<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 24, 1999
REGISTRATION NO. 333-65973
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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QUOTESMITH.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
7375
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION OR CODE NUMBER)
58-1521612
(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
8205 SOUTH CASS AVENUE, SUITE 102
DARIEN, ILLINOIS 60561
(630) 515-0170
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
BURKE A. CHRISTENSEN, ESQ.
VICE PRESIDENT AND GENERAL COUNSEL
QUOTESMITH.COM, INC.
8205 SOUTH CASS AVENUE, SUITE 102
DARIEN, ILLINOIS 60561
(630) 515-0170
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
ROBERT A. MCWILLIAMS, ESQ.
CRAIG C. BRADLEY, ESQ.
GORDON P. PAULSON, ESQ.
FREEBORN & PETERS
311 SOUTH WACKER DRIVE, SUITE 3000
CHICAGO, IL 60606
(312) 360-6551
(312) 360-6570 (FAX)
LARRY A. BARDEN, ESQ.
JON A. BALLIS, ESQ.
SHARON R. FLANAGAN, ESQ.
SIDLEY & AUSTIN
ONE FIRST NATIONAL PLAZA
CHICAGO, ILLINOIS 60603
(312) 853-7000
(312) 853-7036 (FAX)
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APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 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, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement number for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
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<S> <C> <C>
Common Stock, par value $0.001 per share(2)............. $80,000,000.00 $22,240.00(3)
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</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o) under the Securities Act of 1933.
(2) Includes certain associated stock purchase rights issued pursuant to a
Rights Agreement.
(3) Amount previously paid.
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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 SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE CANNOT
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 IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN
ANY STATE WHERE SUCH AN OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED , 1999
PROSPECTUS
SHARES
QUOTESMITH LOGO
COMMON STOCK
This is an initial public offering of common stock by Quotesmith.com, Inc.
We are selling shares of our common stock. We estimate that the
initial public offering price will be between $ and $ per share.
------------------------
There is currently no public market for our common stock. We have applied
to have the common stock approved for quotation on the Nasdaq National Market
under the symbol "QUOT."
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<TABLE>
<CAPTION>
PER SHARE TOTAL
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<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds to Quotesmith.com, before expenses................. $ $
</TABLE>
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Quotesmith.com has granted the underwriters an option for a period of 30
days to purchase up to additional shares of common stock. The underwriters
are severally underwriting the shares being offered on a firm commitment basis.
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
HAMBRECHT & QUIST
PAINEWEBBER INCORPORATED
ABN AMRO ROTHSCHILD
A DIVISION OF ABN AMRO
INCORPORATED
CHARLES SCHWAB & CO., INC.
, 1999
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[PROPOSED GATEFOLD ARTWORK]
GATEFOLD PAGE
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Top of page: Capital Letters, "BUYER-DRIVEN (circular stock photo, fades)
COMMERCE
Headline: Quotesmith.com enables self-directed consumers and business
owners to obtain instant quotes from over 300 insurance
companies. We quarantee the accuracy of every quote. You can
buy from the company of your choice without the involvement of any
commissioned salespeople.
Subheadings: List of available instant quotes by product line in left 1/3
column
Pictures: Quotesmith.com home page, various other pages, right 2/3
<PAGE> 4
Top of left
page: Instant term life quotes
Headline: With Quotesmith.com's instant term life price comparison service,
you are quaranteed to view the lowest term life premiums- or you
get $500...
Subheadings: Instant quotes are available from more than 120 term life
companies. It's quick and easy to obtain instant quotes and get
answers online to frequently asked questions.
Pictures: Quotesmith.com term life quote page, various other pages as
relate to captions
Bottom of left
page: Instant auto insurance quotes section
Headline: Instant auto insurance quotes
Subheadings: Thanks to click-through agreements with Intuit, Insurance
Services, Inc. and
The Progressive Corporation, we've made it easy to get instant
auto insurance quotes from 45 auto insurance companies. And now
several companies offer the ability to buy online which saves
more time.
Pictures: Quotesmith.com home page, various other pages as relate to
captions
Top of right
page: Instant medical insurance quotes
Headline: Now small businesses, families and individuals can get instant
medical insurance quotes...
Subheadings: Instant quotes are now available from more than 30 medical
insurance companies. We've made it easy to view basic coverage
information, optional coverages and costs and to request an
application online from the company of your choice.
Pictures: Quotesmith.com medical insurance quote page, various other pages
as relate to captions
Bottom of
right page:
Headline: Instant group medical, dental, Medicare supplement, "no-exam"
whole life and annuity quotes
Subheadings: Quotesmith.com offers a wide range of instant quotes on several
popular lines of insurance and offers a complete, "quote to
policy delivery" solution delivered by our customer service
representatives. We keep you in control of your insurance
purchase decisions.
Pictures: Various Quotesmith.com quote pages relating to the caption.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary.......................................... 3
Risk Factors................................................ 7
Special Note Regarding Forward-Looking Statements........... 18
Use of Proceeds............................................. 19
Dividend Policy............................................. 19
Capitalization.............................................. 20
Dilution.................................................... 21
Selected Financial and Other Data........................... 22
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 23
Business.................................................... 32
Management.................................................. 45
Certain Transactions........................................ 53
Principal Stockholders...................................... 54
Description of Capital Stock................................ 55
Shares Eligible for Future Sale............................. 61
Underwriting................................................ 63
Legal Matters............................................... 65
Experts..................................................... 65
Additional Information...................................... 65
Index to Financial Statements............................... F-1
</TABLE>
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We maintain a Web site on the World Wide Web at www.quotesmith.com. The
reference to our Web site does not constitute incorporation by reference into
this prospectus. Quotesmith.com and the Quotesmith.com logo are service marks of
Quotesmith.com, Inc. All brand names and trademarks appearing in this prospectus
are the property of their respective holders.
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This prospectus includes statistical data regarding our company, the
Internet and the insurance industry. Such data are based on our records or are
taken or derived from information published or prepared by various sources,
including International Data Corporation, Forrester Research, Inc., A.M. Best
Company, Inc. and the Life Insurance Marketing Research Association.
2
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PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in the
prospectus. This summary may not contain all of the information that you should
consider before investing in our common stock. You should read the entire
prospectus carefully, including the information under "Risk Factors" beginning
on page 7 and the financial statements beginning on page F-1, before making an
investment decision.
QUOTESMITH.COM
We believe that Quotesmith.com is the most comprehensive Internet-based
insurance service available. The Quotesmith.com service enables consumers and
business owners to obtain instant quotes from over 300 insurance companies, and
we guarantee the accuracy of every quote. Combining the reach and efficiency of
the Internet with our proprietary database and industry expertise developed over
the past 15 years, we provide a complete "quote to policy delivery" insurance
solution without the involvement of any commissioned salespeople.
We have created a model that addresses the challenges faced by traditional
insurance distribution methods in a manner that offers significant benefits to
both consumers and insurance companies. The Quotesmith.com model allows
consumers to: (1) efficiently search for, analyze and compare insurance
products; (2) quickly request and obtain insurance quotes; and (3) easily select
and purchase insurance from the insurance company of their choice. Since we
began providing instant insurance quotes on the Internet in May 1996, we have
delivered more than 27,000 policies.
Insurance premiums paid in the United States in 1998 represented over $1.1
trillion according to A.M. Best. The growing acceptance of the Internet and
electronic commerce presents a significant opportunity for the insurance
industry by allowing self-directed consumers to more efficiently and effectively
research and transact with insurance companies. The fragmentation of the
insurance industry and the significant price and product variation has led
consumers and insurance companies to seek alternative means of purchase and
distribution. According to Forrester Research, Internet-influenced sales of
insurance are expected to grow from $1.5 billion in 1998 to $11.0 billion in
2003. We believe that the vast information sharing and communications power of
the Internet will significantly improve the insurance industry for both
consumers and insurance companies.
While a number of new companies have emerged in an attempt to capitalize on
this online insurance opportunity, we do not believe that any of these efforts
fully addresses the limitations inherent in traditional insurance distribution
or the challenges faced by consumers in effectively purchasing insurance. The
Quotesmith.com solution provides the following principal advantages to both
consumers and insurance companies:
- Comprehensive source of insurance information and products including
insurance quotes from over 300 insurance companies across several types
of insurance and access to what we believe is the largest, most complete
repository of comparative information on insurance products, insurance
pricing and insurance providers.
- Guaranteed-accurate instant quotes for which we offer a $500 cash reward
guarantee that we provide an accurate quote. This Quotesmith.com
guarantee is unmatched by our competitors.
- A no salesperson approach that eliminates face-to-face commissioned
agents from the insurance purchase process and puts consumers in control
of their insurance purchase decisions.
3
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- Convenience for consumers to gather information and compare insurance
products on a single Web site, from any location and on their own time.
- Quote to policy delivery support that provides continued, value-added
service and assistance throughout the insurance purchase process
including answering questions and arranging paramedical examinations.
- Focus on customer service through a highly-trained, experienced and
non-commissioned customer service staff that provides support throughout
the application process and aims to eliminate consumer dissatisfaction
and frustration.
- Fully licensed national insurance agency with the ability to provide
insurance policies to consumers throughout the United States.
- User friendly system that provides service 24 hours a day, 7 days a week
through an easy to use Web site designed for fast viewing and rapid
downloading.
The Quotesmith.com model is unique and distinct from both traditional and
online models. Our Internet-based model provides a complete "quote to policy
delivery" insurance solution that puts consumers in control of their insurance
purchase process. By providing extensive comparative information and responsive
customer service throughout the entire insurance information gathering and
purchase process, our model enhances the consumer experience at each stage and
streamlines the overall process. We are not a lead referral service or an online
distribution channel for a single insurance company, but rather we generate
revenues when our customers have successfully obtained an insurance policy from
the insurance company of their choice through our service.
We strive to be the leading Internet-based service for all insurance needs
of consumers and small businesses. We plan to continue to build the
Quotesmith.com brand, offer additional insurance products, expand the number of
participating insurance companies, leverage our customer base, strengthen and
pursue strategic relationships and continue to focus on customer service.
We incorporated and began our operations in March 1984 with an electronic
quotation and policy information service for insurance agents and brokers. Over
the past 15 years, we have been developing our proprietary insurance price
comparison service technology and industry expertise. In 1993, we became
licensed to offer insurance throughout the United States and in 1994 began
providing quotes directly to consumers. We recently entered into a strategic
agreement with Intuit Insurance Services, Inc., a wholly-owned subsidiary of
Intuit Inc., which licenses our insurance quotation database technologies and
extends our customer service and insurance brokerage capabilities to Intuit
Insurance Services and certain of its affiliated Internet sites.
