-----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, KqM55vlDAU7VqQQDv1PFDLLJ6/0fcN72HcKwwCZGLScGswmP+1M1l9ufH83z4IWh iuMKU2oX9P3jvVRJRZMNvA== 0000912057-00-017519.txt : 20000413 0000912057-00-017519.hdr.sgml : 20000413 ACCESSION NUMBER: 0000912057-00-017519 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 20000412 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ZEBU CENTRAL INDEX KEY: 0001095271 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 943339273 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-31440 FILM NUMBER: 599016 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/A 1 S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 12, 2000 REGISTRATION STATEMENT NO. 333-31440 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ AMENDMENT NO. 1 TO 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 ROBERT E. SULLIVAN DANIEL D. MEYERS DEAN M. POULAKIDAS 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. / / The registration fee has been paid previously. 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 [LOGO] ZEBU Shares Common Stock This is the initial public offering of Zebu. We are offering [ ] shares of common stock. We anticipate that the initial public offering price per share will be between $ and $ . 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] Heading: Data Exchange Solutions; For the Insurance Industry The following words scrolling down the page; superimposed on one another: scalability, exchangeability, integration, synchronization, reliability, seamless, accountability, availability. [INSIDE FRONT COVER] Graphic depicting the parties and software applications that can access the Hub, and the intelligent distrubution of data through the Hub and among these parties. 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. Our Business We believe that we provide the most effective infrastructure solution to the application processing and information-sharing 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 term life insurance business, which currently generates approximately 90% of our revenues, 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. We expect that a significant portion of our future revenue growth will depend upon our ability to license our technology. Through our technology and retail term life insurance businesses, we aspire to be a part of the application and issuance process for every life insurance policy. 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 outdated data processing, or legacy, systems are unable to share information easily among insurance carriers, information providers and general agencies. 3 Our Solution Our automated insurance management, or AIM, system solution is based on a unique, easily accessible, or open, database architecture that permits -- - improved management of information; - data to be moved between remote work sites faster, more efficiently and in real time through an advanced method of synchronizing that data; and - rapid development of other 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 1,100 general agencies and more than 30 insurance carriers have adopted our technology. 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.ZEBUINC.COM 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 5,181,806 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 develop and install 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 March 31, 2000. This information excludes -- - 6,921,109 shares of common stock subject to outstanding options granted under our 1999 Stock Option Plan as of March 31, 2000 at a weighted average exercise price of $4.04 per share; - 3,078,891 shares of common stock reserved for future issuance of options under our 1999 Stock Option Plan as of March 31, 2000; and - 1,000,000 additional shares of common stock reserved for issuance under our 1999 Employee Stock Purchase Plan. 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................................... 12,603 3,808 27,127 Net loss................................................... (2,011) (2,625) (14,259) Basic and diluted net loss per share....................... (1.36) -- (1.36) 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 5,181,806 shares and 731,420 shares of common stock, respectively..................... -- 16,411 Unaudited pro forma basic and diluted loss per share, as converted................................................ -- $ (.87) Consolidated Balance Sheet Data: Cash and cash equivalents.................................. $ 2,845 $ 56 $ Working capital (deficiency) 4,772 (6,222) Goodwill and other intangible assets....................... 61,559 -- Total assets............................................... 73,978 946 Current liabilities........................................ 5,576 6,826 Long-term liabilities...................................... 845 1,016 Mandatorily redeemable convertible preferred............... 4,744 1,000 Total shareholders' equity (deficit)....................... $62,814 $(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
The Summary and Selected Financial and Operating Data for SelectTech reflects actual results through December 23, 1999. The Summary Financial and Operating Data for Zebu, formerly 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 and Zebu's contemporaneous acquisition of Select Quote, completed on December 23, 1999, using the purchase method of accounting and the conversion of preferred stock and convertible debentures as if they had been converted 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. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION COULD SUFFER SIGNIFICANTLY. IN ANY SUCH CASE, THE MARKET PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT. 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. In addition, charges for goodwill and other intangible assets resulting from our acquisition of SelectTech, which total $61.6 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, which could distract management and result in a substantial and unexpected increase in our operating expenses. 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. We cannot predict the cost of this integration effort, which may increase our operating expenses substantially. 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 8 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 have a material adverse effect on our ability to increase revenue, and could 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. Approximately $6.9 million of combined pro forma expenses were fixed expenses in the six months ended December 31, 1999. 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 results of operations. 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. For example, a steep increase in commission revenues in early 2000 as a result of consumers' motivation to avoid the effects of new insurance regulations, known as "Triple X," have resulted in unusually high revenues that are unlikely to be repeated in subsequent periods during the year. 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 9 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 results of operations. 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. 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. 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 and cause our stock price to fluctuate as well. We have no control over the commission or bonus rates paid to SelectQuote by insurance carriers, which represent all of the revenues generated by our retail insurance sales business. 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. 10 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 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 result in a significant decrease in revenues and negatively impact our operating results. We face intense competition in the insurance application processing industry and the insurance sales industry, which could affect our ability to increase revenues and capture market share. 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." 11 We are growing rapidly, and our failure to manage this growth could harm our business. 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; - 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. 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 negatively affect our 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 and we may have difficulty retaining their future services, which could harm our business. In developing our software products and the Hub, we procure substantial software programming and testing services from a programmer-based business in Eastern Europe. We do not own that business and cannot direct the activities of its programmers. The programmers are not U.S. citizens or residents. The lack of U.S. legal residence status of those programmers may prevent us from obtaining critical development, debugging and maintenance services when we or our licensees need those services. In addition, the lack of adequate legal protections or enforceability of existing laws in Eastern Europe may harm our ability to protect our software products and services. As a result, we may be exposed to revenue losses and liability to our licensees or their customers. 12 We utilize substantial third-party contract software programming and development services that we do not control, the loss of which could impede the development of our products and threaten our ability to increase revenues and market share. In developing our software products and the Hub, we have procured a substantial portion of our software programming and testing services from third-party contractors. For the six months ended December 31, 1999, we paid 41% of our software programming and testing expenses to such contractors. Although the 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. For more information regarding certain of these third-party contractors, please refer to "Business--Technology and Development." 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 results of operations and financial condition. We cannot assure you that we will generate significant revenue from custom software development and consulting services. Through December 31, 1999, approximately 44% of SelectTech's historical revenues came from custom software development and consulting services provided to insurance carriers and information providers. SelectTech also earned revenues of $481,000 from services provided to SelectQuote during the six-month period from July 1, 1999 through December 31, 1999. SelectTech's provision of these services was not, and is not expected to be, the focus of its 13 business. Historically, these services have provided needed revenue to SelectTech, helped build relationships with significant insurance carriers and allowed development of technology at SelectQuote. The failure to replace this revenue could negatively impact our results of operations. 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. Our systems and operations are vulnerable to damage or interruption from-- - natural disasters, including earthquakes; - telecommunication failures; - power losses; - 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. We may lose key personnel or be unable to hire additional personnel that are necessary to the success of 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 operations and our research and development efforts. We might not be able to protect and enforce our intellectual property rights, which could impair our ability to compete and adversely affect our results of operations. 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. 14 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. Royalty or licensing agreements might not be available on terms we find acceptable, or might not be available at all. Any infringement claim could distract management and disrupt our business. 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 disrupt our ongoing business, distract our management and increase our expenses. Our success depends on the strength of the term life insurance market, and any decline in this market could negatively impact our revenues. Because we currently derive approximately 90% 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 15 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 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 ability to increase revenues and market share 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 prevent us from increasing revenue and market share and negatively affect our results of operations. 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, whether or not successful, also could be time-consuming and expensive to defend, could divert management's attention and could cause consumers to lose confidence in our services. The insurance industry is heavily regulated, and compliance with the regulations of the various jurisdictions in which we operate is costly. 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 16 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, which could expose us to liability and increase our operating costs. 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 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. These legislative and regulatory restrictions could prove burdensome and have a material adverse effect on our 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; 17 - increase the cost of doing business as a result of litigation costs or increased service delivery costs; or - decrease the efficacy of Internet commerce. Legislation or judicial action relating to the Internet could have a negative impact on our revenues and operating costs. 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. The storage of personal information about our insurance policy applicants could expose us to liability. 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, which could distract management and have a material adverse effect on our 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 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 18 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 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 and might have interests that are different from yours. 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, which might have involved the payment of a premium for your shares of our stock. 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 the insurance industry that we obtained from industry reports generated by LIMRA International, Inc.. These reports generally indicate that their information has been obained from sources believed to be reliable, but do not guarantee the accuracy and completeness of their information. Although we believe that the reports 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. From the net proceeds of this offering we expect to use approximately $8.0 million to develop and install new technology products and services, $17.0 million to expand our sales and marketing efforts and the remainder for general corporate purposes, including working capital. We reserve the right to use the net proceeds in other ways, however. We expect that the proceeds of this offering will fund all intended operating and capital expenditures at least through June 30, 2001. 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. Our management will have broad discretion in the actual allocation of net proceeds. 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 5,181,806 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); 16,411,200 shares issued and outstanding, (pro forma and pro forma as adjusted)........................................ 105 164 Additional capital.................................. 65,435 82,140 Deferred stock compensation......................... (862) (862) Retained earnings (deficit)......................... (1,885) (1,885) ------- ------- ------- Total stockholders' equity.......................... 62,813 79,557 ------- ------- ------- Total capitalization................................ $69,457 $79,557 $ ======= ======= =======
The actual outstanding share information in this table, and in the table showing book value dilution per share to new investors on the following page, 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 sold in March 2000 under the terms of an investment agreement dated February 29, 2000. 21 DILUTION BOOK VALUE 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......................... $
CONTRIBUTION COMPARISON. The following table summarizes, on a pro forma basis as of March 31, 2000, 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..... 16,411,200 % $19,669,999 % $1.199 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 Purchased in-process research and development...... -- -- -- -- -- -- 1,246 Amortization of goodwill and other intangible assets............................................ -- -- -- -- -- -- 513 Stock-based compensation(*)........................ -- -- -- -- -- -- 1,325 ------- ------- ------- ------- ------- ------ ------- Total operating expenses............................. 8,269 10,595 15,199 14,359 15,775 8,044 12,603 ------- ------- ------- ------- ------- ------ ------- Operating income (loss).............................. 2,061 1,887 (378) 4,633 4,166 1,303 (2,259) 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 (2,218) Income tax (benefit)................................. 830 803 (162) 1,863 1,685 552 (207) ------- ------- ------- ------- ------- ------ ------- Net income (loss).................................... $ 1,227 $ 1,251 $ (229) $ 2,818 $ 2,528 $ 776 $(2,011) ======= ======= ======= ======= ======= ====== ======= Income (loss) attributable to common stockholders.... $ 1,182 $ 1,206 $ (429) $ 2,657 $ 2,328 $ 653 $(7,095) ======= ======= ======= ======= ======= ====== ======= Net income (loss) per common share: Basic.............................................. $ 0.24 0.21 (0.09) 0.53 0.47 0.13 (1.36) Diluted............................................ $ 0.18 0.18 (0.09) 0.40 0.36 0.11 (1.36) 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 4,772 Goodwill and other intangible assets...................... -- -- -- -- -- 61,559 Total assets.............................................. 4,797 6,192 6,407 8,255 10,208 73,978 Current liabilities....................................... 1,818 2,091 3,197 2,823 2,848 5,576 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 62,814
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. We acquired 100% of the outstanding shares of SelectTech by issuing 5,466,125 common shares and assuming SelectTech stock options and convertible debt in exchange for the equivalent of 4,301,322 shares of our common stock. The fair value of all shares was estimated at $5 per share, based on the results of an independent valuation. The SelectTech acquisition was accounted for using the purchase method of accounting, and accordingly, the total purchase price of $56.3 million has been allocated to the acquired assets and liabilities of SelectTech at their fair values. The allocation of the purchase price is based, in part, on an independent valuation report. As a part of the acquisition agreement, we assumed all SelectTech stock options, both vested and nonvested, that were outstanding as of the acquisition date and converted these stock options into options to purchase our common stock under the Zebu 1999 Stock Option Plan. The fair value of these options was included in the purchase price, using the Black-Scholes option pricing model with the following assumptions: expected life of 2 years; volatility of 0%; expected dividend rate of 0% and risk free interest rate of 6%. The excess of the purchase price over the fair value of the net liabilities assumed has been allocated to intangible assets and goodwill, to be amortized on a straight-line basis over their respective useful lives of two to three years. 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): Current assets............................................ $ 604 Fixed assets.............................................. 342 Purchased in-process research and development charged to operations in the six-month period ended December 31, 1999.................................................... 1,246 Deferred tax assets....................................... 989 Goodwill.................................................. 54,726 Current technology........................................ 4,924 Assembled work force...................................... 864 Customer list............................................. 75 Liabilities............................................... (7,483)
The pro forma adjustments are based upon available information and assumptions that management believes are reasonable. 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)(1) 996 ------- ------- -------- -------- Total revenues.............................................. 10,344 1,444 (481) 11,307 ------- ------- -------- -------- Expenses: Marketing and sales....................................... 8,151 240 (226)(1) 8,165 General and administrative................................ 1,260 492 -- 1,752 Software development and consulting services.............. 108 3,076 (255)(1) 2,929 Purchased in-process research and development............. 1,246 -- -- 1,246 Amortization of goodwill and other intangible assets...... 513 -- 11,197(3) 11,710 Stock-based compensation.................................. 1,325 -- -- 1,325 ------- ------- -------- -------- Total operating expenses.................................... 12,603 3,808 10,716 27,127 ------- ------- -------- -------- Operating loss.............................................. (2,259) (2,364) (11,197) (15,820) Interest income (expense)................................... 40 (261) -- (221) Other income (expense)...................................... 1 -- -- 1 ------- ------- -------- -------- Loss before income tax...................................... (2,218) (2,625) (11,197) (16,040) Income tax (benefit)........................................ (207) -- (1,574)(4) (1,781) ------- ------- -------- -------- Net loss.................................................... $(2,011) $(2,625) $ (9,623) $(14,259) ======= ======= ======== ======== Pro forma diluted net loss per share........................ $ (1.36) ======== Shares used to compute pro forma diluted net loss per common share (5)................................................. 10,498 ========
As of December 31, 1999 ------------------------------ Actual Actual, As Adjusted -------- ------------------- Balance Sheet Data: Cash and cash equivalents................................... $ 2,845 $ Working capital............................................. 4,772 Goodwill and other intangible assets........................ 61,559 Total assets................................................ 73,978 Current liabilities......................................... 5,576 Long-term liabilities....................................... 845 Mandatorily redeemable convertible preferred stock.......... 4,744 Stockholders' equity........................................ $62,814 $
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) 2,882 ------- ------- -------- -------- Total revenues.............................................. 19,941 2,972 (90) 22,823 ------- ------- -------- -------- Expenses: Marketing and sales....................................... 13,867 496 (80)(2) 14,283 General and administrative................................ 1,908 1,036 (10)(2) 2,934 Software development and consulting services.............. -- 4,759 -- 4,759 Amortization of goodwill and other intangible assets...... -- -- 23,420(3) 23,420 Stock-based compensation.................................. -- -- -- -- ------- ------- -------- -------- Total operating expenses.................................... 15,775 6,291 23,330 45,396 ------- ------- -------- -------- Operating income (loss)..................................... 4,166 (3,319) (23,420) (22,573) Interest income (expense)................................... 42 (259) -- (217) Other income................................................ 5 -- -- 5 ------- ------- -------- -------- Income (loss) before income tax............................. 4,213 (3,578) (23,420) (22,785) Income tax (benefit)........................................ 1,685 (1) (2,538)(4) (852) ------- ------- -------- -------- Net income (loss)........................................... $ 2,528 $(3,579) $(20,882) $(21,933) ======= ======= ======== ======== Pro forma diluted net loss per share........................ $ (2.09) ======== Shares used to compute pro forma diluted net loss per common share (5)................................................. 10,498 ========
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
- ---------------------------------- Notes to the Unaudited Pro Forma Condensed Combined and Actual Data (1) For the six months ended December 31, 1999, intercompany consulting services revenue of $481,000 has been eliminated against the related intercompany consulting expense. Such intercompany transactions were determined by the Company on an actual cost basis. (2) For the year ended June 30, 1999, intercompany consulting services revenue of $90,000 has been eliminated against the related intercompany consulting expense. Such intercompany transactions were determined by the Company on an actual cost basis. (3) Amortization of goodwill and other intangible assets totaling $23.4 million for the year ended June 30, 1999 and $11.7 million for the six months ended December 31, 1999 have been reflected as a result of the acquisition of SelectTech. (4) Income tax benefits of $2.5 million for the year ended June 30, 1999 and $1.6 million for the six months ended December 31, 1999 reflect the offset of SelectQuote's income with SelectTech losses. (5) 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 common shares issued in conjunction with the acquisition as if these shares were outstanding on July 1, 1998. 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. 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. ZEBU Zebu, formerly SelectQuote, began business in 1985 as an independent marketer of term life insurance products sold to consumers in the United States. We sell term life insurance through direct-response marketing and the Internet. Growth and profitability in our retail insurance agency business depend 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, policies sold and revenues grew steadily as SelectQuote 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. Our 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. We recognize 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 we recognize revenue, we estimate an allowance, based on historical information, for uncollectible commissions. We 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. We recognize these bonus revenues when we receive notification of the bonus from insurance carriers. We recognize revenue for renewal commissions when an insurance carrier notifies us that we have 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 our recognition of commission revenue can significantly impact our quarterly and annual operating 28 results. The average 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. The premium amount of insurance sold and a particular insurance carrier's backlog and processing technology and 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. We currently offer 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 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." Operating expenses for our 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. We incur most of our variable expenses prior to a carrier's approval of an application and the carrier's 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, our 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 our 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. 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." 29 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 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 an application or submits data to the Hub. A single fee covers all data processed through the Hub for that application. We anticipate that in the future 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. Revenue associated with developing software for others for which we have an obligation to successfully complete specified activities are recognized in revenue using the percentage-of-completion method as milestones are achieved and the specific activities are completed and accepted by the customer. The contracts are single element, fixed fee and short term in nature. Revenue on software arrangements involving multiple elements, which include software licenses, consulting, transaction fees and maintenance, is allocated to the elements using vendor specific objective evidence. We have determined that consulting to install and integrate the software can be separated from software licenses, transaction fees and maintenance because (a) the software does not require modification or customization, (b) the consulting services provided are not essential to the functionality of the software and (c) sufficient vendor specific objective evidence exists to permit the allocation to the contract elements. 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. Revenue from software licenses is deferred and recorded in income ratably over the life of the contract, generally one to four years. We defer these amounts because customers automatically receive upgrades and software enhancements if and when released. The portion of revenues which relate to our obligations to provide post-contract 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. Revenue from maintenance contract renewals are deferred and recognized ratably over the terms of the agreements. Revenue from transactional services are recognized as transactions are processed. There are two software maintenance contracts with one licensee that are renewable on an annual basis. Revenues from these contracts renewals are deferred and recognized ratably over the 12-month term of the agreements. 30 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 Innovative Information Systems, Mr. Gerber's consulting company, and a total of $500,500 to Zebu International, 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, at which time they became our employees. 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 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 resulting from our acquisition of SelectTech, which total $54.7 million, will be amortized over the next three years and charges for other identifiable intangible assets, which total $6.9 million, will be amortized over the next two to three 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. If our revenues from these sources increase substantially, our operations will 31 have higher gross margins. Until this occurs, however, our gross margins will consist primarily of the lower gross margins generated by the retail insurance business, which is determined by deducting marketing and sales expenses from commissions revenues. 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 new policy applications processed through the Hub; - technical difficulties or service interruptions; - our ability to hire or obtain the services of skilled programmers and consultants; - 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. 32 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." Results of Operations ZEBU The following table sets forth the historical results of operations for our SelectQuote retail insurance business 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 Purchased in-process research and development............................ 12.0 Amortization of goodwill and other intangibles............................ -- -- -- -- 5.0 Stock-based compensation................ -- -- -- -- 12.8 ------ ------ ------ ------ ------ Total operating expenses.................. 102.5 75.6 79.1 86.0 121.8 ------ ------ ------ ------ ------ Operating income (loss)................... (2.5) 24.4 20.9 14.0 (21.8) 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 (21.4) Income tax (benefit)...................... (1.1) 9.9 8.4 5.9 (2.0) ------ ------ ------ ------ ------ Net income (loss)......................... (1.5)% 14.8% 12.7% 8.3% (19.4)% ====== ====== ====== ====== ======
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 a $481,000 increase in first-year commissions, a $70,000 increase in renewal commissions and a $412,000 increase in 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 the 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 33 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 our 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. 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 our 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 in late December 1999. PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT For the six months ended December 31, 1999 we recognized purchased in-process research and development, or IPRD, expense of $1.2 million upon the acquisition of SelectTech. As required by SFAS No. 2, we expensed purchased IPRD upon the acquisition of SelectTech as technological feasibility had not been established and no future alternative uses existed. Such IPRD was comprised primarily of 3 projects: QuickView 2.5, Yuricom and General Agency 2.0. As of the acquisition date, none of these products had demonstrated technological or commercial feasibility. We are unsure of the obstacles we will encounter in the form of time and cost necessary to produce technologically feasible products. Should these proposed products fail to become viable, it is unlikely that we would be able to realize any value from the sale of the technology to another party. There are no alternative uses for the in-process work in the event that the proposed products are not feasible. In valuing the purchased IPRD related to QuickView 2.5, we used an income approach method. Under the income approach, the fair value reflects the present value of the projected cash flows that will be generated by the QuickView 2.5 IPRD project and that is attributable to the acquired technology, if successfully completed. The projected revenues used in the income approach are based upon the revenues likely to be generated upon completion of the QuickView project on the beginning of commercial sales, as estimated by our management. Yuricom and General Agency 2.0 were valued using a cost approach. Under this approach, the fair value of the acquired projects is equal to the costs which we will avoid spending in recreating these in-process technologies. This analysis considered the time spent on each project, the various SelectTech personnel involved in developing these technologies, and their respective costs, including overhead. 34 In determining the applicable discount rates to be used in the valuation of the current and in-process technologies, we considered the implicit rate of the transaction and the weighted average cost of capital. An overall after-tax discount rate of 20% was applied to the in-process projects' cash flows. STOCK-BASED COMPENSATION EXPENSE. In connection with the grant of stock options during the six months ended December 31, 1999, we 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 $2.2 million 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. Total commission revenues increased 28% in fiscal 1998 because of a $3.5 million increase in commission revenue and a $687,000 increase in 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 commission components: first-year commissions, renewal commissions and production bonuses. First-year and renewal commissions increased $76,000 and $177,000, respectively, during the year. Production bonuses increased $695,000 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 we reduced advertising expenditures and increased the percentage of licensed agents taking prospective customers' initial calls. Notwithstanding fewer leads and policies sold in fiscal 1999, first-year commission revenues remained level over the two fiscal years. MARKETING AND SALES EXPENSES. 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. 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 from staff increases in response to record activity levels and added higher-paid licensed sales agents as we began changing our 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 sales approach. 35 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 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 $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 $1.2 million and $1.3 million paid to third-party developers in the six months ended December 31, 1998 and 1999, 36 respectively, of which $580,000 and $365,000 was paid to IIG, Innovative Information Systems, Mr. Gerber's consulting company, and Zebu International, 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 and 1999, respectively, of which $639,000 and $1.1 million was paid to IIG, Innovative Information Systems and Zebu International in fiscal 1998 and 1999, respectively. 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. 37 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 on December 23, 1999, all intercompany investments were canceled and all intercompany receivables and loans were forgiven. As part of the transaction, Zebu assumed $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 prepayment terms and the security interest 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 approximately $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. ZEBU Since SelectQuote's formation in 1984, its primary sources of operating funds have been commissions and bonus revenues and bank and private borrowings. Private placements of preferred stock and common stock to individual investors and conversion of convertible debt 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, due to 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. Net cash used in financing activities was $686,000 in fiscal 1999, $839,000 in fiscal 1998 and $372,000 in fiscal 1997. Dividends paid on preferred and common stock were $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 38 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 the acquisition of SelectTech, we issued 498,142 shares of our common stock in exchange for the shares of SelectTech common stock that were 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 remaining 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 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. 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 39 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 our 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. We do not currently intend to borrow against the line before the offering. On March 28, 2000, we sold 2,041,845 shares of Series E mandatorily redeemable convertible preferred stock at $5.15 per share, which provided proceeds of approximately $10.1 million to us, net of a fee paid to Cochran, Caronia & Co. and legal expenses. The shares will automatically convert into 2,041,845 shares of our common stock at the closing of this offering. The Series E mandatorily redeemable convertible preferred stock has a beneficial conversion feature totaling $10,515,502, measured as the difference between the conversion price of $5.15 per share and the estimated fair value of the underlying common stock at the time of issuance of $11.70 per share, limited to the amount of the proceeds received, and was accounted for as a preferred stock dividend which was a reduction to income applicable to common shareholders at issuance. We recorded this dividend in the first quarter ended March 31, 2000. In connection with certain stock option grants during the quarter ended March 31, 2000, we recorded unearned stock based compensation of $2,870,000. We are amortizing this amount over the vesting period of the related options, which is generally three years. 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 the existing SelectQuote 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. 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 40 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. 41 BUSINESS Overview We believe that we provide the most effective infrastructure solution to the application processing and information-sharing problems of the insurance industry. Using our Internet-based, business-to-business 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 synchronization of data 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 1,100 general agencies and over 30 insurance carriers have adopted our technology. 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 also use our technology solutions in our retail term life insurance business. 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 technology and retail term life insurance businesses, we aspire to be a part of the application and issuance process for every life insurance policy. 42 Industry Background THE UNITED STATES LIFE INSURANCE MARKET According to 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; 43 - 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 processes information in batches, does not offer real-time processing, is cumbersome and requires expensive private networks. 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 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 two-way 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 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 management of information, an 44 advanced data synchronization process which allows data to be moved between remote work sites faster, more efficiently and in real time, and rapid development of 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, and have helped to define the technology requirements of 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. 45 - 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. The Hub is an application of hardware, software and modern relational database technology that allows AIMSuite software licensees and their business partners to share data in real time. Insurance carriers, their agents and other participants in the life insurance policy application, underwriting and issuance process license our AIMSuite software products to access the Hub. These users 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 46 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 National Association of Independent Life Brokerage Agencies, or 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 AIMSuite 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. 47 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] [GRAPHIC] 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 1,100 general agents and information providers to install the AIM Agency QuickView software component. We have installed the AIM General Agency software 48 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. - ------------------------------------------------------------------------------------ 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 49 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 comparable applications. As the number of licenses and installed AIM GA and QuickView sites increase, we expect our Hub 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. 50 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
51
- ----------------------------------------------------------------------------------------------------------------- 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
52 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 We believe, based on the number of policies sold, that 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 52 - North American Company for Life and Health of New York (a Sammons Group company) - 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) In fiscal 1999, four of the companies we represented, Banner Life Insurance Company, First Colony Life Insurance Company, First Penn-Pacific Life Insurance Company and Federal Kemper Life Assurance, each accounted for more than 10% of commission revenues. In fiscal 1998, three companies we represented, Valley Forge Life Insurance Company, Federal Kemper Life Assurance Company and First Penn-Pacific Life Insurance Company, each accounted for more than 10% of commission revenues. In fiscal 1997, three companies we represented, Valley Forge Life Insurance Company, Federal Kemper Life Assurance Company and Jackson National Life Insurance Company each accounted for more than 10% of the commission revenues. 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 53 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 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 54 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 Innovative Information Group, Inc., Software Technology, Inc. and Client Server Programs, Inc., 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 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 provided by related parties and we may have difficulty retaining their future services, which could harm our business." 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. 55 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 Mynd, Inc. We believe that the principal competitive factors include-- - real-time synchronization of data; - completeness of the software solution; - ability to upload policy applications; - ease of integration and connectivity with existing and legacy computer systems; - data standardization; - pricing; - scalability; - service and support; - ease of use; - time to market; and - acceptance by insurance carriers and their agents and general agencies. Considering each these factors, we believe that we compete favorably with our competitors. We believe the most important competitive advantages of our processing solution are its use by our existing customers, the ability to integrate with existing and legacy systems and the ability to upload policy applications. Based upon the information available to us, we believe our solution is currently generating revenue from more carriers than the products of 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 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 our principal competitive advantages 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. Based upon the number of policies we sell, we believe that these advantages make us a leading distributor of term life insurance. 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 application processing industry and the insurance sales industry, which could affect our ability to increase revenues and capture market share." 56 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; - 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 57 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--The insurance industry is heavily regulated, and compliance with the regulations of the various jurisdictions in which we operate is costly." 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. 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 we lease an aggregate of approximately 62,400 square feet. Our lease for approximately 27,600 square feet expires on November 30, 2002; and our lease for approximately 34,800 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, and 11,500 square feet of office space in another building under a lease expiring March 31, 2005. 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)............. 45 Director Randall J. Wolf...................... Director
- ------------------------ (1) Compensation committee member. (2) Audit committee member. 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. 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 1995. 59 RANDALL J. WOLF became a director of Zebu on March 28, 2000. 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. Their total compensation consisted solely of salaries during the year. Summary Compensation Table
Annual Compensation ------------ Name and Principal Position Salary - --------------------------- ------------ Charan J. Singh Chief Executive Officer................................... $180,000 David L. Paulsen Chief Financial Officer................................... 202,500
60 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. Upon termination for cause, no severance or employee benefits are payable and option vesting ceases. Upon a termination upon death or disability, no severance is payable but employee benefits are payable for two years and all options fully vest. 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 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 61 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 March 31, 2000, 6,921,109 shares of common stock were subject to outstanding options, and 3,078,891 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 day on which we sign the underwriting agreement for this 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 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. 62 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 two of these subcontracting companies, Software Technology, Inc. and Client Server Programs, Inc., as well. Under these contracts, IIG billed SelectTech $285,100, $544,700 and $1,010,300 for fiscal years 1997, 1998 and 63 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 and we may have difficulty retaining their future services, which could harm our business." 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. On March 28, 2000, we sold 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., became a member of our board of directors. 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. 64 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 March 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.
