere in any way with the right of the Optionee or the right of the Company (or any Parent or Subsidiary) to terminate such employment or service at any time. 6. TERM OF PLAN. The Plan shall become effective upon its adoption by the Board and its approval by vote of the holders of the outstanding shares of the Company entitled to vote on the adoption of the Plan (in accordance with the provisions of Section 19 hereof). It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 14 of the Plan. 7. TERM OF OPTION. Unless the Committee determines otherwise, the term of each Option granted under the Plan shall be ten (10) years from the Grant Date. The term of the Option shall be set forth in the Option Agreement. In any event, no Option shall be exercisable after the expiration of ten (10) years from the Grant Date, and no Incentive Stock Option granted to any Employee who, at the date such Option is granted, owns (within the meaning of Section 424(d) of the Code) more than ten percent (10%) of the total combined voting power of all classes of the stock of the Company or any Parent or Subsidiary shall be exercisable after the expiration of five (5) years from the Grant Date. 8. OPTION EXERCISE PRICE AND CONSIDERATION. (a) OPTION PRICE. Except as provided in subsections (b) and (c) below, the exercise price for the Shares to be issued pursuant to any Option shall be such price as is determined by the Committee, which shall in no event be less than: (i) in the case of Incentive Stock Options, the Fair Market Value of such Shares on the Grant Date; or (ii) in the case of Nonstatutory Stock Options, 85% of such Fair Market Value. (b) TEN PERCENT STOCKHOLDERS. No Incentive Stock Option shall be granted to any Employee who, at the date such Option is granted, owns (within the meaning of Section 424(d) of the Code) more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, unless the exercise price for the Shares to be issued 6 pursuant to such Option is at least equal to 110% of the Fair Market Value of such Shares on the Grant Date. (c) SECTION 162(m) LIMITATIONS. After the Section 162(m) Effective Date, the exercise price of any Option granted to a Covered Employee shall be at least equal to the Fair Market Value of the Shares on the Grant Date. (d) CONSIDERATION. The consideration to be paid for the Optioned Shares shall be payment in cash or by check, cashier's check, certified check, or wire transfer, unless payment in some other manner, including by promissory note, other shares of the Company's Common Stock or such other consideration and method of payment for the issuance of Optioned Shares as may be permitted under Section 153 of the Delaware General Corporation Law, is authorized by the Committee at the time of the grant of the Option. Any cash or other property received by the Company from the sale of Shares pursuant to the Plan shall constitute part of the general assets of the Company. (e) RELOAD OPTIONS. In the event the exercise price or tax withholding of an Option is satisfied by the withholding by the Company or the Optionee's employer of Shares otherwise deliverable to the Optionee, the Committee may issue the Optionee an additional Option, with terms identical to the Option Agreement under which the Option was exercised, but at an exercise price as determined by the Committee in accordance with the Plan. 9. EXERCISE OF OPTION. (a) VESTING PERIOD. Any Option granted hereunder shall be exercisable at such times and under such conditions as determined by the Committee and as shall be permissible under the terms of the Plan, which shall be specified in the Option Agreement evidencing the Option. Unless the Committee specifically determines otherwise at the time of the grant of the Option, each Option shall vest and become exercisable, cumulatively, as to one-third of the Optioned Shares at the first anniversary of the Vesting Commencement Date and as to one twenty-fourth (1/24) of the remaining Optioned Shares at the end of each of the following twenty-four (24) months until all of the Optioned Shares have vested, subject to the Optionee's Continuous Employment, but in no event will the Option vest at a rate of less than 20% per year over five (5) years from the date the Option is granted. An Option may not be exercised for fractional shares or for less than [TEN (10)] Shares. (b) EXERCISE PROCEDURES. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. As soon as practicable following the exercise of an Option in the manner set forth above, the Company shall issue or cause its transfer agent to issue stock certificates representing the Shares purchased. Until the issuance of such stock certificates (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Shares notwithstanding the exercise of the Option. No adjustment will be made for a dividend or other rights for which the record date is prior to the date of the transfer by the Optionee of the consideration for the purchase of the Shares, except as provided in Section 12 of the Plan. 7 (c) EXERCISE OF OPTION WITH STOCK. If an Optionee is permitted to exercise an Option by delivering shares of the Company's Common Stock, the Option Agreement covering such Option may include provisions authorizing the Optionee to exercise the Option, in whole or in part, by (i) delivering whole shares of the Company's Common Stock previously owned by such Optionee (whether or not acquired through the prior exercise of a stock option) having a Fair Market Value equal to the Option price; or (ii) directing the Company to withhold from the Shares that would otherwise be issued upon exercise of the Option that number of whole Shares having a Fair Market Value equal to the Option price. Shares of the Company's Common Stock so delivered or withheld shall be valued at their Fair Market Value at the close of the last business day immediately preceding the date of exercise of the Option, as determined by the Committee. Any balance of the Option price shall be paid in cash. Any Shares delivered or withheld in accordance with this provision shall again become available for purposes of the Plan and for Options subsequently granted thereunder. After the Registration Date, any exercise of an Option under Section 9(c)(i) or 9(c)(ii) above by a Section 16 Person shall comply with the relevant requirements of Section 240.16b-1 et. seq. of the General Rules and Regulations. (d) TERMINATION OF STATUS AS EMPLOYEE, DIRECTOR OR CONSULTANT. If an Optionee shall cease to be an Employee, Director or Consultant for any reason other than permanent and total disability or death, he or she may, but only within thirty (30) days (or such other period of time as is determined by the Committee) after the date of Termination of Service, exercise his or her Option to the extent that he or she was entitled to exercise it at the date of Termination of Service, subject to the condition that no Option shall be exercised after the expiration of the Option period. (e) DISABILITY OF OPTIONEE. If an Optionee shall cease to be an Employee, Director or Consultant due to disability, and such Optionee was in Continuous Employment as an Employee, Director or Consultant from the Grant Date until the date of Termination of Service, the Option may be exercised at any time within six (6) months following the date of Termination of Service, but only to the extent of the accrued right to exercise at the time of Termination of Service, subject to the condition that no option shall be exercised after the expiration of the Option period. (f) DEATH OF OPTIONEE. In the event of the death during the Option period of an Optionee who is at the time of his or her death an Employee, Non- Employee Director or Consultant and who was in Continuous Employment as such from the Grant Date until the date of death, the Option may be exercised at any time within six (6) months following the date of death by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest, inheritance or otherwise as a result of the Optionee's death, but only to the extent of the accrued right to exercise at the time of death, subject to the condition that no option shall be exercised after the expiration of the Option period. (g) TAX WITHHOLDING. After the Registration Date, when an Optionee is required to pay to the Company an amount with respect to tax withholding obligations in connection with the exercise of an Option granted under the Plan, the Optionee may elect prior to the date the amount of such withholding tax is determined (the "TAX DATE") to make such payment, or such increased payment as the Optionee elects to make up to the maximum federal, state and local marginal tax rates, including any related FICA obligation, applicable to the Optionee and the particular transaction, by: (i) delivering cash; (ii) delivering part or all of the payment in previously owned shares of Common Stock (whether or not acquired through the prior exercise of an Option); and/or 8 (iii) irrevocably directing the Company to withhold from the Shares that would otherwise be issued upon exercise of the Option that number of whole Shares having a fair market value equal to the amount of tax required or elected to be withheld (a "WITHHOLDING ELECTION"). If an Optionee's Tax Date is deferred beyond the date of exercise and the Optionee makes a Withholding Election, the Optionee will initially receive the full amount of Optioned Shares otherwise issuable upon exercise of the Option, but will be unconditionally obligated to surrender to the Company on the Tax Date the number of Shares necessary to satisfy his or her minimum withholding requirements, or such higher payment as he or she may have elected to make, with adjustments to be made in cash after the Tax Date. After the Registration Date, notwithstanding anything in the preceding paragraph to the contrary, any withholding of Shares with respect to taxes arising in connection with the exercise of an Option by any Section 16 Person shall satisfy the conditions for exemption therefrom set forth in Section 240.16b-1 et. seq. of the General Rules and Regulations. Any adverse consequences incurred by the Optionee with respect to the use of shares of Common Stock to pay any part of the Option Price or of any tax in connection with the exercise of an Option, including, without limitation, any adverse tax consequences arising as a result of a disqualifying disposition within the meaning of Section 422 of the Code, shall be the sole responsibility of the Optionee. 10. TRANSFER OF OPTIONS. An Option may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent and distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee; provided that upon approval by the Committee an Option Agreement with respect to a Nonstatutory Stock Option may permit the Optionee to transfer vested options through a gift or domestic relations order in settlement of marital property rights to any of the following donees or transferees: (i) any "family member," which includes any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, sister-in-law, including adoptive relations, and any person sharing the employee's household (other than a tenant or employee); (ii) a trust in which "family members" have more than 50% of the beneficial interest; (iii) a foundation in which "family members" or the employee control the management of assets; and (iv) any other entity in which the "family members" (or the employee) own more than 50% of the voting interests; provided that (x) there may be no consideration for any such transfer, (y) the Option Agreement pursuant to which such Options are granted, and any amendment thereto, must be approved by the Committee, and must expressly provide for transferability in a manner consistent with this Section 10, and (z) subsequent transfers of transferred Options shall be prohibited except those in accordance with this Section 10. Following transfer, any such Options shall continue to be subject to the same 9 terms and conditions as were applicable immediately prior to transfer, provided that the term Optionee shall be deemed to refer to the Transferee. The events of termination of service of Section 9 hereof or in the Option Agreement shall continue to be applied with respect to the original Optionee, following which the Options shall be exercisable by the transferee only to the extent, and for the periods specified in the Option Agreement or Section 9, as applicable. Except as specifically provided above, an Option may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent and distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 11. EXERCISE OF UNVESTED OPTIONS. The Committee may grant any Optionee the right to exercise any Option prior to the complete vesting of such Option. Without limiting the generality of the foregoing, the Committee may provide that, if an Option is exercised prior to having completely vested, the Shares issued upon such exercise shall remain subject to vesting at the same rate as under the Option so exercised and shall be subject to a right, but not an obligation, of repurchase by the Company with respect to all unvested Shares if the Optionee ceases to be an Employee for any reason. For the purposes of facilitating the enforcement of any such right of repurchase, at the request of the Committee, the Optionee shall enter into Joint Escrow Instructions with the Company and deliver every certificate for his or her unvested Shares, together with two Assignments Separate from Certificate, duly endorsed in blank by the Optionee and by the Optionee's spouse, if required for transfer. 12. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. (a) RECAPITALIZATION. Subject to any required action by the stockholders of the Company, the number of Optioned Shares covered by each outstanding Option, and the number of Shares which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan, and the per share exercise price of each such Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, combination, reclassification, the payment of a stock dividend on the Common Stock or any other increase or decrease in the number of such shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been effected without receipt of consideration. Such adjustment shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. 10 (b) CORPORATE TRANSACTION. In the event of a proposed Corporate Transaction, the Committee shall notify the Optionee at least fifteen (15) days prior to such proposed Corporate Transaction. Except as provided otherwise in individual Option Agreements, to the extent it has not been previously exercised, the Option will terminate immediately prior to the consummation of such proposed Corporate Transaction, unless the Option is assumed or an equivalent Option is substituted by the successor corporation or a parent or subsidiary of such successor corporation. For the purposes of this subsection, the Option shall be considered assumed if, following the Corporate Transaction, the Option confers the right to purchase, for each Share subject to the Option immediately prior to the Corporate Transaction, the consideration (whether stock, cash, or other securities or property) received in the Corporate Transaction by holders of Common Stock for each Share subject to the Option held on the effective date of the Corporate Transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the Corporate Transaction was not solely common stock of the successor corporation or its parent or subsidiary, the Committee may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option for each Share subject to the Option to be solely common stock of the successor corporation or its parent or subsidiary equal in fair market value to the per share consideration received by holders of Common Stock in the Corporate Transaction. 13. TIME OF GRANTING OPTIONS. Unless otherwise specified by the Committee, the date of grant of an Option under the Plan shall be the Grant Date. Notice of the determination shall be given to each Optionee to whom an Option is so granted within a reasonable time after the date of such grant. 14. AMENDMENT AND TERMINATION OF THE PLAN. The Board may amend or terminate the Plan from time to time in such respects as the Board may deem advisable; provided, however, that any such amendment (a) shall comply with all applicable laws and stock exchange listing requirements, and (b) with respect to Incentive Stock Options granted or to be granted under the Plan, shall be subject to any approval by stockholders of the Company required under the Code. Any such amendment or termination of the Plan shall not affect Options already granted, and such Options shall remain in full force and effect as if the Plan had not been amended or terminated. 15. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued with respect to an Option granted under the Plan unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange or Market upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law. 16. RESERVATION OF SHARES. During the term of this Plan, the Company will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. The inability of the Company to obtain authority from any regulatory body having 11 jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the nonissuance or sale of such Shares as to which such requisite authority shall not have been obtained. 17. INFORMATION TO OPTIONEE. During the term of any Option granted under the Plan, the Company shall provide or otherwise make available to each Optionee a copy of its annual financial statement and any other financial information provided to its stockholders in accordance with the provisions of the Company's Bylaws and applicable law. 18. OPTION AGREEMENT. Options granted under the Plan shall be evidenced by Option Agreements. 19. STOCKHOLDER APPROVAL. The Plan shall be subject to approval by the stockholders of the Company within twelve (12) months before or after the Plan is adopted by the Board. Except as provided otherwise in Section 3, any amendments to the Plan requiring stockholder approval must be approved by the affirmative vote of the holders of a majority of the outstanding shares of voting stock present or represented and entitled to vote at a duly held meeting at which a quorum is present, or by the written consent of the stockholders in the manner provided by Delaware law. * * * 12 EX-10.2 11 EXHIBIT 10.2 SELECTQUOTE, INC. STOCK OPTION AGREEMENT FOR 1999 STOCK OPTION PLAN I. NOTICE OF STOCK OPTION GRANT Optionee's Name and Address: -------------------------------------- -------------------------------------- -------------------------------------- Social Security Number/Tax ID -------------------------------------- You have been granted an option to purchase shares of Common Stock of the Company, subject to the terms and conditions of the Plan and this Option Agreement, as follows: Grant Number -------------------------------------- Date of Grant -------------------------------------- Vesting Commencement Date -------------------------------------- Exercise Price per Share $ ------------------------------------- Total Number of Shares Granted -------------------------------------- Total Exercise Price $ ------------------------------------- Type of Option: --------- Incentive Stock Option --------- Non-Qualified Stock Option Term/Expiration Date: ------------------------------------- Termination Period ------------------------------------- VESTING SCHEDULE: Subject to other limitations set forth in this Agreement, this Option may be exercised, in whole or in part, in accordance with the following schedule: One-third (1/3) of the Shares subject to the Option shall vest twelve months after the Vesting Commencement Date, and 1/24 of the remaining Shares subject to the Option shall vest each month thereafter. TERMINATION PERIOD: This Option may be exercised for thirty (30) days after termination of Optionee's employment or consulting relationship, or such longer period as may be applicable upon the death or disability of Optionee as provided in the Agreement. In the event of Optionee's change in status from Employee to Consultant or Consultant to Employee, this Option Agreement shall remain in effect; provided, however, that in the event of a change in status from Employee to Consultant, Optionee's Incentive Stock Option shall cease to be treated as an Incentive Stock Option and shall be treated as a Non-Qualified Stock Option on the thirty-first (31st) day following such change in status. In no event shall this Option be exercised later than the Term/Expiration Date as provided above. II. AGREEMENT 1. GRANT OF OPTION. SelectQuote, Inc., a Delaware corporation (the "Company"), hereby grants to Optionee named in the Notice of Stock Option Grant (the "Optionee"), an option (the "Option") to purchase the total number of shares of Common Stock (the "Shares") set forth in the Notice of Stock Option Grant, at the exercise price per share set forth in the Notice of Stock Option Grant (the "Exercise Price") subject to the terms, definitions and provisions of the Company's 1999 Stock Option Plan (the "Plan") adopted by the Company, which is incorporated herein by reference. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Option Agreement. If designated in the Notice of Stock Option Grant as an Incentive Stock Option, this Option is intended to qualify as an Incentive Stock Option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). To the extent that the Option, or any portion thereof, does not qualify as an incentive stock option under the Code because the aggregate fair market value (as described below) exceeds $100,000, the Option or portion thereof shall constitute an incentive stock option under the Plan in such calendar year only to the extent of such $100,000 limitation. The "aggregate fair market value," as used above, shall include the fair market value (determined at the grant date) of the Shares for which the Option or portion thereof first becomes exercisable hereunder PLUS the aggregate fair market value (determined as of the respective date or dates of grant) of the Shares or other securities for which the Option or one or more other incentive stock options granted to Optionee prior to the grant date (whether under the Plan or any other option plan of the Corporation or any Parent or Subsidiary) first becomes exercisable during the calendar year. To the extent that the fair market value of the Shares for which the Option first becomes exercisable in any calendar year exceeds such $100,000 limitation, the Option may nevertheless be exercised for those excess Shares in such calendar year as a Non-Qualified Stock Option. 2. EXERCISE OF OPTION. (a) RIGHT TO EXERCISE. This Option shall be exercisable during its term in accordance with the Vesting Schedule set out in the Notice of Stock Option Grant and with the applicable provisions of the Plan and this Option Agreement. In the event of Optionee's Termination of Service, this Option shall be exercisable in accordance with the applicable provisions of the Plan and this Option Agreement. This Option shall be subject to the provisions of Section 14(b) of the Plan relating to the exercisability or termination of the Option in the event of a Corporate Transaction. Notwithstanding the foregoing, this Option will not be exercisable until the Corporation has furnished to Optionee the information required pursuant to Rule 701(e) under the Securities Act of 1933, as amended. (b) METHOD OF EXERCISE. This Option shall be exercisable only by delivery of an Exercise Notice (attached as Exhibit A) which shall state the election to exercise the Option, the whole number of Shares in respect of which the Option is being exercised, and such other provisions as may be required by 2 the Committee. Such Exercise Notice shall be signed by Optionee and shall be delivered in person or by certified mail to the Secretary of the Company accompanied by payment of the Exercise Price. The Option shall be deemed to be exercised upon receipt by the Company of such written notice accompanied by the Exercise Price. No Shares will be issued pursuant to the exercise of the Option unless such issuance and such exercise shall comply with all applicable laws. Assuming such compliance, for income tax purposes, the Shares shall be considered transferred to Optionee on the date on which the Option is exercised with respect to such Shares. 3. OPTIONEE'S REPRESENTATIONS. In the event the Shares purchasable pursuant to the exercise of the Option have not been registered under the Securities Act of 1933, as amended, at the time the Option is exercised, Optionee shall, if required by the Company, concurrently with the exercise or all or any portion the Option, deliver to the Company his or her Investment Representation Statement in the form attached hereto as Exhibit B. 4. TAXES. No Shares will be issued to Optionee or other person pursuant to the exercise of the Option until Optionee or other person has made arrangements acceptable to the Committee for the satisfaction of foreign, federal, state and local income and employment tax withholding obligations. 5. METHOD OF PAYMENT. Payment of the exercise price shall be by any of the following, or a combination thereof, at the election of Optionee: (a) cash; (b) certified or bank cashier's check; or (c) for as long as there exists a public market for the Company's Common Stock on the date of exercise, by surrender of shares of the Company's Common Stock, provided that if such shares were acquired upon exercise of an incentive stock option, Optionee must have first satisfied the holding period requirements under Section 422(a)(1) of the Code. In this case payment shall be made as follows: (i) In addition to the execution and delivery of the Exercise Notice attached as EXHIBIT A, Optionee shall deliver to the Secretary of the Company a written notice which shall set forth the portion of the purchase price Optionee wishes to pay with Common Stock, and the number of shares of such Common Stock Optionee intends to surrender pursuant to the exercise of this Option, which shall be determined by dividing the aforementioned portion of the purchase price by the average of the last reported bid and asked prices per share of Common Stock of the Company, as reported in THE WALL STREET JOURNAL (or, if not so reported, as otherwise reported by Nasdaq or, in the event the Common Stock is listed on a national securities exchange, or on the Nasdaq National Market (or any successor national market system), the closing price of Common Stock of the Company on such exchange as reported in THE WALL STREET JOURNAL, for the day on which the notice of exercise is sent or delivered); (ii) Fractional shares shall be disregarded and Optionee shall pay in cash an amount equal to such fraction multiplied by the price determined under subparagraph (i) above; (iii) The written notice shall be accompanied by a duly endorsed blank stock power with respect to the number of Shares set forth in the notice, and the certificate(s) representing said Shares shall be delivered to the Company at its principal offices within three (3) working days from the date of the notice of exercise; 3 (iv) The Optionee hereby authorizes and directs the Secretary of the Company to transfer so many of the Shares represented by such certificate(s) as are necessary to pay the purchase price in accordance with the provisions herein; and (v) Notwithstanding any other provision herein, Optionee shall only be permitted to pay the purchase price with Shares of the Company's Common Stock owned by him as of the exercise date in the manner and within the time periods allowed under 17 CFR Section 240.16b-3 promulgated under the Securities Exchange Act of 1934 as such regulation is presently constituted, as it is amended from time to time, and as it is interpreted now or hereafter by the Securities and Exchange Commission. The Optionee may elect to pay the exercise price by authorizing a third party to sell Shares subject to the Option and remit to the Company a sufficient portion of the sale proceeds to pay the entire exercise price and any tax withholding resulting from such exercise. 6. RESTRICTIONS ON EXERCISE. This Option may be exercised prior to the time that the Plan has been approved by the shareholders of the Company; provided, however, that all Shares issued upon any such exercise shall be rescinded if shareholder approval is not obtained within the time prescribed, and Shares issued on any such exercise shall not be counted in determining whether shareholder approval is obtained. In addition, this Option may not be exercised if the issuance of the Shares subject to the Option upon such exercise would constitute a violation of any applicable laws. 7. TERMINATION OF RELATIONSHIP. In the event of Optionee's Termination of Service, Optionee may, to the extent otherwise so entitled at the date of such termination (the "Termination Date"), exercise this Option during the Termination Period set out in the Notice of Stock Option Grant. Except as provided in Sections 8 and 9, below, to the extent that Optionee was not entitled to exercise this Option on the Termination Date, or if Optionee does not exercise this Option within the Termination Period, the Option shall terminate. 8. DISABILITY OF OPTIONEE. In the event of Optionee's Termination of Service as a result of his or her disability, Optionee may, but only within six (6) months from the Termination Date (and in no event later than the Term/Expiration Date), exercise the Option to the extent otherwise entitled to exercise it on the Termination Date; provided, however, that if such disability is not a "disability" as such term is defined in Section 22(e)(3) of the Code and the Option is an Incentive Stock Option, such Incentive Stock Option shall cease to be treated as an Incentive Stock Option and shall be treated as a Non-Qualified Stock Option on the ninety-first (91st) day following the Termination Date. To the extent that Optionee was not entitled to exercise the Option on the Termination Date, or if Optionee does not exercise such Option to the extent so entitled within the time specified herein, the Option shall terminate. 9. DEATH OF OPTIONEE. In the event of Optionee's death, the Option may be exercised at any time within six (6) months following the date of death (and in no event later than the Term/Expiration Date) by Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent Optionee could exercise the Option at the date of death. 10. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by Optionee. The terms of this Option shall be binding upon the executors, administrators, heirs and successors of Optionee. 11. TERM OF OPTION. This Option may be exercised only within the term set out in the Notice of Stock Option Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option Assignment. 4 12. TAX CONSEQUENCES. Set forth below is a brief summary as of the date of this Option Agreement of some of the federal and California tax consequences of exercise of this Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. (a) EXERCISE OF INCENTIVE STOCK OPTION. If this Option qualifies as an Incentive Stock Option, there will be no regular federal income tax liability or California income tax liability upon the exercise of the Option, although the excess, if any, of the Fair Market Value of the Shares on the date of exercise over the Exercise Price will be treated as an adjustment to the alternative minimum tax for federal tax purposes and may subject Optionee to the alternative minimum tax in the year of exercise. (b) EXERCISE OF INCENTIVE STOCK OPTION FOLLOWING DISABILITY. If Optionee's Termination of Service occurs as a result of disability that is not total and permanent disability as defined in Section 22(e)(3) of the Code, to the extent permitted on the date of termination, Optionee must exercise an Incentive Stock Option within 30 days of such termination for the Incentive Stock Option to be qualified as an Incentive Stock Option. (c) EXERCISE OF NON-QUALIFIED STOCK OPTION. There may be a regular federal income tax liability and California income tax liability upon the exercise of a Non-Qualified Stock Option. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Shares on the date of exercise over the Exercise Price. If Optionee is an Employee or a former Employee, the Company will be required to withhold from Optionee's compensation or collect from Optionee and pay to the applicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise. (d) DISPOSITION OF SHARES. In the case of a Non-Qualified Stock Option, if Shares are held for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal and California income tax purposes. In the case of an Incentive Stock Option, if Shares transferred pursuant to the Option are held for at least one year after receipt of the Shares and are disposed of at least two years after the Date of Grant, any gain realized on disposition of the Shares also will be treated as long-term capital gain for federal and California income tax purposes. If Shares purchased under an Incentive Stock Option are disposed of within such one-year or two-year periods, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the difference between the Exercise Price and the lesser of (i) the Fair Market Value of the Shares on the date of exercise, or (ii) the sale price of the Shares. 13. LOCK-UP AGREEMENT. (a) AGREEMENT. Optionee, if requested by the Company and the lead underwriter of any public offering of the Common Stock or other securities of the Company (the "Lead Underwriter"), hereby irrevocably agrees not to sell, contract to sell, grant any option to purchase, transfer the economic risk of ownership in, make any short sale of, pledge or otherwise transfer or dispose of any interest in any Common Stock or any securities convertible into or exchangeable or exercisable for or any other rights to purchase or acquire Common Stock (except Common Stock included in such public offering or acquired on the public market after such offering) during the 180-day period following the effective date of a registration statement of the Company filed under the Securities Act of 1933, as amended, or such shorter period of time as the Lead Underwriter shall specify. Optionee further agrees to sign such documents as may be requested by the Lead Underwriter to effect the foregoing and agrees that the Company may impose stop-transfer instructions with respect to such Common Stock subject until the end of such period. The Company and Optionee acknowledge 5 that each Lead Underwriter of a public offering of the Company's stock, during the period of such offering and for the 180-day period thereafter, is an intended beneficiary of this Section 16. (b) PERMITTED TRANSFERS. Notwithstanding the foregoing, Section 16(a) shall not prohibit Optionee from transferring any shares of Common Stock or securities convertible into or exchangeable or exercisable for the Company's Common Stock to the extent such transfer is not otherwise prohibited by this Agreement, either during Optionee's lifetime or on death by will or intestacy to Optionee's immediate family or to a trust the beneficiaries of which are exclusively Optionee and/or a member or members of Optionee's immediate family; provided, however, that prior to any such transfer, each transferee shall execute an agreement pursuant to which each transferee shall agree to receive and hold such securities subject to the provisions of Section 16 hereof. For the purposes of this subsection, the term "immediate family" shall mean spouse, lineal descendant, father, mother, brother or sister of the transferor. (c) NO AMENDMENT WITHOUT CONSENT OF UNDERWRITER. During the period from identification as a Lead Underwriter in connection with any public offering of the Company's Common Stock until the earlier of (i) the expiration of the lock-up period specified in Section 16(a) in connection with such offering or (ii) the abandonment of such offering by the Company and the Lead Underwriter, the provisions of this Section 16 may not be amended or waived except with the consent of the Lead Underwriter. 14. ENTIRE AGREEMENT: GOVERNING LAW. The Plan is incorporated herein by reference. The Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to Optionee's interest except by means of a writing signed by the Company and Optionee. This agreement is governed by California law except for that body of law pertaining to conflict of laws. 15. HEADINGS. The captions used in this Agreement are inserted for convenience and shall not be deemed a part of this Agreement for construction or interpretation. 16. INTERPRETATION. Any dispute regarding the interpretation of this Option Agreement shall be submitted by Optionee or by the Company forthwith to the Board or the Committee that administers the Plan, which shall review such dispute at its next regular meeting. The resolution of such dispute by the Board or the Committee shall be final and binding on all persons. SELECTQUOTE, INC., a Delaware corporation By: ------------------------------------- Its: ------------------------------------- OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE OPTION HEREOF IS EARNED ONLY BY CONTINUING CONSULTANCY OR EMPLOYMENT AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S 1999 STOCK OPTION PLAN WHICH IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR WITHOUT CAUSE. 6 Optionee acknowledges receipt of a copy of the Plan and represents that he is familiar with the terms and provisions thereof, and hereby accepts this Option Agreement subject to all of the terms and provisions thereof. Optionee has reviewed the Plan and this Option Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option Agreement and fully understands all provisions of the Option Agreement. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Committee upon any questions arising under the Plan or this Option Agreement. Optionee further agrees to notify the Company upon any change in the residence address indicated below. Dated: Signed: --------------------------- ---------------------------- Optionee Residence Address: ------------------------------------- ------------------------------------- ------------------------------------- 7 EXHIBIT A 1999 STOCK OPTION PLAN EXERCISE NOTICE SELECTQUOTE, INC. 595 Market Street, 6th Floor San Francisco, CA 94105 Attention: Secretary 1. EXERCISE OF OPTION. Effective as of today, ______________, ________________ ________________, the undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase ___________ shares of the Common Stock (the "Shares") of SelectQuote, Inc. (the "Company") under and pursuant to the Company's 1999 Stock Option Plan (the "Plan") and the [ ] Incentive [ ]Non-Qualified Stock Option Agreement dated ______________, ________ (the "Option Agreement"). 2. REPRESENTATIONS OF OPTIONEE. Optionee acknowledges that Optionee has received, read and understood the Plan and the Option Agreement and agrees to abide by and be bound by their terms and conditions. 3. RIGHTS AS SHAREHOLDER. Until the stock certificate evidencing such Shares is issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 10 of the Plan. Optionee shall enjoy rights as a shareholder until such time as Optionee disposes of the Shares or the Company. 4. DELIVERY OF PAYMENT. Optionee herewith delivers to the Company the full Exercise Price for the Shares. 5. TAX CONSULTATION. Optionee understands that Optionee may suffer adverse tax consequences as a result of Optionee's purchase or disposition of the Shares. Optionee represents that Optionee has consulted with any tax consultants Optionee deems advisable in connection with the purchase or disposition of the Shares and that Optionee is not relying on the Company for any tax advice. 6. TAXES. Optionee agrees to satisfy all applicable federal, state and local income and employment tax withholding obligations and has made arrangements acceptable to the Company to satisfy such obligations. Optionee also agrees, as partial consideration for the designation of the Option as an Incentive Stock Option, to notify the Company in writing within thirty (30) days of any disposition of any shares acquired by exercise of the Option if such disposition occurs within two (2) years from the Grant Date or within one (1) year from the date the Shares were transferred to Optionee. If the Company is required to satisfy any federal, state or local income or employment tax withholding obligations as a result of such an early disposition, Optionee agrees to satisfy the amount of such withholding in a manner that the Committee prescribes. 8 7. RESTRICTIVE LEGENDS. Optionee understands and agrees that the Company shall cause the legends set forth below or legends substantially equivalent thereto, to be placed upon any certificate(s) evidencing ownership of the Shares together with any other legends that may be required by the Company or by state or federal securities laws: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR, IN THE OPINION OF COUNSEL SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH. 8. SUCCESSORS AND ASSIGNS. The Company may assign any of its rights under this Exercise Notice to single or multiple assignees, and this Agreement shall inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer herein set forth, this Exercise Notice shall be binding upon Optionee and his or her heirs, executors, administrators, successors and assigns. 9. INTERPRETATION. Any dispute regarding the interpretation of this Exercise Notice shall be submitted by Optionee or by the Company forthwith to the Company's Board of Directors or the Committee that administers the Plan, which shall review such dispute at its next regular meeting. The resolution of such a dispute by the Board or Committee shall be final and binding on all persons. 10. GOVERNING LAW; SEVERABILITY. This Agreement shall be governed by and construed in accordance with the laws of the State of California excluding that body of law pertaining to conflicts of law. Should any provision of this Agreement be determined by a court of law to be illegal or unenforceable, the other provisions shall nevertheless remain effective and shall remain enforceable. 11. NOTICES. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States mail by certified mail, with postage and fees prepaid, addressed to the other party at its address as shown below beneath its signature, or to such other address as such party may designate in writing from time to time to the other party. 12. FURTHER INSTRUMENTS. The parties agree to execute such further instruments and to take such further action as may be reasonably necessary to carry out the purposes and intent of this agreement. 13. ENTIRE AGREEMENT. The Plan and the Option Agreement are incorporated herein by reference. This Exercise Notice, the Plan, the Option Agreement and the Investment Representation Statement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to Optionee's interest except by means of a writing signed by the Company and Optionee. Submitted by: Accepted by: OPTIONEE: SELECTQUOTE, INC. By: ----------------------------- Its: - ---------------------------------- ---------------------------- (Signature) 9 Address: Address: - -------- -------- - ------------------------------ 595 Market Street, 6th Floor - ------------------------------ San Francisco, CA 94105 10 EXHIBIT B 1998 STOCK OPTION PLAN INVESTMENT REPRESENTATION STATEMENT OPTIONEE : ----------------------------------- COMPANY : SELECTQUOTE, INC. SECURITY : COMMON STOCK AMOUNT : ----------------------------------- DATE : ----------------------------------- In connection with the purchase of the above-listed Securities, the undersigned Optionee represents to the Company the following: (a) Optionee is aware of the Company's business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. Optionee is acquiring these Securities for investment for Optionee's own account only and not with a view to, or for resale in connection with, any "distribution" thereof within the meaning of the Securities Act of 1933, as amended (the "Securities Act"). (b) Optionee acknowledges and understands that the Securities constitute "restricted securities" under the Securities Act and have not been registered under the Securities Act in reliance upon a specific exemption therefrom, which exemption depends upon among other things, the bona fide nature of Optionee's investment intent as expressed herein. In this connection, Optionee understands that, in the view of the Securities and Exchange Commission, the statutory basis for such exemption may be unavailable if Optionee's representation was predicated solely upon a present intention to hold these Securities for the minimum capital gains period specified under tax statutes, for a deferred sale, for or until an increase or decrease in the market price of the Securities, or for a period of one year or any other fixed period in the future. Optionee further understands that the Securities must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. Optionee further acknowledges and understands that the Company is under no obligation to register the Securities. Optionee understands that the certificate evidencing the Securities will be imprinted with a legend which prohibits the transfer of the Securities unless they are registered or such registration is not required in the opinion of counsel satisfactory to the Company. (c) Optionee is familiar with the provisions of Rule 701 and Rule 144, each promulgated under the Securities Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly from the issuer thereof, in a non-public offering subject to the satisfaction of certain conditions. Rule 701 provides that if the issuer qualifies under Rule 701 at the time of the grant of the Option to Optionee, the exercise will be exempt from registration under the Securities Act. In the event the Company becomes subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, ninety (90) days thereafter (or such longer period as any market stand-off agreement may require) the Securities exempt under Rule 701 may be resold, subject to the satisfaction of certain of the conditions specified by Rule 144, including: (1) the resale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934); and, in the case of an affiliate, (2) the availability of certain public information about 11 the Company, (3) the amount of Securities being sold during any three month period not exceeding the limitations specified in Rule 144(e), and (4) the timely filing of a Form 144, if applicable. In the event that the Company does not qualify under Rule 701 at the time of grant of the Option, then the Securities may be resold in certain limited circumstances subject to the provisions of Rule 144, which requires the resale to occur not less than one year after the later of the date the Securities were sold by the Company or the date the Securities were sold by an affiliate of the Company, within the meaning of Rule 144; and, in the case of acquisition of the Securities by an affiliate, or by a non-affiliate who subsequently holds the Securities less than two years, the satisfaction of the conditions set forth in sections (1), (2), (3) and (4) of the paragraph immediately above. (d) Optionee hereby agrees that if so requested by the Company or any representative of the underwriters in connection with any registration of the offering of any securities of the Company under the Securities Act, Optionee shall not sell or otherwise transfer any Shares or other securities of the Company during the 180-day period following the effective date of a registration statement of the Company filed under the Securities Act; provided, however, that such restriction shall only apply to public offerings which include securities to be sold on behalf of the Company to the public in an underwritten public offering under the Securities Act. The Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such 180-day period. (e) Optionee further understands that in the event all of the applicable requirements of Rule 701 or 144 are not satisfied, registration under the Securities Act, compliance with Regulation A, or some other registration exemption will be required; and that, notwithstanding the fact that Rules 144 and 701 are not exclusive, the Staff of the Securities and Exchange Commission has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rules 144 or 701 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. Optionee understands that no assurances can be given that any such other registration exemption will be available in such event. Signature of Optionee: ----------------------------------- Date: --------------------------- 12 EX-10.3 12 EXHIBIT 10.3 SELECTQUOTE, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN SelectQuote, Inc., a Delaware corporation (the "Company"), hereby establishes this 1999 Employee Stock Purchase Plan (the "Plan"). 1. PURPOSE OF PLAN. The purpose of the Plan is to enable Eligible Employees (as defined in Section 3) who wish to become shareholders of the Company a convenient and favorable method of doing so. The Plan is intended to constitute an "employee stock purchase plan," as defined in Section 423(b) of the Internal Revenue Code of 1986, as amended (the "Code"), and shall be interpreted and administered to further that intent. 2. ADMINISTRATION OF THE PLAN. The Plan will be administered by the Compensation Committee (the "Committee") of the Board of Directors of the Company (the "Board"). Subject to the provisions of the Plan, the Committee will have the complete authority to interpret the Plan, to adopt, amend and rescind rules and procedures relating to the Plan, and to make all of the determinations necessary or advisable for the administration of the Plan. All such interpretations, rules, procedures and determinations will, in the absence of fraud or patent mistake, be conclusive and binding on all persons with any interest in the Plan. 3. ELIGIBLE EMPLOYEES. The term "Eligible Employees" means all common law employees of the Company and each other corporation designated by the Committee that hereafter becomes a majority-owned subsidiary of the Company as of the beginning of each Offering Period (as defined in Section 5), except the following: (a) employees who have been continuously employed for less than five days prior to the commencement of the Offering Period (as defined in Section 5); (b) employees whose customary employment is 20 hours or less per week; and (c) employees whose customary employment is for not more than five months in any calendar year. The employment of an employee shall be treated as continuing intact while the employee is on sick leave or other leave of absence approved by the Company. Except as otherwise expressly provided in the Plan and permitted by Section 423 of the Code, all Eligible Employees shall have the same rights and obligations under the Plan. 4. STOCK SUBJECT TO THE PLAN. The stock subject to the Plan shall be shares of the Company's authorized but unissued Common Stock (the "Common Stock"). The aggregate number of shares of Common Stock that may be purchased by Eligible Employees pursuant to the Plan is 1,000,000, subject to adjustment as provided in Section 13. 5. OFFERING PERIODS. The Common Stock shall be offered under the Plan during consecutive offering periods (the "Offering Periods"). The first Offering Period shall begin upon the issuance and sale shares of Common Stock in a public offering on an underwritten firm commitment basis pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission, pursuant to the Securities Act of 1933, as amended, and end on December 31, 2000 (the "Initial Offering Period"). All subsequent Offering Periods will begin on the first day and end on the last day of each subsequent six-month period spanning January 1 to June 30 and July 1 to December 31 until the Plan termination date, as provided in Section 16.1. 6. PARTICIPANTS; PAYROLL DEDUCTIONS 6.1 A person who is an Eligible Employee at the beginning of an Offering Period may elect to have the Company make deductions from the person's Compensation (as defined in Section 6.4), at a specified percentage rate, to be used to purchase shares of Common Stock pursuant to the Plan during each purchase period ("Purchase Period), which shall be coterminous with the Initial Offering Period or the Offering Period as the case may be. This election must be made prior to the beginning of the Offering Period in accordance with such procedures as the Committee may adopt (each Eligible Employee who so elects to have such deductions made will be referred to as a "Participant"). 6.2 The maximum rate of deduction that a Participant may elect for any Offering Period is 10%. An amount equal to the elected percentage shall be deducted from the Participant's pay each time during the Purchase Period that any Compensation is paid to the Participant. The Committee may set such minimum level of payroll deductions as the Committee determines to be appropriate. Any minimum level of deductions set by the Committee shall apply equally to all Eligible Employees. A Participant's accumulated payroll deductions shall remain the property of the Participant until applied toward the purchase of shares of Common Stock under the Plan, but may be commingled with the general funds of the Company. No interest will be paid on payroll deductions accumulated under the Plan. 6.3 A Participant in the Plan on the last day of a Purchase Period shall automatically continue to participate in the Plan during the next Purchase Period unless he or she withdraws in the manner described in Section 11 or is no longer an Eligible Employee. 6.4 The term "Compensation" means all base salary, straight time wages and commissions paid to or on behalf of a Participant for services performed or on account of holidays, vacation, sick leave or other similar events (including any amounts by which such earnings are reduced, at the election of a Participant, pursuant to a cafeteria plan described in Section 125 of the Code, a dependent care assistance program described in Section 129 of the Code, a cash or deferred arrangement described in Section 401(k) of the Code, or any similar plan, program or arrangement), and excluding any overtime, shift premium, bonuses and other incentive compensation, the value of any noncash benefits under any employee benefit plans, and any other amounts paid to the Participant that are specifically excluded by the Committee. 7. PURCHASE OF SHARES 7.1 At the end of the Purchase Period, a Participant's accumulated payroll deductions for the Purchase Period will, subject to the limitations in Section 9 and the 2 withdrawal provisions of Section 11, be applied toward the purchase of shares of Common Stock at a purchase price (the "Purchase Price") equal to the lesser of: (a) 85% of the Market Price (as defined in Section 8.1) of the Common Stock on the first Business Day (as defined in Section 8.2) of the Offering Period; or (b) 85% of the Market Price of the Common Stock on the last Business Day of the Purchase Period, in either event rounded to the nearest whole cent. 7.2 Shares of Common Stock may be purchased under the Plan only with a Participant's accumulated payroll deductions. Fractional shares cannot be purchased. Any portion of a Participant's accumulated payroll deductions for an Offering Period not used for the purchase of Common Stock shall be applied to the purchase of Common Stock in the next Purchase Period, if the Participant is participating in the Plan during that Purchase Period, or returned to the Participant. 7.3 Each Participant who purchases shares of Common Stock under the Plan shall thereby be deemed to have agreed that the Company or the subsidiary of the Company that employs the Participant shall be entitled to withhold, from any other amounts that may be payable to the Participant at or around the time of the purchase, such federal, state, local and foreign income, employment and other taxes which may be required to be withheld under applicable laws. In lieu of such withholding, the Company or such subsidiary may require the Participant to remit such taxes to the Company or such subsidiary as a condition of the purchase. 8. MARKET PRICE 8.1 For purposes of the Plan, the term "Market Price" on any day means, if the Common Stock is publicly traded, the last sales price (or, if no last sales price is reported, the average of the high bid and low asked prices) for a share of Common Stock on that day as reported by the principal exchange on which the Common Stock is listed, or, if the Common Stock is publicly traded but not listed on an exchange, as reported by The Nasdaq Stock Market, or, if such prices or quotations are not reported by The Nasdaq Stock Market, as reported by any other available source of prices or quotations selected by the Committee. 8.2 For purposes of the Plan, the term "Business Day" means a day on which prices or quotations for the Common Stock are reported by a national securities exchange, The Nasdaq Stock Market, or any other available source of prices or quotations selected by the Committee, whichever is applicable pursuant to the preceding paragraph. 8.3 If the Market Price of the Common Stock must be determined for purposes of the Plan at a time when the Common Stock is not publicly traded, then the term "Market Price" shall mean the fair market value of the Common Stock as determined by the Committee, after taking into consideration all the factors it deems appropriate, including, without limitation, recent sale and offer prices of the Common Stock in private transactions negotiated at arm's 3 length. 9. LIMITATIONS ON SHARE PURCHASES 9.1 Notwithstanding Section 3, an employee will not be an Eligible Employee for purposes of the Plan if the employee owns stock possessing 5% or more of the total combined voting power or value of all classes of stock of the Company. For purposes of this 5% limitation, an employee shall be treated as owning any stock the ownership of which is attributed to him or her under the rules of Section 424(d) of the Code, as well as any stock that, in the absence of this paragraph, the employee could purchase under the Plan with his or her payroll deductions held pursuant to Section 6 but not yet applied to the purchase of shares of Common Stock under the Plan. 9.2 During any calendar year, the maximum value of the Common Stock that may be purchased by a Participant under the Plan and all such plans of Company, any Subsidiary of the Company, and any parent corporation (as defined in Section 424(e) of the Code) is $25,000, said value to be determined on the basis of the Market Price of the Common Stock on the first Business Day of each Offering Period that ends in the calendar year. Notwithstanding any other provision of the Plan to the contrary, the rights of a Participant to purchase shares of capital stock under the Plan and all such other plans shall not accrue at a rate which exceeds $25,000 annualized at any time during the calendar year. 9.3 The limitations in Section 9.1 and Section 9.2 are intended to and shall be interpreted in such a manner as will comply with Section 423(b)(3) and Section 423(b)(8) of the Code, respectively. 10. CHANGES IN PAYROLL DEDUCTIONS. The rate of payroll deductions for an Offering Period may not be increased or decreased by a Participant during the Purchase Period. However, the Participant may change the rate of payroll deduction for a subsequent Purchase Period. In addition, a Participant may withdraw in full from the Plan in the manner described in Section 11. 11. WITHDRAWAL FROM THE PLAN 11.1 A Participant may elect to withdraw from the Plan, effective for the Offering Period in progress, by delivering to the Committee written notice thereof prior to the end of the Offering Period. 11.2 If a Participant ceases for any reason (including death, disability or voluntary or involuntary termination of employment) to be an employee of the Company or one of its subsidiaries, the Participant will be deemed to have elected to withdraw from the Plan for the Offering Period and Purchase Period in progress when the Participant's employment ceases. 11.3 If a Participant's payroll deductions are interrupted by any legal process, the Participant will be deemed to have elected to withdraw from the Plan for the Purchase Period in progress when the interruption occurs. 4 11.4 If a Participant elects or is deemed to have elected to withdraw for a Purchase Period in progress, all of the Participant's payroll deductions for that Purchase Period, will be promptly returned to the Participant. 11.5 A Participant may elect to withdraw from the Plan, effective for a Purchase Period that has not yet commenced, by delivering to the Committee written notice thereof prior to the first day of the Purchase Period. 11.6 Following withdrawal from the Plan, in order to participate in the Plan for any subsequent Offering Period, the Participant must again elect to participate in the manner described in Section 6.1. 12. ISSUANCE OF COMMON STOCK 12.1 Certificates for the shares of Common Stock purchased by Participants will be delivered by the Company's transfer agent as soon as practicable after each Purchase Period. In lieu of issuing certificates for such shares directly to Participants, the Company shall be entitled to issue such shares to a bank, broker-dealer or similar custodian (the "Custodian") that has agreed to hold such shares for the accounts of the respective Participants. Fees and expenses of the Custodian shall be paid by the Company or allocated among the respective Participants in such manner as the Committee determines. 12.2 A Participant may direct, in accordance with such procedures as the Committee may adopt, that shares purchased by the Participant shall be issued (or, if such shares are issued to the Custodian, that the account for such shares be held) in the names of the Participant and one other person designated by the Participant, as joint tenants with right of survivorship, tenants in common, or community property, to the extent and in the manner permitted by applicable law. 12.3 A Participant may at any time, in the manner described in Section 17, undertake a disposition (as that term is defined in Section 424(c) of the Code), whether by sale, exchange, gift or other transfer of legal title, of any or all of the shares held for the Participant by the Custodian. In the absence of such a disposition of the shares, the shares shall continue to be held by the Custodian until the holding period set forth in Section 423(a) of the Code has been satisfied. If a Participant so requests, shares for which such holding period has been satisfied will be transferred to another brokerage account specified by the Participant, or a stock certificate for such shares will be issued and delivered to the Participant or his or her designee. 13. CHANGES IN CAPITALIZATION 13.1 Upon the happening of any of the following described events, a Participant's right to purchase shares of Common Stock under the Plan shall be adjusted as hereinafter provided: (a) If the shares of Common Stock are subdivided or combined into a greater or smaller number of shares of Common Stock or if, upon a recapitalization, split-up or 5 other reorganization of the Company, the shares of Common Stock are exchanged for other securities of the Company, the rights of each Participant shall be modified so that the Participant is entitled to purchase, in lieu of the shares of Common Stock that the Participant would otherwise have been entitled to purchase for the Purchase Period in progress at the time of such subdivision, combination or exchange (the "Offering Period Shares"), such number of shares of Common Stock or such number and type of other securities as the Participant would have received if such Offering Period Shares had been issued and outstanding at the time of such subdivision, combination or exchange (unless in the case of an exchange the Committee determines that the nature of the exchange is such that it is not feasible or advisable that the rights of Participants be so modified, in which event the exchange shall be deemed a Terminating Event under Section 14); and (b) If the Company issues any of its shares as a stock dividend upon or with respect to the Common Stock, each Participant who purchases shares of Common Stock under the Plan at the end of the Purchase Period in progress on the record date for the stock dividend shall be entitled to receive the shares so purchased (the "Purchased Shares") and shall also be entitled to receive at no additional cost, but only if the Purchase Price for the Purchased Shares was determined with reference to the Market Price of the Common Stock on the first Business Day of the Offering Period, the number of shares of the class of stock issued as a stock dividend, and the amount of cash in lieu of fractional shares, that the Participant would have received if he or she had been the holder of the Purchased Shares on the record date for the stock dividend. 13.2 Upon the happening of an event specified in clause (a) or (b) above, the class and aggregate number of shares available under the Plan, as set forth in Section 4, shall be appropriately adjusted to reflect the event. Notwithstanding the foregoing, such adjustments shall be made only to the extent that the Committee, based on advice of counsel for the Company, determines that such adjustments will not constitute a change requiring shareholder approval under Section 423(b)(2) of the Code. 14. TERMINATING EVENTS 14.1 Upon (a) the dissolution or liquidation of the Company, (b) a merger or other reorganization of the Company with one or more corporations as a result of which the Company will not be a surviving corporation, (c) the sale of all or substantially all of the assets of the Company or a material division of the Company, (d) a sale or other transfer, pursuant to a tender offer or otherwise, of more than fifty percent (50%) of the then outstanding shares of Common Stock of the Company, (e) an acquisition by the Company resulting in an extraordinary expansion of the Company's business or the addition of a material new line of business, or (f) any exchange that is subject to this Section 14 in accordance with the provisions of Section 13 (any of such events is herein referred to as a "Terminating Event"), the Committee may but shall not be required to: (a) make provision for the continuation of the Participants' rights under the Plan on such terms and conditions as the Committee determines to be appropriate and 6 equitable, including where applicable, but not limited to, an arrangement for the substitution on an equitable basis, for each share of Common Stock that could otherwise be purchased at the end of the Purchase Period in progress at the time of the Terminating Event, of any consideration payable with respect to each then outstanding share of Common Stock in connection with the Terminating Event; or (b) terminate all rights of Participants under the Plan for such Purchase Period and: (i) return to the Participants all of their payroll deductions for such Purchase Period (if shorter); and (ii) for each share of Common Stock, if any, that otherwise could have been purchased under the Plan by a Participant at the end of such Purchase Period (if shorter) (determined by assuming that payroll deductions at the rate elected by the Participant were continued to the end of the payroll period and used to purchase shares based on the Market Price of the Common Stock on the first Business Day of the Offering Period) and with respect to which (A) the Purchase Price at which such share could be purchased (determined with reference only to the Market Price of the Common Stock on the first Business Day of the Offering Period) is exceeded by (B) the Market Price on the date of the Terminating Event of a share of Common Stock, as determined by the Committee, pay to the Participant an amount equal to such excess. 14.2 The Committee shall make all determinations necessary or advisable in connection with Terminating Events, and its determinations shall, in the absent of fraud or patent mistake, be conclusive and binding on all persons with any interest in the Plan. 15. NO TRANSFER OR ASSIGNMENT OF EMPLOYEE'S RIGHTS. An Eligible Employee's rights under the Plan are the Eligible Employee's alone and may not be voluntarily or involuntarily transferred or assigned to, or availed of by, any other person other than by will or the laws of descent and distribution. An Eligible Employee's rights under the Plan are exercisable during his or her lifetime by the Eligible Employee alone. 16. TERMINATION AND AMENDMENT OF PLAN 16.1 The Plan shall terminate on June 30, 2004. The Plan may be terminated at any earlier time by the Board, but, except as provided in Section 14, such termination shall not affect the rights of Participants under the Plan for the Offering Period in progress at the time of termination. The Plan will also terminate in any case when all or substantially all of the unissued shares of Common Stock reserved for the purposes of the Plan have been purchased. If at any time shares of Common Stock reserved for the purpose of the Plan remain available for purchase but not in sufficient number to satisfy all then unfilled purchase requirements, the available shares shall be apportioned among Participants in proportion to the respective amounts of their accumulated payroll deductions, and the Plan shall terminate. Upon such termination or any other termination of the Plan, all payroll deductions not used to purchase shares of Common Stock will be refunded to the Participants entitled thereto. 7 16.2 The Committee or the Board may from time to time adopt amendments to the Plan; provided, however, that, without the approval of the shareholders of the Company, no amendment may increase the number of shares that may be issued under the Plan or make any other change for which shareholder approval is required by Section 423 of the Code or the regulations thereunder. 17. DISPOSITION OF SHARES. Subject to compliance with any applicable federal and state securities and other laws and any policy of the Company in effect from time to time with respect to trading in its shares, a Participant may effect a disposition (as that term is defined in Section 424(c) of the Code) of Common Stock purchased under the Plan at any time the Participant chooses; provided, however, each Participant agrees, by purchasing shares of Common Stock under the Plan, that (a) the Company shall be entitled to withhold from any other amounts that may be payable to the Participant by the Company at or around the time of such disposition such federal, state, local and foreign income, employment and other taxes as the Company may be required to withhold under applicable law; and (b) in lieu of such withholding, the Participant will, upon request of the Company, promptly remit such taxes to the Company. EACH EMPLOYEE PURCHASING SHARES OF COMMON STOCK UNDER THE PLAN ASSUMES THE RISK OF ANY MARKET FLUCTUATIONS IN THE PRICE THEREOF. 18. NO SHAREHOLDER RIGHTS; INFORMATION TO PARTICIPANTS. A Participant shall not have any rights as a shareholder of the Company (other than the right potentially to receive stock dividends under Section 13) on account of shares of Common Stock that may be purchased under the Plan prior to the time such shares are actually purchased by and issued to the Participant. Notwithstanding the foregoing, the Company shall deliver to each Participant under the Plan who does not otherwise receive such materials (a) a copy of the Company's annual financial statements (which shall be delivered annually as promptly as practical following each fiscal year of the Company and review or audit of such statements by the Company's auditors), together with management's discussion and analysis of financial condition and results of operations for the fiscal year, and (b) a copy of all reports, proxy statements and other communications distributed to the Company's security holders generally. 