Our headquarters and principal offices are located at 8205 South Cass
Avenue, Suite 102, Darien, Illinois 60561, and our telephone number is (630)
515-0170.
4
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THE OFFERING
Common stock offered by Quotesmith.com...... shares
Common stock to be outstanding after this
offering.................................... shares
Use of proceeds............................. For general corporate purposes,
including selling, marketing and
brand promotion expenditures and
working capital purposes. See
"Use of Proceeds" on page 19.
Risk factors................................ For a discussion of certain
risks you should consider before
investing in Quotesmith.com
common stock, see "Risk Factors"
beginning on page 7.
Proposed Nasdaq National Market symbol...... QUOT
------------------------
These share numbers are based on shares outstanding, but exclude:
- 500,000 shares of common stock issuable upon exercise of options
outstanding as of June 16, 1999 and 212,000 shares of common stock
issuable upon exercise of options that we will grant upon completion of
this offering, under our 1997 Stock Option Plan; and
- 1,013,000 shares of common stock available for future grant or issuance
under our 1997 Stock Option Plan and 1999 Employee Stock Purchase Plan
after our grant of options to purchase 212,000 upon the completion of
this offering.
------------------------
Unless otherwise indicated, all information in this prospectus assumes that
the underwriters' over-allotment option will not be exercised.
5
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The statement of operations data and balance sheet data presented below are
derived from our financial statements included at the end of this prospectus
beginning on page F-1. The as adjusted balance sheet data summarized below
reflects the application of the net proceeds from the sale of the shares of
common stock in this offering at an assumed initial public offering price of
$ per share, after deducting estimated underwriting discounts and
commissions and estimated offering expenses.
SUMMARY FINANCIAL AND OTHER INFORMATION
(in thousands, except per share data and selected operating statistics)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------- --------------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.......................... $3,812 $4,262 $5,576 $1,165 $ 1,463
Expenses(1)....................... 3,446 4,898 5,774 1,077 2,909
Operating income (loss)........... 366 (636) (198) 88 (1,446)
Net income (loss)................. 223 (467) (196) 78 (1,430)
Basic and diluted net income
(loss) per share................ $ 0.02 $(0.04) $(0.02) $ 0.01 $ (0.11)
Weighted average common shares and
equivalents outstanding:
Basic........................ 12,154 11,956 12,258 11,958 13,023
Diluted...................... 12,154 11,956 12,258 11,983 13,023
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999
--------------------
AS
ACTUAL ADJUSTED
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<S> <C> <C>
BALANCE SHEET DATA:
Cash................................................... $2,946 $
Working capital........................................ 3,316
Total assets........................................... 4,310
Total stockholders' equity............................. 3,734
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------- --------------------
1996 1997 1998 1998 1999
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<S> <C> <C> <C> <C> <C>
SELECTED OPERATING STATISTICS:
Quotes............................ 354,066 591,823 831,291 126,753 335,784
Paid policies..................... 6,701 8,755 10,920 2,455 2,835
</TABLE>
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(1) Since January 1, 1997, our direct response advertising costs no longer
qualify for deferral and are expensed as incurred. If direct response
advertising costs had not been deferred and amortized for any year, expenses
would have been $3.6 million in 1996 and $4.4 million in 1997.
6
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RISK FACTORS
You should consider carefully the following risk factors and all other
information contained in this prospectus before purchasing our common stock.
Investing in our common stock involves a high degree of risk. Additional risks
and uncertainties that are not yet identified or that we currently think are
immaterial may also harm our business and financial condition in the future. Any
of the following risks could materially harm our business, operating results and
financial condition and could result in a complete loss of your investment.
RISKS RELATED TO OUR BUSINESS
OUR LIMITED ELECTRONIC COMMERCE HISTORY MAKES EVALUATING OUR BUSINESS DIFFICULT
Although we began operations in 1984, we did not begin our Internet
operations until May 1996. Accordingly, we have a limited history in operating
our electronic commerce business on which you can evaluate our company and
prospects. Our prospects must be considered in light of the risks,
uncertainties, expenses and difficulties frequently encountered by companies in
a transitional stage of development, particularly companies in new and rapidly
evolving markets, such as electronic commerce, using new and unproven business
models.
OUR INTERNET-BASED INSURANCE SERVICE HAS NOT BEEN PROFITABLE AND MAY NOT BECOME
PROFITABLE IN THE FUTURE
Our first complete year of focusing on our Internet-based insurance service
was 1997. We incurred operating losses of approximately $636,000 in 1997,
$198,000 in 1998 and $1.4 million for the three months ended March 31, 1999.
Because we plan to continue to significantly increase our operating expenses in
an attempt to increase our consumer base, we will need to generate significantly
higher revenues to achieve profitability. Even if we achieve profitability, we
may not be able to maintain profitability in the future. In addition, as our
business model evolves, we expect to introduce a number of new products and
services that may or may not be profitable for us.
NEARLY ALL OF OUR REVENUES ARE CURRENTLY DERIVED FROM CONSUMERS PURCHASING TERM
LIFE INSURANCE THROUGH US
Because nearly all of our revenues are currently derived from consumers
purchasing term life insurance through us, our current financial condition is
largely dependent on the term life insurance industry and in particular
consumers' demand for term life insurance policies. If sales of term life
insurance decline, whether due to the introduction of new products, shifting
consumer preferences or otherwise, our business would be substantially harmed.
In addition, in recent years, term life insurance premiums have been declining.
This decline has caused our average commission per equivalent face amount of a
policy to decrease and has contributed to our operating losses since 1997. If
term life insurance premiums continue to decline, it may become more difficult
for us to become profitable.
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IF THE PURCHASE OF INSURANCE OVER THE INTERNET OR OUR SERVICE OFFERINGS DO NOT
ACHIEVE WIDESPREAD CONSUMER ACCEPTANCE, OUR BUSINESS WILL BE HARMED
Our success will depend in large part on widespread consumer acceptance of
purchasing insurance online. The development of an online market for insurance
has only recently begun, is rapidly evolving and likely will be characterized by
an increasing number of market entrants. Therefore, there is significant
uncertainty with respect to the viability and growth potential of this market.
Our future growth, if any, will depend on the following critical factors:
- the growth of the Internet as a commerce medium generally, and as a
market for consumer financial products and services specifically;
- consumers' willingness to conduct self-directed insurance research;
- our ability to successfully and cost-effectively market our services to a
sufficiently large number of consumers;
- our ability to consistently fulfill application requests on an efficient
and timely basis; and
- our ability to overcome a perception among many consumers that obtaining
insurance online is risky.
There can be no assurance that the market for our services will develop,
that our services will be adopted or that consumers will significantly increase
their use of the Internet for obtaining insurance. If the online market for
insurance fails to develop or develops more slowly than expected, or if our
services do not achieve widespread market acceptance, our business would be
significantly harmed.
WE MAY GENERATE LIMITED REVENUES BECAUSE CONSUMERS CAN OBTAIN FREE QUOTES AND
OTHER INFORMATION WITHOUT PURCHASING INSURANCE THROUGH OUR WEB SITE
We only generate revenues if a consumer purchases insurance through our
service. Consumers can access our Web site and obtain quotes and other
information free of charge without any obligation to purchase insurance through
us. Because virtually all of the insurance policies quoted at our Web site can
be purchased through sources other than us, consumers may take the quotes and
other information that we provide to them and purchase one of our quoted
policies from the agent or broker of their choice. If consumers only use our Web
site for quote information purposes, we will not generate revenues and our
business would be significantly harmed.
WE MAY EXPERIENCE SIGNIFICANT FLUCTUATIONS IN OUR QUARTERLY RESULTS, WHICH MAKES
IT DIFFICULT FOR INVESTORS TO MAKE RELIABLE PERIOD-TO-PERIOD COMPARISONS AND MAY
CONTRIBUTE TO VOLATILITY IN OUR STOCK PRICE
Our quarterly revenues and operating results have fluctuated significantly
in the past and we expect them to continue to fluctuate significantly in the
future. Causes of such fluctuations have included, among other factors:
- the length of time it takes for an insurance company to verify that an
applicant meets the specified underwriting criteria -- this process can
be lengthy, unpredictable and subject to delays over which we have little
or no control, including underwriting backlogs of the insurance company
and the accuracy of information provided by the applicant; we tend to
place a significant number of policies with the most price-competitive
insurance companies, who, due to volume, have longer and more
unpredictable underwriting time frames;
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<PAGE> 12
- increases in selling and marketing expenses, as well as other operating
expenses;
- volatility in bonus commissions paid to us by insurance companies which
typically are highest in the fourth quarter;
- volatility in renewal commission income;
- the conversion and fulfillment rates of consumers' applications, which
vary according to insurance product;
- new sites, services and products by our competitors;
- price competition by insurance companies in the sale of insurance
policies; and
- the level of Internet usage for insurance products and services.
In addition, we have a very long revenue cycle. As a result, substantial
portions of our expenses, including selling and marketing expenses, are incurred
well in advance of potential revenue generation. If revenues do not meet our
expectations as a result of these selling and marketing expenses, our results of
operations will be harmed.
Any one or more of the above-mentioned factors could harm our business and
results of operations, which makes quarterly predictions difficult and often
unreliable. As a result, we believe that quarter-to-quarter comparisons of our
operating results are not necessarily meaningful and not good indicators of our
future performance. Due to the above-mentioned and other factors, it is possible
that in one or more future quarters our operating results will fall below the
expectations of securities analysts and investors. If this happens, the trading
price of our common stock would likely decrease.
WE MUST FURTHER DEVELOP OUR BRAND RECOGNITION AND SUCCESSFULLY EXPAND INTO
ADDITIONAL PRODUCTS OR OUR BUSINESS WILL SUFFER
There are a growing number of Web sites that offer services that are
competitive with the services we offer. Therefore, we believe that broader
recognition and a favorable consumer perception of the Quotesmith.com brand are
essential to our future success. Accordingly, we intend to continue to pursue an
aggressive brand-enhancement strategy consisting of our traditional print
advertising, as well as national radio and television advertising, online
marketing and promotional efforts. We incurred approximately $1.8 million of
selling and marketing expenses during the twelve months ended December 31, 1998
and $681,000 for the three months ended March 31, 1999. To increase awareness of
our brand we are expecting to incur significantly greater amounts. If these
expenditures do not result in a sufficient increase in revenues to cover such
additional selling and marketing expenses, our business, results of operations
and financial condition would be harmed.