Common Stock ----------------------------------------------------- Percent Ownership Number of Shares -------------------------------- Name Beneficially Owned Before Offering After Offering - ---- ------------------ --------------- -------------- Five-Percent Stockholders Edward and Rose Gamrin(1)............................ 1,805,271 11.5% % High Ridge Capital Partners II, L.P.................. 1,571,624 10.0 20 Liberty Street Chester, Connecticut 06412 Entities affiliated with Marsh & McLennan Capital, Inc.(2)............................................ 1,571,624 10.0 20 Horseneck Lane, 1st floor Greenwich, Connecticut 06830 Burton Petersen...................................... 704,256 4.5 340 Sundance Circle Palm Desert, California 92211 Directors and Executive Officers Charan J. Singh(3)................................... 2,149,997 13.5 Steven H. Gerber(4).................................. 1,316,276 8.4 Michael L. Feroah(5)................................. 1,283,194 10.0 Steven J. Tynan(6)................................... 1,571,624 10.0 c/o High Ridge Capital Partners II, L.P. 105 Rowayton Way Rowayton, Connecticut 06853 Randall J. Wolf(7)................................... 1,571,624 10.0 c/o Marsh & McLennan Capital, Inc. 20 Horseneck Lane, 1st floor Greenwich, Connecticut 06830 David L. Paulsen(8).................................. 948,435 5.9 All directors and executive officers as a group (seven persons)(9)................................. 8,970,362 57.2
- -------------------------- (1) Includes 8,000 shares held by the 1999 Irrevocable Trust for the Benefit of Thomas Elias Gamrin, for which Edward and Rose Gamrin disclaim beneficial ownership. (2) The affiliated entities are six limited partnerships whose general partners are controlled by Marsh & McLennan Capital, Inc. 65 (3) 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 May 30, 2000. (4) 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 21,914 shares of our common stock which are exercisable within 60 days of May 30, 2000. (5) 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. (6) 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 these shares, except to the extent of his pecuniary interest therein. (7) All shares are owned by entities affiliated with Marsh & McLennan Capital, Inc. Mr. Wolf is a principal of another related entity, Marsh & McLennan Capital LLC, and could be deemed to be the beneficial owner of all of the shares. Mr. Wolf disclaims beneficial ownership of these shares, except to the extent of his pecuniary interest therein. (8) Includes options to purchase 495,698 shares of our common stock which are exercisable within 60 days of May 30, 2000. (9) Includes options to purchase 1,927,900 shares of our common stock which are exercisable within 60 days of May 30, 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 March 31, 2000, 10,497,974 shares of our common stock were outstanding and held of record by 155 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 March 31, 2000, options to purchase 6,921,109 shares of common stock were outstanding, at a weighted average exercise price of $4.04 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 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 March 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 owns 9,708 shares of our common stock. 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-29 Balance Sheets.............................................. F-30 Statements of Operations.................................... F-31 Statements of Shareholders' Equity (Deficit)................ F-32 Statements of Cash Flows.................................... F-33 Notes to Financial Statements............................... F-34
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' December 31, Equity as of June 30, 1999 December 31, -------------------------- (Restated; 1999 1998 1999 See Note 3) (Note 2) ----------- ------------ ------------- ------------- (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 -- Deferred tax asset........................................ -- -- 298,000 Goodwill and other intangible assets...................... -- -- 61,558,697 ---------- ----------- ----------- Total long-term assets.................................. 1,571,760 1,378,872 63,629,692 ---------- ----------- ----------- TOTAL ASSETS................................................ $8,254,734 $10,207,937 $73,977,613 ========== =========== =========== LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses..................... $1,344,022 $ 912,470 $ 1,793,528 Accrued compensation and benefits......................... 388,070 506,650 690,391 Deferred tax liability.................................... 953,747 1,301,804 0 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 5,575,694 ---------- ----------- ----------- 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 6,420,334 ---------- ----------- ----------- 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 49,818 104,979 156,797 Additional capital........................................ 1,766,585 1,766,585 65,435,147 80,247,395 Deferred stock compensation............................... -- -- (861,772) (861,772) Retained earnings (deficit)............................... 3,355,287 5,304,817 (1,885,139) (1,885,139) ---------- ----------- ----------- ----------- Total stockholders' equity.............................. 5,191,978 7,141,508 62,813,503 77,657,281 ---------- ----------- ----------- ----------- TOTAL LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY.................. $8,254,734 $10,207,937 $73,977,613 $77,657,281 ========== =========== =========== ===========
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 ------------ ------------ ------------ ------------ ------------ (Restated; See Note 3) (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.......................................... -- -- -- -- 513,000 Purchased in-process research and development.... -- -- -- -- 1,246,000 Stock-based compensation(*)...................... -- -- -- -- 1,324,951 ----------- ----------- ----------- ---------- ----------- Total operating expenses....................... 15,199,395 14,359,169 15,774,400 8,043,870 12,602,926 ----------- ----------- ----------- ---------- ----------- INCOME (LOSS) FROM OPERATIONS...................... (377,924) 4,633,224 4,166,157 1,303,336 (2,259,256) 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 (2,218,187) INCOME TAX EXPENSE (BENEFIT)....................... (162,410) 1,863,003 1,685,113 552,277 (207,000) ----------- ----------- ----------- ---------- ----------- NET INCOME (LOSS).................................. $ (229,368) $ 2,818,253 $ 2,528,252 $ 775,644 $(2,011,187) =========== =========== =========== ========== =========== INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS (Note 14)........................................ $ (429,173) $ 2,657,028 $ 2,328,447 $ 652,998 $(7,095,253) =========== =========== =========== ========== =========== NET INCOME (LOSS) PER COMMON SHARE:................ Basic............................................ $ (0.09) $ 0.53 $ 0.47 $ 0.13 $ (1.36) Diluted.......................................... $ (0.09) $ 0.40 $ 0.36 $ 0.11 $ (1.36) 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 LOSS PER COMMON SHARE (UNAUDITED)...................................... $ (1.87) $ (1.14) =========== =========== 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 ISSUED IN CONNECTION WITH SELECTTECH ACQUISITION (Unaudited)............ 5,466,125 54,661 56,232,339 NET LOSS (Unaudited)..... (2,011,187) UNEARNED STOCK COMPENSATION (Unaudited)............ 2,186,723 (2,186,723) AMORTIZATION OF UNEARNED STOCK COMPENSATION (Unaudited)............ -- -- -- -- -- 1,324,951 -- COMMON STOCK ISSUED FOR SERVICES RENDERED (Unaudited)............ 50,000 500 -- -- 249,500 -- -- VALUE OF PREFERRED STOCK BENEFICIAL CONVERSION FEATURE (unaudited).... 5,000,000 (5,000,000) CASH DIVIDENDS PAID (Unaudited)............ (178,769) ---------- ---------- --------- -------- ----------- ----------- ----------- BALANCE, DECEMBER 31, 1999 (Revised, See Note 3) (Unaudited)......... 10,497,974 $ 104,979 2,028,892 $ 20,288 $65,435,147 $ (861,772) $(1,885,139) ========== ========== ========= ======== =========== =========== =========== 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 ISSUED IN CONNECTION WITH SELECTTECH ACQUISITION (Unaudited)............ 56,287,000 NET LOSS (Unaudited)..... (2,011,187) UNEARNED STOCK COMPENSATION (Unaudited)............ -- AMORTIZATION OF UNEARNED STOCK COMPENSATION (Unaudited)............ 1,324,951 COMMON STOCK ISSUED FOR SERVICES RENDERED (Unaudited)............ 250,000 VALUE OF PREFERRED STOCK BENEFICIAL CONVERSION FEATURE (unaudited).... -- CASH DIVIDENDS PAID (Unaudited)............ (178,769) ----------- BALANCE, DECEMBER 31, 1999 (Revised, See Note 3) (Unaudited)......... $62,813,503 ===========
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 ----------- ----------- ----------- ----------- ------------ (Restated; See Note 3) (Unaudited) CASH FLOW FROM OPERATING ACTIVITIES: Net income (loss).................................... $ (229,368) $2,818,253 $2,528,252 $ 775,644 $(2,011,187) 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........... -- -- -- -- 513,000 Non-cash stock compensation........................ -- -- -- -- 1,324,951 Loss from SelectTech stock......................... 87,132 -- -- -- -- Deferred tax liability............................. 169,961 (31,556) 348,057 59,888 (635,795) Purchased in-process research and development...... -- -- -- -- 1,246,000 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) (1,207,449) 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 debt.................................... -- -- -- -- (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 $ -- $ -- Tangible assets acquired in SelectTech acquisition... -- -- -- -- 946,000 Intangible assets acquired SelectTech acquisition.... -- -- -- -- 62,824,000 Issuance of common stock in SelectTech acquisition... $50,000,000 Value of SelectTech options assumed.................. $ 5,744,000 Assumption of liabilities of SelectTech.............. $ 7,483,000
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"). On August 18, 1999 the Company's board of directors approved an exchange of 3.286852 Company shares for each common and preferred share of 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 consolidated financial statements reflect the operating results of SelectQuote for all periods presented and are combined with 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. 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. 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) 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. As of January 1, 1997, the Company owned 50% of SelectTech and accounted for its investment under the equity method. Such investment had a carrying value of $87,132 at January 1, 1997. For the period January 1, 1997 through March 31, 1997, the Company's share of SelectTech's net losses reduced the carrying value of the investment to $0. During April 1997, the Company's Board of Directors approved the payment of a dividend-in-kind of all the Company's shares of SelectTech stock to the Company's shareholders. 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 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. Revenue associated with developing software for others for which the Company has an obligation to successfully complete specified activities are recognized in revenue using the 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) percentage-of-completion method as milestones are achieved and the specific activities are completed and accepted by the customer. The contracts are single element, fixed fee and short term in nature. Revenue on software arrangements involving multiple elements, which include software licenses, consulting, transaction fees and maintenance, is allocated to the elements using vendor specific objective evidence. The Company has determined that consulting to install and integrate the software can be separated from software licenses, transaction fees and maintenance because (a) the software does not require modification or customization (b) the consulting services provided are not essential to the functionality of the software (c) sufficient vendor specific objective evidence exists to permit the allocation to the contract elements. 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. Revenue from software licenses is deferred and recorded in income ratably over the life of the contract, generally one to four years. We defer these amounts because customers automatically receive upgrades and software enhancements if and when released. The portion of revenues which relate to the Company obligations to provide post contract 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. Revenue from maintenance contract renewals are deferred and recognized ratably over the terms of the agreements. Revenue from transactional services are recognized as transactions are processed. 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. 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) 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 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. Potential common shares 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 and Note 16, third paragraph, the outstanding shares of all series of convertible preferred stock will automatically convert into 5,181,806 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. The pro forma amounts do not include the conversion of Senior Secured Convertible debentures (Note 8) into 731,420 shares of common stock. PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT ("IPRD")--As required by SFAS No. 2, the Company expensed purchased IPRD upon the acquisition of SelectTech as technological feasibility had not been established and no future alternative uses existed. Such IPRD was comprised primarily of 3 projects: QuickView 2.5, Yuricom and General Agency 2.0. As of the acquisition date, none of these products had demonstrated technological or commercial feasibility. The Company is unsure of the obstacles it will encounter in the form of time and cost necessary to produce technologically feasible products. Should these proposed products fail to become viable, it is unlikely that the Company would be able to realize any value from the sale of the technology to another party. There are no alternative uses for the in-process work in the event that the proposed products are not feasible. In valuing the purchased IPRD related to QuickView 2.5, the Company used an income approach method. Under the income approach, the fair value reflects the present value of the projected cash flows that will be generated by the QuickView 2.5 IPRD project and that is attributable to the acquired technology, if successfully completed. The projected revenues used in 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) the income approach are based upon the revenues likely to be generated upon completion of the QuickView 2.5 project on the beginning of commercial sales, as estimated by Company management. Yuricom and General Agency 2.0 were valued using a cost approach. Under this approach, the fair value of the acquired projects is equal to the costs which the Company will avoid spending in recreating these in-process technologies. This analysis considered the time spent on each project, the various SelectTech personnel involved in developing these technologies, and their respective costs, including overhead. In determining the applicable discount rates to be used in the valuation of the current and in-process technologies, management considered the implicit rate of the transaction and the weighted average cost of capital. An overall after-tax discount rate of 20% was applied to the in-process projects' cash flows. 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 and has also provided the proforma disclosure as required by SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS 123). The Company reports non-employee stock-based compensation in accordance with SFAS No. 123. COMPREHENSIVE INCOME--There are no material 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. USE OF ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that 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) 2. SIGNIFICANT ACCOUNTING POLICIES (Continued) 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. UNAUDITED INTERIM FINANCIAL INFORMATION--The interim financial information as of and for the six months ended December 31, 1999 is unaudited and has been prepared on the same basis as the audited financial statements. In the opinion of management, such unaudited information includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the interim information. Operating results for the six months ended December 31, 1999 are not necessarily indicative of the results that may be expected for the year ending June 30, 2000. 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 acquisition of SelectTech 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 100% of the outstanding shares of SelectTech by issuing 5,466,125 common shares and assumed SelectTech stock options and convertible debt in exchange for the equivalent of 4,301,322 shares of the Company's common stock. The fair value of all shares was estimated at $5 per share, based on the results of an independent valuation. The acquisition has been accounted for under the purchase method of accounting. The total purchase consideration is set forth below: Fair value of SelectQuote stock issued in the acquisition... $50,000,000 Fair value of SelectTech options assumed.................... 5,744,000 Transaction costs........................................... 543,000 ----------- Total purchase consideration................................ $56,287,000 ===========
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) 3. SELECTTECH ACQUISITION (UNAUDITED) (Continued) The fair value of the SelectTech stock options outstanding prior to the acquisition which were required to be assumed by the Company were valued based on the Black-Scholes option pricing model. The purchase consideration was allocated to the acquired assets and assumed liabilities based on their respective fair values as follows: Current Assets.............................................. $ 604,000 Fixed Assets................................................ 342,000 Purchased in-process research and development charged to operations in the six month period ended December 31, 1999...................................................... 1,246,000 Current Technology.......................................... 4,924,000 Customer List............................................... 75,000 Workforce-in-Place.......................................... 864,000 Deferred Tax Assets......................................... 989,000 Assumed Liabilities......................................... (7,483,000) Goodwill.................................................... 54,726,000 ----------- Total purchase consideration................................ $56,287,000 ===========
The acquired intangible assets and goodwill are being amortized over their estimated useful lives of two to three years on a straight-line basis. The allocation of the purchase price in the Company's initial issuance of its financial statements for the period ended December 31, 1999 was based, in part, on an independent valuation report. Upon receipt of the final report the company expensed $1,246,000 of in-process research and development. As a result, the financial statements as of and for the six months ended December 31, 1999 have been restated from amounts previously reported to expense $1,246,000 of in-process research and development, which resulted in an increase in net loss for the period ended December 31, 1999 of $1,246,000 and a decrease in diluted earnings per share of $0.24. 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........................................ $(21,932,518) $(14,259,283) Net loss per share.............................. $ (2.09) $ (1.36) Shares used in computing net loss per share..... 10,497,974 10,497,974
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) 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 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 ========= ========= ========= ========= =========
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) 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 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 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) 6. TRANSACTIONS WITH SELECTTECH AND OTHER RELATED PARTIES (Continued) $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 acquisition. 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 acquisition. 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-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) 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 (568,795) State............... 88,031 31,324 73,398 (1,431) (67,000) --------- ---------- ---------- -------- --------- Total............. 463,157 31,976 348,108 59,888 (635,795) --------- ---------- ---------- -------- --------- Income tax expense (benefit)........... $(162,410) $1,863,003 $1,685,113 $552,277 $(207,000) ========= ========== ========== ======== =========
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) Nondeductible goodwill................... 8 Write-off of in-process research and development............................ 23 Other.................................... (2) -- -- 2 -- --- -- -- -- --- Income tax expense (benefit)............. (42)% 40% 40% 42% (9)% === == == == ===
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) 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 $ 1,448,000 Allowance for policy cancellations..................... 247,462 214,122 237,062 Accrued liabilities................ 107,965 140,139 151,293 Deferred stock compensation........ -- -- 527,786 Net operating loss carry forward... -- -- 2,304,000 Other.............................. 163,584 142,347 60,737 ----------- ----------- ----------- Total deferred tax assets........ 813,958 888,445 4,728,878 Deferred tax liabilities: Commissions receivable........... (1,767,705) (2,190,249) (2,119,878) Intangibles...................... -- -- (2,311,000) Total deferred tax liabilities... -- -- (4,430,878) ----------- ----------- ----------- Net deferred tax asset (liabilities)...................... $ (953,747) $(1,301,804) $ 298,000 =========== =========== ===========
8. SENIOR SECURED CONVERTIBLE DEBENTURES (UNAUDITED) As a result of the acquisition of SelectTech, the Company assumed SelectTech debentures issued under a Debenture Purchase Agreement dated October 1998, with three insurance carriers that provided $2,500,000 at 12% interest. In connection with the SelectTech acquisition, the Company entered into an amended and restated debenture agreement with the same terms as the original agreement, except for a minor change in security interest and the prepayment term. Subsequent to the acquisition of SelectTech, the Company repaid in full $600,000 to one debenture holder. The debentures are convertible into common stock at approximately $2.60 per share at any time until September 30, 2003. Upon the closing of an initial public offering of the Company's common stock the Company has the right to prepay in full, at its option, any debentures not converted by the holders. 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. The Company has no prepayment rights prior to July 1, 2000. After that date the Company can prepay the debentures at any time. 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) 8. SENIOR SECURED CONVERTIBLE DEBENTURES (UNAUDITED) (Continued) The debentures are subordinated to a line of credit to a bank and are secured by all remaining assets, including source code to all existing and future software while the debentures are outstanding. 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. 9. MANDATORILY REDEEMABLE CONVERTIBLE SERIES D PREFERRED STOCK (UNAUDITED) On December 27, 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 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 estimated fair value of the underlying common stock at the time of issuance of $13.00 per share, 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 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) 10. COMMITMENTS AND CONTINGENCIES (Continued) 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 =========
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. 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) 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. 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. 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) 11. STOCKHOLDERS' EQUITY (Continued) 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 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 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) 12. EMPLOYEE BENEFIT PLAN (Continued) 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. 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 ========= ======
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) 13. STOCK OPTION PLAN (UNAUDITED) (Continued) 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 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 F-24 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) 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............................................... $(2,011,187) Pro forma................................................. (2,337,524) Basic and diluted net loss per common share: As reported............................................... $ (1.36) Pro forma................................................. (1.42)
F-25 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 $(2,011,187) 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 $(7,095,253) ========= ========== ========== ========= =========== 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-26 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 of $3,000,000 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. Each share of the Mandatorily Redeemable Convertible Series E Preferred Stock is convertible at the option of the holder 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 the Company's shares at a per share price which is at least $5.15 (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 E 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 E Preferred Stock at the greater of fair value (as defined) or the liquidation preference. F-27 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) 16. SUBSEQUENT EVENTS (UNAUDITED) (Continued) The Mandatorily Redeemable Convertible Series E Preferred Stock has a beneficial conversion feature totaling $10,515,502, measured as the difference between the conversion price of $5.15 per share and the estimated fair value of the underlying common stock at the time of issuance of $13.00 per share, 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. The Company recorded this dividend in the first quarter ended March 31, 2000. In connection with certain stock option grants during the quarter ended March 31, 2000 the Company recorded unearned stock based compensation of $2,870,000. The Company is amortizing this amount over the vesting period of the related options which is generally three years. F-28 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-29 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-30 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-31 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-32 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-33 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, transaction 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. We recognize revenues from software licenses and services 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. Revenue associated with developing software for others in which SelectTech has an obligation to successfully complete specified activities are recognized in revenue using the percentage-of-completion method as milestones are achieved and the specific activities are complete and accepted by the customer. The contracts are single element, fixed fee and short term in nature. Revenue on software arrangements involving multiple elements, which include software licenses, consulting, transaction fees and maintenance, is allocated to the elements using vendor specific objective evidence. We have determined that consulting to install and integrate the software can be separated from software licenses, transaction fees and maintenance because 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) 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (a) the software does not require modification or customization (b) the consulting services provided are not essential to the functionality of the software (c) sufficient vendor specific objective evidence exists to permit the allocation to the contract elements. 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. Revenue from software licenses is deferred and recorded in income ratably over the life of the contract, generally one to four years. We defer these amounts because customers automatically receive upgrades and software enhancements if and when released. The portion of revenues which relate to our obligations to provide post contract 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. Revenue from maintenance contract renewals is deferred and recognized ratably over the terms of the agreements. Revenue from transactional services is recognized as transactions are processed. 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. 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) 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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. 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. 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) 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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 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 F-37 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) 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 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-38 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-39 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-40 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-41 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-42 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-43 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-44 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 Regarding 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.............................. 42 Management............................ 59 Related Party Transactions............ 63 Principal Stockholders................ 65 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............................................. 6,900 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 issued a total of of 2,041,845 shares of Series E preferred stock in a private placement on March 28, 2000 to a group of accredited investors. These shares are convertible into 2,041,845 shares of common stock. The total consideration received was $10.5 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. 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 4.4 Investment Agreement with High Ridge Capital Partners II, L.P. 4.5 Investment Agreement with High Ridge Capital Partners II, L.P. and several entities associated with Marsh & McLennan Capital, Inc. 5.1 * Opinion of McCutchen, Doyle, Brown & Enersen, LLP
II-2
Exhibit Number Description of Document - ------- ----------------------- 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 23.2.1 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 27.1 Financial Data Schedule
- ------------------------ * To be filed by amendment + Previously filed with the registration statement on form S-1 filed with the Commission on March 1, 2000. 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. II-3 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. (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 No. 1 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 April 12, 2000. ZEBU By: /s/ CHARAN J. SINGH* ----------------------------------------- Charan J. Singh CHIEF EXECUTIVE OFFICER
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 ---- ----- ---- CHARAN J. SINGH* Chairman of the Board of Directors and --------------------------------- Chief Executive Officer (Principal April 12, Charan J. Singh Executive Officer) 2000 STEVEN H. GERBER* --------------------------------- President and Director April 12, Steven H. Gerber 2000 Chief Operating Officer, Insurance DAVID L. PAULSEN* Products and Services, Chief Financial --------------------------------- Officer (Principal Financial Officer April 12, David L. Paulsen and Principal Accounting Officer), and 2000 Director MICHAEL L. FEROAH* --------------------------------- Director April 12, Michael L. Feroah 2000 STEVEN J. TYNAN* --------------------------------- Director April 12, Steven J. Tynan 2000
*By: /s/ DAVID L. PAULSEN - ------------------------------------------- David L. Paulsen Attorney-in-Fact
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 4.4 Investment Agreement with High Ridge Capital Partners II, L.P. 4.5 Investment Agreement with High Ridge Capital Partners II, L.P. and several entities associated with Marsh & McLennan Capital, Inc. 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 23.2.1 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 27.1 Financial Data Schedule
- ------------------------ * To be filed by amendment + Previously filed with the registration statement on form S-1 filed with the Commission on March 1, 2000. EX-4.4 2 EXHIBIT 4.4 Exhibit 4.4 INVESTMENT AGREEMENT by and between SELECTQUOTE, INC. and HIGH RIDGE CAPITAL PARTNERS II, L.P. Dated as of December 27, 1999 S-1 INVESTMENT AGREEMENT THIS INVESTMENT AGREEMENT (this "AGREEMENT") is made as of the 27th day of December, 1999 by and between SelectQuote, Inc., a Delaware corporation (the "COMPANY"), and High Ridge Capital Partners II, L.P., a Delaware limited partnership (the "PURCHASER"). WHEREAS, the Purchaser wishes to subscribe for and purchase shares of the Company's Series D Preferred Stock, par value $0.01 per share (the "SERIES D PREFERRED"); WHEREAS, the Company wishes to issue and sell to the Purchaser shares of Series D Preferred; WHEREAS, the Company and the Purchaser wish to provide, as set forth herein, for certain rights and obligations of the parties hereto relating to the Series D Preferred; NOW, THEREFORE, the parties hereto hereby agree as follows: ARTICLE I SALE AND PURCHASE OF SERIES D PREFERRED 1.1 SALE AND PURCHASE. Subject to the terms and conditions of this Agreement, the Company will issue and sell to the Purchaser, and the Purchaser will purchase from the Company, 50,000 shares of Series D Preferred at a price of $100 per share for a total purchase price of $5,000,000 (the "PURCHASE PRICE") on the Closing Date. 1.2 CERTAIN DEFINED TERMS. (a) "AGREEMENT AND PLAN OF REORGANIZATION" shall mean the Amended and Restated Agreement and Plan of Reorganization, dated as of August 17, 1999, as amended on December 17, 1999, by and among SQIS, SelectTech, the Company and Merger Sub. (b) "CERTIFICATE OF DESIGNATIONS" shall mean the Certificate of Designations of the Company with respect to the Series D Preferred, the form of which is attached as EXHIBIT 1. (c) "CHANGE IN CONTROL" shall have the meaning set forth in Section 5.2(a). (d) "COMMON STOCK" shall mean the common stock, $0.01 par value, of the Company. (e) "CONVERTED SHARES" shall have the meaning set forth in Section 3.18 of this Agreement. (f) "DEBENTURES" shall mean the 12% Senior Secured Convertible Debentures issued by SelectTech on October 15, 1998 and assumed by the Company under the Agreement and Plan of Reorganization and $1,900,000 aggregate principal amount of 12% Senior Secured Convertible Debentures of the Company issued in exchange for the same principal amount of such Debentures of SelectTech following the Merger. (g) "ENFORCEABILITY EXCEPTIONS" shall have the meaning set forth in Section 3.5 of this Agreement. (h) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended. (i) "HOLDER" shall have the meaning set forth in Section 5.2(a) of this Agreement. (j) "INTELLECTUAL PROPERTY" shall mean 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 and all documentation related to any of the foregoing. (k) "JOINT SOLICITATION STATEMENT" shall mean the Joint Solicitation Statement dated October 6, 1999 soliciting the written consent of the shareholders of SQIS and SelectTech approving the Merger. (l) "LIQUIDATION AMOUNT" shall have the meaning set forth in Section 3.1 of the Certificate of Designations. (m) "MANDATORY REDEMPTION DATE" shall mean the fifth anniversary of the date of issuance of the Series D Preferred. (n) "MERGER" shall mean the merger of SelectTech and Merger Sub with and into SQIS pursuant to the Merger Agreement. (o) "MERGER AGREEMENT" shall mean the Merger Agreement, dated as of December 21, 1999, by and among SQIS, SelectTech, the Company and Merger Sub. (p) "MERGER SUB" shall mean SelectQuote Acquisition Sub, a California corporation and a wholly-owned subsidiary of the Company. (q) "NEW SECURITIES" shall have the meaning set forth in Section 5.2(b) of this Agreement. (r) "1940 ACT" shall mean the Investment Company Act of 1940, as amended. (s) "PERSON" or "PERSONS" shall mean any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or other agency or political subdivision thereof. (t) "PURCHASE PRICE" shall have the meaning set forth in Section 1.1 of this Agreement. (u) "PURCHASED SHARES" shall have the meaning set forth in Section 3.18 of this Agreement. (v) "PURCHASER DIRECTOR" shall have the meaning set forth in Section 8.2(a) of this Agreement. (w) "QUALIFYING PUBLIC OFFERING" shall mean the consummation of a firm commitment underwritten public offering of Common Stock by the Company on or before December 31, 2000 of at least $25,000,000 and a price per share (subject to appropriate adjustment in the event of a stock split, reverse stock split, stock dividend, subdivision, reclassification, combination, exchange, recapitalization or other similar transaction) of at least $10. (x) "REGISTRATION RIGHTS AGREEMENT" shall mean the Registration Rights Agreement, dated as of December 23, 1999, by and among the Company, the Purchaser, and the other investors listed on Exhibit A thereto. (y) "RELATED PARTY TRANSACTION" shall mean any transaction to which the Company or any of its Subsidiaries is a party and in which any of the following persons had or will have a direct or indirect material interest: (i) any director or executive officer of the Company or any of its Subsidiaries, (ii) any nominee for election as a director of the Company or any of its Subsidiaries, (iii) any security holder who is known to the Company to own of record or beneficially more than five percent of any class of the Company's voting securities and (iv) any member of the immediate family of any of the foregoing persons. (z) "SECURITIES ACT" shall mean the Securities Act of 1933, as amended. (aa) "SELECTTECH" shall mean SelectTech, a Nevada corporation. (bb) "SERIES A PREFERRED" shall mean the Series A Preferred stock, par value $0.01 per share, of the Company. (cc) "SERIES B PREFERRED" shall mean the Series B Preferred stock, par value $0.01 per share, of the Company. (dd) "SERIES C PREFERRED" shall mean the Series C Preferred stock, par value $0.01 per share, of the Company. (ee) "SERIES D PREFERRED" shall have the meaning set forth in the first recital. (ff) "SHARES" shall mean, collectively, (i) the Series D Preferred issued and sold pursuant to this Agreement, and (ii) the Common Stock issued upon conversion of the Series D Preferred in accordance with the Company's Restated Certificate of Incorporation and the Certificate of Designations. (gg) "SIGNIFICANT SUBSIDIARY" shall mean any Subsidiary of the Company which is a "significant subsidiary" as defined in Section 1.02(w) of Regulation S-X of the Securities and Exchange Commission. (hh) "SUBSIDIARY" of any Person shall mean (i) a corporation, a majority of whose outstanding shares of capital stock or other equity interests with voting power, under ordinary circumstances, to elect directors, is at the time, directly or indirectly, owned by such Person, by one or more subsidiaries of such Person or by such Person and one or more subsidiaries of such Person, and (ii) any other Person (other than a corporation) in which such Person, a subsidiary of such Person or such Person and one or more subsidiaries of such Person, directly or indirectly, at the date of determination thereof, has (x) at least a majority ownership interest or (y) the power to elect or direct the election of the directors or other governing body of such Person. (ii) "SQIS" shall mean SelectQuote Insurance Services, a California corporation. ARTICLE II CLOSING DATE; DELIVERIES 2.1 CLOSING DATE. The closing of the purchase and sale of the Series D Preferred contemplated hereby shall be held at the offices of McCutchen, Doyle, Brown & Enersen, LLP, 3150 Porter Drive, Palo Alto, California at 10:00 A.M. on December 23, 1999 or at such time and place as the Company and the Purchaser may mutually agree. Such time is hereinafter referred to as the "CLOSING," and the date of the Closing is hereinafter referred to as the "CLOSING DATE." 2.2 DELIVERIES. (a) At or prior to the Closing, the Company shall deliver to the Purchaser all documents required by Section 7.1 hereof, (b) At the Closing, the Purchaser shall pay to the Company, by wire transfer of immediately available funds, the Purchase Price, and the Company shall deliver to the Purchaser a stock certificate representing 50,000 shares of Series D Preferred. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to the Purchaser as follows: 3.1 ORGANIZATION AND GOOD STANDING. Each of the Company and its Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its respective jurisdiction of incorporation and has full corporate power and authority to carry on its business as now being conducted. Each of the Company and its Subsidiaries is duly qualified or authorized to do business as a foreign corporation and is in good standing in each jurisdiction in which the conduct of its business or the ownership, leasing or operation of its properties requires such qualification or authorization, except where the failure so to qualify or be authorized would not individually or in the aggregate have a material adverse effect (financial or other) on the Company and its Subsidiaries, taken as a whole. 3.2 CAPITALIZATION. (a) After the effective time of the Merger and immediately prior to the Closing, the Company's authorized capital stock will consist of (i) 50,000,000 shares of Common Stock, 10,498,083 shares of which will be issued and outstanding and 1,111,111 shares of which will be reserved for issuance upon conversion of the Series D Preferred, 2,028,892 shares of which, in the aggregate, will be reserved for issuance upon conversion of the Series A Preferred, Series B Preferred and Series C Preferred, 6,510,635 shares of which will be reserved for issuance upon the exercise of outstanding options under the Company's Stock Option Plan (a copy of which has been delivered to the Purchaser), and 962,395 shares of which will be reserved for issuance under the Debentures, (ii) 10,000,000 shares of preferred stock, par value $0.01 per share, 2,500,000 shares of which are designated Series A Preferred (1,137,251 shares of which will be issued and outstanding); 1,250,000 shares of which are designated Series B Preferred (821,713 shares of which will be issued and outstanding); 750,000 shares of which are designated Series C Preferred (69,928 shares of which will be issued and outstanding); and 50,000 shares of which are designated Series D Preferred (none of which will be issued and outstanding). As of the Closing, all issued and outstanding shares of Common Stock, Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred will have been duly and validly authorized and issued and will be fully paid and nonassessable. (b) Except as set forth in Section 3.2(a) or on SCHEDULE 3.2(b) hereto, there exist no (i) outstanding options, warrants or other rights to purchase or subscribe for any equity securities or other ownership interests of the Company or any of its Subsidiaries, (ii) obligations of the Company or any of its Subsidiaries, whether absolute or contingent, to issue any shares of equity securities, (iii) securities directly or indirectly convertible into or exercisable or exchangeable for any equity securities of the Company or any of its Subsidiaries, (iv) preemptive or similar rights with respect to the issuance of any equity securities of the Company or any of its Subsidiaries, (v) registration or similar rights with respect to any capital stock of the Company or any of its Subsidiaries or (vi) other stockholder agreements, voting agreements or trusts, proxies or other agreements or contractual obligations among the stockholders of the Company with respect to voting or disposition of any capital stock or other equity interests of the Company or any of its Subsidiaries. SCHEDULE 3.2(b) sets forth the aggregate number of shares covered by the options, warrants and other rights, respectively, referred to in item (i) of this Section 3.2(b), as well as the respective expiration dates and exercise prices with respect to such options, warrants and rights. 