19. USE OF PROCEEDS. The proceeds received by the Company from the sale of shares of Common Stock under the Plan will be used for general corporate purposes. 20. GOVERNMENTAL REGULATIONS. The Company's obligation to sell and deliver shares of the Common Stock under the Plan is subject to the approval of any governmental authority required in connection with the authorization, issuance or sale of such shares, including the Securities and Exchange Commission, the securities administrators of the states in which Participants reside, and the Internal Revenue Service. 21. MISCELLANEOUS PROVISIONS 21.1 Nothing contained in the Plan shall obligate the Company or any of its subsidiaries to employ a Participant for any period, nor shall the Plan interfere in any way with the right of the Company or any of its subsidiaries to reduce a Participant's compensation. 8 21.2 The provisions of the Plan shall be binding upon each Participant and, subject to the provisions of Section 15, the heirs, successors and assigns of each Participant. 21.3 Where the context so requires, references in the Plan to the singular shall include the plural, and vice versa, and references to a particular gender shall include either or both genders. 21.4 The Plan shall be construed, administered and enforced in accordance with the laws of the United States, to the extent applicable thereto, as well as the laws of the State of California. 22. APPROVAL OF SHAREHOLDERS. The Plan shall be effective September 1, 1999, subject to approval by the shareholders of the Company in a manner that complies with Section 423(b)(2) of the Code. If such approval does not occur prior to June 30, 2000, the Plan shall be void and of no effect. 9 EX-10.5 13 EXHIBIT 10.5 SOFTWARE DEVELOPMENT AGREEMENT This Software Development Agreement (this "AGREEMENT") is entered into as of April 30, 1997 between Innovative Information Group, Inc. ("IIG"), with its corporate office at 6481 Oneida Court, Sun Valley, Nevada 89433-6654, and SelectTech, with its principal office at 595 Market Street, 6th Floor, San Francisco, California 94105. RECITALS A. IIG engages in research, development and consulting activities in the field of software engineering; B. SelectTech engages in the development of software products for the management and transmission of data in the insurance industry; and C. SelectTech has ongoing research, development and software engineering projects for which it would like IIG to provide software consulting services (the "PROJECTS"; each a "PROJECT"), which are or shall be described in Exhibit A, as attached hereto and as amended by the parties from time to time. AGREEMENT The parties agree as follows: 1. DEFINITIONS. As used herein: (a) The term "SOFTWARE" shall mean the results and products (interim and/or final) of the consulting services performed by IIG, its employees or representatives, for SelectTech, whether pursuant to this Agreement or otherwise, whether tangible or intangible, including, without limitation, each and every invention, discovery, formula, trade secret, software program (including without limitation, object source code, flow charts, algorithms and related documentation), listing, routine, manual, specification, technique, product, concept, know-how, or similar property, whether or not patentable or copyrightable and whether or not embodied in any products, that are made, developed, perfected, designed, conceived or first reduced to practice by IIG, either solely or jointly with others, in the course and scope of the consulting services performed under this Agreement or otherwise, including all of the above that has come into being prior to the date of this Agreement. (b) The term "CONFIDENTIAL INFORMATION" shall mean all information developed by or disclosed or made available to IIG, its employees or representatives, whether in connection with this Agreement or prior to the date of this Agreement, which SelectTech protects against unrestricted disclosure to others and information which is developed by or for IIG specifically for SelectTech under this Agreement, including all Proprietary Information. (c) The term "PROPRIETARY INFORMATION" shall refer to any and all information or material of a confidential, proprietary or secret nature which is or may be applicable to, or related in any way to: (i) the past, present or future business of SelectTech or of any corporation in control of SelectTech (a "PARENT") or any majority-owned subsidiary (a "SUBSIDIARY") of SelectTech; (ii) the research and development or investigations of SelectTech or any Parent or any Subsidiary; or (iii) the business of any client, supplier or customer of SelectTech or of any Parent or Subsidiary. Proprietary Information shall include, without limitation, trade secrets, processes, formulas, data, know-how, improvements, inventions and techniques relating to the Projects and information pertaining to customer lists, marketing plans and strategies, personnel directories and files and information concerning customers or vendors of SelectTech or any Parent or Subsidiary. 2. ENGAGEMENT AND PERFORMANCE OF SERVICES. (a) ENGAGEMENT. SelectTech hereby engages IIG to perform software engineering consulting services (the "SERVICES") in accordance with the terms and conditions of this Agreement. This Agreement will govern all services performed by IIG for SelectTech, whether or not such services are Services as defined in this Agreement. (b) IDENTIFICATION OF PROJECTS AND SERVICES. EXHIBIT A contains a description of the Projects for which IIG initially may perform Services under this Agreement. In addition, SelectTech may request specific consulting services from IIG for individual tasks relative to these projects or for tasks which are not related to any specific project. SelectTech may also request that IIG participate in or undertake other Projects. Project work or specific consulting services will be done by providing IIG with a detailed project specification and Project/Work Approval Form that has been signed by an authorized representative of SelectTech. The Project/ Work Approval Forms and the list of those who are authorized to approve projects are set forth as Exhibit B (the "PROJECT/WORK APPROVAL FORM"). IIG may accept or decline each additional Project or assignment at its discretion. Compensation for additional Projects shall be on the terms set forth in Section 3, unless the parties agree otherwise. (c) PERFORMANCE STANDARDS. IIG shall perform the Services in accordance with the specifications and project timetables and under the direction of the SelectTech Project Manager. The SelectTech Project Manger will be responsible for assigning tasks for each Project and will be the ultimate evaluator of performance by a contract resource. Performance will be governed by the terms and conditions set forth in Exhibit C. (d) DELIVERY. IIG or its designates will deliver all interim and final software products, including source code and other related materials developed under this Agreement (the "SOFTWARE"), by ensuring that all current and active project sources and materials are available from the Source Code Repository Site (Star Team) on no less than a weekly basis. When the Source Code Repository Site (Star Team) is not available, source code may also be delivered to SelectTech or its designees in a standard medium (disk, Zip Disk, CD, etc.). (e) ACCESS SECURITY. IIG will comply with SelectTech's security procedures for control and management of source code or proprietary information and access to SelectTech's installation sites and computer equipment, as set forth in Exhibit D, but shall not be responsible for any delays resulting from delays in obtaining access. 2 (f) SUBCONTRACTING. With SelectTech's consent, IIG may subcontract all or part of the Services to be performed by IIG for SelectTech, provided that all such subcontractors must agree to and abide by terms and conditions substantially similar to those contained in this Agreement. Further, IIG shall require all such subcontractors to agree that all of the work they perform for IIG shall be owned by SelectTech in accordance with the provisions of Section 6. 3. PAYMENT. (a) COMPENSATION FOR SERVICES; PAYMENT. IIG will be paid for the Services on an hourly-rate basis, as specified in Exhibit E and any Project/Work Approval Form. Hourly and other charges regarding a specific Project may be changed by agreement of the parties upon 30 days notice. IIG will submit invoices for Services performed on a monthly basis, within 10 days of the end of each month. SelectTech will pay the amounts invoiced within 15 days of receipt of the invoice. In no event will SelectTech be obligated to pay IIG for any Services not specifically identified in Exhibit A or a Project/Work Approval Form. (b) REIMBURSEMENT OF EXPENSES. SelectTech will not be obligated to pay to IIG the amounts of any expenses incurred in connection with the Services or otherwise unless such expenses are approved by SelectTech in advance. IIG shall report such agreed-upon expenses separately on an IIG invoice to SelectTech. (c) PURCHASES OF HARDWARE AND SOFTWARE. SelectTech may request that IIG purchase specific hardware or software necessary to perform the Services under this Agreement. The cost of such purchase will be agreed upon in advance by SelectTech and reported separately on an IIG invoice to SelectTech. SelectTech will reimburse IIG the agreed-upon cost of any such purchase. 4. TERM AND TERMINATION. This Agreement will continue in effect until terminated by either party in writing; provided that such termination will be effective on the last day of the sixth full calendar month following the date on which the terminating party gives the other party written notice of its intent to terminate this Agreement. If termination is initiated by IIG, IIG will continue to perform the Services under this Agreement until the date of the effectiveness of the termination. 5. WARRANTIES. IIG warrants to SelectTech as follows: (a) IIG will provide highly skilled programming staff which is experienced in programming for the Microsoft Windows operating systems and major Database Management systems using different programming languages, and possesses the additional expertise needed to perform the Services. IIG acknowledges that SelectTech is relying upon the skill and expertise of IIG for the performance of the Services. (b) The Software will be of original development by IIG and will not infringe upon or violate any patent, copyright, trade secret or other property right of any third party. Third-party software will not be incorporated in the Software without SelectTech's prior written consent. If SelectTech so consents, it shall be SelectTech's responsibility to secure any necessary licenses for such third-party software. 3 (c) IIG will use its best efforts to make such additions, modifications or adjustments to the Software as may be necessary to correct in the shortest possible time any problems or defects in the Software or related documentation discovered by IIG or reported to IIG by SelectTech. This warranty shall be null and void in the event that SelectTech modifies any part of the Software without the prior approval of IIG. IIG disclaims any warranties of merchantability and fitness for a particular purpose. 6. PROPERTY RIGHTS. All right, title and interest in and to the Software, and all products derived from the Software, shall at all times be and remain the sole and exclusive property of SelectTech. The Software and all products developed by or for IIG for SelectTech or derived therefrom, in the past or under this Agreement, shall be deemed to be works made for hire. Any patents, trademarks, copyrights or other intellectual property rights that may arise in connection with any products developed by or for IIG for SelectTech or derived therefrom, in the past or under this Agreement, and all of the Software, shall be in the name of, and, if necessary, will be assigned by or for IIG and its employees and contractors to, SelectTech. SelectTech shall own all Proprietary Information related to all of the Projects, and all Proprietary Information created by or for IIG for or on behalf of SelectTech prior to the effective date hereof. (a) IIG agrees to disclose promptly to SelectTech any and all Software and Proprietary Information, whether or not patentable and whether or not reduced to practice, conceived or learned by IIG, its employees, contractors and other agents, either alone or jointly with others, which relate in any manner to the past, present or anticipated business, work, research or investigations of IIG on behalf of SelectTech or any Parent or Subsidiary. (b) IIG further agrees to assist SelectTech in every way (at SelectTech's expense) to obtain and, from time to time, enforce patents on and other intellectual property rights in the Software in any and all countries. To that end, by way of illustration, but not limitation, IIG shall cause its employees, contractors and other agents to testify in any suit or other proceeding involving any of the Software, execute all documents which SelectTech reasonably determines to be necessary or convenient for use in applying for and obtaining patents thereon and enforcing the same, and execute all necessary assignments thereof to SelectTech or persons designated by it. IIG's obligation to assist SelectTech in obtaining and enforcing patents for the Software in any and all countries shall continue beyond the termination of this Agreement. (c) The parties acknowledge that all Software developed by or for IIG in connection with each Project is being created at the instance of SelectTech, and further agree that such Software shall be deemed a work made for hire under the United States copyright laws and that SelectTech shall have the unlimited right to supervise and control IIG and to direct IIG as to all aspects of the creation of such software. SelectTech may alter such Software, add to it, or combine it with any other work or works, in its sole discretion. All original materials submitted by IIG to SelectTech as part of the Software or as part of the process of creating the Software, including, but not limited to, source code, object code, listings, printouts, documentation, notes, flow charts and programming aides, shall be the property of SelectTech, whether or not SelectTech uses such material. No rights in any of the foregoing are reserved to IIG. In the event that any such Software is determined by a court of competent jurisdiction not to be a work made for hire under the United States copyright laws, this Agreement shall operate as an irrevocable assignment of all original materials produced by IIG for SelectTech under this Agreement and of all copyrights of every kind in such materials for the entire duration of the copyrights. No rights are reserved to IIG under this assignment. The parties agree that this 4 assignment and any acts of SelectTech undertaken for the purpose of securing, maintaining, or preserving the copyright in such software pursuant to this assignment, including recordation of this Agreement with the United States Copyright Office, are only precautionary and shall not be considered in determining the character of the software. IIG further agrees to forebear from asserting all moral rights or comparable rights that IIG may have in such materials, including without limitation, any right to prevent modification of the materials, any rights to receive attribution of authorship, or any right to control the materials. (d) IIG agrees to keep and maintain adequate and current records of all Software and Proprietary Information made, conceived, developed or perfected relating to the Projects, and that such records shall be available to, and remain the sole property of, SelectTech at all times. 7. PROTECTION OF CONFIDENTIAL INFORMATION. (a) CONFIDENTIALITY. IIG agrees with respect to any Confidential Information developed by or disclosed to it hereunder: (i) to use such Confidential Information only for the purposes contemplated by this Agreement; (ii) to use the same methods and degree of care to prevent disclosure of such Confidential Information as it uses to prevent disclosure of its own proprietary and confidential information, including marking all confidential information in written or tangible form as "Confidential" and reducing all confidential oral communications to writing and so marking each such writing; and (iii) to return any Confidential Information in tangible form to SelectTech at the request of SelectTech and to retain no copies or reproductions thereof. (b) LIMITATIONS. IIG shall not be obligated to treat information as Confidential Information if such information: (i) is or becomes public knowledge without the fault of IIG; or (ii) is or becomes rightfully available to IIG without confidential restriction from, or pursuant to a distinct development contract with, a source not under SelectTech's control; or (iii) is independently developed by IIG without use of the Confidential Information developed by or disclosed to IIG hereunder; provided, however, that the burden of proof of such independent development shall be upon IIG; or (iv) is disclosed pursuant to court or government action; provided, however, that IIG gives SelectTech reasonable prior notice of disclosure pursuant to such court or government action. 8. LIMITATION OF LIABILITY. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY SPECIAL, CONSEQUENTIAL, INCIDENTAL, OR INDIRECT DAMAGES, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY, ARISING OUT OF THIS AGREEMENT, WHETHER OR NOT SUCH PARTY IS ADVISED OF THE 5 POSSIBILITY OF SUCH DAMAGES, AND NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY. 9. NON-HIRE. Neither party, nor any of their successors and assignees, will hire or enter into any contract with an employee or agent of the other party without the prior consent of the other party. This provision will remain in effect for one (1) year after the cancellation date of this Agreement. 10. ASSIGNMENT. This Agreement shall bind and inure to the benefit of the parties' respective successors and assigns. 11. MISCELLANEOUS PROVISIONS. (a) GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of California without regard to conflict of laws principles. In any action or proceeding to enforce rights under this Agreement, the prevailing party shall be entitled to recover costs and attorneys' fees. (b) NOTICES. All notices under this Agreement shall be in writing and delivered personally or by facsimile, commercial overnight courier, or certified or registered mail, return receipt requested, to a party at its respective address set forth below: SelectTech: SelectTech 595 Market St., 6th Floor San Francisco, California 94105 IIG: Innovative Information Group, Inc. 6481 Oneida Court, Sun Valley, Nevada 89433-6654 (c) ENTIRE AGREEMENT. This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter herein and merges and supersedes all prior discussions between them. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, shall be effective unless in writing signed by the party against whom it is to be enforced. Nothing express or implied in this Agreement is intended to confer, nor shall anything herein confer, upon any person other than the parties and the respective successors or permitted assigns of the parties, any rights, remedies, obligations or liabilities whatsoever. (d) SEVERABILITY. If the application of any provision or provisions of this Agreement to any particular facts or circumstances shall be held to be invalid or unenforceable by any court of competent jurisdiction, then: (i) the validity and enforceability of such provision or provisions as applied to any other particular facts or circumstances and the validity of other provisions of this Agreement shall not in any way be affected or impaired thereby; and (ii) such provision or provisions shall be reformed without further action by the parties hereto and only to the extent 6 necessary to make such provision or provisions valid and enforceable when applied to such particular facts and circumstances. (e) INDEPENDENT CONTRACTORS. The parties are independent contractors, and nothing in this Agreement shall be construed to create a joint venture or partnership. (f) FORCE MAJEURE. A party will not be deemed to have materially breached this Agreement to the extent that performance of its obligations or attempts to cure any breach are delayed or prevented by reason of an act of God, fire, natural disaster, accident, act of government, shortage of equipment, materials or supplies beyond the reasonable control of such party, or any other cause beyond the reasonable control of that party (a "FORCE MAJEURE EVENT"); provided that the party whose performance is delayed or prevented promptly notifies the other party of the nature and duration of the force majeure event. (g) COMPLIANCE WITH LAWS. Each party shall comply with all laws and regulations applicable to it. (h) DISPUTES AND REMEDIES. The parties agree to use their best efforts to resolve any dispute that may arise under the Agreement through good faith negotiations. No party shall commence any arbitration or litigation in relation to this Agreement unless it has first invited the chief executive or other responsible executive officer of the other party to meet with its own chief executive or other responsible executive officer for the purpose of endeavoring to resolve the dispute on mutually acceptable terms. Any dispute arising under the Agreement that cannot be settled by negotiation between the parties shall be submitted to arbitration under the rules of the [American Arbitration Association]. The decision of the arbitrator shall be final. The parties shall continue to perform their obligations under the Agreement as far as possible as if no dispute had arisen pending the final settlement of any matter referred to arbitration. Nothing in this clause shall preclude either party from taking steps to seek immediate equitable relief before any court of competent jurisdiction, if required. (i) COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, and such counterparts together shall constitute one and the same instrument. For purposes hereof, a facsimile copy of this Agreement, including the signature pages hereto, shall be deemed to be an original. * * * 7 IN WITNESS WHEREOF, the parties have executed and delivered this Software Development Agreement as of the date first set forth above. SELECTTECH INNOVATIVE INFORMATION GROUP, INC. - ----------------------------- ---------------------------- Charan Singh Steven H. Gerber Chairman President 8 EXHIBIT A INITIAL PROJECTS 1. AIM ACCS - AIM CENTRAL COMMUNICATION SERVER - THIS SOFTWARE PROJECT WILL PROVIDE A MECHANISM TO MOVE DATA BETWEEN ANY NUMBER OF SITES USING AN INSURANCE DATA WORKFLOW MODEL. THE SELECTTECH PROJECT MANAGERS WILL PROVIDE THE CONSULTING PROGRAMMING STAFF ADDITIONAL PRODUCT DESCRIPTIONS AND ITEMS THAT WOULD COMPOSE A SPECIFICATION ON AN AS NEEDED BASIS. 2. AIM QV - QUICKVIEW - THIS PRODUCT WILL BE A REPLACEMENT FOR MULTIDATA ACCESS. THIS PRODUCT WILL MOVE PENDING DATA, COMMISSION DATA, INFORCE DATA, POLICIES, ELECTRONIC APPLICATIONS AND OTHER INFORMATION, FROM A CREATING SITE (PRIMARILY INSURANCE CARRIER FOR ALL EXCEPT THE ELECTRONIC APPLICATION) TO ANY NUMBER OF OTHER SITES. THE MOVEMENT OF DATA WILL BE MANAGED AND CONTROLLED BY THE ACCS. WITHIN THIS PROJECT THERE WILL BE THREE FORMS OF THE QUICKVIEW SYSTEM. THESE ARE AGENCY QV, CARRIER QV AND WEB QV. THE SELECTTECH PROJECT MANAGERS WILL PROVIDE THE CONSULTING PROGRAMMING STAFF ADDITIONAL PRODUCT DESCRIPTIONS AND ITEMS THAT WOULD COMPOSE A SPECIFICATION ON AN AS NEEDED BASIS. 3. AIM GA - GENERAL AGENCY SYSTEM - THE AIM GENERAL AGENCY SYSTEM WILL BE BUILT TO BE A REPLACEMENT FOR THE MULTIDATA AMS SYSTEM. THIS SYSTEM WILL RETAIN ALL THE FUNCTIONALITY OF THE AMS SYSTEM PLUS HAVE THE FEATURE ADVANTAGES OF BUILDING THIS SYSTEM IN THE WINDOWS OPERATING ENVIRONMENT. THE SELECTTECH PROJECT MANAGERS WILL PROVIDE THE CONSULTING PROGRAMMING STAFF ADDITIONAL PRODUCT DESCRIPTIONS AND ITEMS THAT WOULD COMPOSE A SPECIFICATION ON AN AS NEEDED BASIS. 4. AIM ITS - INSURANCE TELE-INTERVIEW SYSTEM -AIM ITS WILL BE A UNIQUE SYSTEM THAT IS DESIGNED FOR CONDUCTING PART 1 AND PART 2 INSURANCE INTERVIEWS THOUGHT A TELEMARKETING SERVICE. THE SELECTTECH PROJECT MANAGERS WILL PROVIDE THE CONSULTING PROGRAMMING STAFF ADDITIONAL PRODUCT DESCRIPTIONS AND ITEMS THAT WOULD COMPOSE A SPECIFICATION ON AN AS NEEDED BASIS. 5. AIM DMS - DIRECT MARKETING SYSTEM -AIM DMS IS A SYSTEM DESIGNED TO BE A PLATFORM FROM WHICH TO CONDUCT TELEPHONE BASED SALES AND MARKETING OF INSURANCE. THIS PRODUCT IS BASED ON EXISTING SELECTTECH DESIGNS. THE SELECTTECH PROJECT MANAGERS WILL PROVIDE THE CONSULTING PROGRAMMING STAFF ADDITIONAL PRODUCT DESCRIPTIONS AND ITEMS THAT WOULD COMPOSE A SPECIFICATION ON AN AS NEEDED BASIS. 6. GENERAL WORK - IN ADDITION TO THE PROJECTS DESCRIBED ABOVE, IIG WILL ALSO BE REQUESTED TO PROVIDE ADDITIONAL PROGRAMMING AND CONSULTING SERVICES FOR THE CREATING OF UTILITIES AND OTHER PRODUCTS NECESSARY TO SUPPORT THE AIMSUITE OF SOFTWARE PROJECTS. IN EACH CASE, A SELECTTECH PROJECT MANAGER WILL PROVIDE THE CONSULTING PROGRAMMING STAFF ADDITIONAL PRODUCT DESCRIPTIONS AND ITEMS THAT WOULD COMPOSE A SPECIFICATION ON AN AS NEEDED BASIS. EXHIBIT B PROJECT AND WORK APPROVAL FORM
- ------------------------------------------------------- ----------------------------------------------------- DATE: REQUESTOR: - ------------------------------------------------------- ----------------------------------------------------- - ------------------------------------------------------- ----------------------------------------------------- CHANGE REQUEST BY: DEPARTMENT: - ------------------------------------------------------- ----------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- PROJECT/TASK NAME: - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------- ----------------------------------------------------- CHANGE IMPACT: LOW / / NORMAL / / HIGH / / - ------------------------------------------------------- ----------------------------------------------------- DESCRIPTION OF PROJECT/WORK: - ------------------------------------------------------------------------------------------------------------- PRODUCT / / SYSTEM SOFTWARE / / DATABASE / / OTHER / / - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- REASON FOR PROJECT/WORK: - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------- ----------------------------------------------------- EXPECTED START DATE: EXPECTED COMPLETION DATE: - ------------------------------------------------------- ----------------------------------------------------- - ------------------------------------------------------- ----------------------------------------------------- NUMBER OF TOTAL STAFF REQUIRED: - ------------------------------------------------------- ----------------------------------------------------- TYPE OF STAFF REQUIRED (TYPE/HOW MANY) - ------------------------------------------------------- ----------------------------------------------------- - ------------------------------------------------------- ----------------------------------------------------- - ------------------------------------------------------- ----------------------------------------------------- - ------------------------------------------------------- ----------------------------------------------------- - ------------------------------------------------------- ----------------------------------------------------- - ------------------------------------------------------- ----------------------------------------------------- - -------------------------------------------------------------------------------- ---------------------------- ACCOUNTING APPROVAL: DATE: - -------------------------------------------------------------------------------- ---------------------------- - -------------------------------------------------------------------------------- ---------------------------- MANAGEMENT APPROVAL: DATE: - -------------------------------------------------------------------------------- ----------------------------
10 MANAGEMENT APPROVAL DESIGNEES 1. MICHAEL L. FEROAH - EXECUTIVE VICE PRESIDENT 2. HERNAN E. REYES - VICE PRESIDENT OF OPERATIONS 3. STEVEN H. GERBER - PRESIDENT 11 EXHIBIT C PERFORMANCE TERMS AND CONDITIONS By 10th day of each month, IIG shall prepare and e-mail to SelectTech or its designee, the list of dedicated resources - managers, programmers, designers, technical writes and other specialists - available for SelectTech in the next three (3) months. The schedule of available specialists shall to be sent by IIG for on-site support of installations and integration. By the 20th day of the month, SelectTech shall review and e-mail to IIG the schedule with necessary corrections in quantity of resources and their assignments. If SelectTech does not provide any comments, the original IIG's list will be deemed accepted. If SelectTech requires more resources than IIG has proposed, SelectTech shall specify the skills of necessary specialists and IIG shall use best efforts to find, hire and train them. [SelectTech guarantees the use of new hired specialists during at least six (6) months.] If SelectTech overestimates necessary resources and does not provide workload for them, IIG will charge SelectTech for these resources as if they had been fully utilized. Both parties will use best efforts to resolve resource problem in shorter than the three (3) month notification term provided above in the case of urgent need. 2) IIG will provide on-site specialists based on the following conditions: - SelectTech will cover expenses on round-trip transportation to the USA, per-diems, visa fees and any reasonable expenses. These expenses will be invoiced separately. - IIG will buy travel medical insurance for technical resources while these resources are traveling in the US on assignment for SelectTech or its assignees. Medical expenses during assignments in the US will be billed to SelectTech with supporting documentation, and SelectTech will pay up to $100 per month for medical insurance. - SelectTech will cover expenses for accommodations in the USA, transportation within the USA and telephone charges which are not to exceed an agreed upon amount. - SelectTech will provide accommodations, assuring that the residence is in a safe place as determined by reasonable standards, with a separate room for each specialist and access to an equipped kitchen whenever possible. - Should it be determined that the planned stay of any IIG specialist be extended for business purposes, SelectTech will be responsible for reasonable additional expenses which may occur as a result of the extension. - SelectTech will provide one free day and rental car with insurance, if requested, one time per two (2) months for an on-site specialist who has a valid drivers license and is legally able to drive in the US. The on-site specialist will be responsible for gas and any other costs associated with the rental (except rent and insurance fees). - SelectTech in no event may make any direct payments to IIG's representatives visiting the USA, except as specified above. 12 EXHIBIT D SECURITY PROCEDURES 13 EXHIBIT E HOURLY RATES AND TERMS Hourly rates for IIG's Specialists or services will be agreed to in separate agreements. 1. IIG will provide SelectTech with Resource Tracking Sheets that account for the tasks accomplished, hours worked, supervisor sign-off and project assignment for each technical resource prior to the acceptance of any invoicing by SelectTech. 2. For the purposes of this contract, a working month is considered as 160 working hours. IIG will not charge SelectTech for IIG's specialists on vacation or sickness. 3. Per Diems for IIG's representatives staying in the USA are fifty ($50) US dollars per each calendar day including any travel days so long as those days are business related or travel to and from sites. No Per Diem will be paid for personal vacations taken while in the USA. 4. SelectTech will provide either a phone call or an allotment in the amount of $100 per month which is to be used for each specialist personal phone calls. SelectTech assumes no other responsibility for personal phone charges and any amount spent over the allotted amount is the responsibility of the individual. Phone charges in excess of the allotted amount which are not directly paid by the individual but charged to SelectTech in any way, may be deducted from the amounts owed to the individual in per diem or deducted from the amounts owed to IIG. Should such charges occur, prior notice will be given to IIG and a separate invoice presented. 14 EX-10.6 14 EXHIBIT 10.6 SOFTWARE DEVELOPMENT AGREEMENT This Software Development Agreement (this "AGREEMENT") is entered into as of ___________, 199__ between Software Technology International ("STI") and Innovative Information Group ("IIG"). RECITALS A. Each party engages in research, development and consulting activities in the field of software engineering; B. STI has ongoing research, development and software engineering projects for which it would like STI to provide software consulting services (the "PROJECTS"; each a "PROJECT"), which are or shall be described in Exhibit A, as attached hereto and as amended by the parties from time to time. AGREEMENT The parties agree as follows: 1. DEFINITIONS. As used herein: (a) The term "SOFTWARE" shall mean the results and products (interim and/or final) of the consulting services performed by STI, its employees or representatives, for IIG, whether pursuant to this Agreement or otherwise, whether tangible or intangible, including, without limitation, each and every invention, discovery, formula, trade secret, software program (including without limitation, object source code, flow charts, algorithms and related documentation), listing, routine, manual, specification, technique, product, concept, know-how, or similar property, whether or not patentable or copyrightable and whether or not embodied in any products, that are made, developed, perfected, designed, conceived or first reduced to practice by STI, either solely or jointly with others, in the course and scope of the consulting services performed under this Agreement or otherwise, including all of the above that has come into being prior to the date of this Agreement. (b) The term "CONFIDENTIAL INFORMATION" shall mean all information developed by or disclosed or made available to STI, its employees or representatives, whether in connection with this Agreement or prior to the date of this Agreement, which IIG protects against unrestricted disclosure to others and information which is developed by or for STI specifically for IIG under this Agreement, including all Proprietary Information. (c) The term "PROPRIETARY INFORMATION" shall refer to any and all information or material of a confidential, proprietary or secret nature which is or may be applicable to, or related in any way to: (i) the past, present or future business of IIG or of any corporation in control of IIG (a "PARENT") or any majority-owned subsidiary (a "SUBSIDIARY") of IIG; (ii) the research and development or investigations of IIG or any Parent or any Subsidiary; or (iii) the business of any client, supplier or customer of IIG or of any Parent or Subsidiary. Proprietary Information shall include, without limitation, trade secrets, processes, formulas, data, know-how, improvements, inventions and techniques relating to the Projects and information pertaining to customer lists, marketing plans and strategies, personnel directories and files and information concerning customers or vendors of IIG or any Parent or Subsidiary. 2. ENGAGEMENT AND PERFORMANCE OF SERVICES. (a) ENGAGEMENT. IIG hereby engages STI to perform software engineering consulting services (the "SERVICES") in accordance with the terms and conditions of this Agreement. This Agreement will govern all services performed by STI for IIG, whether or not such services are Services as defined in this Agreement. (b) IDENTIFICATION OF PROJECTS AND SERVICES. EXHIBIT A contains a description of the Projects for which STI initially may perform Services under this Agreement. In addition, IIG may request specific consulting services from STI for individual tasks relative to these projects or for tasks which are not related to any specific project. IIG may also request that STI participate or undertake other Projects. Project work or specific consulting services will be done by providing STI with a detailed project specification and Project/Work Approval Form that has been signed by an authorized company representative. The Project/ Work Approval Forms and the list of those who are authorized to approve projects are set forth as Exhibit B (the "PROJECT/WORK APPROVAL FORM"). STI may accept or decline each additional Project or assignment at its discretion. Compensation for additional Projects shall be on the terms set forth in Section 3, unless the parties agree otherwise. (c) PERFORMANCE STANDARDS. STI shall perform the Services in accordance with the specifications and project timetables and under the direction of the IIG Project Manager. The IIG Project Manger will be responsible for assigning tasks for each Project and will be the ultimate evaluator of performance by a contract resource. Performance will be governed by the terms and conditions set forth in Exhibit C. (d) DELIVERY. STI or its designates will deliver all interim and final software products, including source code and other related materials developed under this Agreement (the "SOFTWARE"), by ensuring that all current and active project sources and materials are available from the Source Code Repository Site (Star Team) on no less than a weekly basis. When the Source Code Repository Site (Star Team) is not available, source code may also be delivered to IIG or its designees in a standard medium (disk, Zip Disk, CD, etc.). (e) ACCESS SECURITY. STI will comply with IIG's security procedures for control and management of source code or proprietary information and access to IIG's installation sites and computer equipment, as set forth in Exhibit D, but shall not be responsible for any delays resulting from delays in obtaining access. (f) SUBCONTRACTING. With IIG's consent, STI may subcontract all or part of the Services to be performed by STI for IIG, provided that all such subcontractors must agree to and abide by terms and conditions substantially similar to those contained in this Agreement. Further, STI shall require all such subcontractors to agree that all of the work they perform for STI shall be owned by IIG in accordance with the provisions of Section 6. 2 3. PAYMENT. (a) COMPENSATION FOR SERVICES; PAYMENT. STI will be paid for the Services on an hourly-rate basis, as specified in Exhibit E and any Project/Work Approval Form. Hourly and other charges regarding a specific Project may be changed by agreement of the parties upon 30 days notice. STI will submit invoices for Services performed on a monthly basis, within 10 days of the end of each month. IIG will pay the amounts invoiced within 15 days of receipt of the invoice. In no event will IIG be obligated to pay STI for any Services not specifically identified in Exhibit A or a Project/Work Approval Form. (b) REIMBURSEMENT OF EXPENSES. IIG will not be obligated to pay to STI the amounts of any expenses incurred in connection with the Services or otherwise unless such expenses are approved by IIG in advance. STI shall report such agreed-upon expenses separately on an STI invoice to IIG. (c) PURCHASES OF HARDWARE AND SOFTWARE. IIG may request that STI purchase specific hardware or software necessary to perform the Services under this Agreement. The cost of such purchase will be agreed upon in advance by IIG and reported separately on an STI invoice to IIG. IIG will reimburse STI the agreed-upon cost of any such purchase. 4. TERM AND TERMINATION. This Agreement will continue in effect until terminated by either party in writing; provided that such termination will be effective on the last day of the sixth full calendar month following the date on which the terminating party gives the other party written notice of its intent to terminate this Agreement. If termination is initiated by STI, STI will continue to perform the Services under this Agreement until the date of the effectiveness of the termination. 5. WARRANTIES. STI warrants to IIG as follows: (a) STI will provide highly skilled programming staff which is experienced in programming for the Microsoft Windows operating systems and major Database Management systems using different programming languages, and possesses the additional expertise needed to perform the Services. STI acknowledges that IIG is relying upon the skill and expertise of STI for the performance of the Services. (b) The Software will be of original development by STI and will not infringe upon or violate any patent, copyright, trade secret or other property right of any third party. Third-party software will not be incorporated in the Software without IIG's prior written consent. If IIG so consents, it shall be IIG's responsibility to secure any necessary licenses for such third-party software. (c) STI will use its best efforts to make such additions, modifications or adjustments to the Software as may be necessary to correct in the shortest possible time any problems or defects in the Software or related documentation discovered by STI or reported to STI by IIG. This warranty shall be null and void in the event that IIG modifies any part of the Software without the prior approval of STI. STI disclaims any warranties of merchantability and fitness for a particular purpose. 3 6. PROPERTY RIGHTS. All right, title and interest in and to the Software, and all products derived from the Software, shall at all times be and remain the sole and exclusive property of IIG. The Software and all products developed by or for STI for IIG or derived therefrom, in the past or under this Agreement, shall be deemed to be works made for hire. Any patents, trademarks, copyrights or other intellectual property rights that may arise in connection with any products developed by or for STI for IIG or derived therefrom, in the past or under this Agreement, and all of the Software, shall be in the name of, and, if necessary, will be assigned by or for STI and its employees and contractors to, IIG. IIG shall own all Proprietary Information related to all of the Projects, and all Proprietary Information created by or for STI for or on behalf of IIG prior to the effective date hereof. (a) STI agrees to disclose promptly to IIG any and all Software and Proprietary Information, whether or not patentable and whether or not reduced to practice, conceived or learned by STI, its employees, contractors and other agents, either alone or jointly with others, which relate in any manner to the past, present or anticipated business, work, research or investigations of STI on behalf of IIG or any Parent or Subsidiary. (b) STI further agrees to assist IIG in every way (at IIG's expense) to obtain and, from time to time, enforce patents on and other intellectual property rights in the Software in any and all countries. To that end, by way of illustration, but not limitation, STI shall cause its employees, contractors and other agents to testify in any suit or other proceeding involving any of the Software, execute all documents which IIG reasonably determines to be necessary or convenient for use in applying for and obtaining patents thereon and enforcing the same, and execute all necessary assignments thereof to IIG or persons designated by it. STI's obligation to assist IIG in obtaining and enforcing patents for the Software in any and all countries shall continue beyond the termination of this Agreement. (c) The parties acknowledge that all Software developed by or for STI in connection with each Project is being created at the instance of IIG, and further agree that such Software shall be deemed a work made for hire under the United States copyright laws and that IIG shall have the unlimited right to supervise and control STI and to direct STI as to all aspects of the creation of such software. IIG may alter such Software, add to it, or combine it with any other work or works, in its sole discretion. All original materials submitted by STI to IIG as part of the Software or as part of the process of creating the Software, including, but not limited to, source code, object code, listings, printouts, documentation, notes, flow charts and programming aides, shall be the property of IIG, whether or not IIG uses such material. No rights in any of the foregoing are reserved to STI. In the event that any such Software is determined by a court of competent jurisdiction not to be a work made for hire under the United States copyright laws, this Agreement shall operate as an irrevocable assignment of all original materials produced by STI for IIG under this Agreement and of all copyrights of every kind in such materials for the entire duration of the copyrights. No rights are reserved to STI under this assignment. The parties agree that this assignment and any acts of IIG undertaken for the purpose of securing, maintaining, or preserving the copyright in such software pursuant to this assignment, including recordation of this Agreement with the United States Copyright Office, are only precautionary and shall not be considered in determining the character of the software. STI further agrees to forebear from asserting all moral rights or comparable rights that STI may have in such materials, including without limitation, any right to prevent modification of the materials, any rights to receive attribution of authorship, or any right to control the materials. 4 (d) STI agrees to keep and maintain adequate and current records of all Software and Proprietary Information made, conceived, developed or perfected relating to the Projects, and that such records shall be available to, and remain the sole property of, IIG at all times. 7. PROTECTION OF CONFIDENTIAL INFORMATION. (a) CONFIDENTIALITY. STI agrees with respect to any Confidential Information developed by or disclosed to it hereunder: (i) to use such Confidential Information only for the purposes contemplated by this Agreement; (ii) to use the same methods and degree of care to prevent disclosure of such Confidential Information as it uses to prevent disclosure of its own proprietary and confidential information, including marking all confidential information in written or tangible form as "Confidential" and reducing all confidential oral communications to writing and so marking each such writing; and (iii) to return any Confidential Information in tangible form to IIG at the request of IIG and to retain no copies or reproductions thereof. (b) LIMITATIONS. STI shall not be obligated to treat information as Confidential Information if such information: (i) is or becomes public knowledge without the fault of STI; or (ii) is or becomes rightfully available to STI without confidential restriction from, or pursuant to a distinct development contract with, a source not under IIG's control; or (iii) is independently developed by STI without use of the Confidential Information developed by or disclosed to STI hereunder; provided, however, that the burden of proof of such independent development shall be upon STI; or (iv) is disclosed pursuant to court or government action; provided, however, that STI gives IIG reasonable prior notice of disclosure pursuant to such court or government action. 8. LIMITATION OF LIABILITY. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY SPECIAL, CONSEQUENTIAL, INCIDENTAL, OR INDIRECT DAMAGES, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY, ARISING OUT OF THIS AGREEMENT, WHETHER OR NOT SUCH PARTY IS ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, AND NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY. 9. NON-HIRE. Neither party, nor any of their successors and assignees, will hire or enter into any contract with an employee or agent of the other party without the prior consent of the other party. This provision will remain in effect for one (1) year after the cancellation date of this Agreement. 5 10. ASSIGNMENT. This Agreement shall bind and inure to the benefit of the parties' respective successors and assigns. 11. MISCELLANEOUS PROVISIONS. (a) GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of California without regard to conflict of laws principles. In any action or proceeding to enforce rights under this Agreement, the prevailing party shall be entitled to recover costs and attorneys' fees. (b) NOTICES. All notices under this Agreement shall be in writing and delivered personally or by facsimile, commercial overnight courier, or certified or registered mail, return receipt requested, to a party at its respective address set forth below: IIG: IIG 595 Market St., 6th Floor San Francisco, California 94105 STI: Innovative Information Group, Inc. 6481 Oneida Court, Sun Valley, Nevada 89433-6654 (c) ENTIRE AGREEMENT. This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter herein and merges and supersedes all prior discussions between them. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, shall be effective unless in writing signed by the party against whom it is to be enforced. Nothing express or implied in this Agreement is intended to confer, nor shall anything herein confer, upon any person other than the parties and the respective successors or permitted assigns of the parties, any rights, remedies, obligations or liabilities whatsoever. (d) SEVERABILITY. If the application of any provision or provisions of this Agreement to any particular facts or circumstances shall be held to be invalid or unenforceable by any court of competent jurisdiction, then: (i) the validity and enforceability of such provision or provisions as applied to any other particular facts or circumstances and the validity of other provisions of this Agreement shall not in any way be affected or impaired thereby; and (ii) such provision or provisions shall be reformed without further action by the parties hereto and only to the extent necessary to make such provision or provisions valid and enforceable when applied to such particular facts and circumstances. (e) INDEPENDENT CONTRACTORS. The parties are independent contractors, and nothing in this Agreement shall be construed to create a joint venture or partnership. (f) FORCE MAJEURE. A party will not be deemed to have materially breached this Agreement to the extent that performance of its obligations or attempts to cure any breach are delayed or prevented by reason of an act of God, fire, natural disaster, accident, act of 6 government, shortage of equipment, materials or supplies beyond the reasonable control of such party, or any other cause beyond the reasonable control of that party (a "FORCE MAJEURE EVENT"); provided that the party whose performance is delayed or prevented promptly notifies the other party of the nature and duration of the force majeure event. (g) COMPLIANCE WITH LAWS. Each party shall comply with all laws and regulations applicable to it. (h) DISPUTES AND REMEDIES. The parties agree to use their best efforts to resolve any dispute that may arise under the Agreement through good faith negotiations. No party shall commence any arbitration or litigation in relation to this Agreement unless it has first invited the chief executive or other responsible executive officer of the other party to meet with its own chief executive or other responsible executive officer for the purpose of endeavoring to resolve the dispute on mutually acceptable terms. Any dispute arising under the Agreement that cannot be settled by negotiation between the parties shall be submitted to arbitration under the rules of the [American Arbitration Association]. The decision of the arbitrator shall be final. The parties shall continue to perform their obligations under the Agreement as far as possible as if no dispute had arisen pending the final settlement of any matter referred to arbitration. Nothing in this clause shall preclude either party from taking steps to seek immediate equitable relief before any court of competent jurisdiction, if required. (i) COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, and such counterparts together shall constitute one and the same instrument. For purposes hereof, a facsimile copy of this Agreement, including the signature pages hereto, shall be deemed to be an original. * * * 7 IN WITNESS WHEREOF, the parties have executed and delivered this Software Development Agreement as of the date first set forth above. INNOVATIVE INFORMATION GROUP, INC. SOFTWARE TECHNOLOGY INTERNATIONAL - ------------------------------- ---------------------------- Steven H. Gerber Ivan Kraus Ko President Director Date: Date: ------------------------- ---------------------- 8 EXHIBIT A INITIAL PROJECTS 1. AIM ACCS - AIM CENTRAL COMMUNICATION SERVER - THIS SOFTWARE PROJECT WILL PROVIDE A MECHANISM TO MOVE DATA BETWEEN ANY NUMBER OF SITES USING AN INSURANCE DATA WORKFLOW MODEL. THE IIG PROJECT MANAGERS WILL PROVIDE THE CONSULTING PROGRAMMING STAFF ADDITIONAL PRODUCT DESCRIPTIONS AND ITEMS THAT WOULD COMPOSE A SPECIFICATION ON AN AS NEEDED BASIS. 2. AIM QV - QUICKVIEW - THIS PRODUCT WILL BE A REPLACEMENT FOR MULTIDATA ACCESS. THIS PRODUCT WILL MOVE PENDING DATA, COMMISSION DATA, INFORCE DATA, POLICIES, ELECTRONIC APPLICATIONS AND OTHER INFORMATION, FROM A CREATING SITE (PRIMARILY INSURANCE CARRIER FOR ALL EXCEPT THE ELECTRONIC APPLICATION) TO ANY NUMBER OF OTHER SITES. THE MOVEMENT OF DATA WILL BE MANAGED AND CONTROLLED BY THE ACCS. WITHIN THIS PROJECT THERE WILL BE THREE FORMS OF THE QUICKVIEW SYSTEM. THESE ARE AGENCY QV, CARRIER QV AND WEB QV. THE IIG PROJECT MANAGERS WILL PROVIDE THE CONSULTING PROGRAMMING STAFF ADDITIONAL PRODUCT DESCRIPTIONS AND ITEMS THAT WOULD COMPOSE A SPECIFICATION ON AN AS NEEDED BASIS. 3. AIM GA - GENERAL AGENCY SYSTEM - THE AIM GENERAL AGENCY SYSTEM WILL BE BUILT TO BE A REPLACEMENT FOR THE MULTIDATA AMS SYSTEM. THIS SYSTEM WILL RETAIN ALL THE FUNCTIONALITY OF THE AMS SYSTEM PLUS HAVE THE FEATURE ADVANTAGES OF BUILDING THIS SYSTEM IN THE WINDOWS OPERATING ENVIRONMENT. THE IIG PROJECT MANAGERS WILL PROVIDE THE CONSULTING PROGRAMMING STAFF ADDITIONAL PRODUCT DESCRIPTIONS AND ITEMS THAT WOULD COMPOSE A SPECIFICATION ON AN AS NEEDED BASIS. 4. AIM ITS - INSURANCE TELE-INTERVIEW SYSTEM -AIM ITS WILL BE A UNIQUE SYSTEM THAT IS DESIGNED FOR CONDUCTING PART 1 AND PART 2 INSURANCE INTERVIEWS THOUGHT A TELEMARKETING SERVICE. THE IIG PROJECT MANAGERS WILL PROVIDE THE CONSULTING PROGRAMMING STAFF ADDITIONAL PRODUCT DESCRIPTIONS AND ITEMS THAT WOULD COMPOSE A SPECIFICATION ON AN AS NEEDED BASIS. 5. AIM DMS - DIRECT MARKETING SYSTEM -AIM DMS IS A SYSTEM DESIGNED TO BE A PLATFORM FROM WHICH TO CONDUCT TELEPHONE BASED SALES AND MARKETING OF INSURANCE. THIS PRODUCT IS BASED ON EXISTING IIG DESIGNS. THE IIG PROJECT MANAGERS WILL PROVIDE THE CONSULTING PROGRAMMING STAFF ADDITIONAL PRODUCT DESCRIPTIONS AND ITEMS THAT WOULD COMPOSE A SPECIFICATION ON AN AS NEEDED BASIS. 6. GENERAL WORK - IN ADDITION TO THE PROJECTS DESCRIBED ABOVE, STI WILL ALSO BE REQUESTED TO PROVIDE ADDITIONAL PROGRAMMING AND CONSULTING SERVICES FOR THE CREATING OF UTILITIES AND OTHER PRODUCTS NECESSARY TO SUPPORT THE AIMSUITE OF SOFTWARE PROJECTS. IN EACH CASE, A IIG PROJECT MANAGER WILL PROVIDE THE CONSULTING PROGRAMMING STAFF ADDITIONAL PRODUCT DESCRIPTIONS AND ITEMS THAT WOULD COMPOSE A SPECIFICATION ON AN AS NEEDED BASIS. EXHIBIT B PROJECT AND WORK APPROVAL FORM
- ------------------------------------------------------- ----------------------------------------------------- DATE: REQUESTOR: - ------------------------------------------------------- ----------------------------------------------------- - ------------------------------------------------------- ----------------------------------------------------- CHANGE REQUEST BY: DEPARTMENT: - ------------------------------------------------------- ----------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- PROJECT/TASK NAME: - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------- ----------------------------------------------------- CHANGE IMPACT: LOW / / NORMAL / / HIGH / / - ------------------------------------------------------- ----------------------------------------------------- DESCRIPTION OF PROJECT/WORK: - ------------------------------------------------------------------------------------------------------------- PRODUCT / / SYSTEM SOFTWARE / / DATABASE / / OTHER / / - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- REASON FOR PROJECT/WORK: - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------- ----------------------------------------------------- EXPECTED START DATE: EXPECTED COMPLETION DATE: - ------------------------------------------------------- ----------------------------------------------------- - ------------------------------------------------------- ----------------------------------------------------- NUMBER OF TOTAL STAFF REQUIRED: - ------------------------------------------------------- ----------------------------------------------------- TYPE OF STAFF REQUIRED (TYPE/HOW MANY) - ------------------------------------------------------- ----------------------------------------------------- - ------------------------------------------------------- ----------------------------------------------------- - ------------------------------------------------------- ----------------------------------------------------- - ------------------------------------------------------- ----------------------------------------------------- - ------------------------------------------------------- ----------------------------------------------------- - ------------------------------------------------------- ----------------------------------------------------- - -------------------------------------------------------------------------------- ---------------------------- ACCOUNTING APPROVAL: DATE: - -------------------------------------------------------------------------------- ---------------------------- - -------------------------------------------------------------------------------- ---------------------------- MANAGEMENT APPROVAL: DATE: - -------------------------------------------------------------------------------- ----------------------------
10 EXHIBIT C PERFORMANCE TERMS AND CONDITIONS By 10th day of each month, STI shall prepare and e-mail to IIG or its designee, the list of dedicated resources - managers, programmers, designers, technical writes and other specialists - available for IIG in the next three (3) months. The schedule of available specialists shall to be sent by STI for on-site support of installations and integration. By the 20th day of the month, IIG shall review and e-mail to STI the schedule with necessary corrections in quantity of resources and their assignments. If IIG does not provide any comments, the original STI's list will be deemed accepted. If IIG requires more resources than STI has proposed, IIG shall specify the skills of necessary specialists and STI shall use best efforts to find, hire and train them. [IIG guarantees the use of new hired specialists during at least six (6) months.] If IIG overestimates necessary resources and does not provide workload for them, STI will charge IIG for these resources as if they had been fully utilized. Both parties will use best efforts to resolve resource problem in shorter than the three (3) month notification term provided above in the case of urgent need. 2) STI will provide on-site specialists based on the following conditions: - IIG will cover expenses on round-trip transportation to the USA, per-diems, visa fees and any reasonable expenses. These expenses will be invoiced separately. - STI will buy travel medical insurance for technical resources while these resources are traveling in the US on assignment for IIG or its assignees. Medical expenses during assignments in the US will be billed to IIG with supporting documentation, and IIG will pay up to $100 per month for medical insurance. - IIG will cover expenses for accommodations in the USA, transportation within the USA and telephone charges which are not to exceed an agreed upon amount. - IIG will provide accommodations, assuring that the residence is in a safe place as determined by reasonable standards, with a separate room for each specialist and access to an equipped kitchen whenever possible. - Should it be determined that the planned stay of any STI specialist be extended for business purposes, IIG will be responsible for reasonable additional expenses which may occur as a result of the extension. - IIG will provide one free day and rental car with insurance, if requested, one time per two (2) months for an on-site specialist who has a valid drivers license and is legally able to drive in the US. The on-site specialist will be responsible for gas and any other costs associated with the rental (except rent and insurance fees). - IIG in no event may make any direct payments to STI's representatives visiting the USA, except as specified above. 11 EXHIBIT D SECURITY PROCEDURES 12 EXHIBIT E HOURLY RATES AND TERMS Hourly rates for STI's Specialists or services will be agreed to in separate agreements. 1. STI will provide IIG with Resource Tracking Sheets that account for the tasks accomplished, hours worked, supervisor sign-off and project assignment for each technical resource prior to the acceptance of any invoicing by IIG. 2. For the purposes of this contract, a working month is considered as 160 working hours. STI will not charge IIG for STI's specialists on vacation or sickness. 3. Per Diems for STI's representatives staying in the USA are fifty ($50) US dollars per each calendar day including any travel days so long as those days are business related or travel to and from sites. No Per Diem will be paid for personal vacations taken while in the USA. 4. IIG will provide either a phone call or an allotment in the amount of $100 per month which is to be used for each specialist personal phone calls. IIG assumes no other responsibility for personal phone charges and any amount spent over the allotted amount is the responsibility of the individual. Phone charges in excess of the allotted amount which are not directly paid by the individual but charged to IIG in any way, may be deducted from the amounts owed to the individual in per diem or deducted from the amounts owed to STI. Should such charges occur, prior notice will be given to STI and a separate invoice presented. 3 EX-10.7 15 EXHIBIT 10.7 SOFTWARE DEVELOPMENT AGREEMENT This Software Development Agreement (this "AGREEMENT") is entered into as of February 24, 1997 between Software Technology International ("STI") and Client Server Programs Ltd. ("CSP"). RECITALS A. Each party engages in research, development and consulting activities in the field of software engineering. B. STI has ongoing research, development and software engineering projects for which it would like CSP to provide software consulting services (the "PROJECTS"; each a "PROJECT"), which are or shall be described in Exhibit A, as attached hereto and as amended by the parties from time to time. AGREEMENT The parties agree as follows: 1. DEFINITIONS. As used herein: (a) The term "SOFTWARE" shall mean the results and products (interim and/or final) of the consulting services performed by CSP, its employees or representatives, for STI, whether pursuant to this Agreement or otherwise, whether tangible or intangible, including, without limitation, each and every invention, discovery, formula, trade secret, software program (including without limitation, object source code, flow charts, algorithms and related documentation), listing, routine, manual, specification, technique, product, concept, know-how, or similar property, whether or not patentable or copyrightable and whether or not embodied in any products, that are made, developed, perfected, designed, conceived or first reduced to practice by CSP, either solely or jointly with others, in the course and scope of the consulting services performed under this Agreement or otherwise, including all of the above that has come into being prior to the date of this Agreement. (b) The term "CONFIDENTIAL INFORMATION" shall mean all information developed by or disclosed or made available to CSP, its employees or representatives, whether in connection with this Agreement or prior to the date of this Agreement, which STI protects against unrestricted disclosure to others and information which is developed by or for CSP specifically for STI under this Agreement, including all Proprietary Information. (c) The term "PROPRIETARY INFORMATION" shall refer to any and all information or material of a confidential, proprietary or secret nature which is or may be applicable to, or related in any way to: (i) the past, present or future business of STI or of any corporation in control of STI (a "PARENT") or any majority-owned subsidiary (a "SUBSIDIARY") of STI; (ii) the research and development or investigations of STI or any Parent or any Subsidiary; or (iii) the business of any client, supplier or customer of STI or of any Parent or Subsidiary. Proprietary Information shall include, without limitation, trade secrets, processes, formulas, data, know-how, improvements, inventions and techniques relating to the Projects and information pertaining to customer lists, marketing plans and strategies, personnel directories and files and information concerning customers or vendors of STI or any Parent or Subsidiary. 2. ENGAGEMENT AND PERFORMANCE OF SERVICES. (a) ENGAGEMENT. STI hereby engages CSP to perform software engineering consulting services (the "SERVICES") in accordance with the terms and conditions of this Agreement. This Agreement will govern all services performed by CSP for STI, whether or not such services are Services as defined in this Agreement. (b) IDENTIFICATION OF PROJECTS AND SERVICES. EXHIBIT A contains a description of the Projects for which CSP initially may perform Services under this Agreement. In addition, STI may request specific consulting services from CSP for individual tasks relative to these projects or for tasks which are not related to any specific project. STI may also request that CSP participate or undertake other Projects. Project work or specific consulting services will be done by providing CSP with a detailed project specification and Project/Work Approval Form that has been signed by an authorized company representative. The Project/ Work Approval Forms and the list of those who are authorized to approve projects are set forth as Exhibit B (the "PROJECT/WORK APPROVAL FORM"). CSP may accept or decline each additional Project or assignment at its discretion. Compensation for additional Projects shall be on the terms set forth in Section 3, unless the parties agree otherwise. (c) PERFORMANCE STANDARDS. CSP shall perform the Services in accordance with the specifications and project timetables and under the direction of the STI Project Manager. The STI Project Manger will be responsible for assigning tasks for each Project and will be the ultimate evaluator of performance by a contract resource. Performance will be governed by the terms and conditions set forth in Exhibit C. (d) DELIVERY. CSP or its designates will deliver all interim and final software products, including source code and other related materials developed under this Agreement (the "SOFTWARE"), by ensuring that all current and active project sources and materials are available from the Source Code Repository Site (Star Team) on no less than a weekly basis. When the Source Code Repository Site (Star Team) is not available, or otherwise at STI's request, source code shall be delivered to STI or its designees in a standard medium (disk, Zip Disk, CD, etc.). (e) ACCESS SECURITY. CSP will, and will ensure that each of its employees, contractors and agent will, comply with STI's security procedures for control and management of source code or proprietary information and access to STI's installation sites and computer equipment, as set forth in Exhibit D, but shall not be responsible for any delays resulting from delays in obtaining access. (f) SUBCONTRACTING. With STI's consent, CSP may subcontract all or part of the Services to be performed by CSP for STI, provided that all such subcontractors must agree to and abide by terms and conditions substantially similar to those contained in this Agreement. Further, CSP shall require all such subcontractors to agree in writing that all of the work they perform for CSP shall be owned by STI in accordance with the provisions of Section 6. 2 (g) ACKNOWLEDGMENT OF PROPERTY RIGHTS. CSP shall require each of its employees, contractors and agents who perform any part of the Services to agree in writing that all of the Services he, she or it performs for CSP shall be owned by STI in accordance with the provisions of Section 6. 3. PAYMENT. (a) COMPENSATION FOR SERVICES; PAYMENT. (i) CSP will be paid for the Services on an hourly-rate basis, as specified in Exhibit E and any Project/Work Approval Form. Hourly and other charges regarding a specific Project may be changed by agreement of the parties upon 30 days notice. In no event will STI be obligated to pay CSP for any Services not specifically identified in Exhibit A or a Project/Work Approval Form. (ii) CSP will submit invoices for Services performed on a monthly basis, within 10 days of the end of each month. STI must notify CSP within 5 (five) working days after the date it receives the invoice of any disagreement with regard to the amount invoiced. If no notification of such disagreement is received from STI during such period, the invoice will be deemed accepted and shall be paid. STI will pay the amounts invoiced within 15 days of its receipt of the invoice. If an invoice is not paid on time, STI will pay to CSP a late payment fee of 0.1% of the invoiced amount per day. CSP will separately state the amount of any late payment fee on its next invoice. (b) REIMBURSEMENT OF EXPENSES. STI will not be obligated to pay to CSP the amounts of any expenses incurred in connection with the Services or otherwise unless such expenses are approved by STI in advance. CSP shall report such agreed-upon expenses separately on a CSP invoice to STI. (c) PURCHASES OF HARDWARE AND SOFTWARE. STI may request that CSP purchase specific hardware or software necessary to perform the Services under this Agreement. The cost of such purchase will be agreed upon in advance by STI and reported separately on an CSP invoice to STI. STI will reimburse CSP the agreed-upon cost of any such purchase. 4. TERM AND TERMINATION. This Agreement will continue in effect until terminated by either party in writing; provided that such termination will be effective on the last day of the sixth full calendar month following the date on which the terminating party gives the other party written notice of its intent to terminate this Agreement. If termination is initiated by CSP, CSP will continue to perform the Services under this Agreement until the date of the effectiveness of the termination, but monthly payments to CSP will not be less than 50% of average amount paid for each of the three months prior to CSP's notification of cancellation. 