We have recently expanded our product offering to include other types of
insurance in addition to our traditional term life product and may continue to
do so in the future. Expanding our product offering has required significant
expenditures and further expansion, if any, will require additional
expenditures. In addition, a portion of our increased selling and marketing
expenditures will be used to promote these new product offerings. However, to
date we have generated small amounts of revenues from our new product types. If
our new product offerings do not generate sufficient revenues to cover the
related expenditures, our business, results of operations and financial
condition would be harmed.
9
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PURSUANT TO OUR AGREEMENT WITH INTUIT INSURANCE SERVICES, WE MAY NOT PURSUE
CERTAIN STRATEGIC RELATIONSHIPS OR AGREEMENTS WITHOUT ITS PRIOR CONSENT; INTUIT
INSURANCE SERVICES MAINTAINS A WEB SITE THAT IS COMPETITIVE WITH OUR SERVICE
Pursuant to the service agreement we have with Intuit Insurance Services,
in some situations we may not enter into strategic relationships or agreement
with certain companies, many of whom are significant participants in electronic
commerce, without Intuit Insurance Services' prior consent. This agreement may
preclude us from entering into strategic relationships we find desirable. In
addition, Intuit Insurance Services' Quicken Insuremarket provides online
insurance services similar to ours. Because Intuit Insurance Services operates a
competitive service and Intuit Inc. is one of our significant stockholders, we
may face conflicts of interest with Intuit that could harm our business. For
more information about our relationship with Intuit Inc. and Intuit Insurance
Services refer to "Business -- Strategic Relationships and Agreements -- Intuit
Inc." on page 42 and "Certain Transactions" on page 53.
OUR BUSINESS MAY BE HARMED IF CERTAIN HIGH VOLUME INSURANCE COMPANIES REFUSE TO
APPOINT US AS THEIR AGENT
We generate a significant portion of our revenues in any given year from a
small number of insurance companies. Our top five insurance companies
represented 61.1% of the policies we delivered for the three months ended March
31, 1999, 64.0% during 1998 and 77.5% in 1997. These insurance companies that
generate large policy volume for us do so principally because they offer the
lowest risk-adjusted premium rates during the relevant period.
We conduct our insurance business pursuant to agency contracts with
insurance companies. We cannot guarantee that we will continue to be appointed
as an agent to offer insurance for these or any other insurance companies. In
addition, these contracts, if entered into, can be terminated with or without
cause and with little or no notice to us by the insurance company. The loss of
one or more of these agency contracts with an insurance company that is charging
competitive or low premium rates could harm our business substantially.
WE DO NOT HAVE AGENCY CONTRACTS WITH ALL OF THE INSURANCE COMPANIES WE QUOTE ON
OUR WEB SITE AND SOME INSURANCE COMPANIES MAY REFUSE TO PARTICIPATE IN OUR
DATABASE OR REFUSE TO DO BUSINESS WITH US
While we obtain the information contained in our database directly from
over 300 insurance companies being quoted and listed at our Web site, we
currently hold agency contracts with 115 insurance companies. We typically seek
formal agency appointment from an insurance company after we receive a purchase
request for that insurance company's product from a consumer. In the past a
number of insurance companies quoted on our Web site have refused to appoint us
as an agent or refused to permit us to publish their quotes for various reasons,
including:
- we do not meet with our customers on a face-to-face basis;
- some insurance companies may have exclusive relationships with other
agents;
- we publicly market our service on a price-oriented basis which is not
compatible with the insurance company's branding efforts; and
- a formal business relationship with us might be perceived negatively by
the insurance company's existing distribution channels.
10
<PAGE> 14
We do not intentionally include in our database insurance companies who
object to their inclusion. If a significant number of insurance companies object
to the inclusion of their information in our database the breadth of our
database would be limited. In addition, we only generate revenues from the 115
insurance companies for whom we are appointed as an agent. If consumers desire
to purchase a material number of policies from insurance companies with whom we
are not appointed as an agent, and these insurance companies refuse to enter
into agency contracts with us, it could harm our business and results of
operations.
OUR STRATEGIC RELATIONSHIPS AND AGREEMENTS DO NOT CURRENTLY, AND MAY NEVER,
GENERATE A MATERIAL AMOUNT OF REVENUES FOR US
As part of our marketing strategy, we recently began to enter into certain
strategic relationships and agreements to increase our access to online
consumers. We currently have strategic agreements with Intuit Insurance
Services, drkoop.com, XOOM.com and The Progressive Corporation. However, to date
we have derived only a minimal amount of revenues from these arrangements. Under
certain of these strategic agreements, we are obligated to pay referral fees
based upon requests for applications or quotes, each of which do not generate
revenue for us unless it results in a purchased insurance policy. In addition,
most of these strategic agreements permit either party to terminate the
agreement with short notice. As a result, we cannot assure you that any of these
relationships or agreements will be profitable or generate any material amount
of revenues in the future. If our strategic relationships and agreements do not
meet our expectations regarding revenues and earnings, our business could be
harmed.
IF WE DO NOT MANAGE OUR GROWTH EFFECTIVELY, OUR BUSINESS COULD BE HARMED
We have expanded our operations significantly since May 1996 and anticipate
that further expansion will be required to realize our growth strategy. Our
operations growth has placed significant demands on our management and other
resources, which is likely to continue. To manage our future growth, we will
need to attract, hire and retain highly skilled and motivated officers, managers
and employees and improve existing systems and/or implement new systems for: (1)
transaction processing; (2) operational and financial management; and (3)
training, integrating and managing our growing employee base. We may not be
successful in managing or expanding our operations or maintaining adequate
management, financial and operating systems and controls.
IF OUR QUOTES ARE INACCURATE AND WE MUST PAY OUT CASH REWARD GUARANTEES, OUR
BUSINESS COULD BE HARMED.
We offer consumers a $500 cash reward guarantee that we provide an accurate
quote. In 1997, we paid $10,000 in cash reward guarantees, in 1998, we paid
$8,500 and for the three months ended March 31, 1999, we paid $4,000. If our
quotes or those of services with respect to which we have click-through
arrangements are inaccurate and we are required to pay a substantial number of
cash reward guarantees, we could be harmed.
IF WE LOSE ANY OF OUR EXECUTIVE OFFICERS OUR BUSINESS MAY SUFFER; CERTAIN OF OUR
EXECUTIVE
OFFICERS AND KEY EMPLOYEES HAVE ONLY RECENTLY BEGUN EMPLOYMENT WITH US
We believe that our success is significantly dependent upon the continued
employment and collective skills of our executive officers, including founder
and chief executive officer, Robert S. Bland, and executive vice president,
William V. Thoms. We maintain key man life insurance policies on Messrs. Bland
and Thoms and both of these officers have entered into employment contracts with
us. The loss of either of these two executives or any of our other
11
<PAGE> 15
executive officers could harm our company. In addition, Thomas A. Munro, our
vice president and chief financial officer; Burke A. Christensen, our vice
president of operations and general counsel; Richard W. Graeber, our vice
president of Internet operations; and Grant F. Kuphall, our vice president of
business development, all began employment with us since January 1, 1999. These
individuals have not previously worked together and may not work together
effectively.
RISKS RELATED TO THE INSURANCE INDUSTRY
OUR BONUS COMMISSION REVENUES ARE HIGHLY UNPREDICTABLE
Our bonus commission revenues relate to the amount of premiums paid for new
insurance policies to a single insurance company. In other words, if consumers
purchase policies from a fewer number of insurance companies our bonus
commissions will be higher than if the same policies were purchased from a
larger number of insurance companies. The decision to purchase a policy from a
particular insurance company typically relates to, among other factors, price of
the policy and rating of the insurance company, both are factors over which we
have no control. Insurance companies often change their prices in the middle of
the year for competitive reasons. This may reduce the number of policies placed
with that insurance company which may then reduce our potential bonus
commissions. In addition, we have no control over the bonus commission rates
that are set by each individual insurance company. As a result of these factors,
we are unable to control the amount of bonus commission we receive in any
particular quarter or year and such amounts may fluctuate significantly.
THE INSURANCE SALES INDUSTRY IS INTENSELY COMPETITIVE, AND IF WE FAIL TO
SUCCESSFULLY COMPETE IN THIS INDUSTRY OUR MARKET SHARE AND BUSINESS WILL BE
HARMED
The markets for the products and services offered on our service are
intensely competitive and characterized by rapidly changing technology, evolving
regulatory requirements and changing consumer demands. We compete with both
traditional insurance distribution channels, including insurance agents and
brokers, new non-traditional channels such as commercial banks and savings and
loan associations, and a growing number of direct distributors including other
online services, such as Quicken Insuremarket, InsWeb Corporation and
SelectQuote.
We also potentially face competition from a number of large online services
that have expertise in developing online commerce and in facilitating a high
volume of Internet traffic for or on behalf of our competitors. For instance,
certain of our competitors have relationships with major electronic commerce
companies, including Quicken Insuremarket, which has a relationship with America
Online, and InsWeb, which has relationships with Yahoo!, Snap and Infoseek.
Other large companies with strong brand recognition, technical expertise and
experience in online commerce and direct marketing could also seek to compete in
the online insurance market.
There can be no assurance that we will be able to successfully compete with
any of these current or potential insurance providers. For more information
refer to "Business -- Competition" beginning on page 42.
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<PAGE> 16
RISKS RELATED TO REGULATION
COMPLIANCE WITH THE STRICT REGULATORY ENVIRONMENT APPLICABLE TO THE INSURANCE
INDUSTRY IS COSTLY; IF WE FAIL TO COMPLY WITH THE NUMEROUS LAWS AND REGULATIONS
THAT GOVERN THE INDUSTRY, OUR BUSINESS COULD BE HARMED
We must comply with the complex rules and regulations of each
jurisdiction's insurance department which impose strict and burdensome
guidelines on us regarding our operations. Compliance with these rules and
regulations imposes significant costs on our business. 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;
- approve which entities can be paid commissions from insurance companies;
- license insurance agents and brokers; and
- approve policy forms and regulate certain premium rates.
Due to the complexity, periodic modification and differing statutory
interpretations of these laws, we may not have always been and we may not always
be in compliance with all these laws. Failure to comply with these numerous laws
could result in fines, additional licensing requirements or the revocation of
our license in the particular jurisdiction. Such penalties could significantly
increase our general operating expenses and harm our business. In addition, even
if the allegations in any regulatory action against us turn out to be false,
negative publicity relating to any such allegation could result in a loss of
consumer confidence and significant damage to our brand. We believe that because
many consumers and insurance companies are not yet comfortable with the concept
of purchasing insurance online, the publicity relating to any such regulatory or
legal issues could harm our business. For more information refer to
"Business -- Regulation" beginning on page 43.