3.3 THE MERGER; DISSENTERS. (a) On or prior to the Closing Date, the Merger will have been consummated in accordance with the terms set forth in the Agreement and Plan of Reorganization and the Merger Agreement and all applicable filings with governmental authorities will have been made in accordance with applicable law. (b) Except for Section 1301 of the California General Corporation Law as it applies to the SQIS shareholders or the SelectTech shareholders and Section 92A.380 of the Nevada Revised Statutes on General Corporation Law as it applies to the SelectTech shareholders, the SQIS and SelectTech shareholders have no appraisal, dissenters or other similar rights with respect to the Merger. Except as set forth in SCHEDULE 3.3(b), no shareholder of SQIS or SelectTech has elected to pursue any appraisal, dissenters or other similar rights with respect to the Merger. 3.4 SUBSIDIARIES. (a) SCHEDULE 3.4(a) sets forth a true and complete list of all of the corporations, partnerships and joint ventures in which the Company owns, directly or indirectly, any shares of capital stock or any partnership or joint venture interest, together with a listing, as to each such corporation, partnership or joint venture, of the nature and ownership of its capital stock or partnership or joint venture interests and of the other equity holders in such entities. (b) SQIS is the surviving corporation under the Merger Agreement. All of the outstanding shares of capital stock of SQIS and the Subsidiaries of SQIS have been duly authorized and validly issued, are fully paid and nonassessable and are wholly owned by the Company or SQIS, as the case may be, free and clear of any liens, encumbrances, security agreements, options, claims, charges or restrictions of any nature whatsoever. 3.5 AUTHORIZATION. The Company has all requisite corporate power and authority to issue and sell the Series D Preferred, to enter into this Agreement and the Registration Rights Agreement, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby (including, without limitation, the conversion of shares of Series D Preferred into shares of Common Stock). The execution and delivery of this Agreement and the Registration Rights Agreement, the execution, acknowledgment and filing with the Delaware Secretary of State of the Certificate of Designations and the performance by the Company of its obligations hereunder and under the Certificate of Designations and the Registration Rights Agreement have been duly and validly authorized by all requisite corporate proceedings on the part of the Company. This Agreement and the Registration Rights Agreement have been duly executed and delivered by the Company and, assuming the due authorization, execution and delivery of this Agreement and the Registration Rights Agreement by the Purchaser, constitute valid and legally binding agreements of the Company, enforceable against the Company in accordance with their terms except (a) as the same may be limited by applicable bankruptcy, insolvency, moratorium or similar laws of general application relating to or affecting creditors' rights, including, without limitation, the effect of statutory or other laws regarding fraudulent conveyances and preferential transfers, and (b) for the limitations imposed by general principles of equity. The foregoing exceptions set forth in subsections (a) and (b) of this Section 3.5 are hereinafter referred to as the "ENFORCEABILITY EXCEPTIONS." 3.6 CONSENTS AND APPROVALS. Except as set forth in SCHEDULE 3.6, neither the execution and delivery of this Agreement or the Registration Rights Agreement nor the consummation of the transactions contemplated hereby or thereby (including, without limitation, the conversion of shares of Series D Preferred into shares of Common Stock) will violate, result in a breach of, constitute a default (or an event which, with the giving of notice or the passage of time or both, would constitute a default) under, result in the acceleration of any indebtedness, conflict with, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its Subsidiaries pursuant to (i) the respective certificate of incorporation or charter or by-laws of the Company or any of its Subsidiaries, (ii) any agreement, indenture or other instrument to which the Company or any of its Subsidiaries is a party or by which any of their respective properties is bound, or (iii) any judgment, decree, order or award of any court or governmental body applicable to any of them, except, in the case of clauses (ii) and (iii), to the extent that the occurrence of any such event would not have a material adverse effect (financial or other) on the Company and its Subsidiaries, taken as a whole. To the knowledge of the Company and its Subsidiaries, no consent, approval or authorization of, or declaration, filing or registration with, any governmental or regulatory authority or any other person (either governmental or private), is required to be obtained or made by the Company or any of its Subsidiaries in connection with the execution and delivery by the Company of this Agreement or the Registration Rights Agreement or the consummation by the Company of the transactions contemplated hereby or thereby. 3.7 FINANCIAL STATEMENTS OF SQIS. (a) The audited financial statements of SQIS and its Subsidiaries, on a consolidated basis, as of and for the twelve months ended on June 30, 1999 and the unaudited financial statements of SQIS and its Subsidiaries as of and for the three months ended on September 30, 1999 (collectively, the "SQIS FINANCIAL STATEMENTS") have been prepared in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis during the periods involved (except that the notes to the financial statements as of and for the three months ended September 30, 1999 may not be in accordance with GAAP) and fairly present the financial position of SQIS and its 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 the Agreement and Plan of Reorganization, 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 its Subsidiaries, taken as a whole. Copies of the SQIS Financial Statements are attached hereto as SCHEDULE 3.7(a). (b) SQIS and its Subsidiaries, taken as a whole, have no material liabilities, obligations or loss contingencies that are required to be reflected in SQIS financial statements under GAAP, other than: (i) liabilities disclosed or provided for in the SQIS Financial Statements including the notes thereto; (ii) liabilities of SelectTech assumed under the Agreement and Plan of Reorganization and the Merger Agreement and (iii) liabilities incurred by SelectTech, SQIS and its Subsidiaries in the ordinary course of business since June 30, 1999. 3.8 FINANCIAL STATEMENTS OF SELECTTECH. (a) The audited financial statements of SelectTech as of and for the twelve months ended on June 30, 1999 and the unaudited financial statements of SelectTech as of and for the three months ended on September 30, 1999 (collectively, the "SELECTTECH FINANCIAL STATEMENTS") have been prepared in accordance with GAAP 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 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 the Agreement and Plan of Reorganization, since June 30, 1999, there has not been any material adverse change in the results of operations, financial condition, assets or business of SelectTech. Copies of the SelectTech Financial Statements are attached hereto as SCHEDULE 3.8(a). (b) As of the effective time of the Merger, SelectTech had no material liabilities, obligations or loss contingencies that were required to be reflected in SelectTech financial statements under GAAP, other than: (i) liabilities disclosed or provided for in the SelectTech Financial Statements including the notes thereto and (ii) liabilities incurred in the ordinary course of business since June 30, 1999. 3.9 FINANCIAL STATEMENTS OF THE COMPANY. (a) The unaudited balance sheet of the Company as at September 30, 1999 and the statement of operations for the period from the incorporation of the Company to September 30, 1999, together with the related notes thereto (collectively, the "COMPANY FINANCIAL STATEMENTS"), copies of all of which are attached as SCHEDULE 3.9, were prepared from the books and records of the Company and present fairly the financial position and results of operations of the Company as of September 30, 1999 and for the period then ended in accordance with GAAP consistently applied subject to normal and recurring year end adjustments. (b) The Company has no material liabilities, obligations or loss contingencies that are required to be reflected in the Company's financial statements under GAAP, other than: (i) liabilities disclosed or provided for in the Company Financial Statements including the notes thereto; (ii) liabilities expressly assumed under the Agreement and Plan of Reorganization and the Merger Agreement and (iii) liabilities incurred in the ordinary course of business since September 30, 1999. 3.10 NO MATERIAL ADVERSE CHANGE. Subsequent to June 30, 1999, there has not been any development involving a material adverse change (financial or other) with respect to the Company and its Subsidiaries, taken as a whole. 3.11 COMPLIANCE WITH ORGANIZATIONAL DOCUMENTS AND LAWS. Attached hereto as EXHIBIT 2 and EXHIBIT 3, respectively, are true, complete and accurate copies of the Restated Certificate of Incorporation and Bylaws of the Company as will be in full force and effect on the Closing Date. Neither the Company nor any of its Subsidiaries is in violation of its articles of incorporation or charter or by-laws. The operation, conduct, lease and ownership of the property and business of the Company and each of its Subsidiaries is being conducted in compliance, in all material respects, with all federal, state and local laws, rules, regulations and ordinances and all judgments and orders of any court or governmental authority that the Company or any of its Subsidiaries knows to be applicable to it, except where such violations would not individually or in the aggregate have a material adverse effect (financial or otherwise) on the Company and its Subsidiaries, taken as a whole. 3.12 LICENSES AND PERMITS; APPOINTMENTS. Each of the Company and its Subsidiaries is duly licensed and possesses all requisite permits, licenses, consents and qualifications required by applicable law for the purpose of conducting its business and owning its properties in each jurisdiction in which the conduct of its business or the ownership of its properties requires such license, permit or qualification, except where the failure to have any such license, permit, consent or qualification would not individually or in the aggregate have a material adverse effect (financial or other) on the Company and its Subsidiaries, taken as a whole. Without limiting the generality of the foregoing, SQIS possesses state insurance licenses or permits in the District of Columbia and every state other than Hawaii and South Dakota, and has national appointments by the insurance carriers identified on SCHEDULE 3.12. The Company has no reason to believe that consummation of the Merger will result in the termination or other loss of any such state insurance license or permit. None of such permits, licenses, consents or qualifications or appointments was terminated or limited as a result of the Merger, and there are no proceedings pending or, to the Company's knowledge, threatened, to revoke, terminate or limit any such license, permit, consent or qualification or appointment. 3.13 CONTRACTS; NO VIOLATION OF CONTRACTS, ETC. Attached hereto as SCHEDULE 3.13 is a list of all contracts, agreements, indentures, leases or other instruments to which the Company or any of its Subsidiaries is a party which are material to the business, operations or properties of the Company and its Subsidiaries, taken as a whole, including, without limitation, any shareholder, registration rights or employment agreements to which the Company or any of its Subsidiaries is a party. The Purchaser may receive a copy of any items listed on SCHEDULE 3.13 upon request. Neither the Company nor any of its Subsidiaries is in default in the performance of any obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness or in any contract, agreement, indenture, lease or other instrument to which the Company or any of its Subsidiaries is a party or by which any of them or any of their respective properties may be bound, except for any such default that would not individually or in the aggregate have a material adverse effect (financial or other) on the Company and its Subsidiaries, taken as a whole. 3.14 LITIGATION. Except as set forth in SCHEDULE 3.14, there is no legal, administrative, arbitral or other proceeding, or any governmental or regulatory investigation pending or, to the knowledge of the Company or any of its Subsidiaries, threatened against the Company or any of its Subsidiaries or any of their respective properties. There are no judgments, decrees or orders enjoining the Company or any of its Subsidiaries in respect of, or the effect of which is to prohibit or limit, any business practice or the acquisition of any property or the conduct of business in any area which would not individually or in the aggregate have a material adverse effect (financial or other) on the Company and its Subsidiaries, taken as a whole. 3.15 EMPLOYEE BENEFIT PLANS; ERISA. (a) SCHEDULE 3.15 hereto sets forth each plan, agreement, arrangement or commitment which is an employment or consulting agreement, executive or incentive compensation plan, bonus plan, deferred compensation agreement, employee pension, profit sharing, savings or retirement or welfare plan, (including, but not limited to, "employee benefit plans", as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), maintained by the Company or any Subsidiary of the Company for any present or former employees, officers or directors of the Company, SQIS, SelectTech or their respective Subsidiaries ("COMPANY PERSONNEL") or with respect to which the Company or any Subsidiary of the Company has liability or makes or has an obligation to make contributions ("EMPLOYEE PLANS"). (b) All contributions or payments due under any Employee Plan have been made. Each Employee Plan by its terms and operation is in compliance in all material respects with all applicable laws (including, but not limited to, ERISA, the Code and the Age Discrimination in Employment Act of 1967, as amended). (c) Neither the Company nor any Subsidiary of the Company nor any entity that is or was at any time treated as a single employer with the Company or SQIS or SelectTech or their respective Subsidiaries under Section 414(b), (c), (m) or (o) of the Code has at any time maintained, contributed to or been required to contribute to or had any liability with respect to a plan subject to Title IV of ERISA or Section 412 of the Code (including, without limitation, a multiemployee plan within the meaning of Section 3(37) of ERISA. (d) Neither the Company nor SQIS, SelectTech or any of their respective Subsidiaries nor any other person, including any fiduciary, has engaged in any "prohibited transaction" (as defined in Section 4975 of the Code or Section 406 of ERISA), which could subject the Company, SelectTech or any of their respective Subsidiaries, or any entity the Company or any Subsidiary of the Company has an obligation to indemnify, to any tax or penalty imposed under Section 4975 of the Code or Section 502 of ERISA. (e) None of the events contemplated by the Agreement and Plan of Reorganization, the Merger Agreement or this Agreement (either alone or together with any other event) will (i) entitle any Company Personnel to severance pay, unemployment compensation, or other similar payments under any Employee Plan or law, (ii) accelerate the time of payment or vesting or increase the amount of benefits due under any Employee Plan or increase the compensation payable to any Company Personnel or (iii) result in any payments (including parachute payments within the meaning of that term under Section 280G of the Code) under any Employee Plan or law becoming due to any Company Personnel. (f) Each of the Company, SQIS, SelectTech and their respective Subsidiaries has complied with the Worker Adjustment and Retraining Notification Act, to the extent applicable. 3.16 TAXES. Each of the Company, SQIS and SelectTech and their respective Subsidiaries has timely filed all tax returns required to be filed (or has timely filed for appropriate extensions thereof), which returns are complete and correct in all material respects, 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. Neither the Company nor its Subsidiaries 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. 3.17 BROKERAGE FEES. Neither the Company nor SQIS, SelectTech or any of their respective Subsidiaries has taken any action in connection with this Agreement or the Registration Rights Agreement or the transactions contemplated hereby or thereby, which would give rise to any valid claim against the Company, SQIS, SelectTech, or any of their respective Subsidiaries, or the Purchaser for any brokerage or finder's fee, except for the fees owing to Cochran, Caronia & Co., under an engagement letter agreement, a copy of which has been provided to the Purchaser, which fees will be paid by the Company. 3.18 EXEMPT TRANSACTION. Subject to the accuracy of the Purchaser's representations in Section 4.1 of this Agreement, each of the issuance and sale of the shares of Series D Preferred as provided hereunder (the "PURCHASED SHARES") and the issuance of shares of Common Stock upon conversion of such shares of Series D Preferred (the "CONVERTED SHARES") will constitute a transaction exempt from the registration requirements of Section 5 of the Securities Act; and neither the Company nor any affiliate (as defined in Rule 501(b) of Regulation D under the Securities Act) or any agent acting on behalf of the Company or any such affiliate has, directly or indirectly, sold, offered for sale or solicited offers to buy or otherwise negotiated in respect of, any security (as defined in the Securities Act) which is or will be integrated with the issuance of the Purchased Shares or the issuance of the Converted Shares in a manner that would require registration under the Securities Act of the issuance of the Purchased Shares or the Converted Shares. 3.19 INVESTMENT COMPANY ACT. The Company is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the 1940 Act, and the Company will not be required to register as an "investment company" as a result of the transactions contemplated herein. 3.20 NO INVESTMENT ADVISOR AFFILIATION. The Company is not an "investment advisor," "affiliated company" or an "affiliated person" of an "investment advisor" within the meaning of the 1940 Act. 3.21 INTELLECTUAL PROPERTY. (a) No person or entity has any rights to use any of the respective Intellectual Property of the Company or any of its Subsidiaries, except for licenses entered into in the normal course of business. (b) The Company and its Subsidiaries own, are licensed to use, or have the right to use or operate under, all of their respective Intellectual Property. (c) To the knowledge of the Company and its Subsidiaries, the operation of the business of the Company and its Subsidiaries as it is currently conducted does not infringe the Intellectual Property of any other person or entity, and neither the Company nor any of its Subsidiaries has received notice of any claim concerning such infringement. (d) To the knowledge of the Company and its Subsidiaries, no person is infringing or misappropriating any of the respective Intellectual Property of the Company and its Subsidiaries. 3.22 PROPERTIES, LIENS, ETC. Except as reflected in the SQIS Financial Statements, the SelectTech Financial Statements or the Company Financial Statements, including 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 the Company or its Subsidiaries, the Company and its Subsidiaries own, free and clear of any liens or other encumbrances, all of their tangible and intangible property, real and personal. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PURCHASER The Purchaser represents and warrants to the Company as follows: 4.1 ACQUISITION OF SECURITIES. All of the Series D Preferred to be purchased by the Purchaser hereunder will be acquired for investment for the Purchaser's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and the Purchaser has no present intention of selling, granting any participation in or otherwise distributing any of the Series D Preferred to be purchased. 4.2 NO REGISTRATION. The Purchaser understands and acknowledges that the offer and sale of the Series D Preferred pursuant to this Agreement will not be registered or qualified under the Securities Act or under any other applicable blue sky or state securities law on the grounds that the offering and sale of the Series D Preferred contemplated by this Agreement are exempt from registration and qualification, and that the Company's reliance upon applicable exemptions is predicated in substantial part upon the Purchaser's representations set forth in this Article IV. 4.3 DISPOSITION OF SECURITIES. The Purchaser covenants that in no event will it transfer, assign, convey or otherwise dispose of any Shares unless and until it shall have (i) furnished the Company with an opinion of counsel reasonably satisfactory to the Company, or other evidence reasonably satisfactory to the Company, to the effect that such disposition will not require registration under the Securities Act or appropriate action necessary for compliance with the Securities Act and any other applicable state, local or foreign law has been taken by it and (ii) complied with the other provisions of this Agreement governing the transfer of Shares. 4.4 UNDERSTANDING. The Purchaser understands that if a registration statement under the Securities Act covering the Shares is not in effect when the Purchaser desires to sell the Shares, the Purchaser may be required to hold the Shares for an indeterminate period unless an exemption under the Securities Act and under any applicable blue sky or state securities law is available to the Purchaser. 4.5 AUTHORIZATION. The Purchaser has all requisite power and authority to enter into this Agreement and the Registration Rights Agreement and to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Registration Rights Agreement and the performance by the Purchaser of its obligations hereunder and thereunder have been duly and validly authorized by all requisite action on the part of the Purchaser. This Agreement and the Registration Rights Agreement have been duly executed and delivered by the Purchaser and, assuming the due authorization, execution and delivery of this Agreement and the Registration Rights Agreement by the Company, constitute valid and binding agreements of the Purchaser, enforceable in accordance with their terms, subject to the Enforceability Exceptions. 4.6 BROKERAGE FEES. The Purchaser has not taken any action in connection with this Agreement or the Registration Rights Agreement or the transactions contemplated hereby or thereby, which would give rise to any valid claim against the Company, SQIS, SelectTech, or any of their respective Subsidiaries, or the Purchaser for any brokerage or finder's fee, except for the fees owing to Cochran, Caronia & Co., which fees will be paid by the Company. 4.7 ACCREDITED INVESTOR. The Purchaser acknowledges and represents that it is an "accredited investor" as defined in Rule 501(a) of Regulation D under the Securities Act and has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its prospective investment in the Shares. 4.8 ACCESS TO INFORMATION. The Purchaser has had access to such financial and other information concerning the business and financial condition of the Company as the Purchaser desires for the purposes of making this investment. The Purchaser has had an opportunity to discuss the Company's business, management, and financial affairs with the Company's management and the opportunity to review the Company's facilities and business plan. The Purchaser has also had an opportunity to ask questions of officers of the Company, which questions were answered to its satisfaction. 4.9 NO RELIANCE. The Purchaser has had a full opportunity to consult legal counsel and tax counsel of its choosing, is fully aware of the legal and tax implications of his or its investment in the Company and is not placing reliance on the Company or its counsel with respect to any legal and/or tax advice. ARTICLE V COMPANY COVENANTS. The Company hereby covenants and agrees as follows: 5.1 FINANCIAL AND OTHER INFORMATION. Until the Company shall register any of its securities pursuant to Section 12 of the Exchange Act or becomes subject to Section 15(d) of the Exchange Act, the Company will furnish the following information to the Purchaser so long as the Purchaser and its affiliates beneficially own any Shares: (a) As soon as practicable after the end of each fiscal year, and in any event within 90 days thereafter, an audited consolidated balance sheet as of the end of such fiscal year and the related audited consolidated statements of operations, changes in shareholders' equity and cash flows from operations for the year then ended, including the related notes, of the Company and its Subsidiaries. Such financial statements shall be prepared from the books and records of the Company and its Subsidiaries and present fairly the consolidated financial position and results of operations of the Company and its Subsidiaries as of the respective dates thereof or for the respective periods covered thereby in accordance with GAAP consistently applied and shall be accompanied by the report thereon of the Company's independent public accountant. (b) As soon as practicable after the end of each of the first three fiscal quarters of each fiscal year, and in any event within 60 days thereafter, an unaudited consolidated balance sheet as of the end of the fiscal quarter then ended and the related unaudited consolidated statements of operations, shareholders' equity and cash flows from operations of the Company for the quarter then ended and for the portion of the fiscal year through such date. The Company shall use its best efforts to prepare such financial statements in accordance with GAAP consistently applied, subject to normal and recurring year end adjustments and except that the notes thereto may not be included. (c) Such additional information as may be reasonably requested. 5.2 RIGHTS OF PARTICIPATION. (a) The Company hereby grants to the Purchaser and each other holder of Series D Preferred (each of the Purchaser and each such holder, a "HOLDER") the right to purchase such Holder's pro rata share, as determined based on such Holder's percentage of the Company's issued and outstanding Common Stock (on an as converted basis) ("PRO RATA SHARE"), of any New Securities (as hereinafter defined) which the Company may from time to time propose to issue. Such right to purchase New Securities shall terminate upon (i) a Qualifying Public Offering or (ii) the closing date of an acquisition of the Company by another entity by way of merger or consolidation (other than a merger or consolidation in which the holders of voting securities of the Company 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 shares of capital stock of the Company for securities or consideration issued, or caused to be issued, by the acquiring corporation or its subsidiary (a "CHANGE IN CONTROL"). (b) "NEW SECURITIES" shall mean any shares of capital stock of the Company, or options, warrants or other securities of the Company that are convertible into or exchangeable or exercisable for capital stock of the Company, that are issued by the Company; PROVIDED, HOWEVER, that "New Securities" shall not include (i) securities offered to the public pursuant to a Qualifying Public Offering, (ii) securities issued for the acquisition of another corporation or other entity by the Company pursuant to a stock purchase, merger or similar business combination, purchase of substantially all of such other entity's assets, or other reorganization whereby the Company will own not less than fifty-one percent (51%) of the voting power of such entity, (iii) any securities issued as a dividend or upon a recapitalization or stock split of existing securities, (iv) any stock options and other securities issued to directors, officers and employees of the Company or any other Subsidiary of the Company as compensation pursuant to an officer, director or employee stock option plan or similar plan approved by the Board of Directors of the Company, and any shares issued pursuant to the exercise of such options, (v) Common Stock issued upon conversion of the Series D Preferred and (vi) securities purchased pursuant to this Agreement. (c) In the event the Company receives a bona fide written offer to purchase New Securities, which offer it intends to accept, or in the event the Company otherwise intends to issue New Securities, it shall give each Holder written notice of its intention. Such notice shall describe the type of New Securities and the terms upon which the Company proposes to issue the same. Each Holder shall have 20 days from the date of receipt of any such notice to agree to acquire such Holder's Pro Rata Share of such New Securities, upon the terms specified in the notice by giving written notice to the Company. The closing of the purchase of New Securities by an acquiring Holder shall take place on the date of the closing of the sale of New Securities described in the Company's notice. If the sale described in the Company's notice does not occur, then each Holder's right to purchase its Pro Rata Share of the New Securities identified in such notice shall terminate. Such termination shall not affect each Holder's subsequent right to purchase New Securities under this Section 5.2 pursuant to a subsequent Company notice. Each Holder's Pro Rata Share shall be reduced proportionately if the Company sells less than the aggregate number of shares identified in the Company's notice. (d) The Company shall have 90 days thereafter to sell or enter into an agreement (pursuant to which the sale of New Securities covered thereby shall be closed, if at all, within 90 days from the date of said agreement) to sell the New Securities, at a price and upon terms no more favorable to the purchaser thereof than specified in the Company's notice. In the event the Company has not sold the New Securities within said 90-day period or, if later, within 90 days from the date of an agreement entered into within said 90-day period or, if later, within 10 days of receipt of all governmental approvals required in connection with the sale of such New Securities pursuant to such agreement, the Company shall not thereafter issue or sell any New Securities without first offering such New Securities to the Holder's in the manner provided in this Section 5.2. ARTICLE VI SECURITIES RESTRICTIONS 6.1 RESTRICTIONS ON TRANSFER. (a) No sale, transfer, assignment, gift, pledge, creation of a security interest in, mortgage, hypothecation, encumbrance, placing in trust or other disposition of any Shares by the Purchaser shall be made unless (subject to Section 9.11) each person to whom such disposition is proposed to be made shall have executed and delivered to the Company a written instrument, in form and substance reasonably satisfactory to the Company, evidencing the agreement of such person to become bound by the provisions of this Article VI and Article VIII hereof, effective upon the acquisition by such person of all or any part of the Shares (or any interest therein) which are the subject of such disposition. (b) In addition to the other provisions contained herein restricting or governing the transfer of Shares, the Purchaser agrees that the Shares may not be sold, transferred or disposed of, and the Company will be entitled to refuse to register any transfer of the Shares, unless such sale, transfer or disposition is effected pursuant to (i) an effective registration statement under the Securities Act and in compliance with all applicable state laws or (ii) an opinion of counsel reasonably satisfactory to the Company, or other evidence reasonably satisfactory to the Company, to the effect that such sale, transfer or disposition without registration may be effected without violation of the Securities Act or any applicable state laws. 6.2 LEGENDS. . (a) All certificates representing the Shares shall bear the following securities law legend unless and until the resale of the Shares pursuant to an effective Registration Statement or until the Shares may be sold under Rule 144 under the Securities Act without restrictions: "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT." (b) The legend set forth in Section 6.2(a) shall be removed and the Company shall issue a certificate without such legend to the holder of the Purchased Shares or Converted Shares, as the case may be, upon which it is stamped (and no legend shall be placed on any Purchased Shares or Converted Shares relating thereto), if, unless otherwise required by state securities laws, the legend is no longer required to identify the Converted Shares as "restricted securities" within the meaning of Rule 144. ARTICLE VII CONDITIONS OF CLOSING OF PURCHASE AND SALE OF THE SERIES D PREFERRED 7.1 CONDITIONS TO THE PURCHASER'S OBLIGATIONS. The obligations of the Purchaser to purchase the Series D Preferred and to perform at the Closing its other obligations hereunder related to the purchase and sale of the Series D Preferred are subject to the fulfillment on or prior to the Closing Date of the following conditions: (a) REPRESENTATIONS AND WARRANTIES CORRECT: PERFORMANCE OF OBLIGATIONS. The representations and warranties made by the Company in Article III hereof shall be true and correct as of the Closing Date as if made on and as of the Closing Date; and on or prior to the Closing Date the Company shall have performed all obligations and satisfied all conditions herein required to be performed or satisfied by it on or prior to the Closing Date. (b) AUDITOR'S REPORT. The Company shall have delivered to the Purchaser copies of the audit opinion of Deloitte & Touche LLP, independent public accountants, with respect to the June 30, 1999 SelectTech Financial Statements and the June 30, 1999 SQIS Financial Statements, which opinions shall not contain a going concern qualification and shall otherwise be in form and substance reasonably acceptable to the Purchaser. (c) CONSENTS AND WAIVERS. The Company shall have obtained any and all consents, permits and waivers necessary or appropriate to be obtained by the Company for consummation of the transactions contemplated by this Agreement and the Registration Rights Agreement. (d) LEGAL INVESTMENT. At the time of the Closing, the purchase and sale of the Series D Preferred hereunder shall be legally permitted by all laws and regulations to which the Company and the Purchaser are subject and all filings by the Company necessary under state securities laws shall have been made. (e) COMPLIANCE CERTIFICATE. The Company shall have delivered a certificate, executed by the Chairman, President or any Vice President of the Company, dated the Closing Date, certifying as to the fulfillment of the conditions specified in Sections 7.1(a), (c) and (d) (as it applies to the Company). (f) EVIDENCE OF CORPORATE ACTION. The Company shall have delivered a certificate of the Secretary or any Assistant Secretary of the Company, dated the Closing Date, certifying as to a complete and correct copy of the resolutions of the Board of Directors of the Company (i) approving the form and provisions of, and authorizing the execution and delivery of and consummation of the transactions contemplated by, this Agreement and the Registration Rights Agreement, (ii) approving the execution, acknowledgment and filing with the Delaware Secretary of State of the Certificate of Designations and (iii) authorizing the issuance and sale of the Series D Preferred at a price of $100 per share. (g) DELIVERY OF SHARE CERTIFICATES. The Company shall deliver to the Purchaser certificates for the Series D Preferred described in Section 1.1 hereto. (h) LEGAL OPINION. The Company shall have delivered the opinion of McCutchen, Doyle, Brown & Enersen, LLP substantially in the form set forth in EXHIBIT 4 hereto. (i) PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in connection with the transactions contemplated by this Agreement and the Registration Rights Agreement and all documents and instruments incident to such transactions shall be reasonably satisfactory in substance and form to the Purchaser and the Purchaser's counsel. (j) MERGER CERTIFICATES. As contemplated by the Merger Agreement, merger certificates meeting the requirements of the California General Corporation Law and the Nevada General Corporation Law shall have been properly filed with the Secretary of State of California and the Secretary of State of Nevada. The Company shall have delivered to the Purchaser facsimile evidence that the merger certificates have been so filed. (k) CERTIFICATE OF DESIGNATIONS. The Certificate of Designations shall have been duly exercised and acknowledged and properly filed with the Delaware Secretary of State. The Company shall have delivered to the Purchaser facsimile evidence that the Certificate of Designations has been so filed. (l) REGISTRATION RIGHTS AGREEMENT. The Registration Rights Agreement shall have been duly executed by the Company, the Purchaser and a sufficient number of the Existing Investors (as defined in the Registration Rights Agreement) so as to cause the Registration Rights Agreement to supersede and amend the Prior Agreement (as defined in the Registration Rights Agreement) and to be in full force and effect. (m) DIRECTOR. Mr. Steven J. Tynan shall have been elected as a member of the Board of Directors of the Company, as the Purchaser Director, effective upon the issuance to the Company of directors' and officers' liability insurance, reasonably acceptable to the Purchaser, covering the Purchaser Director. (n) EMPLOYEE AGREEMENT REGARDING PROPRIETARY INFORMATION AND INVENTIONS. Each officer and key employee of the Company and SQIS shall have entered into an Employee Agreement Regarding Proprietary Information and Inventions in the form attached as EXHIBIT 5. 7.2 CONDITIONS TO THE COMPANY'S OBLIGATIONS. The obligations of the Company to issue and sell the Series D Preferred and to perform at the Closing its other obligations hereunder related to the purchase and sale of the Series D Preferred are subject to the fulfillment on or prior to the Closing Date of the following conditions: (a) REPRESENTATIONS AND WARRANTIES CORRECT. The representations and warranties made by the Purchaser in Article IV hereof shall be true and correct as of the Closing Date as if made on and as of the Closing Date. (b) LEGAL INVESTMENT. At the time of the Closing, the purchase and sale of the Series D Preferred hereunder shall be legally permitted by all laws and regulations to which the Company and the Purchaser are subject. (c) PAYMENT BY PURCHASER. The payment by the Purchaser required by Section 2.2(b) hereof shall have been made by wire transfer of immediately available funds to the Company's account designated by the Company. ARTICLE VIII ADDITIONAL AGREEMENTS 8.1 PUT RIGHTS OF THE PURCHASER. (a) The Purchaser shall have the right, upon at least 30 days prior written notice given prior to the expiration of the right as set forth in Section 8.1(b), to cause the Company to purchase any of the Shares from the Purchaser, for a per share amount equal to the Liquidation Amount, determined as of the date of such purchase, in the event of: (i) a sale of assets representing 50% or more of the total value of all assets of the Company determined on a consolidated basis, in any single transaction or series of related transactions or any sale, merger, reorganization or other transaction or series of related transactions that results in the Company beneficially owning less than 50.1% of the voting stock of any Significant Subsidiary; (ii) a Change in Control; (iii) two or more of the following officers of the Company no longer being employed by the Company: Charan J. Singh, Steven H. Gerber, Michael L. Feroah and David L. Paulsen; (iv) a repurchase by the Company of any of its equity securities; (v) the incurrence of indebtedness for money borrowed by the Company exceeding $5,000,000 in aggregate principal amount; (vi) a material Related Party Transaction, other than such a transaction negotiated on an arm's-length basis; or (vii) the sale or issuance by the Company of Common Stock for less than $4.50 per share (subject to appropriate adjustment in the event of a stock split, reverse stock split, stock dividend, subdivision, reclassification, combination, exchange, recapitalization or other similar transaction) or any securities convertible into or exchangeable for Common Stock for an amount which, when converted or exchanged, as the case may be, results in the acquisition of Common Stock for an amount which is less than $4.50 per share (subject to appropriate adjustment in the event of a stock split, reverse stock split, stock dividend, subdivision, reclassification, combination, exchange, recapitalization or other similar transaction). (b) The put right set forth in Section 8.1(a) shall expire upon the closing of a Qualifying Public Offering. 8.2 BOARD REPRESENTATION. (a) The Company and the Purchaser shall take all reasonable action within their respective powers to cause one person named by the Purchaser to be appointed a member of the Board of Directors of the Company (the "PURCHASER DIRECTOR") to serve for a period commencing on the date that the Company obtains directors' and officers' liability insurance pursuant to Section 8.3 (or such date after the Closing Date as the Purchaser waives the requirement of such directors' and officers' liability insurance) and ending on the third anniversary of the Closing Date, PROVIDED, that the Purchaser's right to appoint a member to the Board of Directors of the Company shall be extended to the Mandatory Redemption Date if the Company does not complete a Qualifying Public Offering. At such time as the Purchaser and its affiliates no longer own any Shares, the Purchaser shall cause the Purchaser Director to resign from the Company's Board of Directors. The reasonable actions required of the Company and the Purchaser in this Section 8.2 shall include, without limitation, to the extent within their respective powers, the nomination of the Purchaser Director, the execution of written consents, the calling of special meetings, the removal of directors, the filling of vacancies on the Board of Directors and the waiving of notice. During the period from the Closing Date until the term on the Board of Directors of the individual named by the Purchaser as the Purchaser Director begins, such individual shall receive all notices and materials sent to the Board of Directors of the Company, shall be entitled to attend all meetings of the Board of Directors as an observer, and shall be entitled to receive compensation and benefits pursuant to Section 8.2(b) as though he were a member of the Board of Directors. (b) The Purchaser Director shall receive the same compensation and benefits as those paid by the Company to other non-employee directors. 