5. WARRANTIES. CSP warrants to STI as follows: (a) CSP will provide highly skilled programming staff which is experienced in programming for the Microsoft Windows operating systems and major Database Management systems using different programming languages, and possesses the additional expertise needed to perform the Services. CSP acknowledges that STI is relying upon the skill and expertise of CSP for the performance of the Services. 3 (b) The Software will be of original development by CSP and will not infringe upon or violate any patent, copyright, trade secret or other property right of any third party. Third-party software will not be incorporated in the Software without STI's prior written consent. If STI so consents, it shall be STI's responsibility to secure any necessary licenses for such third-party software. (c) CSP will use its best efforts to make such additions, modifications or adjustments to the Software as may be necessary to correct in the shortest possible time any problems or defects in the Software or related documentation discovered by CSP or reported to CSP by STI. This warranty shall be null and void in the event that STI modifies any part of the Software without the prior approval of CSP. CSP disclaims any warranties of merchantability and fitness for a particular purpose. 6. PROPERTY RIGHTS. All right, title and interest in and to the Software, and all products derived from the Software, shall at all times be and remain the sole and exclusive property of STI. The Software and all products developed by or for CSP for STI or derived therefrom, in the past or under this Agreement, shall be deemed to be works made for hire. Any patents, trademarks, copyrights or other intellectual property rights that may arise in connection with any products developed by or for CSP for STI or derived therefrom, in the past or under this Agreement, and all of the Software, shall be in the name of, and, if necessary, will be assigned by or for CSP and its employees and contractors to, STI. STI shall own all Proprietary Information related to all of the Projects, and all Proprietary Information created by or for CSP for or on behalf of STI prior to the effective date hereof. (a) CSP agrees to disclose promptly to STI any and all Software and Proprietary Information, whether or not patentable and whether or not reduced to practice, conceived or learned by CSP, its employees, contractors and other agents, either alone or jointly with others, which relate in any manner to the past, present or anticipated business, work, research or investigations of CSP on behalf of STI or any Parent or Subsidiary. (b) CSP further agrees to assist STI in every way (at STI's expense) to obtain and, from time to time, enforce patents on and other intellectual property rights in the Software in any and all countries. To that end, by way of illustration, but not limitation, CSP shall cause its employees, contractors and other agents to testify in any suit or other proceeding involving any of the Software, execute all documents which STI reasonably determines to be necessary or convenient for use in applying for and obtaining patents thereon and enforcing the same, and execute all necessary assignments thereof to STI or persons designated by it. CSP's obligation to assist STI in obtaining and enforcing patents for the Software in any and all countries shall continue beyond the termination of this Agreement. (c) The parties acknowledge that all Software developed by or for CSP in connection with each Project has been or is being created at the instance of STI, and further agree that such Software shall be deemed a work made for hire under the United States copyright laws and that STI shall have the unlimited right to supervise and control CSP and to direct CSP as to all aspects of the creation of such software. STI may alter such Software, add to it, or combine it with any other work or works, in its sole discretion. All original materials submitted by CSP to STI as part of the Software or as part of the process of creating the Software, including, but not limited to, source code, object code, listings, printouts, documentation, notes, flow charts and programming aides, shall be the property of STI, whether or not STI uses such material. No 4 rights in any of the foregoing are reserved to CSP. In the event that any such Software is determined by a court of competent jurisdiction not to be a work made for hire under the United States copyright laws, this Agreement shall operate as an irrevocable assignment of all original materials produced by CSP for STI under this Agreement and of all copyrights of every kind in such materials for the entire duration of the copyrights. No rights are reserved to CSP under this assignment. The parties agree that this assignment and any acts of STI undertaken for the purpose of securing, maintaining, or preserving the copyright in such software pursuant to this assignment, including recordation of this Agreement with the United States Copyright Office, are only precautionary and shall not be considered in determining the character of the software. CSP further agrees to forebear from asserting all moral rights or comparable rights that CSP may have in such materials, including without limitation, any right to prevent modification of the materials, any rights to receive attribution of authorship, or any right to control the materials. (d) CSP agrees to keep and maintain adequate and current records of all Software and Proprietary Information made, conceived, developed or perfected relating to the Projects, and that such records shall be available to, and remain the sole property of, STI at all times. 7. PROTECTION OF CONFIDENTIAL INFORMATION. (a) CONFIDENTIALITY. CSP agrees with respect to any Confidential Information developed by or disclosed to it hereunder: (i) to use such Confidential Information only for the purposes contemplated by this Agreement; (ii) to use the same methods and degree of care to prevent disclosure of such Confidential Information as it uses to prevent disclosure of its own proprietary and confidential information, including marking all confidential information in written or tangible form as "Confidential" and reducing all confidential oral communications to writing and so marking each such writing; and (iii) to return any Confidential Information in tangible form to STI at the request of STI and to retain no copies or reproductions thereof. (b) LIMITATIONS. CSP shall not be obligated to treat information as Confidential Information if such information: (i) is or becomes public knowledge without the fault of CSP; or (ii) is or becomes rightfully available to CSP without confidential restriction from, or pursuant to a distinct development contract with, a source not under STI's control; or (iii) is independently developed by CSP without use of the Confidential Information developed by or disclosed to CSP hereunder; provided, however, that the burden of proof of such independent development shall be upon CSP; or (iv) is disclosed pursuant to court or government action; provided, however, that CSP gives STI reasonable prior notice of disclosure pursuant to such court or government action. 5 8. LIMITATION OF LIABILITY. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY SPECIAL, CONSEQUENTIAL, INCIDENTAL, OR INDIRECT DAMAGES, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY, ARISING OUT OF THIS AGREEMENT, WHETHER OR NOT SUCH PARTY IS ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, AND NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY. 9. EMPLOYMENT ISSUES. (a) NON-HIRE. Neither party, nor any of their successors and assignees, will hire or enter into any contract with an employee or agent of the other party without the prior consent of the other party. This provision will remain in effect for one (1) year after the cancellation date of this Agreement. (b) FINDER'S FEE. CSP will provide STI with assistance in finding and training specialists in Belarus for employment by STI or its associates. For each specialist that CSP finds and trains, STI will pay to CSP $5,000, in two equal payments: $2,500 upon STI's hiring the specialist, and $2,500 180 days after the date of such hiring. [PLEASE VERIFY THAT THIS PROVISION IS CORRECT AS DRAFTED.] CSP will provide STI with all materials proving the qualification and education of a specialist. At STI's request, CSP will arrange for an interview of the specialist candidate with STI, at STI's expense. 10. ASSIGNMENT. This Agreement shall bind and inure to the benefit of the parties' respective successors and assigns. 11. MISCELLANEOUS PROVISIONS. (a) GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of California without regard to conflict of laws principles. In any action or proceeding to enforce rights under this Agreement, the prevailing party shall be entitled to recover costs and attorneys' fees. (b) NOTICES. All notices under this Agreement shall be in writing and delivered personally or by facsimile, commercial overnight courier, or certified or registered mail, return receipt requested, to a party at its respective address set forth below: STI: STI Prague, Czech Republic CSP: ------------------------- ------------------------- ------------------------- (c) ENTIRE AGREEMENT. This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter herein and merges and supersedes all prior discussions between them. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, shall be effective unless in writing signed by the party 6 against whom it is to be enforced. Nothing express or implied in this Agreement is intended to confer, nor shall anything herein confer, upon any person other than the parties and the respective successors or permitted assigns of the parties, any rights, remedies, obligations or liabilities whatsoever. (d) SEVERABILITY. If the application of any provision or provisions of this Agreement to any particular facts or circumstances shall be held to be invalid or unenforceable by any court of competent jurisdiction, then: (i) the validity and enforceability of such provision or provisions as applied to any other particular facts or circumstances and the validity of other provisions of this Agreement shall not in any way be affected or impaired thereby; and (ii) such provision or provisions shall be reformed without further action by the parties hereto and only to the extent necessary to make such provision or provisions valid and enforceable when applied to such particular facts and circumstances. (e) INDEPENDENT CONTRACTORS. The parties are independent contractors, and nothing in this Agreement shall be construed to create a joint venture or partnership. (f) FORCE MAJEURE. A party will not be deemed to have materially breached this Agreement to the extent that performance of its obligations or attempts to cure any breach are delayed or prevented by reason of an act of God, fire, natural disaster, accident, act of government, shortage of equipment, materials or supplies beyond the reasonable control of such party, or any other cause beyond the reasonable control of that party (a "FORCE MAJEURE EVENT"); provided that the party whose performance is delayed or prevented promptly notifies the other party of the nature and duration of the force majeure event. (g) COMPLIANCE WITH LAWS. Each party shall comply with all laws and regulations applicable to it. (h) DISPUTES AND REMEDIES. The parties agree to use their best efforts to resolve any dispute that may arise under the Agreement through good faith negotiations. No party shall commence any arbitration or litigation in relation to this Agreement unless it has first invited the chief executive or other responsible executive officer of the other party to meet with its own chief executive or other responsible executive officer for the purpose of endeavoring to resolve the dispute on mutually acceptable terms. Any dispute arising under the Agreement that cannot be settled by negotiation between the parties shall be submitted to arbitration under the rules of the [American Arbitration Association]. The decision of the arbitrator shall be final. The parties shall continue to perform their obligations under the Agreement as far as possible as if no dispute had arisen pending the final settlement of any matter referred to arbitration. Nothing in this clause shall preclude either party from taking steps to seek immediate equitable relief before any court of competent jurisdiction, if required. (i) COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, and such counterparts together shall constitute one and the same instrument. For purposes hereof, a facsimile copy of this Agreement, including the signature pages hereto, shall be deemed to be an original. 7 * * * 8 IN WITNESS WHEREOF, the parties have executed and delivered this Software Development Agreement as of the date first set forth above. CLIENT SERVER PROGRAMS LTD. SOFTWARE TECHNOLOGY INTERNATIONAL - ----------------------------- ---------------------------- Ivan Kraus Ko Director Date: Date: ----------------------- ----------------------- 9 EXHIBIT A INITIAL PROJECTS 1. AIM ACCS - AIM CENTRAL COMMUNICATION SERVER - THIS SOFTWARE PROJECT WILL PROVIDE A MECHANISM TO MOVE DATA BETWEEN ANY NUMBER OF SITES USING AN INSURANCE DATA WORKFLOW MODEL. THE STI PROJECT MANAGERS WILL PROVIDE THE CONSULTING PROGRAMMING STAFF ADDITIONAL PRODUCT DESCRIPTIONS AND ITEMS THAT WOULD COMPOSE A SPECIFICATION ON AN AS NEEDED BASIS. 2. AIM QV - QUICKVIEW - THIS PRODUCT WILL BE A REPLACEMENT FOR MULTIDATA ACCESS. THIS PRODUCT WILL MOVE PENDING DATA, COMMISSION DATA, INFORCE DATA, POLICIES, ELECTRONIC APPLICATIONS AND OTHER INFORMATION, FROM A CREATING SITE (PRIMARILY INSURANCE CARRIER FOR ALL EXCEPT THE ELECTRONIC APPLICATION) TO ANY NUMBER OF OTHER SITES. THE MOVEMENT OF DATA WILL BE MANAGED AND CONTROLLED BY THE ACCS. WITHIN THIS PROJECT THERE WILL BE THREE FORMS OF THE QUICKVIEW SYSTEM. THESE ARE AGENCY QV, CARRIER QV AND WEB QV. THE STI PROJECT MANAGERS WILL PROVIDE THE CONSULTING PROGRAMMING STAFF ADDITIONAL PRODUCT DESCRIPTIONS AND ITEMS THAT WOULD COMPOSE A SPECIFICATION ON AN AS NEEDED BASIS. 3. AIM GA - GENERAL AGENCY SYSTEM - THE AIM GENERAL AGENCY SYSTEM WILL BE BUILT TO BE A REPLACEMENT FOR THE MULTIDATA AMS SYSTEM. THIS SYSTEM WILL RETAIN ALL THE FUNCTIONALITY OF THE AMS SYSTEM PLUS HAVE THE FEATURE ADVANTAGES OF BUILDING THIS SYSTEM IN THE WINDOWS OPERATING ENVIRONMENT. THE STI PROJECT MANAGERS WILL PROVIDE THE CONSULTING PROGRAMMING STAFF ADDITIONAL PRODUCT DESCRIPTIONS AND ITEMS THAT WOULD COMPOSE A SPECIFICATION ON AN AS NEEDED BASIS. 4. AIM ITS - INSURANCE TELE-INTERVIEW SYSTEM -AIM ITS WILL BE A UNIQUE SYSTEM THAT IS DESIGNED FOR CONDUCTING PART 1 AND PART 2 INSURANCE INTERVIEWS THOUGHT A TELEMARKETING SERVICE. THE STI PROJECT MANAGERS WILL PROVIDE THE CONSULTING PROGRAMMING STAFF ADDITIONAL PRODUCT DESCRIPTIONS AND ITEMS THAT WOULD COMPOSE A SPECIFICATION ON AN AS NEEDED BASIS. 5. AIM DMS - DIRECT MARKETING SYSTEM -AIM DMS IS A SYSTEM DESIGNED TO BE A PLATFORM FROM WHICH TO CONDUCT TELEPHONE BASED SALES AND MARKETING OF INSURANCE. THIS PRODUCT IS BASED ON EXISTING STI DESIGNS. THE STI PROJECT MANAGERS WILL PROVIDE THE CONSULTING PROGRAMMING STAFF ADDITIONAL PRODUCT DESCRIPTIONS AND ITEMS THAT WOULD COMPOSE A SPECIFICATION ON AN AS NEEDED BASIS. 6. GENERAL WORK - IN ADDITION TO THE PROJECTS DESCRIBED ABOVE, CSP WILL ALSO BE REQUESTED TO PROVIDE ADDITIONAL PROGRAMMING AND CONSULTING SERVICES FOR THE CREATING OF UTILITIES AND OTHER PRODUCTS NECESSARY TO SUPPORT THE AIMSUITE OF SOFTWARE PROJECTS. IN EACH CASE, A STI PROJECT MANAGER WILL PROVIDE THE CONSULTING PROGRAMMING STAFF ADDITIONAL PRODUCT DESCRIPTIONS AND ITEMS THAT WOULD COMPOSE A SPECIFICATION ON AN AS NEEDED BASIS. EXHIBIT B PROJECT AND WORK APPROVAL FORM
- ------------------------------------------------------- ----------------------------------------------------- DATE: REQUESTER: - ------------------------------------------------------- ----------------------------------------------------- - ------------------------------------------------------- ----------------------------------------------------- CHANGE REQUEST BY: DEPARTMENT: - ------------------------------------------------------- ----------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- PROJECT/TASK NAME: - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------- ----------------------------------------------------- CHANGE IMPACT: LOW / / NORMAL / / HIGH / / - ------------------------------------------------------- ----------------------------------------------------- DESCRIPTION OF PROJECT/WORK: - ------------------------------------------------------------------------------------------------------------- PRODUCT / / SYSTEM SOFTWARE / / DATABASE / / OTHER / / - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- REASON FOR PROJECT/WORK: - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------- ----------------------------------------------------- EXPECTED START DATE: EXPECTED COMPLETION DATE: - ------------------------------------------------------- ----------------------------------------------------- - ------------------------------------------------------- ----------------------------------------------------- NUMBER OF TOTAL STAFF REQUIRED: - ------------------------------------------------------- ----------------------------------------------------- TYPE OF STAFF REQUIRED (TYPE/HOW MANY) - ------------------------------------------------------- ----------------------------------------------------- - ------------------------------------------------------- ----------------------------------------------------- - ------------------------------------------------------- ----------------------------------------------------- - ------------------------------------------------------- ----------------------------------------------------- - ------------------------------------------------------- ----------------------------------------------------- - ------------------------------------------------------- ----------------------------------------------------- - -------------------------------------------------------------------------------- ---------------------------- ACCOUNTING APPROVAL: DATE: - -------------------------------------------------------------------------------- ---------------------------- - -------------------------------------------------------------------------------- ---------------------------- MANAGEMENT APPROVAL: DATE: - -------------------------------------------------------------------------------- ----------------------------
2 EXHIBIT C PERFORMANCE TERMS AND CONDITIONS By 10th day of each month, CSP shall prepare and e-mail to STI or its designee, the list of dedicated resources - managers, programmers, designers, technical writes and other specialists - available for STI in the next three (3) months. The schedule of available specialists shall to be sent by CSP for on-site support of installations and integration. By the 20th day of the month, STI shall review and e-mail to CSP the schedule with necessary corrections in quantity of resources and their assignments. If STI does not provide any comments, the original CSP's list will be deemed accepted. If STI requires more resources than CSP has proposed, STI shall specify the skills of necessary specialists and CSP shall use best efforts to find, hire and train them. [STI guarantees the use of new hired specialists during at least six (6) months.] If STI overestimates necessary resources and does not provide workload for them, CSP will charge STI for these resources as if they had been fully utilized. Both parties will use best efforts to resolve resource problem in shorter than the three (3) month notification term provided above in the case of urgent need. 2) CSP will provide on-site specialists based on the following conditions: - STI will cover expenses on round-trip transportation to the USA, per-diems, visa fees and any reasonable expenses. These expenses will be invoiced separately. - CSP will buy travel medical insurance for technical resources while these resources are traveling in the US on assignment for STI or its assignees. Medical expenses during assignments in the US will be billed to STI with supporting documentation, and STI will pay up to $100 per month for medical insurance. - STI will cover expenses for accommodations in the USA, transportation within the USA and telephone charges which are not to exceed an agreed upon amount. - STI will provide accommodations, assuring that the residence is in a safe place as determined by reasonable standards, with a separate room for each specialist and access to an equipped kitchen whenever possible. - Should it be determined that the planned stay of any CSP specialist be extended for business purposes, STI will be responsible for reasonable additional expenses which may occur as a result of the extension. - STI will provide one free day and rental car with insurance, if requested, one time per two (2) months for an on-site specialist who has a valid drivers license and is legally able to drive in the US. The on-site specialist will be responsible for gas and any other costs associated with the rental (except rent and insurance fees). - STI in no event may make any direct payments to CSP's representatives visiting the USA, except as specified above. 3 EXHIBIT D SECURITY PROCEDURES 4 EXHIBIT E HOURLY RATES AND TERMS 1. Hourly Rates of CSP's specialists are:
SPECIALIST RATE, USD PER HOUR Any CSP's specialist when on-site at STI or its associates $20.00 Project Manager $15.00 Lead Programmer $15.00 Programmer $15.00 Technical Writer $10.00 Testers $10.00 Designer $10.00 Testing Laboratory Staff $4.50 Data Entry $4.50
2. Together with each monthly invoice, CSP will provide STI with Labor Accounting Sheets identifying each project assignment and listing tasks accomplished and working hours spent on each task for each specialist named in the invoice. 3. For the purpose of this agreement, a working month is considered as 160 working hours. CSP will not charge STI for CSP's specialists on vacation or otherwise absent. 4. CSP will provide specialists on-site in the USA or the Czech Republic on the following conditions: - A specialist's stay in the USA will not exceed ninety (60) calendar days, absent a written agreement between CSP and STI to the contrary. A specialist's stay in the USA will not exceed one hundred eighty calendar days during one calendar year. - STI will pay for round-trip transportation of each on-site specialist to the USA or the Czech Republic, as applicable, per-diems, visa fees and any other reasonable charges associated with traveling. These expenses will be invoiced separately. - STI will pay for accommodations in the USA or the Czech Republic, as applicable, transportation within the USA or the Czech Republic, as applicable, and telephone charges for each specialist's personal phone calls in the amount of $100 for each month the specialist is on-site. Any amount spent over this limit will be the responsibility of the individual. STI will assure that the accommodations are in a safe place as determined by reasonable standards, with a separate room for each specialist and access to an equipped kitchen whenever possible. - STI will pay a per diem for each on-site specialist staying in the USA in the amount of fifty ($50) US dollars per calendar day, including travel days that are business related or are spent traveling to and from sites. No per diem will be paid for personal vacations taken while in the USA . Per Diems for CSP's representatives staying in Czech Republic are determined by Czech legislation and shall be paid in Czech currency. [QUESTION: DO WE KNOW WHAT AMOUNTS ARE REQUIRED BY CZECH LAW?] - Should it be determined that the planned stay of any CSP specialist should be extended for business purposes, STI will be responsible for reasonable additional expenses which may occur as a result of the extension. - STI will provide one free day per month and will pay for the rental of a car, including insurance, if requested, for an on-site specialist who has a valid driver license and is legally able to drive in 5 the US or the Czech Republic, as applicable. The on-site specialist will be responsible for gas and any other costs associated with the rental (except the rent and insurance fees). - In no event will STI or its associates make any direct payments to any specialist on-site in the USA or the Czech Republic, except as specified above. 6 EX-10.8 16 EXHIBIT 10.8 OFFICE LEASE OF THE BUILDING OWNERS AND MANAGERS ASSOCIATION OF SAN FRANCISCO THIS LEASE, MADE THIS 19 DAY OF MAY 1997 BETWEEN COAST COUNTIES PROPERTY MANAGEMENT INC. LANDLORD, AND SELECTQUOTE INSURANCE SERVICES AS TENANT. W I T N E S S E T H SECTION 1. PREMISES Landlord hereby leases to Tenant and Tenant hereby hires from Landlord those certain premises (hereinafter called "PREMISES") commonly known as SUITE 304 consisting of approximately 3,846 rentable square feet and highlighted on EXHIBIT A, attached hereto and by this reference made a part hereof, said premises being situated on the 3rd. floor that certain building (hereinafter called "BUILDING") known as 657 MISSION ST., SAN FRANCISCO, CALIFORNIA, 94105. Said letting and hiring is upon and subject to the terms, covenants and conditions herein set forth and Tenant covenant as material part of the consideration for this Lease to keep and perform each and all of said terms, covenants and conditions by it to be kept and performed and that this Lease is made upon the condition of such performance. SECTION 2. PURPOSE The premises shall be used for general office purposes and for no other use or purpose without the prior written consent of Landlord. SECTION 3. TERM The term of this Lease shall be for 5 YEARS and 4 MONTHS, commencing on the 1ST day of AUGUST 1997, or upon Tenant's moving files into the premises and ending on the 31ST day of DECEMBER, 2002 (the "LEASE TERM"). SECTION 4. POSSESSION If Landlord, for any reason whatsoever, cannot deliver possession of the said premises to Tenant on JUNE 21, 1997, this Lease shall not be void or voidable, nor shall Landlord be liable to Tenant for any loss or damage resulting therefrom, but in that event there shall be a proportionate reduction of rent covering the period between the commencement of the said term and the time when Landlord can deliver possession. If possession of the premises is not delivered to Tenant within six months from the scheduled commencement date, this Lease will terminate. Should Landlord tender possession of the premises to Tenant prior to the date specified for the commencement of the term, and Tenant accept such prior tender, such prior occupancy shall be subject to all terms, covenants, and conditions of this Lease, including the payment of rent. No delay in delivery of possession shall operate to extend the term hereof. Within 10 days after written request from Landlord, Tenant shall execute and return to Landlord an acknowledgment of the commencement date of the term of this lease. SECTION 5. RENT 5(a) On or before the first day of each calendar month and ADJUSTED PER PARAGRAPH 45 ITEM 5. During the term hereof Tenant shall pay to Landlord, as minimum monthly rent for the premises, the sum of THREE THOUSAND EIGHT HUNDRED FORTY SIX AND NO/100 DOLLARS ($3,846.00). The minimum monthly rent for any partial month shall be prorated at the rate of 1/30 of the minimum monthly rent per day. Said rent shall be paid by Tenant to Landlord, in advance without deduction or offset, in lawful money of the United States of America at COAST COUNTIES PROPERTY MANAGEMENT, 55 NEW MONTGOMERY ST., SUITE 200, SAN FRANCISCO, CA 94105, or to such other person or at such other place as Landlord may from time to time designate in writing. (ALL CHECKS ARE TO BE MADE OUT TO COAST COUNTIES PROPERTY MANAGEMENT.) Landlord, at Landlord's option, may demand by written notice to Tenant that all future payments be made by Tenant hereunder shall be in the form of either a money order, certified bank check or cashier's check. 5(b) All charges and other amounts of any kind payable by Tenant to Landlord pursuant to this Lease shall be deemed additional rent. Landlord shall have the same remedies for default in the payment of additional rent as for default in the payment of basic rent and additional rent are collectively sometimes hereinafter referred to as rent. 5(c) All rent payable by Tenant to Landlord hereunder, if not received by Landlord when due, shall bear interest from the due date until paid at the publicly announced prime rate or reference charged on such due date by the San Francisco Main Office of Bank of America, N.T. & S.A. (or any successor bank) for a short term, unsecured loans to its most creditworthy borrowers, plus four percent (4%) per annum, but in no event shall such interest exceed the maximum rate permitted by law. Landlord's acceptance of any interest payments shall not constitute a waiver of Tenant's default with respect to the overdue amount or prevent Landlord from exercising any of the rights and remedies available to Landlord under Lease or by law. RENTAL ADJUSTMENT 5(d)The minimum rent provided for in Paragraph (5) above shall be adjusted on AUGUST 1, 1998 and annually thereafter of the Lease term by multiplying the same by the percentage of increase in the Consumer Price Index published by the United States Department of Labor Bureau of Labor Statistics (All Urban Consumers, San Francisco, Oakland - All Items), occurring during the preceding year and the amount thereby determined shall be added to the minimum rent payable during the preceding year. No failure by Landlord to notify Tenant of the adjustment of minimum rent provided for herein shall be construed as a waiver of the right of the Landlord to require such adjustment as of the date or dates when it should have been made, nor shall any such failure be held to estop Landlord from requiring such adjustment and Tenant does hereby knowingly waive the 2 provisions of any statute of limitations barring collection of any sum due to pursuant to any such adjustment because of the passage of time between the date such adjustments to the minimum annual rent ought to have been made and the date suit is brought to collect any sum due as a result thereof. Should the Bureau of Labor Statistics discontinue the publication of the above Index, or publish the same less frequently, or alter the same in some other manner, then Landlord shall adopt a substitute index or substitute procedure which reasonably reflects and monitors consumer prices. CPI SHALL NOT EXCEED 4% ANNUALLY. SECTION 6. RENTAL ADJUSTMENT 6(a) In addition to the monthly rent provided for in paragraph 5 hereof, Tenant shall pay to Landlord the sums set forth in the following subparagraphs. Tenant's percentage share as set forth below has been calculated by dividing the number of square feet of rentable area in the premises by the number of square feet of rentable area in the building. In the event the rentable area of the building is changed, the Tenant's percentage share shall be appropriately adjusted. Rentable area shall be based upon the Building Owners and Managers Association International (BOMA) standard method of floor measurement for office buildings. Tenant hereby approves and accepts Landlord's calculation of Tenant's current percentage share as set forth below. TAX INCREASES AND ASSESSMENTS OPERATING EXPENSE INCREASES SECTION 7. SECURITY Simultaneously with the execution of the lease, Tenant shall deposit with Landlord the sum of, SEVEN THOUSAND SIX HUNDRED NINETY TWO AND NO/100 DOLLARS ($7,692.00) of which sum THREE THOUSAND EIGHT HUNDRED FORTY SIX AND NO/100 DOLLARS ($3,846.00), shall be payment of the first month's rent and the balance thereof, namely, THREE THOUSAND EIGHT HUNDRED FORTY SIX AND NO/100 DOLLARS ($3,846.00), shall be held by Landlord as security for the faithful performance by Tenant of all the terms, covenants and conditions of this lease. Provided that at the end of the term Tenant shall have delivered up the Premises to Landlord, broom clean, and in the same condition as at the commencement date, reasonable wear excepted, said sum held as security shall be returned to Tenant. No interest shall be payable thereon and Landlord shall not be required to keep said sum in a separate account. If Tenant fails to pay any Rent or other charges due hereunder, or otherwise defaults with respect to any provision of this Lease, Landlord may at its option apply or retain all or any portion of the deposit for the payment of any Rent or other charge in default or the payment of any other sum to which Landlord may become obligated by Tenant's default, or to compensate Landlord for any loss damage which Landlord may suffer thereby. If Landlord so uses or applies all or any portion of the deposit, then within 10 days after demand therefor Tenant shall deposit cash with Landlord in an amount sufficient to restore the deposit to the full amount thereof, and Tenant's failure to do so shall be a material breach of this Lease. Landlord's application or retention of the deposit shall not constitute a waiver of Tenant's default to the extent that the deposit does not fully compensate Landlord for all losses or damages incurred by Landlord in connection with such default and shall not prejudice any other rights or remedies available to Landlord under this Lease or by law. 3 No security or guaranty which may now or hereafter be furnished Landlord for payment of the rent herein reserved or for performance by Tenant of the other covenants or conditions of this Lease shall in any way be a bar or defense to any action in unlawful detainer, or for the recovery of the premises, or to any action which Landlord may at any time commence for a breach of any of the covenants or conditions of this lease. SECTION 8. USES PROHIBITED Tenant shall not do or permit anything to be done in or about the premises nor bring or keep anything therein which in any way will increase the rate of or affect any fire or other insurance upon the building or any of its contents or cause a cancellation of any insurance policy covering said building or contents. Tenant shall not do or permit anything to be done in or about the premises which will in any way obstruct or interfere with the rights of other tenants or occupants of the building or injure or annoy them, or use or allow the premises to be used for any residential, immoral, unlawful or objectionable purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about the premises. No cooking devices or other odor causing devices, loudspeakers or other similar device, system or apparatus which can be heard or experienced outside the premises shall, without the prior written approval of Landlord, be used in or at the premises. Tenant shall not commit or suffer to be committed any waste in our upon the premises. "STANDARD MICROWAVING IS PERMITTED." SECTION 9. COMPLIANCE WITH LAW "SEE ATTACHED ADDENDUM" Tenant shall not use or permit anything to be done in or about the premises which will in any way conflict with any law, statute, ordinance or governmental rule, regulation or requirement now in force or which may hereafter be enacted or promulgated. Tenant, at its sole cost and expense, shall promptly comply with all laws, statutes, ordinances and governmental rules, regulations or requirements now in force or which may hereafter be in force and with the requirements of any board of fire underwriters or other similar body now or hereafter constituted relating to or affecting the condition, use of occupancy of the premises, excluding structural changes not related to or affected by Tenants improvements or acts. The judgment of any court of competent jurisdiction or the admission of Tenant in an action against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any law, statue, ordinance or governmental rule, regulation or requirement shall be conclusive of that fact as between Landlord and Tenant. Further, Tenant shall at all times and in all respects comply with all federal, state and local laws, ordinances and regulations ("Hazardous Material Laws") relating to hygiene, environmental protection, or the presence, use generation, storage, transportation or disposal of any toxic or hazardous substances, as the same may be amended from time to time, including without limitation, obtaining any required permits or licenses, and Tenant shall handle, treat, manage and dispose of any and all toxic or hazardous substances in strict conformity with all manufacturers' instructions and prudent business practices. SECTION 10. ALTERATIONS "SEE ATTACHED ADDENDUM" Tenant shall not make or suffer to be made any alterations, additions or improvements to or of the premises or any part thereof without the written consent of Landlord first had and obtained. Any alterations, additions, or improvements to or of said premises, including without limitation any partitions, movable or otherwise, and all carpeting, shall at once become a part of the realty and 4 belong to Landlord. Movable furniture, equipment and trade fixtures shall remain the property of Tenant. If Landlord consents to the making of any alterations, additions or improvements to the premises by Tenant, the same shall be made by Tenant at Tenant's sole cost and expense and any contractor or person selected by Tenant to make the same must first be approved of in writing by Landlord. Upon the expiration or sooner termination of the term Tenant, upon demand by Landlord, at Tenant's sole cost and expense, forthwith and with all due diligence shall remove any alterations, additions or improvements made by Tenant designated by Landlord to be removed, and Tenant, forthwith and with all due diligence, at its sole cost and expense, shall repair any damage to the premises caused by such removal. Tenant's obligation to remove any alterations, additions, improvements, fixtures and/or personal property and to repair any damage from such removal shall survive the termination of this Lease. Construction of the alterations, additions, or improvements shall be completed in accordance with drawings and specifications approved in advance in writing by Landlord, shall be carried out in a good and workmanlike manner, and shall comply with all applicable requirements of governmental authorities and such additional conditions as Landlord may reasonably impose. SECTION 11. REPAIR "SEE ATTACHED ADDENDUM" By entry hereunder upon the commencement of the term hereof, Tenant accepts the premises as being in good, sanitary order, condition and repair. Tenant, at Tenant's sole cost and expense, shall keep the premises and every part hereof in good condition and repair, damage thereto by fire, earthquake, act of God or the elements not caused by Tenant's negligent or willful act excepted, Tenant hereby waiving all rights to make repairs at the expense of the Landlord as provided by law, statute or ordinance now or hereafter in effect. Upon the expiration or sooner termination of the term hereof, Tenant shall surrender the premises to Landlord in the same condition as when received ordinary wear and tear and damage by fire, earthquake, act of God or the elements excepted, unless caused by Tenants negligent or willful act. It is specifically understood and agreed that Landlord has no obligation and has made no promises to alter, remodel, improve, repair, decorate or paint the premises or any part hereof and that no representations respecting the condition of the premises or the building have been made by Landlord to Tenant except as specifically set forth in EXHIBIT A Plans & Specifications attached hereto. There shall be no abatement of Rent and no liability to Landlord by reason of any injury or to interference with Tenant's business arising from the making of any repairs or performance of any maintenance obligations by the Landlord. SECTION 12. ABANDONMENT "SEE ATTACHED ADDENDUM" Tenant shall not vacate or abandon the premises at any time during the term hereof, and if Tenant shall abandon, vacate or surrender the premises or be dispossessed by process of law, or otherwise, any personal property belonging to Tenant and left on the premises shall be deemed to be abandoned, at the option of Landlord. SECTION 13. LIENS "SEE ATTACHED ADDENDUM" Tenant shall keep the premises and the building and the land upon which the building is situated free from any liens arising out of any work performed, materials furnished or obligations incurred by Tenant. Tenant shall in the event of the filing of any such lien, post any bond required to release the premises therefrom. Should Tenant fail to remove any such lien within (5) business days 5 after notice to do so from Landlord, Landlord may, in addition to any other remedies, record a bond pursuant to California Civil Code Section 3143 and all amounts incurred by Landlord shall have the right to post and keep posted on the Premises any notices that may be provided by law or which Landlord may deem to be proper for the protection of Landlord, the Premises and the building from such liens. SECTION 14. ASSIGNMENT AND SUBLETTING "SEE ATTACHED ADDENDUM" 14(a) Tenant shall not mortgage, pledge, hypothecate or encumber this Lease or any interest therein. Tenant shall not assign this Lease or sublet or suffer any other person (the agents and servants of Tenant excepted) to occupy or use the premises, or any part thereof, or any right or privilege appurtenant thereto without the prior written consent of Landlord first had and obtained, which consent shall not be unreasonably withheld. Landlord's consent to one assignment, subleasing or occupancy shall not be deemed to be a consent to any subsequent assignment, subleasing or occupancy. 14(b) Provided further and notwithstanding anything hereinbefore set forth In the event that at any time or from time to time during the term of this lease, Tenant desires to sublet all or any part of the Premises, Tenant shall notify the Landlord in writing (the "SUBLET NOTICE") of the terms of the proposed subletting, and the area so proposed to be sublet and shall give Landlord the right to sublet from Tenant such space (the "Sublet Space") on the same terms as those contained in the Sublet Notice. Such option shall be exercisable by Landlord in writing for a period of 20 days after receipt of the Sublet Notice. If Landlord fails to exercise its option and Tenant desires to complete the proposed sublease, Tenant shall deliver an executed copy of such sublease to Landlord in order to obtain its consent as required in paragraph 14(a) above. If Landlord consents to sublease, then such sublease shall be subject to and made upon the following terms: (i) any such sublease shall be subject to the terms of this Lease and the term thereof may not extend beyond the expiration of the term of this Lease; (ii) 50% of the difference between all sums payable by subtenant and all rent due hereunder for the sublease premises during the term of the sublease, less Tenant's reasonable costs of subletting, shall be payable to Landlord as additional rent hereunder. (iii) no subtenant shall have a right to further sublease its premises. If Landlord fails to exercise such option, and Tenant fails to consummate a sublease with a third party within 60 days after the expiration of Landlord's option period on the same terms and conditions contained in the Sublet Notice, Tenant shall be required to deliver a new Sublet Notice to Landlord and comply with the terms and conditions set forth above before any further subletting shall be permitted. 14(c) Regardless of Landlord's consent, no subletting nor assignment shall release Tenant of Tenant's obligation or alter the primary liability of Tenant to pay rent and perform other obligations of tenant under this lease. 6 14(d) In no event shall Tenant assign this Lease or sublet the premises or any portion thereof to any then, existing or prospective tenant of said building. 14(e) Tenant shall pay Landlord's reasonable costs incurred in connection with Tenant's request to assign this lease or sublet the premises, regardless whether or not the Landlord consents to the proposed transfer. SECTION 15. INDEMNIFICATION OF LANDLORD Tenant agrees to indemnify and defend Landlord against and save Landlord harmless from any and all loss, cost, liability, damage and expense, including without limitation, penalties, fines and reasonable attorneys fees and costs, incurred in connection with or arising from any cause whatsoever in, on or about the Premises, including without limiting the generality of the foregoing: (1) any default by Tenant in the observance or performance of any of the terms, covenants or conditions of this Lease on Tenant's part to be observed or performed, or (2) the use of occupancy or manner of the use or occupancy of the Premises by Tenant or any other person or entity claiming through or under Tenant, including without limitation, the presence, use, generation, storage, transportation or disposal of any toxic or hazardous substances, or (3) the condition of the Premises or any occurrence or happening on the Premises from any cause whatsoever, or (4) any acts, omissions or negligence of Tenant or of Tenant's agents, contractors, employees, subtenants, licensees, invitees or visitors or any such person or entity, in, on or about the Premises or the Building, either prior to the commencement of, during, or after the expiration of the term, including without limitation any acts, omissions or negligence in the making or performing of any alterations. Tenant further agrees to indemnify, defend and save harmless Landlord, Landlord's agents and the lessors under any ground or underlying leases, from and against any and all loss, cost, liability, damage and expense, incurred in connection with or arising from any claims by any persons by reason of injury to persons or damage to property occasioned by any use, occupancy condition, occurrence, happening, act, omission or negligence referred to in the preceding sentence. In the event any action or proceeding is brought against Landlord for any claim against which Tenant is obligated to indemnify Landlord hereunder, Tenant upon notice from Landlord shall defend such action or proceeding at Tenant's sole expense by counsel approved by Landlord, which approval shall not be unreasonably withheld. The provisions of this paragraph 15 shall survive the expiration or earlier termination of this lease. SECTION 16. INSURANCE "SEE ATTACHED ADDENDUM" Tenant agrees to keep in force during the term hereof, at Tenant's expense, public liability and property damage insurance. Said policy shall name COAST COUNTIES PROPERTY MANAGEMENT INC. AND THE BERNHEIM FAMILY TRUST LANDLORD as a additional insured, and shall insure Landlord's contingent liability as respects acts, or omissions of Tenant, shall be issued by an insurance company licensed to do business in the state where the premises are located; and shall provide that said insurance shall not be canceled or amended unless thirty (30) days prior written notice to Landlord is first given. Said policy or a certificate thereof shall be delivered to Landlord by Tenant prior to the commencement of the term and each renewal of such insurance. Tenant hereby waives all rights of subrogation against Landlord to which any insurance carrier may at any time become entitled under any policy of insurance carried by Tenant. 7 SECTION 17. UTILITIES Landlord shall furnish to the premises, during reasonable hours of generally recognized business days, to be determined by Landlord, and subject to the rules and regulations of the building, water and heat required in Landlord's judgment for the comfortable use and occupation of the premises for such purposes, and elevator service. Landlord shall not be liable or responsible for janitorial or garbage service. Tenant shall not be entitled to any abatement or reduction of rent by reason of Landlord's failure to furnish any of the foregoing when such failure or delay is caused by accident, breakage, repairs, strikes, lockouts or other labor disturbances or labor disputes of any character, or is caused directly or indirectly by the limitation, curtailment, rationing or restrictions, on use of water, electricity, gas or any other form of energy serving the premises or the building, or by any other cause, similar or dissimilar, beyond the reasonable control of Landlord. Landlord shall not be liable under any circumstances for loss of business or injury to property, however occurring, through or in connection with or incidental to failure to furnish any of the foregoing. TENANT SHALL PAY AND PROVIDE FOR ALL SERVICES AND UTILITIES NOT FURNISHED BY LANDLORD. SAID SPACE IS SEPARATELY METERED FOR ELECTRICITY AND WILL BE READ BY MANAGEMENT COMPANY AND INVOICED MONTHLY. Tenant will not, without the written consent of Landlord, use any apparatus or device in the premises which will in any way increase the amount of electricity, cooking capacity or water usually furnished or supplied for use of the premises for general office purposes or connect with electric current, except through existing electrical outlet in the premises, or water pipes, any apparatus or device for the purpose of using electric current or water. If Tenant shall require water or electric current in excess of that customarily furnished or supplied to their tenants of the building for use of their premises for general office purposes, Tenant shall first procure the consent of landlord, which Landlord may refuse, to the use thereof and Landlord may cause an electric current or water meter to be installed in the premises so as to measure the amount of excess electric current consumed, as shown by said meters, at the rates charged for such services by the local public utility furnishing the same, plus any additional expense incurred in keeping account of the excess electric current or water so consumed. SECTION 18. PERSONAL PROPERTY AND OTHER TAXES Tenant shall pay, before delinquency, any and all taxes levied or assessed and which become payable during the term hereof upon Tenant's equipment, furniture, fixtures and other personal property located in the premises, including carpeting installed by Tenant even though said carpeting has become a part of the lease premises; and any and all taxes or increases therein levied or assessed on Landlord or Tenant by virtue of alterations, additions or improvements to the premises made by Tenant or Landlord at Tenant's request. In the event said taxes are charged to or paid or payable by Landlord, Tenant, forthwith upon demand therefore, shall reimburse landlord of all such taxes paid by Landlord. SECTION 19. RULES AND REGULATIONS Tenant shall faithfully observe and comply with the rules and regulations printed on or annexed to this Lease and all modifications of and additions thereto applicable to all tenants of the 8 building from time to time put into effect by Landlord of which Tenant shall have notice. Landlord shall not be responsible to Tenant for rite nonperformance by any other tenant or occupant of the building of any of said rules and regulations. SECTION 20. HOLDING OVER If Tenant holds possession of the premises after the term of this lease, Tenant shall, (at option of Landlord to be exercised by Landlord's giving written notice to Tenant and not otherwise) become a Tenant from month to month upon the terms and conditions herein specified, so far as applicable, at a monthly rental of ONE HUNDRED FIFTEEN PERCENT (115%) OF THE LAST MONTHLY RENT payable in advance, in lawful money, and shall continue to be such Tenant until thirty (30) days after Tenant shall have given to Landlord or Landlord shall have given to Tenant a written notice of intent to terminate such monthly tenancy. Unless landlord shall exercise the option hereby given him, Tenant shall be Tenant at sufferance only, whether or not Landlord shall accept any rent from Tenant while Tenant is so holding over. SECTION 21. SUBORDINATION "SEE ATTACHED ADDENDUM" This Lease shall be subject and subordinate at all times to all ground or underlying leases which may now exist or hereafter be executed affecting the building and/or the land upon which the building is situated and to the lien of any mortgages or deeds of trust in any amount or amounts whatsoever now or hereafter placed on or against said building and/or land or on or against the Landlord's interest or estate therein or on or against any ground or underlying lease without the necessity of having further instruments on the part of Tenant to effectuate such subordination. Notwithstanding the foregoing, Tenant covenants and agrees to execute and deliver, upon demand, such further instruments evidencing such subordination of the Lease to such ground or underlying leases and to the lien of any such mortgages or deeds of trust as may be required by Landlord. Tenant hereby irrevocably appoints Landlord the attorney in fact of Tenant to execute and deliver any such instrument or instruments for or in the name of Tenant. In the event of termination any ground or underlying lease, or in the event of foreclosure or exercise of any power of sale under any mortgage or deed of trust superior to this Lease or to which this Lease is subject or subordinate, upon Tenant's attornment to the Lessor under such ground or underlying lease or to the purchaser at any foreclosure sale or sale pursuant to the exercise of any power of sale under any mortgage or deed of trust, this Lease shall not terminate and Tenant shall automatically be and become the Tenant of said Lessor under such ground or underlying lease or to said purchaser, whichever shall make demand therefore. SECTION 22. ENTRY BY LANDLORD "SEE ATTACHED ADDENDUM" Landlord reserves and shall at any and all reasonable times have the right to enter the premises to inspect the same, and any other service to be provided by Landlord to Tenant hereunder, to submit the premises to prospective purchasers or tenants, to post notices of non-responsibility, and to alter, improve or repair the premises and any portion of the building without abatement of rent and may for the purpose erect scaffolding and other necessary structures where reasonably required by the character of the work to be performed, always providing the entrance to the premises shall not be blocked thereby and further providing that the business of tenant shall not be interfered with unreasonably. Tenant hereby waives any claim for damages for any injury or inconveniences to or 9 interference with Tenant's business, any loss of occupancy of quiet enjoyment of the premises and other loss occasioned by such entry. For each of the aforesaid purposes, Landlord shall at all times have and retain a key with which to unlock all of the doors in, upon and about the premises excluding Tenant's vaults and safes, and Landlord shall have the right to use any and all means which Landlord may deem proper to open said doors in an emergency in order to obtain entry to the premises and any entry to the premises obtained by Landlord by any of said means, or otherwise shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into or a detainer of the premises or an eviction of tenant from the premises or any portion thereof. SECTION 23. INSOLVENCY OR BANKRUPTCY Either (a) the appointment of a receiver to take possession of all of the assets of Tenant, (b) an assignment by Tenant for the benefit of creditors, or (c) any action taken or suffered by Tenant under any insolvency, bankruptcy or reorganization act shall constitute a breach of this Lease by Tenant. Upon the happening of any such event this Lease shall terminate five (5) days after written notice of termination from Landlord to Tenant. In no event shall this Lease be assigned or assignable by reason of any voluntary or involuntary bankruptcy proceedings nor shall any rights or privileges hereunder be an asset of Tenant in any bankruptcy, insolvency or reorganization proceedings. SECTION 24. DEFAULT "SEE ATTACHED ADDENDUM" In the event of any breach or default of Lease by Tenant then Landlord, besides any other rights and remedies of Landlord at law or equity, shall have the right either to terminate Tenant's right to possession of the premises and thereby terminate this Lease or to have this Lease continue in full force and effect with Tenant at all times having the right to possession of the premises. Should Landlord elect to terminate Tenant's right to possession of the premises and terminate this Lease, the Landlord shall have the immediate right of entry and may remove all persons and property from the premises. Such property so removed may be stored in a public warehouse or elsewhere at the cost and for the account of Tenant. Upon such termination Landlord, in addition to any other rights and remedies (including rights and remedies under Subparagraphs (1), (2) and (4) of Subdivision (a) of Section 1951.2 of the California Civil Code of any amendment thereto), shall be entitled to recover from Tenant the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Tenant proves could be reasonably avoided The worth at the time of award of the amount referred to in subparagraphs (1) and (2) of Subdivision (a) of Section 1951.2 of the California Civil Code shall be computed by allowing interest at the maximum rate allowed by law. The worth at the time of the award of the amount referred to in subparagraph (3) of Subdivision (a) Section 1951.2 of the California Civil Code shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of the award plus 1%. Any proof by Tenant of the amount of rental loss that could be reasonably avoided shall be made in the following manner: Landlord and Tenant shall each select a licensed real estate broker in the business of renting property of the same type and use as the premises and in the same geographic vicinity and such two real estate brokers shall select a third licensed real estate broker and the three 10 licensed real estate brokers so selected shall determine the amount of rental loss that could be reasonably avoided for the balance of the term of this Lease after the time of award. The decision of the majority of said licensed real estate brokers shall be final and binding upon the parties hereto. Should Landlord, following any breach or default of this Lease by Tenant, elect to keep this Lease in full force and effect, with Tenant retaining the right to possession of the premises (notwithstanding the fact the Tenant may have abandoned the leased premises), then Landlord, besides the rights and remedies specified in Section 1951.4 of the California Civil Code and all other rights and remedies Landlord may have at law or equity, shall have the right to enforce all of Landlord's rights and remedies under this Lease, including but not limited to the right to recover the installments of rent as they become due under this Lease. Notwithstanding any such election to have this Lease remain in full force and effect, Landlord may at any time thereafter elect terminate Tenant's right to possession of said premises and thereby terminate this Lease for any previous breach or default which remains uncured, or for any subsequent breach or default. SECTION 25. DESTRUCTION OR DAMAGE 25(a) In the event the Premises or a portion of the Building is damaged by fire or other insured casualty, Landlord shall diligently repair the same to the extent possible with the insurance proceeds received by Landlord, subject to the provisions of this Section hereinafter set forth, if such repairs can in Landlord's opinion be made within 90 days after issuance of a building permit therefor under the laws and regulations of federal, state and local governmental authorities having jurisdiction thereof. In such event this Lease shall remain in full force and effect except that if such damage is not the result of the negligence or willful misconduct of Tenant or Tenant's agents, contractors, employees, subtenants, licensees, invitees or visitors, an abatement of basic rent shall be allowed Tenant for such part of the Premises as shall be rendered unusable by Tenant in the conduct of its business during the time such part is so unusable. Notwithstanding the foregoing, if such damage shall occur during the final year of the term of this Lease, Landlord shall not be obligated to repair such damage, but may instead elect to terminate this Lease upon written notice given to Tenant within 30 days after the date of such fire or other casualty, in which event this Lease shall terminate as of the termination date specified in Landlord's notice. 25(b) If such repairs cannot in Landlord's opinion be made within 90 days after issuance of a building permit therefor or if such damage is uninsured, Landlord may elect upon notice to Tenant given 60 days after the date of such fire or other casualty to (i) repair or restore such damage, in which event this Lease shall continue in full force and effect, but basic rent shall be partially abated as hereinabove in this Section provided or (ii) terminate this Lease in which event this Lease shall terminate as of the termination date specified in Landlord's notice. 25(c) A total destruction of the Building automatically shall terminate this lease. Landlord and Tenant acknowledge that this Lease constitutes the entire agreement of the parties regarding events of damage or destruction, and Tenant waives the provisions of California Civil Code Sections 1932(2) and 1933(4) and any similar statute now or hereafter in force. 25(d) If the Premises are to be repaired under this Section, Landlord shall repair at its cost any injury or damage to the Building itself and the initial improvements made by Landlord pursuant 11 to EXHIBIT A Tenant shall pay the cost of repairing or replacing all other improvements in the Premises and Tenant's trade fixtures, furnishings, equipment and other personal property. SECTION 26. EMINENT DOMAIN If all or any part of the premises shall be taken or appropriated by any public or quasi-public authority under the power of eminent domain, and such taking will substantially impair Tenant's use of the premises for more than 90 days, either party hereto shall have the right, at its option, to terminate this Lease. If all or any part of the building of which the premises are a part shall be taken or appropriated by any public or quasi-public authority under the power of eminent domain, Landlord may terminate this Lease. In either of such events, Landlord shall be entitled to and Tenant upon demand of Landlord shall assign to Landlord any rights of Tenant to any and all income, rent, award, or any interest therein whatsoever which may be paid or made in connection with such public or quasi-public use or purposes, and Tenant shall have no claim against Landlord or the condemnor for the value of any unexpired term of this Lease. If a part of the premises shall be so taken or appropriated and neither party hereto shall elect to terminate this Lease, the rent thereafter to be paid shall be equitably reduced. SECTION 27. PLATS AND RIDERS Clauses, plats and riders, if any, signed by Landlord and Tenant and endorsed on or affixed to this Lease are a part hereof, and in the event of variation or discrepancy the duplicate original hereof, including such clauses, plats and riders, if any, held by Landlord shall control. SECTION 28. SALE BY LANDLORD "SEE ATTACHED ADDENDUM" In the event the original Landlord hereunder, or any successor owner of the building, shall sell or convey the Building, all liabilities and obligations on the part of the original Landlord, or such successor owner, under this Lease, accruing thereafter shall terminate, and thereupon all such liabilities and obligations shall be binding upon the new owner. Tenant agrees to attorn to such new owner. If any security be given by Tenant to secure the faithful performance of all or any of the covenants of this Lease on the part of tenant, Landlord may transfer and/or deliver the security, to the successor in interest of Landlord, and thereupon Landlord shall be discharged from any further liability in reference thereto. Except as set forth in this Paragraph 28, this Lease shall not be affected by any such sale or conveyance. "TENANT SHALL BE EXEMPTED FROM ANY TAX INCREASE FROM SALE OR TRANSFER OF THE PROPERTY DURING THE TERM OF THIS LEASE." SECTION 29. ESTOPPEL CERTIFICATES At any time and from time to time, upon not more than ten (10) days prior request by Landlord, Tenant shall execute, acknowledge and deliver to Landlord a statement certifying the date of commencement of this Lease, stating that this Lease is unmodified and in full force and effect (or if there have been modifications, that this Lease is in full force and effect as modified and the date and nature of such modifications) and the dates to which the rent has been paid, and setting forth such other as may reasonably be requested by Landlord. Landlord and Tenant intend that any such statement delivered pursuant to this paragraph may be relied upon by any mortgagee or the beneficiary of any Deed of Trust or by any purchaser or prospective purchaser of the building. Tenant hereby irrevocably appoints Landlord as its agent and attorney-in-fact to execute, 12 acknowledge and deliver any such certificate in the name of and on behalf of Tenant, in the event that Tenant fails to so execute, acknowledge and deliver any such certificate within 10 days after receipt thereof. Failure to comply with this provision shall be a material breach of this Lease by tenant giving Landlord all rights and remedies under paragraph 24 hereof, as well as a right to damages caused by the loss of a loan or sale, which may result from such failure by Tenant. SECTION 30. RIGHT OF LANDLORD TO PERFORM All covenants and agreements to be kept or performed by tenant under any of the terms of this Lease shall be performed by Tenant at Tenant's sole cost and expense and without any abatement of rent. If Tenant shall fail to pay any sum of money, other than rent required to be paid by it hereunder, or shall fail to perform any other act on its part be performed hereunder, and such failure shall continue for ten (10) days after written notice thereof of by Landlord, Landlord may, but shall not be obligated to, and without waiving and default of Tenant or releasing Tenant from any obligations of Tenant hereunder, make any such payment or perform any such other act on Tenant's part to be made or performed as in this Lease provided. All sums so paid by the Landlord and all necessary incidental costs, together with interest thereon at the rate of ten percent (10%) per annum from the day of such payment by the Landlord, shall be paid to Landlord forthwith on demand, and Landlord shall have (in addition to any other right or remedy of Landlord) the same rights and remedies in the event of nonpayment thereof by Tenant as in the case of default by Tenant in payment of rent. SECTION 31. ATTORNEY FEES If as a result of any breach or default on the part of Tenant under this Lease, Landlord uses the services of any attorney in order to secure compliance with this Lease, Tenant shall reimburse Landlord upon demand as additional rent for any and all attorneys' fees and expenses incurred by Landlord, whether or not formal legal proceedings are instituted. Should either party bring action against the other party, by reason of or alleging the failure of the other party to comply with any or all of its obligations hereunder, whether for declaratory or other relief, then the party which prevails in such action shall be entitled to its reasonable attorneys' fees and expenses related to such action, in addition to all other recovery or relief. A party shall be deemed to have prevailed in any such action (without limiting the generality of the foregoing ) if such action is dismissed upon the payment by the other party of the sums allegedly due or the performance of obligations allegedly not complied with, or if such party obtains substantially the relief sought by it in the action, irrespective of whether such action is prosecuted to judgment. In addition, if either party to this Lease becomes a party to or is involved in any way in any action concerning this Lease or the Premises by reason in whole or in part of any act, neglect, fault or omission of any duty by the other party, its employees or contractors, the party subjected to said involvement shall be entitled to reimbursement for any and all reasonable attorneys' fees and costs. SECTION 32. SURRENDER OF PREMISES The voluntary or other surrender of this Lease by Tenant or mutual cancellation thereof shall not work a merger and, at the option of Landlord, shall terminate all or any existing subleases or subtenancies, or at the option of Landlord, may operate as an assignment to Landlord of any or all such subleases or subtenancies. 13 SECTION 33. WAIVER The waiver by Landlord or Tenant of performance of any term, covenant or condition herein contained shall not be deemed to be a waiver of such term, covenant or condition or any subsequent breach of the same or any other term, covenant or condition herein contained. The subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular rent so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rent. SECTION 34. NOTICES All notices and demands which may or are required to be given by either party to the other hereunder shall be in writing. All notices and demands by Landlord to Tenant shall be delivered personally or sent by United States certified or registered mail, postage prepaid, addressed to Tenant at the premises, or to such other place as Tenant may from time to time by like notice designate. All notices and demands by Tenant to Landlord shall be delivered personally or sent by a nationally recognized Express mail carrier or United States certified or registered mail, postage prepaid, addressed to Landlord at COAST COUNTIES PROPERTY MANAGEMENT, 55 NEW MONTGOMERY ST., SUITE 200, SAN FRANCISCO, CA 94105 or such other place as Landlord may from time to time by like notice designate. SECTION 35. NOTICE TO SURRENDER At least ninety (90) days before the last day of the term hereof, Tenant shall give to Landlord a written notice of intention to surrender the premises on that date, but nothing contained herein or any failure to give such notice shall be construed as an extension of the term hereof or as consent of Landlord to any holding over by Tenant. SECTION 36. DEFINED TERMS AND MARGINAL HEADINGS The words "LANDLORD" and "TENANT", as used herein shall include the plural as well as the singular. Words used in masculine gender include the feminine and neuter. If there be more than one Tenant, the obligations hereunder imposed upon Tenant shall be joint and several. The marginal headings and titles to the paragraphs of the Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part hereof. SECTION 37. AUTHORITY OF PARTIES CORPORATE AUTHORITY. If Tenant is a corporation, each individual executing this Lease on behalf of said corporation represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said corporation, in accordance with a duly adopted resolution of the board of directors of said corporation or in accordance with the by-laws of said corporation, and that this Lease is binding upon said corporation in accordance with its terms. 