REGULATION OF THE SALE OF INSURANCE OVER THE INTERNET AND OTHER ELECTRONIC
COMMERCE IS UNSETTLED, AND FUTURE REGULATIONS COULD HARM OUR BUSINESS
As a company involved in the sale of insurance over the Internet, we are
subject to additional regulatory risk as insurance regulations have not been
fully modified to cover Internet transactions. Currently, many state insurance
regulators are exploring the need for specific regulation of insurance sales
over the Internet. Such regulation could dampen the growth of the Internet as a
means of providing insurance services. Moreover, the laws governing general
commerce on the Internet remain largely unsettled, even in areas where there has
been some legislative action. It may take years to determine whether and how
existing laws such as those governing intellectual property, privacy and
taxation apply to the Internet. In addition, the growth and development of the
market for electronic commerce may prompt calls for more stringent consumer
protection laws that may impose additional burdens on companies conducting
business over the Internet. Any new laws or regulations or new interpretations
of existing laws or regulations relating to the Internet could harm our
business.
WE COULD BE SUBJECT TO LEGAL LIABILITY FOR DISTRIBUTING INFORMATION ON OUR WEB
SITE
Our customers rely upon information we publish regarding insurance quotes,
coverages, exclusions, limitations and ratings. To the extent that the
information we provide is not accurate, we could be liable for damages from both
consumers and insurance companies. These types of claims have been brought,
sometimes successfully, against online services and print publications in the
past. These types of claims could be time-consuming and expensive to
13
<PAGE> 17
defend, divert management's attention, and could cause consumers to lose
confidence in our service. As a result, these types of claims, whether or not
successful, could harm our business, financial condition and results of
operations.
In addition, because we are appointed as an agent for only 115 of the over
300 insurance companies quoted on our Web site, we do not have contractual
authorization to publish information regarding the policies from insurance
companies for whom we are not appointed. Certain of these insurance companies
have in the past demanded that we cease publishing their policy information and
others may do so in the future. In some cases we have published information
despite these demands. If we are required to stop publishing information
regarding some of the insurance policies that we track in our database, it could
harm us.
RISKS RELATED TO THE INTERNET AND ELECTRONIC COMMERCE
ANY FAILURES OF, OR CAPACITY CONSTRAINTS IN, OUR SYSTEMS OR THE SYSTEMS OF THIRD
PARTIES ON WHICH WE RELY COULD HARM OUR BUSINESS
We use both internally-developed and third-party systems to operate our
service. If the number of users of our service increases substantially, we will
need to significantly expand and upgrade our technology, transaction processing
systems and network infrastructure. We do not know whether we will be able to
accurately project the rate or timing of any such increases, or expand and
upgrade our systems and infrastructure to accommodate such increases in a timely
manner. Our ability to facilitate transactions successfully and provide high
quality customer service also depends on the efficient and uninterrupted
operation of our computer and communications hardware systems. Our service has
experienced periodic system interruptions, and it is likely that these
interruptions will continue to occur from time to time. Additionally, our
systems and operations are vulnerable to damage or interruption from human
error, natural disasters, power loss, telecommunication failures, break-ins,
sabotage, computer viruses, acts of vandalism and similar events. We may not
carry sufficient business interruption insurance to compensate for losses that
could occur. Any system failure that causes an interruption in service or
decreases the responsiveness of the our service would impair our
revenue-generating capabilities, and could damage our reputation and our brand
name.
OUR SUCCESS DEPENDS, IN PART, ON OUR ABILITY TO PROTECT OUR PROPRIETARY
TECHNOLOGY
We believe that our success depends, in part, on protecting our
intellectual property. Other than our trademarks, most of our intellectual
property consists of proprietary or confidential information that is not subject
to patent or similar protection. Competitors may independently develop similar
or superior products, software or business models.
We cannot guarantee that we will be able to protect our intellectual
property. There is no way to assure that unauthorized third parties will not try
to copy our products or business model or use our confidential information to
develop competing products. Legal standards relating to the validity,
enforceability and scope of protection of proprietary rights in Internet-
related businesses are uncertain and still evolving. As a result, we cannot
predict the future viability or value of our proprietary rights and those of
other companies within the industry. We also cannot guarantee that our business
activities and products will not infringe upon the proprietary rights of others,
or that other parties will not assert infringement claims against us. Any
infringement claims and resulting litigation, should it occur, could subject us
to significant liability for damages and could result in invalidation of our
proprietary rights. Even if we eventually won, any resulting litigation could be
time-consuming and expensive to defend and could divert our management's
attention.
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<PAGE> 18
WE NEED TO ADAPT TO RAPID TECHNOLOGICAL CHANGE TO REMAIN COMPETITIVE
Our market is characterized by rapidly changing technologies, frequent new
product and service introductions and evolving industry standards. The recent
growth of the Internet and intense competition in our industry exacerbate these
market characteristics. Our future success will depend on our ability to adapt
to rapidly changing technologies by continually improving the features and
reliability of our database and service. We may experience difficulties that
could delay or prevent the successful introduction or marketing of new products
and services. In addition, new enhancements must meet the requirements of our
current and prospective customers and must achieve significant market
acceptance. We could also incur substantial costs if we need to modify our
service or infrastructures or adapt our technology to respond to these changes.
YEAR 2000 PROBLEM MAY HARM OUR BUSINESS
The risks posed by year 2000 issues could adversely affect our business in
a number of significant ways. Although we believe that our internally developed
systems and technology are year 2000 ready, our information technology system
nevertheless could be substantially impaired or cease to operate due to year
2000 problems. Additionally, we rely on information technology supplied by third
parties, and our participating insurance company suppliers are also dependent on
information technology systems and on their own third party vendors' systems.
Year 2000 problems that any third parties or we experience could harm our
business. Additionally, the Internet could face serious disruptions arising from
the year 2000 problem. For more information refer to "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Year 2000
Readiness Disclosure" beginning on page 30.
OUR BUSINESS MAY BE HARMED IF WE ARE UNABLE TO SAFEGUARD THE SECURITY AND
PRIVACY OF OUR CUSTOMER'S INFORMATION
A significant barrier to electronic commerce and online communications has
been the need for secure transmission of confidential information over the
Internet. Our ability to secure the transmission of confidential information
over the Internet is essential in maintaining consumer and insurance company
confidence in our service. In addition, because we handle confidential and
sensitive information about our customers, any security breaches would damage
our reputation and could expose us to litigation and liability. We cannot
guarantee that our systems will prevent security breaches.
OUR BUSINESS ASSUMES THE CONTINUED DEPENDABILITY OF THE INTERNET INFRASTRUCTURE
Our success will depend upon the development and maintenance of the
Internet's infrastructure to cope with its significant growth and increased
traffic. This will require a reliable network backbone with the necessary speed,
data capacity and security, and the timely development of complementary
products, such as high-speed modems, for providing reliable Internet access and
services. The Internet has experienced a variety of outages and other delays as
a result of damage to portions of its infrastructure and could face such outages
and delays in the future. For more information refer to "-- Year 2000 problem
may harm our business" above. Outages and delays are likely to cause a loss of
business by affecting the level of Internet usage and the processing of
insurance quotes and applications requests made through our Web site. We are
unlikely to make up for this loss of business. In addition, the Internet could
lose its viability due to delays in the development or adoption of new standards
to handle increased levels of activity or due to increased government
regulation. The adoption of new standards or government regulation may require
us to incur substantial compliance costs. For more information refer to "--
Regulation of the sale of insurance over
15
<PAGE> 19
the Internet and other electronic commerce is unsettled, and future regulations
could harm our business" on page 13.
RISKS RELATED TO THIS OFFERING AND OWNERSHIP OF OUR COMMON STOCK
BECAUSE OUR SHARES HAVE NOT BEEN PUBLICLY TRADED BEFORE THIS OFFERING, THE
INITIAL PUBLIC OFFERING PRICE MAY NOT ACCURATELY REFLECT THE TRADING PRICE OF
OUR STOCK AND OUR STOCK PRICE MAY BE VOLATILE
Prior to this offering, you could not buy or sell our common stock
publicly. An active public market for our common stock may not develop or be
sustained after this offering. Although the initial public offering price will
be negotiated between the underwriters and us and based on several factors, the
market price after the offering may vary from the initial offering price.
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 fluctuations, as well as general political and
economic conditions, such as a recession or interest rate or currency rate
fluctuations, could adversely affect the market price of our common stock. In
addition, the 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.
Such market prices generally are not sustainable and are subject to wide
variations. If our common stock trades to such levels following this offering,
it likely 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 their
securities. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs, divert management's attention and
resources, and harm our financial condition and results of operations.
FUTURE SALES OF OUR COMMON STOCK MAY CAUSE OUR STOCK PRICE TO DECLINE
After this offering, we will have shares of common stock
outstanding and we will have an additional 712,000 shares of common stock
reserved for issuance pursuant to outstanding stock options. Following the
consummation of this offering we intend to register for resale up to 1,225,000
shares of common stock reserved for issuance under our 1997 Stock Option Plan
and 1999 Employee Stock Purchase Plan. The federal securities laws impose
restrictions on the ability of stockholders who acquired their shares prior to
this offering to resell their shares. Also, our directors, officers and
substantially all of our current stockholders have agreed, subject to certain
limited exceptions, not to sell their shares for a period of 180 days after the
date of this prospectus.
We cannot predict if future sales of our common stock, or the availability
of our common stock for sale, will cause the market price of our common stock to
decline.
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<PAGE> 20
CERTAIN OF OUR OFFICERS AND DIRECTORS WILL OWN A MAJORITY OF OUR STOCK AND WILL
CONTINUE TO CONTROL OUR COMPANY AFTER THIS OFFERING; THEIR INTERESTS MAY NOT BE
THE SAME AS OUR PUBLIC STOCKHOLDERS
Following this offering, Robert Bland, our chairman, president and chief
executive officer will directly control % of our outstanding common stock,
and William Thoms, our executive vice president, will directly control % of
our outstanding common stock. As a result, if Messrs. Bland and Thoms act
together, they will be able to take any of the following actions without the
approval of our public stockholders:
- elect our directors;
- amend certain provisions of our charter;
- approve a merger, sale of assets or other major corporate transaction;
- defeat any takeover attempt, even if it would be beneficial to our public
stockholders; and
- otherwise control the outcome of all matters submitted for a stockholder
vote.