8.3 DIRECTORS' AND OFFICERS' INSURANCE. The Company shall obtain, promptly following the Closing, and thereafter shall use its reasonable best efforts to maintain in effect, directors' and officers' liability insurance covering the Purchaser Director on terms reasonably acceptable to the Purchaser during the period in which the Purchaser Director serves on the Company's Board of Directors. 8.4 INFORMATION CONFIDENTIAL. The Purchaser acknowledges that the information received by it pursuant hereto is confidential and for its use only. The Purchaser will not use such information in violation of the Securities Exchange Act or reproduce, disclose or disseminate such information to any other person (other than its employees, agents or advisors having a need to know the contents of such information), except in connection with the exercise of rights under this Agreement, unless the Company has made such information available to the public generally or such Purchaser is required to disclose such information by law or a governmental body. 8.5 SELECTION OF INVESTMENT BANKERS AND APPRAISERS. So long as the Purchaser owns shares of Series D Preferred, the choice of a firm of independent investment bankers or qualified appraisers to determine the value of assets or of the Series D Preferred under Section 3.5 or 6.2, respectively, of the Certificate of Designations shall be made jointly by the Company and the Purchaser; PROVIDED, that if the Company and the Purchaser are unable to agree, then such firm shall be chosen by the American Arbitration Association. ARTICLE IX MISCELLANEOUS 9.1 MODIFICATIONS, AMENDMENTS AND WAIVERS. Any modification, amendment or waiver hereof shall not be effective unless in writing and signed by the parties hereto. 9.2 SURVIVAL. The representations and warranties made herein shall survive the Closing of the purchase and sale of the Series D Preferred for a period of two years. The covenants and agreements made herein shall survive the Closing in accordance with their terms. 9.3 SUCCESSORS AND ASSIGNS. Subject to Section 9.11, the provisions of this Agreement which bind, or are for the benefit of, the Purchaser also bind, or are for the benefit of, and enforceable by, any subsequent holders of Shares (except any subsequent holder who acquires any such Shares in a registered public offering); PROVIDED, HOWEVER, that no provisions of this Agreement shall be for the benefit of, or enforceable by, any subsequent holders unless and until such third-party transferee has executed and delivered to the Company an Additional Party Signature Page in the form attached hereto as EXHIBIT 6 and thereby becomes bound by those terms of this Agreement by which its transferor is subject. 9.4 ENTIRE AGREEMENT. This Agreement and any other documents delivered pursuant hereto constitute the full and entire understanding and agreement among the parties with regard to the subject matter hereof and thereof. 9.5 NOTICES. All notices and other communication required or permitted hereunder shall be effective upon receipt and shall be in writing and delivered personally, by confirmed facsimile transmission, by overnight delivery service or by mail, postage prepaid, addressed as follows: (a) if to the Company, to: SelectQuote, Inc. 595 Market Street, 6th Floor San Francisco, California 94105 Attention: Charan J. Singh, President Telephone: (415) 543-7338 x2211 Telecopy: (800) 436-7000 with a copy to: McCutchen, Doyle, Brown & Enersen, LLP 3150 Porter Drive Palo Alto, California 94304 Attention: Alan B. Kalin, Esq. Telephone: (650) 849-4400 Telecopy: (650) 849-4800 (b) if to the Purchaser, to: High Ridge Capital, LLC 20 Liberty Street Chester, Connecticut 06412 Attention: Mr. Steven J. Tynan Telephone: (860) 526-5213 Telecopy: (860) 526-5870 and High Ridge Capital, LLC 672 Oenoke Ridge Road New Canaan, Connecticut 06840 Attention: Mr. James L. Zech Telephone: (203) 972-3982 Telecopy: (203) 972-3986 with a copy to: Dewey Ballantine LLP 1301 Avenue of the Americas New York, New York 10019 Attention: James A. FitzPatrick, Jr., Esq. Telephone: (212) 259-6220 Telecopy: (212) 259-6333 Either party may by notice given in accordance with this Section 9.5 to the other party designate another address or person for receipt of notice hereunder. 9.6 SEVERABILITY. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. If any provision of this Agreement, or the application thereof to any Person or any circumstance, is invalid or unenforceable, (i) a suitable and equitable provision shall be substituted therefor in order to carry out, so far as may be valid and enforceable, the intent and purpose of such invalid or unenforceable provision and (ii) the remainder of this Agreement and the application of such provision to other Persons or circumstances shall not be affected by such invalidity or unenforceability. 9.7 EXPENSES. (a) The Company will be responsible for paying its own attorneys' and other fees and expenses and disbursements incurred in connection with the preparation, negotiation and execution of this Agreement ("EXPENSES"). The Company shall also pay the fees and disbursements of one firm of attorneys for Purchaser in connection with the preparation, negotiation and execution of this Agreement in an amount not exceeding $70,000. (b) Notwithstanding subsection (a) of this Section 9.7, in the event that the transactions contemplated herein are not consummated, each party shall be responsible for paying its own Expenses; provided, that if failure to consummate such transactions is a result of the Company's refusal to proceed when the Purchaser has fulfilled or agreed to fulfill its obligations hereunder, then the Company shall pay all of the Purchaser's Expenses, including legal fees and expenses. 9.8 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. 9.9 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. 9.10 CONSTRUCTION OF AGREEMENT. The language in all parts of this Agreement shall in all cases be construed according to its fair meaning, and not strictly for or against any party hereto. 9.11 ASSIGNMENT; BINDING EFFECT. This Agreement may not be assigned or delegated, in whole or in part, by any party hereto without the prior written consent of other party hereto, which consent shall not be unreasonably withheld. Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. 9.12 NO THIRD PARTY BENEFICIARIES. This Agreement is for the benefit of the parties hereto and is not intended to confer upon any other person any rights or remedies hereunder. 9.13 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the internal laws of the State of California applicable to contracts made and to be performed therein. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. SELECTQUOTE, INC. By: --------------------------------- Name: Title: HIGH RIDGE CAPITAL PARTNERS II, L.P. By: HIGH RIDGE GP II, LLC, as General Partner By: LIBERTY STREET PARTNERS LP, as Member By: LIBERTY STREET CORP., as General Partner By: ----------------------------------- Name: Steven J. Tynan Title: President ADDITIONAL PARTY SIGNATURE PAGE The undersigned hereby executes that certain Investment Agreement, dated as of December 23, 1999, by and between SelectQuote, Inc. and High Ridge Capital Partners II, L.P. (the "AGREEMENT"), authorizes this signature page to be attached as a counterpart of such Agreement, and agrees to be bound by such Agreement as if the undersigned had executed such Agreement on the date of its original execution. -------------------------------- Name (printed) -------------------------------- Address -------------------------------- Telephone Number -------------------------------- Telecopy Number -------------------------------- Signature S-1 AMENDMENT NO. 1 TO INVESTMENT AGREEMENT BY AND BETWEEN SELECTQUOTE, INC. AND HIGH RIDGE CAPITAL PARTNERS II, L.P. This AMENDMENT NO. 1 TO INVESTMENT AGREEMENT (the "AMENDMENT") is made as of the 29th day of February, 2000 by and between SelectQuote, Inc., a Delaware corporation (the "COMPANY") and High Ridge Capital Partners II, L.P., a Delaware limited partnership ("HIGH RIDGE"). Capitalized terms used but not defined herein shall have the meanings set forth in the Investment Agreement, dated as of December 27, 1999, by and between the Company and High Ridge (the "INVESTMENT AGREEMENT"). In accordance with the provisions of Section 9.1 of the Investment Agreement, which states that any modification, amendment or waiver of the terms of the Investment Agreement shall not be effective unless in writing and signed by the parties thereto, the parties to this Amendment hereby agree as follows: 1. The Company and High Ridge hereby amend and restate Section 8.1(a)(vii) of the Investment Agreement relating to put rights of High Ridge in its entirety as follows: "(vii) the sale or issuance by the Company of Common Stock for less than $5.15 per share (subject to appropriate adjustment in the event of a stock split, reverse stock split, stock dividend, subdivision, reclassification, combination, exchange, recapitalization or other similar transaction) or any securities convertible into or exchangeable for Common Stock for an amount which, when converted or exchanged, as the case may be, results in the acquisition of Common Stock for an amount which is less than $5.15 per share (subject to appropriate adjustment in the event of a stock split, reverse stock split, stock dividend, subdivision, reclassification, combination, exchange, recapitalization or other similar transaction)." 2. This Amendment shall be governed by the laws of the State of California, with any terms relating to United States securities laws to be interpreted in accordance with the federal laws of the United States of America. Any dispute arising under or with respect to this Amendment shall be resolved exclusively in the appropriate court in San Francisco, California. 3. This Amendment and the Investment Agreement shall constitute the entire agreement among the parties regarding the transactions contemplated herein and therein, and may not be amended except in writing. Except as set forth herein, all of the terms of the Investment Agreement shall remain unchanged and be in full force and effect and are hereby ratified and confirmed in all respects. In the event of any conflict between the provisions of this Amendment and the Investment Agreement, the provisions of this Amendment shall control. On and after the date hereof, each reference in the Investment Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like import shall mean and be a reference to the Investment Agreement as amended hereby. 4. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. * * * IN WITNESS WHEREOF, the parties have executed this Amendment No. 1 to Investment Agreement as of the date first above written. SELECTQUOTE, INC. By: -------------------------------- Name: Title: HIGH RIDGE CAPITAL PARTNERS II, L.P. By: HIGH RIDGE GP II, LLC, as General Partner By: LIBERTY STREET PARTNERS LP, as Member By: LIBERTY STREET CORP., as General Partner By: -------------------------------- Name: Steven J. Tynan Title: President EX-4.5 3 EXHIBIT 4.5 Exhibit 4.5 INVESTMENT AGREEMENT by and between SELECTQUOTE, INC., HIGH RIDGE CAPITAL PARTNERS II, L.P., MARSH & MCLENNAN CAPITAL TECHNOLOGY VENTURE FUND, L.P., MARSH & MCLENNAN CAPITAL TECHNOLOGY PROFESSIONALS VENTURE FUND, L.P., TRIDENT II, L.P. MARSH & MCLENNAN EMPLOYEES' SECURITIES COMPANY, L.P. and MARSH & MCLENNAN CAPITAL PROFESSIONALS FUND, L.P. Dated as of February 29, 2000 INVESTMENT AGREEMENT THIS INVESTMENT AGREEMENT (this "AGREEMENT") is made as of the 29th day 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"), McCutchen, Doyle, Brown & Enersen, LLP ("MDBE") and High Ridge Capital Partners II, L.P., a Delaware limited partnership (together with the Marsh Parties, each a "PURCHASER" and collectively, the "PURCHASERS"). WHEREAS, each Purchaser wishes to subscribe for and purchase shares of the Company's Series E Preferred Stock, par value $0.01 per share (the "SERIES E PREFERRED"); WHEREAS, the Company wishes to issue and sell to the Purchasers shares of Series E Preferred; WHEREAS, the Company and the Purchasers wish to provide, as set forth herein, for certain rights and obligations of the parties hereto relating to the Series E Preferred; NOW, THEREFORE, the parties hereto hereby agree as follows: ARTICLE I SALE AND PURCHASE OF SERIES E PREFERRED 1.1 SALE AND PURCHASE. Subject to the terms and conditions of this Agreement, the Company will issue and sell to each Purchaser, and each Purchaser agrees, severally and not jointly, to purchase from the Company, the number of shares of Series E Preferred set forth opposite such Purchaser's name on Schedule 1 at a price of $5.15 per share (the "PRICE PER SHARE"), on the Closing Date. 1.2 CERTAIN DEFINED TERMS. (a) "AMENDED REGISTRATION RIGHTS AGREEMENT" shall mean the Existing Registration Rights Agreement, as amended by Amended and Restated Registration Rights Agreement, dated as of February 29, 2000, by and among the Company, the Purchasers, and the holders of more than 50% of the Registrable Securities under the Existing Registration Rights Agreement. (b) "CHANGE IN CONTROL" shall have the meaning set forth in Section 5.2(a). (c) "COMMON STOCK" shall mean the common stock, $0.01 par value, of the Company. (d) "CONVERTED SHARES" shall have the meaning set forth in Section 3.15 of this Agreement. (e) "DEBENTURES" shall mean the 12% Senior Secured Convertible Debentures issued by SelectTech on October 15, 1998 and assumed by the Company under the Agreement and Plan of Reorganization and $1,900,000 aggregate principal amount of 12% Senior Secured Convertible Debentures of the Company issued in exchange for the same principal amount of such Debentures of SelectTech following the Merger. (f) "ENFORCEABILITY EXCEPTIONS" shall have the meaning set forth in Section 3.5 of this Agreement. (g) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended. (h) "EXISTING PREFERRED STOCK" shall mean the Series A Preferred, the Series B Preferred, the Series C Preferred and the Series D Preferred. (i) "EXISTING REGISTRATION RIGHTS AGREEMENT" shall mean the Registration Rights Agreement, dated as of December 23, 2000, by and among the Company and the investors listed on Exhibit A thereto. (j) "HOLDER" shall have the meaning set forth in Section 5.2(a) of this Agreement. (k) "INTELLECTUAL PROPERTY" shall mean 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 and all documentation related to any of the foregoing. 2 (l) "LIQUIDATION AMOUNT" shall have the meaning set forth in Section 3.3 of the Restated Certificate of Incorporation. (m) "MANDATORY REDEMPTION DATE" shall mean December 27, 2004. (n) "NEW SECURITIES" shall have the meaning set forth in Section 5.2(b) of this Agreement. (o) "1940 ACT" shall mean the Investment Company Act of 1940, as amended. (p) "PERSON" or "PERSONS" shall mean any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or other agency or political subdivision thereof. (q) "PRICE PER SHARE" shall have the meaning set forth in Section 1.1 of this Agreement. (r) "PURCHASED SHARES" shall have the meaning set forth in Section 3.15 of this Agreement. (s) "QUALIFYING PUBLIC OFFERING" shall mean the consummation of a firm commitment underwritten public offering of Common Stock by the Company on or before December 31, 2000 of at least $25,000,000 and a price per share (subject to appropriate adjustment in the event of a stock split, reverse stock split, stock dividend, subdivision, reclassification, combination, exchange, recapitalization or other similar transaction) of at least $10. (t) "RELATED PARTY TRANSACTION" shall mean any transaction to which the Company or any of its Subsidiaries is a party and in which any of the following persons had or will have a direct or indirect material interest: (i) any director or executive officer of the Company or any of its Subsidiaries, (ii) any nominee for election as a director of the Company or any of its Subsidiaries, (iii) any security holder who is known to the Company to own of record or beneficially more than five percent of any class of the Company's voting securities and (iv) any member of the immediate family of any of the foregoing persons. (u) "RESTATED CERTIFICATE OF INCORPORATION" shall mean the amended and restated Certificate of Incorporation of the Company as filed with the Secretary of State of the State of Delaware on February 29, 2000. (v) "SECURITIES ACT" shall mean the Securities Act of 1933, as amended. (w) "SERIES A PREFERRED" shall mean the Series A Preferred stock, par value $0.01 per share, of the Company. (x) "SERIES B PREFERRED" shall mean the Series B Preferred stock, par value $0.01 per share, of the Company. 3 (y) "SERIES C PREFERRED" shall mean the Series C Preferred stock, par value $0.01 per share, of the Company. (z) "SERIES D PREFERRED" shall mean the Series D Preferred stock, par value $0.01 per share, of the Company. (aa) "SERIES E DIRECTOR" shall have the meaning set forth in Section 8.2(a) of this Agreement. (bb) "SERIES E PREFERRED" shall have the meaning set forth in the first recital. (cc) "SHARES" shall mean, collectively, (i) the Series E Preferred issued and sold pursuant to this Agreement, and (ii) the Common Stock issued upon conversion of the Series E Preferred in accordance with the Company's Restated Certificate of Incorporation. (dd) "SIGNIFICANT SUBSIDIARY" shall mean any Subsidiary of the Company which is a "significant subsidiary" as defined in Section 1.02(w) of Regulation S-X of the Securities and Exchange Commission. (ee) "SUBSIDIARY" of any Person shall mean (i) a corporation, a majority of whose outstanding shares of capital stock or other equity interests with voting power, under ordinary circumstances, to elect directors, is at the time, directly or indirectly, owned by such Person, by one or more subsidiaries of such Person or by such Person and one or more subsidiaries of such Person, and (ii) any other Person (other than a corporation) in which such Person, a subsidiary of such Person or such Person and one or more subsidiaries of such Person, directly or indirectly, at the date of determination thereof, has (x) at least a majority ownership interest or (y) the power to elect or direct the election of at least a majority of the directors or other governing body of such Person. (ff) "SQIS" shall mean SelectQuote Insurance Services, a California corporation. ARTICLE II CLOSING DATE; DELIVERIES 2.1 CLOSING DATE. The closing of the purchase and sale of the Series E Preferred contemplated hereby shall be held at the offices of McCutchen, Doyle, Brown & Enersen, LLP, 3150 Porter Drive, Palo Alto, California at 10:00 a.m. on March 20, 2000 or at such time and place as the Company and the Purchasers may mutually agree. Such time is hereinafter referred to as the "CLOSING," and the date of the Closing is hereinafter referred to as the "CLOSING DATE." 2.2 DELIVERIES. Subject to the satisfaction or waiver of the relevant conditions set forth herein: (a) at or prior to the Closing, the Company shall deliver to the Purchasers all documents required by Section 7.1 hereof, 4 (b) at the Closing, each Purchaser shall pay to the Company, by wire transfer of immediately available funds, the product of (i) the number of shares purchased by such Purchaser pursuant to this Agreement, multiplied by (ii) the Price Per Share, and the Company shall deliver to each Purchaser a stock certificate representing its respective number of shares of Series E Preferred. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to the Purchasers as follows: 3.1 ORGANIZATION AND GOOD STANDING. Each of the Company and its Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its respective jurisdiction of incorporation and has full corporate power and authority to carry on its business as now being conducted. Each of the Company and its Subsidiaries is duly qualified or authorized to do business as a foreign corporation and is in good standing in each jurisdiction in which the conduct of its business or the ownership, leasing or operation of its properties requires such qualification or authorization, except where the failure so to qualify or be authorized would not individually or in the aggregate have a material adverse effect (financial or other) on the Company and its Subsidiaries, taken as a whole. 3.2 CAPITALIZATION. (a) Immediately prior to the Closing, the Company's authorized capital stock will consist of (i) 100,000,000 shares of Common Stock, 10,497,974 shares of which will be issued and outstanding, 2,041,845 shares of which will be reserved for issuance upon conversion of the Series E Preferred, 3,139,961 shares of which, in the aggregate, will be reserved for issuance upon conversion of the Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred, 6,556,542 shares of which will be reserved for issuance upon the exercise of outstanding options under the Company's Stock Option Plan (a copy of which has been delivered to the Purchasers), and 729,961 shares of which will be reserved for issuance under the Debentures, (ii) 10,000,000 shares of preferred stock, par value $0.01 per share, 2,500,000 shares of which are designated Series A Preferred (1,137,235 shares of which will be issued and outstanding); 1,250,000 shares of which are designated Series B Preferred (821,690 shares of which will be issued and outstanding); 750,000 shares of which are designated Series C Preferred (69,925 shares of which will be issued and outstanding); 50,000 shares of which are designated Series D Preferred (50,000 of which will be issued and outstanding) and 2,041,845 shares of which are designated Series E Preferred (none of which will be issued and outstanding). As of the Closing, all issued and outstanding shares of Common Stock, Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series E Preferred will have been duly and validly authorized and issued and will be fully paid and nonassessable. (b) Except as set forth in Section 3.2(a) or on SCHEDULE 3.2(b) hereto, there exist no (i) outstanding options, warrants or other rights to purchase or subscribe for any equity securities or other ownership interests of the Company or any of its Subsidiaries, (ii) 5 obligations of the Company or any of its Subsidiaries, whether absolute or contingent, to issue any shares of equity securities, (iii) securities directly or indirectly convertible into or exercisable or exchangeable for any equity securities of the Company or any of its Subsidiaries, (iv) preemptive or similar rights with respect to the issuance of any equity securities of the Company or any of its Subsidiaries, (v) registration or similar rights with respect to any capital stock of the Company or any of its Subsidiaries or (vi) other stockholder agreements, voting agreements or trusts, proxies or other agreements or contractual obligations among the stockholders of the Company with respect to voting or disposition of any capital stock or other equity interests of the Company or any of its Subsidiaries. SCHEDULE 3.2(b) sets forth the aggregate number of shares covered by the options, warrants and other rights, respectively, referred to in item (i) of this Section 3.2(b), as well as the respective expiration dates and exercise prices with respect to such options, warrants and rights. 3.3 SUBSIDIARIES. (a) SCHEDULE 3.3(a) sets forth a true and complete list of all of the corporations, partnerships and joint ventures in which the Company owns, directly or indirectly, any shares of capital stock or any partnership or joint venture interest, together with a listing, as to each such corporation, partnership or joint venture, of the nature and ownership of its capital stock or partnership or joint venture interests and of the other equity holders in such entities. (b) All of the outstanding shares of capital stock of SQIS and the Subsidiaries of SQIS have been duly authorized and validly issued, are fully paid and nonassessable and are wholly owned by the Company or SQIS, as the case may be, free and clear of any liens, encumbrances, security agreements, options, claims, charges or restrictions of any nature whatsoever. 3.4 AUTHORIZATION. The Company has all requisite corporate power and authority to issue and sell the Series E Preferred, to enter into this Agreement and the Amended Registration Rights Agreement, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby (including, without limitation, the conversion of shares of Series E Preferred into shares of Common Stock). The execution and delivery of this Agreement and the Amended Registration Rights Agreement, the execution, acknowledgment and filing with the Delaware Secretary of State of the Restated Certificate of Incorporation and the performance by the Company of its obligations hereunder and under the Restated Certificate of Incorporation and the Amended Registration Rights Agreement have been duly and validly authorized by all requisite corporate proceedings on the part of the Company. This Agreement and the Amended Registration Rights Agreement have been duly executed and delivered by the Company and, assuming the due authorization, execution and delivery of this Agreement and the Amended Registration Rights Agreement by the Purchaser, constitute valid and legally binding agreements of the Company, enforceable against the Company in accordance with their terms except (a) as the same may be limited by applicable bankruptcy, insolvency, moratorium or similar laws of general application relating to or affecting creditors' rights, including, without limitation, the effect of statutory or other laws regarding fraudulent conveyances and preferential transfers, and (b) for the limitations imposed by general 6 principles of equity. The foregoing exceptions set forth in subsections (a) and (b) of this Section 3.4 are hereinafter referred to as the "ENFORCEABILITY EXCEPTIONS." 3.5 CONSENTS AND APPROVALS. Except as set forth in SCHEDULE 3.5, neither the execution and delivery of this Agreement or the Amended Registration Rights Agreement nor the consummation of the transactions contemplated hereby or thereby (including, without limitation, the conversion of shares of Series E Preferred into shares of Common Stock) will violate, result in a breach of, constitute a default (or an event which, with the giving of notice or the passage of time or both, would constitute a default) under, result in the acceleration of any indebtedness, conflict with, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its Subsidiaries pursuant to (i) the respective certificate of incorporation or charter or by-laws of the Company or any of its Subsidiaries, (ii) any agreement, indenture or other instrument to which the Company or any of its Subsidiaries is a party or by which any of their respective properties is bound, or (iii) any judgment, decree, order or award of any court or governmental body applicable to any of them, except, in the case of clauses (ii) and (iii), to the extent that the occurrence of any such event would not have a material adverse effect (financial or other) on the Company and its Subsidiaries, taken as a whole. To the knowledge of the Company and its Subsidiaries, no consent, approval or authorization of, or declaration, filing or registration with, any governmental or regulatory authority or any other person (either governmental or private), is required to be obtained or made by the Company or any of its Subsidiaries in connection with the execution and delivery by the Company of this Agreement or the Amended Registration Rights Agreement or the consummation by the Company of the transactions contemplated hereby or thereby. 3.6 FINANCIAL STATEMENTS OF THE COMPANY. (a) The audited financial statements of SQIS and its Subsidiaries, on a consolidated basis, as of and for the twelve months ended on June 30, 1999, the audited financial statements of SelectTech, on a consolidated basis, as of and for the twelve months ended on June 30, 1999, and the unaudited balance sheet of the Company as at December 31, 1999 and the statement of operations for the period from the incorporation of the Company to December 31, 1999, together with the related notes thereto (collectively, the "COMPANY FINANCIAL STATEMENTS"), copies of all of which are attached as SCHEDULE 3.6, were prepared from the books and records of the Company and present fairly the financial position and results of operations of the Company as of and for the periods indicated in accordance with GAAP consistently applied subject to normal and recurring year end adjustments. (b) The Company has no material liabilities, obligations or loss contingencies that are required to be reflected in the Company's financial statements under GAAP, other than: (i) liabilities disclosed or provided for in the Company Financial Statements including the notes thereto; (ii) liabilities incurred in the ordinary course of business since December 31, 1999; and (iii) liabilities set forth in SCHEDULE 3.6(b). 3.7 NO MATERIAL ADVERSE CHANGE. Subsequent to June 30, 1999, there has not been any development involving a material adverse change (financial or other) with respect to the Company and its Subsidiaries, taken as a whole. 7 3.8 COMPLIANCE WITH ORGANIZATIONAL DOCUMENTS AND LAWS. Attached hereto as EXHIBIT 1 and EXHIBIT 2, respectively, are true, complete and accurate copies of the Restated Certificate of Incorporation and Bylaws of the Company as will be in full force and effect on the Closing Date. Neither the Company nor any of its Subsidiaries is in violation of its certificate of incorporation or charter or bylaws. The operation, conduct, lease and ownership of the property and business of the Company and each of its Subsidiaries is being conducted in compliance, in all material respects, with all federal, state and local laws, rules, regulations and ordinances and all judgments and orders of any court or governmental authority that the Company or any of its Subsidiaries knows to be applicable to it, except where such violations would not individually or in the aggregate have a material adverse effect (financial or otherwise) on the Company and its Subsidiaries, taken as a whole. 3.9 LICENSES AND PERMITS; APPOINTMENTS. Each of the Company and its Subsidiaries is duly licensed and possesses all requisite permits, licenses, consents and qualifications required by applicable law for the purpose of conducting its business and owning its properties in each jurisdiction in which the conduct of its business or the ownership of its properties requires such license, permit or qualification, except where the failure to have any such license, permit, consent or qualification would not individually or in the aggregate have a material adverse effect (financial or other) on the Company and its Subsidiaries, taken as a whole. Without limiting the generality of the foregoing, SelectQuote Insurance Services, a Subsidiary of the Company, possesses state insurance licenses or permits in the District of Columbia and every state other than Hawaii and South Dakota, and has national appointments by the insurance carriers identified on SCHEDULE 3.9. 3.10 CONTRACTS; NO VIOLATION OF CONTRACTS, ETC. Attached hereto as SCHEDULE 3.10 is a list of all contracts, agreements, indentures, leases or other instruments to which the Company or any of its Subsidiaries is a party which are material to the business, operations or properties of the Company and its Subsidiaries, taken as a whole, including, without limitation, any shareholder, registration rights or employment agreements to which the Company or any of its Subsidiaries is a party. Each Purchaser may receive a copy of any items listed on SCHEDULE 3.10 upon request. Neither the Company nor any of its Subsidiaries is in default in the performance of any obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness or in any contract, agreement, indenture, lease or other instrument to which the Company or any of its Subsidiaries is a party or by which any of them or any of their respective properties may be bound, except for any such default that would not individually or in the aggregate have a material adverse effect (financial or other) on the Company and its Subsidiaries, taken as a whole. 3.11 LITIGATION. Except as set forth in SCHEDULE 3.11, there is no legal, administrative, arbitral or other proceeding, or any governmental or regulatory investigation pending or, to the knowledge of the Company or any of its Subsidiaries, threatened against the Company or any of its Subsidiaries or any of their respective properties. There are no judgments, decrees or orders enjoining the Company or any of its Subsidiaries in respect of, or the effect of which is to prohibit or limit, any business practice or the acquisition of any property or the conduct of business in any area except those which would not individually or in the aggregate have a material adverse effect (financial or other) on the Company and its Subsidiaries, taken as a whole. 8 3.12 EMPLOYEE BENEFIT PLANS; ERISA. (a) SCHEDULE 3.12 hereto sets forth each plan, agreement, arrangement or commitment which is an employment or consulting agreement, executive or incentive compensation plan, bonus plan, deferred compensation agreement, employee pension, profit sharing, savings or retirement or welfare plan, (including, but not limited to, "employee benefit plans", as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), maintained by the Company or any Subsidiary of the Company for any present or former employees, officers or directors of the Company or its Subsidiaries ("COMPANY PERSONNEL") or with respect to which the Company or any Subsidiary of the Company has liability or makes or has an obligation to make contributions ("EMPLOYEE PLANS"). (b) All contributions or payments due under any Employee Plan have been made. Each Employee Plan by its terms and operation is in compliance in all material respects with all applicable laws (including, but not limited to, ERISA, the Internal Revenue Code of 1986, as amended (the "CODE") and the Age Discrimination in Employment Act of 1967, as amended). (c) Neither the Company nor any Subsidiary of the Company nor any entity that is or was at any time treated as a single employer with the Company or any of its Subsidiaries under Section 414(b), (c), (m) or (o) of the Code has at any time maintained, contributed to or been required to contribute to or had any liability with respect to a plan subject to Title IV of ERISA or Section 412 of the Code (including, without limitation, a multiemployee plan within the meaning of Section 3(37) of ERISA). (d) Neither the Company nor any of its Subsidiaries nor any other person, including any fiduciary, has engaged in any "prohibited transaction" (as defined in Section 4975 of the Code or Section 406 of ERISA), which could subject the Company or any of its Subsidiaries, or any entity the Company or any Subsidiary of the Company has an obligation to indemnify, to any tax or penalty imposed under Section 4975 of the Code or Section 502 of ERISA). (e) None of the events contemplated by this Agreement (either alone or together with any other event) will (i) entitle any Company Personnel to severance pay, unemployment compensation, or other similar payments under any Employee Plan or law, (ii) accelerate the time of payment or vesting or increase the amount of benefits due under any Employee Plan or increase the compensation payable to any Company Personnel or (iii) result in any payments (including parachute payments within the meaning of that term under Section 280G of the Code) under any Employee Plan or law becoming due to any Company Personnel. (f) Each of the Company and its Subsidiaries has complied with the Worker Adjustment and Retraining Notification Act, to the extent applicable. 3.13 TAXES. Each of the Company and its Subsidiaries has timely filed all tax returns required to be filed (or has timely filed for appropriate extensions thereof), which returns are complete and correct in all material respects, and has paid, or has made adequate 9 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 the Company nor any of its Subsidiaries 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. 3.14 BROKERAGE FEES. Neither the Company nor any of its Subsidiaries has taken any action in connection with this Agreement or the Amended Registration Rights Agreement or the transactions contemplated hereby or thereby, which would give rise to any valid claim against the Company or any of its Subsidiaries, or the Purchasers for any brokerage or finder's fee. 3.15 EXEMPT TRANSACTION. Subject to the accuracy of the Purchasers' representations in Section 4.1 of this Agreement, each of the issuance and sale of the shares of Series E Preferred as provided hereunder (the "PURCHASED SHARES") and the issuance of shares of Common Stock upon conversion of such shares of Series E Preferred (the "CONVERTED SHARES") will constitute a transaction exempt from the registration requirements of Section 5 of the Securities Act; and neither the Company nor any affiliate (as defined in Rule 501(b) of Regulation D under the Securities Act) or any agent acting on behalf of the Company or any such affiliate has, directly or indirectly, sold, offered for sale or solicited offers to buy or otherwise negotiated in respect of, any security (as defined in the Securities Act) which is or will be integrated with the issuance of the Purchased Shares or the issuance of the Converted Shares in a manner that would require registration under the Securities Act of the issuance of the Purchased Shares or the Converted Shares. 3.16 INVESTMENT COMPANY ACT. The Company is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the 1940 Act, and the Company will not be required to register as an "investment company" as a result of the transactions contemplated herein. 3.17 NO INVESTMENT ADVISOR AFFILIATION. The Company is not an "investment advisor," "affiliated company" or an "affiliated person" of an "investment advisor" within the meaning of the 1940 Act. 3.18 INTELLECTUAL PROPERTY. (a) No person or entity has any rights to use any of the respective Intellectual Property of the Company or any of its Subsidiaries, except for licenses entered into in the normal course of business. (b) The Company and its Subsidiaries own, are licensed to use, or have the right to use or operate under, all of their respective Intellectual Property. (c) To the knowledge of the Company and its Subsidiaries, the operation of the business of the Company and its Subsidiaries as it is currently conducted does not infringe the Intellectual Property of any other person or entity, and neither the Company nor any of its Subsidiaries has received notice of any claim concerning such infringement. 10 (d) To the knowledge of the Company and its Subsidiaries, no person is infringing or misappropriating any of the respective Intellectual Property of the Company and its Subsidiaries. 3.19 PROPERTIES, LIENS, ETC. Except as reflected in the Company Financial Statements, including 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 the Company or its Subsidiaries, the Company and its Subsidiaries own, free and clear of any liens or other encumbrances, all of their tangible and intangible property, real and personal. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS Each Purchaser, severally and not jointly, represents and warrants, as to itself, to the Company as follows: 4.1 ACQUISITION OF SECURITIES. All of the Series E Preferred to be purchased by the Purchaser hereunder will be acquired for investment for the Purchaser's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and the Purchaser has no present intention of selling, granting any participation in or otherwise distributing any of the Series E Preferred to be purchased. 4.2 NO REGISTRATION. The Purchaser understands and acknowledges that the offer and sale of the Series E Preferred pursuant to this Agreement will not be registered or qualified under the Securities Act or under any other applicable blue sky or state securities law on the grounds that the offering and sale of the Series E Preferred contemplated by this Agreement are exempt from registration and qualification, and that the Company's reliance upon applicable exemptions is predicated in substantial part upon the Purchaser's representations set forth in this Article IV. 4.3 DISPOSITION OF SECURITIES. The Purchaser covenants that in no event will it transfer, assign, convey or otherwise dispose of any Shares unless and until it shall have (i) furnished the Company with an opinion of counsel reasonably satisfactory to the Company, or other evidence reasonably satisfactory to the Company, to the effect that such disposition will not require registration under the Securities Act or has taken appropriate action necessary for compliance with the Securities Act and any other applicable state, local or foreign law has been taken by it and (ii) complied with the other provisions of this Agreement governing the transfer of Shares. 4.4 UNDERSTANDING. The Purchaser understands that if a registration statement under the Securities Act covering the Shares is not in effect when the Purchaser desires to sell the Shares, the Purchaser may be required to hold the Shares for an indeterminate period unless an exemption under the Securities Act and under any applicable blue sky or state securities law is available to the Purchaser. 11 4.5 AUTHORIZATION. The Purchaser has all requisite power and authority to enter into this Agreement and the Amended Registration Rights Agreement and to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Amended Registration Rights Agreement and the performance by the Purchaser of its obligations hereunder and thereunder have been duly and validly authorized by all requisite action on the part of the Purchaser. This Agreement and the Amended Registration Rights Agreement have been duly executed and delivered by the Purchaser and, assuming the due authorization, execution and delivery of this Agreement and the Amended Registration Rights Agreement by the Company, constitute valid and binding agreements of the Purchaser, enforceable in accordance with their terms, subject to the Enforceability Exceptions. 4.6 BROKERAGE FEES. The Purchaser has not taken any action in connection with this Agreement or the Amended Registration Rights Agreement or the transactions contemplated hereby or thereby, which would give rise to any valid claim against the Company or any of its Subsidiaries, or any Purchaser for any brokerage or finder's fee. 4.7 ACCREDITED INVESTOR. The Purchaser acknowledges and represents that it is an "accredited investor" as defined in Rule 501(a) of Regulation D under the Securities Act and has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its prospective investment in the Shares. 4.8 ACCESS TO INFORMATION. The Purchaser has had access to such financial and other information concerning the business and financial condition of the Company as the Purchaser desires for the purposes of making this investment. The Purchaser has had an opportunity to discuss the Company's business, management, and financial affairs with the Company's management and the opportunity to review the Company's facilities and business plan. The Purchaser has also had an opportunity to ask questions of officers of the Company, which questions were answered to its satisfaction. 