14 SECTION 38. TIME AND APPLICABLE LAW Time is of the essence of this Lease and each and all of its provisions. This Lease shall in all respects be governed by the laws of the state in which the premises are located. SECTION 39. SUCCESSORS Subject to the provisions of Paragraph 14 hereof, the covenants and conditions herein contained shall be binding upon and inure to the benefits of the heirs, successors, executors, administrators and assigns of the parties hereto. SECTION 40. ENTIRE AGREEMENT This Lease constitutes the entire agreement between Landlord and Tenant and no promises or representations, express or implied, either written or oral, not herein set forth shall be binding upon or inure to the benefit of Landlord or Tenant. This Lease shall not be modified by any oral agreement, either express or implied, and all modifications hereof shall be in writing and signed by both Landlord and Tenant. SECTION 41. LATE CHARGE In the event Tenant shall fail to pay any rents or sums due within (10) days from the date such sums are hereunder on or before the due date herein provided, then and in that event the amount so due and unpaid shall bear a late charge equal to five percent (5%) of the amount due together with interest accruing from the date due at the maximum interest rate permitted by law, which late charge and interest shall be payable forthwith upon demand. (The foregoing shall be in addition to any other right or remedy of Landlord.) RETURNED CHECK CHARGE IS $25.00. If Tenant shall fail to timely pay the monthly rent, returned check charges, late charges or any other charges to be paid by Tenant hereunder promptly, when due, on three occasions in any twelve month period or if Tenant shall be assessed or become subject to late charge or returned check charge on three or more occasions in any continuous twelve month period, then Tenant shall be deemed to have committed an incurable breach of this lease agreement. As a result of such breach, Tenant shall be deemed to have forfeited all rights under this lease agreement and Landlord, at Landlord's option may terminate this agreement immediately upon the occurrence of such breach. SECTION 42. JOINT AND SEVERAL LIABILITY Should Tenant consist of more than one person or entity, they shall be jointly and severally liable on this Lease. SECTION 43. LIGHT, AIR AND VIEW The diminution of light, air or view by any structure which hereafter be erected whether or not by Landlord) shall not entitle Tenant to any reduction of rent, result in any liability of Landlord to Tenant, or in any other way effect this Lease or Tenant's obligation hereunder. 15 SECTION 44. SUBSTITUTED PREMISES In the event the Leased premises consist of less than five thousand (5,000) square feet, Landlord shall have the right, at any time during the Term hereof, upon not less than ninety (90) days prior written notice to Tenant, to substitute for the Leased Premises such other space in the building as shall be substantially the same size as the Leased Premises ("THE SUBSTITUTED PREMISES"), provided that Landlord shall pay all expenses of tenant incidental to Tenant's relocation to the Substituted Premises and that Landlord shall improve the Substituted Premises for Tenant's use and occupancy at least to the same extent as the Leased Premises occupied by Tenant prior to such relocation. If Tenant does not agree to such relocation then Tenant shall give notice of termination of this Lease to Landlord within fifteen (15) days of the notice of relocation. Upon receipt of such notice to termination, Landlord shall have fifteen (15) days to rescind notice of relocation. If landlord does not rescind the notice of relocation in writing to Tenant within such fifteen (15) day period, then the Lease will terminate on the date specified in notice of relocation. If tenant does not agree to such relocation then Tenant shall give notice of termination of this Lease to Landlord within fifteen (15) days of the notice of relocation. Upon receipt of such notice to termination, Landlord shall have fifteen (15) days to rescind notice of relocation. If Landlord does not rescind the notice of relocation in writing to Tenant within such fifteen (15) day period, then Lease will terminate on the date specified in notice of relocation. SECTION 45. BROKERAGE COMMISSION Tenant and Landlord each represents and warrants that it has dealt with no broker, agent, or finder on account of this Lease, other than the following broker, TRAMMELL CROW COMPANY & BELVEDERE ASSOCIATES (the "BROKERS"). Landlord and Tenant each agree to defend, indemnify, and hold harmless the other from and against any and all claims, damages, and costs, including attorneys' fee, in connection with any claim for brokerage, finder's, or similar fees, or compensation related to this Lease other than the Broker, which may be made or alleged as a result of acts or commissions of that party. SECTION 46. ADDITIONAL PROVISIONS The exhibits and addenda listed below are incorporated in this lease: 1. Rules and Regulations. 2. EXHIBIT "A" Description of Premises. 3. Tenant will have One Option to Extend the term for a period of five (5) years at the then-existing fair market value plus CPI. 4. Landlord will remove existing carpeting, paint the floor and touch up the paint in the remainder of the premises. 5. Rent for said premises will be as follows: YEAR (1) $1.00 per rsf, YEAR (2) $1.03 per rsf, YEAR (3) $1.06 per rsf YEAR (4) $1.09 per rsf and YEAR (5) at $1.12 per rsf. 16 THE PARTIES HERETO HAVE EXECUTED THIS LEASE ON THE DATE SPECIFIED IMMEDIATELY ADJACENT TO THEIR RESPECTIVE SIGNATURES. "LANDLORD" COAST COUNTIES PROPERTY MGMT INC 55 NEW MONTGOMERY #200 SAN FRANCISCO, CA 94105 By: -------------------------------- By: Robert Bernheim Title: President Dated: 5/19/97 "TENANT" SELECT QUOTE INSURANCE SERVICES By: -------------------------------- Title: Executive Vice President Dated: 5/14/97 By: -------------------------------- Title: Chairman Dated: 5/14/97 CERTIFICATE (If Tenant is a Corporation) I, Nancy Malik, Secretary of, Tenant, hereby certify that the officer(s) executing the foregoing Lease on behalf of Tenant was/were duly authorized to act in his/their capacities as EVP and Chairman, and his/their action(s) are the action of Tenant. (Corporate Seal) --------------------------------- Secretary SEE YOUR ATTORNEY - ------------------------------------------------------------------------------ THIS LEASE SHOULD BE GIVEN TO YOUR ATTORNEY FOR REVIEW AND APPROVAL BEFORE YOU SIGN IT. BOMA MAKES NO REPRESENTATION OR RECOMMENDATION CONCERNING THE LEGAL EFFECT, LEGAL SUFFICIENCY, OR TAX CONSEQUENCES OF THIS LEASE. THESE ARE QUESTIONS FOR YOUR ATTORNEY - ------------------------------------------------------------------------------ 17 EXHIBIT A [DRAWING NOT INCLUDED IN SCAN] RULES AND REGULATIONS FOR 657 MISSION STREET ATTACHED TO AND MADE A PART OF THIS LEASE Lease Agreement made this 15 day of May, 1997 between COAST COUNTIES PROPERTY MANAGEMENT LNC, Landlord and SELECTQUOTE INSURANCE SERVICES., as Tenant 1. Except as provided or required by Landlord in accordance with buildings standards, no sign, placard, picture advertisement, name or notice shall be inscribed, displayed, printed, painted or affixed by Tenant on or to any part of the building or exterior of the premises leased to tenants or to the door or doors thereof without the written consent of Landlord first obtained and Landlord shall have the right to remove any such sign, placard, picture, advertisement, name or notice to and at the expense of Tenant. 2. Except as provided or required by Landlord in accordance with building standards, no draperies, curtains, blinds, shades, screens or other devices shall be hung at or used in connection with any window or exterior door or doors of the premises. 3. The bulletin board or directory of the building shall be used primarily for display of the name and location of Tenants and Landlord reserves the right to exclude any other names therefrom, to limit the number of names associated with tenants to be placed thereon and to charge for names associated with tenants to be placed thereon at rates applicable to all tenants. 4. The sidewalks, halls, passages, exits, entrances, elevators and stairways of the building shall not be obstructed by tenants or used by them for any purpose other than for ingress to and egress from their respective premises. The halls, passages, exits, entrances, elevators, stairways, balconies and roof of the building are not for the use of the general public and Landlord in all cases reserves the right to control the same and prevent access thereto by all persons whose presence, in the judgment of the Landlord, is or may be prejudicial to the safety, character, reputation or interests of the building and its tenants; provided however, that Landlord shall not prevent such access to persons with whom tenants deal in the ordinary course of business unless such persons are engaged in illegal activities. No person shall go upon the roof of the building unless expressly so authorized by Landlord. 5. Tenants shall not alter any lock nor install any new or additional locks or any bolts on any interior or exterior door of any premises leased to tenant. Keys and access cards to premises are the exclusive property of Owner. There shall be a minimum charge of $15.00 for replacement of each lost key and $25.00 charge for each lost access card. In the event that any keys to premises are lost, Tenant shall be liable for entire cost of all key and lock replacement, at Owner's discretion, as required for the security of premises and building. LANDLORD RESERVES THE RIGHT TO LIMIT THE NUMBER OF ACCESS CARDS ASSOCIATED WITH TENANTS LEASED PREMISES. 6. The doors, windows, light fixtures and any lights or skylights that reflect or admit light into halls or other places of the building shall not be covered or obstructed. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown or placed therein. The expense of any breakage, stoppage or damage resulting from the violation of this rule shall be borne by the Tenant who, or whose employees or invitees, cause such expense. 7. Tenants shall not mark, drive nails, screw or drill into the walls, woodwork or plaster or in any way deface the building or any premises leased to supporting partitions. Pictures paintings and other similar solely decorative items can be hung with the approval of management. 8. Furniture, freight or equipment of every kind shall be moved into or out of the building only at such times and in such manner as Landlord shall designate. Landlord may prescribe and limit the weight, size and position of all equipment to be used by tenants, other than standard office desks, chairs and tables and portable office machines. Safes and other heavy equipment shall, if considered necessary by landlord, stand on wood strips of such thickness as Landlord deems necessary to distribute properly the weight thereof. All damage to the building or premises occupied by tenants caused by moving or maintaining any property of a tenant shall be repaired at the expense of such tenant. 9. No tenant shall sweep or throw or permit to be swept or thrown any dirt or other substance into any of the corridors halls or elevators or out of the doors or stairways of the building; use or keep or permit to be used or kept any foul or noxious gas or substance; permit or suffer the premises occupied by such tenant to be occupied or used in a manner offensive or objectionable to Landlord or other tenants by reason of noise, odors or vibrations; interfere in any way with other tenants or persons having business in the building; or bring or keep or permit to be brought or kept in the building any animal life form, other than human, except seeing-eye dogs when in the company of their masters. 10. No cooking shall be done or permitted by tenants in their respective premises, nor shall premises occupied by tenants be used for the storage or merchandise, washing clothes, lodging, or any improper, objectionable or immoral purposes. "STANDARD MICROWAVE IS PERMITTED." 11. No tenant shall use or keep in the building any kerosene, gasoline or inflammable or combustible fluid or material or use any method of heating or air-conditioning other than such as supplied by Landlord. 12. No boring or cutting for telephone or electric wires shall be allowed without the consent of Landlord and such wires permitted shall be introduced at the place and in the manner described by Landlord. The location of telephones, speakers, fire extinguisher and all other office equipment affixed to premises occupied by tenants shall be subject to the approval of Landlord. Each tenant shall pay all expenses incurred in connection with the installation of its equipment, including any telephone and electricity distribution equipment. 13. Upon termination of occupancy of the building, each tenant shall deliver to Landlord all keys furnished by Landlord, and any reproductions thereof made by or at the direction of such tenant, and in the event of loss of any keys, Tenant shall pay Landlord therefor. 14. No tenant shall affix any floor covering in any manner except as approved by the Landlord. The expense of repairing any damage caused by removal of any such floor covering shall be borne by the tenant by whom, or by whose contractors, employees or invitees, the damage was caused. 2 15. No mail, furniture, packages, supplies, equipment, merchandise or deliveries of any kind will be received in the building or carried up or down in the elevators except between such hours and in such elevators as shall be designated by Landlord. 16. On Saturdays, Sundays and legal holidays access to the building shall be by access cards. Anyone without an access card or proper identification may be refused entry into the building. This is for the safety and protection of the building. In no case shall Landlord be liable for any loss or damage for any error with respect to the admission to or exclusion from the building of any person. In case of invasion, mob, riot, public excitement or other commotion and at such times as Landlord deems necessary for the safety and protection of the building, its tenants and all property located therein, Landlord may prohibit and prevent access to the building by any and all persons by any means Landlord deems appropriate. 17. Each tenant shall see that the exterior doors of its premises are closed and securely locked on Sundays and legal holidays and not later than 6:00 pm of each other day. Each tenant shall exercise extraordinary care and caution that all water faucets or water apparatus are entirely shut off each day before its premises are left unoccupied and that all electricity or gas shall likewise be carefully shut off so as to prevent waste or damage to Landlord or to other tenants of the building. 18. Landlord may exclude or expel from the building any person who, in the judgment of Landlord, is intoxicated or under the influence of liquor or drugs, or who shall in any manner do any act in violation of any of the rules and regulations of the building. 19. The requirements of tenants will be attended to only upon application to Landlord at the office of the building. Employees of Landlord shall not perform any work outside of their regular duties unless under special instructions from Landlord, and no employee of Landlord shall be required to admit any person (Tenant or otherwise) to any premises in the building. 20. No vending or food or beverage dispensing machine or machines of any description shall be installed, maintained or operated upon any premise in the building without the written permission of the Landlord. 21. Landlord, without notice and without liability to any tenant, at any time may change the name or the street address of the building. 22. The word "BUILDING" as used in these rules and regulations means the building of which a part of the premises are pursuant to the Lease to which these rules and regulations are attached. Each tenant shall be liable to Landlord and to each other tenant of the building for any loss, cost, expense, damage or liability, including attorneys fees, caused or occasioned by the failure of such first named tenant to comply with these rules, but Landlord shall have no liability for such failure or for failing or being unable to enforce compliance therewith by any tenant and such failure by Landlord or non-compliance by any other tenant shall not be a ground for termination of the Lease to which these rules and regulations are attached by the Tenant thereunder. 23. Carpet protector pads or chairs with carpet approved casters shall be used by all desk stations. 3 24. Each Tenant shall maintain the portions of its premises which are visible from the outside of the Building or from hallways or other public areas of the Building, in a neat, clean and orderly condition. 25. No Tenant shall tamper with or attempt to adjust the temperature control thermostats in its premises. Landlord shall adjust such thermostats as required to maintain heat and air-conditioning at the Building standard temperature. 26. No Tenant shall place any items whatsoever on the roof or balcony areas of the building without prior written consent of Landlord. 27. No curtains, draperies, blinds, shutters, shades, screens or other coverings, hangings or decorations shall be attached to, hung or placed in, or used in connection with any window or the Building without prior written consent of Landlord. In any event, with the prior written consent of Landlord, such items shall be installed on the office side of the Landlord's standard window covering and shall in no way be visible from the exterior of the Building. 28. No Tenant shall obtain or use in the premises ice, drinking water, food, beverage, towel or other similar services, except at such reasonable hours and under reasonable regulations as may be fixed by the Landlord. 29. Except with the prior written consent of Landlord, no Tenant shall sell, or permit the sale at retail, of newspapers, magazines, periodicals, tickets or any other goods or merchandise to the general public in or on the premises, nor shall any Tenant carry on, or permit or allow any employee or other person to carry on, the business of stenography, notary, typewriting or similar business in or from the premises for the service or accommodation of occupants of any other portion of the Building, nor shall the premises of any Tenant be used for manufacturing of any kind, or any business or activity other than that specifically provided or in such Tenant's lease. 30. No Tenant shall install any radio or television antenna, loudspeaker or other device on the roof or exterior walls of the Building. 31. There shall not be used in any space, or in the public halls of the Building, either by any Tenant or others, any hand trucks except those equipped with rubber tires and side guards or such other material handling equipment as Landlord may approve. No other vehicles of any kind shall be brought by any Tenant into the Building or kept in or about the premises. 32. Each Tenant shall store all its trash and garbage within its premises. No material shall be placed in the trash boxes or receptacles if such material is of such nature that it may not be disposed of in the ordinary and customary manner of removing and disposing of trash and garbage in the City of San Francisco without being in violation of any law or ordinance governing such disposal. All garbage and refuse disposal shall be made only through entryways and elevators provided for such purpose and at such times as landlord shall designate 33. Canvassing, peddling, soliciting, and distribution of handbills or any other written materials in or about the Building are prohibited, and each Tenant shall cooperate to prevent same. 4 34. While in the Building, Tenant's contractors shall be subject to and under the control and direction of the manager of the Building or the Building Engineer (but not as an agent or employee of Landlord or said manager or engineer). 35. Landlord may waive any one or more of these Rules and Regulations for the benefit of any particular Tenant or Tenants, but no such waiver by Landlord shall be construed as waiver of such Rules and Regulations against any or all of the Tenants of the Building. 36. These Rules and Regulations are in addition to, and shall not be construed to in any way modify or amend, in whole or in part, the terms, covenants, agreements and conditions of any lease of premises in the Building. 37. Smoking is prohibited within 10 feet of the building entry. 38. NO pets, dogs, cats, birds, or other animals are allowed on or about the premises, not even visiting animals are allowed, excepting guide, service, or signal dogs pursuant to California Civil Code Sections 54.1 and 54.2. 39. Landlord reserves the right to make such other reasonable rules and regulations as in its judgment may from time to time be needed for the safety, care and cleanliness of the Building and for the preservation of good order therein. 5 - -------------------------------------------------------------------------------- 657 MISSION STREET - -------------------------------------------------------------------------------- LEASE BUILDING LEASE AGREEMENT WITH SELECT QUOTE INSURANCE SERVICES 657 MISSION STREET SUITE 304 COMMENCEMENT DATE: AUGUST 1, 1997 EXPIRATION DATE: DECEMBER 31, 2002 TABLE OF CONTENTS
PAGE Section 1. Premises.......................................................1 Section 2. Purpose........................................................1 Section 3. Term...........................................................1 Section 4. Possession.....................................................1 Section 5. Rent...........................................................2 Section 6. Rental Adjustment..............................................3 Section 7. Security.......................................................3 Section 8. Uses Prohibited................................................4 Section 9. Compliance with Law............................................4 Section 10. Alterations....................................................4 Section 11. Repair.........................................................5 Section 12. Abandonment....................................................5 Section 13. Liens..........................................................5 Section 14. Assignment and Subletting......................................6 Section 15. Indemnification of Landlord....................................7 Section 16. Insurance......................................................7 Section 17. Utilities......................................................8 Section 18. Personal Property and Other Taxes..............................8 Section 19. Rules and Regulations..........................................8 Section 20. Holding Over...................................................9 Section 21. Subordination..................................................9 Section 22. Entry by Landlord..............................................9
Section 23. Insolvency or Bankruptcy......................................10 Section 24. Default.......................................................10 Section 25. Destruction or Damage.........................................11 Section 26. Eminent Domain................................................12 Section 27. Plats and Riders..............................................12 Section 28. Sale by Landlord..............................................12 Section 29. Estoppel Certificates.........................................12 Section 30. Right of Landlord To Perform..................................13 Section 31. Attorney Fees.................................................13 Section 32. Surrender of Premises.........................................13 Section 33. Waiver........................................................14 Section 34. Notices.......................................................14 Section 35. Notice to Surrender...........................................14 Section 36. Defined Terms and Marginal Headings...........................14 Section 37. Authority of Parties..........................................14 Section 38. Time and Applicable Law.......................................15 Section 39. Successors....................................................15 Section 40. Entire Agreement..............................................15 Section 41. Late Charge...................................................15 Section 42. Joint and Several Liability...................................15 Section 43. Light, Air and View...........................................15 Section 44. Substituted Premises..........................................16 Section 45. Brokerage Commission..........................................16 Section 46. Additional Provisions.........................................16
ii FIRST ADDENDUM TO THE LEASE AGREEMENT The First Addendum is made part of the Lease Agreement made this 14th day of May, 1997 between Coast Counties Property Management Inc., Landlord, and SelectQuote as Tenant. PAGE 4 ITEM-(9) COMPLIANCE WITH LAW. Landlord warrants, that on the commencement date, the Premises comply with all applicable laws, ordinances rules and regulations of governmental authorities and that, during the term of the lease, Landlord will comply with all applicable laws regarding the Premises and the building except to the extent Tenant must comply. Relative to Hazardous Materials, to Landlord's best knowledge, Landlord represents, warrants and covenants to Tenant as follows: (i) the Premises and the Building are, as of the Commencement Date, in compliance with all Laws regarding the handling, transportation, storage, treatment, use and disposition of Hazardous Material; (ii) Landlord shall be responsible for all costs (which costs shall not be included in Common Area expense) incurred in complying with any order, ruling or other requirement of any court or governmental body or agency having Jurisdiction over the Building requirements. Landlord to comply with any federal, state and local laws, regulations, guidelines, codes and ordinances (individually and collectively, "LAWS") which relate to Hazardous Material in, on or about the Building and the Premises including, without limitation, the cost of any required or necessary repair, cleanup or detoxification in the preparation of any closure or other required plans excluding, however, any such cost relating to Hazardous Material on the Premises established to have been caused directly by Tenant's use of the Premises; (iii) to the extent commercially practical, Landlord shall take such action as is necessary to enforce the requirements contained in any leases or occupancy agreements with other tenants or occupancy in the Center which relate to the handling, transportation, storage, treatment, use or disposition of Hazardous Material by such other tenants or Occupants; (iv) Landlord shall indemnify, defend and hold Tenant, its directors, officers, employees and agents, and any successor to Tenant's interest in the Premises, harmless from and against any and all claims, judgments, damages, penalties, fines, costs, liabilities or losses (including without limitation sums paid in settlement of claims, attorneys' fees, consultant fees and expert fees) caused by, arising out of, or related to (A) the breach of any representation, warrant or covenant of Landlord contained herein, or (B) Hazardous Material in, on or about the Building or the Premises which was created, handled, placed, stored, used, transported or disposed of by Landlord, or (C) any such Hazardous Material with respect to which any court or governmental body or agency having jurisdiction over the Building holds Landlord responsible for or otherwise requires Landlord to undertake any repair, cleanup, detoxification or other remedial action, excluding, however, hazardous Material on the Premises established to have been caused directly by Tenant's use of the Premises. PAGE 5 ITEM-(10) Minor decorations and any improvements Landlord makes prior to commencement will be excluded. Landlord's consent to alterations shall not be unreasonably withheld, conditioned or unduly delayed. At the time of consent to alterations, Landlord shall be required at that time to indicate whether or not Tenant is going to be required to remove them upon surrender of the Lease. PAGE 5 ITEM-(11) Except for repairs that must be made by Tenant, landlord shall be required to pay for and make all other repairs and replacements to the Premises, Common Areas, and Building to maintain the property in a condition comparable to other office buildings of similar quality in the San Francisco area, including the roof, foundations, exterior walls, interior structural walls, all structural components, and all systems such as mechanical, electrical and plumbing. PAGE 5 ITEM-(12) Abandonment shall not have occurred so long as Rent and Additional Rent are current. PAGE 5 ITEM-(13) Tenant shall have twenty (20) days after receiving notice of any lien to either (a) discharge the lien, or (b) post a bond equal to the amount of the disputed claim. PAGE 5 ITEM-(14) (a) Landlord's consent shall not be unreasonably withheld, conditioned or unduly delayed. (b)(i) Landlord shall have only twenty (20) days after notice from Tenant to decide whether it wants to exercise its right to sublet the space, not thirty (30) days. (ii) Tenant's "reasonable costs" should include, but not be limited to, brokerage fees, legal fees, cash concessions and tenant improvement costs. (d) "Prospective Tenant" is defined to mean a Tenant with whom Landlord has already initiated negotiations. (e) Landlord's "reasonable costs" are limited to legal fees and staff costs not to exceed $1,500.00 for any single sublease or assignment situation. PAGE 6 ITEM-(15) Tenant's indemnification of Landlord shall be limited to claims: (i) for personal injury, death or property damage; (ii) for incidents occurring in or about the premises or Building; and (iii) caused by the negligence or willful misconduct of Tenant, its agents, employees or invitees. Additionally, Landlord indemnifies, defends and holds Tenant harmless from claims for the same 2 limited causes. Also, notwithstanding the above indemnification, the parties release each other from any claims either party has against the other to the extent the claim is covered by the injured party's insurance or the insurance the injured party is required to carry under the terms of the Lease, whichever is greater. PAGE 6 ITEM-(16) In addition to insurance requirements of Tenant, Landlord shall be required to keep the Building, including improvements, insured against damage and destruction, fire, vandalism and other perils in the amount of the full replacement value. The insurance shall include an extended coverage endorsement of the kind required by an institutional lender to repair and restore the Building. both parties are required to carry public liability and property damage insurance, and both parties are required to waive all rights of subrogation against the other. PAGE 7 ITEM-(21) Upon Landlord's demand, Tenant shall have ten (10) days within which to deliver to Landlord instruments evidencing subordination of the Lease. Additionally, Landlord shall warrant that it owns the Building and, that if Tenant is not in default, warrant that Tenant's peaceable and quiet enjoyment of the Premises shall not be disturbed by anyone. PAGE 7 ITEM-(22) Landlord's entry is conditioned upon: (i) giving Tenant at least twenty-four (24) hours advance notice, except in an emergency; (ii) promptly finishing any work for which it entered; and (iii) causing the least practical interference to Tenant's business. PAGE 8 ITEM-(24) Landlord shall be required to mitigate its damage by making reasonable efforts to relet the Premises on reasonable terms. IN WITNESS WHEREOF, the parties hereto have executed or caused this instrument to be executed the day and year first written above. COAST COUNTIES PROPERTY SELECTQUOTE MANAGEMENT BY: BY: ------------------------------------ --------------------------- Robert Bernheim DATE: DATE: --------------------------------- ------------------------ 3 EX-10.9 17 EXHIBIT 10.9 595 MARKET STREET OFFICE LEASE BASIC LEASE INFORMATION LANDLORD: THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES TENANT: SELECTQUOTE INSURANCE SERVICES FLOORS: 6th and 7th (Entire Term) 5th (May 1, 1999 - November 30, 2002) SUITES: 600 and 740 (Entire Term) 500 (May 1, 1999 - November 30, 2002) SQUARE FOOTAGE: 15,093 (Commencement Date - April 30, 1999) 28,913 (May 1, 1999 - November 30, 2002) MONTHLY BASE RENT: Commencement Date - October 31, 1996 -- $22,639.50 November 1, 1996 - October 31, 1997 -- $23,897.25 November 1, 1997 - October 31, 1998 -- $25,155.00 November 1, 1998 - April 30, 1999 -- $26,412.75 May 1, 1999 - October 31, 1999 -- $50,597.75 November 1, 1999 - October 31, 2000 -- $53,007.17 November 1, 2000 - October 31, 2001 -- $55,416.58 November 1, 2001 - November 30, 2002 -- $57,826.00 TENANT'S PERCENTAGE SHARE OF EXPENSES AND TAXES: 3.794% (Commencement Date - April 30, 1999) 7.267% (May 1, 1999 - November 30, 2002) BASE YEAR: 1996 TERM: Approximately 7 Years, ending November 30, 2002 (with one option for an additional term of 42 months) SECURITY DEPOSIT: $26,413.00 (increased to $57,826 on May 1, 1999) SCHEDULED COMMENCEMENT DATE: November 15, 1995 TERMINATION DATE: November 30, 2002 TENANT'S BROKER: Belvedere Associates Dated as of , 1995 ---------------- San Francisco, California 595 MARKET STREET OFFICE LEASE THIS 595 MARKET STREET OFFICE LEASE (this "LEASE"), made as of August 16, 1995, between THE EQUITABLE LIFE INSURANCE SOCIETY OF THE UNITED STATES, a New York corporation ("LANDLORD"), and SELECTQUOTE INSURANCE SERVICES, a California corporation ("TENANT"), W I T N E S S E T H: 1. PREMISES. (a) Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, for the term and subject to the agreements, covenants, conditions and provisions hereinafter set forth, to each and all of which Landlord and Tenant hereby mutually agree, the space (the "INITIAL PREMISES") shown outlined in red on the floor plan(s) attached hereto as EXHIBIT A-1 and situated on the sixth and seventh (6th and 7th) floors of the building (the "BUILDING") constructed by Landlord at 595 Market Street, in the City and County of San Francisco, California and the space (the "FUTURE PREMISES") shown outlined in red on the floor plan(s) attached hereto as EXHIBIT A-2 and situated on the fifth (5th) floor of the Building. (The Initial Premises and the Future Premises are referred to collectively herein as the "PREMISES.") As used in this Lease, the Building shall include all the land thereunder and all appurtenances thereto. The Premises shall include the right to the use, in common with others, of lobbies, entrances, stairs, elevators and other public portions of the Building. All the windows and outside walls of the Premises, and terraces adjacent to the Premises, and Any space in the Premises used for shafts, stacks, pipes, conduits, ducts, electric or other utilities, sinks or other Building facilities, and the use thereof and access thereto through the Premises for the purposes of operation, maintenance and repairs, are reserved to Landlord. (b) Landlord and Tenant acknowledge and agree that as of the date hereof the rentable square footage of the Initial Premises is fifteen thousand ninety-three (15,093) square feet, the rentable square footage of the Future Premises is thirteen thousand eight hundred and twenty (13,820) square feet, and such figures shall be final and binding on Landlord and Tenant for purposes of this Lease. 2. TERM. The term of this Lease with respect to the Initial Premises shall commence (the "COMMENCEMENT DATE") on the earlier to occur of (i) November 15, 1995 (the "SCHEDULED COMMENCEMENT DATE") or (ii) the date of Tenant's occupancy of the Initial Premises and, unless sooner terminated as hereinafter provided, shall end on November 30, 2002 (the "EXPIRATION DATE"). Tenant is currently in possession of the Future Premises under the terms of that certain Sublease (the "SUBLEASE"), dated May 4, 1993, by and between Royal Indemnity Company, a Delaware corporation, as sublessor ("SUBLESSOR"), and Tenant, as sublessee. Sublessor is the tenant under that certain 595 Market Street Office Lease (as amended, the "MASTER LEASE"), dated February 14, 1979, by and between Sublessor and Landlord. The term of both the Sublease and the Master Lease shall end on April 30, 1999. Tenant hereby agrees not to exercise any right Tenant may have to hold possession of the Future Premises under the Sublease or Master Lease after April 30, 1999, and that, as of May 1, 1999, Tenant's occupancy of the Future Premises shall be governed solely by this 1 Lease. The term of this Lease with respect to the Future Premises shall commence on May 1, 1999 and, unless sooner terminated as hereinafter provided, shall end on the Expiration Date. 3. BASE RENT. (a) Tenant shall pay to Landlord as base rent for the Premises the sum of: (i) Twenty-Two Thousand Six Hundred Thirty-Nine and Fifty Hundredths Dollars ($22,639.50) per month for the period from the Commencement Date through October 31, 1996; (ii) Twenty-Three Thousand Eight Hundred Ninety-Seven and Twenty-Five Hundredths Dollars ($23,897.25) per month for the period from November 1, 1996 through October 31, 1997; (iii) Twenty-Five Thousand One Hundred Fifty-Five Dollars ($25,155.00) per month for the period from November 1, 1997 through October 31, 1998; (iv) Twenty-Six Thousand Four Hundred Twelve and Seventy-Five Hundredths Dollars ($26,412.75) per month for the period from November 1, 1998 through April 30, 1999; (v) Fifty Thousand Five Hundred Ninety-Seven and Seventy-Five Hundredths Dollars ($50,597.75) per month for the period from May 1, 1999 through October 31, 1999; (vi) Fifty-Three Thousand Seven and Seventeen Hundredths Dollars ($53,007.17) per month for the period from November 1, 1999 through October 31, 2000; (vii) Fifty-Five Thousand Four Hundred Sixteen and Fifty-Eight Hundredths Dollars ($55,416.58) per month for the period from November 1, 2000 through October 31, 2001; and (viii) Fifty-Seven Thousand Eight Hundred Twenty-Six Dollars ($57,826.00) per month for the period from November 1, 2001 through the Expiration Date. Base rent shall be payable in advance, on or before the first day of each and every calendar month; provided, however, that base rent for the first full calendar month of the term of this Lease shall be paid upon execution of this Lease. If the Commencement Date falls on a day other than the first day of a calendar month Tenant shall pay an appropriately prorated base rent for the fractional first month of the term of this Lease on the Commencement Date and the base rent payment made upon execution of this lease shall be applied to the first full calendar month of the term of this Lease. Rent shall be paid to Landlord, without deduction or offset, in lawful money of the United States of America at 595 Market Street, Suite 2430, San Francisco, California 94105, or to such other person or at such other place as Landlord may from time to time designate in writing. (b) Notwithstanding the provisions of Subparagraph 3(a) above, provided no Event of Default shall occur under this Lease at any time during the term hereof, Landlord hereby waives the 2 payment by Tenant of the base rent for the portion of the Initial Premises located on the sixth (6th) floor of the Building for the period from November 15, 1995 through and including February 14, 1996, and agrees that the base rent for the period from November 15, 1995 through and including February 14, 1996 shall be One Thousand Nine Hundred Nine and Fifty Hundredths Dollars ($1,909.50) per month. The foregoing waiver shall be deemed revoked automatically and shall be of no further force and effect (if and to the extent any period remains for which Landlord has agreed to waive payment of any portion of the base rent), and any and all amounts of base rent, payment of which has theretofore been deemed waived by Landlord pursuant to this Subparagraph 3(b) shall become immediately due and payable upon demand by Landlord, upon the occurrence at any time during the term of this Lease of an Event of Default under this Lease. The foregoing concession of Landlord is personal to the named Tenant under this Lease and shall be deemed revoked prospectively (if and to the extent any period remains for which Landlord has agreed to waive payment of any portion of the base rent) upon any subletting of all or any portion of the Premises or assignment of this Lease by the named Tenant under this Lease and the concession granted in this Paragraph shall not inure to the benefit of any subtenant or assignee of the named Tenant hereunder. 4. OPERATING COSTS ADJUSTMENTS. (a) Tenant shall pay to Landlord as additional rent during each calendar year or part thereof following the calendar year 1996 (the "BASE Year") through April 30, 1999 three and seven hundred ninety-four thousandths percent (3.794%) (the "INITIAL PERCENTAGE") of the total dollar increase, if any, in Operating Expenses (as hereinafter defined) paid or incurred by Landlord in each such year over Operating Expenses paid or incurred by Landlord in the Base Year and during each calendar year or part thereof during the period from May 1, 1999 through the Expiration Date seven and two hundred sixty-seven thousands percent (7.267%) (the "FUTURE PERCENTAGE") of the total dollar increase, if any, in Operating Expenses paid or incurred by Landlord in such year over Operating Expenses paid or incurred by Landlord in the Base Year. As used in this Lease, "OPERATING EXPENSES" means (i) all commercially reasonable costs and expenses incurred or paid by Landlord in connection with the management, operation, maintenance and repair of the Building in accordance with generally accepted accounting principles and commensurate with other Class-A office buildings in San Francisco, California, including, without limitation, water and sewer charges, garbage and waste disposal; license, permit and inspection fees; heat, light, power and other utilities; air conditioning and ventilation; elevator and escalator service; plumbing service; janitorial and cleaning service; maintenance, repair and service contracts; equipment lease payments; watchmen, lobby attendants and personnel engaged in the management, operation, maintenance, repair and protection of the Building, together with wages, salaries, payroll burden, taxes and employee benefits applicable thereto; insurance, including, without limitation, fire and extended coverage, personal injury and property damage liability and rental income insurance; furniture, artwork, landscaping and other customary items provided in the common areas of the Building; the cost of maintaining the sidewalks surrounding the Building; supplies, telephone, delivery, postage and stationery expenses; tools and equipment; the cost to maintain and repair intra-building telecommunications network cabling; all costs and expenses of contesting by appropriate legal proceedings any matter concerning operating or managing the Building or the amount or validity of any "Building Taxes," as defined in Subparagraph 4(b) hereof (except that such costs and expenses shall in no event be included in the Base Year); (ii) a management fee payable at a rate of compensation determined from time to time by Landlord following written notice to Tenant; Building office rent or rental value; (iii) depreciation of all personal property, fixtures and equipment 3 (including window washing machinery) used in the management, operation, maintenance and repair of the Building and depreciation on exterior window coverings provided by Landlord and carpeting in public corridors and common areas; and (iv) the cost of capital improvements or capital assets constructed or acquired after the Base Year which reduce any item of Operating Expenses or are reasonably necessary to comply with any governmental law or regulation or are reasonably necessary for the health and safety of the occupants of the Building, amortized over such reasonable period as Landlord shall determine, together with interest on the unamortized balance at a rate per annum equal to the rate then payable by Landlord on funds borrowed for the purpose of constructing or acquiring such capital improvements or capital assets. Notwithstanding the foregoing, Operating Expenses shall not include "Building Taxes," as defined in Subparagraph 4(b) hereof, or the taxes covered under Paragraph 5 hereof, depreciation on the Building (except as specified above), costs of tenant improvements (including the costs of those permits, licenses and inspections required in connection with the construction of such tenant improvements), real estate brokers, commissions, attorneys, fees and expenses incurred in connection with negotiations or disputes with Building tenants or prospective Building tenants, interest and capital items, except the cost together with interest, of capital improvements and capital assets as specified above. The determination of Operating Expenses and their allocation shall be in accordance with generally accepted accounting principles applied on a consistent basis. Actual Operating Expenses for the Base Year and each subsequent calendar year shall be adjusted, if necessary, to equal Landlord's reasonable estimate of Operating Expenses for a full calendar year and, if the total square footage of the Building occupied during such full calendar year is less than ninety-five percent (95%), to reflect a ninety-five percent (95%) occupancy level of the Building. (b) Tenant shall pay to Landlord as additional rent during each calendar year or part thereof following the Base Year through April 30, 1999 the Initial Percentage of the total dollar increase, if any, in "Building Taxes," as hereinafter defined, for each such calendar year over Building Taxes for the Base Year and during each calendar year or part thereof during the period from May 1, 1999 through the Expiration Date the Future Percentage of the total dollar increase, if any, in "Building Taxes" for each such calendar year over Building Taxes for the Base Year. As used in this Lease, the term "BUILDING TAXES" means all taxes, service payments in lieu of taxes, assessments, general or special, excises, exactions, transit charges, housing fund assessments or other housing charges, child care assessments or levies, fees or charges, general or special, ordinary or extraordinary, unforeseen as well as foreseen, of any kind which are assessed, levied, charged, confirmed or imposed by any public authority upon the Building, or its use, occupancy or operations, or upon any personal property used in the operation of the Building, or with respect to services or utilities consumed in the use, occupancy or operations of the Building, or upon Landlord with respect-to the Building, or upon the act of leasing any space within the Building, or in connection with the business of renting space within the Building or with respect to the possession, leasing, operation, use or occupancy by Tenant of the Premises or any portion thereof, or upon or measured by the gross rentals received by Landlord from the Building. Building Taxes shall also include any tax, fee or other excise, however described, which may be levied or assessed in lieu of, or as a substitute, in whole or in part, for, or as an addition to, any other Building Taxes. Building Taxes shall not include (i) federal, state and local corporate income or franchise taxes, (ii) inheritance or estate taxes imposed upon or assessed against the Building or any part thereof or interest therein, including franchise, gift, transfer, excise, capital stock, or succession taxes, (iii) taxes computed upon the basis of the net income derived from the Building by Landlord or the owner of any interest therein, unless, due to a change in the method of taxation, any of such taxes is levied or assessed 4 against Landlord in lieu of, or as a substitute, in whole or in part, for, or as an addition to, any other charge which would otherwise constitute a Building Tax, and (iv) penalties or interest resulting directly from late payments of real estate taxes. To the extent the Building Taxes are reduced as a result of the legal proceedings described in Paragraph 4(a)(i) and to the extent such reduction does not reduce the Building Taxes to an amount less than the Building Taxes of the Base Year, Tenant's pro-rata share of the Building Taxes shall reflect Tenant's pro-rata share of such reduction. (c) During December of each calendar year or as soon thereafter as practicable, Landlord shall give Tenant written notice of Landlord's estimate of the additional rent payable under Subparagraphs 4(a) and 4(b) hereof for the next calendar year. On or before the first day of each month during the next calendar year, Tenant shall pay to Landlord one-twelfth (1/12) of such estimated additional rent, provided that if such notice is not given in December, Tenant shall continue to pay on the basis of the prior year's estimate until the month after such notice is given. Notwithstanding the foregoing, during December 1998 or as soon thereafter as practicable, Landlord shall give Tenant written notice of Landlord's estimate (the "INITIAL ESTIMATE") of the additional rent payable under Subparagraphs 4(a) and 4(b) hereof for the calendar year 1999 based on the Initial Percentage and Landlord's estimate (the "FUTURE ESTIMATE") of the- additional rent payable under Subparagraphs 4(a) and 4(b) hereof for the calendar year 1999 based on the Future Percentage. On or before the first day of each month during the period from January 1999 through April 1999, Tenant shall pay to Landlord one-twelfth (1/12) of the Initial Estimate. On or before the first day of each month during the period from May 1999 through December 1999, Tenant shall pay to Landlord one-twelfth (1/12) of the Future Estimate. If at any time it appears to Landlord that the additional rent payable under either Subparagraph 4(a) or 4(b) hereof for the current calendar year will vary from its estimate by more than five percent (5%), Landlord may, by written notice to Tenant, revise its estimate for such year, and subsequent payments by Tenant for such year shall be based upon such revised estimate. (d) Within ninety (`90) days after the close of each calendar year or as soon after such ninety (90) day period as practicable, Landlord shall deliver to Tenant a statement (the "ADDITIONAL RENT STATEMENT") of additional rent payable under Subparagraphs 4(a) and 4(b) hereof for such calendar year prepared by a certified public accountant designated by Landlord, and such statement shall be final and binding upon Landlord and Tenant. If such statement shows ` an amount owing by Tenant that is less than the estimated payments for such calendar year previously made by Tenant, Landlord shall credit the excess to the next succeeding monthly installments of rent. If such statement shows an amount owing by Tenant that is more than the estimated payments for such calendar year previously made by Tenant, Tenant shall pay the deficiency to Landlord within thirty (30) days after delivery of such statement. (e) The termination of this Lease shall not affect the subsequent obligations of the parties hereto to comply with the foregoing provisions, except that, if for any reason other than the default of Tenant, this Lease shall terminate on a day other than the last day of a calendar year, the additional rent payable by Tenant applicable to the calendar year in which such termination shall occur shall be prorated on the basis which the number of days from the commencement of such calendar year to and including such termination date bears to three hundred sixty-five (365). 5. TAXES PAYABLE BY TENANT. In addition to the base rent and additional rent payable as a result of increases in Building Taxes and Operating Expenses and other charges to be paid by 5 Tenant hereunder, Tenant shall reimburse Landlord upon demand for any and all taxes payable by Landlord (other than net income taxes) whether or not now customary or within the contemplation of the parties hereto (i) upon, measured by or reasonably attributable to the cost or value of Tenant's equipment, furniture, fixtures and other personal property located in the Premises or by the cost or value of any alterations, additions, fixtures or improvements made in or to the Premises by or for Tenant, regardless of whether title to such alterations, additions, fixtures or improvements shall be in Tenant or Landlord, and (ii) upon this transaction or any document to which Tenant is a party creating or transferring an interest or an estate -in the Premises. All taxes payable by Tenant under this Paragraph 5 shall be deemed to be, and shall be paid as, additional rent. 6. USE. (a) The Premises shall be used for general office purposes and for no other purpose. General office purposes assumes the presence and use in the Premises of customary desk-top personal computers, telecopy machines and other desk-top telecommunications equipment, mailing equipment and duplicating/photocopy equipment as well as the use of refrigerators and microwave ovens for the use of Tenant's personnel in the existing kitchen area. The use of so called mainframe computers or high speed duplicating equipment requiring the maintenance of special or dedicated electrical or ventilation Building services or requiring the strengthening of or the addition of structural supports to the load bearing capacity of the Premises is not a permitted use within the scope of the term general office purposes. Tenant shall not do or permit to be done in or about the Premises, nor bring or keep or permit to be brought or kept therein, anything which is prohibited by or will in any way conflict with any law, statute., ordinance or governmental rule or regulation now in force or which may hereafter be enacted. Tenant shall, in its use and occupancy of the Premises, comply with the requests of Landlord's insurers with respect to Tenant's business operations in the Premises, and Tenant shall not do or permit to be done in or about the Premises anything which is prohibited by Landlord's fire insurance policy for the Building, or will in any way increase the existing rate of or affect any insurance carried by Landlord upon the Building or any part thereof or any of its contents. Tenant shall not bring or keep, or permit to be brought or kept, in the Premises or in the Building any toxic or hazardous substance, material or waste or other contaminant or pollutant, other than nonreportable quantities of such substances when found in commonly used household cleansers, office supplies and general office equipment, and any such substances shall be used, kept, stored and disposed of in strict accordance with applicable laws. Tenant shall not do or permit anything to be done in or about the Premises which will in any way obstruct or interfere with the- rights of other tenants of the Building, or injure or annoy them, or maintain or permit any nuisance-in, on or about the Premises or commit or suffer to be committed any waste in, on or about the Premises. Tenant shall not bring into the Building any furniture, equipment, materials or other objects which, in the sole discretion of Landlord, exceed the load bearing capacity of the Building or any portion thereof. (b) Upon the written request of Landlord, Tenant shall provide periodic written reports of the type and quantities of hazardous substances, materials, waste and contaminants used, stored or being disposed of by Tenant in the Premises and if Landlord in good faith determines that such substances create a risk to the health and safety of Tenant's employees and invitees or to other tenants in the Buildings, Tenant shall, upon demand by Landlord, take such remedial action, at the sole cost and expense of Tenant (including, without limitation, elimination or removal of any hazardous substances from the Premises), as Landlord deems necessary or advisable. 6 7. SERVICES. (a) Landlord shall maintain the public and common areas of the Building, such as lobbies, stairs, corridors and restrooms, in reasonably good order and condition (except for damage occasioned by the act of Tenant or employees, licensees or invitees of Tenant, which damage shall be repaired by Landlord at Tenant's expense). (b) Landlord shall supply the Premises during reasonable and usual business hours (exclusive of Saturdays, Sundays and holidays) as determined by Landlord and subject to the Rules and Regulations of the Building (attached hereto as EXHIBIT B) as established from time to time by Landlord, with (i) electricity for lighting and operation of desk-top office machines, (ii) heating, ventilation and cooling reasonably required for the comfortable occupation of the Premises, (iii) elevator service, either automatic or with attendants, as Landlord elects, (iv) lighting replacement, including tubes, ballasts and lamps (for Landlord's designated Building standard lights), (v) rest room supplies, and (vi) window washing. If Tenant requests electricity or heat or air conditioning at any other time, and if Landlord is able to provide the same, Tenant shall pay Landlord such charge as Landlord shall establish from time to time for providing such services during such hours. Any such charges which Tenant is so obligated to pay shall be deemed to be additional rent under this Lease, and should Tenant fail to pay the same within five (5) days after demand, such failure shall be a default by Tenant under this Lease. Landlord shall also furnish janitor service during the times and in the manner that such services are customarily furnished in comparable office buildings in the area. Landlord makes no representation with respect to the adequacy or fitness of the heating, air conditioning or ventilation equipment in the Building to maintain temperatures which may be required for, or because of, any equipment of Tenant other than normal fractional horsepower office equipment, or with respect to the continuousness or variability of the electric current supplied to the Premises, and Landlord shall have no liability for loss or damage suffered by Tenant or others in connection therewith. Landlord shall not be in default hereunder or be liable for any loss of business, right of access or any damages directly or indirectly resulting from, nor shall the rent herein reserved be abated by reason of (i) the installation, use or interruption of use of any equipment in connection with the furnishing of any of the foregoing services, (ii) failure to furnish or delay in furnishing any of the foregoing services when such failure or delay is caused by accident or any condition beyond the reasonable control of Landlord or by the making of necessary repairs or improvements to the Premises or to the Building, or (iii) the limitation, curtailment, rationing or restrictions on use of water, electricity, gas or any form of energy serving the Premises or the Building, whether such results from mandatory governmental restrictions or voluntary compliance with governmental guidelines, nor shall the occurrence of any of the foregoing constitute or be construed as a constructive or other eviction of Tenant. Landlord shall use reasonable efforts diligently to remedy any interruption in the furnishing of such services. If Landlord, solely as a result of its negligence or willful misconduct, fails to furnish any of the foregoing services, and the interruption of such services renders the entire Premises untenantable for at least five (5) consecutive days, then the base rent allocable to those consecutive days, immediately following such five (5) day period, on which the entire Premises are rendered untenantable as a result of such interruption of services shall be abated. (c) Tenant shall not, without Landlord's prior written consent, use heat generating machines or equipment or lighting other than Landlord's designated Building standard lights in the Premises which affect the temperature otherwise maintained by the air conditioning system. If such 7 consent is given, Landlord shall have the right to install supplementary air conditioning units in the Premises and the cost thereof, including the costs of installation, operation and maintenance thereof, shall be paid by Tenant to Landlord upon billing by Landlord. Tenant shall not, without Landlord's prior written consent, install any lighting or equipment in the Premises that would cause the connected electrical load in the Premises to exceed one and one-half (1.5) watts per square foot. If such consent is given, Tenant shall pay Landlord upon billing for the cost of such excess. All costs payable by Tenant under this Subparagraph 7(c) shall be deemed to be, and shall be paid - -as, additional rent. 8. TENANT'S PERSONAL PROPERTY/ALTERATIONS. (a) All of Tenant's trade fixtures, movable furniture, furnishings, office equipment and other easily movable personal property not permanently affixed to the Premises shall, subject to the provisions hereof, remain the property of Tenant. (b) Tenant shall not make or suffer to be made any alterations, additions or improvements to or of the Premises or any part thereof, or attach any fixtures or equipment thereto, without Landlord's prior written consent. With respect to NON-STRUCTURAL alterations, additions and improvements, Landlord's consent shall not be unreasonably withheld nor unduly delayed. Any alterations, additions or improvements to the Premises consented to by Landlord shall be made at Tenant's sole cost and expense by a duly licensed and reputable contractor approved by Landlord. All such work shall be done strictly in accordance with the plans approved by Landlord and otherwise in conformity with a valid building permit and/or all other permits or licenses when and where required, copies of which shall be furnished to Landlord before the work is commenced, and with any work not acceptable to any governmental authority or agency having or exercising jurisdiction over such work, or not reasonably satisfactory to Landlord, being promptly replaced and corrected at Tenant's expense. Landlord's approval or consent to any such work shall not impose any liability upon the Landlord. The contractor or person selected to make such alterations, additions or improvements shall at all times be subject to Landlord's control while in the Building. Landlord shall have the right to require that any such contractor hired shall, prior to commencing work in the Premises, provide Landlord with a performance bond and a labor and materials payment bond in the amount of the contract price for the work naming Landlord and Tenant (and any other person designated by Landlord) as co-obligees. Tenant shall be responsible for any additional alterations and improvements required by law to be made by Landlord to or in the Building as a result of any alterations, additions or improvements to the Premises made by or for Tenant. Tenant shall pay Landlord prior to commencement of the work an administration fee equal to ten percent (10%) of the cost of the work to compensate Landlord for the administrative costs incurred and the Building services provided by Landlord in the supervision and coordination of the work. (This administration fee shall not be applicable to those Tenant Improvements (as defined in EXHIBIT C) substantially completed prior to February 1, 1996 or those Fifth Floor - -Improvements (as defined in EXHIBIT C) substantially completed prior to June 1, 1996.) All alterations, additions, fixtures (other than trade fixtures) and improvements, including, but not limited to carpeting, other floor coverings, built-in shelving, bookcases, paneling and built-in security systems made in or upon the Premises either by or for Tenant and affixed to or forming a part of the Premises, shall immediately upon installation become Landlord's property free and clear of all liens and encumbrances. 8 (c) Upon the expiration or any sooner termination of this Lease, Tenant shall remove or cause to be removed at its expense (i) all of Tenant's personal property described in Subparagraph 8(a) above, (ii) all telephone, data processing, audio and video, security and electrical (other than Building standard) cables, wires, lines, duct work, sensors, switching equipment, control boxes and related improvements, and (iii) any and all alterations, additions, fixtures and improvements made in or upon the Premises during the term of this Lease by or for Tenant, unless Landlord, at the time of its approval of such work in accordance with this Paragraph 8 shall have expressly waived such requirement in writing. Landlord hereby expressly waives such requirement with respect to the improvements (excluding any of Tenant's personal property described in Subparagraph 8(a) above, or any telephone, data processing, audio and video, security and electrical (other than Building Standard) cables, wires, lines, duct work, sensors, switching equipment, control boxes and related improvements) that already have been made to the Future Premises as of August 1, 1995 and with respect to the Tenant Improvements and Fifth Floor Improvements, as those terms are defined in EXHIBIT C, to the extent the Tenant Improvements and Fifth Floor Improvements are completed prior to December 31, 1995. Tenant shall repair at its expense all damage to the Premises and the Building caused by the removal of any of the items provided in this Subparagraph 8(c). Any personal property described in this Subparagraph 8(c) not removed from the Premises by Tenant upon the expiration or sooner termination of this Lease shall, at Landlord's option, become the property of Landlord, or Landlord may remove or cause to be removed such property for Tenant's account, and Tenant shall reimburse Landlord for the cost of removal (including the cost of repairing any damage to the Premises or the Building caused by removal) and storage and a reasonable charge for Landlord's overhead, within ten (10) days after receipt of a statement therefor. Tenant's obligations under this Subparagraph 8(c) shall survive the termination of this Lease. 9. LIENS. Tenant shall keep the Premises and the Building free from any and all liens arising out of any work performed, materials furnished or obligations incurred by Tenant. Tenant shall promptly and fully pay and discharge all claims on which any such lien could be based. Notwithstanding the foregoing, Tenant shall have the right, exercisable during the first twenty days after the earlier of the date Landlord receives notice of a mechanic's lien or Tenant receives notice of such lien, to contest-such lien, provided Tenant posts a bond in a form satisfactory to Landlord. Landlord shall have the right to post and keep posted on the Premises any notices that may be provided by law or which Landlord may deem to be proper for the protection of Landlord, the-Premises and the Building from such liens, or to take any other action Landlord deems necessary to remove or discharge liens or encumbrances at the expense of Tenant. To the extent that it is reasonably feasible, Landlord shall give Tenant written notice prior to taking such action. 10. REPAIRS/CONDITION UPON SURRENDER. Landlord shall deliver possession of the Initial Premises to Tenant in accordance with Paragraph 44 of EXHIBIT C to this Lease. The Future Premises shall be deemed delivered to Tenant as of May 1, 1999. Tenant shall accept such delivery of the Premises in their then "AS IS" condition, which acceptance shall constitute the agreement of Tenant that the Premises are in the condition required by this Lease and that Tenant waives any and all defects therein. Tenant shall, at all times during the term hereof and at Tenant's sole cost and expense, keep the Premises and every part thereof in good condition and repair, ordinary wear and tear and damage thereto by fire, earthquake, act of God or the elements excepted, Tenant hereby waiving all rights to make repairs at the expense of Landlord as provided by any law, statute or ordinance now or hereafter in effect. All repairs and replacements made by or on behalf of Tenant shall be made and performed at Tenant's cost and expense and at such time and in such manner as 9 Landlord may reasonably designate, by contractors or mechanics reasonably approved by Landlord and so that the same shall be at least equal in quality, value, character and utility to the original work or installation being repaired or replaced. Tenant shall upon the expiration or sooner termination of the term hereof surrender the Premises to Landlord in the condition required by Subparagraph 8(c) hereof, and otherwise broom clean in the same condition as when received, ordinary wear and tear and damage from causes beyond the reasonable control of Tenant excepted. Tenant hereby waives all rights under, and benefits of, subsection I of section 1932 and sections 1941 and 1942 of the California Civil Code and any similar law, statute or ordinance now or hereafter in effect. No representations respecting the condition of the Premises or the Building have been made to Tenant either by Landlord or by any real estate broker, except as specifically herein set forth. Tenant's obligation to keep the Premises and every part thereof in good condition and repair is part of the consideration for Landlord's leasing the Premises to Tenant. 11. DESTRUCTION OR DAMAGE. If the Premises or the Building are damaged by fire or other casualty, Landlord shall repair the same, subject to the provisions of this Paragraph 11 hereinafter set forth, provided such repairs can, in Landlord's opinion, be made within sixty (60) days, and this Lease shall remain in full force and effect. If such repairs cannot, in Landlord's opinion, be made within sixty (60) days, Landlord at its option shall by written notice to Tenant given within thirty (30) days after the date of such fire or other casualty either (i) elect to repair or restore such damage, this Lease continuing in full force and effect, or (ii) terminate this Lease as of a date specified in such notice, which date shall not be less than thirty (30) nor more than (60) days after the date such notice is given. If such fire or other casualty shall have damaged the Premises or common areas necessary to Tenant's occupancy, and if such damage is not the result of the negligence or willful misconduct of Tenant or Tenant's employees, contractors, licensees or invitees, then during the period the Premises are rendered unusable by such damage Tenant shall be entitled to a reduction in rent in the proportion that the area of the Premises rendered unusable by such damage bears to the total area of the Premises. Landlord shall not be required to repair any injury or damage or to make any repairs or replacements of any improvements installed in the Premises by or for Tenant, and Tenant shall, at Tenant's sole cost and expense, repair and restore all such improvements, including, without limitation, the Tenant Improvements, if any. A total destruction of the Building shall automatically terminate this Lease. Tenant hereby waives California Civil Code sections 1932(2) and 1933(4) providing for termination of hiring upon destruction of-the thing hired. 