This control could discourage others from initiating a potential merger,
takeover or another change of control transaction that could be beneficial to
our public stockholders. As a result, the market price of our common stock could
be harmed.
OUR CHARTER DOCUMENTS AND DELAWARE LAW CONTAIN CERTAIN PROVISIONS THAT MAY
DISCOURAGE TAKEOVER ATTEMPTS WHICH COULD PRECLUDE OUR STOCKHOLDERS FROM
RECEIVING A CHANGE OF CONTROL PREMIUM
Our certificate of incorporation and bylaws and Delaware law contain
anti-takeover provisions that could have the effect of delaying or preventing
changes in control that a stockholder may consider favorable. The provisions in
our charter documents include the following:
- a classified board of directors with three-year staggered terms;
- the ability of our board of directors to issue shares of preferred stock
and to determine the price and other terms, including preferences and
voting rights, of those shares without stockholder approval;
- stockholder action to be taken only at a special or regular meeting; and
- advance notice procedures for nominating candidates to our board of
directors.
Our preferred stock purchase rights would cause substantial dilution to any
person or group who attempts to acquire a significant interest in our company
without advance approval of our board of directors. In addition, our executive
officers have employment agreements that may entitle them to substantial
payments in the event of a change of control.
The foregoing could have the effect of delaying, deferring or preventing a
change in control of our company, discourage bids for our common stock at a
premium over the market price, or harm the market price of, and the voting and
other rights of the holders of, our common stock. We also are subject to certain
Delaware laws that could have similar effects. One of these laws prohibits us
from engaging in a business combination with any significant stockholder for a
period of three years from the date the person became a significant stockholder
unless certain conditions are met. For more information refer to "Description of
Capital Stock -- Delaware Anti-Takeover and Certain Certificate of Incorporation
and By-law Provisions" beginning on page 58.
17
<PAGE> 21
OUR MANAGEMENT TEAM WILL HAVE BROAD DISCRETION OVER THE USE OF PROCEEDS FROM
THIS OFFERING
The net proceeds of this offering are estimated to be approximately
$ at an assumed initial public offering price of $ per share
and after deducting the estimated underwriting discount and estimated offering
expenses. Our management will retain broad discretion as to the allocation of
the proceeds of this offering and we may not be able to invest these proceeds to
yield a significant return. As of the date of this prospectus, we do not intend
to use the proceeds from this offering other than for working capital and
general corporate purposes.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price is expected to be substantially higher
than the net tangible book value of each outstanding share of common stock. If
you purchase common stock in this offering, you will suffer immediate and
substantial dilution. The dilution will be $ per share in the net tangible
book value of the common stock from the expected initial public offering price.
In addition, if outstanding options to purchase shares of common stock are
exercised, there could be further dilution. For more information refer to
"Dilution" on page 21.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus are "forward-looking
statements." These forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of
activity, performance, or achievements to be materially different from any
future results, levels of activity, performance, or achievements expressed or
implied by such forward-looking statements. Such factors include, among other
things, those listed under "Risk Factors" and elsewhere in this prospectus.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," "intends," or "continue" or
the negative of such terms or other comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements. Moreover, we do not assume
responsibility for the accuracy and completeness of such statements. We are
under no duty to update any of the forward-looking statements after the date of
this prospectus.
18
<PAGE> 22
USE OF PROCEEDS
We will receive net proceeds of $ from the sale of the
shares of common stock in this offering, after deducting
estimated offering expenses of $ and estimated underwriting discounts
and commissions at an assumed initial public offering price of $ per share.
If the underwriters exercise their over-allotment option in full, we will
receive net proceeds of $ , after deducting estimated expenses of
$ and estimated underwriting discounts and commissions.
We will use approximately $2.0 million of the proceeds of this offering to
repay a $2.0 million loan we received from Intuit on June 24, 1999. The loan
from Intuit bears an interest rate of 12.5% per annum and interest is payable
quarterly. This loan becomes payable on the earlier of (1) December 24, 2000 or
(2) the date of the closing of this offering. In addition, we will be required
to prepay this loan to the extent of any proceeds we receive from a sale of our
equity securities or securities convertible into equity securities. We are using
the proceeds of the loan from Intuit for general corporate purposes including
selling and marketing expenditures.
In the 12 months following this offering, we intend to use approximately
$ million of the net proceeds for expansion of our selling and marketing
efforts, including brand promotion. The amounts we actually expend for any of
the foregoing purposes may vary significantly and will depend on a number of
factors, including the amount of our future revenues. We intend to use the
remainder of the net proceeds, over time, for general corporate purposes,
including working capital to fund operating losses, if any, and capital
expenditures. We may also use a portion of the net proceeds currently intended
for general corporate purposes to acquire or invest in complementary businesses,
technologies, products or services, although no specific acquisitions or
investments are planned and no portion of the net proceeds has been allocated
for any such acquisition or investment. Pending such uses, we intend to invest
the net proceeds of this offering in investment-grade, interest-bearing
securities.
Accordingly, we will have broad discretion in the application of the net
proceeds of this offering. Please refer to "Risk Factors -- Our management team
will have broad discretion over the use of proceeds from this offering" on page
18.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock and
do not intend nor expect to pay any cash dividends in the foreseeable future. We
intend to retain future earnings, if any, to finance the expansion of our
business.
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<PAGE> 23
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999:
- on an actual basis; and
- on an as adjusted basis to reflect (1) our receipt of the estimated net
proceeds from the sale of the shares of common stock in this offering at
an assumed initial public offering price of $ per share after
deducting the estimated offering expenses and underwriting discounts and
commissions and (2) the application of approximately $2.0 million of the
net proceeds of this offering to pay the loan from Intuit as described in
"Use of Proceeds" on page 19.
The outstanding share information excludes (1) 500,000 shares of common
stock issuable upon the exercise of outstanding stock options at a weighted
average exercise price of $4.62 per share and (2) 1,225,000 shares of common
stock reserved for future grant or issuance under our 1997 Stock Option Plan and
our 1999 Employee Stock Purchase Plan. Upon completion of this offering, options
to purchase 212,000 shares of common stock will be issued to certain directors
and employees at the initial public offering price. For more information please
refer to "Management -- Stock Based Plans" beginning on page 50 and notes 6 and
8 to our financial statements beginning of page F-12.
This information is qualified by, and should be read in conjunction with,
our financial statements and related notes appearing at the end of this
prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1999
----------------------
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS)
<S> <C> <C>
Stockholders' equity:
Preferred stock, $.001 par value, 5,000,000 shares
authorized; no shares issued and outstanding, actual
and as adjusted........................................ $ -- $
Common stock, $.001 par value, 60,000,000 shares
authorized; 13,515,091 shares issued and outstanding,
actual; shares issued and outstanding,
as adjusted............................................ 16
Additional paid-in capital................................ 5,798
Retained-earnings deficit................................. (1,817)
Treasury stock at cost (2,534,000 shares)................. (263)
------- -------
Total stockholders' equity............................. 3,734
------- -------
Total capitalization................................... $ 3,734 $
======= =======
</TABLE>
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<PAGE> 24
DILUTION
Our net tangible book value as of March 31, 1999 was $3,734,344, or $0.28
per share. Net tangible book value per share is determined by dividing the
number of outstanding shares of our common stock into our net tangible book
value (total tangible assets less total liabilities). Dilution in net tangible
book value per share 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. Assuming our sale of the shares of common stock being offered hereby
at an assumed initial public offering price of $ per share and after
deducting the estimated underwriting discounts and commissions and estimated
offering expenses, the net tangible book value of our company as of March 31,
1999 would have been approximately $ , or $ per share. This represents
an immediate increase in net tangible book value of $ per share to existing
stockholders and an immediate dilution of $ per share to new investors
purchasing shares at the initial public offering price. The following table
illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $
Net tangible book value per share before the offering..... $0.28
Increase in net tangible book value attributable to new
investors..............................................
-----
Net tangible book value per share after offering............
-----
Dilution in net tangible book value per share to new
investors................................................. $
=====
</TABLE>
The following table summarizes, as of March 31, 1999, the differences
between the number of shares of common stock purchased from us, the total
consideration paid to us and the average price per share paid by existing
stockholders and by investors purchasing shares of common stock in this offering
at an assumed initial public offering price of $ (before deducting the
estimated underwriting discounts and commissions and estimated offering
expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ -------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders................ % $ % $
New investors........................
-------- --- -------- ---
Total........................... 100% 100%
======== === ======== ===
</TABLE>
The foregoing discussion and tables assume no exercise of any stock options
outstanding as of March 31, 1999. The table excludes an aggregate of 1,475,000
shares of common stock reserved for issuance pursuant to the 1997 Stock Option
Plan and 250,000 shares of common stock reserved for issuance pursuant to the
1999 Employee Stock Purchase Plan. As of June 16, 1999, there were options
outstanding to purchase a total of 500,000 shares of common stock with a
weighted average exercise price of $4.62 per share. To the extent that any of
these options are exercised, there would be further dilution to new public
investors. For more information please refer to "Capitalization," on page 20,
"Management -- Stock Based Plans" beginning on page 50 and notes 6 and 8 to our
financial statements beginning on page F-12.