4.9 NO RELIANCE. The Purchaser has had a full opportunity to consult legal counsel and tax counsel of its choosing, is fully aware of the legal and tax implications of his or its investment in the Company and is not placing reliance on the Company or its counsel with respect to any legal and/or tax advice. ARTICLE V COMPANY COVENANTS The Company hereby covenants and agrees as follows: 5.1 FINANCIAL AND OTHER INFORMATION. Until the Company shall register any of its securities pursuant to Section 12 of the Exchange Act or becomes subject to Section 15(d) of the Exchange Act, the Company will furnish the following information to each Purchaser so long as such Purchaser and its affiliates beneficially own any Shares: (a) As soon as practicable after the end of each fiscal year, and in any event within 90 days thereafter, an audited consolidated balance sheet as of the end of such fiscal 12 year and the related audited consolidated statements of operations, changes in shareholders' equity and cash flows from operations for the year then ended, including the related notes, of the Company and its Subsidiaries. Such financial statements shall be prepared from the books and records of the Company and its Subsidiaries and present fairly the consolidated financial position and results of operations of the Company and its Subsidiaries as of the respective dates thereof or for the respective periods covered thereby in accordance with GAAP consistently applied and shall be accompanied by the report thereon of the Company's independent public accountant. (b) As soon as practicable after the end of each of the first three fiscal quarters of each fiscal year, and in any event within 60 days thereafter, an unaudited consolidated balance sheet as of the end of the fiscal quarter then ended and the related unaudited consolidated statements of operations, shareholders' equity and cash flows from operations of the Company for the quarter then ended and for the portion of the fiscal year through such date. The Company shall use its best efforts to prepare such financial statements in accordance with GAAP consistently applied, subject to normal and recurring year end adjustments and except that the notes thereto may not be included. (c) Such additional information as may be reasonably requested. 5.2 RIGHTS OF PARTICIPATION. (a) The Company hereby grants to each Purchaser and each other holder of Series E Preferred (each of the Purchasers and each such holder, a "HOLDER") the right to purchase such Holder's pro rata share, as determined based on such Holder's percentage of the Company's issued and outstanding Common Stock (on an as converted basis) ("PRO RATA SHARE"), of any New Securities (as hereinafter defined) which the Company may from time to time propose to issue. Such right to purchase New Securities shall terminate upon (i) a Qualifying Public Offering or (ii) the closing date of an acquisition of the Company by another entity by way of merger or consolidation (other than a merger or consolidation in which the holders of voting securities of the Company 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 shares of capital stock of the Company for securities or consideration issued, or caused to be issued, by the acquiring corporation or its subsidiary (a "CHANGE IN CONTROL"). (b) "NEW SECURITIES" shall mean any shares of capital stock of the Company, or options, warrants or other securities of the Company that are convertible into or exchangeable or exercisable for capital stock of the Company, that are issued by the Company; PROVIDED, HOWEVER, that "New Securities" shall not include (i) securities offered to the public pursuant to a Qualifying Public Offering, (ii) securities issued for the acquisition of another corporation or other entity by the Company pursuant to a stock purchase, merger or similar business combination, purchase of substantially all of such other entity's assets, or other reorganization whereby the Company will own not less than fifty-one percent (51%) of the voting power of such entity, (iii) any securities issued as a dividend or upon a 13 recapitalization or stock split of existing securities, (iv) any stock options and other securities issued to directors, officers and employees of the Company or any other Subsidiary of the Company as compensation pursuant to an officer, director or employee stock option plan or similar plan approved by the Board of Directors of the Company, and any shares issued pursuant to the exercise of such options, (v) Common Stock issued upon conversion of Existing Preferred Stock or Series E Preferred and (vi) any Shares. (c) In the event the Company receives a bona fide written offer to purchase New Securities, which offer it intends to accept, or in the event the Company otherwise intends to issue New Securities, it shall give each Holder written notice of its intention. Such notice shall describe the type of New Securities and the terms upon which the Company proposes to issue the same. Each Holder shall have 20 days from the date of receipt of any such notice to agree to acquire such Holder's Pro Rata Share of such New Securities, upon the terms specified in the notice by giving written notice to the Company. The closing of the purchase of New Securities by an acquiring Holder shall take place on the date of the closing of the sale of New Securities described in the Company's notice. If the sale described in the Company's notice does not occur, then each Holder's right to purchase its Pro Rata Share of the New Securities identified in such notice shall terminate. Such termination shall not affect each Holder's subsequent right to purchase New Securities under this Section 5.2 pursuant to a subsequent Company notice. Each Holder's Pro Rata Share shall be reduced proportionately if the Company sells less than the aggregate number of shares identified in the Company's notice. (d) The Company shall have 90 days after its delivery of the notice referred in subsection (c) to sell or enter into an agreement (pursuant to which the sale of New Securities covered thereby shall be closed, if at all, within 90 days from the date of said agreement) to sell the New Securities, at a price and upon terms no more favorable to the purchaser thereof than specified in the Company's notice. In the event the Company has not sold the New Securities within said 90-day period or, if later, within 90 days from the date of an agreement entered into within said 90-day period or, if later, within 10 days of receipt of all governmental approvals required in connection with the sale of such New Securities pursuant to such agreement, the Company shall not thereafter issue or sell any New Securities without first offering such New Securities to the Holder's in the manner provided in this Section 5.2. (e) High Ridge Capital Partners II, L.P. hereby consents to the issuance and sale of the Series E Preferred as contemplated by this Agreement, and waives any right it might have to purchase its pro rata share of the Series E Preferred issued and sold under this Agreement, which right arises out of that certain Investment Agreement, dated as of December 27, 1999, between it and the Company, except to the extent of its purchase of shares of Series E Preferred as specifically set forth in this Agreement. 14 ARTICLE VI SECURITIES RESTRICTIONS 6.1 RESTRICTIONS ON TRANSFER. (a) No sale, transfer, assignment, gift, pledge, creation of a security interest in, mortgage, hypothecation, encumbrance, placing in trust or other disposition of any Shares by any Purchaser shall be made unless (subject to Section 9.11) each person to whom such disposition is proposed to be made shall have executed and delivered to the Company a written instrument, in form and substance reasonably satisfactory to the Company, evidencing the agreement of such person to become bound by the provisions of this Article VI and Article VIII hereof, effective upon the acquisition by such person of all or any part of the Shares (or any interest therein) which are the subject of such disposition. (b) In addition to the other provisions contained herein restricting or governing the transfer of Shares, each Purchaser agrees that the Shares may not be sold, transferred or disposed of, and the Company will be entitled to refuse to register any transfer of the Shares, unless (i) such sale, transfer or disposition is effected pursuant to an effective registration statement under the Securities Act and in compliance with all applicable state laws or (ii) an opinion of counsel reasonably satisfactory to the Company, or other evidence reasonably satisfactory to the Company, to the effect that such sale, transfer or disposition without registration may be effected without violation of the Securities Act or any applicable state laws shall have been delivered to the Company. 6.2 LEGENDS. (a) All certificates representing the Shares shall bear the following securities law legend unless and until the resale of the Shares pursuant to an effective Registration Statement or until the Shares may be sold under Rule 144 under the Securities Act without restrictions: "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT." (b) The legend set forth in Section 6.2(a) shall be removed and the Company shall issue a certificate without such legend to the holder of the Purchased Shares or Converted Shares, as the case may be, upon which it is stamped (and no legend shall be placed on any Purchased Shares or Converted Shares relating thereto), if, unless otherwise required by state securities laws, the legend is no longer required to identify the Converted Shares as "restricted securities" within the meaning of Rule 144. 15 ARTICLE VII CONDITIONS OF CLOSING OF PURCHASE AND SALE OF THE SERIES E PREFERRED 7.1 CONDITIONS TO THE PURCHASERS' OBLIGATIONS. The obligations of each Purchaser to purchase the Series E Preferred and to perform at the Closing its other obligations hereunder related to the purchase and sale of the Series E Preferred are subject to the fulfillment on or prior to the Closing Date of the following conditions: (a) REPRESENTATIONS AND WARRANTIES CORRECT; PERFORMANCE OF OBLIGATIONS. The representations and warranties made by the Company in Article III hereof shall be true and correct as of the Closing Date as if made on and as of the Closing Date; and on or prior to the Closing Date the Company shall have performed all obligations and satisfied all conditions herein required to be performed or satisfied by it on or prior to the Closing Date. (b) AUDITOR'S REPORT. The Company shall have delivered to the Purchaser copies of the audit opinion of Deloitte & Touche LLP, independent public accountants, with respect to the June 30, 1999 SQIS Financial Statements, which opinions shall not contain a going concern qualification and shall otherwise be in form and substance reasonably acceptable to the Purchaser. (c) CONSENTS AND WAIVERS. The Company shall have obtained any and all consents, permits and waivers necessary or appropriate to be obtained by the Company for consummation of the transactions contemplated by this Agreement and the Amended Registration Rights Agreement. (d) LEGAL INVESTMENT. At the time of the Closing, the purchase and sale of the Series E Preferred hereunder shall be legally permitted by all laws and regulations to which the Company and the Purchasers are subject and all filings by the Company necessary under state securities laws shall have been made. (e) COMPLIANCE CERTIFICATE. The Company shall have delivered a certificate, executed by the Chairman, President or any Vice President of the Company, dated the Closing Date, certifying as to the fulfillment of the conditions specified in Sections 7.1(a), (c) and (d) (as it applies to the Company). (f) EVIDENCE OF CORPORATE ACTION. The Company shall have delivered a certificate of the Secretary or any Assistant Secretary of the Company, dated the Closing Date, certifying as to a complete and correct copy of the resolutions of the Board of Directors of the Company (i) approving the form and provisions of, and authorizing the execution and delivery of and consummation of the transactions contemplated by, this Agreement and the Amended Registration Rights Agreement, (ii) approving the execution, acknowledgment and filing with the Delaware Secretary of State of the Restated Certificate of Incorporation and (iii) authorizing the issuance and sale of the Series E Preferred at the Price Per Share. 16 (g) DELIVERY OF SHARE CERTIFICATES. The Company shall deliver to the Purchaser certificates for the Series E Preferred described in Section 1.1 hereto. (h) LEGAL OPINION. The Company shall have delivered the opinion of McCutchen, Doyle, Brown & Enersen, LLP substantially in the form set forth in EXHIBIT 3 hereto. (i) PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in connection with the transactions contemplated by this Agreement and the Amended and Restated Registration Rights Agreement and all documents and instruments incident to such transactions shall be reasonably satisfactory in substance and form to the Purchaser and the Purchaser's counsel. (j) RESTATED CERTIFICATE OF INCORPORATION. The Restated Certificate of Incorporation shall have been duly exercised and acknowledged and properly filed with the Delaware Secretary of State. The Company shall have delivered to the Purchaser facsimile evidence that the Restated Certificate of Incorporation has been so filed. (k) AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT. The Amended and Restated Registration Rights Agreement shall have been duly executed by the Company, the Purchasers and a sufficient number of the Investors (as defined in the Existing Registration Rights Agreement) so as to cause the Amended and Restated Registration Rights Agreement to amend and restate the Existing Registration Rights Agreement and to be in full force and effect. (l) DIRECTOR. Mr. Randall J. Wolf shall have been elected as a member of the Board of Directors of the Company, as the Series E Director, effective upon the Closing. (m) EMPLOYEE AGREEMENT REGARDING PROPRIETARY INFORMATION AND INVENTIONS. Each officer and key employee of the Company shall have entered into an Employee Agreement Regarding Proprietary Information and Inventions in the form attached as EXHIBIT 4. 7.2 CONDITIONS TO THE COMPANY'S OBLIGATIONS. The obligations of the Company to issue and sell the Series E Preferred and to perform at the Closing its other obligations hereunder related to the purchase and sale of the Series E Preferred are subject to the fulfillment on or prior to the Closing Date of the following conditions: (a) REPRESENTATIONS AND WARRANTIES CORRECT. The representations and warranties made by the Purchasers in Article IV hereof shall be true and correct as of the Closing Date as if made on and as of the Closing Date. (b) LEGAL INVESTMENT. At the time of the Closing, the purchase and sale of the Series E Preferred hereunder shall be legally permitted by all laws and regulations to which the Company and the Purchasers are subject. 17 (c) PAYMENT BY PURCHASERS. The payment by the Purchasers required by Section 2.2(b) hereof shall have been made by wire transfer of immediately available funds to the Company's account designated by the Company. ARTICLE VIII ADDITIONAL AGREEMENTS 8.1 PUT RIGHTS OF THE PURCHASERS. (a) Each Purchaser shall have the right, upon at least 30 days prior written notice given prior to the expiration of the right as set forth in Section 8.1(b), to cause the Company to purchase any of the Shares from such Purchaser, for a per share amount equal to the Liquidation Amount, determined as of the date of such purchase, in the event of: (i) a sale of assets representing 50% or more of the total value of all assets of the Company determined on a consolidated basis, in any single transaction or series of related transactions or any sale, merger, reorganization or other transaction or series of related transactions that results in the Company beneficially owning less than 50.1% of the voting stock of any Significant Subsidiary; (ii) a Change in Control; (iii) two or more of the following officers of the Company no longer being employed by the Company: Charan J. Singh, Steven H. Gerber, Michael L. Feroah and David L. Paulsen; (iv) a repurchase by the Company of any of its equity securities; (v) the incurrence of indebtedness for money borrowed by the Company exceeding $5,000,000 in aggregate principal amount; (vi) a material Related Party Transaction, other than such a transaction negotiated on an arm's-length basis; or (vii) the sale or issuance by the Company of Common Stock for less than $5.15 per share (subject to appropriate adjustment in the event of a stock split, reverse stock split, stock dividend, subdivision, reclassification, combination, exchange, recapitalization or other similar transaction) or any securities convertible into or exchangeable for Common Stock for an amount which, when converted or exchanged, as the case may be, results in the acquisition of Common Stock for an amount which is less than $5.15 per share (subject to appropriate adjustment in the event of a stock split, reverse stock split, stock dividend, subdivision, reclassification, combination, exchange, recapitalization or other similar transaction). 18 (b) The put right set forth in Section 8.1(a) shall expire upon the closing of a Qualifying Public Offering. 8.2 BOARD REPRESENTATION. (a) The Company and the Purchasers shall take all reasonable action within their respective powers to cause one person named by the Purchasers to be appointed a member of the Board of Directors of the Company (the "SERIES E DIRECTOR") to serve for a period commencing on the Closing Date and ending on the third anniversary of the Closing Date, PROVIDED, that the Purchasers' right to appoint a member to the Board of Directors of the Company shall be extended to the Mandatory Redemption Date if the Company does not complete a Qualifying Public Offering. At such time as the Purchasers and their affiliates no longer own any Shares, the Purchasers shall cause the Series E Director to resign from the Company's Board of Directors. The reasonable actions required of the Company and the Purchasers in this Section 8.2 shall include, without limitation, to the extent within their respective powers, the nomination of the Series E Director, the execution of written consents, the calling of special meetings, the removal of directors, the filling of vacancies on the Board of Directors and the waiving of notice. (b) The Series E Director shall receive the same compensation and benefits as those paid by the Company to other non-employee directors. 8.3 DIRECTORS' AND OFFICERS' INSURANCE. The Company has obtained and shall use its reasonable best efforts to maintain in effect, directors' and officers' liability insurance covering the Series E Director on terms reasonably acceptable to the Purchasers during the period in which the Series E Director serves on the Company's Board of Directors. 8.4 INFORMATION CONFIDENTIAL. Each Purchaser acknowledges that the information received by it pursuant hereto is confidential and for its use only. Such Purchaser will not use such information in violation of the Securities Exchange Act or reproduce, disclose or disseminate such information to any other person (other than its employees, agents or advisors having a need to know the contents of such information), except in connection with the exercise of rights under this Agreement, unless the Company has made such information available to the public generally or such Purchaser is required to disclose such information by law or a governmental body. 8.5 SELECTION OF INVESTMENT BANKERS AND APPRAISERS. So long as any Purchaser owns shares of Series E Preferred, the choice of a firm of independent investment bankers or qualified appraisers to determine the value of assets or of the Series E Preferred under Section 3.3 of the Restated Certificate of Incorporation shall be made jointly by the Company and the Purchasers; PROVIDED, that if the Company and such Purchasers are unable to agree, then such firm shall be chosen by the American Arbitration Association. 19 ARTICLE IX MISCELLANEOUS 9.1 MODIFICATIONS, AMENDMENTS AND WAIVERS. Any modification, amendment or waiver hereof shall not be effective unless in writing and signed by the parties hereto. 9.2 SURVIVAL. The representations and warranties made herein shall survive the Closing of the purchase and sale of the Series E Preferred for a period of two years. The covenants and agreements made herein shall survive the Closing in accordance with their terms. 9.3 SUCCESSORS AND ASSIGNS. Subject to Section 9.11, the provisions of this Agreement which bind, or are for the benefit of, the Purchasers also bind, or are for the benefit of, and enforceable by, any subsequent holders of Shares (except any subsequent holder who acquires any such Shares in a registered public offering); PROVIDED, HOWEVER, that no provisions of this Agreement shall be for the benefit of, or enforceable by, any subsequent holders unless and until such third-party transferee has executed and delivered to the Company an Additional Party Signature Page in the form attached hereto as EXHIBIT 5 and thereby becomes bound by those terms of this Agreement by which its transferor is subject. 9.4 ENTIRE AGREEMENT. This Agreement and any other documents delivered pursuant hereto constitute the full and entire understanding and agreement among the parties with regard to the subject matter hereof and thereof. 9.5 NOTICES. All notices and other communication required or permitted hereunder shall be effective upon receipt and shall be in writing and delivered personally, by confirmed facsimile transmission, by overnight delivery service or by mail, postage prepaid, addressed as follows: (a) if to the Company, to: SelectQuote, Inc. 595 Market Street, 6th Floor San Francisco, California 94105 Attention: Charan J. Singh, President Telephone: (415) 543-7338 x2211 Telecopy: (800) 436-7000 with a copy to: McCutchen, Doyle, Brown & Enersen, LLP 3150 Porter Drive Palo Alto, California 94304 Attention: Alan B. Kalin, Esq. Telephone: (650) 849-4400 20 Telecopy: (650) 849-4800 (b) if to High Ridge, to: High Ridge Capital, LLC 20 Liberty Street Chester, Connecticut 06412 Attention: Mr. Steven J. Tynan Telephone: (860) 526-5213 Telecopy: (860) 526-5870 and High Ridge Capital, LLC 672 Oenoke Ridge Road New Canaan, Connecticut 06840 Attention: Mr. James L. Zech Telephone: (203) 972-3982 Telecopy: (203) 972-3986 with a copy to: Dewey Ballantine LLP 1301 Avenue of the Americas New York, New York 10019 Attention: James A. FitzPatrick, Jr., Esq. Telephone: (212) 259-6220 Telecopy: (212) 259-6333 (c) if to the Marsh Parties, to: Marsh & McLennan Capital, Inc. 20 Horseneck Lane Greenwich, Connecticut 06830 Attention: David Wermuth, Esq. Telephone: (203) 8620-2924 Telecopy: (203) 862-2925 with a copy to: Cleary, Gottlieb, Steen & Hamilton One Liberty Plaza New York, New York 10006 Attention: David Leinwand, Esq. Telephone: (212) 225-2000 21 Telecopy: (212) 225-3999 Either party may by notice given in accordance with this Section 9.5 to the other party designate another address or person for receipt of notice hereunder. 9.6 SEVERABILITY. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. If any provision of this Agreement, or the application thereof to any Person or any circumstance, is invalid or unenforceable, (i) a suitable and equitable provision shall be substituted therefor in order to carry out, so far as may be valid and enforceable, the intent and purpose of such invalid or unenforceable provision and (ii) the remainder of this Agreement and the application of such provision to other Persons or circumstances shall not be affected by such invalidity or unenforceability. 9.7 EXPENSES. (a) The Company will be responsible for paying its own attorneys' and other fees and expenses and disbursements incurred in connection with the preparation, negotiation and execution of this Agreement ("EXPENSES"). The Company shall also pay the fees and disbursements of one firm of attorneys for Purchasers in connection with the preparation, negotiation and execution of this Agreement in an amount not exceeding $35,000. (b) Notwithstanding subsection (a) of this Section 9.7, in the event that the transactions contemplated herein are not consummated, each party shall be responsible for paying its own Expenses; provided, that if failure to consummate such transactions is a result of the Company's refusal to proceed when any Purchaser has fulfilled or agreed to fulfill its obligations hereunder, then the Company shall pay all of such Purchaser's Expenses, including legal fees and expenses. 9.8 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. 9.9 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. 9.10 CONSTRUCTION OF AGREEMENT. The language in all parts of this Agreement shall in all cases be construed according to its fair meaning, and not strictly for or against any party hereto. 9.11 ASSIGNMENT; BINDING EFFECT. This Agreement may not be assigned or delegated, in whole or in part, by any party hereto without the prior written consent of other party hereto, which consent shall not be unreasonably withheld. Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. 22 9.12 NO THIRD PARTY BENEFICIARIES. This Agreement is for the benefit of the parties hereto and is not intended to confer upon any other person any rights or remedies hereunder. 9.13 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the internal laws of the State of California applicable to contracts made and to be performed therein. 23 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. SELECTQUOTE, INC. By: -------------------------------- Name: Title: HIGH RIDGE CAPITAL PARTNERS II, L.P. By: HIGH RIDGE GP II, LLC, as General Partner By: LIBERTY STREET PARTNERS LP, as Member By: LIBERTY STREET CORP., as General Partner By: -------------------------------- Name: Steven J. Tynan Title: President MARSH & MCLENNAN CAPITAL TECHNOLOGY VENTURE FUND, L.P. By: MARSH & MCLENNAN CAPITAL TECHNOLOGY By: MARSH & MCLENNAN GP II, Inc. By: -------------------------------- Name: ------------------------------ Title: ----------------------------- 24 MARSH & MCLENNAN CAPITAL TECHNOLOGY PROFESSIONALS VENTURE FUND, L.P. By: MARSH & MCLENNAN GP II, INC. By: ----------------------------- Name: ----------------------------- Title: ----------------------------- TRIDENT II, L.P. By: TRIDENT CAPITAL II, L.P. By: MARSH & MCLENNAN GP I, Inc. By: ----------------------------- Name: ----------------------------- Title: ----------------------------- MARSH & MCLENNAN EMPLOYEES' SECURITIES COMPANY, L.P. By: MARSH & MCLENNAN GP I, Inc. By: ----------------------------- Name: ----------------------------- Title: ----------------------------- MARSH & MCLENNAN CAPITAL PROFESSIONALS FUND, L.P. By: MARSH & MCLENNAN GP I, Inc. By: ----------------------------- Name: ----------------------------- Title: ----------------------------- 25 MCCUTCHEN, DOYLE, BROWN & ENERSEN, LLP By: ----------------------------- Name: ------------------------- Title: ------------------------ 26 SCHEDULE 1 PURCHASERS
- ----------------------------------------------- ---------------------------------- ----------------------------------- NAME NUMBER OF SHARES AGGREGATE AMOUNT - ----------------------------------------------- ---------------------------------- ----------------------------------- High Ridge Capital Partners II, L.P. 460,513 $2,371,642.00 - ----------------------------------------------- ---------------------------------- ----------------------------------- Marsh & McLennan Capital Technology Venture 771,923 $3,975,403.45 Fund, L.P. - ----------------------------------------------- ---------------------------------- ----------------------------------- Marsh & McLennan Capital Technology 299,357 $1,541,688.55 Professionals Venture Fund, L.P. - ----------------------------------------------- ---------------------------------- ----------------------------------- Trident II, L.P. 472,968 $2,435,785.20 - ----------------------------------------------- ---------------------------------- ----------------------------------- Marsh & McLennan Employees' Securities 12,759 $65,708.85 Company, L.P. - ----------------------------------------------- ---------------------------------- ----------------------------------- Marsh & McLennan Capital Professionals Fund, 14,617 $75,277.55 L.P. - ----------------------------------------------- ---------------------------------- ----------------------------------- McCutchen, Doyle, Brown & Enersen, LLP 9,709 $50,001.35 - ----------------------------------------------- ---------------------------------- ----------------------------------- TOTAL 2,041,846 $10,515,506.95 - ----------------------------------------------- ---------------------------------- -----------------------------------
27 REVISED SCHEDULE 1 TO INVESTMENT AGREEMENT Zebu, a Delaware corporation (the "COMPANY"), and 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, and Marsh & McLennan Capital Professionals Fund, L.P., a Cayman Islands exempted limited partnership (collectively, the "MARSH PARTIES") are each a party, among others, to that certain Investment Agreement, dated February 29, 2000, (the "INVESTMENT AGREEMENT"). Capitalized terms used but not defined herein shall have the meanings set forth in the Investment Agreement. The Company and the Marsh Parties hereby agree that: 1. The shares of Series E Preferred Stock to be purchased by the Marsh Parties as set forth in Schedule 1 to the Investment Agreement shall be reallocated among the Marsh Parties as follows:
- ----------------------------------------------- ---------------------------------- ----------------------------------- NAME NUMBER OF SHARES AGGREGATE AMOUNT - ----------------------------------------------- ---------------------------------- ----------------------------------- Marsh & McLennan Capital Technology Venture 773,166 $3,981,804.90 Fund, L.P. - ----------------------------------------------- ---------------------------------- ----------------------------------- Marsh & McLennan Capital Technology 298,891 $1,539,288.65 Professionals Venture Fund, L.P. - ----------------------------------------------- ---------------------------------- ----------------------------------- Trident II, L.P. 472,234 $2,432,005.10 - ----------------------------------------------- ---------------------------------- ----------------------------------- Marsh & McLennan Employees' Securities 12,793 $65,605.85 Company, L.P. - ----------------------------------------------- ---------------------------------- ----------------------------------- Marsh & McLennan Capital Professionals Fund, 14,594 $75,159.10 L.P. - ----------------------------------------------- ---------------------------------- -----------------------------------
2. The foregoing reallocations shall not affect (a) the Price Per Share paid by the Marsh Parties for such shares of Series E Preferred Stock, (b) the total number of shares of Series E Preferred Stock purchased by the Marsh Parties or (c) the Price Per Share paid for or the total number of shares of Series E Preferred Stock purchased by any other party to the Investment Agreement. IN WITNESS WHEREOF, the parties hereto have executed this instrument as of March 21, 2000. COMPANY: ZEBU, a Delaware corporation By: /s/ Charan Singh, Chief Executive Officer MARSH PARTIES MARSH & MCLENNAN CAPITAL MARSH & MCLENNAN EMPLOYEES' PROFESSIONALS FUND, L.P. SECURITIES COMPANY, L.P. By: Marsh & McLennan Capital, Inc. By: Marsh & McLennan Capital, Inc. By: /s/ Randall A. Golden By: /s/ Randall A. Golden TRIDENT II, L.P. MARSH & MCLENNAN CAPITAL TECHNICAL VENTURE FUND, L.P. By: Marsh & McLennan Capital, Inc. By: Marsh & McLennan Capital, Inc. By: /s/ Randall A. Golden By: /s/ Randall A. Golden MARSH & MCLENNAN CAPITAL TECHNOLOGY PROFESSIONALS VENTURE FUND, L.P. By: Marsh & McLennan Capital, Inc. By: /s/ Randall A. Golden 2 EX-10.14 4 EXHIBIT 10.14 Exhibit 10.14 CREDIT AGREEMENT BY AND BETWEEN LASALLE BANK NATIONAL ASSOCIATION AND SELECTQUOTE INSURANCE SERVICES FEBRUARY 8, 2000 CREDIT AGREEMENT This Credit Agreement is made as of February 8, 2000 by and between LASALLE BANK NATIONAL ASSOCIATION, a national banking association with its principal offices located in Chicago, Illinois, ("LENDER"), and SELECTQUOTE INSURANCE SERVICES, a California corporation with its principal offices located in San Francisco, California ("BORROWER"). WITNESSETH: WHEREAS, the Borrower desires to borrow from the Lender certain amounts for the purposes set forth in Section 8.A.8 below; WHEREAS, the Lender is agreeable to extending said credit facility provided that said credit facility is secured and is on the terms and conditions provided herein; WHEREAS, certain financial covenants of the Borrower hereinafter set forth relate to the financial condition and results of Borrower, and the financial condition and results of Borrower are a material inducement to the Lender's willingness to enter into this Credit Agreement and extend the financial accommodations referred to herein; WHEREAS, as a condition for extending such financial accommodations, the Lender requires that Borrower enter into this Credit Agreement establishing the terms and conditions thereof; NOW THEREFORE, for and in consideration of the foregoing premises and the mutual agreements contained herein, the parties hereto, intending to be legally bound, do hereby agree as follows: SECTION 1. DEFINITIONS. Section 1.A. In addition to the terms that are elsewhere defined herein, when used herein, the following terms have the meanings as set forth below: "ACCOUNTS," "ACCOUNT DEBTOR," "CHATTEL PAPER," "DOCUMENTS," "EQUIPMENT," "FIXTURES," "GENERAL Intangibles," "GOODS," "INSTRUMENTS," "INVENTORY", "SECURITIES", "SECURITIES ENTITLEMENTS", "SECURITIES ACCOUNTS" and "FINANCIAL ASSETS" shall have the meanings assigned to the respective terms in the Security Agreement. "ACT" or "ACTS" means, collectively, the Laws of any state or governmental subdivision thereof which apply to the conduct of business by the Borrower. "APPLICABLE LIBOR MARGIN," for purposes of determining the interest rate on a LIBOR Loan, means initially 2.75%. "ADJUSTED LIBOR" is defined in Section 3.A hereof. "AFFILIATE" of any Person means any other Person that directly or indirectly, through one or more intermediaries, controls or is controlled by or is under common control with such Person and includes, without limitation, each shareholder, director and any Subsidiaries of such Person. For purposes of this definition, "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise. For purposes of this Agreement, all Subsidiaries of Borrower are Affiliates of Borrower. "AGREEMENT" means, collectively, this Credit Agreement, together with any and all exhibits, appendices, schedules and amendments hereto and modifications, renewals, extensions, restatements and substitutions thereof and therefor. "AUTHORIZED OFFICER" means one or more officers of the Borrower duly authorized (and so certified to the Lender by the corporate Secretary of the Borrower involved pursuant to a certificate of authority and incumbency from time to time satisfactory to the Lender ), acting alone, to request Loans hereunder and execute and deliver documents, instruments, agreements, reports, statements and certificates in connection herewith. "BORROWING" means the total of Loans made by Lender to the Borrower on a single date and for a single Interest Period. "BORROWING BASE" means an amount which is equal to 70% of Eligible Accounts (less all discounts, allowances and credits granted by the Borrower to the applicable Account Debtors, and less all contra accounts). "BORROWING BASE CERTIFICATE" means a certificate (in form satisfactory to the Lender) of the treasurer or authorized chief financial officer of Borrower as to the Borrowing Base as of the date of such certificate and certifying and representing that all Accounts of the Borrower identified thereon as being Eligible Accounts meet all of the requirements and standards therefor. "BORROWING NOTICE" means the request of the Borrower for Loans as further described in Section 3.C hereof. "BUSINESS DAY" means any day other than a Saturday, Sunday or other day on which banks are authorized or required to be closed in Chicago, Illinois, and with respect to LIBOR Loans, a day on which dealings in United States Dollars may be carried on by the Lender or the Reference Bank in the London interbank eurodollar market. "CAPITAL EXPENDITURES" means all payments, expenditures and the obligations incurred by a Person for the purchase, creation, improvement, replacement, substitution, addition, renovation or lease of a fixed or capital asset with a useful life of more than one year and which are required to be classified or accounted for as a capital asset or capital lease on the balance sheet or statement of cash flow of such Person, as determined in accordance with GAAP, including equipment which is purchased simultaneously with the trade-in of existing equipment owned by such Person to the extent of the gross amount of the purchase price of such purchased equipment less the book value of the equipment being traded in at such time, but excluding (a) expenditures made in connection with the replacement or restoration of assets, to the extent such replacement or restoration is financed out of (i) insurance proceeds paid on account of the loss of or damage to the assets so replaced or restored or (ii) awards or compensation arising from the taking by condemnation or eminent domain of the assets so replaced, (b) any portion of capital lease obligations that is not required to be capitalized on such Person's balance sheet, and (c) interest capitalized during construction. "CLOSING DATE" means the later of the date hereof or the date on which all of the conditions precedent to the Loans set forth in Section 6 hereof have been fully satisfied. "COLLATERAL" means all "Collateral" (or other property which is subjected to a Lien in the relevant operative document) as defined in the Security Agreement, the Stock Pledge Agreement, the Intellectual Property Assignment, the Subordination Agreements (all as amended or supplemented), and shall also include any and all other property, tangible and intangible, on or in which a Lien has been granted to the Lender, pursuant to any other Loan Documents. "COMMITMENT" means the Revolving Commitment. "CONSOLIDATED" means the consolidation of accounts in accordance with GAAP, including principles of consolidation. "CONTINGENT LIABILITY" or "CONTINGENT LIABILITIES" means any agreement, undertaking or arrangement by which any Person (i) guarantees, endorses or otherwise becomes or is contingently liable upon (by direct or indirect agreement, contingent or otherwise, to provide funds for payment, to supply funds to, or otherwise to invest in, a debtor, or otherwise to assure a creditor against loss) the debt, obligation or other liability of any other Person (other than by endorsement of instruments G18 in the course of collection), or (ii) guarantees the payment of dividends or other distributions upon the shares of any other Person, or (iii) undertakes or agrees (contingently or otherwise) (a) to purchase, repurchase, or otherwise acquire any Debt, obligation or liability or any security therefor, or (b) to provide funds for the payment or discharge thereof (whether in the form of loans, advances, stock purchases, capital contributions or otherwise), or (c) to maintain solvency, assets, level of income or other financial condition, or (d) to make payment other than for values received. The amount of any Person's obligation under any Contingent Liability shall (subject to any limitation set forth herein) be deemed to be the outstanding principal amount (or maximum permitted principal amount, if larger) of the debt, obligation or other liability guaranteed or supported thereby. "DEBT" of any Person means all items of indebtedness, obligation or liability of any kind or nature, whether matured or unmatured, liquidated or unliquidated, direct or contingent, joint or several, of such Person, including without limitation and without duplication: Contingent Liabilities of such Person; any indebtedness secured by a Lien on or payable out of the proceeds 4 or production from any property of such Person regardless of whether such indebtedness has been assumed by such Person; obligations representing the deferred purchase price of property; obligations which are evidenced by notes, acceptances, or other instruments; capitalized lease obligations; and obligations in respect of letters of credit. "DEFAULT" means any event which, with the giving of notice or the passage of time or both, would constitute, become or mature into an Event of Default. "DEFAULT RATE" is as defined at Section 3.G hereof. "EBITDA" means, for any period, on a Consolidated basis for the Borrower, the sum for such period of (a) Net Income, PLUS (b) depreciation and amortization expense deducted in the determination of such Net Income, PLUS (c) Interest Expense deducted in the determination of such Net Income, PLUS (d) federal and state income taxes as determined in accordance with GAAP and deducted in the determination of such Net Income, and MINUS (e) any items of gain which are extraordinary items as defined in GAAP to the extent reflected in the determination of such Net Income. "ELIGIBLE ACCOUNTS" are Accounts of the Borrower which meet all of the following requirements, as determined by the Lender in its absolute discretion: (a) such Accounts represent completed and bona fide transactions which arise from arm's length transactions between unrelated parties who are not Affiliates in the ordinary course of the Borrower's business; (b) such Accounts shall not (i) be unpaid more than 90 days from the billing date of the original invoice or (ii) be payable by an Account Debtor more than 25% of whose Accounts are otherwise ineligible; (c) the services which gave rise to such Accounts were fully rendered by a Borrower to the Account Debtor on the Borrower's customary basis, with no part of such services or the fee therefor being disputed; (d) such Accounts are not evidenced in whole or in part by a judgment, Chattel Paper or Instrument; (e) Account Debtors with respect to such Accounts have not made an assignment for the benefit of creditors and are not insolvent or the subject of any bankruptcy, reorganization, liquidation or insolvency proceedings of any kind or of any other proceeding or action, threatened or pending, which might have a material adverse affect on the assets or business of such Account Debtor; (f) Account Debtors with respect to such Accounts are not the governments of the United States of America or any agency, department or instrumentality thereof, are not located outside of the United States of America and are not officers, directors, employees, a Subsidiary or Affiliate of the Borrower; (g) such Accounts are valid, legally enforceable obligations of the applicable Account Debtors and are not subject to any offset or counterclaim based on any then existing or asserted claim or other existing or asserted defense or dispute on the part of such Account Debtors; (h) such Accounts are evidenced by an invoice or other documentation in form acceptable to the Lender; (i) such Accounts are assignable and subject to a valid and first perfected security interest in favor of the Lender, free of any and all other security interests, liens, claims or encumbrances; and (j) such Accounts are not determined by the Lender to be ineligible for any other reason generally accepted in the banking business as a reason for ineligibility. No Accounts of SelectTech prior to its merger into Borrower or Accounts arising out of the sale of software or software services by Borrower are includable in Eligible Accounts. 5 "EMPLOYEE PLAN" means any pension, retirement, disability, medical, dental or other health plan, life insurance or other death benefit plan, profit sharing, deferred compensation, stock option, bonus or other incentive plan, vacation benefit plan, severance plan, or other employee benefit plan or arrangement, including, without limitation, those pension, profit-sharing and retirement plans of the Borrower described from time to time in the Financial Statements and any pension plan, welfare plan, Defined Benefit Pension Plans (as defined in ERISA) or any multi-employer plan, maintained or administered by the Borrower or any Affiliate of the Borrower, to which the Borrower or any Affiliate of the Borrower is a party or may have any liability or by which the Borrower or any Affiliate is bound. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, together with all rules and regulations issued thereunder or in connection therewith. "EURODOLLAR RESERVE PERCENTAGE" is defined in Section 3.A hereof. "EVENT OF DEFAULT" means an event or occurrence described in Section 9 of this Agreement. "EXPIRATION DATE" is defined at Section 2.A.1 hereof. "FINANCIAL ASSURANCE" means the financial assurance (whether in the form of a bond, letter of credit, cash or otherwise) required pursuant to any Act. "FINANCIAL STATEMENTS" means all of the balance sheets, statements of operations, statements of cash flow and statements of changes in shareholders' equity of the Borrower for each Fiscal Year or each month or quarter thereof which have been delivered to the Lender on or prior to the date hereof and which are to be delivered to the Lender pursuant to Section 8.A.2 of this Agreement. "FISCAL YEAR" means the fiscal year of Borrower ending on June 30 for each year. "FUNDED DEBT" means Debt for or with respect to borrowed money with an ultimate maturity greater than one (1) year from the date of determination, provided in any event that for all purposes hereof all Loans and Letter of Credit Utilization shall be considered as and included in Funded Debt. "GAAP" means generally accepted accounting principles, applied on a basis consistent with prior periods; provided, however, that GAAP with respect to any interim financial statements or reports shall be deemed subject to year-end adjustments and footnotes made in accordance with GAAP. 6 "GUARANTOR" means, individually, each of the following individuals: Charan Singh, David Paulsen, Steven Gerber and Michael Feroah. "GUARANTORS" means, collectively, the four (4) Guarantors. "GUARANTY" means a guaranty delivered by a Guarantor guaranteeing the interest on the Loans with the amount of the Guaranty not to exceed $50,000 for any Guarantor. "GUARANTEES" means, collectively, the four (4) separate Guarantees delivered by the four (4) Guarantors. "INTELLECTUAL PROPERTY ASSIGNMENT" mean the Collateral Assignment of Intellectual Property dated the date hereof between the Borrower and the Lender. "INTELLECTUAL PROPERTY RIGHTS" means all patents and patent applications, trademarks, copyrights, trade names, trade dress, trade secrets, design rights, service marks, trademarks and service mark registrations and applications, registrations and renewals thereof, confidential research, development and commercial information, know-how and other proprietary information, together with any licenses of (whether as licensor or licensee) and license agreements pertaining to any of the foregoing and all license fees and royalties arising from the use thereof, all rights corresponding to the foregoing and all other rights of any kind whatsoever accruing thereunder or pertaining thereto (including without limitation, all claims for damages by way of past, present and future infringement of any of the rights included above, with the right, but not the obligation, to sue for and collect such damages for said use or infringement of the rights included above), together in each case with the goodwill of the business connected with the use of and symbolized by each such trademark and service mark. "INTEREST EXPENSE" means, with respect to any Person, for any period, the aggregate interest expense, net of interest income, for such period (including, without duplication, all commissions, discounts, and other fees and charges owed with respect to letters of credit, the portion of any capitalized lease obligations allocable to interest expense, and capitalized interest) determined in accordance with GAAP (but in any event excluding interest on tax assessments to the extent such interest is included in deferred taxes). "INTEREST PERIOD" is defined at Section 3.D hereof. "INTEREST RATE CONTRACT" means interest rate protection, swap, or collar agreements, and other similar agreements or arrangements (if any) designed to provide protection against fluctuations in interest rates, pursuant to which the Borrower has obligations to Lender that may require payment in the future by the Borrower. "LAWS" means all ordinances, statutes, rules, regulations, codes, orders, injunctions, writs or decrees of any government, whether federal, state, municipal, local or foreign, of any political subdivision or agency thereof, or of any court, board or similar entity established by any of the foregoing. 7 "LEASEHOLDS" means all of the right, title and interest of the Borrower in, to and under any leases, sub-leases, licenses or other agreements, granting rights to the Borrower to enter, occupy or use real property. "LEVERAGE RATIO" means, as determined for the Borrower as of the end of each quarter of Borrower's Fiscal Year for the then applicable Measurement Period, the ratio of Funded Debt to Total Capitalization. "LIBOR" is defined in Section 3.A hereof. "LIBOR LOAN" means a Loan bearing interest at the rate specified in Section 3.A(b) hereof. "LIEN" means any security interest, mortgage, pledge, hypothecation, collateral assignment, lien (statutory or otherwise), charge or encumbrance of any kind or nature whatsoever, any deposit or preferential arrangement of any kind or nature whatsoever, including, without limitation, any conditional sale or other title retention agreement, or any financing lease involving substantially the same economic effect as any of the foregoing. "LOAN" means a Revolving Loan and "LOANS" means the Revolving Loans, collectively and in the aggregate. "LOAN DOCUMENTS" means, collectively, any Interest Rate Contract hereafter entered into, and all of those documents set forth and described in Section 6 hereof, as amended, modified, supplemented or restated from time to time, and any facilities or agreements in replacement thereof. "MARGIN STOCK" means "margin stock" as defined in Regulation U of the Board of Governors of the Federal Reserve System. "MATERIALLY ADVERSE EFFECT" means, relative to any occurrence, event, condition or circumstance, or any change therein, of whatever nature (including any adverse determination in any litigation, arbitration, or governmental investigation or proceeding), a materially adverse effect on: (i) the assets of or the business, revenues, financial condition, operations of the Borrower; or (ii) the ability of the Borrower to timely or fully perform any of the payment or other material obligations involving any of its Debt. "MEASUREMENT PERIOD" means with respect to each quarter then ending, beginning with the quarter ending December 31, 1999 and thereafter, the rolling period of the four fiscal quarters then ending. "MONIES" means (i) all cash at any time on deposit with or held by the Lender or any other bank or institution for the account of the Borrower, (ii) all accounts of the Borrower with the Lender or any other bank or institution, (iii) all investments and reinvestments of amounts from time to time credited to such accounts, and (iv) all interest, dividends, distributions and 8 other proceeds payable on or with respect to such investments and reinvestments and such accounts. "NET CASH PROCEEDS" means, in each case as set forth in a statement in reasonable detail delivered to the Lender: (a) with respect to the disposition of any asset by any Person, the excess, if any, of (i) the cash received in connection with such disposition over (ii) the sum of (A) the principal amount of any Debt (other than Debt under this Agreement) which is secured by such asset and which is required to be repaid in connection with the disposition thereof, PLUS (B) the reasonable out-of-pocket expenses incurred by such Person in connection with such disposition, PLUS, (C) provision for taxes, including income taxes, attributable to the disposition of such asset; (b) with respect to the issuance by any Person of any equity securities or Debt, the gross proceeds received by such Person from such issuance less all legal expenses, discounts and commission and other fees and expenses incurred or to be incurred and all federal, state, local and foreign taxes assessed or to be assessed in connection therewith; and (c) with respect to the receipt by any Person or the Lender of any payment under any insurance policy or pursuant to any condemnation award, the aggregate amount of any such payment made to such Person or the Lender less any income tax liability of such Person reasonably estimated by such Person to relate to such payment and all legal expenses incurred in connection with the recovery or collection thereof. " NET INCOME" means, for any period, the net income of Borrower for such period, before the payment of dividends on all capital stock, determined in accordance with GAAP. "NOTE" means the Revolving Note. "OBLIGATIONS" means each and every promise, agreement, covenant, debt and all other liabilities, obligations and indebtedness of the Borrower, its successors or assigns, to the Lender, whether primary, secondary, contingent, direct, or indirect, howsoever incurred, created, arising or evidenced, whether presently or hereafter existing, evidenced, arising or becoming due, which such promise, agreement, covenant, debt, liabilities, obligations or indebtedness arises from or in connection with the Loans or under this Agreement, the Note, any Interest Rate Contract or any other Loan Documents, or any refinancings, substitutions, extensions, renewals, replacements and modifications for or of the foregoing, or the enforcement by the Lender of its rights and remedies under any or all of the foregoing (including all costs, expenses and reasonable attorneys' and paralegals' fees and expenses incurred by the Lender), including any of the foregoing that arises after the filing of a petition by or against the Borrower under any insolvency or related proceeding, even if the obligations do not accrue because of the automatic stay under bankruptcy laws or otherwise. "PARENT" means SelectQuote, Inc, a Delaware corporation which owns all the capital stock of Borrower. "PERMITTED INVESTMENTS" means (i) cash, (ii) readily marketable securities issued or guaranteed by the government of the United States of America or any agency thereof having a maturity at the time of issuance of not exceeding one year, (iii) commercial paper rated at least 9 A-1 by Standard & Poor's Corporation or P-1 by Moody's Investors Service, Inc., having a maturity at the time of issuance not exceeding one year, and money market funds invested in short-term securities rated at least as provided in the preceding clause, (iv) certificates of deposit of or demand or time deposits with or repurchase agreements of any commercial bank which is organized under the laws of the United States of America or any state thereof and has capital and surplus of in excess of $100,000,000, and demand deposits or local operating accounts with the Lender or any other financial institutions acceptable to the Lender, (v) property used in the ordinary course of business, the purchase of which does not otherwise violate or cause or result in a violation of any provision hereof, (vi) current assets arising from the sale of goods and services in the ordinary course of business, (vii) loans or advances to employees in the ordinary course of business, and loans to officers not in excess of $5,000 at any time outstanding, (viii) existing investments in existing Subsidiaries or Affiliates of Borrower, and (ix) existing investments and the acquisitions permitted under Section 8.B.3 hereof. "PERMITTED LIENS" means any Liens (i) provided for hereunder or under the Loan Documents in favor of the Lender; (ii) for taxes or assessments not yet due and payable; (iii) of vendors incurred in the ordinary course of business, payment with respect to which is not then due and payable; (iv) which arise out of pledges or deposits under any Laws relating to workers' compensation, unemployment insurance, old age pensions or other social security or retirement benefits; (v) which are being contested in good faith by appropriate and lawful proceedings, so long as levy and execution thereon have been and continue to be stayed and which do not materially impair or adversely affect the value or use of the assets and properties of the Borrower or the operation or condition of the business of the Borrower; (vi) which are existing on Equipment, Fixtures and/or real property of the Borrower and are set forth on SCHEDULE 7.G hereto, PROVIDED, HOWEVER, that the Debt secured by existing Liens on Equipment, Fixtures and/or real property shall not be increased and such Debt shall not be secured by any Equipment, Fixtures and/or real property other than that securing such Debt as of the date hereof; (vii) which are purchase money security interests on Equipment and/or Fixtures (exclusive of any such Liens referred to in subparagraph (vi) above) securing the deferred purchase price thereof within the limitations of and as may be permitted under Section 8.B.2(viii) hereinafter; PROVIDED, HOWEVER, that any such Lien shall attach only to the Equipment and/or Fixture financed by the holder of such Lien; (viii) which are currently existing on Accounts of the Borrower and are set forth on SCHEDULE 7.G hereto; or (ix) with respect to the property (other than Accounts) of any new Subsidiary of the Borrower which becomes a Subsidiary after the date hereof, so long as such Liens are either incurred in connection with an acquisition by the Borrower permitted under Section 8.B.3 hereof or were in existence prior to such acquisition, and, if incurred in connection with such an acquisition, are subordinated to the Liens in favor of the Lender. "PERSON" means any individual, sole proprietorship, joint venture, partnership, association, unincorporated organization, joint-stock company or association, limited liability company, trust, corporation, entity, institution or government body (or agency or political subdivision thereof). "PLEDGED SHARES" means the shares of common and preferred stock of Parent or the Borrower (or any shares issued in exchange or substitution therefor, whether by merger or 10 otherwise) owned directly or indirectly by Michael Feroah, Steven Gerber, David Paulsen and Charan Singh (each, a "PLEDGOR" and collectively, the "PLEDGORS"), members of senior management of Borrower, all of which are pledged to the Lender pursuant to the Stock Pledge and Security Agreement of even date herewith among the Lender and the Pledgors (the "STOCK PLEDGE AGREEMENT"). "PRIME RATE" means the rate of interest announced or referred to by the Lender from time to time as its prime or reference rate for interest rate determinations, with each change in such Prime Rate to take effect on the same day such change is announced by the Lender. The use of the term "Prime Rate" herein or in the Note is not intended nor does it imply that said rate of interest is a preferred rate of interest or one which is offered by the Lender to its most creditworthy customers. "PRIME RATE LOAN" means a Loan bearing interest at the rate specified in Section 3.A(a) hereof. "REFERENCE BANK" means ABN/AMRO Bank. "REFUNDING BORROWING" is defined in Section 3.C.(c) hereof. "RESTRICTED PAYMENTS" means (i) any dividend payment or other distribution, direct or indirect, of assets, properties, cash, rights, obligations or securities on account of any shares of any class of capital stock of the Borrower which is not a wholly-owned Subsidiary of Borrower, or (ii) any exchange, conversion, repurchase, purchase, redemption, retirement, sinking fund or other similar acquisition for value, direct or indirect, of any shares of any class of capital stock of the Borrower or any warrants, rights or options to acquire any such shares, now or hereafter outstanding, or (iii) any payment or repayment of principal of, premium (if any), or interest on any Subordinated Debt, and any redemption, purchase, retirement, defeasance, sinking fund or similar payment with respect to any Subordinated Debt, unless permitted by the terms of the document or instrument pursuant to which said Subordinated Debt is created and which have been approved by the Lender, or (iv) any earn-out under any acquisition agreement, unless permitted by the terms thereunder and approved by Lender. "REVOLVING COMMITMENT" is defined in Section 2.A.1 hereof. "REVOLVING LOANS" is defined in Section 2.A.1 hereof. "REVOLVING NOTE" means the promissory note of the Borrower evidencing the Revolving Loans. "REVOLVING LIBOR LOAN" means a Revolving Loan which is also a LIBOR Loan. "REVOLVING PRIME RATE LOAN" means a Revolving Loan which is also a Prime Rate Loan. "SEC" means the Securities and Exchange Commission. 11 "SECURITY AGREEMENT" means that certain Security Agreement of the Borrower in favor of the Lender, of even date herewith, as the same may be amended or supplemented. "SELECTQUOTE" is defined in the Preamble hereof. "SELECTTECH" means SelectTech, a Nevada corporation, which was merged into the Borrower on December 27, 1999. "STOCK PLEDGE AGREEMENT" is as defined and included in the definition of Pledged Shares. "STOCKHOLDERS' EQUITY" means the sum of the capital stock, additional paid-in-capital and retained earnings (after deducting treasury stock) as determined in accordance with GAAP. "SUBORDINATED DEBT" means Debt for money borrowed by the Borrower if, but only to the extent that, the payment and, if permitted hereunder, any collateral therefor is and remains at all times subordinated to the Obligations and the collateral and other security therefor, on terms and conditions satisfactory to the Lender. "SUBORDINATION AGREEMENTS" means the Subordination Agreement of even date herewith between the Lender and each of Security Connecticut Life Insurance Company and North American Company for Life and Health Insurance. "SUBSIDIARY" with respect to any Person means any corporation or other business entity of which more than fifty percent (50%) of the outstanding common stock or other ownership interests is owned, directly or indirectly, by such Person. "TANGIBLE NET WORTH" means Stockholders' Equity PLUS Subordinated Debt LESS all intangible assets (treated as such in accordance with GAAP), including: all investments in unconsolidated subsidiaries; unamortized debt discount and deferred charges; refundable taxes; prepaid assets or expenses; goodwill; patents, trade names, trademarks, copyrights, franchises; customer lists; unamortized restrictive covenants, unamortized organization expenses and administrative costs; deposits; loans and advances to Affiliates, stockholders, directors, officers, employees or relatives of the foregoing; land options; and the excess of cost of shares acquired over book value of related assets. "TERMINATION DATE" means December 15, 2000. "TOTAL CAPITALIZATION" means the sum of (i) the aggregate amount of Debt for borrowed money and (ii) Stockholders Equity. "UCC" means the version of the Uniform Commercial Code as enacted in Illinois, as amended from time to time. Section 1.B. Any accounting terms used but not otherwise defined herein shall have their customary meanings as defined in, pursuant to, or in accordance with GAAP. All other 12 terms used but not otherwise defined herein shall have the meanings provided by the UCC to the extent said terms are used or defined therein. Section 1.C. Unless otherwise defined or the context otherwise requires, terms for which meanings are provided in this Agreement shall have such meanings when used in the other Loan Documents. Section 1.D. In this Agreement and each other Loan Document, unless a clear contrary intention appears: (i) the singular number includes the plural number, and VICE VERSA; (ii) reference to any Person includes such Person's successors and assigns but, if applicable, only if such successors and assigns are permitted by this Agreement, and reference to a Person in a particular capacity excludes such Person in any other capacity or individually; (iii) reference to any gender includes each other gender; (iv) references to any agreement (including this Agreement and the SCHEDULES, APPENDICES AND EXHIBITS hereto), document or instrument means such agreement, document or instrument as amended or modified and in effect from time to time in accordance with the terms thereof and, if applicable, the terms hereof and reference to any promissory note includes any promissory note which is an extension or renewal thereof or a substitute or replacement therefor; (v) unless the context indicates otherwise, reference to any Article, Section, Appendix, Schedule or Exhibit means such Article or Section hereof or Schedule, Appendix or Exhibit hereto; (vi) "hereunder," "hereof," "hereto" and words of similar import shall be deemed references to this Agreement as a whole and not to any particular Article, Section or other provision hereof; (vii) "including" (and with correlative meaning "include") means including without limiting the generality of any description preceding such term; and (viii) relative to the determination of any period of time, "from" means "from and including" and "to" and "through" means "to but excluding." Section 1.E. If, after the date of this Agreement, there shall occur any change in GAAP from those used in the preparation of the Borrower's audited financial statements for the Fiscal Year ending June 30, 1999, and such change shall result in a change in the method of calculation of any financial covenant, standard or term found in this Agreement, either Borrower or the Lender may by notice to the other require that the Lender and the Borrower negotiate in good faith to amend such covenant, standard or term so as equitably to reflect such change in GAAP, with the desired result being that the criteria for evaluating the financial condition of the Borrower shall be the same as if such change had not been made. SECTION 2. CREDIT FACILITY. Section 2.A. REVOLVING LOANS AND REVOLVING NOTE. Subject to the terms and conditions of this Agreement, the Lender agrees to lend to the Borrower the Revolving Loans as provided in this Section. 2.A.1. REVOLVING LOANS. Subject to the terms and conditions of this Agreement, the Lender agrees to lend to the Borrower from time to time until the earlier of the Termination Date or the occurrence of either a Default or an Event of Default hereunder (the earlier of such date being hereinafter referred to as the "EXPIRATION DATE"), such sums, in a minimum amount(s) as 13 set forth in Section 3.B hereof, as Borrower may request from time to time by a Borrowing Notice pursuant to Section 3.C hereof; provided, however, that the aggregate principal amount of all loans outstanding under this Section 2.A.1 (individually, a "REVOLVING LOAN" or "LOAN" or, collectively, the "REVOLVING LOANS" or "LOANS") at any one time shall not exceed the lesser of (i) Three Million Dollars ($3,000,000) or (ii) the Borrowing Base (such lesser amount hereinafter referred to as the "REVOLVING COMMITMENT"). Subject to the terms and conditions hereof, the Borrower may borrow or repay and reborrow hereunder, from the date hereof until the Expiration Date, either the full amount of the Revolving Commitment or any lesser sum in the minimum amounts referred to herein. If, at any time, the Revolving Loans exceed the Revolving Commitment, the Borrower shall immediately notify the Lender of the existence of and pay to the Lender the amount of such excess. For all purposes of this Agreement, where a determination of the unused or available amount of the Revolving Commitment is necessary, the Revolving Loans shall be deemed to utilize the Revolving Commitment. 2.A.2. REVOLVING NOTE. In order to evidence the Revolving Loans, at the time of the making of the initial Revolving Loan, the Borrower will execute and deliver a promissory note, substantially in the form of EXHIBIT A hereto (together with any and all amendments, modifications, supplements, substitutions, renewals, extensions and restatements, thereof and therefor, the "REVOLVING NOTE"). The Revolving Loans shall bear and pay interest and mature on the date as set forth therein and herein. SECTION 3. GENERAL PROVISIONS APPLICABLE TO ALL LOANS. Section 3.A. APPLICABLE INTEREST RATES. The Borrower may elect that each Borrowing of each Loan be made by means of a Prime Rate Loan or a LIBOR Loan; provided, however, that there shall not be more than five Borrowings of LIBOR Loans outstanding at any time. (a) PRIME RATE LOANS. Each Prime Rate Loan by the Lender shall bear interest (computed on the basis of a year of 360 days and actual days elapsed) on the unpaid principal amount thereof from the date such Loan is made until maturity (whether by acceleration or otherwise) at a rate per annum equal to the Prime Rate from time to time in effect. Interest on all Prime Rate Loans is payable on the last day of each calendar month and at maturity (whether by acceleration or otherwise), commencing February 29, 2000. (b) LIBOR LOANS. Each LIBOR Loan made by the Lender shall bear interest (computed on the basis of a year of 360 days and actual days elapsed) on the unpaid principal amount thereof from the date such Loan is made until maturity (whether by acceleration or otherwise) at a rate per annum equal to the sum of the Applicable LIBOR Margin plus the Adjusted LIBOR, payable on the last day of the applicable Interest Period and at maturity (whether by acceleration or otherwise), and, if the applicable Interest Period is longer than three months, on each day occurring every three months after the date such Loan is made. "ADJUSTED LIBOR" means, for any Borrowing of LIBOR Loans, a rate per annum determined in accordance with the following formula: 14 LIBOR -------------------- Adjusted LIBOR= 100% - Eurodollar Reserve Percentage "LIBOR" means, for an Interest Period for a Borrowing of LIBOR Loans, the rate of interest per annum (rounded upwards, if necessary, to nearest 1/100 of 1%) at which deposits in U.S. dollars in immediately available funds are offered by the Lender or the Reference Bank at approximately 11:00 a.m. (London, England time) two (2) Business Days before the beginning of such Interest Period by prime banks in the interbank eurodollar market for a period equal to such Interest Period and in an amount equal or comparable to the principal amount of the LIBOR Loan scheduled to be made by the Lender as part of such borrowing. "EURODOLLAR RESERVE PERCENTAGE" means, for any Borrowing of LIBOR Loans, the daily average for the applicable Interest Period of the maximum rate at which reserves (including, without limitation, any supplemental, marginal and emergency reserves) are imposed during such Interest Period by the Board of Governors of the Federal Reserve System (or any successor) under Regulation D on "eurocurrency liabilities", as defined in such Board's Regulation D, (or in respect of any other category of liabilities that includes deposits by reference to which the interest rate on LIBOR Loans is determined or any category of extension of credit or other assets that include loans by non-United States offices of Lender to United States residents) subject to any amendments of such reserve requirement by such Board or its successor, taking into account any transitional adjustments thereto. For purposes of this definition, the LIBOR Loans shall be deemed to be "eurocurrency liabilities" as defined in Regulation D. (c) MARGIN, RATE AND FEE DETERMINATIONS. The Lender shall determine each interest rate applicable to the Loans hereunder and its determination thereof shall be conclusive and binding except in the case of manifest error. Section 3.B. MINIMUM AND MAXIMUM BORROWING AMOUNTS. Each Borrowing of Prime Rate Loans shall be in an amount not less than $50,000 or any larger amount that is an integral multiple of $25,000. Each Borrowing of LIBOR Loans shall be in an amount not less than $200,000, or any larger amount that is an integral multiple of $100,000. Section 3.C. BORROWING PROCEDURES. (a) NOTICE TO THE LENDER. The Borrower shall give telephonic or telecopy notice to the Lender in the form attached hereto as EXHIBIT B (the "BORROWING NOTICE") (which notice shall be irrevocable once given and, if by telephone, shall be promptly confirmed in writing) by no later than 12:00 noon (Chicago time) (i) on the date at least three (3) Business Days prior to the date of each requested Borrowing of LIBOR Loans and (ii) on the date of any requested Borrowing of Prime Rate Loans. Each such notice shall specify the date of the requested Borrowing (which shall be a Business Day), the amount of the requested Borrowing, the type of Loans to comprise such Borrowing (if no election as to type of Borrowing is specified in any such notice, then the requested Borrowing shall be of Prime Rate Loans) and, if such Borrowing is to be comprised of LIBOR Loans, the Interest Period applicable thereto. The Borrower agrees that the Lender may rely on any such telephonic or telecopy notice given by any person the 15 Lender in good faith believes is an Authorized Officer without the necessity of independent investigation and in the event any notice by such means conflicts with the written confirmation, such notice shall govern if the Lender has acted in reliance thereon. (b) BORROWER'S FAILURE TO NOTIFY. In the event the Borrower fails to give notice pursuant to Section 3.C.(a) above of the reborrowing of the principal amount of any maturing Borrowing and has not notified the Lender by 12:00 noon (Chicago time) on the day such Borrowing matures that it intends to repay such Borrowing with funds not borrowed hereunder, the Borrower shall be deemed to have requested a Borrowing of Prime Rate Loans on such day in the amount of the maturing Borrowing then due, in each case subject to Section 6.C hereof, which new Borrowing shall be applied to pay, as the case may be, the maturing Borrowing then due. (c) DISBURSEMENT OF LOANS. Not later than 2:00 p.m. (Chicago time) on the date of any Borrowing (a "FUNDING DATE") of LIBOR Loans or Prime Rate Loans, Lender shall make available its Loan in funds immediately available in Chicago, Illinois, except to the extent such Borrowing is either a reborrowing, in whole or in part, of the principal amount of a maturing Borrowing of Loans (a "REFUNDING BORROWING") in which case Lender shall record the Loan made by it as a part of such Refunding Borrowing on its books or records or on a schedule to the appropriate Note, as provided in Section 3.H.(b) hereof, and shall effect the repayment, in whole or in part, as appropriate, of its maturing Loan through the proceeds of such new Loan. Subject to Section 6 hereof, the Lender shall make the proceeds of each Borrowing available to the Borrower at the Lender's principal office in Chicago, Illinois. Section 3.D. INTEREST PERIODS. As provided in Section 3.C hereof, at the time of each request for the Borrowing of LIBOR Loans hereunder the Borrower shall select an Interest Period applicable to such Loans from among the available options. The term "INTEREST PERIOD" means the period commencing on the date a Borrowing of LIBOR Loans is made and ending on the date, as the Borrower may select, 1, 2, 3 or 6 months thereafter; PROVIDED, HOWEVER, that: (a) the Borrower may not select an Interest Period that extends beyond the Termination Date; (b) whenever the last day of any Interest Period would otherwise be a day that is not a Business Day, the last day of such Interest Period shall be extended to the next succeeding Business Day, provided that, if such extension would cause the last day of such Interest Period to occur in the following calendar month, the last day of such Interest Period shall be the immediately preceding Business Day; and (c) for purposes of determining the Interest Period for a Borrowing of LIBOR Loans, a month means a period starting on one day in a calendar month and ending on the numerically corresponding day in the next calendar month; PROVIDED, HOWEVER, that if there is no numerically corresponding day in the month in which such an Interest Period is to end or if such an Interest Period begins on the last Business Day of a calendar month, then such Interest Period shall end on the last Business Day of the calendar month in which such Interest Period is to end. 16 Section 3.E. MATURITY OF LIBOR LOANS. Each LIBOR Loan shall mature and become due and payable by the Borrower on the last day of the Interest Period applicable thereto. Section 3.F. PREPAYMENTS. (a) GENERALLY. The Borrower shall have the privilege of prepaying without premium or penalty and in whole or in part (but, if in part, then: (i) in an amount not less than $50,000 or any larger amount that is an integral multiple of $25,000 in the case of Prime Rate Loans, and in an amount not less than $200,000 or any larger amount that is an integral multiple of $100,000 in the case of LIBOR Loans and (ii) in an amount such that the minimum amount required for a Borrowing pursuant to Section 3.B hereof remains outstanding) on any Business Day upon prior notice to the Lender which must be received by the Lender by no later than 12:00 noon (Chicago time) on the date of such prepayment in the case of Prime Rate Loans and by no later than 12:00 noon (Chicago time) on the date three Business Days in advance of the date of such prepayment in the case of LIBOR Loans, such prepayment to be made by the payment of the principal amount to be prepaid and accrued interest thereon and, in the case of LIBOR Loans, any compensation required by Section 3.J hereof. Partial prepayments of any outstanding type of Loan shall be applied to the various Borrowings and various installments of principal thereof in the inverse order of their maturity. (b) REBORROWINGS. Any amount paid or prepaid on the Revolving Loans before the Expiration Date may, subject to the terms and conditions of this Agreement, be borrowed, repaid and borrowed again. (c) MANDATORY PREPAYMENTS. Notwithstanding that no Default or Event of Default has occurred and is continuing, the Borrower shall pay to the Lender, as prepayments on the Loans, (i) within ten (10) days after receipt thereof, 100% of the Net Cash Proceeds with respect to the sale of any assets permitted under Section 8.B.8(iii) and (ii) upon completion of any initial public offering or a private placement (to the extent such private placement exceeds $20,000,000 in aggregate proceeds of the stock or debt of the Borrower or its successors), 100% of all amounts owed to the Lender hereunder. Prepayments under this section shall be applied to the Revolving Loan, in each case in prepayment of installments thereof in the inverse order of maturity. If any amounts required to be prepaid under this section are applied to the Revolving Loan pursuant hereto, then those amounts may not be reborrowed and the amount of the Revolving Commitment shall thereupon be permanently reduced by a corresponding amount. Section 3.G. DEFAULT RATE. If any Event of Default has occurred and is continuing, then each Loan or other monetary Obligation shall bear interest, after as well as before judgment (computed on the basis of a year of 360 days and actual days elapsed) from the date of such Event of Default until such Loan or other monetary Obligation is paid in full, payable on demand, at a rate per annum (the "DEFAULT RATE") equal to: (a) with respect to any Prime Rate Loan, the sum of three percent (3%) PLUS the Prime Rate from time to time in effect; and 17 (b) with respect to any LIBOR Loan, the sum of three percent (3%) PLUS the rate of interest in effect thereon at the time of such default until the end of the Interest Period applicable thereto and, thereafter, at a rate per annum equal to the sum of three percent (3%) PLUS the Prime Rate from time to time in effect; and (c) with respect to other monetary Obligations for which a Default Rate is not otherwise specified, the sum of three percent (3%) PLUS the Prime Rate from time to time in effect. Section 3.H. NOTE. (a) The Loan made to the Borrower by Lender shall be evidenced by a promissory note of the Borrower, dated the date hereof, payable to the order of Lender in the principal amount of the Commitment, and otherwise be in the form of EXHIBIT A hereto. (b) Lender shall record on its books or records or on a schedule to the appropriate Note the amount of each Loan made by it to the Borrower, the Interest Period thereof (if applicable), all payments of principal and interest and the principal balance from time to time outstanding thereon, the interest rate applicable thereto, and, in respect of any Loan, the type of such Loan; provided that prior to the transfer of the Note all such amounts shall be recorded on a schedule to the Note. The record thereof, whether shown on such books or records of Lender or on a schedule to the Note, shall be PRIMA FACIE evidence as to all such amounts; PROVIDED, HOWEVER, that the failure of Lender to record any of the foregoing or any error in any such record shall not limit or otherwise affect the obligation of the Borrower to repay all Loans made hereunder together with accrued interest thereon. At the request of Lender and upon Lender tendering to the Borrower the Note to be replaced, the Borrower shall furnish a new Note to Lender to replace any outstanding Note and at such time the first notation appearing on a schedule on the reverse side of, or attached to, the Note shall set forth the aggregate unpaid principal amount of all Loans, if any, then outstanding thereon. Section 3.I. REVOLVING COMMITMENT TERMINATIONS. The Borrower shall have the right at any time and from time to time, upon prior written notice to the Lender, to terminate without premium or penalty, in whole or in part, any Revolving Commitment, each such termination (whether in whole or in part) to be effective as of the close of the calendar quarter specified in such notice (provided such effective date occurs no earlier than thirty (30) Business Days after such notice) and each partial termination to be in an amount not less than $500,000 or any larger amount that is an integral multiple of $250,000; provided that the Revolving Commitments may not be reduced to an amount less than the aggregate principal amount of the utilization then outstanding thereunder. Any termination of Commitments pursuant to this Section 3.I may not be reinstated. Section 3.J. FUNDING INDEMNITY. In the event Lender shall incur any loss, cost or expense (including, without limitation, any loss of profit, and any loss, cost or expense incurred by reason of the liquidation or re-employment of deposits or other funds acquired by Lender to 18 fund or maintain any LIBOR Loan or the relending or reinvesting of such deposits or amounts paid or prepaid to Lender) as a result of: (a) any payment (including prepayment) of a LIBOR Loan on a date other than the last day of its Interest Period for any reason, whether before or after default, and whether or not such payment is required by any provisions of this Agreement, or (b) any failure (because of a failure to meet the conditions of Section 6 or otherwise) by the Borrower to borrow a LIBOR Loan on the date specified in a notice given pursuant to Section 3.C hereof, then, upon the demand of Lender, the Borrower shall pay to Lender such amount as will reimburse Lender for such loss, cost or expense. If Lender makes such a claim for compensation, it shall provide to the Borrower a certificate executed by an officer of Lender setting forth the amount of such loss, cost or expense in reasonable detail (including an explanation of the basis for and the computation of such loss, cost or expense) and the amounts shown on such certificate shall be deemed rebuttably presumptive evidence of the correctness thereof. Section 3.K. CHANGE IN CIRCUMSTANCES, ETC. (a) CHANGE OF LAW. Notwithstanding any other provisions of this Agreement or the Note, if at any time after the date hereof any change in applicable Law or in the interpretation thereof makes it unlawful for Lender to make or continue to maintain LIBOR Loans or to give effect to its obligations as contemplated hereby, Lender shall promptly give notice thereof to the Borrower, and Lender's obligations to make or maintain LIBOR Loans under this Agreement shall terminate until it is no longer unlawful for Lender to make or maintain LIBOR Loans. The Borrower shall prepay on demand the outstanding principal amount of any such affected LIBOR Loans, together with all interest accrued thereon and all other amounts then due and payable to Lender under this Agreement; provided, however, subject to all of the terms and conditions of this Agreement, the Borrower may then elect to borrow the principal amount of the affected LIBOR Loan from Lender by means of a Prime Rate Loan from Lender. (b) UNAVAILABILITY OF DEPOSITS OR INABILITY TO ASCERTAIN, OR INADEQUACY OF, LIBOR. If on or prior to the first day of any Interest Period for any Borrowing of LIBOR Loans: (i) the Lender advises the Borrower that deposits in United States Dollars (in the applicable amounts) are not being offered to it or the Reference Bank in the interbank eurodollar market, for such Interest Period, or (ii) Lender advises the Borrower that LIBOR as determined by the Lender will not adequately and fairly reflect the cost to Lender of funding LIBOR Loans for such Interest Period, 19 then, until the Lender notifies the Borrower that the circumstances giving rise to such suspension no longer exist, the obligation of the Lender to make LIBOR Loans shall be suspended. (c) INCREASED COST AND REDUCED RETURN. (1) If on or after the date hereof, the adoption of any applicable Law, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by Lender with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency: (i) shall subject Lender to any tax, duty or other charge with respect to the Loans, the Note or its obligation to make Loans, or shall change the basis of taxation of payments to Lender of the principal of or interest on the Loans or any other amounts due under this Agreement in respect of its Loans or its obligation to make Loans (except for changes in the rate of tax on the overall net income of Lender imposed by the jurisdiction in which Lender's principal executive office is located); or (ii) shall impose, modify or deem applicable any reserve, special deposition or similar requirement (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding with respect to any LIBOR Loans any such requirement included in an applicable Eurodollar Reserve Percentage) against assets of, deposits with or for the account of, or credit extended by, Lender or shall impose on Lender or on the interbank market any other condition affecting the Loans, the Note or Lender's obligation to make Loans; and the result of any of the foregoing is to increase the cost to Lender of making or maintaining any Loan, or to reduce the amount of any sum received or receivable by Lender under this Agreement or under the Note with respect thereto, by an amount deemed by Lender to be material, then, within fifteen (15) days after demand by Lender, the Borrower shall be obligated to pay Lender such additional amount or amounts as will compensate Lender for such increased cost or reduction (computed commencing on the effective date of any event mentioned herein). Lender agrees to use its best efforts to give the Borrower notice of the occurrence of any event mentioned herein. (2) If Lender shall determine that the adoption after the date hereof of any applicable Law regarding capital adequacy, or any change in any existing Law, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by Lender (or any of its branches or any corporation controlling Lender (or any of its branches or any corporation controlling Lender) with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on Lender's or such corporation's capital, as the case may be, as a consequence of Lender's obligations hereunder or 20 for the credit which is the subject matter hereof to a level below that which Lender or such corporation could have achieved but for such adoption, change or compliance (taking into consideration Lender's or such corporation's policies with respect to liquidity and capital adequacy) by an amount deemed by Lender to be material, then from time to time, within fifteen (15) days after demand by Lender, the Borrower shall pay to the Lender such additional amount or amounts reasonably determined by Lender as will compensate Lender for the reduction. (d) DISCRETION OF LENDER AS TO MANNER OF FUNDING. Notwithstanding any other provision of this Agreement, Lender shall be entitled to fund and maintain its funding of all or any part of the Loans in any manner it sees fit, it being understood, however, that for the purposes of this Agreement all determinations hereunder shall be made as if Lender had actually funded and maintained each LIBOR Loan through the purchase of deposits in the relevant market having a maturity corresponding to such Loan's Interest Period and bearing an interest rate equal to LIBOR, for such Interest Period. (e) IMPLEMENTATION OF EUROPEAN ECONOMIC AND MONETARY UNION ("EMU"). This Agreement (including, without limitation, the definition of LIBOR and related definitions) will be amended to the extent determined by the Lender (acting reasonably and in consultation with the Borrower) to be necessary to reflect implementation of the EMU and change in currency and to put the Lender and the Borrower in the same position, so far as possible, that they would have been in if such implementation and change in currency had not occurred. SECTION 4. FEES. Section 4.A. REVOLVING COMMITMENT FEES. The Borrower shall pay to the Lender such fees as set forth in the letter agreement dated the date hereof between Borrower and Lender with respect to the Revolving Commitment ("COMMITMENT FEES"). SECTION 5. PLACE AND APPLICATION OF PAYMENTS. Section 5.A. PLACE AND APPLICATION OF PAYMENTS. All payments of principal of and interest on the Loans and all payments of fees and all other amounts payable under this Agreement shall be made to the Lender no later than 12:00 Noon (Chicago time) at the principal office of the Lender in Chicago, Illinois (or such other location in the State of Illinois as the Lender may designate to the Borrower). Any payments received after such time shall be deemed to have been received by the Lender on the next Business Day. All such payments shall be made in lawful money of the United States of America, in immediately available funds at the place of payment, without setoff or counterclaim. Alternatively, at its sole discretion, the Lender may charge against or debit any deposit account or other Monies of the Borrower on deposit with or in possession of the Lender, all or any part of any amount due hereunder or under the Note. The Lender's right from time to time after the occurrence or happening of an Event of Default hereunder (which has not been cured or waived in a writing signed by the Lender) to set off indebtedness owing by Borrower to the Lender against the Borrower's Monies, deposits, credits, accounts or other property now or at any time in the possession or control of the Lender, except as provided herein, is hereby acknowledged and agreed to by the Borrower. 