12. SUBROGATION. Landlord and Tenant shall each have included in all policies of fire, extended coverage, business interruption and other insurance respectively obtained by them covering the Premises, the Building and contents therein, a waiver by the insurer of all right of subrogation against the other in connection with any loss or damage thereby insured against. Any additional premium for such waiver shall be paid by the primary insured. To the full extent permitted by law, Landlord and Tenant each waives all right of recovery against the other for, and agrees to release the other from liability for, loss or damage to the extent such loss or damage is covered by valid and collectible INSURANCE IN effect at the time of such loss or damage or would be covered by the insurance required to be maintained under this Lease by the party seeking recovery. 13. EXCULPATION, INDEMNIFICATION AND INSURANCE. (a) Tenant hereby waives as against Landlord, and releases Landlord from, all claims for damage to any property or injury, illness or death of any person in, upon or about the Premises 10 and/or the Building arising at any time and from any cause whatsoever (including, without limitation, when such damage, injury, illness or death shall have been caused in whole or in part by the act, omission, or active or passive negligence of Landlord, its employees, agents or contractors), other than solely by reason of the gross negligence or willful act of Landlord, its employees, agents or contractors. Notwithstanding anything in the foregoing to the contrary, in no event shall Landlord be responsible to Tenant for claims for damages arising from or in connection with the acts or omissions of any other tenant or occupant of the Building, or for consequential or punitive damages. (b) Tenant shall indemnify, protect, defend and hold Landlord harmless from and against any and all claims, loss, damages, causes of action, liability, cost and expense (including, without limitation, attorneys, fees) arising from or in connection with: (i) the use, storage and disposal by Tenant of any hazardous substances, materials or waste in the Premises; and (ii) any damage to any property or injury, illness or death of any person (A) occurring in or on the Premises or any part thereof arising at any time and from any cause whatsoever other than by reason, and only to the extent, of the negligence or willful act of Landlord, its employees, agents or contractors, and (B) occurring in, on, or-about any part of the Building other than the Premises when such damage, injury, illness or death shall be caused in whole or in part by the act, neglect, omission or fault of Tenant, its agents, servants, employees, invitees or licensees, other than by reason, and only to the extent, of the negligence or willful act of Landlord, its employees, agents or contractors. (c) Tenant shall, at its sole cost and expense, obtain and keep in force during the term of this Lease fire and extended coverage insurance on Tenant's improvements, including, without limitation, the Tenant Improvements, fixtures, furnishings and equipment in and upon the Premises in an amount not less than eighty percent (80%) of the full replacement cost thereof (without deduction for depreciation). All amounts that shall be received under the insurance specified in this Subparagraph 13(c) shall first be applied to the payment of the cost of repair or replacement of-any of Tenant's improvements, fixtures, furnishings and equipment that were damaged or destroyed, or, if this Lease terminates, prior to such repair or replacement being made, paid over to Landlord to the extent that the improvements or fixtures damaged or destroyed have become Landlord's property pursuant to Paragraph 8 hereof. (d) Tenant shall, at its sole cost and expense, obtain and keep in force during the term of this Lease comprehensive general liability insurance including contractual and fire legal liability coverage, with a minimum combined single limit of liability of Three Million Dollars ($3,000,000) per occurrence for injury to, illness of, or death of persons and damage to property occurring in, upon or about the Premises or the Building. Landlord reserves the right to increase the foregoing amount from time to time as Landlord determines is required adequately to protect Landlord from the matters insured against. The foregoing insurance shall insure the performance by Tenant of the indemnity agreement set forth in Subparagraph 13(a) hereof. (e) All insurance required under this Paragraph 13 and all renewals thereof shall be issued by such good and responsible companies qualified to do and doing business in the State of California 11 as may be approved by Landlord, which approval shall not be unreasonably withheld, with a designation in the current "Bests Insurance Reports" as issued from time to time as follows: policyholders' rating of not less than B+, financial rating of not less than X. Each policy shall expressly provide that the policy shall not be cancelled or altered without thirty (30) days' prior written notice to Landlord and shall remain in effect notwithstanding any such cancellation or alteration until such notice shall have been given to Landlord and such thirty (30) day period shall have expired. All insurance under this Paragraph 13 shall name Landlord as an additional insured, shall be primary and noncontributing with any insurance which may be carried by Landlord, and shall expressly provide that Landlord, although named as an insured, shall nevertheless be entitled to recover under the policy for any loss, injury or damage to Landlord, its employees and contractors (i.e., severability of interests endorsement). Upon the issuance thereof, each such policy or a duplicate or certificate thereof shall be delivered to Landlord for retention by it. In the event that Tenant shall fail to insure or shall fail to furnish to Landlord upon notice to do so any such policy, duplicate policy or certificate as herein required, Landlord may, but shall not be obligated so to do, effect such insurance for the benefit of Tenant or Landlord or both of them for a period not exceeding one year, and any premium paid by Landlord shall be recoverable from Tenant as additional rent on demand. (f) The provisions of this Paragraph 13 shall survive the termination of this Lease with respect to any damage, injury, illness or death occurring prior to such termination. 14. COMPLIANCE WITH LEGAL REQUIREMENTS. Tenant shall, at its sole cost and expense, promptly comply with all laws, statutes, ordinances and governmental rules, regulations or requirements now in force or which may hereafter be in force, including, without limitation, the Americans with Disabilities Act, 42 U.S.C. Sections 12101 ET. SEQ., laws regarding the use, storage and disposal of hazardous substances, with the requirements of any board of fire underwriters or other similar body now or hereafter constituted, with any direction or occupancy certificate issued pursuant to any law by any public agencies or officers, as well as the provisions of all recorded documents affecting the Premises of which Tenant has received actual notice, insofar as any thereof relate to or affect the condition, use or occupancy of the Premises, excluding requirements of structural changes not related to or necessitated or affected by Tenant's acts or by improvements made by or for Tenant. 15. ASSIGNMENT AND SUBLETTING. (a) Tenant shall not, directly or indirectly, without the prior written consent of Landlord (which consent shall not be unreasonably withheld), and otherwise in strict accordance with the provisions of this Paragraph 15, assign this Lease or any interest herein or sublease the Premises or any part thereof, or permit the use or occupancy of the Premises by any person or entity other than Tenant. Tenant shall not, directly or indirectly, without the prior written consent of Landlord, pledge, mortgage or hypothecate this Lease or any interest herein. Any sale or transfer (including, without limitation, by consolidation, merger or reorganization) of a controlling interest in the voting stock of Tenant, if Tenant is a corporation, or of a controlling partnership interest of Tenant, if Tenant is a partnership, in one or a series of transactions, shall be deemed an assignment for purposes of this Subparagraph 15(a). The term "CONTROLLING" as used in the immediately preceding sentence shall mean the right to exercise, directly or indirectly, forty-nine percent (49%) or more of the voting or equity rights attributable to the interest of the controlled entity. This Lease shall not, 12 nor shall any interest herein, be assignable as to the interest of Tenant involuntarily or by operation of law without the prior written consent of Landlord. Any of the foregoing acts without such prior written consent of Landlord shall be void and shall, at the option of Landlord, constitute a default that entitles Landlord to terminate this Lease. Without limiting or excluding other reasons for withholding Landlord's consent, Landlord shall have the right to withhold consent if the proposed assignee or subtenant or the use of the Premises to be made by the proposed assignee or subtenant is not consistent with the character and nature of other tenants and uses permitted in the Building or on the particular floor(s) of the Building on which the Premises are located, or is prohibited by this Lease, or if the proposed assignee or subtenant is currently a tenant or other occupant of the Building, or it is not demonstrated to the satisfaction of Landlord that the proposed assignee or subtenant has good business and moral character and reputation and that the financial condition of the proposed assignee or subtenant equals or exceeds that required by Landlord of other tenants leasing comparable space in the Building. Tenant agrees that the instrument by which any assignment or sublease to which Landlord consents is accomplished shall expressly provide that the assignee or subtenant will perform all of the covenants to be performed by Tenant under this Lease (in the case of a sublease, only insofar as such covenants relate to the portion of the Premises subject to such sublease) as and when performance is due after the effective date of the assignment or sublease, that Landlord will have the right to enforce such covenants directly against-such assignee or subtenant and that upon written notice to such assignee or subtenant from Landlord of a default by Tenant under the terms of this Lease, the assignee or subtenant shall pay any sublease rental or other compensation otherwise payable under any agreement with Tenant, as and when due, directly to Landlord. Any purported assignment or sublease without an instrument containing the foregoing provisions shall be void. (b) If Tenant wishes to assign this Lease or sublease all or any part of the Premises, Tenant shall give written notice to Landlord identifying the intended assignee or subtenant by name and address and specifying all of the terms of the intended assignment or sublease. Tenant shall give Landlord such additional information concerning the intended assignee or subtenant (including complete financial statements and a business history) or the intended assignment or sublease (including true copies thereof) as Landlord requests. For a period of twenty (20) days after such written notice is given by Tenant, Landlord shall have the right, by giving written notice to Tenant, to (i) consent in writing to the intended assignment or sublease, (ii) withhold and decline to consent to the intended assignment or sublease, or (iii) in the case of an assignment of this Lease or a sublease of substantially the entire Premises for substantially the balance of the term of this Lease, terminate this Lease by written notice to Tenant, which termination shall be effective as of the date on which the intended assignment or sublease would have been effective if Landlord had not exercised such termination right. If Landlord elects to terminate this Lease, then from and after the date of such termination, Landlord and Tenant each shall have no further obligation to the other under this Lease with respect to the Premises except for matters occurring or obligations arising hereunder prior to the date of such termination. If Landlord elects to terminate this Lease, Tenant shall have the right, by giving written notice to Landlord within five (5) days of Landlord's exercise of its right under clause (iii) above, to rescind its request to Landlord to consent to the proposed assignment or subletting, in which event this Lease shall not terminate and this Lease shall remain in full force and effect. If Landlord does not exercise any of the rights set forth in clause (i), (ii) or (iii) above by giving written notice to Tenant within such period of twenty (20) days, Landlord shall be deemed to consent in writing to the intended assignment or sublease pursuant to clause (i) of the preceding sentence. Tenant acknowledges and agrees that this Paragraph 15 is an economic 13 provision, like rent, and that Landlord's right to terminate this Lease and to recapture possession of the Premises, in the event Landlord exercises its right under clause (iii) above, or to share in the excess rent (as that term is hereinafter defined), in the event Landlord exercises its right under clause (i) above, was granted by Tenant to Landlord in consideration of certain other economic concessions granted by Landlord to Tenant. (c) If Landlord consents in writing (or Landlord is deemed to consent in writing in accordance with Subparagraph (b) hereof) or the assignment or sublease is otherwise permitted under this Lease, Tenant may complete the intended assignment or sublease subject to the following covenants: (i) the assignment or sublease shall be on the same terms as set forth in the written notice given by TENANT TO Landlord, (ii) no assignment or sublease shall be valid and no assignee or ` subtenant shall take possession of the Premises or any part thereof until an executed duplicate original of such assignment or sublease, in compliance with Subparagraph 15(a) hereof, has been delivered to Landlord, (iii) no assignee or subtenant shall have a right further to assign or sublease, and (iv) fifty percent (50%) of the excess rent (as hereinafter defined) derived from such assignment or sublease shall-be paid to Landlord. Such excess rent shall be deemed to be, and shall be paid by Tenant to Landlord as, additional rent. Tenant shall pay such excess rent to Landlord immediately as and when such excess rent becomes due and payable to Tenant. As used in this Paragraph, "excess rent" shall mean the amount by which the total money and other economic consideration to be paid by the assignee or subtenant as a result of an assignment or sublease, whether denominated rent or otherwise, exceeds, in the aggregate, the total amount of rent which Tenant is obligated to pay to Landlord under this Lease (prorated to reflect the rent allocable to the portion of the Premises subject to such assignment or sublease), less only the reasonable costs paid by Tenant for additional improvements installed in the portion of the Premises subject to such assignment or sublease at Tenant's sole cost and expense for the specific assignee or subtenant in question and approved by Landlord in accordance with the provisions of Paragraph 8 hereof, and reasonable leasing commissions paid by Tenant in connection with such assignment or sublease, without deduction for carrying costs due to vacancy or otherwise. Such costs of additional improvements and leasing commissions shall be amortized without interest over the term of such assignment or sublease unless, with respect to such additional improvements, such additional improvements have a useful life greater than the term of such assignment or sublease, in which case such additional improvements shall be amortized without interest over their useful life. (d) No assignment or sublease whatsoever shall release Tenant from Tenant's obligations and liabilities under this Lease or alter the primary liability of Tenant to pay all rent and to perform all obligations to be paid and performed by Tenant. The acceptance of rent by Landlord from any other person or entity shall not be deemed to be a waiver by Landlord of any provision of this Lease. Consent to one assignment or sublease shall not be deemed consent to any subsequent assignment or sublease. If any assignee, subtenant or successor of Tenant defaults in the performance of any obligation to be performed by Tenant under this Lease, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against such assignee, subtenant or successor. Landlord may consent to subsequent assignments or subleases or amendments or modifications to this Lease with assignees, subtenants or successors of Tenant, without obtaining any consent thereto from Tenant or any successor of Tenant, provided that Landlord shall have given Tenant written notice thereof, and such action shall not release Tenant from liability under this Lease. 14 (e) Tenant shall reimburse Landlord, as additional rent, (i) Landlord's reasonable costs and attorneys' fees incurred in conjunction with the processing and documentation of any requested or permitted assignment, subletting, hypothecation or transfer of Tenant's interest in this Lease or the Premises (whether or not said transaction is consummated), and (ii) all costs incurred by Landlord in connection with moving the new subtenant or assignee into the Premises (including, without limitation, freight elevator and security guard services). Notwithstanding anything to the contrary in this Lease, if Tenant or any proposed assignee, subtenant or other transferee of Tenant claims that Landlord has unreasonably withheld or delayed its consent under Subparagraph 15(b) hereof, or otherwise has breached or acted unreasonably under this Paragraph 15, their sole remedy shall be a declaratory judgment and an injunction for the relief sought without any monetary damages, and Tenant waives all other remedies on its own behalf and to the extent permitted under by law, on behalf of Tenant's proposed assignee, subtenant or other transferee. (f) Notwithstanding the provisions of Subparagraph 15(a) hereof, Tenant shall have the right to sublease the entire Premises to an affiliate or subsidiary of Tenant, provided that Tenant has submitted sufficient information to Landlord to enable Landlord to determine, and Landlord has notified Tenant in writing that it has determined, in its sole discretion, that the following conditions with respect to-the proposed sublease have been .satisfied: (i) The total-net worth of the proposed sublessee is greater than or equal to the total net worth of Tenant on the date of this Lease; (ii) The use of the Premises to be made by the proposed subtenant is permitted by this Lease and is consistent with the character and nature of other tenants and uses permitted in the Building and on the particular floors on which the Premises are located; (iii) The proposed subtenant has a good business and moral character and reputation; and (iv) The electrical, HVAC and weight load to be imposed by the proposed subtenant on the Premises will not exceed the design load capacities and performance criteria of the Building. (g) Notwithstanding the provisions of Subparagraph 15(a) hereof, Tenant may sell or transfer a controlling interest in the voting stock of Tenant, provided that Tenant has submitted sufficient information to Landlord to enable Landlord to determine, and Landlord has notified Tenant in writing that it has determined, in its sole discretion, that the following conditions with respect to the proposed sale or transfer have been satisfied: (i) The total net worth of the proposed purchaser is greater than or equal to the greater of (1) the total net worth of Tenant on the date of this Lease and (2) the total net worth of Tenant immediately prior to such sale or transfer; (ii) The use of the Premises to be made by the proposed purchaser is permitted by this Lease and is consistent with the character and nature of other tenants and uses permitted in the Building and on the particular floors on which the Premises are located; 15 (iii) The proposed purchaser has a good business and moral character and reputation; and (iv) The electrical, HVAC and weight load to be imposed by the proposed purchaser on the Premises will not exceed the design load capacities and performance criteria of the Building. 16. RULES AND REGULATIONS. Tenant shall faithfully observe and comply with the Rules and Regulations attached as EXHIBIT B to this Lease and, after notice thereof, all reasonable modifications thereof and additions thereto from time to time promulgated in writing by Landlord. Landlord shall not-be responsible to Tenant for the nonperformance by any other tenant or occupant of the Building of any of said Rules and Regulations. 17. ENTRY BY LANDLORD. Landlord reserves and shall have the right from time to time and upon twenty-four (24) hours notice (other than for services provided by Landlord on a regular basis or in the event of an emergency, as to which no notice shall be required), to enter the Premises to (a) inspect the Premises, (b) exhibit the Premises to prospective purchasers, lenders or tenants, (c) determine whether Tenant is complying with all its obligations hereunder, (d) supply janitor service and any other service to be provided by Landlord to Tenant hereunder, (e) post notices of nonresponsibility, and (f) make repairs required of Landlord hereunder or repairs to any adjoining space or utility services or make repairs, alterations or improvements to any other portion of the Building; provided, however, that all such work shall be done as promptly as reasonably possible and so as to cause as little interference to Tenant as reasonably possible. Subject to Paragraph 13 hereof, Tenant hereby waives any claim for damages for any injury or inconvenience to or interference with Tenant's business, any loss of occupancy or quiet enjoyment of the Premises or any other loss or claim for abatement of rent occasioned by such entry. Landlord shall at all times have and retain a key with which to unlock all of the doors in, upon or about the Premises (excluding Tenant's vaults, safes and similar areas designated in writing by Tenant in advance), and Landlord shall have the right to use any and all means which Landlord may deem reasonable under the circumstances to open said doors in an emergency in order to obtain entry to the Premises, and any entry to the Premises obtained by Landlord by any reasonable means, or otherwise, shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into or a detainer of the Premises or an eviction, actual or constructive, of Tenant from the Premises, or any portion thereof. 18. EVENTS OF DEFAULT. The occurrence of any one or more of the following events ("EVENT OF DEFAULT") shall constitute a breach of this Lease by Tenant: (a) If Tenant shall fail to pay any monthly base rent or additional rent when and as the same becomes due and payable and such failure continues for more than three (3) business days after Landlord gives written notice thereof to Tenant; provided, that after the second such failure in any calendar year, the failure to pay monthly base rent or additional rent as and when the same becomes due and payable shall be an immediate default without further notice; or (b) If Tenant shall fail to pay any other sum or charge payable by Tenant hereunder when and as the same becomes due and payable and such failure shall continue for more than five (5) days following written notice thereof from Landlord; or 16 (c) If Tenant shall fail to perform or observe any other agreement, covenant, condition or provision hereof or of the Rules and Regulations specified in Paragraph 16 hereof to be performed or observed by Tenant when and as performance or observance is due, such failure shall continue for more than twenty (20) days following written notice thereof from Landlord and Tenant shall not within such period commence with due diligence and dispatch the curing of such default or, havling so commenced, shall thereafter fail or neglect to prosecute or complete with due diligence and dispatch the curing of such default; provided, however, that notwithstanding the foregoing, a change in use of the Premises in violation of Subparagraph 6(a) hereof, or the failure to observe the provisions of this Lease concerning the use, storage or disposal of hazardous substances in the Premises, or a transfer or encumbrance of this Lease or Tenant's interest in the Premises in violation of Paragraph 15 hereof shall be an immediate, noncurable default hereunder; or (d) If Tenant shall make a general assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts as they become due, or shall file a petition in bankruptcy, or shall be adjudicated as bankruptcy or insolvent, or shall file a petition seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, or shall file an answer admitting or shall fail timely to contest the material allegations of a petition filed against it in any such proceeding, or shall seek or consent to or acquiesce in the appointment of any trustee, receiver or liquidator of Tenant or any material part of its properties; or (e) If within sixty (60) days after the commencement of any proceeding against Tenant seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such proceeding shall not have been dismissed or if, within sixty (60) days after the appointment without the consent or acquiescence of Tenant of any trustee, receiver or liquidator of Tenant or of any material part of its properties, such appointment shall not have been vacated; or (f) the taking of any action leading to, or the actual dissolution or liquidation of Tenant, if Tenant is other than an individual; or (g) If this Lease or any estate of Tenant hereunder shall be levied upon under any attachment or execution and such attachment or execution is not vacated within ten (10) days; or (h) If Tenant shall vacate or abandon the Premises or any part thereof at any time during the term of this Lease, unless Tenant continues to pay rent, additional rent and any other sums payable under this Lease. 19. TERMINATION UPON DEFAULT. If an Event of Default shall occur, Landlord at any time thereafter may give a written termination notice to Tenant and on the date specified in such notice, Tenant's right to possession shall terminate and this Lease shall terminate. Upon such termination, Landlord may recover from Tenant: (a) The worth at the time of award of the unpaid rent which had been earned at the time of termination; 17 (b) The worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; (c) The worth at the time of award of the amount by which the unpaid rent for the balance of the term of this Lease after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; and (d) Any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom. The "worth at the time of award" of the amounts referred to in Subparagraphs (a) and (b) above shall be computed by allowing interest at the maximum annual interest rate allowed by law on the date of termination for business loans (not primarily for personal, family or household purposes) not exempt from the usury law, or, if there is no such maximum annual interest rate, at the "Prime Rate" (as defined below) charged on such termination date plus five (5) percentage points (the Prime Rate plus five (5) percentage points). As used in this Lease, the term "PRIME RATE" shall mean the rate of interest announced from time to time by the San Francisco Main Office of Bank of America NT & SA (or any successor bank thereto) as its "reference rate, (or, if there is no such "reference rate" announced, the rate announced by such bank on which such bank prices its commercial loans to its most creditworthy customers). The "worth at the time of award" of the amount referred to in Subparagraph (c) above shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). For the purpose of determining unpaid rent under Subparagraphs (a)-(c) above, the monthly rent reserved in this Lease shall be deemed to be the sum of the base rent due under Paragraph 3 hereof and the additional rent last payable by Tenant under Paragraph 4 hereof. Tenant hereby waives all rights under California Code of Civil Procedure section 1179 and Civil Code section 3275 providing for relief from forfeiture and any other right of reinstatement following termination of this Lease. The foregoing waiver shall survive the termination of this Lease. 20. CONTINUATION AFTER DEFAULT. Even though Tenant has breached this Lease, this Lease shall continue in effect for so long as Landlord does not terminate Tenant's right to possession, and Landlord may enforce all its rights and remedies under this Lease, including the right to recover the rent as it becomes due under this Lease. Without limiting the generality of the foregoing, Landlord has the remedy described in California Civil Code Section 1951.4 (lessor may continue lease in effect after lessee's breach and abandonment and recover rent as it becomes due, if lessee has right to sublet or assign, subject only to reasonable limitations). Acts of maintenance or preservation or efforts to relet the Premises or the appointment of a receiver upon initiative of Landlord to protect Landlord's interest under this Lease, or the withholding of consent to a subletting or assignment or terminating a subletting or assignment shall not constitute a termination of Tenant's right to possession unless written notice of termination is given by Landlord to Tenant. 21. LANDLORD'S RIGHT TO CURE DEFAULTS. All agreements, covenants, conditions and provisions to be performed or observed by Tenant under this Lease shall be at its sole cost and expense and without any abatement of rent. If Tenant shall fail to pay any sum of money, other than rent, required to be paid by it hereunder or shall fail to perform-any other act on its part to be performed hereunder, Landlord may, but shall not be obligated so to do, and without waiving or 18 releasing Tenant from any obligations of Tenant, make any such payment-or perform any such other act on Tenant's part to be made or performed as in this Lease provided. To the extent that it is reasonably feasible, Landlord shall give Tenant written notice prior to making such a payment or performing such an act on Tenant's part. All sums so paid by Landlord and all necessary incidental costs shall be deemed additional rent hereunder and shall be payable to Landlord on demand, together with interest thereon at the maximum annual interest rate allowed by law on the date of expenditure by Landlord for business loans (not primarily for personal, family or household purposes) not exempt from the usury law, or, if there is no such maximum annual interest, at the Prime Rate (as defined in Subparagraph 19(d) hereof) charged on the date of expenditure by Landlord plus five (5) percentage points (the Prime Rate plus five (5) percentage points), from the date of expenditure by Landlord to the date of repayment by Tenant and Landlord shall have (in addition to any other right or remedy of Landlord) the same rights and remedies in the event of the nonpayment thereof by Tenant as in the case of default by Tenant in the payment of rent. 22. LATE CHARGE/DEFAULT INTEREST. Tenant acknowledges that the late payment by Tenant of any monthly installment of base rent or additional rent will cause Landlord to incur costs and expenses, the exact amount of which is extremely difficult and impractical to fix. Such costs and expenses will include administration and collection costs, loss of use of available funds, and processing and accounting expenses. Therefore, if any monthly installment of base rent or additional rent is not received by Landlord within five (5) days after such installment is due, Tenant shall immediately pay to Landlord a late charge equal to four percent (4%) of such delinquent installment. Landlord and Tenant agree that such late charge represents a reasonable estimate of such costs and expenses and is fair compensation to Landlord for the loss suffered by Tenant's failure to make timely payment. In no event shall such late charge be deemed to grant to Tenant a grace period of extension of time within which to pay any monthly rent or be deemed an election of remedies by Landlord preventing it from exercising any right or enforcing any remedy available to Landlord upon Tenant's failure to pay each installment of monthly rent due under this Lease in a timely fashion, including the right to terminate this Lease. All amounts of money payable by Tenant to Landlord hereunder, if not paid when due (and as to monthly installments of base rent and additional rent if not paid prior to imposition of the late charge provided above), shall bear interest from the due date (or from the date of imposition of the late charge, as the case may be) until paid at the maximum annual interest rate allowed by law for business loans (not primarily for personal, family or household purposes) not exempt from the usury law at such due date or, if there is no such maximum annual interest rate, at the Prime Rate (as defined in Subparagraph 19(d) hereof) charged on such due date plus five (5) percentage points. 23. OTHER RELIEF. The remedies provided for in this Lease are in addition to any other remedies available to Landlord at law or in equity by statute or otherwise. 24. ATTORNEYS' FEES. In the event of any action or proceeding at law or in equity between Landlord and Tenant to enforce any provision of this Lease or to protect or establish any right or remedy of either Landlord or Tenant hereunder, the unsuccessful party to such action or proceeding shall pay to the prevailing party all costs and expenses, including reasonable attorneys, fees, incurred by such prevailing party in such action or proceeding and in any appeal in connection therewith, and, if such prevailing party shall recover judgment in any such action, proceeding or appeal, such costs, expenses and attorneys' fees shall be included in and as a part of such judgment. For the purposes of this paragraph the "PREVAILING PARTY" shall be the: (i) party prosecuting such proceeding or action, if 19 any relief is granted to such party, or (ii) the other party to the proceeding, if no relief is granted to the party prosecuting such proceeding; provided, that if both parties prosecute claims in the same proceeding and relief is granted to both parties or no relief is granted to either party in such proceeding, neither party shall be deemed the "prevailing party" and each party shall bear its own costs and expenses and all other costs of such proceeding or action shall be divided equally between the parties. 25. EMINENT DOMAIN. If all or any part of the Premises shall be taken, or any part of the Building that is necessary for Tenant's access to or use of the Premises, as a result of the exercise of the power of eminent domain or agreement in lieu thereof, this Lease shall terminate as to the part so taken as of the date of taking, and, in the case of a partial taking, either Landlord or Tenant shall have the right to terminate this Lease as to the balance of the Premises by giving written notice to the other within thirty (30) days after such date; provided, however, that a condition to the exercise by Tenant of such right to terminate shall be that the portion of the Premises taken shall be of such extent and nature as substantially to handicap, impede or impair Tenant's use of the balance of the Premises. In the event of any taking, Landlord shall be entitled to any and all compensation, damages, income, rent, awards or interest therein whatsoever which may be paid or made in connection therewith, and Tenant shall have no claim against Landlord for the value of any unexpired term of this Lease or otherwise. Notwithstanding the foregoing, Tenant shall have the right to claim and recover from the condemning authority a separate award for Tenant's moving expenses, business dislocation damages, personal property and fixtures, unamortized costs of leasehold improvements paid for by Tenant, provided that neither the making of such a claim nor the recovery of such an award would in any way reduce the amount or adversely affect the terms of Landlord's award arising out of such taking. In the event of a partial taking of the Premises which does not result in a termination of this Lease, the monthly rent thereafter to be paid shall be equitably reduced. If all or any part of the Building shall be taken as a result of the exercise of the power of eminent domain, Landlord shall have the right to terminate this Lease by giving written notice to Tenant within thirty (30) days after the date of taking. 26. SUBORDINATION TO MORTGAGES. This Lease shall be subject and subordinated at all times to the lien of all mortgages and deeds of trust in any amount or amounts whatsoever which may now exist or hereafter be placed on or against the Building or on or against Landlord's interest or estate therein, all without the necessity of having further instruments executed on the part of Tenant to effectuate such subordination. Notwithstanding the foregoing in the event of a foreclosure of any such mortgage or deed of trust or of any other action or proceeding for the enforcement thereof, or of any sale thereunder, this Lease will not be barred, terminated, cut off or foreclosed, nor will the rights and possession of Tenant hereunder be disturbed, if Tenant shall not then be in default in the payment of rent or other sums or be otherwise in default under this Lease, and Tenant shall attorn to the purchaser at such foreclosure, sale or other action or proceeding. Tenant agrees to execute, acknowledge and deliver upon demand such further instruments evidencing such subordination of this Lease to the lien of any such mortgages or deeds of trust as may reasonably be required by Landlord; provided, however, that Tenant's covenant to subordinate this Lease to mortgages or deeds of trust hereafter executed is conditioned upon each such senior instrument-containing the commitments specified in the preceding sentence. 27. NO MERGER. The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not work a merger and shall, at the option of Landlord, terminate all or 20 any existing subleases or subtenancies, or operate as an assignment to Landlord of any or all such subleases or subtenancies. 28. SALE. In the event the original Landlord hereunder, or any successor owner of the Building, shall sell or convey the Building, all liabilities and obligations on the part of the original Landlord, or such successor owner, under this Lease accruing thereafter shall terminate, and thereupon all such liabilities and obligations shall be binding upon the new owner. Tenant agrees to attorn to such new owner, provided such new owner assumes and agrees to perform Landlord's obligations under this Lease. 29. ESTOPPEL CERTIFICATE. At any time and from time to time but on not less than ten (10) days, prior written request by Landlord, Tenant shall execute, acknowledge and deliver to Landlord, promptly upon request, a certificate certifying: (a) That this Lease is unmodified and in full force and effect (or, if there have been modifications, that this Lease is in full force and effect as modified, and stating the date and nature of each modification); (b) The date, if any, to which rent and other sums payable hereunder have been paid; (c) That no notice has been received by Tenant of any default which has not been cured, except as to defaults specified in such certificate; (d) That Landlord is not in default hereunder, except as to defaults specified in such certificate; and (e) Such other matters as may be reasonably requested by Landlord or any actual or prospective purchaser or mortgage lender. Any such certificate may be relied upon by any actual or prospective purchaser, mortgagee or beneficiary under any deed of trust of the Building or any part thereof. 30. NO LIGHT, AIR OR VIEW EASEMENT. Any diminution or shutting off of light, air or view by any structure which may be erected on lands adjacent to the Building shall in no way affect this Lease or impose any liability on Landlord. 31. HOLDING OVER. If, without objection by Landlord, Tenant holds possession of the Premises after expiration of the term of this Lease., Tenant shall become a tenant from month to month upon the terms herein specified but at a monthly rent equal to 200% of the then prevailing monthly rent paid by Tenant at the expiration of the term of this Lease pursuant to all the provisions of Paragraphs 3 and 4 hereof, payable in advance on or before the first day of each month. Each party shall give the other written notice at least one month prior to the date of termination of such monthly tenancy of its intention to terminate such tenancy. 32. ABANDONMENT. Tenant's vacation, surrender or abandonment of the Premises or any part thereof at any time during the term hereof shall constitute a material breach of this Lease, unless Tenant continues to pay rent and additional rent under this Lease and continues to comply with all other terms and provisions of this Lease. If Tenant shall vacate, abandon or surrender the Premises and not continue to pay rent and additional rent under this Lease or not continue to comply with all 21 of the other terms and provisions of this Lease, or shall be dispossessed by process of law or otherwise, whether or not Tenant continues to pay rent and additional rent under this Lease and continues to comply with all other terms and provisions of this Lease any personal property belonging to Tenant and left on the Premises shall be deemed to be abandoned, at the option of Landlord, and Landlord may sell or otherwise dispose of such personal property in any commercially reasonable manner. 33. SECURITY DEPOSIT. Tenant deposited with Landlord Two Thousand Three Hundred Dollars ($2,300) (the "FIRST DEPOSIT") in connection with the Seventh Floor Lease (as defined in EXHIBIT C). Tenant has also deposited with Landlord the sum of Twenty-Four Thousand One Hundred Thirteen Dollars ($24,113.00) (the "SECOND DEPOSIT") in connection with the execution of this Lease. On-May 1, 1999, Tenant shall deposit with Landlord the additional sum of Thirty-One Thousand Four-Hundred Thirteen Dollars (the "THIRD DEPOSIT") in connection with the termination of the Master Lease. Because the Seventh Floor Lease is being terminated concurrently with the execution of this Lease and the Seventh Floor Space (as defined in EXHIBIT C) is included in the Initial Premises, Landlord shall hold the First Deposit, the Second Deposit and, as of May 1, 1999, the Third Deposit (collectively and individually, the "DEPOSIT") as security for the faithful performance and observance by Tenant of all of the agreements, covenants, conditions and provisions of this Lease to be performed or observed by Tenant, and Tenant shall not be entitled to interest thereon. Landlord shall not be required to segregate the Deposit from its other funds. In the event Tenant fails to perform or observe any of the agreements, covenants, conditions and provisions of this Lease to be performed or observed by it, including, without limitation, defaults by Tenant in the payment of rent, the repair of damage to the Premises caused by Tenant, and the cleaning of the Premises upon termination of the tenancy created hereby, then, at Landlord's option, Landlord may, but shall not be obligated to, apply the Deposit, or so much thereof as may be necessary, to remedy any such failure by Tenant. If Landlord applies the Deposit or any part thereof to remedy any such failure by Tenant, then Tenant shall immediately pay to Landlord the sum necessary to restore the Deposit to the full amount specified in this Paragraph 33. Any remaining portion of the Deposit shall be returned to Tenant upon termination of this Lease. Upon termination of the original Landlord's or any successor landlord's interest in the Premises or the Building, the original Landlord or such successor landlord shall be relieved of further liability with respect to the Deposit upon the original Landlord's or such successor landlord's complying with California Civil Code section 1950.7. 34. WAIVER. The waiver by Landlord or Tenant of any breach of any agreement, covenant, condition or provision herein contained shall not be deemed to be a waiver of any subsequent breach of the same or any other agreement, covenant, condition or provision herein contained, nor shall any custom or practice which may grow up between Landlord and Tenant in the administration of this Lease be construed to waive or to lessen the right of Landlord or Tenant to insist upon the performance by Landlord or Tenant in strict accordance with this Lease. The subsequent acceptance of rent hereunder by Landlord or the payment of rent by Tenant shall not be deemed to be a waiver of any preceding breach by Landlord or Tenant of any agreement, covenant, condition or provision of this Lease, other than the failure of Tenant to pay the particular rent so accepted, regardless of Landlord's or Tenant's knowledge of such preceding breach at the time of acceptance or payment of such rent. 22 35. NOTICES. All notices, communications and demands which may or are required to be given by either Landlord or Tenant to the other hereunder shall be deemed to have been fully given when made in writing and either personally delivered (by hand or overnight air courier service), deposited in the United States mail, certified or registered, postage prepaid, and addressed as follows: to Tenant at its address specified beneath its signature below, or to such other place as Tenant may from time to time designate in a notice to Landlord, or delivered to Tenant at the Premises; to Landlord at its address specified beneath its signature below, or to such other place as Landlord may from time to time designate in a notice to Tenant. All notices, communications and demands shall be effective on the date of receipt or attempted delivery (evidenced by the registered mail receipt if mailed) or on the date of delivery, if hand delivered or delivered by overnight air courier service. Tenant hereby appoints as its agent to receive the service of all default notices and notice of commencement of unlawful detainer proceedings the person in charge of or apparently in charge of or occupying the Premises at the time, and, if there is no such person, then such service may be made by attaching the same to the main entrance of the Premises and such service shall be effective for all purposes under this Lease. 36. COMPLETE AGREEMENT. There are no oral agreements between Landlord and Tenant affecting this Lease, and this Lease supersedes and cancels any and all previous negotiations, arrangements, brochures, agreements (except for the Sublease, as consented to by Landlord) and understandings, oral or written, if any, between Landlord and Tenant or displayed by Landlord to Tenant with respect to the subject matter of this Lease or the Building. There are no representations between Landlord and Tenant or between any real estate broker and Tenant other than those contained in this Lease and all reliance with respect to any representations is solely upon representations contained in this Lease. This Lease may not be amended or modified in any respect whatsoever except by an instrument in writing signed by Landlord and Tenant. 37. SIGNAGE. Landlord shall provide identification of Tenant's name and suite numerals at the main entrance door to the Premises with one space on the Building lobby directory. All signs, notices and graphics of every kind or character, visible in or from public corridors, the common Areas or the exterior of the Premises, shall be subject to Landlord's prior written approval. 38. REAL ESTATE BROKERS. Tenant warrants and represents that it has negotiated this Lease through its broker, Belvedere Associates ("TENANT'S BROKER"), and has not authorized or employed, or acted by implication to authorize or to employ, any other real estate broker or salesman to act for Tenant in connection with this Lease. Tenant shall hold Landlord harmless from and indemnify and defend Landlord against any and all claims by any real estate broker or salesman other than Tenant's Broker for a commission or finder's fee as a result of Tenant's entering into this Lease. Landlord warrants that it shall pay the standard fees and commissions-due Tenant's Broker, as set forth in Landlord's letter to Tenant's Broker dated May 11, 1995, in connection with the negotiation of this Lease. 39. CORPORATE AUTHORITY. If Tenant is a corporation, each person executing this Lease on behalf of Tenant does hereby covenant and warrant that (a) Tenant is duly incorporated and validly existing under the laws of its state of incorporation, (b) Tenant has and is qualified to do business in California, (c) Tenant has full corporate right and authority to enter into this Lease and to perform all Tenant's obligations hereunder, and (d) each person (and all of the persons if more than one signs) signing this Lease on behalf of the corporation is duly and validly authorized to do so. 23 40. MISCELLANEOUS. The words "LANDLORD" and "TENANT" as used herein shall include the plural as well as the singular. If there is more than one Tenant, the obligations hereunder imposed upon Tenant shall be joint and several. Time-is of the essence of this Lease and each and all of its provisions. Submission of this instrument for examination or signature by Tenant does not constitute a reservation of or option for lease, and it is not effective as a lease or otherwise until execution and delivery by both Landlord and Tenant. The agreements, covenants, conditions and provisions herein contained shall, subject to the provisions as to assignment, apply to and bind the heirs, executors, administrators, successors and assigns of the parties hereto. Tenant shall not record this Lease or a short form memorandum hereof without the prior consent of Landlord. Tenant shall not, without the prior written consent of Landlord, use the name of the Building for any purpose other than as the address of the business to be conducted by Tenant in the Premises. If any provision of this Lease shall be determined to be illegal or unenforceable, such determination shall not affect any other provision of this Lease and all such other provisions shall remain in full force and effect. This Lease shall be governed by and construed in accordance with the laws of the State of California. 41. EXHIBITS. The following items, EXHIBIT A (Plan Outlining Premises), EXHIBIT B (Rules and Regulations) and EXHIBIT C (Addendum) are attached to this Lease and by this reference made a part hereof. 42. QUIET ENJOYMENT. So long as Tenant pays all rent and performs all of its other obligations as required under this Lease, Tenant shall quietly enjoy the Premises without hindrance or molestation by Landlord or any person lawfully claiming through or under Landlord, subject to the terms of this Lease and the terms of any and all present and future ground leases, underlying leases, mortgages, deeds of trust or other encumbrances, and all renewals, modifications, consolidations, replacements or extensions thereof or advances made thereunder, affecting all or any portion of the Premises, the Building or the real property on which they are situated, and all other agreements or matters to which this Lease is subordinate. IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the day and year first hereinabove written. Tenant Landlord: SELECTQUOTE INSURANCE THE EQUITABLE LIFE ASSURANCE SERVICES, a California SOCIETY OF THE UNITED STATUS, a New York corporation By: By: --------------------------- --------------------------- Name Name --------------------- ----------------------- Title Title --------------------- ---------------------- By: ------------------------ Name -------------------- Title ------------------- 24 EXHIBIT B 595 MARKET STREET RULES AND REGULATIONS 1. The sidewalks, halls, passages, exits, entrances, shopping malls, elevators, escalators and stairways of the Building shall not be obstructed by any of the tenants or used by them for any purpose other than for ingress to and egress from their respective premises. The halls, passages, exits, entrances, shopping malls, elevators, escalators and stairways are not for the general public and Landlord shall in all cases retain the right to control and prevent access thereto of all persons whose presence in the judgment of Landlord would be prejudicial to the safety, character, reputation and interests of the Building and its tenants, provided that nothing herein contained shall be construed to prevent such access to persons with whom any tenant normally deals in the ordinary course of its business, unless such persons are engaged in illegal activities. No tenant and no employee or invitee of any tenant shall go upon the roof of the Building. Landlord shall have the right at any time without the same constituting an actual or constructive eviction and without incurring any liability to Tenant therefor to change the arrangement and/or location of entrances or passageways, doors or doorways, corridors, elevators, stairs, toilets or other common areas of the Building. 2. No sign, placard, picture, name, advertisement or notice visible from the exterior of any tenant's premises shall be inscribed, painted, affixed or otherwise displayed by any tenant on any part of the Building without the prior written consent of Landlord. Landlord will adopt and furnish to tenants general guidelines relating to signs inside the Building. Tenant agrees to conform to such guidelines. All approved signs or lettering on doors shall be printed, painted, affixed or inscribed at the expense of Tenant by a person approved by Landlord. Material visible from outside the Building will not be permitted. 3. The Premises shall not be used for the storage of merchandise held for sale to the general public or for lodging. No cooking shall be done or permitted on the Premises, except that private use by Tenant of a microwave oven and Underwriters' Laboratory approved equipment for brewing coffee, tea, hot chocolate and similar beverages shall be permitted, provided that such use is in accordance with all applicable federal, state and municipal laws, codes, ordinances, rules and regulations. 4. No tenant shall employ any person or persons other than the janitor of Landlord for the purpose of cleaning its premises unless otherwise agreed to by Landlord in writing. Except with the written consent of Landlord, no person or persons other than those approved by Landlord shall be permitted to enter the Building for the purpose of cleaning the same. No tenant shall cause any unnecessary labor by reason of such tenant's carelessness or indifference in the preservation of good order and cleanliness. Landlord shall not be responsible to any tenant for any loss of property on the Premises, however occurring, or for any damage done to the effects of any tenant by the janitor or any other employee or any other person. Janitor service will not be furnished on nights when rooms are occupied after 6 p.m. unless, by agreement in writing, service is extended to a later hour for specifically designated rooms. 5. Landlord will furnish each tenant free of charge with two keys to each door lock provided in the Premises by Landlord. Landlord may make a reasonable charge for any additional keys. No tenant shall have any such keys copied or any keys made. No tenant shall alter any lock or install a new or additional lock or any bolt on any door of its premises. Each tenant, upon the termination of its lease, shall deliver to Landlord all keys to doors in the Building. 6. Landlord shall designate appropriate entrances and a "Freight" elevator for deliveries or other movement to or from the Premises of equipment, materials, supplies, furniture or other property, and Tenant shall not use any other entrances or elevators for such purposes. The Freight elevator shall be available for use by all tenants in the Building, subject to such reasonable scheduling as Landlord in its discretion shall deem appropriate. All persons employed and means or methods used to move equipment, materials, supplies, furniture or other property in or out of the Building must be approved by Landlord prior to any such movement. The scheduling and manner of all move-ins and move-outs shall be coordinated through the Building office and shall only take place after 6 p.m. on weekdays, on weekends (subject to additional charges), or at such other times as Landlord may designate. Landlord shall have the right to prescribe the maximum weight, size and position of all equipment, materials, furniture or other property brought into the Building. Heavy objects shall, if considered necessary by Landlord, stand on a platform of such thickness as is necessary to properly distribute the weight. Landlord will not be responsible for loss of or damage to any such property from any cause, and All damage done to the Building by moving or maintaining such property shall be repaired at the expense of Tenant. 7. No tenant shall use any method of heating or air conditioning other than that supplied by Landlord, No tenant shall use or keep or permit to be used or kept any foul or noxious gas or substance in the Premises, or permit or suffer the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors or vibrations, or interfere in any way with other tenants or those having business in the Building, nor shall any animals or birds be brought or kept in the Premises or the Building. 8. Landlord shall have the right, exercisable without notice and without liability to any tenant, to change the name or street address of the Building. 9. Landlord establishes the hours of 7 a.m. to 6 p.m. of each day other than Saturdays, Sundays and legal holidays as reasonable and usual business hours for the purposes of Subparagraph 7(b) of the lease. If Tenant requests electricity or heat or air conditioning during any hours on Saturdays, Sundays or legal holidays, or during the hours of 6 p.m. to 7 a.m. on any other day, and if Landlord is able to provide the same, Tenant shall pay Landlord such charge as Landlord shall establish from time to time for providing such services during such hours. Any such charges which Tenant is obligated to pay shall be deemed to be additional rent under the Lease, and should Tenant fail to pay the same within five (5) days after demand, such failure shall be a default by Tenant under the Lease. 10. Landlord reserves the right to exclude from the Building between the hours of 6 p.m. and 7 a.m., and at all hours on Saturdays, Sundays and legal holidays, all persons who do not present identification acceptable to Landlord. All persons entering the Building during said hours shall comply with Landlord's sign-in and sign-out procedures. Each tenant shall provide Landlord with a list of all persons authorized by Tenant to enter its premises and shall be liable to Landlord for all 2 acts of such persons. Landlord shall in no case be liable for damages for any error with regard to the admission to or exclusion from the Building of any person. In the case of invasion, mob, riot, public excitement or other circumstances rendering such action advisable in Landlord's opinion, Landlord reserves the right to prevent access to the Building during the continuance of the same by such action as Landlord may deem appropriate, including closing doors. 11. The directory of the Building will be provided exclusively for the display of the name and location of tenants of the Building and Landlord reserves the right to exclude any other names therefrom. Additional names which Tenant may decide to have placed on the Building directory must first be approved by Landlord and shall be at such charges as may be established by Landlord. Landlord reserves the right to restrict the amount of directory space utilized by any tenant. 12. No curtains, draperies, blinds, shutters, shades,. screens or other coverings, hangings or decorations shall be attached to, hung or placed in, or used in connection with any window of the Building without the prior written consent of Landlord. In any event, with the prior written consent of Landlord, such items shall be installed on the office side of Landlord's standard window covering and shall in no way be visible from the exterior of the Building. Tenant shall keep window coverings closed when the effect of sunlight (or the lack thereof) would impose unnecessary loads on the Building's heating or air conditioning systems. 13. No tenant shall obtain for use in the Premises ice, drinking water, food, beverage, towel or other similar services, except at such reasonable hours and under such reasonable regulations as may be fixed by Landlord. 14. Each tenant shall ensure that the doors of its premises are closed and locked and that all water faucets, water apparatus and utilities are shut off before Tenant or Tenant's employees leave the Premises so as to prevent waste or damage, and for any default or carelessness in this regard, Tenant shall make good all injuries sustained by other tenants or occupants of the Building or Landlord. On multiple-tenancy floors, all tenants shall keep the doors to the Building corridors closed at all times except for ingress and egress. 15. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were construed, no foreign substance of any kind whatsoever shall be thrown therein and the expense of any breakage, stoppage or damage resulting from the violation of this rule shall be borne by the tenant who, or whose employees or invitees, shall have caused it. 16. Except with the prior written consent of Landlord, no tenant shall sell any newspapers, magazines, periodicals, theater or travel tickets or any other goods or merchandise to the general public in or on the Premises, nor shall any tenant carry on or permit or allow any employee or other person to carry on the business of stenography, typewriting, printing or photocopying or any similar business in or from the Premises for the service or accommodation of occupants of any other portion of the Building, nor shall the premises of any tenant be used for manufacturing of any kind, or any business or activity other than that specifically provided for in such tenant's lease. 17. No tenant shall install any radio or television antenna, loudspeaker or other device on the roof or exterior walls of the Building. No television, radio or recorder shall be played in such a manner as to cause a nuisance to any other tenant. 3 18. There shall not be used in any space, or in the public halls of the Building, either by any tenant or others, any hand trucks except those equipped with rubber tires and side guards or such other material handling equipment as Landlord may approve. No other vehicles of any kind shall be brought by any tenant into the Building or kept in or about its premises. 19. Each tenant shall store all its trash and garbage within its premises. No material shall be placed in the trash boxes or receptacles if such material is of such nature that it may not be disposed of in the ordinary and customary manner of removing and disposing of office Building trash and garbage in the City of San Francisco without being in violation of any law or ordinance governing such disposal. All garbage and refuse disposal shall be made only through entryways and elevators provided for such purposes and at such times as Landlord shall designate. 20. Canvassing, soliciting, distribution of handbills or any other written material and peddling in the Building are prohibited, and each tenant shall cooperate to prevent the same. 21. The requirements of tenants will be attended to only upon application in writing at the office of the Building. Employees of Landlord shall not perform any work or do anything outside of their regular duties unless under special instructions from Landlord. 22. Landlord may waive any one or more of these Rules and Regulations for the benefit of any particular tenant or tenants, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of any other tenant or tenants, nor prevent Landlord from thereafter enforcing any such Rules and Regulations against any or all of the tenants of .the Building. 23. These Rules and Regulations are in addition to, and shall not be construed to in any way modify or amend, in whole or in part, the agreements, covenants, conditions and provisions of any lease of premises in the Building. 24. Landlord reserves the right to make such other rules and regulations as in its judgment may from time to time be needed for the safety, care and cleanliness of the Building and for the preservation of good order therein. 4 EXHIBIT C Addendum to 595 Market Street Office Lease The following Paragraphs are added to and incorporated into the 595 Market Street Office Lease attached hereto (the "LEASE"). Except as otherwise defined in this Addendum, capitalized terms used herein shall have the same meaning as given the terms in the Lease. 43. TERMINATION OF SEVENTH FLOOR LEASE. Landlord and Tenant entered into that certain 595 Market Street Office Lease (the "SEVENTH FLOOR LEASE"), dated as of March 24, 1995, with respect to certain premises located on the seventh (7th) floor of the Building and identified as Suite 740 (the "SEVENTH FLOOR SPACE"). The term of the Seventh Floor Lease is month-to-month. Because the Seventh Floor Space is included in the Initial Premises, Landlord and Tenant agree that, as of the Commencement Date, the Seventh Floor Lease shall terminate and be of no further force and effect. 