21
<PAGE> 25
SELECTED FINANCIAL AND OTHER DATA
The historical statement of operations data and balance sheet data in the
table below are derived from our financial statements. This data should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" beginning on page 23 and with the financial
statements, related notes, and other financial information beginning on page
F-1. The historical results presented below are not necessarily indicative of
the results to be expected for any future period.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------- ----------------
1994 1995(1) 1996 1997 1998 1998 1999
------ ------- ------ ------ ------ ------ -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues....................... $1,138 $2,243 $3,812 $4,262 $5,576 $1,165 $ 1,463
Expenses:
Selling and
marketing(2)........... 267 266 1,109 2,152 1,791 277 681
Operations................ 538 1,022 1,551 1,794 2,690 534 958
General and
administrative......... 400 472 786 952 1,293 266 1,270
------ ------ ------ ------ ------ ------ -------
Total expenses......... 1,205 1,760 3,446 4,898 5,774 1,077 2,909
Operating income (loss)........ (67) 483 366 (636) (198) 88 (1,446)
Interest income (expense),
net.......................... (16) (10) (14) (41) 2 (10) 16
Deferred income taxes
(credit)..................... -- 81 129 (210) -- -- --
------ ------ ------ ------ ------ ------ -------
Net income (loss).............. $ (83) $ 392 $ 223 $ (467) $ (196) $ 78 $(1,430)
====== ====== ====== ====== ====== ====== =======
Basic and diluted net income
(loss) per share............. $(0.01) $ 0.03 $ 0.02 $(0.04) $(0.02) $ 0.01 $ (0.11)
====== ====== ====== ====== ====== ====== =======
Weighted average common shares
and equivalents outstanding:
Basic..................... 13,706 13,706 12,154 11,956 12,258 11,958 13,023
Diluted................... 13,706 13,706 12,154 11,956 12,258 11,983 13,023
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1994 1995 1996 1997 1998 MARCH 31, 1999
------ ------ ------ ------ ------ --------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash.......................... $ 10 $ 34 $ 1 $ 4 $ 518 $2,946
Working capital (deficit)..... (85) 257 334 (121) 749 3,316
Total assets.................. 149 687 869 830 1,806 4,310
Long-term liabilities......... 74 21 146 233 -- --
Total liabilities............. 280 427 636 1,063 817 576
Total stockholders' equity
(deficiency in assets)...... (131) 260 233 (233) 989 3,734
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------- -----------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING STATISTICS:
Quotes................................. 354,066 591,823 831,291 126,753 335,784
Paid policies.......................... 6,701 8,755 10,920 2,455 2,835
</TABLE>
- -------------------------
(1) As of January 1, 1995, in accordance with a new accounting standard, we
changed our method of accounting for direct response advertising costs and
began to defer those costs and amortize them over the period of expected
future benefits. The change in accounting had the effect of increasing 1995
net income by $274,000 or $0.02 per share.
(2) Since January 1, 1997, our direct response advertising costs no longer
qualify for deferral and are expensed as incurred. If direct response
advertising costs had not been deferred and amortized for any year, selling
and marketing expenses would have been $621,000 in 1995, $1.2 million in
1996, and $1.7 million in 1997.
22
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements and the notes thereto and the other financial information appearing
elsewhere in this prospectus. In addition to historical information, the
following discussion and other parts of this prospectus contain forward-looking
information that involves risks and uncertainties. Our actual results could
differ materially from those anticipated by such forward-looking information due
to factors discussed under "Risk Factors" beginning on page 7, "Special Note
Regarding Forward-Looking Statements" on page 18 and elsewhere in this
prospectus.
OVERVIEW
We believe that Quotesmith.com is the most comprehensive Internet-based
insurance service available. The Quotesmith.com service enables consumers and
business owners to obtain instant quotes from over 300 insurance companies, and
we guarantee the accuracy of every quote. Combining the reach and efficiency of
the Internet with our proprietary database and industry expertise developed over
the past 15 years, we provide a complete "quote to policy delivery" insurance
solution without the involvement of any commissioned salespeople.
We have created a model that addresses the challenges faced by traditional
insurance distribution methods in a manner that offers significant benefits to
both consumers and insurance companies. The Quotesmith.com model allows
consumers to: (1) efficiently search for, analyze and compare insurance
products; (2) quickly request and obtain insurance quotes; and (3) easily select
and purchase insurance from the insurance company of their choice.
We incorporated and began our operations in March 1984 and during the
period from 1984 to 1994, we provided an electronic quotation and policy
information service to insurance agents and brokers. During this period, we
built our proprietary database and price comparison technology, and we began
securing key insurance company support and recruiting and training employees.
Throughout this period we were not engaged in the marketing of insurance to
consumers. In 1994, we began focusing our business strategy on marketing term
life insurance to self-directed consumers utilizing our proprietary insurance
price comparison technology. In May 1996, we began providing real time quotes
for term life insurance on the Internet and began receiving online insurance
application requests from consumers. During 1998 and in the first quarter of
1999, we raised $4.7 million through the sale of our common stock to private
investors, including $3.0 million from Intuit.
We are licensed as an agent for life and health insurance throughout the
United States. We recently expanded our Internet service offerings and now
include instant quotes for several types of insurance, including dental,
individual and family medical insurance, Medicare supplement insurance,
"no-exam" whole life insurance, fixed annuity insurance and, through
click-through arrangements with Progressive and Quicken Insuremarket, access to
private passenger automobile insurance quotes. We have also started to offer
small group medical insurance quotes and products to businesses of up to 100
employees.
We generate revenues from the receipt of commissions paid to us by
insurance companies based upon the policy premiums paid by consumers through our
service. These revenues come in the form of first year, bonus and renewal
commissions that vary by company and product. We recognize the full first year
commission revenues after the insurance company approves the policy and accepts
the initial payment. At the time revenue is recognized, an allowance is recorded
based on historical information for estimated commissions that will not be
received due to the non-payment of installment first year premiums. We
occasionally receive bonuses
23
<PAGE> 27
based upon individual criteria set by insurance companies. We recognize bonus
revenues when we receive notification from the insurance company of the bonus
due to us. Bonus revenues are typically higher in the fourth quarter due to the
bonus system used by many life insurance companies. Revenues for renewal
commissions are recognized after we receive notice that the insurance company
has received payment for a renewal premium. Renewal commission rates are
significantly less than first year commission rates and may not be offered by
every insurance company. We also generate a portion of our revenues from fees
through our arrangements with Progressive and Intuit Insurance Services.
The timing between when we submit a consumer's application for insurance to
the insurance company and when we generate revenues has varied over time. The
type of insurance product and the insurance company's backlog are the primary
factors that impact the length of time between submitted applications and
revenue recognition. Over the past three years, the time between application
submission and revenue recognition has averaged approximately four months. Any
changes in the amount of time between submitted application and revenue
recognition, of which a significant part is not under our control, will create
fluctuations in our operating results and could harm our business, operating
results and financial condition.
The insurance industry is heavily regulated and prices are set by the
insurance companies typically after they have registered changes with the state
insurance departments. Insurance agents are precluded from discounting or
rebating commissions, and they are not allowed to set premium or commission
levels.
From May 1, 1996 through March 31, 1999, we have provided over two million
quotes, collected over 110,000 insurance application requests and delivered over
27,000 insurance policies. Over 98% of our revenues in 1998 were derived from
the sale of term life policies. See "Risk Factors -- Nearly all of our revenues
are currently derived from consumers purchasing term life insurance through us"
on page 7. Our top five insurance companies represented 64% of the policies we
delivered during 1998, 77.5% during 1997 and 77.4% during 1996. Of our top ten
insurance companies in 1998, 40% were not in the top ten in 1997. Our top
insurance company for 1998 accounted for 21.8% of the 1998 policies delivered,
but only accounted for 8.2% in 1997 and 1.7% in 1996 of all policies delivered.
See "Risk Factors -- Our business may be harmed if certain high volume insurance
companies refuse to appoint us as their agent" on page 10.
Other revenues are primarily comprised of revenue streams associated with
our historical business of providing electronic quotations and policy
information to insurance agents and brokers. These revenues are recognized when
we receive notification that such revenues have been earned.
Operations expenses are comprised of both variable and semi-variable
expenses, including wages, benefits and expenses associated with processing
insurance applications and maintaining our database and Web site. The historical
lag between the time an application is submitted to the insurance companies and
when we recognize revenues, significantly impacts our operating results as most
of our variable expenses are incurred prior to application submission.
Selling and marketing expenses consist primarily of direct advertising
costs. Beginning in 1994, we initiated a series of magazine advertisements aimed
at consumers and began to provide insurance price comparison reports and
solicitations by mail. During the period from 1994 to 1998, we continued to use
direct advertising as our primary method of marketing. In the foreseeable
future, we expect to significantly increase our advertising and marketing
efforts in an attempt to build greater brand awareness.
24
<PAGE> 28
General and administrative expenses consist primarily of executive
compensation and benefits, financial and legal expenses and office expenses
(rent and utilities). An additional facilities expansion is planned for mid
1999. In 1998, we recorded compensation expense of $150,000 relating to the
issuance of stock options to employees. In the first quarter of 1999, we
recorded compensation expense of $791,000 relating to the issuance of stock
options and common stock sold to employees. These amounts represent the
difference between the deemed value of our common stock for accounting purposes
at the date of grant or amendment of the options as compared to the exercise
price of such options or sales price of the stock. Additional unearned
compensation expense will be amortized over the remaining vesting period of the
applicable options in the amounts of $390,000 for the remainder of 1999,
$190,000 in 2000 and $40,000 in 2001.
RESULTS OF OPERATIONS
The following table sets forth our results of operations expressed as a
percentage of total revenues:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES
-----------------------------------------------------
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------- -----------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Commission................................ 91.7% 96.6% 98.8% 98.1% 99.1%
Other..................................... 8.3 3.4 1.2 1.9 0.9
----- ----- ----- ----- -----
Total revenues....................... 100.0 100.0 100.0 100.0 100.0
Expenses:
Selling and marketing..................... 29.1 50.5 32.1 23.8 46.5
Operations................................ 40.7 42.1 48.2 45.9 65.5
General and administrative................ 20.6 22.3 23.2 22.8 86.8
----- ----- ----- ----- -----
Total expenses....................... 90.4 114.9 103.5 92.5 198.8
----- ----- ----- ----- -----
Operating income (loss)..................... 9.6 (14.9) (3.5) 7.5 (98.8)
Interest income (expense), net.............. (0.4) (1.0) -- (0.8) 1.1
----- ----- ----- ----- -----
Income (loss) before taxes.................. 9.2 (15.9) (3.5) 6.7 (97.7)
Income taxes (credit)....................... 3.4 (5.0) -- -- --
----- ----- ----- ----- -----
Net income (loss)........................... 5.8% (10.9)% (3.5)% 6.7% (97.7)%
===== ===== ===== ===== =====
</TABLE>
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Revenues
Revenues increased 25.6% to $1.5 million for the three months ended March
31, 1999 from $1.2 million for the three months ended March 31, 1998. The growth
in revenues in the first quarter of 1999 was due to a 15.5% growth in the number
of paid policies, a 155.3% increase in bonus and renewal revenues from $62,000
to $159,000, combined with a slight increase in the average first year
commission revenues per policy.
Expenses
Selling and Marketing. Selling and marketing expenses increased 146% to
$681,000 for the three months ended March 31, 1999 from $277,000 for the three
months ended March 31, 1998, and increased as a percentage of revenues to 46.6%
from 23.8%.
25
<PAGE> 29
Operations. Operations expenses increased 79.2% to $958,000 for the three
months ended March 31, 1999 from $534,000 for the three months ended March 31,
1998, and increased as a percentage of revenues to 65.5% from 45.9%. The
increase was due primarily to a staffing increase of 55.8% over the same period
in 1998 as a result of increased policy processing.