21 SECTION 6. CONDITIONS PRECEDENT AND SUBSEQUENT. Notwithstanding any other provisions of this Agreement, the Lender, at its sole option and in its sole discretion, need not make any Loans to the Borrower for the account of the Borrower, unless the conditions precedent described below are fulfilled: Section 6.A. DELIVERY OF DOCUMENTS AS CONDITIONS PRECEDENT. The delivery of each of the following documents, each of which shall be satisfactory to the Lender in substance and form, by or on behalf of the Borrower to the Lender shall constitute separate and distinct conditions precedent to the effectiveness of this Agreement and the making of any Loans: 6.A.1. AGREEMENT. A copy of this Agreement duly executed by Borrower. 6.A.2. NOTE. The Revolving Note dated as of the Closing Date duly executed by the Borrower and payable to the Lender. 6.A.3. STOCK PLEDGE AGREEMENT. The Stock Pledge Agreement duly executed by Parent, the Borrower and the Pledgors, together with the stock certificates for the Pledged Shares and duly executed stock powers or assignments endorsed in blank, and appropriate UCC-1 financing statements from the respective Pledgors for filing with the appropriate Secretary of State. The Pledged Shares shall constitute at least 35.06% of the total issued and outstanding shares of Parent. 6.A.4. [Intentionally Omitted] 6.A.5. SECURITY AGREEMENT, INTELLECTUAL PROPERTY ASSIGNMENTS, AND SUBORDINATION AGREEMENTS. The Security Agreement duly executed by the Borrower, the Intellectual Property Assignment, and the Subordination Agreements. 6.A.6. FINANCING STATEMENTS. UCC-1 financing statements executed by the Borrower for filing with the offices indicated on SCHEDULE 6.A.6 hereto, and such other financing statements or fixture filings as the Lender may request from the Borrower from time to time. 6.A.7. UCC AND OTHER SEARCH RESULTS. Satisfactory UCC financing statement, judgment and tax lien search results of the Borrower from or of the offices indicated on SCHEDULE 6.A.7 hereto, and from such other offices or governmental agencies or bodies as the Lender, in its sole discretion, may request from time to time, indicating that any financing statements to be filed by the Lender or described above, after being duly and properly filed and recorded, will give the Lender first priority perfected liens and security interests on and in the Collateral of the Borrower, except by reason of Permitted Liens, and that there are no other lienors or creditors claiming any interest in the Collateral of the Borrower, except holders of Permitted Liens. 6.A.8. EVIDENCE OF INSURANCE. Evidence that the Borrower has insurance as required by Section 8.A.16, including property, casualty and liability insurance satisfactory to the Lender, together with: (i) loss payable/mortgagee endorsements naming the Lender as loss payee and 22 mortgagee with respect to property and casualty insurance covering Collateral; and (ii) certificate(s) of insurance(s) and binder(s) naming the Lender as additional insured with respect to liability insurance. 6.A.9. ARTICLES OF INCORPORATION. Articles of Incorporation, and each and every amendment thereto, of the Borrower, certified of recent date by the Secretary of State or appropriate government official in the State in which the Borrower is incorporated. 6.A.10. GOOD STANDING. Certificate of the appropriate Secretary of State or government official of recent date, as to the good standing of the Borrower in the State of its incorporation and where it is qualified to do business. 6.A.11. SECRETARY'S CERTIFICATE. Certificate of Secretary of the Borrower as to (i) resolutions authorizing entry into, execution, delivery and performance of its obligations under this Agreement and related Loan Documents to which it is a party, (ii) the incumbency and signatures of the officers authorized to execute on its behalf the Loan Documents to which it is a party, (iii) its Articles of Incorporation, and (iv) its bylaws. 6.A.12. SOLVENCY CERTIFICATE. Certificate of Solvency duly executed by the Borrower, with pro forma balance sheet and cash flow projections provided for thereunder. 6.A.13. OPINION. The satisfactory opinion letter of Stephen Tennis, counsel for Parent, the Borrower and the Guarantors dated as of the Closing Date and addressed to the Lender as to the matters referred to in Sections 7.A., 7.B., 7.C., 7.D., 7.E., 7.F. (as far as litigation is concerned), 7.J., 7.S of this Agreement, the perfection of the Lender's Liens in the Collateral and the enforceability of the Stock Pledge Agreement and Guaranties on Parent, the Borrower, the Pledgors and Guarantors. 6.A.14. ENVIRONMENTAL DATA. All environmental data, information and reports concerning any real estate or any other property which the Lender may request. 6.A.15. OFFICER'S CERTIFICATE. A certificate of the President of Borrower certifying: (i) that the conditions herein insofar as they relate to the Borrower have been satisfied, (ii) as to the truth of the representations and warranties herein contained, and (iii) that no Materially Adverse Effect has occurred since June 30, 1999. 6.A.16. GUARANTEES. Each of the four (4) Guarantees dated as of the Closing Date duly executed by the respective Guarantor in favor of the Lender. 6.A.17. PERSONAL FINANCIAL STATEMENTS OF GUARANTORS. Personal Financial Statements for each of the Guarantors. 6.A.18. RECEIVABLES AUDIT. Prior to the first draw and thereafter in accordance with Section 8.A.(vi) hereof, an audit of the accounts receivables position of the Borrower by a third party acceptable to the Lender. 23 6.A.19. OTHER DOCUMENTS. In form and substance satisfactory to the Lender the initial Borrowing Base Certificate and any other documents which the Lender may reasonably request from or to be delivered by the Borrower from time to time to effect the intent of this Agreement and the Loan Documents. Section 6.B. FEES. All fees referred to in Section 4 hereof which are then due shall have been paid to the Lender on the Closing Date. Section 6.C. CONDITIONS PRECEDENT. The following conditions are conditions precedent to the obligation of the Lender to make or disburse any Loan hereunder at any time requested by the Borrower, and each request by the Borrower for a Loan hereunder shall be deemed to constitute the Borrower's representation and warranty to the Lender that, as of the dates of such request and on which such Loan is disbursed, these conditions have been satisfied: 6.C.1. MATERIALLY ADVERSE EFFECT. No Materially Adverse Effect shall have occurred, as determined by the Lender in its sole and complete discretion, since the date hereof. 6.C.2. REPRESENTATIONS AND WARRANTIES. The representations and warranties set forth in Section 7 hereof and in each Loan Document to which the Borrower is a party shall be true and correct in all material respects. 6.C.3. COVENANTS. The affirmative and negative covenants set forth herein (including, without limitation, those covenants set forth in Section 8 hereof) and in any other Loan Documents to which the Borrower is a party, are not being breached and are inviolate in all material respects. 6.C.4. EVENT OF DEFAULT. No Default or Event of Default shall have occurred and then be continuing or would occur as a result of making such Loan. 6.C.5. REVOLVING COMMITMENTS. After giving effect to the Loan (if it is a Revolving Loan), the aggregate principal amount of all such Loans outstanding hereunder shall not exceed the applicable Revolving Commitment. 6.C.6. NO VIOLATIONS. Such Loan shall not violate any order, judgment or decree of any court or other authority or any provision of Law applicable to Lender (including, without limitation, Regulation U of the Board of Governors of the Federal Reserve System) as then in effect. 6.C.7. NOTE; NOTICE OF BORROWING. The Lender shall have received the Note of the Borrower and the notice required by Section 3.C hereof. 6.C.8. SATISFACTORY COMPLETION OF DUE DILIGENCE. In the case of the initial draw only, the Lender shall have satisfactorily completed its due diligence examination of the Borrower and any related parties, their respective operations and properties, including its audit/review of the Collateral, historical and pro forma financial information, and projections and business plans. 24 6.C.9. ADDITIONAL FEES. For any Loans on or after January 31, 2000, such Fees referred to in the letter referred to in Section 4.A. hereof shall have been paid to the Lender. SECTION 7. REPRESENTATIONS AND WARRANTIES. As further inducement to the Lender to enter into this Agreement and make the Loans hereunder, the Borrower represents and warrants, as of the date hereof, and as of the date of each disbursement of each of the Loans, the following, which shall survive the execution and delivery of this Agreement, the Note and the Loan Documents and until all of the Obligations have been paid, satisfied or discharged in full, regardless of any investigation by the Lender of the Borrower's financial condition or assets: Section 7.A. CORPORATE EXISTENCE AND RELATED MATTERS. The Borrower is a corporation duly organized, validly existing and in good standing under the Laws of the State or country of its incorporation and is duly qualified to do and transact business and is in good standing as a foreign corporation in each and every state or country in which the conduct of its business or the location of its properties requires such qualification and the failure to so qualify would have a Materially Adverse Effect. As of the date hereof, the only Subsidiaries or Affiliates of Borrower are designated in SCHEDULE 7.A hereto. SCHEDULE 7.A hereto correctly sets forth, as to each such Subsidiary or Affiliate, whether or not it is a Consolidated Subsidiary, the jurisdiction of its incorporation, the percentage of issued and outstanding shares of each class of its capital stock owned by Borrower and the Subsidiaries and, if such percentage is not 100%, a description of each class of its authorized capital stock and the number of shares of each class issued and outstanding. All of the issued and outstanding shares of capital stock of each Subsidiary are validly issued and outstanding and fully paid and nonassessable and all such shares indicated in SCHEDULE 7.A as owned by Borrower or a Subsidiary are owned, beneficially and of record, by Borrower or such Subsidiary, free of any Lien. SCHEDULE 7.A contains all assumed or business names utilized by the Borrower or Affiliate, the jurisdiction of incorporation of the Borrower, and all jurisdictions where the Borrower is qualified to do business. The information in SCHEDULE 7.A hereto is true and complete. Section 7.B. CORPORATE AUTHORITY. The Borrower has all corporate power and authority to own its property and assets and to carry on and engage in its business as it is presently being conducted, and has all licenses, permits, franchises, consents, approvals and authorizations required in connection with the foregoing, including without limitation all of the foregoing required under applicable Laws. The execution, issuance, delivery, and performance of all documents in connection with this Agreement, the Note and the Loan and other Loan Documents to which the Borrower is a party or signatory and the incurrence and performance of the Obligations hereunder and thereunder (i) are within the corporate power and authority of the Borrower, (ii) have been duly and properly authorized by all necessary corporate, director, shareholder and any other action of the Borrower, and (iii) have not resulted in and will not result in: (a) the creation or imposition of any Lien of any nature whatsoever (except in favor of the Lender) upon the Borrower's property or assets; or 25 (b) the violation or contravention of, the occurrence of a default, event of default or event, which with the passage of time or giving of notice or both, would constitute, mature into or become a default or event of default under, (1) any term or provision of the Borrower's Articles of Incorporation or bylaws, (2) any licenses, permits, franchises, consents, approvals or authorizations referred to above, (3) any certificates of authority to do or transact business, (4) any applicable order of any court or government or administrative agency, or (5) any material contract, agreement (including any loan or credit agreement or agreement with the holders of the Borrower's preferred stock or any Subordinated Debt), mortgage, indenture, instrument, judgment or Laws to which the Borrower is a party or signatory or by which it or its properties or assets are, or may be, bound. Section 7.C. CONSENTS, APPROVALS, ETC. Except for the filing of UCC financing statements, the filing of appropriate documents with the United States Patent and Trademark Office to perfect Lender's Liens in registered trademarks and patents of the Borrower, and the notation of Lender's Liens against vehicles of Borrower on the certificates of title for such vehicles, no consent, approval or authorization or order of, or filing, registration or qualification with, any Person (governmental, regulatory, or otherwise) is required to be obtained or effected by the Borrower in connection with the execution, issuance, delivery and performance of all documents in connection with this Agreement, the Note and the Loan and other Loan Documents to which the Borrower is a party or signatory or the incurrence or performance of the Obligations or, if so required, has been duly obtained or effected before the date hereof and are indicated on SCHEDULE 7.C hereto. Section 7.D. BINDING EFFECT AND ENFORCEABILITY. Upon delivery hereof and thereof, this Agreement, the Note and the Loan and other Loan Documents to which the Borrower is a party or signatory will be its respective legal, valid and binding obligations enforceable in accordance with their respective terms and provisions (except as limited by bankruptcy, insolvency or other laws or equitable principles of general application relating to the enforcement of creditors' rights generally) and, on the date of said delivery, the Borrower will not be in violation or contravention of, and no Default or Event of Default will exist under, any of the foregoing. Section 7.E. DEFAULT OF DEBT, LICENSES, PERMITS, ORDERS AND OTHER AGREEMENTS. The Borrower is not in breach or default of (in any material respect), and no event of default or event, which with the passage of time or giving of notice or both, would constitute, mature into or become a default or event of default, has occurred and is continuing with respect to (i) any Debt of any kind or nature, (ii) any license, permit, franchise, approval, consent or authorization referred to in Section 7.B above, (iii) any order of any court or governmental or administrative agency, or (iv) any agreement to which it is a party, which breach or default might have a Materially Adverse Effect. Section 7.F. FINANCIAL CONDITION AND LITIGATION. The Financial Statements of the Borrower delivered to the Lender (including, without limitation, the audited financial statements of Borrower as at/of June 30, 1999, and the unaudited financial statements of Borrower for the period ended September 30,1999, have been prepared in accordance with GAAP, are true and 26 correct in all material respects and fairly present the financial condition of the Borrower as at the dates thereof and results of operations for the periods covered thereby. Since the ending date of the period covered by the most recent Financial Statements dated September 30, 1999, delivered to the Lender and received thereby, no Materially Adverse Effect has occurred and no dividends on or redemptions of the Borrower's common or preferred stock have been made. Except as disclosed to the Lender on said most recent Financial Statements: (i) the Borrower has no Debt, except as permitted hereunder, or liabilities, contingent or otherwise; and (ii) except as disclosed on SCHEDULE 7.F, no proceedings, suits, orders, claims, investigations, or other actions are pending before any court or governmental authority or, to the best knowledge of Borrower, threatened against the Borrower that are not fully covered by insurance. With respect to any representation and warranty which is deemed to be made after the date hereof by the Borrower, the Financial Statements which as of such date shall most recently have been furnished by the Borrower to the Lender for purposes of or in connection with this Agreement shall have been prepared in accordance with GAAP, shall be true and correct in all material respects, and shall fairly present the financial condition of the Borrower as of the dates thereof and results of operations for the periods covered thereby. Section 7.G. TITLE AND LIENS. The Borrower has good and marketable title to all of its property and assets, including all such property and assets listed on the most recent Financial Statements and the other Collateral (except as thereafter disposed of in accordance with and as permitted by the Security Agreement) and, except as set forth on SCHEDULE 7.G, the Collateral is not subject to any liens, claims, security interests, mortgages, pledges, charges or other encumbrance of any Person, except the Lender and holders of the Permitted Liens. The Borrower has obtained such waivers or consents from holders of Permitted Liens on certain Equipment as are necessary and are satisfactory to the Lender in order to grant to the Lender a second lien on such Equipment without violating, breaching or defaulting the security agreement or any terms of the Debt secured by the Permitted Lien on such Equipment. Section 7.H. EMPLOYEE PLANS. All of the Borrower's Employee Plans are listed on SCHEDULE 7.H hereto and are in material compliance with all provisions of ERISA and meet the minimum funding standards of Section 302 of ERISA where applicable. No withdrawal liability has been incurred under any such Employee Plans. No Prohibited Transaction or Reportable Event, as defined in ERISA, has occurred with respect to any such Employee Plans. No proceedings have been instituted to terminate or appoint a trustee to administer any such Employee Plans. Section 7.I. TAXES. Except as listed on SCHEDULE 7.I. hereto, the Borrower has filed all federal, state and local tax returns and reports required by Law, have paid all taxes, assessments, penalties, interest and any other governmental charges which are or were due and payable, have made adequate provision for the payment of all taxes, assessments, penalties, interest and other governmental charges which are accruing but are not yet due and payable, and have no knowledge and are not aware of any deficiency or additional assessment which may have or has arisen in connection of the foregoing. 27 Section 7.J. COMPLIANCE WITH LAWS. To the best knowledge of the Borrower, the Borrower has complied in all material respects with all Laws applicable to it or to the conduct of its business, noncompliance with which could have a Materially Adverse Effect, and the Borrower has not received any notice of any kind from any Person claiming or alleging, directly or indirectly, a violation of any Law, noncompliance with which could have a Materially Adverse Effect. Section 7.K. CORPORATE STRUCTURE AND AFFILIATES. Borrower has no Subsidiaries and no Affiliates, except as identified on SCHEDULE 7.A hereto, which shall include the directors and shareholders of the Borrower. Borrower's authorized and outstanding capital stock is as set forth in SCHEDULE 7.A hereto. Section 7.L. CORPORATE NAMES. The Borrower has no assumed corporate names and is not doing business under any corporate name, other than as identified on SCHEDULE 7.A hereto. Section 7.M. SOLVENCY. The Borrower (i) is solvent and will not be rendered insolvent by the incurrence of the Obligations, by the execution of this Agreement, the Note, and any other Loan or other Loan Documents to which it is a party or signatory, or by any transactions contemplated hereunder or thereunder, (ii) is able to pay its debts as they come due and does not intend to incur, or believe that it will incur, debts beyond its ability to pay such debts as they mature or come due, (iii) has capital sufficient to carry on its business and any business in which it intends or is about to engage, and (iv) owns property and assets having a value in excess of its liabilities and debts. Section 7.N. MARGIN REGULATIONS. The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation G, T, U or X of the Board of Governors of the Federal Reserve System). No part of the proceeds of any of the Loans made hereunder will be used to purchase or carry any Margin Stock, to reduce or retire any indebtedness originally incurred to purchase or carry any Margin Stock, to extend credit to others for the purpose of purchasing or carrying any such Margin Stock, or for any other purpose which might cause any of the Loans to be considered purpose credit within the meaning of Regulation G, T, U or X of the Board of Governors of the Federal Reserve Board. Section 7.O. INDEBTEDNESS TO AFFILIATES. Except as set forth on SCHEDULE 7.O hereto, there are no outstanding loans from any Affiliate to the Borrower, or from the Borrower to any Affiliate. Section 7.P. ACTS OF GOD. Neither the business nor properties of the Borrower are presently affected by any fire, explosion, accident, drought, storm, hail, earthquake, embargo, act of God or of the public enemy or of political unrest, or potential expropriation, or other casualty (whether or not covered by insurance) which could have a Materially Adverse Effect. Section 7.Q. LABOR CONTROVERSIES; UNION CONTRACTS, ETC. There are no labor controversies pending or, to the knowledge of the Borrower, threatened against the Borrower, 28 which if adversely determined could have a Materially Adverse Effect. There are no pending or, to the Borrower's knowledge, threatened or anticipated (i) employment discrimination charges or complaints against or involving the Borrower before any governmental Person, (ii) unfair labor practice charges or complaints, disputes or grievances or arbitration proceedings or controversies affecting the Borrower, (iii) union representation petitions respecting the employees of the Borrower, or (v) strikes, slowdowns, work stoppages, or lockouts or threats thereof affecting the Borrower. There are no collective bargaining agreements covering any of the employees of the Borrower. The Borrower has not breached or otherwise failed to comply with any provision of any collective bargaining agreement or other labor union contract applicable to any of its employees. Section 7.R. COLLATERAL, ETC. The Borrower does not own any real property, or leases any real property as lessee, or otherwise uses any real property in connection with its operations, except as set forth in SCHEDULE 7.R hereto, which contains a complete and accurate description, by owner/lessor and location (by street address) of all such owned, leased and/or used properties. With respect to each Leasehold: (i) The Borrower has a valid and indefeasible leasehold interest in the Leasehold, or other rights to use the Leasehold, free and clear of all Liens except Permitted Liens; and (ii) Each Lease is a valid and subsisting lease in full force and effect in accordance with the terms thereof, the Borrower is in possession of the Leasehold, and no material default by the Borrower exists under any Lease. The Borrower is the record and/or beneficial owner of all presently existing Collateral, in each case free and clear of all Liens except Permitted Liens. The provisions of the Loan Documents are effective to create, in favor of the Lender, legal, valid and enforceable Liens in all right, title and interest of the Borrower in any and all of the Collateral described therein, securing the Obligations from time to time outstanding, and upon all filings and recordings being duly made in the locations referred to in the applicable Loan Documents or the taking of possession of the Collateral by the Lender in accordance with the provisions of such Loan Documents, each of such Loan Documents shall constitute, as of and after the Closing Date, a fully perfected first priority Lien in all right, title and interest of the Borrower in such Collateral superior in right to any Liens, existing or future, which the Borrower or any creditors thereof or purchasers (other than purchasers of inventory in the ordinary course of business and purchasers of assets the sale of which is permitted hereunder or under the applicable Loan Document) therefrom, or any other Person, may have against such Collateral or interests therein, except to the extent, if any, otherwise resulting from a Permitted Lien. Section 7.S. INTELLECTUAL PROPERTY. The Borrower has the legal right to all Intellectual Property Rights that are necessary for the conduct of its business. All Intellectual Property Rights (other than trade secrets, confidential research development and commercial information and know-how) of the Borrower are set forth on SCHEDULE 7.S hereto. With respect to all Intellectual Property Rights: (i) the Borrower is the sole and exclusive owner of the entire and 29 unencumbered right, title and interest in and to thereof; (ii) the Borrower has no knowledge of the existence of any Intellectual Property Rights held by any other Person that would preclude the Borrower from using its Intellectual Property Rights in the conduct of its business; (iii) no claim has been made, and the Borrower has no knowledge of any claim that is likely to be made, that the use by the Borrower of any of its Intellectual Property Rights does or may violate the rights of any Person; and (iv) each Intellectual Property Right of the Borrower has not been adjudged invalid or unenforceable and is valid and enforceable, and there are no prior or other uses thereof which to the Borrower's best knowledge could lead to any such Intellectual Property Right becoming invalid or unenforceable. Section 7.T. SURETY OBLIGATIONS; FINANCIAL ASSURANCES. The Borrower is not obligated as surety or indemnitor under any surety or similar bond or other contract, or issued or entered into any agreement to assure payment, performance or completion of performance of any undertaking or obligation of any Person. The Borrower has not posted or placed any Financial Assurance except as indicated in SCHEDULE 7.T hereto. Section 7.U. BUSINESS RELATIONS. There exists no actual or threatened termination, cancellation, or adverse limitation of, or any adverse modification or change in, the contractual and/or business relationship between the Borrower and any owner/lessor of any facility utilized in the Borrower's business, municipality, customer and/or supplier, and there exists no present condition or state of facts or circumstances in such relations, which in each case would have a Materially Adverse Effect. Section 7.V. ACCURACY OF INFORMATION. All factual information heretofore, or contemporaneously furnished by or on behalf of the Borrower in writing to the Lender for purposes of or in connection with this Agreement or any transaction contemplated hereby, and all other such factual information hereafter furnished by or on behalf of the Borrower to the Lender will be, true and accurate in every material respect on the date as of which such information is dated, or certified, and to the best knowledge of Borrower such information is not, or shall not be, as the case may be, incomplete by omitting to state any material fact necessary to make such information not misleading. To the best knowledge of the Borrower there is no fact which has a Materially Adverse Effect or in the future may (so far as the Borrower may now foresee), have a Materially Adverse Effect, which has not been set forth herein or in written materials, certificates or statements furnished to the Lender prior to the date hereof. Section 7.W. YEAR 2000. The Borrower has reviewed the areas within its businesses and operations which could be adversely affected by, and have developed or are developing a program to address on a timely basis, the "Year 2000 Problem" (that is, the risk that computer applications used by the Borrower may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date on or after December 31, 1999), and have made related appropriate inquiry of material suppliers, vendors and customers. Based on such review and program, the Borrower believes that the "Year 2000 Problem" will not have a Materially Adverse Effect. From time to time, at the request of the Lender, the Borrower shall provide to the Lender such updated information or documentation as is requested regarding the status of its efforts to address the Year 2000 Problems. 30 Section 7.X. HAZARDOUS MATERIALS. Borrower has not caused or permitted any Hazardous Material to be disposed of or incorporated into, either on or under real property legally or beneficially owned or operated by Borrower, and no such real property has ever been used as a dump site or long-term storage site for any Hazardous Materials which would be reasonably likely to (a) give rise to present or future legal liability, and (b) have a material adverse effect on the business or financial condition of Borrower. The failure, if any, of Borrower in connection with the operation of their business, to obtain or be in compliance with any permit, certificate, license, approval and other authorization, or to file any notification or report relating to chemical substances, air emissions, effluent discharges and Hazardous Material storage, treatment, transport and disposal has not had, nor will it have, a Materially Adverse Effect, and no facts or circumstances exist which could give rise to liabilities with respect to Hazardous Materials on the business or financial condition of Borrower which would be reasonably likely to have a Materially Adverse Effect. "Hazardous Materials" means and includes (a) any friable asbestos (or asbestos which becomes friable), PCBs or dioxins or insulation or other material composed of or containing friable asbestos (or asbestos which becomes friable), PCBs or dioxins and (b) any petroleum or any fraction thereof and any hazardous or toxic waster, substance or material defined as such in (or for purposes of) the Comprehensive Environmental Response, Compensation and Liability Act of 1980, any applicable so-called "superfund" or "superlien" law, or any other applicable law regulating or pertaining to any such waste, substance or material, as now or at any time hereafter in effect. SECTION 8. COVENANTS. The Borrower hereby covenants and agrees with the Lender that, until the Obligations have been satisfied and discharged in full, the Borrower will comply and/or cause compliance with the following covenants, unless the Lender shall give its prior written consent to the contrary: Section 8.A. AFFIRMATIVE COVENANTS. 8.A.1. FINANCIAL COVENANTS. The Borrower shall maintain compliance with the following financial covenants during the periods indicated below: (a) TANGIBLE NET WORTH. The Borrower's Tangible Net Worth shall not at any time be less than $1,000,000. (b) LEVERAGE. The Borrower's Leverage Ratio shall not at any time exceed 0.45 :1.00. 8.A.2. FINANCIAL INFORMATION AND REPORTING. The Borrower shall keep and cause to be kept proper books and records in which full and true entries will be made, in accordance with 31 GAAP, of all dealings or transactions relating to its business and affairs, and the Borrower shall cause to be furnished to the Lender: (i) As soon as practicable and, in any event, within fifty (50) days after the end of each quarter of each Fiscal Year, all of the Borrower's statements of income and retained earnings and of cash flows through the quarter then ended and a balance sheet of the Borrower as of the end of such quarter, all in reasonable detail and certified by Borrower's president or chief financial officer as fairly presenting the financial condition and operations of the Borrower as of and for the period then ending and being accurate in all material respects and having been prepared in accordance with GAAP; (ii) As soon as practicable and, in any event, within one hundred twenty (120) days after the end of each Fiscal Year, all of the Borrower's audited and unaudited statements of income and retained earnings and of cash flows through the Fiscal Year then ended and a balance sheet of the Borrower as of the end of such Fiscal Year, in each case with comparable information at the close of and for the prior Fiscal Year, all in reasonable detail, containing no qualifications unacceptable to the Lender and audited by an independent certified public accountant selected by the Borrower and acceptable to the Lender and prepared in accordance with GAAP; (iii) Together with the Financial Statements for each quarter of each Fiscal Year, (a) a certificate executed by the chief financial officer of Borrower in the form of EXHIBIT C hereto certifying to the Lender that the Borrower is in compliance with each of the financial covenants set forth in Section 8.A.1 hereof and setting forth in detail satisfactory to the Lender the calculations and computations showing such compliance, and (b) a certificate executed by the president or chief financial officer of Borrower stating whether any Default or Event of Default currently exists and is continuing and what action, if any, the Borrower is taking or proposes to take with respect thereto; (iv) A Borrowing Base Certificate on and as of the date hereof, on and as of the date of any borrowing of a Loan, and within forty-five (45) days after the end of each month certified as of the last day of such month; (v) When and as so furnished, such other financial information concerning the Borrower, its business, financial condition or assets as may be furnished to the holders of the Borrower's common or preferred stock (including all financial statements, reports and proxy statements), or as the Lender may reasonably request from time to time; and, promptly upon the filing thereof, all registration statements and annual, quarterly, monthly or other regular reports which the Borrower files with the SEC; (vi) When requested by Lender, but in no event less than annually, permit a third party acceptable to Lender to conduct an audit of account receivables; (vii) Promptly upon discovery thereof, notice of any action, suit, arbitration, investigation, administrative or other proceeding instituted, commenced or threatened 32 against or affecting the Borrower which may reasonably be expected to cause the Borrower to incur or be liable for claims, damages and/or costs of any kind (including, without limitation, attorneys' fees, expert witness fees and court, judgment, settlement and compliance or remedial costs), aggregating in excess of $100,000; (viii) Promptly upon the Borrower's becoming aware thereof, notice of any proposed Laws, or amendments thereto, which would regulate, restrict or prohibit the Borrower in such a way as might have a Materially Adverse Effect; (ix) Notice of the occurrence or existence of any Default or Event of Default immediately upon the Borrower's becoming aware thereof; and promptly upon discovery thereof, notice of any development, financial or otherwise, which might have a Materially Adverse Effect; (x) Upon request of the Lender from time to time, any information concerning the Borrower's compliance with any and all Laws; (xi) Promptly upon the Borrower becoming aware thereof, notice of any claim of violation of any Law, and notice of any violation or breach by the Borrower of the terms of, or any revocation or suspension or threatened revocation or suspension of, any license or permit of the Borrower; (xii) Notice of the cancellation or expiration of any bond, letter of credit or similar instrument issued as Financial Assurance and the terms of any replacement or renewal bond, letter of credit or similar instrument if not issued by the Lender; (xiii) Within forty-five (45) days after the end of each six-month period, regardless of whether any New Subsidiary has been acquired during such period, a New Subsidiary Certificate substantially in the form of EXHIBIT D hereto; (xiv) Within sixty (60) days of the end of each Fiscal Year, updated annual budgets, financial projections (rolling three years) and business plans for the ensuing Fiscal Year; and (xv) Within thirty (30) days after the end of each month, a receivables aging report as at the end of such month. 8.A.3. CORPORATE EXISTENCE AND CONDUCT OF BUSINESS. The Borrower will maintain and preserve its corporate existence, good standing, certificates of authority, licenses, permits, franchises, patents, trademarks, trade names, service marks, copyrights, leases and all other contracts and rights necessary or desirable to continue its operations and business on a profitable basis and will generally continue the same line of business as that being presently conducted. 8.A.4. TAXES AND LAWS. The Borrower will pay when due, all taxes, assessments, charges and levies imposed on the Borrower or any of its property or assets or which it is 33 required to withhold and pay out and will comply in all material respects with all applicable present and future Laws applicable to the Borrower or any of its property or assets, unless the Borrower is contesting in good faith, by an appropriate proceeding, the validity, amount, imposition or applicability of the above while maintaining reserves therefor which are appropriate and adequate as determined in accordance with GAAP, and such contest does not have or cause a Materially Adverse Effect. 8.A.5. INSPECTION. Upon the Lender's request, the Borrower will allow the Lender, and any of its officers, employees or agents, to visit, during normal business hours, for inspection and review, the Borrower's premises and will make available and furnish to the Lender the Borrower's books and records and such financial information concerning the Borrower's property or assets, business, affairs, operations or financial condition as reasonably requested by the Lender. 8.A.6. LENDER COSTS. The Borrower shall pay upon demand, all reasonable out-of-pocket fees, costs and expenses (including those of outside counsel, auditors, appraisers, accountants, insurance and environmental advisors, title companies, surveyors, and other consultants and agents) incurred or paid by the Lender in connection with the preparation, negotiation, documentation, administration (including periodic field and collateral audits and site visits), amendment, modification, waiver, interpretation, collection or enforcement of this Agreement, the Note, or any other Loan Documents and the credit and security therefor. In addition, the Borrower shall pay upon demand all such costs and expenses of the Lender in connection with any Default or Event of Default by the Borrower hereunder, or in connection with the collection or enforcement of any of the terms hereof or of the other Loan Documents and the credit and security therefor, or any "work-out," refinancing or restructuring of the credit arrangement set forth herein. Any attorneys' fees due hereunder are to be calculated at the attorneys' customary hourly rates, and not as a percentage of the indebtedness or of the amount recovered. The Borrower agrees to indemnify the Lender, its successors and assigns, and its respective officers, directors and employees, from and hold each of them harmless against (i) any transfer taxes, documentary taxes and any other taxes, penalties, assessments or charges made by any governmental authority by reason of the execution, delivery and performance of the Loan Documents and any security therefor, and (ii) any and all losses, claims, damages, liabilities and expenses, including all expenses of litigation or preparation therefor, which any of them may incur or which may be asserted against any of them in connection with or arising out of the direct or indirect application of the proceeds of Loans. The obligations under this Section 8.A.6 shall survive repayment of the Loans and the assignment of any rights hereunder. 8.A.7. EMPLOYEE PLANS. The Borrower shall (i) keep in full force and effect any and all Employee Plans which are presently in existence or may, from time to time, come into existence under ERISA, and not withdraw from any such Employee Plans, unless such withdrawal can be effected or such Employee Plans can be terminated without material liability to the Borrower; (ii) make contributions to all of such Employee Plans in a timely manner and in a sufficient amount to comply with the requirements of ERISA, including the minimum funding standards of Section 302 of ERISA; (iii) comply with all material requirements of ERISA which relate to such Employee Plans; (iv) notify the Lender immediately upon receipt of any notice concerning the 34 imposition of any withdrawal liability or of the institution of any proceeding or other action which may result in the termination of any such Employee Plans or the appointment of a trustee to administer such Employee Plans; and (v) promptly advise the Lender of the occurrence of any Reportable Event or Prohibited Transaction, as defined in ERISA, with respect to any such Employee Plans. 8.A.8. USE OF PROCEEDS OF LOANS. The Borrower shall use the proceeds of the Loans for working capital purposes. 