44. CONSTRUCTION OF TENANT IMPROVEMENTS. (a) Landlord shall deliver possession of the Initial Premises to Tenant upon execution of the Lease for the purpose of constructing the Tenant Improvements (as hereinafter defined), and Tenant shall accept possession of the Initial Premises in its "AS IS" condition. The Lease, with the exception of Paragraphs 1 through 5, 7 and 8 of the Lease, shall become effective with respect to the Initial Premises upon delivery of the Initial Premises to Tenant. Except as provided below, Landlord has no obligation and has made no promise to alter, remodel, improve, repair, decorate or paint the Initial Premises or any part of the Initial Premises, or to pay for any such work, and neither Landlord nor Landlord's agents have made any representations to Tenant with respect to the condition of the Initial Premises. (b) Tenant shall substantially complete any and all alterations of, or improvements to, the Initial Premises (the "TENANT IMPROVEMENTS"), in accordance with the Final Plans (as defined below) submitted to and approved by Landlord, prior to Tenant's occupancy of the Initial Premises. The Tenant Improvements shall be made and performed in a safe and workmanlike manner, using only first-class materials, in compliance with the minimum Building standard specifications for interior tenant improvements developed by Landlord for uniform application in the Building, and in accordance with the provisions of the following Subparagraphs (b)(i) through (b)(ix) of this Paragraph 44. (i) No work with respect to the Tenant Improvements shall proceed without Landlord's prior written approval of: (1) Tenant's contractor(s) and subcontractor(s); (2) certificates of insurance furnished to Landlord from a company or companies approved by Landlord (A) by Tenant's general contractor, evidencing comprehensive general liability insurance (with contractual liability and products and completed operations coverages) with a minimum combined single limit for bodily injury and property damage in an amount not less than Two Million Five Hundred Thousand Dollars ($2,500,000) per occurrence, endorsed to show Landlord as an additional insured and endorsed to show a waiver of subrogation by the insurer to any claims the insurer may have against Landlord, (B) by any and all subcontractors, evidencing comprehensive general liability insurance (with contractual liability and products and completed operations coverages) with a minimum combined single limit for bodily injury and property damage in an amount not less than One Million Dollars ($1,000,000) per occurrence, endorsed to show Landlord as an additional insured and endorsed to show a waiver of subrogation by the insurer to any claims the insurer may have against Landlord, and (C) by Tenant evidencing builder's risk insurance with respect to the Tenant Improvements, in such amounts as are deemed reasonable by Landlord, and workers, compensation insurance, as required by law; and (3) detailed plans and specifications for such work, prepared by a licensed architect approved in writing by Landlord (the "TENANT'S ARCHITECT"), which indicate that such work will not exceed the design load capacities and performance criteria of the Building, including its electrical, HVAC and weight capacities (unless Landlord has consented to such excess in accordance with Paragraph 7(c) of the Lease), and construction means and methods (which approval shall not be unreasonably withheld or delayed). (ii) Except as otherwise expressly provided herein, the Tenant Improvements shall be undertaken ` at Tenant's sole cost and expense and in strict conformance with all applicable laws, regulations, building codes and the requirements of any building permit and all other applicable permits or licenses issued with respect to such work. Tenant shall be solely responsible for obtaining all such permits and licenses from the appropriate governmental authorities, and any delay in obtaining such permits or licenses shall not be deemed to extend the Commencement Date or the Expiration Date or to waive or toll Tenant's rental obligations with respect to the Premises. Copies of all permits and licenses shall be furnished to Landlord before any work is commenced, and any work not acceptable to any governmental authority or agency having or exercising jurisdiction over such work, or not reasonably satisfactory to Landlord, shall be promptly replaced and corrected at Tenant's expense. (iii) Tenant shall pay to Landlord an administration fee (the "ADMINISTRATION FEEL") equal to five percent (5%) of the total cost of constructing the Tenant Improvements and the Fifth Floor Improvements (as defined below). Notwithstanding the foregoing, if Tenant selects Charles Pankow Builders as general contractor for all of the Tenant Improvements, the Administration Fee shall be two percent (2%) of the total cost of constructing the Tenant Improvements and the Fifth Floor Improvements. In addition, Tenant shall reimburse Landlord for all costs and fees, including, without limitation, architect's and engineer's fees, incurred by Landlord in connection with its review and approval of the Final Plans (as defined below). (iv) All work by Tenant shall be scheduled through Landlord and shall be diligently and continuously pursued from the date of its commencement through its completion. Landlord hereby agrees to use its best efforts-to facilitate such work and to ensure access by Tenant and availability to Tenant of all freight elevators and all similar facilities necessary to facilitate such work, subject, however, to the uniform rules and regulations established by Landlord for construction work in the 2 Building. All work shall be conducted in a manner that maintains harmonious labor relations and does not unreasonably interfere with or delay any other work or activities being carried out by Landlord in the Building. Landlord or Landlord's agent shall have the right to enter the Initial Premises and inspect the Initial Premises and the Tenant Improvements at all reasonable times during the construction of the Tenant Improvements. (v) Tenant shall cause the Tenant's Architect to prepare and submit to Landlord for its approval (which approval shall not be unreasonably withheld or delayed) substantially complete architectural plans, drawings and specifications for all Tenant Improvements, including complete engineered mechanical and electrical working drawings for the Initial Premises, showing the subdivision, layout, finish and decoration work desired by Tenant therefor, and any internal or external communications or special utility facilities which will require installation of conduits or other improvements within common areas, all in such form and in such detail as may be reasonably required by Landlord. Tenant agrees to engage Takahashi ` Consulting Engineers for the design and preparation of mechanical drawings for the for the mechanical systems serving the Initial Premises, Camisa & Wipf for the design and preparation of electrical drawings for-the design and preparation of the electrical systems serving the Initial Premises, and Castle Sprinklers for the design and preparation of sprinkler drawings for the sprinkler systems serving the Initial Premises. Landlord hereby approves of such engagement of Takahashi Consulting Engineers, Camisa Wipf, and Castle Sprinklers. Such complete plans, drawings and specifications are referred to herein as "FINAL PLANS." Tenant shall submit the Final Plans for the approval of Landlord. Within five (5) business days after Landlord receives the Final Plans for approval, Landlord shall give its written approval to the Final Plans, or provide Tenant with specific written objections to the Final Plans. If Landlord objects to the Final Plans, Landlord shall make itself available to meet with Tenant and the Tenant's Architect within three (3) business days after said objection to resolve the objections and to deliver to the Tenant's Architect such information as may be necessary to enable the Tenant's Architect to cause the Final Plans to be revised consistent with Landlord's objections. No delay in the scheduling of completion of the Tenant Improvements resulting from Landlord's review, revision and approval of the Final Plans consistent with the foregoing time schedule shall be deemed to extend the Commencement Date or Expiration Date or waive or toll Tenant's rental obligations with respect to the Premises. In the event that Tenant and/or its contractors and subcontractors desire to change the Final Plans subsequent to approval by Landlord, Tenant shall provide notice of such proposed change to Landlord for Landlord's written approval, which approval shall be required prior to the implementation of such proposed change. At the conclusion of construction, Tenant shall cause the Tenant's Architect to provide two (2) complete sets of record drawings of the Tenant Improvements, as constructed, which shall not materially deviate from the Final Plans, and Tenant shall also cause to be provided a project closeout package, including a punchlist signoff, project team list, permit cards, contractor's payroll certification, unconditional lien releases and final construction costs itemized by trade. (vi) Landlord shall approve the list of bidding general contractors, which shall include Charles Rankow Builders. Tenant, with the prior written consent of Landlord, shall enter into a contract (the "GENERAL CONTRACT") with one of the Bidding Contractors ("TENANT'S CONTRACTOR") for the construction of the Tenant Improvements. (vii) Tenant shall-cause Tenant's Contractor to enter into a subcontract with Castle Sprinklers for the sprinkler systems work required under the General Contract. With respect to all 3 mechanical systems work required under the General Contract, Tenant shall cause Tenant's Contractor to solicit and review bids from three (3) subcontractors (the "MECHANICAL BIDDERS"), which shall be approved by Landlord, and, with the prior written consent of Landlord, to enter into a subcontract with one of the Mechanical Bidders. With respect to all electrical systems work required under the General Contract, Tenant shall cause Tenant's Contractor to solicit and review bids from three (3) subcontractors for all such work (the "ELECTRICAL BIDDERS"), which shall be approved by Landlord, and, with the prior written consent of Landlord, to enter into a subcontract with one of the Electrical Bidders. To the extent Tenant's Contractor desires to subcontract other work required under the General Contract, Tenant shall cause Tenant's Contractor to solicit bids for such proposed subcontract (the "OTHER WORK BIDDERS"), at least one (1) of which, if Landlord so elects, shall be a subcontractor designated by Landlord, and, with the prior written consent of Landlord, to enter into such subcontract with one of the Other Work Bidders. Tenant's Contractor may engage such laborers and suppliers as it deems appropriate. (viii) All payments by Tenant for work done by a subcontractor in connection with the Tenant Improvements shall be made by joint check issued to Tenant's Contractor and such subcontractor and shall be conditioned upon Tenant's receipt of (1) conditional lien waivers and releases upon progress payments, executed by Tenant's Contractor and such subcontractor covering the full amount disbursed through the date of the disbursement, and (2) a conditional lien waiver and release upon final payment covering the final payment amount, executed by Tenant's Contractor and such subcontractor. (ix) Although Landlord has the right to review, request revisions to and approve the Final Plans, Landlord's sole interest in doing so is to protect the Building and Landlord's interest in the Building. Accordingly, Tenant shall not rely upon Landlord's approval for any purpose other than for the purpose of .acknowledging the consent of Landlord to proceed with the requested action and Landlord shall incur no liability of any kind by reason of the granting of such approvals. (c) Landlord shall reimburse Tenant up to Four Hundred Ninety-Six Thousand Four Hundred Thirty Dollars ($496,430) (the "TENANT IMPROVEMENT ALLOWANCE") for the construction of the Tenant Improvements, including all architectural and engineering fees incurred in connection therewith, any sums payable to Landlord in connection therewith, and any improvements Tenant desires to make to the Future Premises (the "FIFTH FLOOR IMPROVEMENTS"), provided that the Fifth Floor Improvements are done in accordance with the terms and provisions of the Master Lease, the Sublease and that certain Landlord's Consent to Sublease, dated May 17, 1993, executed by Landlord and acknowledged and agreed to by Tenant and Sublessor, and provided further that Tenant shall, at its sole expense, bear all costs of any additional alterations and improvements required by law to be made to or in the Building as a result of the Fifth Floor Improvements. Provided no Event of Default, or event described in Paragraph 18 of the Lease that with the passage of time or the giving of notice or both would result in an Event of Default (a "POTENTIAL DEFAULT"), shall then exist under the Lease and provided that Tenant has directed Landlord to disburse the Administration Fee to Landlord from the Tenant Improvement Allowance and such disbursement has been made, from and after the date hereof Landlord shall make advances to Tenant of the Tenant Improvement Allowance upon presentation of invoices from Tenant or the person performing the work or rendering the service and such reasonable supporting documentation as Landlord may request, including, without limitation, conditional mechanics' lien releases and certificates of payment issued by the Tenant's Architect and, if applicable, Tenant's designated representative. 4 Invoices that are submitted and approved by Landlord shall be paid on or before the fifteen (15th) day of the following month. If, on the earlier of February 1, 1996 or the substantial completion of the Tenant Improvements, Landlord has not advanced the entire Tenant Improvement Allowance to Tenant, Landlord shall have no further obligation to disburse any additional monies to Tenant, with respect to the Tenant Improvements, under this Paragraph 44. If, on the earlier of June 30, 1996 or the substantial completion of the Fifth Floor Improvements, Landlord has not advanced the entire Tenant Improvement Allowance to Tenant, Tenant shall forfeit any remaining amount and Landlord shall have no further obligation to disburse any additional monies to Tenant under this Paragraph 44. (d) Landlord, at its sole cost and expense, shall renovate the men's and women's rest rooms on the sixth (6th) floor of the Building in accordance with standard Building plans and current building codes. The quality and appearance of the rest rooms as so renovated shall be equivalent to the rest rooms located on the twenty-fourth (24th) floor. Such renovation shall be completed no later than November 15, 1995. (e) Tenant shall indemnify, defend and hold Landlord harmless from and against any and all expenses, costs, losses, fines, liabilities and/or damages (including, without limitation, attorneys, fees) arising out of or pertaining to the construction by Tenant of the Tenant Improvements, unless caused by or arising out of the negligence or willful misconduct of Landlord or its employees, contractors, agents or representatives. 45. RIGHT OF FIRST REFUSAL. (a)If at any time prior to the Expiration Date, any portion of the seventh (7th) floor of the Building becomes available (the "AVAILABLE SPACE"), whether through Landlord's exercise of its relocation rights, if any, with respect to such space or otherwise, provided no Event of Default or Potential Default shall then exist under the Lease, Landlord shall give Tenant written notice of the availability of the Available Space and the terms and conditions (including, without limitation, rent, which shall be the prevailing fair market rent for leases commencing as of the date the Available Space shall become available, as reasonably determined by Landlord, for the Available Space, and, if applicable, reimbursement of Landlord's costs incurred in relocating any seventh (7th) floor tenants) (the "OFFER") that Landlord is willing to offer to prospective tenants for the Available Space for a period of time equal to the remainder of the original term of the Lease. Tenant shall have ten (10) days following receipt of the Offer to elect to lease all of the Available Space upon the terms of the Offer. (b) If Tenant does not timely elect to lease all of the Available Space on the terms of the Offer or if Landlord and Tenant do not execute a lease amendment with respect to all of the Available Space within ten (10) business days following Tenant's election to lease all of the Available Space, Tenant's right to lease the Available Space shall lapse and Landlord may lease the Available Space or any part of the Available Space to any other prospective tenant on such terms as Landlord and such prospective tenant may agree. (c) If Tenant does timely accept the Offer, all of the Available Space shall be added to and be deemed a part of the Premises for all purposes of the Lease, on the terms and conditions of the Offer. 5 (d) The right contained in this Paragraph 45 is personal to the named Tenant hereunder, its affiliates, and the surviving entity resulting from a merger with or acquisition of Tenant, and such right shall not inure to the benefit of any assignee or subtenant of the named Tenant hereunder. 46. EXPANSION OPTION. (a) Subject to the terms and conditions of this Paragraph 46, Tenant shall have the option (the "EXPANSION OPTION") to expand the Premises on May 1, 1999 to include the entire fourth (4th) floor of the Building on the terms and conditions (including rent, which shall be the rent then being offered by Landlord to prospective tenants for space similar to the fourth floor space for leases commencing May 1, 1999 and ending on or near the Expiration Date (the "FOURTH FLOOR FAIR MARKET RENT") that Landlord is willing to offer to prospective tenants for the Fourth Floor Space for a period of time equal to the remainder of the original term of the Lease, provided that no Event of Default or Potential Default shall exist under the Lease when Tenant exercises such right or on May 1, 1999. Tenant may exercise such right only by giving Landlord written notice of Tenant's exercise of such right (the "EXPANSION ELECTION NOTICE") no later than May 1, 1998. If Tenant fails (or is unable due to an Event of Default) to timely exercise such right in accordance herewith, such right shall terminate. (b) If Tenant disagrees with Landlord's determination of Fourth Floor Fair Market Base Rent, Tenant, as its sole and exclusive remedy, shall have the right, within ten (10) business days of written notification of Landlord's determination of Fourth Floor Fair Market Base Rent, to rescind and revoke its election to exercise the Expansion option, in which case Landlord may lease the Fourth Floor Space or any part thereof to any other prospective tenant on such terms as Landlord and such prospective tenant may agree. The failure of Tenant to timely exercise the rescission right granted it hereunder shall constitute Tenant's acceptance of Landlord's determination of the Fourth Floor Fair Market Base Rent. 47. OPTION TO EXTEND. (a) Subject to the terms and conditions of this Paragraph 47, Tenant shall have the option (the "EXTENSION OPTION") to extend the term of the Lease for one additional forty-two (42) month term (the "OPTION TERM"), on all of the same terms and conditions of the Lease except for monthly base rent, provided that no Event of Default or Potential Default shall exist under the Lease when Tenant exercises such right or on the commencement of the Option Term. Tenant may exercise such right only by giving Landlord written notice of Tenant's exercise of such right no later than April 30, 2001. If Tenant fails (or is unable due to an Event of Default) to timely exercise such right in accordance herewith, such right shall terminate. (b) Base rent for the Option Term shall be determined by Landlord on or before January 31, 2002. Base rent for the Option Term shall be an amount equal to the base rent then being offered by Landlord to prospective tenants for space similar to the Premises, as such space may have been expanded under the terms of this Lease, for a term equivalent to the Option Term for leases commencing as of December 1, 2002 ("EXTENSION FAIR MARKET BASE RENT"); provided that in no event shall monthly base rent for an Option Term be less than the monthly base rent and any additional rent payable during the last twelve months of the initial term of the Lease. 6 (c) If Tenant disagrees with Landlord's determination of Extension Fair Market Base Rent, Tenant, as its sole and exclusive remedy, shall have the right, within ten (10) business days of written notification of Landlord's determination of Extension Fair Market Base Rent, to rescind and revoke its election to exercise the extension right under Subparagraph 46(a) above, in which case the term of the Lease shall expire on November 30, 2002. The failure of Tenant to timely exercise the rescission right granted it hereunder shall constitute Tenant's acceptance of Landlord's determination of the Extension Fair Market Base Rent. IN WITNESS WHEREOF, Landlord and Tenant have executed this Addendum concurrently with the execution of the Lease. SELECTQUOTE INSURANCE THE EQUITABLE LIFE ASSURANCE SERVICES, a California SOCIETY OF THE UNITED STATES, a New York corporation By: By: ------------------------- ----------------------------- Name Name -------------------- ------------------------- Title Title -------------------- ----------------------- 7 FIRST AMENDMENT TO 595 MARKET STREET OFFICE LEASE EXPANSION OF PREMISES This First Amendment to Lease ("Amendment") is made this 20th day of January 1997 by and between MARKET & SECOND, INC., a Delaware Corporation, successor in interest to The Equitable Life Assurance Society of the United States, Inc., ("Landlord") and SELECTQUOTE INSURANCE SERVICES, Inc., a California Corporation ("Tenant"). WITNESSETH: WHEREAS, the parties hereto have entered into a certain Lease (the "Lease") dated August 16, 1995, demising certain premises located at 595 Market Street, San Francisco, CA ("The Building"), as more fully described therein as Suites 600 and 740 (collectively referred to as the "Premises"). WHEREAS, Landlord and Tenant desire to expand the rentable area of the Premises and provide certain improvements to the Premises. NOW, THEREFORE, in consideration of the mutual covenants contained herein, Landlord and Tenant agree as follows: 1. EXPANSION OF PREMISES: Effective February 15, 1997, Section 1 of the Lease shall be amended by adding to the Premises Suite 710 consisting of approximately 1,034 rentable square feet located on the seventh (7th) floor of the Building (hereinafter referred to as the "Expansion Space"), further described on Exhibit A of this Amendment attached hereto. 2. IMPROVEMENTS: Tenant shall accept the Expansion Space in its "As Is" condition. However, prior to Landlord's delivery of the Expansion Space to Tenant, Landlord shall recarpet and repaint the Expansion Space utilizing building standard finishes, with color selections to be chosen by Tenant. 3. RENT: Section 3 of the Lease is hereby amended to provide that, commencing as of February 15, 1997 and expiring as of November 30, 2002, the Base Rent due and payable by Tenant in connection with the Expansion Space shall be Twenty Eight Thousand Nine Hundred and Fifty Two 00/100 Dollars ($28,952.00) per annum, payable in equal monthly installments of Two Thousand Four Hundred twelve and 67/100 Dollars ($2,412.67). The Base Year shall for the Expansion Space shall be 1997 and Tenant's Percentage Share for the Expansion Space shall be .26%. 4. Tenant hereby represents and certifies to Landlord that there exist no defenses or offsets to enforcement of the Lease by Landlord, and Landlord is not, as of the date hereof, in default in the performance of any obligation or covenant of Landlord under the Lease. 5. It is understood and agreed between the parties hereto that said Lease, as amended, shall have the same effect and all covenants, conditions, remedies, and terms of the original Lease including the security payment provision, if any, shall remain in full force and effect, except as aforesaid. 6. Each capitalized term used herein, unless otherwise defined, shall have the meaning ascribed to such term in the Lease. IN WITNESS WHEREOF, the undersigned have executed this Amendment effective as of the day and year first above written. TENANT: LANDLORD: SELECTQUOTE INSURANCE SERVICES, Inc. MARKET & SECOND, INC. a California Corporation a Delaware Corporation By: By: ------------------------ ------------------------- Its: Its: ----------------------- ------------------------ Date: Date: ---------------------- ------------------------ By: ------------------------ Its: ----------------------- Date: ---------------------- 2 SECOND AMENDMENT TO 595 MARKET STREET OFFICE LEASE EXPANSION OF PREMISES This Second Amendment to Lease ("Amendment") is made this 30th day of May 1997 by and between MARKET & SECOND, INC., a Delaware Corporation, successor in interest to The Equitable Life Assurance Society of the United States, Inc., ("Landlord") and SELECTQUOTE INSURANCE SERVICES, Inc., a California Corporation ("Tenant"). WITNESSETH: WHEREAS, the parties hereto have entered into a certain Lease (the "Lease") dated August 16, 1995 and amended as of January 20, 1997 ("First Amendment to 595 Market Street Office Lease"), demising certain premises located at 595 Market Street, San Francisco, CA ("the Building"), as more fully described therein as Suites 600, 710 and 740 (collectively referred to as the "Premises"). WHEREAS, Landlord and Tenant desire to expand the rentable area of the Premises and provide certain improvements to the Premises. NOW, THEREFORE, in consideration of the mutual covenants contained herein, Landlord and Tenant agree as follows: 1. EXPANSION OF PREMISES: Effective August 1, 1997, the Premises as defined in Section 1 of the Lease shall be amended by adding Suite 720 consisting of approximately 1,304 rentable square feet located on the seventh (7th) floor of the Building (hereinafter referred to as the "Expansion Space"), further described on Exhibit A of this Amendment attached hereto. 2. IMPROVEMENTS: Tenant shall accept the Expansion Space in its "As Is" condition. Landlord shall provide Tenant up to an amount of Nine Thousand Seven Hundred Eighty and 00/100 Dollars (9,780.00) for any alterations requested by Tenant to be made to the Expansion Space. Any alterations requested by Tenant shall be made in accordance with the provisions of Section 8 of the Lease. 3. RENT: Section 3 of the Lease is hereby amended to provide that, commencing as of August 1, 1997 and expiring as of November 30, 2002, the Base Rent due and payable by Tenant in connection with the Expansion Space shall be Thirty Six Thousand Five Hundred Twelve and 00/100 Dollars ($36,512.00) per annum, payable in equal monthly installments of Three Thousand Forty Two and 67/100 Dollars ($3,042.67). The Base Year shall for the Expansion Space shall be 1997 and Tenant's Percentage Share for the Expansion Space shall be .328%. 4. Tenant hereby represents and certifies to Landlord that there exist no defenses or offsets to enforcement of the Lease by Landlord, and Landlord is not, as of the date hereof, in default in the performance of any obligation or covenant of Landlord under the Lease. 5. It is understood and agreed between the parties hereto that said Lease, as amended, shall have the same effect and all covenants, conditions, remedies, and terms of the original Lease including the security payment provision, if any, shall remain in full force and effect, except as aforesaid. 6. Each capitalized term used herein, unless otherwise defined, shall have the meaning ascribed to such term in the Lease. IN WITNESS WHEREOF, the undersigned have executed this Amendment effective as of the day and year first above written. TENANT: LANDLORD: SELECTQUOTE INSURANCE SERVICES, Inc. MARKET & SECOND, INC. a California Corporation a Delaware Corporation By: By: ------------------------ ------------------------- Its: Its: ----------------------- ------------------------ Date: Date: ---------------------- ------------------------ By: ------------------------ Its: ----------------------- Date: ---------------------- 2 THIRD AMENDMENT TO 595 MARKET STREET OFFICE LEASE THIS THIRD AMENDMENT TO 595 MARKET STREET OFFICE LEASE ("Amendment") is made and entered into as of August ___, 1999, by and between MARKET & SECOND, INC., a Delaware corporation, successor in interest to The Equitable Life Assurance Society of the United States ("Landlord"), and SELECTQUOTE INSURANCE SERVICES, INC., a California corporation ("Tenant"). A. Landlord and Tenant have heretofore entered into that certain 595 Market Street Office Lease (the "Office Lease") dated August 16, 1995, for certain premises in the building commonly known as 595 Market Street, San Francisco, California (the "Building"). The Office Lease was amended by that certain First Amendment to 595 Market Street Office Lease dated January 20, 1997 (the "First Amendment"), and by that certain Second Amendment to 595 Market Street Office Lease dated May 30, 1997 (the "Second Amendment") (collectively, the "Prior Amendments"). The Office Lease and the Prior Amendments are collectively referred to herein as the "Lease". B. Pursuant to the terms of the Lease, Tenant leased from Landlord certain premises located on the entire fifth floor of the Building (the "5th Floor Premises"), the entire sixth floor of the Building (the "6th Floor Premises") and a portion of the seventh floor of the Building containing approximately 3,611 rentable square feet of space, as more particularly shown on EXHIBIT A attached hereto (the "Surrender Premises"). C. Landlord and Tenant desire to amend the Lease to provide for the termination of the Lease with respect to the Surrender Premises only. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties do hereby agree as follows: 1. PARTIAL TERMINATION. (a) Effective as of September 30, 1999 (the "Surrender Date"), the Lease shall be terminated with respect to the Surrender Premises only, and such termination shall have the same force and effect as if the term of the Lease with respect to the Surrender Premises were by the provisions thereof fixed to expire as of the Surrender Date. From and after the Surrender Date, the term "Premises" appearing in the Lease shall refer to the 5th Floor Premises and the 6th Floor Premises only. Tenant acknowledges and agrees that, as of the date hereof, any remaining obligations of Landlord pursuant to Paragraph 2 of the First Amendment and/or Paragraph 2 of the Second Amendment with respect to improvements to the Surrender Space are hereby terminated and are of no further force or effect. (b) On or before the Surrender Date, Tenant shall vacate the Surrender Premises and leave the same in the condition required pursuant to the provisions of Paragraphs 8(c) and 10 of the Lease. In the event Tenant fails to vacate the Surrender Premises on or before the Surrender Date in accordance with the provisions of this Amendment, in addition to all other remedies Landlord may have under the Lease, Tenant shall indemnify, protect and hold Landlord harmless from and against any and all loss, cost, damage or liability (including attorneys' fees and costs) arising out of such failure, including, without limitation, any claims for delay may by any successor tenant to the Surrender Premises. In addition, any such failure to timely surrender the Surrender Premises in the condition required pursuant to the provisions of Paragraphs 8(c) and 10 of the Lease shall constitute a default by Tenant under the Lease and entitle Landlord to exercise any or all of its remedies provided in Articles 19 and 20 of the Lease, notwithstanding that Landlord may elect to accept one or more payments of Base Rent and/or additional rent with respect to the Surrender Premises following the Surrender Date. 2. BASE RENT. The Basic Lease Information and Article 3 of the Lease are hereby amended to provide that, from and after the Surrender Date, Tenant shall pay monthly base rent for the Premises as follows: October 1, 1999 - October 31, 1999: $48,370.00 per month November 1, 1999 - October 31, 2000 $50,673.33 per month November 1, 2000 - October 31, 2001 $52, 976.67 per month November 1, 2001 - November 30, 2002 $55,280.00 per month 3. TENANT'S PERCENTAGE SHARE. The Basic Lease Information and Article 4 of the Lease are hereby amended to provide that, from and after the Surrender Date, Tenant's percentage share of Operating Expenses and Building Taxes with respect to the Premises shall be 6.95%. 4. 5TH FLOOR ELEVATOR LOBBY. Landlord, at Landlord's cost, shall re-carpet the elevator lobby of the 5th Floor Premises using Building standard carpet. Such work shall be performed on a date or dates mutually agreed upon by Landlord and Tenant, but in any event on or prior to December 1, 1999 (subject to delays outside the reasonable control of Landlord including, without limitation, delays caused by Tenant). Tenant agrees to cooperate with Landlord in the performance of such work, and Tenant acknowledges that such work may, at Landlord's election, be performed during normal business hours. Tenant hereby waives any claims against Landlord for the interruption of Tenant's business operations as a result of such work. 5. CAPITALIZED TERMS. All capitalized terms not defined herein shall have the meaning given to them in the Lease. 6. EFFECTIVENESS. Except as expressly modified herein, the terms, covenants and conditions of the Lease shall remain in full force and effect. 7. RATIFICATION. Landlord and Tenant hereby ratify and confirm all of the provisions of the Lease as amended by Paragraphs 1 through 6 hereof. 2 IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment as of the day and year first above written. TENANT: LANDLORD: SELECTQUOTE INSURANCE SERVICES, Inc. MARKET & SECOND, INC. a California Corporation a Delaware Corporation By: By: ------------------------ ------------------------- Its: Its: ----------------------- ------------------------ By: By: ------------------------ ------------------------- Its: Its: ----------------------- ------------------------ CERTIFICATE I, __________________, as Secretary of the aforesaid Tenant, hereby certify that the individual(s) executing the foregoing Amendment on behalf of Tenant was/were duly authorized to act in his/their capacity/capacities as set forth above, and his/their action(s) is/are the action of Tenant. ------------------------ ------------------------ [Print Name and Title] 3 EX-10.10 18 EXHIBIT 10.10 OFFICE LEASE between MARKET & SECOND, INC., a Delaware corporation as Landlaord and SELECTQUOTE INSURANCE SERVICES, INC., a California corporation as Tenant Dated as of August 31, 1999 San Francisco, California OFFICE LEASE BASIC LEASE INFORMATION Date: August 31, 1999 Landlord: MARKET & SECOND, INC., a Delaware corporation Tenant: SELECTQUOTE INSURANCE SERVICES, INC. a California corporation Building (Paragraph 1(a)): 595 Market Street San Francisco, California 94105 Premises (Paragraph 1(b)): Approximately 13,820 rentable square feet located on the 7th floor of the Building, more commonly known as Suite 700 (the "7th Floor Premises"), approximately 4,044 rentable square feet located on the 9th floor of the Building, more commonly known as Suite 950 (the "9th floor Premises"), and approximately 13,820 renewable square feet located on the 10th floor of the Building, more commonly known as Suite 1000 (the "10th Floor Premises"); the 7th Floor Premises, the 9th Floor Premises and the 10th Floor Premises are collectively referred to herein as the "Premises"). Term Commencement (Paragraph 2): With respect to the 7th Floor Premises: the earlier of (a) "substantial completion" of the 7th Floor Premises (as defined in the Work Letter), and (b) December 1, 1999. With respect to the 9th Floor Premises: October 1, 1999. With respect to the 10th Floor Premises: the earlier of (a) "substantial completion" of the 10th Floor Premises (as defined in the Work Letter), and (b) April 1, 2000. Term Expiration (Paragraph 2): March 31, 2005 Rental Commencement (Paragraph 3(a)): Upon Term Commencement Base Rent (Paragraph 3(a)): With respect to the 7th Floor Premises: --------------------------------------- Term Commencement - Nov. 30, 2000: $43,187.50 per month Dec. 1, 2000 - Nov. 30, 2001 $44,339.17 per month Dec. 1, 2001 - Nov. 30, 2002 $45,490.83 per month Dec. 1, 2002 - Nov. 30, 2003 $46,642.50 per month Dec. 1, 2003 - Nov. 30, 2004 $47,794.17 per month With respect to the 9th Floor Premises: --------------------------------------- Term Commencement - Mar. 31, 2001 $13,817.00 per month Apr. 1, 2001 - Mar. 31, 2002 $14,154.00 per month Apr. 1, 2002 - Mar. 31, 2003 $14,491.00 per month Apr. 1, 2003- Mar. 31, 2004 $14,828.00 per month Apr. 1, 2004- Mar. 31, 2005 $15,165.00 per month With respect to the 10th Floor Premises: ---------------------------------------- Term Commencement - Mar. 31, 2001: $47,218.33 per month Apr. 1, 2001 - Mar. 30, 2002 $48,370.00 per month Apr. 1, 2002 - Mar. 30, 2003 $49,512.67 per month Apr. 1, 2003 - Mar. 30, 2004 $50,673.33 per month Apr. 1, 2004 - Mar. 30, 2005 $51,825.00 per month Base Year (Paragraph 1(c)): 2000 Tenant's Percentage Share (Paragraph 1(h)): 7.96% Security Deposit (Paragraph 33): $344,352.51; provided, however, in the event that Tenant performs all of the terms and conditions of the Lease during the entire Term hereof, and 2 provided that no Event of Default (or any event which with the passage of time or giving of notice would constitute an event of Default) has occurred or is then occurring under the Lease, the Security Deposit shall be reduced to the following amounts at the following intervals: (1) $229,568.34 after eighteen (18) months from the Term Commencement, and (2) $114,784.17 after thirty-six (36) months from the Term Commencement. Tenant's Address for Notices (Paragraph 35): SelectQuote Insurance Services, Inc. 595 Market Street, Suite 600 San Francisco, CA 94105 Attn: Ed Gamrin, Chairman Landlord's Address for Notices (Paragraph 35): Market & Second, Inc. c/o GIC Real Estate, Inc. 255 Shoreline Drive, Suite 600 Redwood City, California 94065 With a copy to: Tower Realty Management Corporation 595 Market Street, Suite 2210 San Francisco, California 94105 Address for Rent Payments (Paratgraph 3(f)): Rent shall be paid to "Market & Second, Inc." at 75 Remittance Drive, Suite 1170, Chicago, Illinois 60675-1170 Brokers (Paragraph 40): Jones Lang LaSalle for Landlord; Belvedere Associates for Tenant. Exhibits (Paragraph 46): Exhibit A - Plan Outlining the Premises Exhibit A-1 - Temporary Space Exhibit B - Rules and Regulatons Exhibit C - Work Letter The provisions of the Lease identified above in parentheses are those provisions where references to particular Basic Lease Information appear. Each such reference shall incorporate the applicable Basic Lease Information. In the event of any conflict between any Basic Lease Information and the Lease, the latter shall control. TENANT: LANDLORD: SELECTQUOTE INSURANCE SERVICES, INC. MARKET & SECOND, INC. a California corporation a Delaware corporation By: /s/ Edward Gamrin By: Its: Chairman Its: 3 By: /s/ David L. Paulsen By: Its: Executive Vice President Its: 4 OFFICE LEASE THIS LEASE, dated August 31, 1999, for purposes of reference only, is made and entered into by MARKET & SECOND, INC., a Delaware corporation ("LANDLORD"), and SELECTQUOTE INSURANCE SERVICES, INC., a California corporation ("TENANT"). WITNESSETH: Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord the premises described in subparagraph 1(b) below for the term and subject to the terms, covenants, agreements and conditions hereinafter set forth, to each and all of which Landlord and Tenant hereby mutually agree. 1. DEFINITIONS. Unless the context otherwise specifies or requires, the following terms shall have the meanings herein specified: (a) The term "BUILDING" shall mean the land and other real-property described in the Basic Lease Information, as well as any property interest in the area or the streets bounding the parcel described in the Basic Lease Information, and all other improvements on or appurtenances to said parcel or said streets. (b) The term "PREMISES" shall mean the portion of the Building located on the floor(s) specified in the Basic Lease Information which is crosshatched on the floor plan(s) attached to this Lease as Exhibit A. (c) The term "BASE YEAR" shall mean the calendar year specified in the Basic Lease Information as the Base Year. (d) The term "OPERATING EXPENSES" shall mean (1) all costs of management, operation and maintenance of the Building, including, without limitation: wages, salaries and payroll burden of employees; property management fees; janitorial, maintenance, lobby attendant and other services; Building office rent or rental value; power, water, waste disposal and other utilities; materials and supplies; maintenance, replacements and repairs; license costs; insurance premiums and the deductible portion of any insured loss; and depreciation of all personal property, fixtures and equipment (including window washing machinery) used in the management, operation, maintenance and repair of the Building and depreciation on exterior window coverings provided by Landlord and carpeting in public corridors and common areas; and (2) the cost or any capital improvements made to the Building by Landlord after the Base Year that am reasonably anticipated to reduce other Operating Expenses or are required for the health and safety of tenants, or made to the Building by Landlord after the date of this Lease that are required under any governmental law or regulation that was not applicable to the Building at the time it was constructed, such cost or allocable portion thereof to be amortized over such reasonable period as Landlord shall determine together with interest on the unamortized balance at the rate of 10% per annum or such higher rate as may have been paid by Landlord on funds borrowed for the purpose of constructing or acquiring such capital improvements. Operating Expenses shall not include: Property Taxes; depreciation on the Building other than depreciation on exterior window coverings provided by Landlord and carpeting in public corridors and common areas; costs of tenants' improvements; real estate brokers' commissions; interest (except as stated in clause (2) above); and capital items other than those referred to in clause (2) above. Landlord shall exclude from Base Year Operating Expenses any non-recurring items, including capital expenditures otherwise permitted under clause (2) above (and shall only include amortization of such expenditures in subsequent year Operating Expenses to the extent permitted under clause (2) above, including any remaining amortization of permitted capital expenditures made prior to or after Term Commencement). If Landlord eliminates from any subsequent year Operating Expenses a recurring category of expenses previously included in Base Year Operating Expenses, Landlord may subtract such category from Base Year Operating Expenses commencing with such subsequent year. Operating Expenses from the Base Year and each subsequent calendar year shall be adjusted, if necessary, to equal Landlord's reasonable estimate of Operating Expenses for a full calendar year and, if the total square footage of the Building occupied during such full calendar year is less than ninety-five percent (95%), to reflect a ninety-five percent (95%) occupancy level of the Building. Landlord and Tenant acknowledge that certain of the costs of management, operation and maintenance of the Building and certain of the costs of the capital improvements referred to in clause (2) above may be allocated exclusively to a single component of the Building (E.G., to an office area, a retail area or a parking facility) and certain of such costs may be allocated among such components. The determination of such costs and their allocation shall be in accordance with sound accounting and management practices applied on a consistent basis. (e) The term "BASE OPERATING EXPENSES" shall mean the Operating Expenses paid or incurred by Landlord in the Base Year. (f) The term "PROPERTY TAXES" shall mean, unless required to be paid by Tenant under Paragraph 7, all taxes, service payments in lieu of taxes, assessments, general or special, excises, exactions, transit charges, housing fund assessments or other housing charges, child care assessments or levies, fees or charges general or special, ordinary or extraordinary, unforeseen as well as foreseen, of any kind which are assessed, levied, charged, confirmed or imposed by any public authority upon the Building, or its use, occupancy or operation, or upon any personal property used in the operation of the Building, or with respect to services or utilities consumed in the use, occupancy or operation of the Building, or upon Landlord with respect to the Building, or upon the act of leasing any space within the Building, or in connection with the business of renting space within the Building or with respect to the possession, leasing, operation, use or occupancy by Tenant of the Premises or any portion thereof, or upon or measured by the gross rentals received by Landlord from the Building. Property Taxes shall also include (i) any tax, fee or other excise, however described, which may be levied or assessed in lieu of, or as a substitute, in whole or in part, for, or as an addition to, any other Property Taxes, and (ii) any interest or penalties charged on account of any such Property Taxes. Property Taxes shall not include (x) corporate income or franchise taxes, (y) inheritance or estate taxes imposed upon or assessed against the Building or any part thereof interest therein, and (z) taxes computed upon the basis of the net income derived from the Building by Landlord or the owner of any interest therein, unless, due to a change in the method of taxation, any of such taxes is levied or assessed against Landlord in lieu of, or as a substitute, in 2 whole or in part, for, or as in addition to, any other charge which would otherwise constitute a Property Tax. If Property Taxes for the Base Year are reduced as the result of protest, or by means of agreement, or as the result of legal proceedings or otherwise, Landlord shall adjust Tenant's obligations for Property Taxes in all years following the Base Year, and Tenant shall pay Landlord within 30 days after notice any additional amount required by such adjustment for any such years or portions thereof that have theretofore occurred. (g) The term "BASE PROPERTY TAXES" shall mean the amount of Property Taxes paid by Landlord allocable to the Base Year. (h) The term "TENANT'S PERCENTAGE" share shall mean the percentage figure specified in the Basic Lease Information. 2. TERM; CONDITION OF PREMISES. (a) The term of this Lease shall commence and, unless sooner terminated as hereinafter provided, shall end on the dates respectively specified in the Basic Lease Information as the "TERM COMMENCEMENT" and the "TERM EXPIRATION." Except as otherwise set forth in the Work Letter attached to this Lease as EXHIBIT C, Landlord shall deliver the 7th Floor Premises, the 9th Floor Premises and the 10th Floor Premises to Tenant on the commencement of the respective term of each in their then existing condition with no alterations being made by Landlord. If Landlord, for any reason whatsoever, cannot deliver the 7th Floor Premises, the 9th Floor Premises or the 10th Floor Premises to Tenant at the commencement of the respective terms thereof, this Lease shall not be void or voidable nor modified in any manner, nor shall Landlord be liable to Tenant for any loss or damage resulting therefrom. No delay in delivery of the 7th Floor Premises, the 9th Floor Premises or the 10th Floor Premises shall operate to extend the term hereof, and any early commencement of the term shall not operate to advance the Term Expiration, unless, in either case, Landlord so elects by notice to Tenant. Tenant shall execute a confirmation of the Term Commencement, Term Expiration and other matters, in such form as Landlord may reasonably request, within ten (10) days after requested. (b) Notwithstanding anything to the contrary contained in this Lease, Landlord hereby agrees to lease to Tenant, on a temporary basis, certain space on the twenty-eighth (28th) floor of the Building, commonly known as Suite 2800, and containing approximately 5,316 rentable square feet of space, as such space is more particularly shown on EXHIBIT A-1 attached hereto and incorporated herein (the "TEMPORARY SPACE"). Tenant's lease of the Temporary Space shall be on and subject to all of the terms and provisions of this Lease, except as expressly set forth in this Paragraph 2(b). The term of this Lease with respect to the Temporary Space only (the "TEMPORARY SPACE TERM") shall commence on September 15, 1999 (the "TEMPORARY SPACE COMMENCEMENT DATE") and shall terminate on that date (the "TEMPORARY SPACE EXPIRATION DATE") which is the earlier to occur of (i) five (5) business days following the Term Commencement with respect to the 10th Floor Premises, or (ii) five (5) business days following written notice from Tenant to Landlord terminating Tenant's lease of the Temporary Space. Base Rent for the Temporary Space shall be an amount equal to Nineteen Thousand Nine Hundred Thirty-Five Dollars ($19,935.00) per month. Base Rent for any fractional month during the Temporary Space Term shall be equitably prorated based upon the actual number of days in such month. No Escalation Rent shall be due with respect to the Temporary Space. Tenant shall accept possession of the Temporary Space in its "as is" 3 condition, without any agreements, representations, understandings or obligations on the part of Landlord to perform any alterations, repairs or improvements thereto. Tenant hereby acknowledges and agrees that Landlord shall at all times have access to the Temporary Space for the purpose of showing the Temporary Space to prospective tenants and/or to real estate brokers. On or prior to the Temporary Space Expiration Date, Tenant shall surrender the Temporary Space and deliver possession of the same to Landlord in a vacant and broom clean condition, free of all of Tenant's personal property, and otherwise in the condition required pursuant to the terms of this Lease. Any failure by Tenant to timely surrender possession of the Temporary Space in the condition required hereunder shall be a material breach of this Lease and, in addition, shall be subject to the provisions of Section 31 below. 3. RENTAL. (a) Tenant shall pay to Landlord throughout the term of this Lease as rental for the Premises the sum specified in the Basic Lease Information as the Base Rent, provided that the rental payable during each calendar year subsequent to the Base Year shall be the Base Rent, increased by Tenant's Percentage Share of the total dollar increase, if any, in Operating Expenses paid or incurred by Landlord in such year over the Base Operating Expenses, and also increased by Tenant's Percentage Share of the total dollar increase, if any, in Property Taxes paid by Landlord in such year over the Base Property Taxes. Tenant acknowledges that the Basic Lease Information may set forth different Percentage Shares of Operating Expenses and Property Taxes or a single percentage share applicable to both. The increased rental due pursuant to this subparagraph (a) is hereinafter referred to as "ESCALATION RENT." In no event shall a decrease in Property Taxes below the amount of Base Property Taxes, or a decrease in Operating Expenses below the amount of Base Operating Expenses, cause the Base Rent set forth in the Basic Lease Information to be reduced. (b) Rental shall be paid to Landlord on or before the first day of the term hereof and on or before the first day of each and every successive calendar month thereafter during the term hereof. In the event the term of this Lease commences on a day other than the first day of a calendar month or ends on a day other than the last day of a calendar month, the monthly rental for the first and last fractional months of the term hereof shall be appropriately prorated. The first full calendar month's rental shall be paid concurrently with Tenant's execution of this Lease. (c) All sums of money due from Tenant hereunder not specifically characterized as rental shall constitute additional rent, and if any such sum is not paid when due it shall nonetheless be collectible as additional rent with the next installment of rental thereafter falling due, but nothing contained herein shall be deemed to suspend or delay the payment of any sum of money at the time it becomes due and payable hereunder, or to limit any other remedy of Landlord. (d) Tenant hereby acknowledges that late payment by Tenant to Landlord of rent and other sums due hereunder after the expiration of any applicable grace period described in subparagraph 19(a) will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed on Landlord by the terms of any encumbrances covering the Building and the Premises. Accordingly, if any installment of rent or any other sums due from Tenant shall not be received by Landlord prior to the expiration of any applicable grace period described in subparagraph 19(a), Tenant shall pay to Landlord a late charge 4 equal to 5% of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of late payment by Tenant based on the circumstances existing as of the date of this Lease. Acceptance of such late charge by Landlord shall in no event constitute a waiver of Tenant's default with respect to such overdue amount, nor prevent Landlord from exercising any of the other rights and remedies granted hereunder. (e) Any amount due from Tenant, if not paid when first due, shall bear interest from the date due until paid at an annual rate equal to 4% over the annual prime rate of interest announced publicly by Citibank, N.A. in New York, New York from time to time (but in no event in excess of the maximum rate of interest permitted by law), provided that interest shall not be payable on late charges incurred by Tenant nor on any amounts upon which late charges are paid by Tenant to the extent such interest would cause the total interest to be in excess of that legally permitted. Payment of interest shall not excuse or cure any default hereunder by Tenant. (f) All payments due from Tenant shall be paid to Landlord, without deduction or offset, in lawful money of the United States of America at the address for payment of rent set forth in the Basic Lease Information, or to such other person or at such other place as Landlord may from time to time designate by notice to Tenant. 4. ESCALATION RENT PAYMENTS. (a) With respect to each calendar year during the term of this Lease subsequent to the Base Year, Tenant shall pay to Landlord as additional rent, at the times hereinafter set forth, an amount equal to the Escalation Rent. Prior to or at any time after the commencement of any calendar year subsequent to the Base Year Landlord may, but shall not be required to, notify Tenant of Landlord's estimate of the amount, if any, of the Escalation Rent for such current calendar year. Tenant shall pay to Landlord on the first day of each calendar month during such current calendar year one-twelfth (1/12) of the amount of any such estimated Escalation Rent for such current calendar year payable by Tenant hereunder. If at any time or times Landlord determines that the amount of any Escalation Rent payable by Tenant for the current year will vary from its estimate by more than 5%, Landlord may, by notice to Tenant, revise Landlord's estimate for such year, and subsequent payments by Tenant for such year shall be based on such revised estimate. Following the close of each calendar year, Landlord shall deliver to Tenant a statement of the actual amount of Escalation Rent for the immediately preceding year, accompanied by a statement made by an accounting or auditing officer designated by Landlord showing the Operating Expenses and Property Taxes on the basis of which Escalation Rent was determined. The statement of said accounting or auditing officer shall be final and binding upon Landlord and Tenant. All amounts payable by Tenant as shown on said statement, less any amounts theretofore paid by Tenant on account of Landlord's earlier estimate of Escalation Rent for such calendar year made pursuant to this Paragraph 4, shall be paid by or, if Tenant theretofore shall have paid more than such amounts, reimbursed to Tenant within ten (10) days after delivery of said statement to Tenant. (b) If this Lease shall terminate on a day other than the last day of a calendar year, the amount of any Escalation Rent payable by Tenant for the calendar year in which this Lease terminates shall be prorated on the basis by which the number of days from the commencement of said calendar year to and including said date on which this Lease terminates bears to 365 and shall 5 be due and payable when rendered notwithstanding termination of this Lease. Escalation Rent allocable to the calendar year in which this Lease terminates shall be deemed to have been incurred evenly over the entire twelve-month period of the calendar year. 5. USE. The Premises shall be used for general office purposes (including uses related or incidental thereto, such as copy/mail room facilities, kitchen area and other legally permitted office-related uses compatible with comparable buildings in the San Francisco financial district) and for no other use or purpose without the prior written consent of Landlord, which may be granted or denied in Landlord's absolute discretion. Tenant shall not do or permit to be done in or about the Premises, nor bring or keep or permit to be brought or kept therein, anything which is prohibited by or would in any way conflict with any law, statute, ordinance or governmental rule or regulation now in force or which may hereafter be enacted or promulgated, or which is prohibited by the standard form of fire insurance policy, or would in any way increase the existing rate of or affect any fire or other insurance upon the Building or any of its contents, or cause a cancellation of any insurance policy covering the Building or any part thereof or any of its contents. Without limiting the generality of the foregoing or of Paragraph 15 below, Tenant shall not bring, or permit to be brought, upon the Premises, any hazardous or toxic materials or chemicals, except for ordinary and customary office products and cleaning supplies which are used, stored, and removed in compliance with all applicable laws, statutes, ordinances and governmental rules, regulations or requirements, in small quantities reasonably necessary for Tenant's office use of the Premises. Tenant shall promptly notify Landlord of all hazardous or toxic substances maintained in the Premises. Tenant shall not do or permit anything to be done in or about the Premises which would in any way obstruct or interfere with the rights of other tenants of the Building, or injure or annoy them, or use or allow the Premises to be used for any improper, immoral, unlawful or objectionable purposes, nor shall Tenant cause, maintain or permit any nuisance or waste in, on or about the Premises. 6. SERVICES. (a) Landlord shall maintain the public and common areas of the Building, including lobbies, stairs, elevators, corridors and restrooms, windows, mechanical, plumbing and electrical equipment therein, and the structure itself in reasonably good order and condition, comparable in quality to that of comparable office buildings in the San Francisco financial district, except for damage occasioned by the acts of Tenant, its employees, agents, contractors or invitees, which damage shall be repaired by Landlord at Tenant's expense. (b) Landlord shall furnish the Premises with (1) electricity for lighting and the operation of customary office machines, (2) heat and air conditioning to the extent reasonably required for the comfortable occupancy by Tenant in its use of the Premises during reasonable and usual business hours (exclusive of Saturdays, Sundays and holidays) as determined by Landlord and subject to the Rules and Regulations of the Building attached hereto as EXHIBIT B, as established from time to time by Landlord (the "RULES AND REGULATIONS"), or such shorter period as may be prescribed by any applicable policies or regulations adopted by any utility or governmental agency, (3) elevator service, (4) lighting replacement (for Building standard lights, ballasts, bulbs and lighting tubes), (5) restroom supplies, (6) window washing with reasonable frequency, and (7) lobby attendant services and janitor service during the times and in the manner that such services are customarily finished in comparable office buildings in the area. Landlord may establish reasonable measures to conserve energy, including but not limited to, automatic switching of lights after hours, 6 so long as such measures do not unreasonably interfere with Tenant's use of the Premises. Landlord shall not be in default hereunder or be liable for any damages directly or indirectly resulting from, nor shall the rental herein reserved be abated by reason of (i) the installation, use or interruption of use of any equipment in connection with the furnishing of any of the foregoing services, (ii) failure to furnish or delay in furnishing any such services when such failure or delay is caused by accident or any condition beyond the actual or reasonable control of Landlord or by the making of necessary repairs or improvements to the Premises or to the building, or (iii) the limitation, curtailment, rationing or restrictions of use of water, electricity, gas or any other forth of energy serving the Premises or the Building. Landlord shall use reasonable efforts diligently to remedy any interruption in the furnishing of such services. (c) Tenant shall not, without Landlord's prior written consent, use heat generating machines or equipment or lighting other than Landlord's designated Building standard lights in the Premises which affect the temperature otherwise maintained by the air conditioning system. If such consent is given, Landlord shall have the right to install supplementary air conditioning units in the Premises and the cost thereof, including the costs of installation, operation and maintenance thereof, shall be paid by Tenant to Landlord upon billing by Landlord. Tenant shall not, without Landlord's prior written consent, install lighting or equipment in the Premises that would cause the connected electrical load in the Premises to exceed three (3.0) watts per rentable square foot. If such consent is given, Tenant shall pay Landlord upon billing for the cost of such excess. All costs payable by Tenant under this subparagraph 6(c) shall be deemed to be, and shall be paid as, additional rent. (d) In the event that Landlord, at Tenant's request, provides services to Tenant that are not otherwise provided for in this Lease, Tenant shall pay Landlord's reasonable charges for such services upon billing therefor. 7. IMPOSITIONS PAYABLE BY TENANT. In addition to the monthly rental and other charges to be paid by Tenant hereunder, Tenant shall pay or reimburse Landlord for any and all of the following items (hereinafter collectively referred to as "IMPOSITIONS"), whether or not now customary or in the contemplation of the parties hereto: taxes (other than local, state and federal personal or corporate income taxes measured by the net income of Landlord from all sources), assessments (including, without limitation, all assessments for public improvements, services or benefits, irrespective of when commenced or completed), excises, levies, business taxes, license, permit, inspection and other authorization fees, transit development fees, assessments or charges for housing funds, service payments in lieu of taxes and any other fees or charges of any kind, which are levied, assessed, confirmed or imposed by any public authority, but only to the extent the Impositions are (a) upon, measured by or reasonably attributable to the cost or value of Tenant's equipment, furniture, fixtures and other personal properly located in the Premises, or the cost or value of any leasehold improvements made in or to the Premises by or for Tenant, regardless of whether title to such improvements shall be in Tenant or Landlord; (b) upon or measured by the monthly rental or other charges payable hereunder, including, without limitation, any gross receipts tax levied by the City and County of San Francisco, the State of California, the Federal Government or any other governmental body with respect to the receipt of such rental; (c) upon, with respect to or by reason of the development, possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises or any portion thereof; or (d) upon this transaction or any document to which Tenant is a party creating or transferring an interest or an 7 estate in the Premises. In the event that it shall not be lawful for Tenant to reimburse Landlord for the Impositions but it is lawful to increase the monthly rental to take into account Landlord's payment of the Impositions, the monthly rental payable to Landlord shall be revised to net Landlord the same net return without reimbursement of the Impositions as would have been received by Landlord with reimbursement of the Impositions. 8. ALTERATIONS. (a) Tenant shall make no alterations, additions or improvements to the Premises or install fixtures in the Premises without first obtaining Landlord's consent, which consent shall not be unreasonably withheld or delayed. In no event, however, may the Tenant make any alterations, additions or improvements or install fixtures which in Landlord's reasonable judgment might adversely affect the structural components of the Building or Building mechanical, utility or life safety systems. At the time such consent is requested, Tenant shall furnish to Landlord a description of the proposed work, an estimate of the cost thereof and such information as shall reasonably be requested by Landlord substantiating Tenant's ability to pay for such work. Landlord, at its sole option, may require as a condition to the granting of such consent to any work costing in excess of $10,000, that Tenant provide to Landlord, at Tenant's sole, cost and expense, a lien and completion bond in an amount equal to one and one-half (1.5) times any and all estimated costs of the proposed work, to insure Landlord against any liability from mechanics' and materialmen's liens and to insure completion of the work. Before commencing any work, Tenant shall give Landlord at least five (5) days written notice of the proposed commencement of such work in order to give Landlord an opportunity to prepare, post and record such notice as may be permitted by law to protect Landlord's interest in the Premises and the Building from mechanics' and materialmen's liens. Tenant shall pay Landlord prior to commencement of the work an administration fee equal to eight percent (8%) of the cost of the work to compensate Landlord for the administrative costs incurred and the Building services provided by Landlord the supervisor and coordination of the work. Within a reasonable period following completion of any work for which plans and specifications were required to obtain a building permit for such work, Tenant shall furnish to Landlord "as built" plans showing the changes made to the Premises. (b) Any alterations, additions or improvements to the Premises shall be made by Tenant at Tenant's sole cost and expense, and any contractor or other person selected by Tenant to make the same shall be subject to Landlord's prior approval, which approval shall not be unreasonably withheld or delayed. Tenant's contractor and its subcontractors shall employ union labor to the extent necessary to insure, so far as may be possible, the progress of the alterations, additions or improvements and the performance of any other work or the provision of any services in the Building without interruption on account of strikes, work stoppage or similar causes of delay. All work performed by Tenant shall comply with the laws, rules, orders, directions, regulations and requirements of all governmental entities having jurisdiction over such work and shall comply with the rules, orders, directions, regulations and requirements of any nationally recognized board of insurance underwriters. All alterations, additions and improvements shall immediately become Landlord's property and, at the end of the term hereof, shall remain on the Premises without compensation to Tenant; provided, however, that if Landlord at the time of consenting to the making of any such alterations, additions and improvements, Tenant shall, prior to the end of the term, at its sole cost and expense, remove such alterations, additions and improvements and repair and restore the Premises to their condition at the commencement of the term. If Landlord consents to, inspects 8 the work of, supervises, recommends or designates any architects, engineers, contractors, subcontractors, or suppliers, the same shall not be deemed a warranty as to the adequacy of the design, workmanship or quality of materials of the work, or as to the compliance of the work with the plans and specifications or any legal requirements. 9. LIENS. Tenant shall keep the Premises and the Building free from any liens (and claims thereof) arising out of any work performed, materials furnished or obligations incurred by or for Tenant. Landlord shall have the right to post and keep posted on the Premises any notices that may be provided by law or which Landlord may deem to be proper for the protection of Landlord, the Premises and the Building from such liens and claims. 10. REPAIRS. By entry hereunder Tenant accepts the Premises as being in the condition in which Landlord is obligated to deliver the Premises, provided that such acceptance shall not extend to latent defects which are not discoverable through a diligent inspection of the Premises. Tenant shall, at all times during the term hereof and at Tenant's sole cost and expense, keep the Premises in good condition and repair, ordinary wear and tear and damage thereto by fire, earthquake, act of God or the elements excepted. Tenant hereby waives all rights to make repairs at the expense of Landlord or in lieu thereof to vacate the Premises. Tenant shall at the end of the term hereof surrender to Landlord the Premises and all alterations, additions and improvements thereto (except to the extent Tenant is required to remove any such alterations, additions or improvements pursuant to subparagraph 8(b) above) in the same condition as when received, ordinary wear and tear and damage by fire, earthquake, act of God or the elements excepted. Landlord has no obligation and has made no promise to alter, remodel, improve, repair, decorate or paint the Premises or any part thereof, except as specifically herein set forth. No representations respecting the condition of the Premises or the Building have been made by Landlord to Tenant, except as specifically herein set forth. 11. DESTRUCTION OR DAMAGE. (a) In the event the Premises or the portion of the Building necessary for Tenant's use and enjoyment of the Premises are damaged by fire, earthquake, act of God, the elements or other casualty, Landlord shall repair the same, subject to the provisions of this Paragraph hereinafter set forth, if (i) such repairs can, in Landlord's opinion, be made within a period of 180 days after commencement of the repair work, (ii) the cost of repairing damage for which Landlord is not insured shall be less than ten percent (10%) of the then full insurable value of the Premises with respect to repairing any damage to the Premises or five percent (5%) of the then full insurable value of the Building with respect to repairing any damage to other areas of the Building, and (iii) the damage or destruction does not occur during the twelve (12) months of the term of this Lease or any extension thereof. This Lease shall remain in full force and effect except that so long as the damage or destruction is not caused by the fault or negligence of Tenant, its contractors, agents, employees or invitees, an abatement of rental shall be allowed Tenant for such part of the Premises as shall be rendered unusable by Tenant in the conduct of its business during the time such part is so unusable. (b) As soon as is reasonably possible following the occurrence of any damage, Landlord shall notify Tenant of the estimated time and cost required for the repair or restoration of the Premises or the portion of the Building necessary for Tenant's occupancy. If, in Landlord's opinion, such repairs cannot be made within 180 days as set forth in subparagraph (a)(i) above, 9 Landlord or Tenant may elect by written notice to the other within 30 days after Landlord's notice of estimated time and cost is given, to terminate this Lease effective as of the date of such damage or destruction. If Landlord is not obligated to effect the repair based upon the circumstances set forth in subparagraphs (a)(ii) or (a)(iii) above, Landlord shall have the right to terminate this Lease, by written notice to Tenant within 30 days after Landlord's notice of time and cost is given, effective as of the date of such damage or destruction. If neither party so elects to terminate this Lease, this Lease shall continue in full force and effect, but the rent shall be partially abated as hereinabove in this Paragraph provided, and Landlord shall proceed diligently to repair such damage. (c) A total destruction of the Building shall automatically terminate this Lease. Tenant waives California Civil Code Section 1932, 1933, 1941 and 1942 providing for (among other things) termination of hiring upon destruction of the thing hired and the right to make repairs and to vacate the Premises under certain conditions. (d) In no event shall Tenant be entitled to any compensation or damages from Landlord, specifically including, but not limited to, any compensation or damages for (i) loss of the use of the whole or any part of the Premises, (ii) damage to Tenant's personal property in or improvements to the Premises, or (iii) any inconvenience, annoyance or expense occasioned by such damage or repair (including moving expenses and the expense of establishing and maintaining any temporary facilities). (e) Landlord, in repairing the Premises, shall not be required to repair any injury or damage to the personal property of Tenant, or to make any repairs to or replacement of any alterations, additions, improvements or fixtures installed on the Premises by or for Tenant. 12. INSURANCE. (a) Tenant agrees to procure and maintain in force during the term hereof, at Tenant's sole cost and expense, Commercial General Liability insurance in an amount not less than two million dollars ($2,000,000) combined single limit for bodily injury and property damage for injuries to or death of persons and property damage occurring in, on or about the Premises or the Building. Such policy shall name Landlord, Landlord's manager or managing agent and any other party designated by Landlord as additional insureds, shall insure Landlord's and Landlord's managing agent's contingent liability as respects acts or omissions of Tenant, shall be issued by a company licensed to do business in the State of California and otherwise reasonably acceptable to Landlord, and shall provide that the policy may not be canceled nor amended without thirty (30) days prior written notice to Landlord. Tenant shall also procure and maintain in force during the term hereof full replacement cost "all risk" insurance on its personal property and trade fixtures in the Premises. Tenant may carry said insurance under a blanket policy, provided however, said insurance by Tenant shall include an endorsement confirming application to and coverage of Landlord. Said insurance shall be primary insurance to any other insurance that may be available to Landlord. Any other insurance available to Landlord shall be non-contributing with and excess to the insurance required to be carried by Tenant hereunder. (b) A Certificate of Insurance shall be delivered to Landlord by Tenant prior to commencement of the term of this Lease and upon each renewal of such insurance. 10 (c) Tenant shall, prior to and throughout the term of this Lease, procure from each of its insurers under all policies of fire, theft, public liability, workers' compensation and any other insurance policies of Tenant now or hereafter existing, pertaining in any way to the Premises or the Building or any operation therein, a waiver, as set forth in Paragraph 13 of this Lease, of all rights of subrogation which the insurer might otherwise, if at all, have against the Landlord or any officer, agent or employee of Landlord (including Landlord's managing agent). (d) Landlord shall procure and maintain with respect to Landlord's interest in the Building such types of insurance and in such amounts as reasonably prudent landlords of comparable buildings in the San Francisco Financial District generally procure and maintain. 