General and Administrative. General and administrative expenses increased
377.5% to $1.3 million for the three months ended March 31, 1999 from $266,000
for the three months ended March 31, 1998 and increased as a percentage of
revenues to 86.8% from 22.8%. This increase included compensation expense of
$791,000 relating to common stock sold and stock options granted in March 1999
as described in note 8 to our financial statements. This increase also reflected
additional executive and financial personnel, increased rent due to the
expansion of facilities and increased legal and accounting fees.
Interest Income (Expense), Net
Interest income, net for the three months ended March 31, 1999 was $16,000
as compared to interest expense, net of $10,000 for the same period last year.
The change is attributable to the retirement of notes payable and the investment
of proceeds from the private sale of common stock since March 31, 1998.
Income Taxes (Credit)
We had no income tax credit for the three months ended March 31, 1999 due
to valuation allowances provided against net deferred tax assets. We had no
income tax provision for the three months ended March 31, 1998 due to the
utilization of operating loss carryforwards.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
Revenues
Revenues increased 30.8% to $5.6 million in 1998 from $4.3 million in 1997.
The growth in revenues in 1998 was primarily driven by an increase in the number
of paid policies, plus bonus and renewal revenues increased 125.3% to $799,000
in 1998 from $355,000 in 1997.
Expenses
Selling and Marketing. Selling and marketing expenses decreased 16.8% to
$1.8 million in 1998 from $2.2 million in 1997, and decreased as a percentage of
revenues to 32.1% from 50.5%. Beginning on January 1, 1997, we no longer
qualified to defer direct response advertising costs. Accordingly, 1997 selling
and marketing expenses included advertising costs incurred in 1997 as well as
amortization of previous years' costs that were unamortized as of December 31,
1996. Adjusting 1997 advertising expenses to eliminate the amortization of prior
period deferrals of advertising costs reduces 1997 selling and marketing
expenses to $1.7 million. Selling and marketing expenses in 1998 increased by
8.0% from adjusted 1997 amounts.
Operations. Operations expenses increased 49.9% to $2.7 million in 1998
from $1.8 million in 1997, and increased as a percentage of revenues to 48.2%
from 42.1%. Operations expenses primarily increased due to an increase in staff
and associated wages and benefits. Postage and other variable costs also
increased, but not as a percentage of revenues.
General and Administrative. General and administrative expenses increased
35.8% to $1.3 million in 1998 from $952,000 in 1997, and increased to 23.2% of
revenues in 1998 from 22.3% of revenues in 1997. The increase in general and
administrative expenses was primarily due to salaries of additional executive
and financial personnel and rent due to the expansion of
26
<PAGE> 30
facilities. In addition, $150,000 was recorded as compensation expense in 1998
relating to stock options.
Interest Income (Expense), Net
Interest income, net was $2,000 in 1998 as compared to interest expense,
net of $41,000 in 1997. The change is attributable to the retirement of notes
payable and the investment of proceeds from the private sale of common stock
during 1998.
Income Taxes (Credit)
Due to losses incurred for financial reporting and income tax purposes, we
provided valuation allowances to reduce our net deferred tax assets to zero as
of December 31, 1997 and 1998. Components of our 1998 and 1997 tax provisions
are described in note 3 to our financial statements.
COMPARISONS OF YEARS ENDED DECEMBER 31, 1997 AND 1996
Revenues
Revenues increased 11.8% to $4.3 million in 1997 from $3.8 million in 1996.
The growth in revenues in 1997 was driven by an increase in the number of paid
policies, partially offset by a decrease in the average first year commission
revenues per policy. Bonus and renewal commission revenues increased 1.1% to
$355,000 in 1997 from $351,000 in 1996.
Expenses
Selling and Marketing. Selling and marketing expenses increased 94.0% to
$2.2 million in 1997 from $1.1 million in 1996, and increased as a percentage of
revenues to 50.5% from 29.1%. Beginning on January 1, 1997, we no longer
qualified to defer our direct response advertising costs. Accordingly, 1997
selling and marketing expenses included advertising costs incurred in 1997 as
well as amortization of previous years' costs that were unamortized as of
December 31, 1996. Adjusting 1997 and 1996 advertising expenses to eliminate the
effect of deferral and amortization of advertising costs reduces 1997 expenses
to $1.7 million and increases 1996 expenses to $1.2 million. As adjusted, 1997
selling and marketing expenses increased by 32.8% over 1996.
Operations. Operations expense increased 15.7% to $1.8 million in 1997 from
$1.6 million in 1996, and increased as a percentage of revenues to 42.1% from
40.7%. Operations expenses primarily increased due to an increase in staff
during 1997.
General and Administrative. General and administrative expenses increased
21.0% to $952,000 in 1997 from $786,000 in 1996, and increased as a percentage
of revenues to 22.3% from 20.6% as a result of increased salaries and benefits,
legal and accounting fees and rent.
Interest Income (Expense), Net
Interest expense, net was $41,000 in 1997 and an expense of $14,000 in
1996. The change is attributable to an increase in notes payable.
Income Taxes (Credit)
As described in note 3 to the accompanying financial statements, income
taxes in 1997 reflect an effective tax rate that is less than 1996 due to the
valuation allowances provided against net deferred tax assets in 1997.
27
<PAGE> 31
SELECTED QUARTERLY OPERATING RESULTS
The following table sets forth certain unaudited statements of operations
data on an absolute basis and as a percentage of revenues for the five most
recent quarters. The information for each of these quarters has been prepared on
substantially the same basis as the audited financial statements included
elsewhere in this prospectus, and, in our opinion, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results of operations for such periods. Quarterly results
are not necessarily indicative of the results to be expected in the future.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------
MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31,
1998 1998 1998 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues..................................... $1,165 $1,391 $1,345 $1,675 $ 1,463
Expenses:
Selling and marketing...................... 277 344 482 688 681
Operations................................. 534 674 734 748 958
General and administrative................. 266 223 283 521 1,270
------ ------ ------ ------ -------
Total expenses..................... 1,077 1,241 1,499 1,957 2,909
------ ------ ------ ------ -------
Operating income (loss)...................... 88 150 (154) (282) (1,446)
Interest income (expense), net............... (10) -- 5 7 16
------ ------ ------ ------ -------
Income (loss) before income taxes............ 78 150 (149) (275) (1,430)
Income taxes (credit)........................ -- 33 (33) -- --
------ ------ ------ ------ -------
Net income (loss)............................ $ 78 $ 117 $ (116) $ (275) $(1,430)
====== ====== ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues...................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Expenses:
Selling and marketing....................... 23.8 24.7 35.8 41.1 46.5
Operations.................................. 45.9 48.5 54.6 44.6 65.5
General and administrative.................. 22.8 16.0 21.0 31.1 86.8
----- ----- ----- ----- -----
Total expenses...................... 92.5 89.2 111.4 116.8 198.8
----- ----- ----- ----- -----
Operating income (loss)....................... 7.5 10.8 (11.4) (16.8) (98.8)
Interest income (expense), net................ (0.8) -- 0.4 0.4 1.1
----- ----- ----- ----- -----
Income (loss) before income taxes............. 6.7 10.8 (11.0) (16.4) (97.7)
Income taxes (credit)......................... -- 2.4 (2.4) -- --
----- ----- ----- ----- -----
Net income (loss)............................. 6.7% 8.4% (8.6)% (16.4)% (97.7)%
===== ===== ===== ===== =====
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Since 1995, our primary sources of operating funds have been commissions, a
private financing and bank borrowings. During the first quarter of 1999 and in
1998, we raised our first outside financing through the sale of common stock.
Total proceeds of the sale of our common stock were $3.4 million in 1999 and
$1.3 million in 1998.
Cash used in operating activities was $755,000 for the three months ended
March 31, 1999, compared to $32,000 for the three months ended March 31, 1998.
The increase in cash used in the 1999 period was primarily a result of a net
loss for the period as well as a decrease in accounts payable and accrued
liabilities. Cash used in operations was $135,000 in 1998 and
28
<PAGE> 32
$10,000 in 1997, as compared to cash provided by operations of $34,000 in 1996.
Such amounts reflect increasing amounts of cash used for advertising and
operations.
Cash used in investing activities was $201,000 for the three months ended
March 31, 1999, $57,000 for the three months ended March 31, 1998, $186,000 in
1998, $107,000 in 1997, and $51,000 in 1996. These funds were primarily used for
the purchase of furniture, equipment and computer software.
Cash provided by financing activities was $3.4 million for the three months
ended March 31, 1999, attributable to proceeds from private sales of our common
stock, compared to $25,000 for the three months ended March 31, 1998. Cash
provided by financing activities for 1998 was $835,000 as a result of proceeds
from the private sale of our common stock which was partially offset by the
repayment of notes payable. Cash provided by financing activities was $121,000
in 1997 as compared to cash used in financing activities of $17,000 in 1996, and
reflects proceeds from the issuance of notes payable, and in 1996, the purchase
of $250,000 of treasury stock.
On June 24, 1999, we borrowed $2.0 million from Intuit. The loan from
Intuit bears an interest rate of 12.5% per annum and interest is payable
quarterly. This loan must be repaid on the earlier of (1) December 24, 2000 or
(2) the date of the closing of this offering. In addition, we will be required
to prepay this loan to the extent of any proceeds we receive from a sale of our
equity securities or securities convertible into equity securities.
We currently expect that the cash proceeds we receive from this offering,
together with our existing cash balances, will be sufficient to meet our
anticipated cash requirements for at least the next 12 months. We may need to
raise additional capital in order to meet competitive pressures, support more
rapid expansion, develop new products, acquire related or complementary
businesses or technologies and or take advantage of unforeseen opportunities.
The timing and amounts of such 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 such offering may have
rights or privileges senior to the holders of our common stock. If debt
financing is available, it may require 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Board Executive Committee (AcSEC)
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 requires specific
accounting treatment for internal use software which is effective for fiscal
years beginning after December 15, 1998. Accordingly, we adopted SOP 98-1 in
1999, and do not expect that SOP 98-1 will have a material effect on our
operating results or financial position.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 133, "Accounting for
Derivative Instruments and Hedging Activities," which is effective for fiscal
years beginning after June 15, 1999. We do not expect that the adoption of SFAS
133 will have a material effect on our results of operations or financial
position.