8.A.9. FINANCIAL ASSURANCE. The Borrower shall timely comply or cause compliance with the requirements of any Act or any other Law concerning Financial Assurance. If any funds are drawn on any Financial Assurance at any time, the Borrower shall promptly notify the Lender in writing of the amount of and the reason for the draw. The Borrower shall not maintain more in Financial Assurance than is required pursuant to any Act or any Law at any time. At the earliest available opportunity under any Act or other Law, the Borrower shall request that the amount of Financial Assurance be reduced if and as permitted under the Act, or such other Law. 8.A.10. OPERATING AND INVESTMENT ACCOUNT(S). The Borrower shall maintain its principal investment accounts with the Lender. If the average amount of demand deposit balances on deposit in the Borrower's investment accounts over any calendar quarter is not sufficient to cover the costs of non-credit services provided by the Lender in servicing such accounts (as determined and priced in accordance with the Lender's standard rate schedule of non-credit bank services as then in effect), the Borrower shall pay to the Lender, on demand, a deficient balances fee on the amount of the deficiency based on the Lender's earnings credit rate then in effect in accordance with the Lender's standard practice. 8.A.11. [Intentionally Omitted]. 8.A.12. COMPLIANCE WITH LAWS. Borrower shall comply or cause compliance with all applicable building codes, zoning ordinances, environmental protection, health and safety laws and regulations and other laws and regulations governing it. 8.A.13. COLLATERAL AGREEMENTS; NEW SUBSIDIARIES AND FUTURE ACQUISITIONS. The Borrower shall, with reasonable promptness and diligence (i) pledge or cause to be pledged to the Lender, through execution of the Addendum attached to the Stock Pledge and Security Agreement and delivery of the stock certificates and other matters referred to therein, 100% of the stock (or other ownership interest) of any Person (a "NEW SUBSIDIARY") hereafter acquired/formed by the Borrower; and (ii) cause each said party listed in (i) above to execute an agreement of joinder and assumption (a "JOINDER AGREEMENT(S)") in the form of EXHIBIT E hereto pursuant to which it will become a Borrower under this Agreement and the Note and a Debtor under the Security Agreement and a party to other relevant Loan Documents, and to execute such other documents and take such other action as may be necessary or appropriate to grant to the Lender a first priority perfected security interest in the Collateral covered by such Loan Documents. In addition, any such New Subsidiary shall deliver to the Lender: an executed Officer's Certificate substantially in the form attached as EXHIBIT F hereto; organizational 35 documents as specified in Section 6.A.9 and 6.A.10; an executed secretary's certificate as described in Section 6.A.11; executed financing statements for each state in which Collateral owned by a New Subsidiary is located; and such other documents, instruments or agreements as the Lender may reasonably request. In addition, if the Borrower hereafter acquires or leases any real property the Borrower shall, prior to or contemporaneously therewith, furnish to the Lender all documentation of the type reasonably requested by the Lender to acquire a security interest in reference to the Leaseholds or the owned properties involved. 8.A.14. INTEREST RATE CONTRACTS. The Borrower shall execute all documents and take such other action as may be necessary and appropriate to include all of its obligations to the Lender under any Interest Rate Contract as obligations which are secured by the Collateral. Nothing herein shall obligate the Agent or Borrower to enter into any Interest Rate Contract. 8.A.15. [Intentionally Deleted.] 8.A.16. MAINTENANCE OF INSURANCE. The Borrower shall maintain insurance with financially sound and respectable insurance companies or associations in such companies or associations in such amounts and covering such casualties and risks as are customary in accordance with prudent business practice in the case of companies engaged in the same or a similar business and similarly situated, which insurance may provide for reasonable deductibility from coverage thereof. The Borrower will, upon request, furnish to the Lender at reasonable intervals a certificate of an Authorized Officer setting forth the nature and extent of all insurance maintained by the Borrower. The Borrower shall retain all incidents of ownership of the insurance maintained pursuant hereto and shall not borrow upon or otherwise impair its rights to receive the proceeds of such insurance. 8.A.17. USE OF PROCEEDS OF INITIAL PUBLIC OFFERING OR PRIVATE PLACEMENT. The Borrower shall apply the proceeds from any initial public offering or private placement of the capital stock or debt of Borrower or its successors (to the extent such private placement exceeds $20,000,000) to the payment of any outstanding amounts owed under the Loan Documents. Section 8.B. NEGATIVE COVENANTS. 8.B.1. LIENS. The Borrower shall not create, grant, pledge, permit or suffer to exist, any Lien upon any of the Collateral or any other property or assets of the Borrower, except Permitted Liens. 8.B.2. DEBT. The Borrower shall not, directly or indirectly, create, assume, incur, suffer to exist, guarantee, become or be liable for or with respect to any manner of obligations, liabilities, indebtedness or other Debt whatsoever to any Person, except with respect to: (i) the Obligations hereunder; (ii) unsecured Subordinated Debt; (iii) existing Debt indicated on SCHEDULE 8.B.2 hereto (to the extent such existing Debt is repaid, additional Debt may not be incurred); (iv) current liabilities and accounts payable arising or accruing in the ordinary course of business (other than a guaranty or indebtedness for borrowed money, an extension of credit or deferred 36 purchase price of property not otherwise permitted hereunder); (v) contingent Debt for any draws at any time made on outstanding instruments as Financial Assurance; (vi) contingent Debt with respect to any Interest Rate Contracts with the Lender; (vii) Debt assumed or incurred in or in connection with any merger or acquisition permitted under Section 8.B.3; and (viii) purchase money Debt incurred in connection with liens described in clause (vii) of the definition of Permitted Liens, PROVIDED, HOWEVER, that such purchase money Debt shall not exceed $50,000 in the aggregate during any one Fiscal Year (it being understood that the amount of any such Debt permitted to be incurred during any one Fiscal Year, but not so incurred, shall not carry over to subsequent Fiscal Years). 8.B.3. FISCAL YEAR, NAME CHANGES, MERGERS AND ACQUISITIONS. The Borrower shall not (i) change its Fiscal Year or its corporate name or without prior written notice to Lender and only after all necessary or desirable Financing Statements have been duly and properly filed and recorded maintaining Lender's first priority perfected liens and security interests on and in the Collateral, adopt an assumed corporate name, (ii) consolidate or merge with any Person, (iii) acquire any stock in, or acquire all or substantially all of the assets or properties of, or make any investment in, any Person, except that the existing investments listed on SCHEDULE 8.B.3 are permitted hereunder, or (iv) create any Subsidiaries. 8.B.4. REDEMPTIONS, DIVIDENDS AND PAYMENTS UNDER SUBORDINATED DEBT. The Borrower shall not declare or make any Restricted Payments. 8.B.5. TRANSACTIONS WITH AFFILIATES. Except as set forth in SCHEDULE 8.B.5, the Borrower shall not enter into any transaction with its Affiliates or any of its or its Affiliates' shareholders, directors, officers or employees, except in the ordinary course of business and upon fair and reasonable terms which are no less favorable to said Borrower than those that would be available at the time of such transaction in a comparable arm's length transaction with a Person not an Affiliate. The Borrower shall not pay any management fee to any Affiliate other than Borrower. 8.B.6. CAPITAL STRUCTURE. The Borrower shall not have outstanding or issue any shares of preferred stock. The Borrower shall not make any changes in its capital structure (including the terms of its outstanding stock), amend its articles of incorporation, certificate of designation, or bylaws, or make any changes in any of its business objectives, purposes or operations if such change has a reasonable likelihood of having a Materially Adverse Effect. The Borrower shall not be permitted to issue any stock. 8.B.7. CHANGE IN NATURE OF BUSINESS. The Borrower shall not engage in any business unrelated to, or make any material change in the nature of, its business as carried on at the date hereof. 8.B.8. TRANSFER OF ASSETS. The Borrower shall not sell, assign, transfer, lease or otherwise dispose any of its property or assets, except as may be permitted under the Security Agreement or other Loan Documents. Provided in any event that the following are permitted: (i) sales of inventory in the ordinary course of business; (ii) sales of worn out or obsolete tools, machinery or equipment no longer used or useful in the operation of business for fair value, so long as the proceeds of any such sale does not exceed $50,000; (iii) sales of other assets for cash 37 and for fair value in an aggregate amount not to exceed $25,000 in any Fiscal Year, provided that the Net Cash Proceeds resulting therefrom is applied in prepayment of the Loans in the order set forth in Section 3.F(c) hereof. 8.B.9. PREPAYMENT OR MODIFICATION OF DEBT. The Borrower will not (i) prepay any Subordinated Debt or any Funded Debt owing to, or any indebtedness for money borrowed by the Borrower from a Person other than the Lender, or any Debt secured by any of its assets, except Debt to the Lender or to any holder of Permitted Liens, and except for prepayment of Debt secured by an asset if a replacement asset of equal or greater value is purchased in connection therewith, or (ii) enter into or modify any agreement as a result of which the terms of payment of any of the foregoing Debt are amended or modified, except Subordinated Debt so long as such amendment or modification does not, and will not result in any, increase in the amount of, interest rate on, or collateral for, or any earlier payment or maturity of, the Subordinated Debt, or conflict with or breach the terms of this Agreement or any Loan Documents hereunder or the applicable subordination agreement with the Lender therefor. 8.B.10. FALSE STATEMENTS. The Borrower will not furnish the Lender any certificate or other document that knowingly contains any untrue statement of material fact or that omits to state a material fact necessary to make it not misleading in light of the circumstances under which it was furnished. 8.B.11. INCONSISTENT OR RESTRICTIVE AGREEMENTS. The Borrower shall not enter into any agreement which would violate or cause a breach of or under this Agreement or any Loan Documents or the performance by the Borrower of any obligation hereunder or thereunder or which prohibits or would prohibit the creation, incurrence or assumption of any Lien upon the Borrower's property or assets, whether now owned or hereafter acquired. 8.B.12. INVESTMENTS. The Borrower shall not make any loan or advance to any Person, or purchase or otherwise acquire any capital stock, assets, obligations, or other securities of, make any capital contribution to, or otherwise invest in or acquire any interest in any Person, or participate as a partner or joint venturer with any other Person, except for Permitted Investments. SECTION 9. EVENTS OF DEFAULT. The following events shall constitute and be deemed Events of Default hereunder: Section 9.A. OBLIGATIONS. Failure by the Borrower (i) to make any payment of principal on any Loan or Note on the date such payment Obligation is due, or (ii) to make any payment of interest on any Loan or Note or any payment of any fee due hereunder within 3 Business Days after such payment Obligation is due. Section 9.B. BREACH OR DEFAULT UNDER LOAN DOCUMENTS. (i) failure or neglect of the Borrower to perform, keep or observe any of the covenants at Sections 8.A.1, 8.A.2, 8.A.7, 8.A.8, 8.A.10, 8.A.17 or 8.B hereof; or (ii) failure or neglect of the Borrower to perform, keep or observe any of its respective other covenants, conditions, promises or agreements contained 38 herein or in any other Loan Document to which it is a party or signatory and the Borrower fails to cure the foregoing within thirty (30) days after notice from the Lender to the Borrower thereof; or (iii) an Event of Default occurs under any other Loan Document; or (iv) at any time any notice is given by the Borrower of the discontinuance, invalidity or unenforceability of or the Borrower's obligations thereunder. Section 9.C. REPRESENTATION AND WARRANTIES. Any warranty or representation now or hereafter made by the Borrower hereunder or under any Loan Document, is untrue or incorrect in any material respect or fails to state a material fact necessary to make such warranty or representation not misleading in light of the circumstances in which it was made, or any schedule, certificate, statement, report, financial data, notice or writing furnished to the Lender at any time by the Borrower is untrue or incorrect in any material respect or fails to state a material fact needed to make the foregoing not misleading in light of the circumstances in which the foregoing were furnished, in each case on the date as of which the facts set forth therein are stated or certified and the Borrower fails to cure any of the foregoing within thirty (30) days after the Borrower should have become aware of the same. Section 9.D. JUDGMENTS. A final and non-appealable judgment or order, or an aggregate of final and non-appealable outstanding judgments or orders, requiring payment in excess of $100,000, either not fully covered by insurance or the insurance for which is disputed or contested, shall have been entered against the Borrower, and such judgments or order(s) shall remain unsatisfied or undischarged and in effect for thirty (30) consecutive days without a stay of enforcement or execution thereof. Section 9.E. INSOLVENCY AND RELATED PROCEEDINGS. If the Borrower (i) if a natural Person, dies or, if not a natural Person, is dissolved; (ii) authorizes or makes an assignment for the benefit of creditors; (iii) generally shall not pay its debts as they become due; (iv) shall admit in writing its inability to pay its debts generally; or (v) shall authorize or commence (whether by the entry of an order for relief or the appointment of a receiver, trustee, examiner, custodian or other similar official therefor or for any substantial part of its property) any proceeding or voluntary case under any bankruptcy, reorganization, insolvency, dissolution, liquidation, adjustment or arrangement of debt, receivership or similar Laws or if such proceedings are commenced or instituted, or an order for relief or approving any petition commencing such proceedings is entered against the Borrower and such party, by any action or failure to act, authorize, approve, acquiesce, or consent to the commencement or institution of such proceedings, or such proceedings are not dismissed within sixty (60) days after the date of filing, commencement or institution. Section 9.F. OTHER MATERIAL AGREEMENTS. If the Borrower defaults or a default or an event of default occurs under or in the performance of its obligations under (i) any other agreement with the Lender, or (ii) under any other material (exceeding $100,000) agreement, document or instruments for borrowed money, and such default, breach, or event of default continues beyond any applicable grace period thereunder and the effect of which shall be to allow the holder of such agreement, document or instrument to terminate the foregoing, or the Person to whom such obligation is owed to cause such obligation to become due prior to its 39 stated maturity or otherwise accelerated, or (iii) under any other material agreement, document or instrument (not for borrowed money), and such default, breach, or event of default continues beyond any applicable grace period thereunder and the effect of which shall be to allow the holder of such agreement, document or instrument to terminate the foregoing or to accelerate obligations exceeding $100,000 owed to it thereunder. Section 9.G. STATE ACTION. If any proceeding is instituted or commenced by the State or country of incorporation of the Borrower, seeking a forfeiture of the [Certificate] of Incorporation of the Borrower and any order entered in such proceeding shall fail to be vacated within thirty (30) days. Section 9.H. ERISA MATTERS. If any of the following events shall have occurred with respect to any Employee Plan and the resultant or potential liability of the Borrower therefor exceeds $100,000: (i) a Reportable Event or Prohibited Transaction, as such terms are defined in ERISA, shall have occurred; (ii) a trustee is appointed by any governmental body or agency or any court to administer any Employee Plan; (iii) any Employee Plan is involuntarily terminated, or circumstances exist which constitute grounds entitling the Pension Benefit Guaranty Corporation to institute proceedings to terminate any Employee Plan; or (iv) any withdrawal liability is incurred in connection with any termination of an Employee Plan. Section 9.I. TAX LIENS. If a notice of lien, levy or assessment is filed or recorded with respect to all or a material part of the assets or the Collateral owned by the Borrower by the United States, or any department, agency or instrumentality thereof, or by any state, county, municipality or other governmental agency, or any taxes or debts owing at any time or times hereafter to any one or more of the foregoing become a lien upon a material part of the Collateral, unless such notice or lien is a Permitted Lien or is removed within ninety (90) days after filing or recording of such notice or becoming such lien. Section 9.J. FAILURE OF LIEN. If any Loan Document shall at any time after its execution and delivery and for any reason (other than as a result of any action or inaction by the Lender) cease (i) to create a valid and perfected first priority Lien (except for Permitted Liens) in and to the Collateral covered thereby; or (ii) to be in full force and effect or shall be declared null and void, or the validity or enforceability thereof shall be contested or the Borrower shall deny it has any further liability or obligation under any Loan Document, or the Borrower shall fail to perform any of its obligations under any Loan Document beyond any applicable grace period. Section 9.K. [Intentionally Omitted]. Section 9.L. ENVIRONMENTAL OR OTHER REMEDIATION COSTS. If the Borrower or Affiliate becomes aware of, any environmental contamination or similar site deficiency which may reasonably be expected to cause the Borrower or Affiliate to incur or be liable for costs of any kind aggregating in excess of a cost of $100,000. Section 9.M. OPERATING PERMITS AND LICENSES. If the Borrower fails to maintain any permits or licenses which are necessary and required for the ownership, use, occupancy or 40 operation of its business, if such deficiency would have a Materially Adverse Effect and is not cured within 30 days. Section 9.N. MATERIAL ADVERSE CHANGE. If since June 30, 1999, there shall have occurred any condition or event which the Lender determines has or might be reasonably expected to have a Materially Adverse Effect. Section 9.0. CHANGE IN CONTROL. If a Change in Control shall occur. "CHANGE IN CONTROL" means (i) the direct or indirect sale, lease, exchange or other transfer of all or substantially all of the assets of Borrower to any Person or Group, as defined in Rule 13d-5 under the Exchange Act ("Group"), other than an Affiliate of Borrower, (ii) the merger or consolidation of Borrower with or into another entity with the effect that the then existing shareholders of Borrower, collectively, hold less than 50.1% of the combined voting power of the then outstanding securities of the surviving entity of such merger or the corporation resulting from such consolidation ordinarily (and apart from rights arising under special circumstances) having the right to vote in the election of directors, (iii) during any two-year period, the replacement of a majority of the Board of Directors of Borrower from the directors who constituted the Board of Directors at the beginning of such period, and such replacement shall not have been approved by a vote of at least a majority of the Board of Directors of Borrower then still in office who were either members of the Board of Directors at the beginning of such period or whose election as a member of the Board of Directors was previously so approved, (iv) a Person or Group (other than existing shareholders of Borrower, and/or any executive officer of Borrower or its Subsidiaries, or its successors) shall, as a result of a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise, have become the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of securities of Borrower representing 50% or more of the combined voting power of the then outstanding securities of Borrower ordinarily (and apart from rights arising under special circumstances) having the right to vote in the election of directors or shall have acquired the right to designate a majority of the Board of Directors of Borrower, (v) any Person or Group (other than existing shareholders of Borrower, or its executive officers) shall acquire the right, by contract or otherwise, to elect, appoint or otherwise designate a majority of the Board of Directors of Borrower, whether or not such right is exercised, or (vi) the occurrence of any event specified in Section 9.E. with respect to Borrower or any of its Subsidiaries. SECTION 10. RIGHTS AND REMEDIES. Section 10.A. TERMINATION OF COMMITMENT AND ACCELERATION. Upon the happening or occurrence of an Event of Default described in Section 9.E. above, the Lender's Commitments shall immediately terminate, and upon the happening or occurrence of any other Event of Default set forth in Section 9, such Event of Default not having been previously cured or waived in writing by the Lender, the Lender may declare the Commitments terminated, if they have not yet been terminated. Following the termination of the Commitments, the Lender may accelerate the Obligations by declaring that the Obligations are then due and payable and, thereupon, the Note shall be and become forthwith, due and payable without any presentment, demand, protest, notice of any of the foregoing or other notice of any kind, all of which are hereby expressly 41 waived notwithstanding anything contained herein or in the Note to the contrary, and the Lender shall have all rights and remedies now or hereafter provided by applicable Laws and without limiting the generality of the foregoing may, at its option, also appropriate and apply toward the payment of the Note, any indebtedness of the Lender to the Borrower, howsoever created or arising, and may also exercise any and all rights and remedies hereunder, under the Loan Documents or in and to the Collateral referred to in the Security Agreement and Stock Pledge Agreement. Section 10.B. RIGHTS OF SECURED CREDITOR. Lender shall have, in addition to the rights and remedies given to it under this Agreement, the Note and the other Loan Documents, all of the rights and remedies of a secured party under the Uniform Commercial Code as enacted in any jurisdiction in which any of the Collateral may be located and all rights and remedies allowed by all applicable Laws, all of which rights and remedies shall be cumulative and non-exclusive, to the extent permitted by said Laws. In addition to all such rights and remedies, the sale, lease or other disposition of the Collateral, or any part thereof, by Lender after an Event of Default may be for cash, credit or any combination thereof, and Lender may purchase all or any part of the Collateral at public or, if permitted by Law, private sale, and in lieu of actual payment of such purchase price, may set-off the amount of such purchase price against the Obligations then owing. Any sale of the Collateral may be adjourned from time to time with or without notice. Lender may, in its sole discretion, cause any Collateral to remain on the Borrower's premises, at the Borrower's expense, pending sale or other disposition of such Collateral. Lender shall have the right to conduct such sales on the Borrower's premises, at Borrower's expense, or elsewhere on such occasion or occasions as Lender may see fit. Section 10.C. ENTRY UPON PREMISES AND ACCESS TO INFORMATION. If an Event of Default then exists, without notice, demand or legal process of any kind, Lender may take possession of any or all of the Collateral, wherever it might be found and for that purpose, Lender shall have the right, without breaching the peace, to enter upon the premises of the Borrower where the Collateral is located (or is believed to be located) without any obligation to pay rent to the Borrower, or any other place or places under the control of the Borrower where the Collateral is believed to be located and kept, and remove the Collateral therefrom to the premises of Lender or any agent of Lender, for such time as Lender may desire, in order to effectively collect or liquidate the Collateral, and/or Lender may require the Borrower to assemble the Collateral and make it available to Lender at a place or places to be designated by Lender. If an Event of Default then exists, Lender shall have the right to obtain access to the Borrower's data processing equipment, computer hardware and software relating to the Collateral and to use all of the foregoing and the information contained therein in any manner Lender deems appropriate which is related to the preservation or disposition of the Collateral or to the collection of the Obligations. Section 10.D. SALE OR OTHER DISPOSITION OF COLLATERAL BY LENDER. Any notice required to be given by Lender of a sale, lease or other disposition or other intended action by Lender with respect to any of the Collateral which is deposited in the United States mails, postage prepaid and duly addressed to Borrower at the address specified in Section 11.I, at least ten (10) Business Days prior to such proposed action, shall constitute fair and reasonable notice to Borrower of any 42 such action. The net proceeds realized by the Lender upon any such sale or other disposition, after deduction for the reasonable expenses of retaking, holding, preparing for sale, selling or the like and the reasonable attorneys' fees and legal expenses incurred by Lender in connection therewith, shall be applied as provided herein toward satisfaction of the Obligations. The Lender shall account to Borrower for any surplus realized upon any such sale or other disposition, and Borrower shall remain liable for any deficiency. The commencement of any action, legal or equitable, or the rendering of any judgment or decree for any deficiency shall not affect Lender's Lien on the Collateral until the Obligations are fully paid. Borrower agrees that Lender has no obligation to preserve rights to the Collateral against any other parties. To the extent Borrower has the power, without violating the terms of any agreement existing as of the Closing Date, to grant such a license, Lender is hereby granted a license or other right to use, without charge, the Borrower's labels, patents, production certificates, type certificates, supplemental certificates, copyrights, rights of use of any name, trade secrets, trade names, tradestyles, trademarks, service marks and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale and selling any Collateral. Section 10.E. COLLECTION OF RECEIVABLES. After an Event of Default occurs and is continuing, Lender is authorized and empowered (which authorization and power, being coupled with an interest, is irrevocable until the last to occur of termination of this Agreement and payment and performance in full of all of the Obligations) in its sole and absolute discretion: (i) To endorse in the Borrower's name and to collect any chattel paper, checks, notes, drafts, instruments or other items of payment tendered to or received by Lender in payment of any receivable included in the Collateral; (ii) To notify, either in Lender's name or the Borrower's name, and/or to require the Borrower to notify, any account debtor or any other Person obligated under or in respect of any receivable included in the Collateral, of the fact of Lender's Lien thereon and of the collateral assignment thereof to Lender; (iii) To direct, either in Lender's name or the Borrower's name, and/or to require the Borrower to direct, any account debtor or other Person obligated under or in respect of any receivable to make payment directly to Lender of any amounts due or to become due thereunder or with respect thereto; and (iv) To demand, collect, surrender, release or exchange all or part of any receivable or any amounts due thereunder or with respect thereto, or compromise or extend or renew for any period (whether or not longer than the initial period) any and all sums which are now or may hereafter become due or owing upon or with respect to any receivable included in the Collateral, or enforce, by suit or otherwise, payment or performance of any receivable either in Lender's own name or in the name of the Borrower. Under no circumstances shall Lender be under any duty to act in regard to any of the foregoing matters. The costs relating to any of the foregoing matters, including reasonable attorneys' fees 43 and out-of-pocket expenses, shall be borne solely by Borrower whether the same are incurred by Lender or Borrower. Section 10.F. RESCISSION. If at any time after acceleration of the maturity of the Loans, Borrower shall pay all arrears of interest and all payments on account of principal of the Loans which shall have become due otherwise than by acceleration (with interest on principal and, to the extent permitted by laws, on overdue interest, at the rates specified in this Agreement) and all Events of Default and Defaults (other than nonpayment of principal of and accrued interest of the Loans due and payable solely by virtue or acceleration) shall be remedied or waived pursuant to this Agreement, then by written notice to Borrower, the Lender may elect, in its sole discretion, to rescind and annul the acceleration and its consequences; but such action shall not affect any subsequent Event of Default or Default or impair any right or remedy consequent thereon. The provisions of the preceding sentence do not give Borrower the right to require Lenders to rescind or annul any acceleration hereunder, even if the conditions set forth herein are met. Section 10.G. APPLICATION OF PAYMENTS. All monies received by the Lender from the exercise of any rights or remedies shall, unless otherwise required by applicable Law, be applied as follows: A. First, to the payment of all reasonable expenses (to the extent not paid by Borrower) actually incurred by the Lender in connection with the exercise of such rights or remedies, including all out-of-pocket costs and expenses of collection, reasonable attorneys' fees and court costs, all costs incurred by the Lender directly or indirectly in carrying out the terms, covenants and agreements contained in any Loan Document, together with interest thereon as provided therein, and all other costs and expenses described in Section 8.A.6; B. Next, to the payment of any outstanding fees due hereunder; C. Next, to the payment of interest then accrued and unpaid on the Note; D. Next, to the payment of principal then owing on the Note; E. Next, to all of the other Obligations; F. Surplus, if any, unless a court of competent jurisdiction decrees otherwise, to the holder(s) of any junior liens as may be required by the provision of any applicable agreement governing Subordinated Debt and to the Borrower, as appropriate. SECTION 11. MISCELLANEOUS. Section 11.A. ASSIGNMENTS AND PARTICIPATIONS. Lender, without the consent of the Borrower, may assign or sell participation, to one or more banks or other financial institutions all or a portion of its rights and obligations under this Agreement (including without limitation all or a portion of its Commitments and the Loans owing to it. 44 Section 11.B. WITHHOLDING TAXES. Except as otherwise required by Law, each payment by the Borrower under this Agreement or the Note shall be made without setoff or counterclaim and without withholding for or on account of any present or future taxes imposed by or within the jurisdiction in which the Borrower is domiciled, any jurisdiction from which the Borrower makes any payment hereunder, or (in each case) any political subdivision or taxing authority thereof or therein (excluding any such tax imposed on the overall net income of Lender). If any such withholding is so required, the Borrower shall make the withholding, pay the amount withheld to the appropriate governmental authority before penalties attach thereto or interest accrues thereon and forthwith pay such additional amount as may be necessary to ensure that the net amount actually received by Lender free and clear of such taxes (including such taxes on such additional amount) is equal to the amount which Lender would have received had such withholding not been made. If the Lender pays any amount in respect of any such taxes, penalties or interest, the Borrower shall reimburse the Lender for that payment on demand in the currency in which such payment was made. If a Borrower pays any such taxes, penalties or interest, it shall deliver official tax receipts evidencing that payment or certified copies thereof to the Lender on or before the thirtieth day after payment. Section 11.C. AMENDMENT AND WAIVERS. No amendment or modification of any provision of this Agreement shall be effective without the written agreement of Lender and Borrower. Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. No notice to or demand on Borrower in any case shall entitle Borrower to any further notice or demand in similar or other circumstances. Section 11.D. MERGER AND INTEGRATION CLAUSE. This Agreement and the Loan Documents contain the entire agreement between the parties hereto with respect to the subject matter hereof and specifically supersedes in its entirety the proposal letter of the Lender to Borrower dated October 12, 1999, and any prior drafts thereof or proposals or letters from the Lender with respect to the terms of credit facility hereunder or any other matter which is the subject matter of this Agreement or any of the Loan Documents. Section 11.E. APPLICABLE LAW. This Agreement, the Note and the other Loan Documents have been executed, issued, delivered and accepted in and shall be deemed to have been made under and shall be governed by and construed in accordance with the Laws of the State of Illinois. Section 11.F. SEVERABILITY. This Agreement, the Note and the other Loan Documents shall be construed and interpreted in such manner as to be effective, enforceable and valid under all applicable Laws. If any provision of this Agreement, the Note or the other Loan Documents shall be held invalid, prohibited or unenforceable under any applicable Laws of any applicable jurisdiction, such invalidity, prohibition or unenforceability shall be limited to such provision and shall not affect or invalidate the other provisions hereof or thereof or affect the validity or enforceability of such provision in any other jurisdiction, and to that extent, the provisions hereof and thereof are severable. 45 Section 11.G. SECTION HEADINGS. Section headings used in this Agreement are for convenience only and shall not effect the construction or interpretation of this Agreement. Section 11.H. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of the Lender and the Borrower, and their respective successors and assigns; provided, however, that the Borrower has no right to assign any of its rights or its obligations hereunder without the prior written consent of Lender. Section 11.I. NOTICES. Any notices, requests or consents required or permitted by this Agreement shall be (i) in writing, and (ii) delivered in person, telexed, telecopied or sent by certified or registered mail, postage prepaid, return receipt requested, or by overnight mail or express delivery service to the addresses of the parties hereto set forth below, unless such address, telex number or telecopier number is changed by written notice hereunder. Each such notice, request, consent or other communication shall be effective (i) if given by telecopier, when such telecopy is transmitted to the telecopier number specified on the signature page hereof and a confirmation of such telecopy has been received by the sender, (ii) if given by telex, when such telex is transmitted to the telex number specified on the signature page hereof and the answerback is received by sender, (iii) if given by mail, five (5) days after such communication is deposited in the mail, certified or registered with return receipt requested, addressed as aforesaid or (iv) if given by any other means, when delivered at the addresses specified on the signature page hereof; PROVIDED THAT any notice given pursuant to Sections 2 and 3 hereof shall be effective only upon receipt. Section 11.J. COUNTERPARTS. This Agreement may be executed in any number of counterparts, and by the different parties on different counterparts, each of which when executed shall be deemed an original but all such counterparts taken together shall constitute one and the same instrument. Section 11.K. INDEMNIFICATION. The Borrower hereby indemnifies, exonerates and holds free and harmless the Lender, each of its Affiliates and each of their officers, directors, employees, agents-and attorneys (collectively, the "INDEMNIFIED PARTIES" or, individually, an "INDEMNIFIED PARTY"), from and against any and all actions, causes of action, suits, proceedings, investigations, losses, costs, liabilities, damages, punitive damages, penalties and expenses, including reasonable attorneys' and paralegals' fees and disbursements (the "INDEMNIFIED LIABILITIES"), incurred by the Indemnified Parties or any of them as a result of, or arising out of, or relating to (irrespective of whether such Indemnified Party is a party to the action for which indemnification hereunder is sought): (a) any transaction financed or to be financed in whole or in part, directly or indirectly, with the proceeds of any Loan; (b) the entering into and performance under this Agreement or any other Loan Document or by any party thereto; or 46 (c) any investigation, litigation, or proceeding related to any acquisition or proposed acquisition by the Borrower of all or any portion of the stock or all or substantially all the assets of any Person or merger or proposed merger of the Borrower with any other Person, whether or not the Lender is party thereto and whether or not the proceeds of any Loans are used or to be used in connection therewith; except for any such Indemnified Liabilities arising by reason of an Indemnified Party's gross negligence or wilful misconduct. In addition, if the Borrower institutes any action, suit or proceeding against any of the Indemnified Parties and such action, suit or proceeding is unsuccessful, the Borrower shall indemnify and hold harmless the Indemnified Parties from and against all Indemnified Liabilities arising in connection with or relating to such action, suit or proceeding. The Borrower shall pay or reimburse the Indemnified Parties for any Indemnified Liabilities from time to time within thirty (30) days after demand. This Section and the agreements of the Borrower set forth herein shall survive the termination of this Agreement and any or all of the Loan Documents and repayment of all of the Obligations hereunder and thereunder. If and to the extent that the undertaking described in this Section 11.K. is held or determined by any court of competent jurisdiction to be unenforceable for any reason, the Borrower hereby agree to make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable Laws. Section 11.L. INDEPENDENCE OF COVENANTS. All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or be otherwise within the limitations of, another covenant shall not avoid the occurrence of an Event of Default or Default if such action is taken or condition exists, and if a particular action or condition is expressly permitted under any covenant, unless expressly limited to such covenant, the fact that it would not be permitted under the general provisions of another covenant shall not constitute an Event of Default or Default if such action is taken or condition exists. Section 11.M. MARSHALLING; RECOURSE TO SECURITY; PAYMENTS SET ASIDE. Lender shall not be under any obligation to marshall any assets in favor of Borrower or any other party or against or in payment of any or all of the Obligations. Recourse to security shall not be required at any time. To the extent that Borrower makes a payment or payments to the Lender or the Lender enforces its Liens or exercises its rights of setoff, and such payment or payments or the proceeds of such enforcement of setoff or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or another party under any bankruptcy law, state or federal law, common law or equitable cause, then to the extent of such recovery, the obligation or part thereof originally intended to be satisfied, and all Liens, rights and remedies therefor, shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred. Section 11.N. LIMITATION OF LIABILITY. To the extent permitted by applicable Law, no claim may be made by Borrower or any other Person against Lender, or its Affiliates, directors, officers, employees, attorneys or agents, for special, indirect, consequential or punitive damages in respect of any claim for breach of contract or any other theory of liability arising out of or related to the transactions contemplated by this Agreement, or any act, omission or event 47 occurring in connection therewith; and Borrower hereby waives, releases and agrees not to sue upon any claim for any such damages, whether or not accrued and whether or not known or suspected to exist in its favor. Section 11.O. CONSENT TO JURISDICTION AND WAIVER OF JURY TRIAL AND PERSONAL SERVICE. THE BORROWER EXPRESSLY SUBMITS AND CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN COOK COUNTY, ILLINOIS IN ANY ACTION, SUIT OR PROCEEDING (WHETHER IN CONTRACT OR TORT, AT LAW OR IN EQUITY) COMMENCED THEREIN IN CONNECTION WITH OR WITH RESPECT TO THE OBLIGATIONS, THIS AGREEMENT, THE NOTE OR ANY OTHER LOAN DOCUMENTS (INCLUDING, WITHOUT LIMITATION, ANY DEFENSES OR COUNTER CLAIMS THEREIN), AND THE BORROWER AND THE LENDER EACH WAIVE ANY RIGHT TO JURY TRIAL THAT THEY MAY NOW OR HEREAFTER HAVE UNDER ANY LAWS AND ANY OBJECTION TO VENUE IN CONNECTION THEREWITH. THE BORROWER HEREBY WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS OR PAPERS ISSUED OR SERVED IN CONNECTION WITH THE FOREGOING AND AGREES THAT SERVICE OF SUCH PROCESS OR PAPERS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, RETURN RECEIPT REQUESTED, DIRECTED TO THE BORROWER AS SET FORTH IN SECTION 11.I. ABOVE AND THE BORROWER'S REGISTERED AGENT, IN WHICH CASE SUCH PROCESS OR PAPERS SHALL BE DEEMED RECEIVED FIVE (5) DAYS THEREAFTER, OR BY OVERNIGHT MAIL OR EXPRESS DELIVERY SERVICE, IN WHICH CASE SUCH PROCESS OR PAPERS SHALL BE DEEMED RECEIVED ONE (1) DAY THEREAFTER. [SIGNATURE PAGE FOLLOWS] 48 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. BORROWER: SELECTQUOTE INSURANCE SERVICES By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- Address: 595 Market Street, 6th Floor San Francisco, CA 94105 Telephone: (415) 543-7338 Telecopy: (800) 436-7000 LENDER: LASALLE BANK NATIONAL ASSOCIATION By: ------------------------------------- Name: Janet R. Gates Title: Senior Vice President Address: 135 South LaSalle Street Chicago, IL 60603 Telephone: (312) 904-4617 Telecopy: (312) 904-6189 49 EX-21.1 5 EXHIBIT 21.1 Exhibit 21.1 Subsidiaries SelectQuote Insurance Services, a California corporation ("SQIS") SelectQuote Insurance Services of Texas, Inc., a Texas corporation (100% owned by Charan Singh) EX-23.2-1 6 EXHIBIT 23.2.1 Exhibit 23.2.1 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 1 to the Registration Statement No. 333-31440 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 April 11, 2000 EX-27.1 7 EXHIBIT 27.1
5 1,000 YEAR JUN-30-1999 JUL-01-1998 JUN-30-1999 799 900 5,868 542 0 8,829 3,550 (2,421) 10,208 2,848 0 0 20 50 7,071 10,208 0 19,941 0 15,774 5 0 42 4,213 1,685 2,528 0 0 0 2,528 0.47 0.36
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