13. SUBROGATION. Landlord and Tenant hereby release each other, and their respective officers, directors, trustees, beneficiaries, partners, members, managers, agents and employees, from, and waive their entire claim of recovery for, any claims for damage to the Premises and the Building and to Tenant's alterations, trade fixtures, equipment and personal property that are caused by or result from fire, lightning or any other perils normally included in an "all risk" property insurance policy, whether or not such loss or damage is due to the negligence of Landlord, or its officers, directors, trustees, beneficiaries, partners, members, managers, agents or employees, or of Tenant, or its officers, directors, trustees, beneficiaries, partners, members, managers, agents, or employees. Landlord and Tenant shall cause each such insurance policy obtained by it to provide that the insurance company waives all right of recovery by way of subrogation against the other party in connection with any damage covered by such insurance policy. Landlord and Tenant shall each indemnify the other against and reimburse the other for any and all loss or expense, including reasonable attorneys' fees, resulting from the failure to obtain such waiver. 14. INDEMNIFICATION. Tenant hereby waives all claims against Landlord for damage to any property or injury or death of any person in, upon or about the Premises arising at any time and from any cause other than solely by reason of the gross negligence or willful misconduct of Landlord, its employees or contractors, and Tenant shall defend Landlord against, hold Landlord harmless from, and reimburse Landlord for any and all claims, liability, damage and loss arising out of (a) injury to or death of any person, and (b) damage to or destruction of any property, attributable to or resulting from the condition, use or occupancy of the Premises by Tenant or Tenant's failure to perform its obligations under this Lease, except such as is caused solely by the gross negligence or willful misconduct of Landlord, its contractors or employees. The foregoing indemnity obligation of Tenant shall include reasonable attorneys' fees, investigation costs and all other reasonable costs and expenses incurred by Landlord from the first notice that injury, death or damage has occurred or that any claim or demand is to be made or may be made. The provisions of this Paragraph shall survive the termination of this Lease with respect to any damage, injury or death occurring prior to such termination. 15. COMPLIANCE WITH LEGAL REQUIREMENTS. Tenant, at its sole cost and expense, shall promptly comply with all laws, statutes, ordinances and governmental rules, regulations or requirements now in force or which may hereafter be in force, with the requirements of any board of fire underwriters or other similar body now or hereafter constituted, with any direction or occupancy certificate issued pursuant to any law by any public officer or officers, as well as the provisions of all recorded documents affecting the Premises (including, without limitation, any ground lease, mortgage or covenants, conditions and restrictions), insofar as any thereof relate to or affect the 11 condition, use or occupancy of the Premises, including structural utility system and life safety system changes necessitated by Tenant's acts, use of the Premises or by improvements made by or for Tenant. 16. ASSIGNMENT AND SUBLETTING. (a) Tenant shall not hypothecate or encumber this Lease or any interest herein without the prior written consent of Landlord, which may be granted or denied in Landlord's absolute discretion. Tenant shall not, without the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed by Landlord, transfer or assign this Lease or any interest herein, sublet the Premises or any part thereof, or permit the use of the Premises by any party other than Tenant. This Lease shall not, nor shall any interest herein, be assignable as to the interest of Tenant by operation of law without the consent of Landlord, which consent shall not be unreasonably withheld. Any of the foregoing acts without such consent shall be void and shall, at the option of Landlord, terminate this Lease. In connection with each consent requested by Tenant, Tenant shall submit to Landlord the terms of the proposed transaction, the identity of the parties to the transaction, the proposed documentation for the transaction, and all other information reasonably requested by Landlord concerning the proposed transaction and the parties involved. (b) If the Tenant is a privately held corporation, or is an unincorporated association, limited liability company or partnership, the transfer, assignment, or hypothecation of any stock or interest in such corporation, association, limited liability company or partnership in excess of fifty percent (50%) in the aggregate shall be deemed an assignment or transfer within the meaning and provisions of this Paragraph 16. If Tenant is a publicly held corporation, the public trading of stock in Tenant shall not be deemed an assignment or transfer within the meaning of this Paragraph. (c) Without limiting the other instances in which it may be reasonable for Landlord to withhold its consent to an assignment or subletting, Landlord and Tenant acknowledge that it shall be reasonable for Landlord to withhold its consent in the following instances: (1) if at the time consent is requested or at any time prior to the granting of consent, Tenant is in default under this Lease or would be in default under this Lease but for the pendency of any grace or cure period under Paragraph 19 below; (2) if the proposed assignee or sublease is a governmental agency; (3) if, in Landlord's reasonable judgment, the use of the Premises by the proposed assignee or sublessee would not be comparable to the types of office use by other tenants in the building, would entail any alterations which would lessen the value of the leasehold improvements in the Premises, or would conflict with any so-called "exclusive" or percentage lease then in favor of another tenant of the Building; (4) if, in Landlord's reasonable judgment, the financial worth of the proposed assignee or sublessee does not meet the credit standards applied by Landlord for other tenants under leases with comparable terms, or the character, reputation, or business of the proposed assignee or sublessee is not consistent with the quality of the other tenancies in the Building; 12 (5) if in case of subletting involving either or both the 7th Floor Premises and the 10th Floor Premises, such subletting is of less than the entire 7th Floor Premises and/or the entire 10th Floor Premises, as applicable; and (6) if the proposed assignee or sublessee is an existing tenant of the Building. (d) If at any time during the term of this Lease Tenant desires to assign its interest in this Lease or sublet all or any part of the Premises, Tenant shall give notice to Landlord setting forth the terms of the proposed assignment or subletting ("Tenant's Notice"). Landlord shall have the option, exercisable by notice given to Tenant within fifteen (15) business days after Tenant's Notice is given ("Landlord's Option Period"), either (1) to consent to the assignment in which event the provisions of subparagraph (g) shall be applicable, or to consent to the subletting in which event the provisions of subparagraph (h) shall be applicable; (2) to become the assignee or sublessee of Tenant (instead of the entity specified in Tenant's Notice) upon the terms set forth in Tenant's Notice; (3) in the event of a proposed assignment, to terminate this Lease and to retake possession of the Premises; or (4) in the event of a proposed subletting of the entire Premises, or a portion of the Premises for all or substantially all of the remainder of the term, to terminate this Lease with respect to, and to retake possession of, the space in question, together with, if only a portion of the Premises is involved, such rights of access to and from such portion as may be reasonably required for its use and enjoyment. (e) The provisions of subparagraphs (a) and (b) above notwithstanding, Tenant may assign this Lease or sublet the Premises or any portion thereof, with prior notice to Landlord but without the necessity of Landlord's consent and without extending any option to Landlord pursuant to subparagraph (d) above, to any corporation which controls, is controlled by or is under common control with Tenant, to any corporation or other entity resulting from the merger or consolidation with Tenant, or to any person or entity which acquires all the assets of Tenant as a going concern of the business that is being conducted on the Premises. (f) No sublessee (other than Landlord if it exercises its option pursuant to subparagraph (d) above) shall have a right further to sublet without Landlord's prior consent, which Tenant acknowledges may be withheld in Landlord's absolute discretion, and any assignment by a sublessee of its sublease shall be subject to Landlord's prior consent in the same manner as if Tenant were entering into a new sublease. No sublease, once consented to be Landlord, shall be modified or terminated by Tenant without Landlord's prior consent, which consent shall not be unreasonably withheld. (g) In the case of an assignment to an entity other than Landlord, 50% of any sums or other economic consideration received by Tenant as a result of such assignment shall be paid to Landlord after first deducting the unamortized cost of leasehold improvements paid for by Tenant, and the cost of any reasonable real estate commissions and reasonable attorneys' fees incurred by Tenant in connection with such assignment. (h) In the case of a subletting to an entity other than Landlord, 50% of any sums or economic consideration received by Tenant as a result of such subletting shall be paid to Landlord after first deducting (1) the rental due hereunder, prorated to reflect only rental allocable to the sublet 13 portion of the Premises, (2) the cost of leasehold improvements made to the sublet portion of the Premises at Tenant's cost, amortized over the term of this Lease except for leasehold improvements made for the specific benefit of the sublessee, which shall be amortized over the term of the sublease, and (3) the cost of any reasonable real estate commissions and reasonable attorneys' fees incurred by Tenant in connection with such subletting, amortized over the term of the sublease. (i) Regardless of Landlord's consent, no subletting or assignment (except to Landlord) shall release Tenant of Tenant's obligation or alter the primary liability of Tenant to pay the rental and to perform all other obligations to be performed by Tenant hereunder. The acceptance of rental by Landlord from any other person shall not be deemed to be a waiver by Landlord of any provision hereof. Consent to one assignment or subletting shall not be deemed consent to any subsequent assignment or subletting. In the event of default by any assignee of Tenant or any successor of Tenant in the performance of any of the terms hereof, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against such assignee or successor. Landlord may consent to subsequent assignments or subletting of this Lease or amendments or modifications to this Lease with assignees of Tenant, without notifying Tenant, or any successor of Tenant, and without obtaining its or their consent thereto, and such action shall not relieve Tenant of liability under this Lease. (j) In the event Tenant shall assign this Lease or sublet the Premises or request the consent of Landlord to any assignment, subletting, hypothecation or other action requiring Landlord's consent hereunder (and provided that Landlord does not elect to proceed pursuant to clause (2), (3) or (4) of Paragraph 16(d) above), then Tenant shall pay Landlord's then reasonable and standard processing fee and Landlord's reasonable attorneys' fees incurred in connection therewith. (k) Any sublease hereunder shall be subordinate and subject to the provisions of this Lease, and if this Lease shall be terminated during the term of any sublease, Landlord shall have the right to: (a) deem such sublease as merged and canceled and repossess the subject space by any lawful means, or (b) deem such termination as an assignment of such sublease to Landlord and not as a merger, and require that such subtenant attorn to and recognize Landlord as its landlord under any such sublease. If an Event of Default shall occur under this Lease, Landlord is hereby irrevocably authorized, as Tenant's agent and attorney-in-fact, to direct any subtenants and assignees to make all payments under or in connection with the sublease or assignment directly to Landlord (which Landlord shall apply towards Tenant's obligations under this Lease)." 17. RULES: NO DISCRIMINATION. Tenant shall faithfully observe and comply with the Rules and Regulations, and after notice thereof, all reasonable modifications thereof and additions thereto from time to time promulgated in writing by Landlord. In the event of any conflict between the Rules and Regulations and the express provisions of this Lease, the express provisions of this Lease shall govern. Landlord shall not be responsible to Tenant for the nonperformance by any other tenant or occupant of the Building of any of said Rules and Regulations. Tenant specifically covenants and agrees that Tenant shall not discriminate against or segregate any person or group of persons on account of race, sex, creed, color, national origin, or ancestry or other legally protected classification, in the occupancy, use, sublease, tenure or enjoyment of the Premises. 14 18. ENTRY BY LANDLORD. Landlord may enter the Premises at reasonable hours and, if practicable, upon twenty-four (24) hours' written or verbal notice to Tenant (except that no such notice shall be required in the event of an emergency) to (a) inspect the same; (b) exhibit the same to prospective purchasers, lenders or tenants, provided, however, that Landlord shall only exhibit the Premises to prospective tenants during the final 90 days of Tenant's occupancy of the Premises; (c) determine whether Tenant is complying with all its obligations hereunder; (d) supply janitor service and any other service to be provided by landlord to Tenant hereunder; (e) post notices of nonresponsibility; and (f) make repairs or perform maintenance required of Landlord under the terms hereof or repairs to any adjoining space or utility services or make repairs, alterations or improvements to any other portion of the Building; provided, however, that all such work shall be done as promptly as reasonably possible and so as to cause as little interference to Tenant as reasonably possible. Tenant hereby waives any claim for damages for any inconvenience to or interference with Tenant's business or any loss of occupancy or quiet enjoyment of the Premises occasioned by such entry. Landlord shall at all times have and retain a key with which to unlock all of the doors in, on or about the Premises (excluding Tenant's vaults, safes and similar areas designated in writing by Tenant in advance); and Landlord shall have the right to use any and all means which Landlord may deem proper to open Tenant's doors in an emergency in order to obtain entry to the Premises, and any entry to the Premises obtained by Landlord in an emergency shall not be construed or deemed to be forcible or unlawful entry into or be a detainer of the Premises or of Tenant from the Premises or an eviction, actual or constructive, of Tenant from the Premises or any portion thereof. 19. EVENTS OF DEFAULT. The following events shall constitute Events of Default under this Lease. (a) A default by Tenant in the payment when due of any rent or other sum payable hereunder and the continuation of such default for a period of five (5) days after the same is due; (b) A default by Tenant in the performance of any of the other terms, covenants, agreements or conditions contained herein and, if the default is curable, the continuation of such default for a period of 20 days after notice by Landlord or beyond the time reasonably necessary for cure if the default is of a nature to require more than 20 days to remedy; (c) The bankruptcy or insolvency of Tenant, transfer by Tenant in fraud of creditors, an assignment by Tenant for the benefit of creditors, or the commencement of any proceedings of any kind by or against Tenant under any provision of the Federal Bankruptcy Act or under any other insolvency, bankruptcy or reorganization act unless, in the event any such proceedings are involuntary, Tenant is discharged from the same within 60 days thereafter; (d) The appointment of a receiver for a substantial part of the assets of Tenant; (e) The abandonment of the Premises; (f) The levy upon this Lease or any estate of Tenant hereunder by any attachment or execution and the failure to have such attachment or execution vacated within 20 days thereafter; 15 (g) A violation by Tenant or any affiliate of Tenant under any other lease or agreement with Landlord which is not cured within the time permitted for cure thereunder; and (h) If Tenant violates the same term or condition of this Lease on two (2) occasions during any twelve (12) month period, Landlord shall have the right to exercise all remedies for any violations of the same term or condition during the next twelve (12) months without providing further notice or an opportunity to cure. 20. TERMINATION UPON DEFAULT. Upon the occurrence of any Event of Default by Tenant hereunder, Landlord may, at its option and without any further notice or demand, in addition to any other rights and remedies given hereunder or by law, terminate this Lease and exercise its remedies relating thereto in accordance with the following provisions: (a) Landlord shall have the right, so long as the Event of Default remains uncured, to give notice of termination to Tenant, and on the date specified in such notice this Lease shall terminate. (b) In the event of any such termination of this Lease, landlord may then or any time thereafter by judicial process, re-enter the Premises and remove therefrom all persons and property and again repossess and enjoy the Premises, without prejudice to any other remedies that Landlord may have by reason of Tenant's default or of such termination. (c) In the event of any such termination of this Lease, and in addition to any other rights and remedies Landlord may have, Landlord shall have all of the rights and remedies of a landlord provided by Section 1951.2 of the California Civil Code. The amount of damages which Landlord may recover in event of such termination shall include, without limitation: (1) the worth at the time of award of the unpaid rent which had been earned at the time of termination; (2) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; (3) the worth at the time of award (computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent) of the amount by which the unpaid rent for the balance of the term after the time of award plus one percent) of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of rental loss that Tenant proves could be reasonably avoided; (4) all legal expenses and other related costs incurred by Landlord following Tenant's default; (5) all costs incurred by Landlord in restoring the Premises to good order and condition, or in remodeling, renovating or otherwise preparing the Premises for reletting; and (6) all costs (including, without limitation, any brokerage commissions) incurred by Landlord in reletting the premises. (d) After terminating this Lease, Landlord may remove any and all personal property located in the Premises and place such property in a public or private warehouse or elsewhere at the sole cost and expense of Tenant. In the event that Tenant shall not immediately pay the cost of storage of such property after the same has been stored for a period of thirty (30) days or more, Landlord may sell any or all thereof at a public or private sale in such manner and at such times and places as Landlord in its sole discretion may deem proper, without notice to or demand upon Tenant. Tenant waives all claims for damages that may be caused by Landlord's removing or storing or selling the property as herein provided, and Tenant shall indemnify and hold Landlord free 16 and harmless from and against any and all losses, costs and damages, including without limitation all costs of court and attorneys' fees of Landlord occasioned thereby. (e) In the event of the occurrence of any of the events specified in Paragraph 19(c) of this Lease, if Landlord shall not choose to exercise, or by law shall not be able to exercise, its rights hereunder to terminate this Lease, then, in addition to any other rights of Landlord hereunder or by law, neither Tenant, as debtor-in-possession, nor any trustee or other person (collectively, the "Assuming Tenant") shall be entitled to assume this Lease unless on or before the date of such assumption, the Assuming Tenant (a) cures, or provides adequate assurance that the Assuming Tenant will promptly cure, any existing default under this Lease, (b) compensates, or provides adequate assurance that the Assuming Tenant will promptly compensate, Landlord for any pecuniary loss (including, without limitation, attorneys' fees and disbursements) resulting from such default, and (c) provides adequate assurance of future performance under this Lease. For purposes of this subparagraph (e) "adequate assurance" of such cure, compensation or future performance shall be effected by the establishment of an escrow fund for the amount at issue or by bonding. 21. CONTINUATION AFTER DEFAULT. Landlord shall have the remedy described in California Civil Code Section 1951.4 (i.e., Landlord may continue this Lease in effect after Tenant's breach and abandonment and recover rental as it becomes due, because Tenant has the right to sublet or assign, subject only to reasonable limitations). Even though Tenant has breached this Lease and abandoned the Premises, this Lease shall continue in effect for so long as Landlord does not terminate Tenant's right to possession, and Landlord may enforce all its rights and remedies under this Lease, including the right to recover the rental as it becomes due under this Lease. Acts of maintenance or preservation or efforts to relet the Premises or the appointment of a receiver upon initiative of Landlord to protect Landlord's interest under this Lease shall not constitute a termination of Tenant's right to possession. 22. OTHER RELIEF. The remedies provided for in this Lease are in addition to any other remedies available to Landlord at law or in equity by statute or otherwise. 23. LANDLORD'S RIGHT TO CURE DEFAULTS. All agreements and provisions to be performed by Tenant under any of the terms of this Lease shall be at its sole cost and expense and without any abatement of rental. If Tenant shall fail to pay any sum of money, other than rental, required to be paid by it hereunder or shall fail to perform any other act on its part to be performed hereunder and such failure shall continue for 20 days after notice thereof by Landlord, or such longer period as may be allowed hereunder, or such shorter period as may be appropriate in emergencies, Landlord may, but shall not be obligated so to do, and without waiving or releasing Tenant from any obligations of Tenant, make any such payment or perform any such other act on Tenant's part to be made or performed as in this Lease provided to the extent Landlord may deem desirable, with full right of offset. All sums so paid by Landlord (with interest at an annual rate equal to four percent (4%) over the annual prime rate of interest announced publicly by Citibank, N.A., in New York, New York from time to time, but in no event in excess of the maximum interest rate permitted by law) and all necessary incidental costs shall be payable to Landlord on demand. 24. ATTORNEYS' FEES. If any action arising out of this Lease is brought by either party hereto against the other, then and in that event the unsuccessful party to such action shall pay to the prevailing party all costs and expenses, including reasonable attorneys' fees, incurred by such 17 prevailing party, and if the prevailing party shall recover judgment in such action, such costs, expenses and attorneys' fees shall be included in and as part of such judgment. 25. EMINENT DOMAIN. If all or any part of the Premises shall be taken as a result of the exercise of the power of eminent domain, this Lease shall terminate as to the part so taken as of the date of taking, and, in the case of a partial taking, either Landlord or Tenant shall have the right to terminate this Lease as to the balance of the Premises by notice to the other within 30 days after such date; provided, however, that a condition to the exercise by Tenant of such right to terminate shall be that the portion of the Premises taken shall be of such extent and nature as substantially to handicap, impede or impair Tenant's use of the balance of the Premises. In the event of any taking, Landlord shall be entitled to any and all compensation, damages, income, rent, awards, or any interest therein whatsoever which may be paid or made in connection therewith, and Tenant shall have no claim against Landlord for the value of any unexpired term of this Lease or otherwise. In the event of a partial taking of the Premises which does not result in a termination of this Lease, the monthly rental thereafter to be paid shall be equitably reduced. 26. SUBORDINATION. (a) This Lease shall be subject and subordinate to any ground lease, mortgage, deed of trust, or any other hypothecation for security now or hereafter placed upon the Building and to any and all advances made on the security thereof or Landlord's interest therein, and to all renewals, modifications, consolidations, replacements and extensions thereof. In the event any mortgage or deed of trust to which this Lease is subordinate is foreclosed or a deed in lieu of foreclosure is given to the mortgagee or beneficiary, Tenant shall attorn to the purchaser at the foreclosure sale or to the grantee under the deed in lieu of foreclosure; in the event any ground lease to which this Lease is subordinate is terminated, Tenant shall attorn to the ground lessor. Tenant agrees to execute any documents required to effectuate such subordination, to make this Lease prior to the lien of any mortgage or deed of trust or ground lease, or to evidence such attornment. (b) In the event any mortgage or deed of trust to which this Lease is subordinate is foreclosed or a deed in lieu of foreclosure is given to the mortgagee or beneficiary, or in the event any ground lease to which this Lease is subordinate is terminated, this Lease shall not be barred, terminated, cut off or foreclosed nor shall the rights and possession of Tenant hereunder be disturbed if Tenant shall not then be in default in the payment of rental and other sums due hereunder or otherwise be in default under the terms of this Lease, and if Tenant shall attorn to the purchaser, grantee, or ground lessor as provided in subparagraph (a) above or, if requested, enter into a new lease for the balance of the term hereof upon the same terms and provisions as are contained in this Lease. Tenant's covenant under subparagraph (a) above to subordinate this Lease to any ground lease, mortgage, deed of trust or other hypothecation hereafter executed is conditioned upon each such senior instrument containing the commitments specified in this subparagraph (b). 27. NO MERGER. The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not work a merger, and shall, at the option of Landlord, terminate all or any existing subleases or subtenancies, or operate as an assignment to it of any or all such subleases or subtenancies. 18 28. SALE. In the event the original Landlord hereunder or any successor owner of the Building, shall sell or convey the Building, all liabilities and obligations on the part of the original Landlord, or such successor owner, under this Lease accruing thereafter shall terminate, and thereupon all such liabilities and obligations shall be binding upon the new owner. Tenant agrees to attorn to such new owner, and Landlord agrees to remit to such new owner (or, at Landlord's election, credit such new owner with the amount of) Tenant's security deposit held by Landlord pursuant to Paragraph 33 below. 29. ESTOPPEL CERTIFICATE. At any time and from time to time but on not less than ten (10) business days' prior notice by Landlord or Tenant, the other party hereto shall execute, acknowledge, and deliver to the requesting party, promptly upon request, a certificate certifying (a) that this Lease is unmodified and in full force and effect (or, if there have been modifications, that this Lease is in full force and effect, as modified, and stating the date and nature of each modification), (b) the date, if any, to which rental and other sums payable hereunder have been paid, (c) that no notice has been received by the responding party of any default which has not been cured, except as to defaults specified in the certificate, (d) whether there is then existing any claim by the responding party of default hereunder by the requesting party, and, if so, specifying the nature thereof, and (e) such other matters as may be reasonably requested by Landlord or Tenant. Any such certificate may be relied upon by any prospective purchaser, mortgagee or beneficiary under any deed of trust on the Building or any part thereof. 30. NO LIGHT, AIR, OR VIEW EASEMENT. Any diminution or shutting off of light, air or view by any structure which may be erected on lands adjacent to the Building shall in no way affect this Lease or impose any liability on Landlord. 31. HOLDING OVER. Unless Landlord expressly agrees otherwise in writing, Tenant shall pay Landlord 200% of the amount of rent and additional rent then in effect immediately prior to expiration or earlier termination of this Lease, computed on a monthly basis, for each month or portion thereof that Tenant shall fail to vacate or surrender possession of the Premises or any part thereof after expiration or earlier termination of this Lease in the condition required under this Lease, together with all damages (direct and consequential) sustained by Landlord on account thereof. Tenant shall pay such amounts on demand, and, in the absence of demand, monthly in advance. The foregoing provisions, and Landlord's acceptance of any such amounts, shall not serve as permission for Tenant to hold-over, nor serve to extend the term (although Tenant shall remain a tenant-at-sufferance bound to comply with all provisions of this Lease until Tenant properly vacates the Premises). Landlord shall have the right at any time after expiration or earlier termination of this Lease to reenter and possess the Premises and remove all property and persons therefrom, and Landlord shall have such other remedies for holdover as may be available to Landlord under other provisions of this Lease or applicable laws. 32. ABANDONMENT. Tenant shall not abandon the Premises or any part thereof at any time during the term hereof. If Tenant shall abandon or surrender the Premises, or be dispossessed by process of law or otherwise, any personal property belonging to Tenant and left on the Premises shall be deemed to be abandoned, at the option of Landlord, and Landlord may sell or otherwise dispose of such personal property in any commercially reasonable manner. 19 33. SECURITY DEPOSIT. Tenant shall, upon execution of this Lease, deposit with Landlord the sum specified in the Basic Lease Information (the "deposit"). The deposit shall be held by Landlord as security for the faithful performance by Tenant of all the provisions of this Lease to be performed or observed by Tenant. If Tenant fails to pay rent or other sums due hereunder, or otherwise defaults with respect to any provision of this Lease, Landlord may use, apply or retain all or any portion of the deposit for the payment of any rent or other sum in default or for the payment of any other sum to which Landlord may become obligated by reason of Tenant's default, or to compensate Landlord for any loss or damage which Landlord may suffer thereby. If Landlord so uses or applies all or any portion of the deposit, Tenant shall within 10 days after demand therefor deposit cash with Landlord in an amount sufficient to restore the deposit to the full amount thereof and Tenant's failure to do so shall be a material breach of this Lease. Landlord shall not be required to keep the deposit separate from its general accounts, and Tenant shall not be entitled to interest on the deposit. Within thirty (30) days following the Term Expiration, Landlord shall return to Tenant any portion of the deposit due to Tenant. 34. WAIVER. The waiver by Landlord of any agreement, condition or provision herein contained shall not be deemed to be a waiver of any subsequent breach of the same or any other agreement, condition or provision herein contained, nor shall any custom or practice which may grow up between the parties in the administration of the terms hereof be construed to waive or to lessen the right of Landlord to insist upon the performance by Tenant in strict accordance with such terms. The subsequent acceptance of rental hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any agreement, condition or provision of this Lease, other than the failure of Tenant to pay the particular rental so accepted, regardless of Landlord's knowledge of the preceding breach at the time of acceptance of the rental. 35. NOTICES AND CONSENTS. Except as expressly provided to the contrary in this Lease, all notices, consents, demands and other communications from one party to the other that are given with respect to this Lease, the Premises or the Building shall be in writing and shall not be effective for any purpose unless the same shall be served personally or by national air courier service, or by United States certified mail, return receipt requested, postage prepaid, and addressed as follows: to Tenant at the address specified in the Basic Lease Information, or to such other place as Tenant may from time to time designate in a notice to Landlord; to Landlord at the address specified in the Basic Lease Information, or to such other place as Landlord may from time to time designate in a notice to Tenant; or, in the case of Tenant, delivered to Tenant at the Premises. Each notice, consent, demand or other communication hereunder shall be deemed to have been given as of the third (3rd) business day following the date of such mailing (or as of any earlier date evidenced by a receipt from such national air courier service or the United States Postal Service) or immediately if personally delivered. Notices not sent in accordance with the foregoing shall be of no force or effect until received by the party to which the notice is sent at the address for such party specified herein. 36. COMPLETE AGREEMENT. There are no oral agreements between Landlord and Tenant affecting this Lease, and this Lease supersedes and cancels any and all previous negotiations, arrangements, brochures, agreements, letters of intent and understandings if any, between Landlord and Tenant or displayed by Landlord to Tenant with respect to the subject matter of this Lease, the Premises, the Building or related facilities, with the exception of that certain 595 Market Street Office Lease dated August 16, 1995, by and between Tenant and Landlord's predecessor-in-interest, as amended from time to time. 20 37. CORPORATE AUTHORITY. If Tenant signs as a corporation, each of the persons executing this Lease on behalf of Tenant warrants that Tenant is a duly authorized and existing corporation and that Tenant has and is qualified to do business in California, that the corporation has full right and authority to enter into this Lease and that each and both of the persons signing on behalf of the corporation were authorized to do so. 38. PARTNERSHIP AUTHORITY. If Tenant is a partnership, joint venture, or other unincorporated association, each individual executing this Lease on behalf of Tenant warrants that this Lease is binding on Tenant and that each and both of the persons signing on behalf of Tenant were authorized to do so. 39. LIMITATION OF LIABILITY TO BUILDING. The liability of Landlord to Tenant for any default by Landlord under this Lease or arising in connection with Landlord's operation, management, leasing, repair, renovation, alteration, or any other matter relating to the Building or the Premises, shall be limited to the interest of Landlord in the Building. Tenant agrees to look solely to Landlord's interest in the Building for the recovery of any judgment against Landlord, and Landlord shall not be personally liable for any such judgment or deficiency after execution thereon. The limitations of liability contained in this Paragraph 39 shall apply equally and inure to the benefit of Landlord, its successors and their respective, present and future partners of all tiers, beneficiaries, officers, directors, trustees, shareholders, agents and employees, and their respective heirs, successors and assigns. Under no circumstances shall any present or future general partner of Landlord (if Landlord is a partnership) or individual trustee or beneficiary (if Landlord or any partner of Landlord is a trust) have any liability for the performance of Landlord's obligations under this Lease. 40. BROKERS. Tenant confirms and represent that Tenant has contacted and dealt with solely the brokers identified in the Basic Lease Information and that no other broker has participated in the negotiation of this Lease or is entitled to any commission in connection with this Lease. 41. SUBSTITUTION OF PREMISES. Landlord hereby reserves the right to substitute for the 9th Floor Premises any other premises (herein referred to as the "new premises") in the Building provided: (i) the new premises shall be similar to the 9th Floor Premises in size (up to 10% larger or smaller with the Rent and any other rights and obligations of the parties based on the square footage of the 9th Floor Premises adjusted proportionately to reflect the increase or decrease); (ii) Landlord shall provide the new premises in a condition substantially comparable to the 9th Floor Premises at the time of the substitution (and Tenant shall diligently cooperate in the preparation or approval of any plans or specifications for the new premises as requested by Landlord or Landlord's representatives); (iii) the parties shall execute an appropriate amendment to this Lease confirming the change within thirty (30) days after Landlord requests; and (iv) if Tenant shall already have taken possession of the 9th Floor Premises: (a) Landlord shall pay the direct, out-of-pocket, reasonable expenses of Tenant in moving from the 9th Floor Premises to the new premises, and (b) Landlord shall give Tenant at least thirty (30) days' notice before making such change, and such move shall be made during evenings, weekends, or otherwise so as to incur the least inconvenience to Tenant. Tenant shall surrender and vacate the 9th Floor Premises on the date required in Landlord's notice of substitution, in the condition and as required under this Lease upon expiration, and any failure to do so shall be subject to Article 31. 21 42. TELECOMMUNICATION LINES. (a) LINES. Subject to Landlord's continuing right of supervision and approval, and the other provisions hereof, Tenant may: (i) install telecommunication lines ("LINES") connecting the Premises to Landlord's terminal block on the floor or floors on which the Premises are located, or (ii) use such Lines as may currently exist and already connect the Premises to such terminal block. Landlord's predecessor or independent contractor has heretofore connected such terminal block through riser system Lines to Landlord's main distribution frame ("MDF") for the Building. Landlord disclaims any representations, warranties or understandings concerning the capacity, design or suitability of Landlord's riser Lines, MDF or related equipment. If there is, or will be, more than one tenant on any floor, at any time, Landlord may allocate, and periodically reallocate, connections to the terminal block based on the proportion of square feet each tenant occupies on such floor, or the type of business operations or requirements of such tenants, in Landlord's reasonable discretion. Landlord may arrange for an independent contractor to review Tenant's requests for approval hereunder, monitor or supervise Tenant's installation, connection and disconnection of Lines, and provide other such services, or Landlord may provide the same. In each case, Tenant shall pay Landlord's fees and costs therefor as provided in Paragraph 8 of this Lease. (b) INSTALLATION. Tenant may install and use Tenant's Lines and make connections and disconnections at the terminal blocks as described above, provided Tenant shall: (i) obtain Landlord's prior written approval of all aspects thereof, (ii) use an experienced and qualified contractor designated or approved in writing in advance by Landlord (whom Landlord may require to enter an access and indemnity agreement on Landlord's then standard form of agreement therefor), (iii) comply with such inside wire standards as Landlord may adopt from time to time, and all other provisions of this Lease, including Paragraph 8 respecting alterations, and the Building rules respecting access to the wire closets, (iv) not install Lines in the same sleeve, chaseway or other enclosure in close proximity with electrical wire, and not install PVC-coated Lines under any circumstances, (v) thoroughly test any riser Lines to which Tenant intends to connect any Lines to ensure that such riser Lines are available and are not then connected to or used for telephone, data transmission or any other purpose by any other party (whether or not Landlord has previously approved such connections), and not connect to any such unavailable or connected riser Lines, and (vi) not connect any equipment to the Lines which may create an electromagnetic field exceeding the normal insulation ratings of ordinary twisted pair riser cable or cause radiation higher than normal background radiation, unless the Lines therefor (including riser Lines) are appropriately insulated to prevent such excessive electromagnetic fields or radiation (and such insulation shall not be provided by the use of additional unused twisted pair Lines). As a condition to permitting installation of new Lines, Landlord may require that Tenant remove any existing Lines located in or serving the Premises. (c) LIMITATION OF LIABILITY. Unless due solely to Landlord's intentional misconduct or grossly negligent acts, Landlord shall have no liability for damages arising, and Landlord does not warrant that Tenant's use of the Lines will be free, from the following (collectively called "LINE PROBLEMS"): (i) any eavesdropping, wire-tapping or theft of long distance access codes by unauthorized parties, (ii) any failure of the Lines to satisfy Tenant's requirements, (iii) any capacitance, attenuation, cross-talk or other problems with the Lines, any misdesignation of the Lines in the MDF room or wire closets, or any shortages, failures, variations, interruptions, disconnections, loss or damage caused by or in connection with the installation, maintenance, 22 replacement, use or removal of any other Lines or equipment at the Building by or for other tenants at the Building or by any failure of the environmental conditions at or the power supply for the Building to conform to any requirements of the Lines, or (iv) any other problems associated with any Lines by any cause whatsoever. Under no circumstances shall any Line Problems be deemed an actual or constructive eviction of Tenant, render Landlord liable to Tenant for abatement of any rent or other charges under this Lease, or relieve Tenant from performance of Tenant's obligations under this Lease. Landlord in no event shall be liable for damages by reason of loss of profits, business interruption or other consequential damage arising from any Line Problems. 43. DISABILITIES ACT. The parties acknowledge that the Americans With Disabilities Act of 1990 (42 U.S.C. ss. 12101 et seq.) and regulations and guidelines promulgated thereunder ("ADA"), and any similarly motivated state and local laws ("LOCAL BARRIERS ACTS"), as the same may be amended and supplemented from time to time (collectively referred to herein as the "DISABILITIES ACTS") establish requirements for business operations, accessibility and barrier removal, and that such requirements may or may not apply to the Premises and Building depending on, among other things: (i) whether Tenant's business is deemed a "public accommodation" or "commercial facility," (ii) whether such requirements are "readily achievable," and (iii) whether a given alteration affects a "primary function area" or triggers "path of travel" requirements. The parties hereby agree that: (a) Landlord shall perform any required ADA Title III and related Local Barriers Acts compliance in the common areas, except as provided below (the cost of which shall be included in Operating Expenses, other than Base Operating Expenses), (b) Tenant shall perform any required ADA Title III and related Local Barriers Acts compliance in the Premises, and (c) Landlord may perform, or require that Tenant perform, and Tenant shall be responsible for the costs of, ADA Title III and related Local Barriers Acts "path of travel" and other requirements triggered by any public accommodation or other use of, or alteration in, the Premises. Tenant shall be responsible for ADA Title I and related Local Barriers Acts requirements relating to Tenant's employees, and Landlord shall be responsible for ADA Title I and related Local Barriers Acts requirements relating to Landlord's employees." 44. CONFIDENTIALITY. Tenant shall keep the content and all copies of this Lease, related documents or amendments now or hereafter entered, and all proposals, materials, information and matters relating thereto strictly confidential, and shall not disclose, disseminate or distribute any of the same, or permit the same to occur, except to the extent reasonably required for proper business purposes by Tenant's employees, attorneys, insurers, auditors, lenders and subtenants or assignees (and Tenant shall obligate any such parties to whom disclosure is permitted to honor the confidentiality provisions hereof), and except as may be required by law or court proceedings. 45. MISCELLANEOUS. The words "LANDLORD" and "TENANT" as used herein shall include the plural as well as the singular. If there be more than one Tenant, the obligations hereunder imposed upon Tenant shall be joint and several. Time is of the essence of this Lease and each and all of its provisions. Submission of this instrument for examination or signature by Tenant does not constitute a reservation of or option for lease, and it is not effective as a lease or otherwise until execution and delivery by both Landlord and Tenant. The agreements, conditions and provisions herein contained shall, subject to the provisions as to assignment, apply to and bind the heirs, executors, administrators, successors and assigns of the parties hereto. Tenant shall not, without the consent of Landlord, use the name of the Building for any purpose other than as the address of the business to be conducted by Tenant in the Premises. Upon the request of Landlord, Tenant shall 23 provide to Landlord from time to time, at no expense to Landlord, copies of such financial statements with respect to Tenant as may have been prepared by or for Tenant. Landlord's acceptance of a partial rent payment shall not constitute a waiver of any rights of Tenant or Landlord, including, without limitation, any right Landlord may have to recover possession of the Premises, in unlawful detainer, or otherwise. If any provision of this Lease shall be determined to be illegal or unenforceable, such determination shall not affect any other provision of this Lease and all such other provisions shall remain in full force and effect. This Lease shall be governed by and construed pursuant to the laws of the State of California. 46. YEAR 2000 PERFORMANCE. Landlord is in the process of performing a readiness audit with respect to Year 2000 Performance. As used herein, the term "YEAR 2000 PERFORMANCE" means that Building-related systems and equipment under Landlord's control which are material to proper Building operations can reasonably be expected to perform without material adverse effect despite the change of century from 1999 to 2000 and the leap year. The parties acknowledge that the process of auditing, assess and implementing Year 2000 Performance solutions is time consuming and uncertain, and dependent in part on the performance of third parties not under Landlord's control Thus, Landlord makes no representations or warranties with respect to Year 2000 Performance of Building-related systems and equipment, and interruptions of services as a result of Year 2000 Performance problems will be deemed to be interruptions out of Landlord's reasonable control. Landlord will inform Tenant promptly after Landlord gains actual knowledge of any significant Year 2000 Performance problem which Landlord reasonably believes may adversely impact Building operations, and will use commercially reasonable efforts to audit, asses and implement programs to meet the goal of Year 2000 Performance. The cost of such efforts shall be included as an Operating Expense in the year incurred, provided, however, that capital replacement costs, if any, shall be amortized over the useful life of the replacement. Some information may be obtained from third parties, and may not have been independently verified. Any information which Landlord provides will be subject to and made in reliance on the Year 2000 Information Readiness and Disclosure Act. 47. QUIET ENJOYMENT. Landlord covenants and warrants to Tenant that upon Tenant's paying the rental and all other charges and payments under this Lease and performing the covenants required to be performed by Tenant under this Lease, Tenant shall and may peaceably and quietly enjoy the Premises, subject to the terms, covenants, conditions, provisions and agreements of this Lease, without interference by Landlord or any person lawfully claiming by, through or under Landlord. The foregoing covenant is in lieu of any other covenant express or implied. 48. EXHIBITS. The exhibit(s) and addendum, if any, specified in the Basic Lease Information are attached to this Lease and by this reference made a part hereof. IN WITNESS WHEREOF, the parties have executed this Lease as of the date first set forth above. TENANT: LANDLORD: SELECTQUOTE INSURANCE SERVICES, INC., MARKET & SECOND, INC., a California corporation A Delaware corporation By: By: -------------------------------- -------------------------- 24 Its: Chairman Its: Authorized Signatory By: By: -------------------------------- -------------------------- Its: Executive Vice President Its: Authorized Signatory CERTIFICATE I, Nancy Malik, as Secretary of the aforesaid Tenant, hereby certify that the individual(s) executing the foregoing Lease on behalf of Tenants was/were duly authorized to act in his/their capacity/capacities as set forth above, and his/their action(s) is/are the action of tenant. ------------------------------------ Secretary - Nancy Malik [Printed Name and Title] 25 EXHIBIT B 595 MARKET STREET RULES AND REGULATIONS 1. The sidewalks, halls, passages, exits, entrances, shopping malls, elevators, escalators and stairways of the Building shall not be obstructed by any of the tenants or used by them for any purpose other than for ingress to and egress from their respective premises. The halls, passages, exits, entrances, shopping malls, elevators, escalators and stairways are not for the general public and Landlord shall in all cases retain the right to control and prevent access thereto of all persons whose presence in the judgment of Landlord would be prejudicial to the safety, character, reputation and interests of the Building and its tenants, provided that nothing herein contained shall be construed to prevent such access to persons with whom any tenant normally deals in the ordinary course of its business, unless such persons are engaged in illegal activities. No tenant and no employee or invitee of any tenant shall go up on the roof of the Building. Landlord shall have the right at any time without the same constituting an actual or constructive eviction and without incurring any liability to Tenant therefor to change the arrangement and/or location of entrances or passageway, doors or doorways, corridor, elevators, stairs, toilets or other common areas of the Building. 2. No sign, placard, picture, name, advertisement or notice visible from the exterior of any tenant's premises shall be inscribed, painted, affixed or otherwise displayed by any tenant on any part of the Building without the prior written consent of Landlord. Landlord will adopt and furnish to tenants general guidelines relating to signs inside the Building. Tenant agrees to conform to such guidelines. All approved signs or lettering on doors shall be printed, painted, affixed or inscribed at the expense of Tenant by a person approved by landlord. Material visible from outside the Building will not be permitted. 3. The Premises shall not be used for the storage of merchandise held for sale to the general public or for lodging. No cooking shall be done or permitted on the Premises, except that private use by Tenant of Underwriters' Laboratory approved equipment for brewing coffee, tea, hot chocolate and similar beverages shall be permitted, provided that such use is in accordance with all applicable federal, state and municipal laws, codes, ordinances, rules and regulations. 4. No tenant shall employ any person or persons other than the janitor of Landlord for the purpose of cleaning its premises unless otherwise agreed to by Landlord in writing. Except with the written consent of Landlord, no person or persons other than those approved by Landlord shall be permitted to enter the Building for the purpose of cleaning the same. No tenant shall cause any unnecessary labor by reason of such tenant's carelessness or indifference in the preservation of good order and cleanliness. Landlord shall not be responsible to any tenant for any loss of property on the Premises, however occurring, or for any damage done to the effects of any tenant by the janitor or any other employee or any other person. Janitor service will not be furnished on nights when rooms are occupied after 6 p.m. unless, by agreement in writing, service is extended to a later hour for specifically designated rooms. 5. Landlord will furnish each tenant free of charge with two keys to each door lock provided in the Premises by Landlord. Landlord may make a reasonable charge for any additional keys. No tenant shall have any such keys copied or any keys made. No tenant shall alter any lock or install a new or additional lock or any bolt on any door of its premises. Each tenant, upon the termination of its lease, shall deliver to Landlord all keys to doors in the Building. 6. Landlord shall designate appropriate entrances and a "Freight" elevator for deliveries or other movement to or from the Premises of equipment, materials, supplies, furniture of other property, and Tenant shall not use any other entrances or elevators for such purposes. The Freight elevator shall be available for use by all tenants in the Building, subject to such reasonable scheduling as Landlord in its discretion shall deem appropriate. All persons employed and means or methods used to move equipment, materials, supplies, furniture or other property in or out of the Building must be approved by Landlord prior to any such movement. The scheduling and manner of all move-ins and move-outs shall be coordinated through the Building office and shall only take place after 6 p.m. on weekdays, on weekends (subject to additional charges), or at such other times as Landlord may designate. Landlord shall have the right to prescribe the maximum weight, size and position of all equipment, materials, furniture or other property brought into the Building. Heavy objects shall, if considered necessary by Landlord, stand on a platform of such thickness as is necessary to properly distribute the weight. Landlord will not be responsible for loss of or damage to any such property from any cause, and all damage done to the Building by moving or maintaining such property shall be repaired at the expense of Tenant. 7. No tenant shall use any method of heating or air conditioning other than that supplied by Landlord. No tenant shall use or keep or permit to be used or kept any foul or noxious gas or substance in the Premises, or permit or suffer the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors or vibrations, or interfere in any way with other tenants or those having business in the Building, nor shall any animals or birds be brought or kept in the Premises or the Building. 8. Landlord shall have the right, exercisable without notice and without liability to any tenant, to change the name or street address of the Building. 9. Landlord establishes the hours of 7 a.m. to 6 p.m. of each day other than Saturdays, Sundays and legal holidays as reasonable and usual business hours for the purposes of subparagraph 6(b) of the Lease. If Tenant requests electricity or heat or air conditioning during any hours on Saturdays, Sundays or legal holidays, or during the hours of 6 p.m. to 7 a.m. on any other day, and if Landlord is able to provide the same, Tenant shall pay Landlord such charge as Landlord shall establish from time to time for providing such services during such hours. Any such charges which Tenant is obligated to pay shall be deemed to be additional rent under the Lease, and should Tenant fail to pay the same within five (5) days after demand, such failure shall be a default by Tenant under the Lease. 10. Landlord reserves the right to exclude from the Building between the hours of 6 p.m. and 7 a.m., and at all hours on Saturdays, Sundays and legal holidays, all persons who do not present identification acceptable to Landlord. All persons entering the Building during said hours shall comply with Landlord's sign-in and sign-out procedures. Each tenant shall provide Landlord with a list of all persons authorized by Tenant to enter its premises and shall be liable to Landlord for all 2 acts of such persons. Landlord shall in no case be liable for damages for any error with regard to the admission to or exclusion from the Building of any person. In the case of invasion, mob, riot, public excitement or other circumstances rendering such action advisable in Landlord's opinion, Landlord reserves the right to prevent access to the Building during the continuance of the same by such action as Landlord may deem appropriate, including closing doors. 11. The directory of the Building will be provided exclusively for the display of the name and location of tenants of the Building and Landlord reserves the right to exclude any other names therefrom. Additional names which Tenant may decide to have placed on the Building directory must first be approved by Landlord and shall be at such charges as may be established by Landlord. Landlord reserves the right to restrict the amount of directory space utilized by any tenant. 12. No curtains, draperies, blinds, shutters, shades, screens or other coverings, hangings or decorations shall be attached to, hung or placed in, or used in connection with any window of the Building without the prior written consent of Landlord. In any event, with the prior written consent of Landlord, such items shall be installed on the office side of Landlord's standard window covering and shall in no way be visible from the exterior of the Building. Tenant shall keep window coverings closed when the effect of sunlight (or the lack thereof) would impose unnecessary loads on the Building's heating or air conditioning systems. 13. No tenant shall obtain for use in the Premises ice, drinking water, food, beverage, towel or other similar services, except at such reasonable hours and under such reasonable regulations as may be fixed by Landlord. 14. Each tenant shall ensure that the doors of its premises are closed and locked and that all water faucets, water apparatus and utilities are shut off before Tenant or Tenant's employees leave the Premises so as to prevent waste or damage, and for any default or carelessness in this regard, Tenant shall make good all injuries sustained by other tenants or occupants of the Building or Landlord. On multiple-tenancy floors, all tenants shall keep the doors to the Building corridors closed at all times except for ingress and egress. 15. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were construed, no foreign substance of any kind whatsoever shall be thrown therein and the expense of any breakage, stoppage or damage resulting from the violation of this rule shall be borne by the tenant who, or whose employees or invitees, shall have caused it. 16. Except with the prior written consent of Landlord, no tenant shall sell any newspapers, magazines, periodicals, theater or travel tickets or any other goods or merchandise to the general public in or on its premises, nor shall any tenant carry on or permit or allow any employee or other person to carry on the business of stenography, typewriting, printing or photocopying or any similar business in or from its premises for the service or accommodation of occupants of any other portion of the Building, nor shall the premises of any tenant be used for manufacturing of any kind, or any business or activity other than that specifically provided for in such tenant's lease. 3 17. No tenant shall install any radio or television antenna, loudspeaker or other device on the roof or exterior walls of the Building. No television or radio or recorder shall be played in such a manner as to cause a nuisance to any other tenant. 18. There shall not be used in any space, or in the public halls of the Building, either by any tenant or others, any hand trucks except those equipped with rubber tires and side guards or such other material handling equipment as Landlord may approve. No other vehicles of any kind shall be brought by any tenant into the Building or kept in or about its premises. 19. Each tenant shall store all its trash and garbage within its premises. No material shall be placed in the trash boxes or receptacles if such material is of such nature that it may not be disposed of in the ordinary and customary manner of removing and disposing of office building trash and garbage in the City of San Francisco without being in violation of any law or ordinance governing such disposal. All garbage and refuse disposal shall be made only through entryways and elevators provided for such purposes and at such times as Landlord shall designate. 20. Canvassing, soliciting, distribution of handbills or any other written material and peddling in the Building are prohibited, and each tenant shall cooperate to prevent the same. 21. The requirements of tenants will be attended to only upon application in writing at the office of the Building. Employees of Landlord shall not perform any work or do anything outside of their regular duties unless under special instructions from Landlord. 22. Landlord may waive any one or more of these Rules and Regulations for the benefit of any particular tenant or tenants, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of any other tenant or tenants, nor prevent Landlord from thereafter enforcing any such Rules and Regulations against any or all of the tenants of the Building. 23. These Rules and Regulations are in addition to, and shall not be construed to in any way modify or amend, in whole or in part, the agreements, covenants, conditions and provisions of any lease of premises in the Building. 24. Landlord reserves the right to make such other rules and regulations as in its judgment may from time to time be needed for the safety, care and cleanliness of the Building and for the preservation of good order therein. 4 EXHIBIT C WORK LETTER This Work Letter ("WORK LETTER") is an Exhibit to that certain document captioned Office Lease (referred to herein for convenience as the "LEASE") between MARKET & SECOND, INC., a Delaware corporation ("LANDLORD"), and SELECTQUOTE INSURANCE SERVICES, INC., a California corporation ("TENANT"), dated August ___, 1999. I. DATES AND ALLOWANCE. 7TH FLOOR PREMISES. SPACE PLAN DATE: September 1, 1999. CONSTRUCTION DRAWINGS DATE: September 15, 1999. ALLOWANCE: Up to Thirty Dollars ($30.00) per rentable square feet of space in the 7th Floor Premises (i.e., $414,600.00), as further described in Section IV(b). 9TH FLOOR PREMISES. SPACE PLAN DATE: December 1, 1999. CONSTRUCTION DRAWINGS DATE: December 15, 1999. ALLOWANCE: Up to Thirty-Five Dollars ($35.00) per rentable square feet of space in the 9th Floor Premises (i.e., $141,540.00), as further described in Section IV(b). 10TH FLOOR PREMISES. SPACE PLAN DATE: December 1, 1999. CONSTRUCTION DRAWINGS DATE: December 15, 1999. ALLOWANCE: Up to Thirty-Five Dollars ($35.00) per rentable square feet of space in the 10th Floor Premises (i.e., $483,700.00), as further described in Section IV(b). II. CONSTRUCTION REPRESENTATIVES, SPACE PLANNER, ARCHITECT AND ENGINEER. Landlord's and Tenant's construction representatives for coordination of planning, construction, approval of change orders, substantial and final completion, and other such matters (unless either party changes its representative upon written notice to the other), and the other parties involved in planning the Work, are: LANDLORD'S REPRESENTATIVE: Jeffrey Brueckner Tower Realty Management Corporation ADDRESS: 595 Market Street, Suite 2210 San Francisco, CA 94105 TELEPHONE: (415) 512-6801 FAX: (415) 512-6809 TENANT'S REPRESENTATIVE: Mary Ann Pacula ADDRESS: 595 Market Street, Suite 600 San Francisco, California 94105 TELEPHONE: (415) 543-7338 FAX: (415) 882-4672 SPACE PLANNER: Forum Design. ARCHITECT: Forum Design. ENGINEER: One or more California licensed engineers approved or designated by Landlord in writing. III. PLANS. The term "PLANS" shall refer to the Space Plan and Construction Drawings collectively. The term "PLANNER" herein shall refer to the Space Planner, Architect or Engineer, as appropriate, each of whom shall be retained by landlord. Tenant has sole responsibility to provide all information concerning its space planning requirements to the Planner, to cause the Planner to prepare the Plans, and to obtain Landlord's final approval thereof (including all revisions) by the dates set forth above. Such dates are critical and of the essence hereof with respect to contracting out the Work, obtaining permits, and achieving substantial completion in a timely manner. The Plans shall be signed or initialed by Tenant, if requested by Landlord, and shall be prepared and approved in accordance with the following provisions: (a) SPACE PLAN. By the Space Plan Date, Tenant shall: (1) provide Space Planner with all information concerning Tenant's requirements in order for Space Planner to prepare the Space Plan, (2) cause Space Planner to complete Tenant's Space Plan, (3) obtain Landlord's 2 written approval thereof, and (4) provide three (3) copies thereof to Architect. "SPACE PLAN" herein means a floor plan, drawn to scale, showing (i) demising walls, interior walls and other partitions, including type of wall or partition and height, (ii) doors and other openings in such walls or partitions, including type of door and hardware, (iii) any floor or ceiling openings, and any variations to building standard floor or ceiling heights, (iv) electrical outlets, and any restrooms, kitchens, computer rooms, file cabinets, file rooms and other special purpose rooms, and any sinks or other plumbing facilities, or other special electrical, HVAC, plumbing or other facilities or equipment, including all special loading, (v) communications system, including location and dimensions of equipment rooms, and telephone and computer outlet locations, (vi) special cabinet work or other millwork items, (vii) any space planning considerations under the Disabilities Acts, (viii) finish selections (i.e., color selection of painted areas, and selection of floor and any special wall coverings from Landlord's available building standard selections) (which selections Tenant may defer until the Construction Drawings Date), and (ix) any other details or features reasonably required in order to obtain a preliminary cost estimate as described in Section IV or otherwise reasonably requested by Architect, Engineer or Landlord in order for the Space Plan to serve as a basis for preparing the Construction Drawings. (b) CONSTRUCTION DRAWINGS. By the Construction Drawings Date, Tenant shall: (1) provide all information concerning Tenant's requirements in order for Architect and Engineer to prepare the Construction Drawings, (2) cause Architect and Engineer to complete the Construction Drawings (which shall include at least three (3) mylar sepias, or such other quantity as Landlord may reasonably require), and (3) obtain Landlord's written approval thereof. `Construction Drawings" herein means fully dimensioned architectural construction drawings and specifications, and any required engineering drawings (including mechanical, electrical, plumbing, air-conditioning, ventilation and heating), and shall include any applicable items described above for the Space Plan, and to the extent applicable: (i) electrical outlet locations, circuits and anticipated usage therefor, (ii) reflected ceiling plan, including lighting, switching, and any special ceiling specifications, (iii) duct locations for heating, ventilating and air-conditioning equipment, (iv) details of all millwork, (v) dimensions of all equipment and cabinets to be built in, (vi) furniture plan showing details of space occupancy, (vii) keying schedule, (viii) lighting arrangement, (ix) location of print machines, equipment in lunch rooms, concentrated file and library loadings and any other equipment or systems (with brand names wherever possible) which require special consideration relative to air-conditioning, ventilation, electrical, plumbing, structural, fire protection, life-fire-safety system, or mechanical systems, (x) special heating, ventilating and air conditioning equipment and requirements, (xi) weight and location of heavy equipment, and anticipated loads for special usage rooms, (xii) demolition plan, (xiii) partition construction plan, (xiv) all requirements under the Disabilities Acts and other governmental requirements, and (xv) final finish selections, and any other details or features reasonably required in order to obtain a final cost estimate as described in Section IV or otherwise reasonably requested by Architect, Engineer or Landlord in order for the Construction Drawings to serve as a basis for contracting the Work. (c) LANDLORD'S APPROVAL OF PLANS. Landlord shall either approve any Plans or revisions submitted pursuant hereto or disapprove of the same with suggestions for making the same acceptable. Landlord shall not unreasonably withhold approval if the Plans provide for a customary office layout, with finishes and materials generally conforming to building standard finishes and materials currently being used by Landlord at the Building, are compatible with the Building's shell and core construction, and if no modifications will be required for the Building electrical, heating, 3 air-conditioning, ventilation, plumbing, fire protection, life-fire-safety, or other systems or equipment, and will not require any structural modifications to the Building, whether required by heavy loads or otherwise. Notwithstanding the foregoing to the contrary, the Plans must include a Building Standard ceiling system comparable in all material respects to the ceiling system located on the sixth (6th) floor of the Building as of the date of the Lease. Landlord may request that Tenant approve Landlord's suggested changes in writing (such approval shall not be unreasonably withheld), or Landlord may arrange directly with the Planner for revised Plans to be prepared incorporating such suggestions (in which case, Tenant shall sign or initial the revised Plans and/or Landlord's notice concerning the suggested changes, if requested by Landlord). Landlord's approval of the Plans shall not be deemed a warranty as to the adequacy or legality of the design, and Landlord hereby disclaims any responsibility or liability for the same. (d) GOVERNMENTAL APPROVAL OF PLANS. Landlord shall cause its contractor to apply, as soon as practicable, for any normal building permits required for the Work which are issued pursuant to a local building code as a ministerial matter. If the Plans must be revised in order to obtain such building permits, Landlord shall promptly notify Tenant. In such case, Tenant shall promptly arrange for the Plans to be revised to satisfy the building permit requirements and shall submit the revised Plans to Landlord for approval as a Change Order under Section III(e). Landlord shall have no obligation to apply for any zoning, parking or sign code amendments, approvals, permits or variances, or any other governmental approval, permit or action (except normal building permits as described above). If any such other matters are required, Tenant shall promptly seek to satisfy such requirements or revise the Plans to eliminate such requirements. (e) CHANGES AFTER PLANS ARE APPROVED. If Tenant shall desire any changes, alterations, or additions to the Plans after they have been approved by Landlord, Tenant shall submit a detailed written request or revised Plans (the "CHANGE ORDER") to Landlord for approval. If reasonable and practicable and generally consistent with the Plans theretofore approved, Landlord shall not unreasonably withhold approval, but all costs in connection therewith, including, without limitation, construction costs, permit fees, and any additional plans, drawings and engineering reports or other studies or tests, or revisions of such existing items, shall be paid for by Tenant as a Tenant's Cost under Section IV. The cost of any corrections for errors or omissions made by any space planner, architect, engineer or contractor recommended or engaged by Tenant, including corrections for unforeseen or concealed conditions, shall be borne by Tenant. (f) PLANNING FOR DISABILITIES ACTS. Tenant shall be responsible for matters under the Disabilities Acts relating to the Premises or improvements thereto. Without limiting the generality of the forgoing, Tenant shall: (a) provide complete and accurate information such that the Plans will comply with the Disabilities Acts, and update such information as needed, and (b) be responsible for any changes to the Work or Premises resulting from changes in Tenant's employees, business operations or the Disabilities Acts. Without limitation as to the other provisions, Tenant hereby expressly acknowledges that Tenant's indemnity and related obligations under the Lease shall apply to violations of this provision. 4 IV. COST OF THE WORK, ALLOWANCE AND TENANT'S COST. (a) COST OF THE WORK. Except for the Allowance to be provided by Landlord hereunder, Tenant shall pay the entire cost (herein referred to as the "COST OF THE WORK") for or related to: (1) the Work, including, without limitation, costs of labor, hardware, equipment and materials, contractors' charges for overhead and fees, and so-called "general conditions" (including rubbish removal, utilities, freight elevators, hoisting, field supervision, building permits, occupancy certificates, inspection fees, utility connections, bonds, insurance, sales taxes, and the like), (2) the Plans, including, without limitation, all revisions thereto, and engineering reports, or other studies, reports or tests, air balancing or related work in connection therewith, and (3) Landlord's costs and administrative fee described below. "WORK" herein means: (i) the improvements and items of work shown on the final approved Plans (including changes thereto approved by Landlord), and (ii) any demolition, preparation or other work required in connection therewith, including without limitation, structural or mechanical work, additional HVAC equipment or sprinkler heads, or modifications to any building mechanical, electrical, plumbing or other systems and equipment or relocation of any existing sprinkler heads, either within or outside the Premises required as a result of the layout, design, or construction of the Work or in order to extend any mechanical distribution, fire protection or other systems from existing points of distribution or connection, or in order to obtain building permits for the work to be performed within the Premises (unless Landlord requires that the Plans be revised to eliminate the necessity for such work). The Cost of the Work shall include a Landlord administrative fee equal to ten percent (10%) of all other amounts included in the Cost of the Work. (b) ALLOWANCE. Landlord shall provide a construction allowance (the "Allowance') as set forth in Section I above. Landlord shall make the Allowance available towards: (1) costs of permanent leasehold improvements included in the Work, including labor, hardware, equipment and materials, contractors' charges for overhead and fees, and general conditions, (2) costs of the Space Plan and Construction Drawings, provided such costs, as a share of the Allowance, shall not exceed Two and 50/100 Dollars ($2.50) per rentable square feet of space in the Premises (i.e., $34,550.00 for each the 7th Floor Premises and the 10th Floor Premises, and $10,110 for the 9th Floor Premises) (and which shall exclude planning for furniture, fixtures and equipment), (3) costs incurred by Tenant for real estate consulting fees payable to Tenant's broker identified in the Basic Lease Information ("TENANT'S BROKER") in connection with the Lease, provided such costs, as a share of the Allowance, shall not exceed, in the aggregate, Four Dollars ($4.00) per rentable square feet of space in the 7th Floor Premises (i.e., $55,280.00) (the "PERMITTED REAL ESTATE CONSULTING FEE"), and (4) Landlord's costs and administrative fee, as described above. Landlord shall pay the Permitted Real Estate Consulting Fee directly to Tenant's Broker upon receipt of an invoice from Tenant's Broker setting forth in detail reasonably satisfactory to Landlord the amount of the real estate consulting fees owed by Tenant to Tenant's Broker, which invoice shall be accompanied by written authorization from Tenant to remit the Permitted Real Estate Consulting Fee to Tenant's Broker. If all or any portion of the Allowance shall not be used, Landlord shall be entitled to the savings and Tenant shall receive no credit therefor. (c) TENANT'S COST; ESTIMATES AND PAYMENTS. Any portion of the Cost of the Work exceeding the Allowance is referred to herein as "TENANT'S COST." Landlord may at any time estimate Tenant's Cost in advance, or revise any such estimate, in which case Tenant shall deposit the estimated amount (or the increase reflected in any revised estimate) with Landlord within three (3) days after Landlord so requests; provided, however, any initial estimate of Tenant's Cost shall be 5 an amount equal to (i) the bid of the contractor selected pursuant to Section IV(d) below, less (ii) the Allowance. If the Work involves progress payments, Landlord shall apply the amounts deposited by Tenant first. If, after final completion and payment for the Work, the actual amount of Tenant's Cost exceeds the estimated amount, Tenant shall pay the difference to Landlord within three (3) days after Landlord so requests. If such estimated amount exceeds the actual amount of Tenant's Cost, Landlord shall provide a refund of the difference. Tenant's Cost shall be deemed "rent" under the Lease (and all remedies for the non-payment of rent shall be available to Landlord therefor), and Tenant's obligations under the Lease to keep the Premises and Building free of liens shall apply to any liens arising from any failure to pay Tenant's Cost hereunder. (d) SELECTION OF CONTRACTOR. Landlord's contractor shall be the contractor selected pursuant to a procedure whereby the approved Construction Drawings are submitted to three (3) general contractors, selected by Landlord and reasonably approved by Tenant, who are each requested to submit a bid price for performance of the Work to Landlord and Tenant, who shall jointly open and review the bids. Landlord and Tenant, after adjusting the bids to compensate for any inconsistent assumptions, shall select the lowest priced responsible and responsive bidder as Landlord's contractor to perform the Work. Tenant acknowledges and agrees that the bid price submitted by the contractor chosen to perform the Work shall not constitute a price guaranty, and is subject to increases, including, but not limited to, increases based on: (a) changes in the Construction Drawings or the Work, (b) increases in costs of labor or materials or the delivery thereof, (c) concealed conditions encountered on the job site, (d) new legal requirements becoming effective following preparation of the bid, or (e) strikes, acts of God, shortages of materials or labor, or other causes beyond Landlord's reasonable control. V. CONSTRUCTION. (a) LANDLORD TO ARRANGE WORK. Provided Tenant completes the Plans on time and deposits with Landlord an amount equal to the estimate of Tenant's Cost as provided above, and is not then in violation of the Lease (including this exhibit), Landlord shall use reasonable efforts to cause Landlord's contractor to substantially complete the Work by December 1, 1999, with respect to the 7th Floor Premises, and by April 1, 2000, with respect to the 10th Floor Premises. Landlord reserves the right to substitute comparable or better materials and items for those shown in the Plans, so long as they do not materially and adversely affect the appearance of the Premises. (b) LANDLORD'S WORK. Landlord shall, at Landlord's sole expense, prior to Tenant's taking occupancy of the Premises, complete any work in the restrooms located in the Premises necessary to cause such restrooms to comply with applicable building codes including, without limitations, the Disabilities Acts. (c) SUBSTANTIAL COMPLETION AND WALK-THROUGH. Landlord shall be deemed to have "substantially completed" the Work for purposes hereof if Landlord has caused the Work to be sufficiently completed such that Tenant can reasonably use the Premises or complete any improvements or changes to the Premises to be made by Tenant. When Landlord notifies Tenant that the Work has been substantially completed, either party may request a joint walk-through inspection in order for Tenant to identify any necessary final completion or other "punchlist" items. Neither party shall unreasonably withhold approval concerning such items. If Tenant fails to participate in a walk-through as provided above, or otherwise fails to object to Landlord's notice of 6 substantial completion in writing within three (3) business days thereafter specifying in detail the items of work needed to be performed in order for substantial completion, Tenant shall be deemed conclusively to have agreed that the Work is substantially completed for purposes of the Commencement Date and commencement of Rent under the Lease as of the date set forth in Landlord's notice. If there is any dispute as to whether Landlord has substantially completed the Work, Landlord may request a good faith decision by Landlord's architect which shall be final and binding on the parties. (d) FINAL COMPLETION.Substantial completion shall not prejudice Tenant's rights to require full completion of any remaining items of Work, which Landlord shall use reasonable efforts to complete promptly after substantial completion has occurred. If Landlord notifies Tenant in writing that the Work is fully completed, and Tenant fails to object thereto in writing within five (5) business days thereafter specifying in detail the items of work needed to be completed and the nature of work needed to complete said items, Tenant shall be deemed conclusively to have accepted the Work as fully completed (or such portions thereof as to which Tenant has not so objected). In connection with the Work, Landlord: (1) shall cause building standard suite identification signage, and building standard window blinds, to be installed (to the extent not already existing), and (2) may cause a contractor to perform air balancing tests on the Premises and adjust the HVAC system as a result thereof. The costs of such items may be charged against the Allowance, and if the Allowance shall be insufficient, Tenant shall pay Landlord for such costs as additional rent within five (5) days after billed. (e) LANDLORD'S ROLE. The parties acknowledge that neither Landlord nor its managing agent is an architect or engineer, and that the Work will be designed and performed by independent architects, engineers and contractors. Landlord and its managing agent shall have no responsibility for construction means, methods or techniques or safety precautions in connection with the Work, and do not guarantee that the Plans or Work will be free from errors, omissions or defects, and shall have no liability therefor. In the event of such errors, omissions or defects, Landlord shall cooperate in any action Tenant desires to bring against such parties. VI. WORK PERFORMED BY TENANT. Landlord, at Landlord's discretion, may permit Tenant and any of Tenant's space planners, architects, engineers, contractors, suppliers, employees, agents and other such parties (collectively, "TENANT'S CONTRACTORS") to enter the Premises prior to completion of the Work in order to make the Premises ready for Tenant's use and occupancy. If Landlord permits such entry prior to completion of the Work, then such permission shall be deemed a license only and not a lease, and is conditioned upon: (a) Tenant obtaining Landlord's prior written approval of such entry, Tenant's Contractors and the work they will perform, and complying with all of the other requirements of the Lease pertaining to work performed by Tenant in the Premises, all insurance requirements under the Lease, and all other conditions imposed by Landlord for the prior submission of security, affidavits and lien waivers or otherwise in connection therewith, (b) Tenant and Tenant's Contractors working in harmony and not interfering with Landlord and Landlord's space planners, architects, engineers, contractors, suppliers, employees, agents and other such parties (collectively, "LANDLORD'S CONTRACTORS") in doing the Work or with other tenants and occupants of the Building, and (c) Tenant paying for any utilities and services consumed in connection with such work. If at any time such entry shall cause or threaten to cause such disharmony or interference, or violate any of the other foregoing requirements, in Landlord's sole opinion, Landlord shall have the right to revoke such license immediately upon oral or written notice 7 to Tenant. Landlord shall not be liable in any way for any injury, loss or damage which may occur to any decorations, fixtures, personal property, installations or other improvements or items of work installed, constructed or brought upon the Premises by or for Tenant or Tenant Contractors prior to completion of the Work, all of the same being at Tenant's sole risk, and Tenant hereby agrees to protect, defend, indemnify and hold Landlord and its employees, agents, and affiliates harmless from all liabilities, losses, damages, claims, demands, and expenses (including attorneys' fees) arising from early entry to the Premises pursuant hereto. VII. MISCELLANEOUS. (a) INTERPRETATION. The terms of this Work Letter shall govern the initial build-out of the 7th Floor Premises, the 9th Floor Premises and the 10th Floor Premises, individually. As used herein, all defined terms (including, without limitation, "PREMISES," "PLANS," "WORK," "COST OF THE WORK," "TENANT'S COST," AND "ALLOWANCE") shall refer individually, not collectively, to each of the 7th Floor Premises, the 9th Floor Premises and the 10th Floor Premise. Without limiting the generality of the foregoing, (1) no portion of the Allowance allocated to the 7th Floor Premises shall be used in connection with the 9th Floor Premises or the 10th Floor Premises, (2) no portion of the Allowance allocated to the 9th Floor Premises shall be used in connection with the 7th Floor Premises or the 10th Floor Premises, and (3) no portion of the Allowance allocated to the 10th Floor Premises shall be used in connection with the 7th Floor Premises or the 9th Floor Premises, without the prior written approval of Landlord, which approval may be granted or withheld in Landlord's sole discretion. Tenant acknowledges and agrees that in no event shall the initial build-out of the 9th Floor Premises or the 10th Floor Premises commence prior to December 1, 1999, unless Landlord, in Landlord's sole discretion, elects to commence such construction prior to December 1, 1999. Notwithstanding anything herein to the contrary, upon mutual agreement of Landlord and Tenant, the Plans may reflect the improvements to be constructed in the 7th Floor Premises, the 9th Floor Premises and the 10th Floor Premises, as a whole, and Landlord may then bid simultaneously, pursuant to Section IV(d) above, the Work to be constructed in the 7th Floor Premises, the 9th Floor Premises and the 10th Floor Premises. Capitalized terms not otherwise defined herein shall have the meanings ascribed thereto in the Lease. (b) APPLICATION. This Exhibit shall not apply to any additional space added to the Premise at any time, whether by any options or rights under the Lease or otherwise, or to any portion of the Premises in the event of a renewal or extension of the Term of the Lease, whether by any options or rights under the Lease or otherwise, unless expressly so provided in the Lease or any amendment or supplement thereto. (c) LEASE PROVISIONS AND MODIFICATION. This Exhibit is intended to supplement and be subject to the provisions of the Lease, including, without limitation, those provisions requiring that any modification or amendment be in writing and signed by authorized representatives of both parties. IN WITNESS WHEREOF, the parties have executed this Work Letter as of the date first set forth above. TENANT: LANDLORD: 8 SELECTQUOTE INSURANCE SERVICES, INC., MARKET & SECOND, INC., a California corporation a Delaware corporation By: By: ------------------------------- ------------------------------- Its: Its: Authorized Signatory ------------------------------- By: By: ------------------------------- ------------------------------- Its: Its: Authorized Signatory ------------------------------- 9 TABLE OF CONTENTS
PAGE 1. Definitions..................................................1 2. Term; Condition of Premises..................................3 3. Rental.......................................................4 4. Escalation Rent Payments.....................................5 5. Use..........................................................6 6. Services.....................................................6 7. Impositions Payable by Tenant................................7 8. Alterations..................................................8 9. Liens........................................................9 10. Repairs......................................................9 11. Destruction or Damage........................................9 12. Insurance...................................................10 13. Subrogation.................................................11 14. Indemnification.............................................11 15. Compliance with Legal Requirements..........................11 16. Assignment and Subletting...................................12 17. Rules: No Discrimination...................................14 18. Entry by Landlord...........................................15 19. Events of Default...........................................15 20. Termination Upon Default....................................16 21. Continuation after Default..................................17 22. Other Relief................................................17 23. Landlord's Right to Cure Defaults...........................17 24. Attorneys' Fees.............................................17 25. Eminent Domain..............................................18 26. Subordination...............................................18 27. No Merger...................................................18 28. Sale........................................................19 29. Estoppel Certificate........................................19 30. No Light, Air, or View Easement.............................19
i TABLE OF CONTENTS (Continued)
PAGE 31. Holding Over...............................................19 32. Abandonment................................................19 33. Security Deposit...........................................20 34. Waiver.....................................................20 35. Notices and Consents.......................................20 36. Complete Agreement.........................................20 37. Corporate Authority........................................21 38. Partnership Authority......................................21 39. Limitationof Liability to Building.........................21 40. Brokers....................................................21 41. Substitution of Premises...................................21 42. Telecommunication Lines....................................22 (a) Lines................................................22 (b) Installation.........................................22 (c) Limitation of Liability..............................22 43. Disabilities Act...........................................23 44. Confidentiality............................................23 45. Miscellaneous..............................................23 46. Year 2000 Performance......................................24 47. Quiet Enjoyment............................................24 48. Exhibits...................................................24
ii EX-10.11 19 EXHIBIT 10.11 FORM OF EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("AGREEMENT") is entered into as of ___________, 1999 between SELECTQUOTE, INC., a Delaware corporation (hereinafter referred to as the "COMPANY"), and ____________________ (hereinafter referred to as the "EXECUTIVE"). R E C I T A L S: A. The Company wishes to engage the Executive as the __________ of the Company on the terms and conditions set forth in this Agreement. B. The Executive is willing to accept employment as the ___________ of the Company on the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the promises and the mutual covenants set forth in this Agreement, the Company and the Executive agree as follows: 1. POSITION AND RESPONSIBILITIES. (a) POSITION. The Executive shall have the title and position of ____________________ of the Company. The Executive shall report directly to [the Chairman of the Board and the Board of Directors]. (b) DUTIES AND RESPONSIBILITIES. The duties and responsibilities of the Executive are further described in EXHIBIT A hereto. The Executive will use his best efforts to perform those duties and discharge his responsibilities pursuant to this Agreement competently, carefully and faithfully. 2. TERMS AND CONDITIONS OF EMPLOYMENT. (a) PERIOD OF EMPLOYMENT. The Company will employ the Executive, and the Executive accepts employment with the Company, for a period of ________ years commencing on _______________, subject to Section 3. (b) DEVOTION OF TIME. The Executive will devote his full time, attention and energies (exclusive of any periods of sickness and disability and of such normal holiday and vacation periods as have been established by the Company) to the affairs of the Company to fulfill the responsibilities of his office. [The Executive will not enter the employ of or serve as a consultant to, or in any way perform any services with or without compensation for, any other person, business or organization without the prior written consent of the Board of Directors.] (c) BASE SALARY. The Executive shall be paid a base salary ("BASE SALARY") of no less than $__________ on an annualized basis. Base salary will be paid in equal semi-monthly installments. Any increases in this Base Salary will be granted in accordance with the Company's policies and procedures. (d) CASH INCENTIVES. The Executive shall be eligible to participate in the Company's [Executive Bonus Program]. The Executive shall be eligible to receive a bonus ("BONUS") of up to [___% of his Base Salary] [__________ Dollars ($________)] annually as provided in the [Executive Bonus Program] during the term of this Agreement. (e) EQUITY INCENTIVES. [The Executive shall be eligible to participate in the Company's 1999 Employee Stock Option Plan (the "OPTION PLAN"). The minimum grant of options to the Executive under this plan shall be __________ per year.] [The Executive has received a grant of stock options pursuant to existing Option Agreements with Company. . . .] (f) BENEFITS. The Executive shall be entitled to participate in any pension, insurance or other benefit plan that may be maintained by the Company for its employees from time to time, including but not limited to programs of life and medical insurance, long term disability insurance, the Company's 401K plan, and paid vacation and holiday benefits. [In addition to these standard benefits, the Company will provide [list other perqs].] (g) BUSINESS EXPENSES. The Company will reimburse the Executive for all reasonable travel, entertainment and other expenses the Executive shall incur in connection with the performance of his duties under this Agreement, provided that the Executive properly accounts for such expenses in accordance with the Company's policies and practices. [You may add more detailed expense policy covering mobile phone, frequent flyer miles, travel per diems, automobile, etc.] (h) COMPANY PROPERTY. The Executive agrees that all notes, memoranda, reports, manuals, materials, data and other papers and records of every kind relating to the business or finances of the Company which shall come into his possession during the term of this Agreement shall be the sole and exclusive property of the Company. This property shall be surrendered to the Company upon the termination of the Executive's employment with the Company, or otherwise upon request of the Board of Directors. (i) PROPRIETARY INFORMATION AGREEMENT. The Executive has executed and delivered to the Company a Proprietary Information and Assignment of Inventions Agreement. The Executive's obligations under that agreement are incorporated into this Agreement by this reference. 3. TERMINATION AND SEVERANCE. (a) TERMINATION BY THE COMPANY FOR THE COMPANY'S CONVENIENCE. The Company may terminate the Executive's employment under this Agreement without cause at any time by giving notice to the Executive. Such termination will become effective upon the date specified in such notice. A termination of the Executive's employment by the Executive for good reason (as defined below) will also be deemed to be a termination by the Company without cause. Any such termination shall have the following consequences: (i) the Company shall pay to the Executive the Executive's Base Salary for a period of ______ [years/months] following such termination, (ii) [the Company shall pay to the Executive the pro rata portion of the Executive's annual Bonus that the Executive would have received had the Executive been employed by the Company on the date on which annual bonuses are determined pursuant to the Company's [Executive Bonus Program] for the year of termination, calculated based on 2 that portion of the year during which the Executive was employed by the Company] [$________, which amount is agreed to approximate the amount of the Bonus to which Executive would have been entitled but for such termination]; (iii) the Company shall reimburse the Executive for all business expenses incurred by the Executive prior to the date of such termination and otherwise payable pursuant to this Agreement; (iv) [[all] [one-half] of the Executive's unvested options to purchase Common Stock of the Company will immediately vest upon such termination, and the vesting of the Executive's remaining unvested options to purchase Common Stock of the Company shall cease upon the date of such termination; and (v) [for a period of [six months] following such termination, the Company will continue to provide the Executive with medical, dental and other insurance benefits on terms at least equivalent to the benefits provided to the Executive prior to such termination.] Other than the foregoing, the Company will not be obligated to make any other payment or provide any other benefit to the Executive. For the purposes of this section, the term "FOR GOOD REASON" shall mean the establishment by the Executive in written notice to the Company that any of the following has occurred: (A) a material reduction in the Executive's Base Salary; (B) a change of the Company's [Executive Bonus Program] that is materially adverse to the Executive; (C) a material reduction in the Executive's responsibilities; (D) a change in the fundamental business of the Company [which materially and adversely affects the Executive's compensation potential with the Company]; or (E) a material breach of this Agreement by the Company. (b) TERMINATION BY THE COMPANY FOR CAUSE. The Company may terminate the Executive's employment at any time for cause by giving written notice to the Executive. Unless otherwise specified in the Company's notice, such termination will become effective immediately upon giving of such notice. Any such termination shall have the following consequences: (i) the Company shall pay to the Executive such amount of the Executive's Base Salary earned by the Executive prior to the date of such termination but unpaid by the Company; (ii) [the Company shall pay to the Executive that portion of the Executive's annual Bonus that the Executive would have received had the Executive been employed by the Company at the date on which annual bonuses are determined pursuant to the Company's 3 [Executive Bonus Program] that is attributable to that portion of the year during which the Executive was employed by the Company]; (iii) the Company shall reimburse the Executive for all business expenses incurred by the Executive prior to the date of such termination and otherwise payable pursuant to this Agreement; and (iv) the vesting of the Executive's options to purchase Common Stock of the Company shall cease upon the date of such termination. Other than the foregoing, the Company will not be obligated to make any other payment or provide any other benefit to the Executive. For the purposes of this section, "CAUSE" shall mean: (A) fraud, theft or embezzlement by the Executive against the Company or any of its affiliates, business partners or customers; (B) gross dishonesty materially affecting the Company's interests; (C) final conviction for a felony or a breach of a law involving moral turpitude or which breach is materially injurious to the Company or its reputation; (D) the Executive's willful and continued failure to perform substantially his duties for the Company or any entity in control of, controlled by or in common control with the Company (other than failure resulting from the Executive's incapacity due to illness), as determined by the Board of Directors in good faith following notice to the Executive and a reasonable opportunity, not to exceed 30 days, for the Executive to bring his performance into compliance with the Board's requirements; (E) the Executive's appropriation of a Company corporate opportunity, other than as approved by the Board of Directors after full disclosure; (F) the Executive's material breach of this Agreement. The existence of cause for termination of this Agreement shall be conclusively determined for all purposes by a majority vote of a quorum of the Board of Directors, excluding the Executive for both purposes if he is a director, in good faith. (c) TERMINATION BY THE EXECUTIVE FOR THE EXECUTIVE'S CONVENIENCE. The Executive may terminate his employment without cause at any time by giving written notice to the Company. Such termination become effective upon the date specified in such notice, or at such earlier time as the Company may elect, in its discretion. Any such termination will have the following consequences: (i) the Company shall pay to the Executive such amount of the Executive's Base Salary earned by the Executive prior to the date of such termination but unpaid by the Company; 4 (ii) [the Company shall pay to the Executive the pro rata portion of the Executive's annual Bonus that the Executive would have received had the Executive been employed by the Company on the date on which annual bonuses are determined pursuant to the Company's [Executive Bonus Program] for the year of termination, calculated based on that portion of the year during which the Executive was employed by the Company]; (iii) the Company shall reimburse the Executive for all business expenses incurred by the Executive prior to the date of such termination and otherwise payable pursuant to this Agreement; and (iv) the vesting of the Executive's remaining unvested options to purchase Common Stock of the Company shall cease upon the date of such termination. Other than the foregoing, the Company will not be obligated to make any other payment or provide any other benefit to the Executive. (d) TERMINATION UPON A CHANGE OF CONTROL. Upon any termination of the Executive's employment within ___ months of the occurrence of a change of control (as defined below), other than a termination described under Section 3(c), the Executive shall be entitled to receive the benefits set forth in Section 3(a), provided that (i) all unvested options shall fully vest upon the change of control, and (ii) the Executive shall receive a severance payment equal to [___ times Base Salary], payable within [60] days following the change of control. For the purposes of this section, "CHANGE OF CONTROL" means [(i) the acquisition of shares of capital stock of the Company by a person or entity or a group of related persons or entities in one or a series of transactions that causes the stockholders of the Company immediately prior to the transaction or series of transactions to own less than 50% of the outstanding shares of capital stock of the Company immediately after the transaction or series of transactions]; [(ii) the acquisition of shares of capital stock of the Company by a person or entity or a group of related persons or entities in one or a series of transactions equaling 20% or more of the outstanding capital stock of the Company in combination with a change in the composition of the Board of Directors of the Company of more than 50% of the directors immediately prior to the transaction or series of transactions that occurs within 12 months of such transaction or series of transactions]; (iii) a merger or other reorganization of the Company whereby the stockholders of the Company immediately prior to the transaction own less than 50% of the outstanding shares of capital stock of the surviving corporation immediately after the transaction; or (iv) a sale of all or substantially all of the assets of the Company. (e) TERMINATION BY DEATH OR DISABILITY. This Agreement shall terminate upon the death or disability of the Executive. The Executive shall be considered disabled if he is physically, emotionally or mentally unable to perform and does not perform substantially the essential functions of his position for more than [180] consecutive days. Any such termination shall have the following consequences: 5 (i) the Company shall pay the Executive the Executive's Base Salary for a period of [___ year/months] following such termination; (ii) [the Company shall pay the Executive that portion of the Executive's annual Bonus that the Executive would have received had the Executive been employed by the Company at the date on which annual bonuses are determined pursuant to the Company's [Executive Bonus Program] that is attributable to that portion of the year during which the Executive was employed by the Company] [$________, which amount is agreed to approximate the amount of the Bonus that Executive would have been entitled but for such termination]; (iii) the Company shall reimburse the Executive for all business expenses incurred by the Executive prior to the date of such termination and otherwise payable pursuant to this Agreement; (iv) [[all] [one-half] of the Executive's unvested options to purchase Common Stock of the Company will immediately vest, and the vesting of the Executive's remaining unvested options to purchase Common Stock of the Company shall cease upon the date of such termination;] and (v) [for a period of [six] months following a termination upon the disability of the Executive, the Company will continue to provide the Executive with medical, dental and other insurance benefits on terms at least equivalent to the benefits provided to the Executive prior to such termination.] (f) DATES OF PAYMENTS. The payment of Base Salary due the Executive upon a termination under Section (b) shall be made on the date of such termination. The payment of Base Salary due the Executive upon a termination under Section 3(c) shall be made on the date of the effectiveness of such termination. All payments due the Executive upon a termination under Section 3(a) for Base Salary attributable to services performed by the Executive prior to the date of termination shall be made on the date of the effectiveness of such termination. All payments of Base Salary due the Executive after the termination of his employment shall be made to Executive in approximately equal installments not less frequently than monthly, in accordance with the Company's normal payroll practice. All Bonus payments due the Executive after the termination of his employment shall be made to Executive on the date on which bonus payments are made generally under the [Executive Bonus Program]. All reimbursements of expenses due the Executive after the termination of his employment shall be made as soon as reasonably possible after the Company receives all documentation necessary to verify such expenses. 4. EXCESS PARACHUTE PAYMENT. Notwithstanding any other provision of this Agreement, if any payment to be made or benefit to be provided to the Executive pursuant to this Agreement, after taking into account all other payments or benefits provided by the Company to the Executive, would constitute a "parachute payment" as defined in Section 280G of the Code, then the payments to be made or benefits to be provided to the Executive shall be reduced so that the aggregate present value of all parachute payments does not exceed 299% of the Executive's "annualized includible compensation for the base period" (as such term is defined in Section 280(d)(1) of the Code). The determination of any reduction in the payments or benefits to be provided to the Executive shall be 6 made by the Board of Directors in good faith, and such determination shall be conclusive and binding on the Executive. 5. NOTICE. Notices given pursuant to the provisions of this Agreement must be in writing and shall be sent by certified mail, postage pre-paid, or by overnight courier, or by telex, telecopier or telegraph, charges prepaid, to the following addresses: To the Company: 595 Market Street, 6th Floor San Francisco, CA 94105 Attention: President Facsimile: ------------------------ Telephone: ------------------------ To the Executive: ----------------------------------- ----------------------------------- Facsimile: ------------------------ Telephone: ------------------------ Any party may, from time to time, designate any other address to which any such notice to it or him shall be sent. Any such notice shall be deemed to have been delivered upon receipt. 6. MISCELLANEOUS. (a) GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with laws of the State of California without regard to its conflict of laws provisions. (b) WAIVER; AMENDMENT. The waiver by any party to this Agreement of a breach of any provision by the other party or the occurrence of an event constituting "cause" shall not be construed as a waiver of any subsequent breach or event. No provision of this agreement may be terminated, amended, supplemented, waived or modified other than by an instrument in writing, signed by the party against whom the enforcement of the termination, amendment, supplement, waiver or modification is sought. (c) ENTIRE DOCUMENT. This Agreement, including its Exhibits, represents the entire agreement between the parties with respect to the subject matter of this Agreement and supersedes any previous agreement or understanding. (d) ASSIGNABILITY. The rights and obligations of the parties under this Agreement shall inure to the benefit of and be binding upon their respective successors and assigns. The Executive may not assign his rights and obligations hereunder without the express, written consent of the Company. The Company may assign its rights and obligations to any successor in interest to the Company's business, subject to the provisions of Section 3(d). (e) SEVERABILITY. If any provision of this Agreement is deemed to be invalid or unenforceable, this remainder of the Agreement shall remain valid and binding and of like effect as though such provision were not included. 7 [(f) DISPUTE RESOLUTION. If there is a dispute between the parties arising out of or relating to this Agreement, including but not limited to its alleged breach or termination, the parties shall first attempt in good faith to settle this dispute by mediation, either under the rules of the American Arbitration Association or with the assistance of another organization established to provide mediation services. If mediation is unsuccessful, any remaining unresolved controversy or claim arising out of or relating to this contract, its alleged breach or termination, shall be resolved by arbitration in accordance with the commercial arbitration rules of the American Arbitration Association and the laws of the State of California. The arbitration shall occur in San Francisco, California. There shall be a single arbitrator agreed upon mutually by the parties. If the parties cannot agree upon the selection of an arbitrator within 30 days after the demand for arbitration given by one party to the other, the selection of the arbitrator shall be made by obtaining a list of seven arbitrators from the San Francisco office of the American Arbitration Association. After obtaining this list, the parties shall alternately strike names from the list, with the Employee to be the party striking first. After each party has stricken three names from the list, the remaining name shall be the single arbitrator for this proceeding. Alternatively, the parties may agree, by written stipulation, to appoint a single arbitrator whose name is not on a list supplied by the American Arbitration Association, The arbitrator will have the power to award contract damages to either party. Each party shall be responsible for paying one half of the arbitrator's fees, and its own costs and attorneys fees, except that the arbitrator shall be empowered to award costs and attorneys fees to the prevailing party, should he or she find that the position of the other party is without substantial merit. The arbitrator's award shall be in writing and shall be accompanied by a written opinion explaining the reasons for the arbitrator's decision.] * * * 8 IN WITNESS WHEREOF, the Company and the Executive have executed this Agreement as of the date first set forth above. THE COMPANY THE EXECUTIVE By: -------------------------------- ----------------------------------- Name: ------------------------- Title: ------------------------- Date: , 2000 Date: , 2000 ------------------------- ------------------------ 9 EXHIBIT A DUTIES AND RESPONSIBILITIES OF --------------------------- 10 EX-10.12 20 EXHIBIT 10.12 FORM OF INDEMNITY AGREEMENT This Indemnification Agreement (the "AGREEMENT") is made as of _______ ___, 2000, by and between SelectQuote, Inc., a Delaware corporation (the "COMPANY"), and _____________ ("INDEMNITEE"). RECITALS The Company and Indemnitee recognize the increasing difficulty in obtaining liability insurance for directors, officers and key employees, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance. The Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting directors, officers and key employees to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited. Indemnitee does not regard the current protection available as adequate under the present circumstances, and Indemnitee and agents of the Company may not be willing to continue to serve as agents of the Company without additional protection. The Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, and to indemnify its directors, officers and key employees so as to provide them with the maximum protection permitted by law. AGREEMENT In consideration of the mutual promises made in this Agreement, and for other good and valuable consideration, receipt of which is hereby acknowledged, the Company and Indemnitee hereby agree as follows: 1. CERTAIN DEFINITIONS; CONSTRUCTION OF PHRASES. (a) "Change in Control" shall mean, and shall be deemed to have occurred if, on or after the date of this Agreement, (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company acting in such capacity or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing more than 50% of the total voting power represented by the then outstanding securities of the Company that vote generally at elections ("VOTING SECURITIES"), (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation other than a merger or consolidation which would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 80% of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of (in one transaction or a series of related transactions) all or substantially all of the Company's assets. (b) References to the "Company" shall include, in addition to SelectQuote, Inc., any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger to which SelectQuote, Inc. (or any of its wholly owned subsidiaries) is a party which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees, agents or fiduciaries, so that if Indemnitee is or was a director, officer, employee, agent or fiduciary of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued. (c) "Independent Legal Counsel" shall mean an attorney or firm of attorneys, selected in accordance with the provisions of Section 2(d) hereof, who shall not have otherwise performed services for the Company or Indemnitee within the last three years (other than with respect to matters concerning the rights of Indemnitee under this Agreement, or of other indemnitees under similar indemnity agreements). (d) For purposes of this Agreement, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "serving at the request of the Company" shall include any service as a director, officer, employee or agent of the Company which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants, or beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the best interests of the Company" as referred to in this Agreement. (e) "Reviewing Party" shall mean a majority of the Company's Board of Directors who are not parties to the particular Claim (even if less than a quorum) for which Indemnitee is seeking indemnification, or Independent Legal Counsel. 2. INDEMNIFICATION. (a) THIRD PARTY PROCEEDINGS. The Company shall indemnify Indemnitee if Indemnitee is or was 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 (other than an action by or in the right of the Company) by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of 2 any action or inaction on the part of Indemnitee while an officer or director or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) and other amounts actually and reasonably incurred by Indemnitee in connection with such action, suit or proceeding if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe Indemnitee's conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, or, with respect to any criminal action or proceeding, that Indemnitee had reasonable cause to believe that Indemnitee's conduct was unlawful. (b) PROCEEDINGS BY OR IN THE RIGHT OF THE COMPANY. The Company shall indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Company or any subsidiary of the Company to procure a judgment in its favor by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while an officer or director or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) and, to the fullest extent permitted by law, amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld), in each case to the extent actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such action or suit if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company and its stockholders. Termination of any action, suit or proceeding by judgment or settlement shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in or not opposed to the best interest of the Company. Notwithstanding the foregoing, no indemnification under this Section 2(b) shall be made in respect of any claim, issue or matter as to which Indemnitee shall have been finally adjudicated by court order or judgment to be liable to the Company in the performance of Indemnitee's duty to the Company and its stockholders unless and only to the extent that the court in which such action or proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such expenses which such court shall determine. (c) REVIEW OF INDEMNIFICATION. Notwithstanding the foregoing, (i) the obligations of the Company under Sections 2(a) and 2(b) (unless ordered by a court) shall be subject to the condition that the Reviewing Party shall authorize (in a written opinion, in any case in which the Independent Legal Counsel referred to in Section 2(d) hereof is involved) indemnification in the specific case, upon a determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct set forth in Sections 2(a) and 2(b), (ii) the obligation of the Company to make an advance of expenses pursuant to Section 4(a) shall be subject to the condition that, if, when and to the extent that the Reviewing Party determines that 3 Indemnitee would not be permitted to be so indemnified under applicable law, the Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts theretofore paid; provided, however, that if Indemnitee has commenced or thereafter commences legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law, any determination made by the Reviewing Party that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any advance of expenses until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed). Indemnitee's obligation to reimburse the Company for any advance of expenses shall be unsecured and no interest shall be charged thereon. If there has not been a Change in Control, the Reviewing Party shall be selected by the Board of Directors, and if there has been such a Change in Control (other than a Change in Control which has been approved by a majority of the Company's Board of Directors who were directors immediately prior to such Change in Control), the Reviewing Party shall be the Independent Legal Counsel. If there has been no determination by the Reviewing Party or if the Reviewing Party determines that Indemnitee substantively would not be permitted to be indemnified in whole or in part under applicable law, Indemnitee shall have the right to commence litigation seeking an initial determination by the court or challenging any such determination by the Reviewing Party or any aspect thereof, including the legal or factual bases therefor, and the Company hereby consents to service of process and to appear in any such proceeding. Absent such litigation, any determination by the Reviewing Party shall be conclusive and binding on the Company and Indemnitee. (d) CHANGE IN CONTROL. The Company agrees that if there is a Change in Control of the Company (other than a Change in Control which has been approved by a majority of the Company's Board of Directors who were directors immediately prior to such Change in Control), then, with respect to all matters arising prior to the Change in Control, the rights of Indemnitee to payments of expenses and advances of expenses under this Agreement or any other agreement or under the Company's Certificate of Incorporation or Bylaws as now or hereafter in effect, Independent Legal Counsel, if desired by Indemnitee, shall be selected by Indemnitee and approved by the Company (which approval shall not be unreasonably withheld). Such counsel, among other things, shall render its written opinion to the Company and Indemnitee as to whether and to what extent Indemnitee would be permitted to be indemnified under applicable law and the Company agrees to abide by such opinion. The Company agrees to pay the reasonable fees of the Independent Legal Counsel referred to above and to indemnify fully such counsel against any and all expenses (including attorneys' fees), claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto. Notwithstanding any other provision of this Agreement, the Company shall not be required to pay expenses of more than one Independent Legal Counsel in connection with all matters concerning a single Indemnitee, and such Independent Legal Counsel shall be the Independent Legal Counsel for any or all other Indemnitees unless (i) the Company otherwise determines or (ii) any Indemnitee shall provide a written statement setting forth in detail a reasonable objection to such Independent Legal Counsel representing other Indemnitees. (e) MANDATORY PAYMENT OF EXPENSES. Notwithstanding the other provisions of this Section 2, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 2(a) or Section 2(b) or the defense of any claim, issue or matter therein, Indemnitee shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by Indemnitee in connection therewith. 4 3. NO EMPLOYMENT RIGHTS. Nothing contained in this Agreement is intended to create in Indemnitee any right to continued employment. 4. EXPENSES; INDEMNIFICATION PROCEDURE. (a) ADVANCEMENT OF EXPENSES. Except as otherwise determined pursuant to Section 2(c), the Company shall advance all expenses incurred by Indemnitee in connection with the investigation, defense, settlement or appeal of any civil or criminal action, suit or proceeding referred to in Section 2(a) or Section 2(b) (including amounts actually paid in settlement of any such action, suit or proceeding). Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall ultimately be determined that Indemnitee is not entitled to be indemnified by the Company as authorized hereby. (b) NOTICE/COOPERATION BY INDEMNITEE. Indemnitee shall, as a condition precedent to his or her right to be indemnified under this Agreement, give the Company notice in writing as soon as practicable of any claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the Chief Executive Officer of the Company and shall be given in accordance with the provisions of Section 12(d) below. In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. (c) PROCEDURE. If a claim under this Agreement, under any statute, or under any provision of the Company's Certificate of Incorporation or Bylaws providing for indemnification, is not paid in full by the Company within thirty (30) days after a written request for payment thereof has first been received by the Company, Indemnitee may, but need not, at any time thereafter bring an action against the Company to recover the unpaid amount of the claim and, subject to Section 11 of this Agreement, Indemnitee shall also be entitled to be paid for the expenses (including attorneys' fees) of bringing such action. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in connection with any action, suit or proceeding in advance of its final disposition) that Indemnitee has not met the standards of conduct which make it permissible under applicable law for the Company to indemnify Indemnitee for the amount claimed. It is the parties' intention that, if the Company contests Indemnitee's right to indemnification, the question of Indemnitee's right to indemnification shall be for the court to decide, and neither the failure of the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its stockholders) to have made a determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct required by applicable law, nor an actual determination by the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its stockholders) that Indemnitee has not met such applicable standard of conduct, shall create a presumption that Indemnitee has or has not met the applicable standard of conduct. (d) NOTICE OF INSURERS. If, at the time of the receipt of a notice of a claim pursuant to Section 4(b) hereof, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter 5 take all necessary or desirable action to cause such insurers to pay all amounts payable as a result of such proceeding in accordance with the terms of such policies. (e) SELECTION OF COUNSEL. In the event the Company shall be obligated under Section 4(a) hereof to pay the expenses of any proceeding against Indemnitee, the Company shall be entitled to assume the defense of such proceeding, with counsel reasonably acceptable to Indemnitee, upon the delivery to Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same proceeding, provided that (i) Indemnitee shall have the right to employ counsel in any such proceeding at Indemnitee's expense; and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there is a conflict of interest between the Company and Indemnitee in the conduct of any such defense or (C) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, then the fees and expenses of Indemnitee's counsel shall be at the expense of the Company. 5. ADDITIONAL INDEMNIFICATION RIGHTS; NONEXCLUSIVITY. (a) SCOPE. Notwithstanding any other provision of this Agreement, the Company hereby agrees to indemnify Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company's Certificate of Incorporation, the Company's Bylaws or by statute. In the event of any change, after the date of this Agreement, in any applicable law, statute, or rule which expands the right of a Delaware corporation to indemnify a member of its board of directors or an officer, such changes shall be deemed to be within the purview of Indemnitee's rights and the Company's obligations under this Agreement. In the event of any change in any applicable law, statute or rule which narrows the right of a Delaware corporation to indemnify a member of its board of directors or an officer, such changes, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement shall have no effect on this Agreement or the parties' rights and obligations hereunder. (b) NONEXCLUSIVITY. The indemnification provided by this Agreement shall not be deemed exclusive of any additional rights to indemnification to which Indemnitee may be entitled under the Company's Certificate of Incorporation, its Bylaws, any agreement, any vote of stockholders or disinterested members of the Company's Board of Directors, the General Corporation Law of the State of Delaware, or otherwise, both as to action in Indemnitee's official capacity and as to action in another capacity while holding such office. The indemnification provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though he or she may have ceased to serve in any such capacity at the time of any action, suit or other covered proceeding. 6. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the expenses, judgments, fines or penalties actually or reasonably incurred in the investigation, defense, appeal or settlement of any civil or criminal action, suit or proceeding, but not, however, for the total amount thereof, the 6 Company shall nevertheless indemnify Indemnitee for the portion of such expenses, judgments, fines or penalties to which Indemnitee is entitled. 7. MUTUAL ACKNOWLEDGMENT. Both the Company and Indemnitee acknowledge that in certain instances, federal law or public policy may override applicable state law and prohibit the Company from indemnifying its directors and officers under this Agreement or otherwise. For example, the Company and Indemnitee acknowledge that the Securities and Exchange Commission (the "SEC") has taken the position that indemnification is not permissible for liabilities arising under certain federal securities laws, and federal legislation prohibits indemnification for certain ERISA violations. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the SEC to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee. 8. SEVERABILITY. Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. The Company's inability, pursuant to court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable as provided in this Section 9. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms. 9. EXCEPTIONS. Any other provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement: (a) CLAIMS INITIATED BY INDEMNITEE. To indemnify or advance expenses to Indemnitee with respect to proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except with respect to proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law, but such indemnification or advancement of expenses may be provided by the Company in specific cases if the Board of Directors finds it to be appropriate; (b) LACK OF GOOD FAITH. To indemnify Indemnitee for any expenses incurred by Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by Indemnitee in such proceeding was not made in good faith or was frivolous; (c) INSURED CLAIMS. To indemnify Indemnitee for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) to the extent such expenses or liabilities have been paid directly to Indemnitee by an insurance carrier under a policy of officers' and directors' liability insurance maintained by the Company; or (d) CLAIMS UNDER SECTION 16(b). To indemnify Indemnitee for expenses or the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute. 7 10. ATTORNEYS' FEES. In the event that any action is instituted by either Indemnitee or by or in the name of the Company under this Agreement, the prevailing party shall be entitled to such party's costs of suit and reasonable attorneys' fees, which shall be payable whether or not such action or proceeding is prosecuted to judgment. 11. MISCELLANEOUS. (a) GOVERNING LAW. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of Delaware, without giving effect to principles of conflict of law. (b) ENTIRE AGREEMENT; ENFORCEMENT OF RIGHTS. This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter herein and merges all prior discussions between them. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, shall be effective unless in writing signed by the parties to this Agreement. The failure by either party to enforce any rights under this Agreement shall not be construed as a waiver of any rights of such party. (c) CONSTRUCTION. This Agreement is the result of negotiations between and has been reviewed by each of the parties hereto and their respective counsel, if any; accordingly, this Agreement shall be deemed to be the product of all of the parties hereto, and no ambiguity shall be construed in favor of or against any one of the parties hereto. (d) NOTICES. Any notice, demand or request required or permitted to be given under this Agreement shall be in writing and shall be deemed sufficient when delivered personally or sent by confirmed facsimile or twenty-four (24) hours after being deposited with a nationally recognized overnight courier or forty-eight (48) hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, and addressed to the party to be notified at such party's address or facsimile number as set forth below or as subsequently modified by written notice. (e) COUNTERPARTS. This Agreement may be executed in two or more counterparts, and delivery of a signed counterpart by facsimile transmission will constitute due execution and delivery of this Agreement. (f) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the Company and its successors and assigns, and inure to the benefit of Indemnitee and Indemnitee's heirs and legal representatives. (g) SUBROGATION. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company to effectively bring suit to enforce such rights. The parties hereto have executed this Agreement as of the day and year set forth on the first page of this Agreement. SELECTQUOTE, INC. 8 A Delaware Corporation By: -------------------------------- Title: ------------------------------ 595 Market Street, 6th Floor San Francisco, CA 94105 Facsimile Number: (415) 546-7154 AGREED TO AND ACCEPTED: - --------------------------------- (Signature) 9 EX-10.13 21 EXHIBIT 10.13 FORM OF AFFILIATE AGREEMENT This Agreement (the "Affiliate Agreement") is delivered as of December ___, 1999, to SelectQuote, Inc., a Delaware corporation ("HOLDING COMPANY") by the undersigned stockholder (the "STOCKHOLDER") of SelectTech, a Nevada corporation ("SELECTTECH"), or SelectQuote Insurance Services, a California corporation ("SQIS"). W I T N E S S E T H: WHEREAS, SelectTech and SelectQuote Acquisition Sub, a California corporation and a wholly owned subsidiary of Holding Company ("SUB"), and SQIS have entered into an Amended and Restated Agreement and Plan of Reorganization dated as of August 17, 1999 (the "MERGER AGREEMENT"), pursuant to which SelectTech and Sub each will be merged with and into SQIS (the "MERGER"), whereby SQIS will be the surviving corporation and will become a wholly owned subsidiary of Holding Company; and WHEREAS, the Stockholder is currently the owner of shares of the capital stock of SelectTech (the "SELECTTECH SHARES") or SQIS (the "SQIS SHARES") and, upon consummation of the Merger, the Stockholder will become the owner of shares of the capital stock of Holding Company (the "HOLDING COMPANY SHARES"); NOW, THEREFORE, in consideration of the premises, provisions, mutual agreements and covenants set forth in the Merger Agreement and this Affiliate Agreement, it is agreed as follows: 1. STOCKHOLDER OBLIGATIONS. The Stockholder acknowledges and agrees that: (a) He may be deemed to be an "affiliate" of SelectTech or SQIS within the meaning of Rule 145 under the Securities Act of 1933, as amended (the "SECURITIES ACT"). (b) All certificates representing the Holding Company Shares deliverable to the Stockholder in connection with the Merger and any certificates subsequently issued with respect thereto or in substitution therefor shall, in addition to any other legend required by the Merger Agreement or applicable federal or state securities laws, bear a legend substantially as follows: THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A TRANSACTION TO WHICH RULE 145 UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), APPLIES. THE SHARES REPRESENTED BY THIS CERTIFICATE MAY ONLY BE TRANSFERRED IN ACCORDANCE WITH THE TERMS AND CONDITIONS OF PARAGRAPHS (c), (e), (f) AND (g) OF RULE 144 UNDER THE SECURITIES ACT. Holding Company, at its discretion, may cause stop transfer orders to be placed with its transfer agent with respect to the certificates for the Holding Company Shares. (c) The Stockholder will observe and comply with the Securities Act and the General Rules and Regulations thereunder, as now in effect and as from time to time amended, and including those hereafter enacted, regarding the Holding Company Shares. 2. REMOVAL OF LEGEND. Upon the written request of the Stockholder, Holding Company will request that its transfer agent remove the legend set forth in Section 1(b) above affixed to the Stockholder's certificates representing Holding Company Shares, provided that, as of the date of such request, the Stockholder is not, and has not been for at least three months, an affiliate of Holding Company and a period of at least two years, as determined in accordance with paragraph (d) of Rule 144, has elapsed since the date the Holding Company Shares were acquired from Holding Company in the Merger. 3. MISCELLANEOUS. (a) No waiver by any party hereto of any condition or of any breach of any provision of this Affiliate Agreement shall be effective unless in writing. (b) All notices and other communications required or permitted hereunder shall be in writing and shall be deemed effectively given upon personal delivery or on the day sent by facsimile transmission if a true and correct copy is sent the same day by first class mail, postage prepaid, or by dispatch by an internationally recognized express courier service, and in each case addressed as follows: SelectQuote, Inc. 595 Market Street, 6th Floor San Francisco, CA 94105 Attn: Secretary or to such other address as any party hereto may designate for itself by notice given as herein provided. (c) This Affiliate Agreement shall be enforceable by, and shall inure to the benefit of and be binding upon, the parties hereto and their respective successors and assigns. As used herein, the term "successors and assigns" shall mean, where the context so permits, heirs, executors, administrators, trustees and successor trustees, and personal and other representatives. (d) This Affiliate Agreement shall be governed by and construed, interpreted, and enforced in accordance with the laws of the State of California. 2 IN WITNESS WHEREOF, the parties have executed this Affiliate Agreement as of the date first above written. SELECTQUOTE, INC. By: ---------------------------- Name: ------------------------- Title: ------------------------- -------------------------------- (Stockholder's signature) -------------------------------- Stockholder's name -------------------------------- -------------------------------- -------------------------------- Stockholder's address 3 EX-23.2 22 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of Zebu on Form S-1 of our report dated February 29, 2000 on the consolidated financial statements of Zebu and our report dated February 29, 2000 on the financial statements of SelectTech, both reports appearing in the Prospectus, which is part of this Registration statement . We also consent to the reference to us under the heading "Experts" in such Prospectus. /s/ DELOITTE & TOUCHE LLP San Francisco, California February 29, 2000 EX-23.4 23 EXHIBIT 23.4 Exhibit 23.4 CONSENT OF PERSON ABOUT TO BECOME DIRECTOR I consent to become a director of Zebu on or before the closing of its initial public offering. I also consent to the use of my name and information I provided about myself in the registration statement on Form S-1 for the initial public offering. Date: February 29, 2000 Signature: /s/ RANDALL J. WOLF ------------------------------------ Printed Name: Randall J. Wolf ------------------------------------
EX-27.1 24 EXHIBIT 27.1
5 1,000 6-MOS DEC-31-1999 JUL-01-1999 DEC-31-1999 2,845 0 6,651 (635) 0 10,348 4,764 (2,991) 75,130 6,073 1,900 4,744 20 105 63,344 75,130 0 10,344 0 (11,331) 1 0 40 (946) 376 (570) 0 0 0 (570) (1.08) (1.08)
-----END PRIVACY-ENHANCED MESSAGE-----