29
<PAGE> 33
YEAR 2000 READINESS DISCLOSURE
Our State Of Readiness. We have defined year 2000 compliance as follows:
That the information technology time and date data processes,
including, but not limited to, calculating, comparing and sequencing
data from, into and between the 20th and 21st centuries contained in
our products and services offered through our service, will function
accurately, continuously and without degradation in performance and
without requiring intervention or modification in any manner that will
or could harm the performance of such products or the delivery of such
services as applicable at any time hereafter.
We have implemented a year 2000 program to review and assure the year 2000
readiness of our information technology systems that consist of a combination of
internally-developed software and third-party software and hardware.
We have internally developed most of the systems used in the operation of
our business and believe that these systems are year 2000 compliant. We
completed an assessment, remediation, and testing of all of our internally
developed production programs in the first quarter of 1999.
We are also assessing the year 2000 readiness of our third-party supplied
hardware and software. The failure of such hardware and software systems to be
year 2000 compliant could harm our operations as well as the operation of our
Web site. As part of our assessment program, we are contacting third-party
vendors and licensors of software and computer technology to seek assurances
that their products are year 2000 compliant. We expect to complete the
assessment process in the second quarter of 1999. We expect to fix or replace
any noncompliant components by the end of the third quarter of 1999.
We are evaluating our non-information technology systems for year 2000
compliance and have not, to date, discovered any material year 2000 issues with
respect to our non-information technology systems. We expect to complete this
evaluation by July 31, 1999.
We are in the process of contacting our material insurance company
participants whose products or services are sold through our service to
determine if they are year 2000 compliant. We expect to complete this assessment
in the second quarter of 1999.
Our customers are individual Internet users, and, therefore, no individual
customer is material to an evaluation of our year 2000 compliance issues.
The Costs To Address Year 2000 Issues. We have expensed and will continue
to expense amounts incurred in connection with year 2000 compliance. To date, we
have expended approximately $50,000, and we expect to expend an additional
$10,000, to become year 2000 ready. The additional costs to make any other
products or services year 2000 compliant by the end of the third quarter of 1999
will be expensed as incurred. We do not expect any additional costs to be
material.
We are not currently aware of any material operational issues or costs
associated with preparing our systems for the year 2000. However, we may
experience unexpected material costs caused by undetected errors or defects in
the technology used in our systems or because of the failure of a material
insurance company participant in our program to be year 2000 compliant.
Risks Associated With Year 2000 Issues. Notwithstanding our year 2000
compliance efforts, the failure of a material system or vendor, including one or
more insurance company participants in our service, or the Internet generally,
to be year 2000 compliant could harm the operation of our service, prevent
certain products and services from being offered through our service, or have
other unforeseen, harmful consequences to us.
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Finally, we also are subject to external year 2000-related failures or
disruptions that might generally affect industry and commerce, such as utility
or transportation company year 2000 compliance failures and related service
interruptions. All of these factors could harm our business, financial condition
and results of operations.
Contingency Plans. There is a possibility that an unforeseen year
2000-related event may occur and cause a disruption for which we are not
currently prepared. Our contingency plan for this possibility includes having
our computer programmers and support staff on call or on site to respond to any
disruption of our business during a critical transition date (e.g., September 9,
1999 or January 1, 2000). We will continue to assess our systems and those of
our vendors throughout the remainder of this year. If our contingency plan is
inadequate to prevent or resolve a year 2000 disruption, there could be a
material harmful effect on our business, financial condition and results of
operations.
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BUSINESS
OVERVIEW
We believe that Quotesmith.com is the most comprehensive Internet-based
insurance service available. The Quotesmith.com service enables consumers and
business owners to obtain instant quotes from over 300 insurance companies, and
we guarantee the accuracy of every quote. Combining the reach and efficiency of
the Internet with our proprietary database and industry expertise developed over
the past 15 years, we provide a complete "quote to policy delivery" insurance
solution without the involvement of any commissioned salespeople.
We have created a model that addresses the challenges faced by traditional
insurance distribution methods in a manner that offers significant benefits to
both consumers and insurance companies. The Quotesmith.com model allows
consumers to: (1) efficiently search for, analyze and compare insurance
products; (2) quickly request and obtain insurance quotes; and (3) easily select
and purchase insurance from the insurance company of their choice.
INDUSTRY BACKGROUND
The Traditional Insurance Market in the United States
The insurance market in the United States represented over $1.1 trillion in
premiums paid in 1998 according to A.M. Best. Insurance products are widely held
by households and businesses. Estimates by the United States Bureau of Labor
Statistics showed that in 1997, the average household paid nearly $4,500 for
personal insurance products, accounting for 12.9% of the average annual
household spending of approximately $35,000.
The United States insurance market is broadly divided into two categories:
life and health insurance and property and casualty insurance. Over 4,500
insurance companies distribute their products through a network of agents and
brokers or sell directly to consumers. There are approximately one million
individuals licensed as agents and brokers to sell insurance in the United
States. A variety of distribution systems have evolved, including "captive"
one-company agents and independent agents and brokers that typically represent
only two to five insurance companies.
Challenges to Purchasing and Delivering Insurance
There are numerous challenges to the informed purchase and delivery of
insurance products. Some of these challenges are due to the specialized nature
of insurance products and other challenges result from the way in which
insurance has been traditionally distributed.
These challenges include:
- Fragmented delivery. Insurance products are available from captive
agents, independent agents and direct distribution channels as well as
new entrants, including banks and other financial institutions. Because
of this fragmentation, there has been no single source of policy coverage
and pricing information from which a consumer can obtain unbiased and
complete information.
- Quantity and variation of products. Insurance policies vary by type of
insurance product, underwriting guidelines, insurance company,
jurisdiction and the particular characteristics and preferences of the
consumer. This creates a complex pricing structure that is not readily
understandable or comparable without the use of technology.
- Information-intensive underwriting process. The underwriting process
requires consumers to submit, and insurance companies to collect, large
amounts of individualized and
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personal information. This process is difficult and time consuming and,
if not accurately completed, will delay the approval of a policy.
- Negative consumer perception. Consumers often believe that they paid too
much for their insurance and were not properly informed by insurance
agents. Face-to-face contact with an insurance agent may convey the sense
of a high-pressure sales environment with a lack of unbiased information.
- Misalignment of interests between insurance agents and
consumers. Commission-based insurance agents represent only a limited
number of insurance companies. Accordingly, they are compensated to
promote and sell a limited range of products, which is in direct conflict
with the consumer's need to obtain insurance at the lowest price.
- Inconvenient and time-consuming purchase. Researching policy coverages,
contacting competing insurance companies, collecting information and
obtaining insurance quotes require large blocks of time usually during
regular working hours. Consumers are often unable to shop for insurance
on their own time and from the convenience of their own home.
Distribution of insurance through traditional agent and broker sales forces
is expensive and inefficient for insurance companies. According to the Life
Insurance Marketing Research Association, total marketing and sales costs are
$144 for every $100 of first year life and health insurance premiums.
Traditional agency distribution methods have high fixed costs associated with
establishing and maintaining numerous branch and local offices, high commission
structures, recurring training costs and high agent turnover. In addition,
insurance companies often do not target certain segments of the population
because of the inability to profitably serve these segments through traditional
distribution channels.
Emergence of the Internet and Electronic Commerce
The Internet has emerged as a global medium for communication, information
and commerce. International Data Corporation estimates that there were 97
million Internet users worldwide at the end of 1998 and anticipates this number
will grow to approximately 320 million users by the end of 2002. The Internet
possesses a number of unique characteristics that differentiate it from
traditional media and other methods of commerce, including:
- companies can reach and serve a large and global group of consumers
electronically from a central location;
- companies can provide personalized, low-cost and real time consumer
interaction;
- users communicate or access information without geographic or temporal
limitations;
- users enjoy greater convenience and privacy and face less sales pressure;
and
- users have an enormous diversity of easily accessible content and
commerce offerings.
As a result of these unique characteristics and the Internet's growing
adoption rate, businesses have an enormous opportunity to conduct commerce over
the Internet. International Data Corporation estimates that commerce over the
Internet will increase from approximately $32 billion worldwide in 1998 to
approximately $426 billion in 2002. The Internet gives companies the opportunity
to develop one-to-one relationships with consumers worldwide without having to
make the significant investments to build and manage a local market presence or
develop the printing and mailing capabilities associated with traditional direct
marketing activities.
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Emergence of the Electronic Service Category
A new category of Internet-based electronic service providers has emerged
that offers a focused range of services with special emphasis on providing
relevant content, information and transaction capabilities. Recent examples
include companies operating as online providers of mortgages, online securities
brokers and automobile referral services. These consumer-focused, one-stop,
information-based destinations provide enhanced, high margin services by acting
as independent intermediaries that facilitate interaction and transaction flow
between buyers and sellers. Consumers benefit because they are able to obtain
value-added information services and transaction capabilities on their own time
schedule. Sellers benefit because they are able to deliver targeted offerings
more effectively to consumers.
Online Insurance Opportunity
The growing acceptance of the Internet and electronic commerce presents a
significant opportunity for the insurance industry by allowing consumers to more
efficiently and effectively research and transact with insurance companies. The
fragmentation of the insurance industry and the significant price and product
variation has led consumers to seek alternative means of purchase and insurance
companies to seek alternative means of distribution. According to Forrester
Research, Internet-influenced sales of insurance are expected to grow from $1.5
billion in 1998 to $11.0 billion in 2003. We believe that the vast information
sharing and communications power of the Internet will significantly improve the
insurance industry for both consumers and insurance companies.
Characteristics of the insurance product that make it particularly well
suited for delivery over the Internet include:
- insurance is an information-based product that needs no physical shipment
or warehousing of merchandise;
- through a single medium consumers can access information and compare a
wide variety of insurance companies' products;
- effective two-way communication flow via the Internet allows insurance
companies to interact with consumers and rapidly collect underwriting
information;
- enhanced convenience, privacy and control over the process of researching
and purchasing insurance without the pressure of a commissioned agent;
and
- ability of insurance companies to target and serve segments of the market
which previously were unprofitable through traditional distribution
channels by reducing the need for large sales staff and costly local
offices.
Many companies are trying to address this significant online insurance
opportunity. Some companies have created "lead referral" Web sites for the
purpose of capturing consumer name and address information to be forwarded, as a
prospective sales lead, to a specified insurance company or its traditional
sales force. Many of these Web sites are paid upfront referral fees, are aligned
with a limited number of insurance companies and often do not reveal many of the
lowest priced insurance policies. Consumers are often still forced to complete
their purchase through a commissioned salesperson. Additionally, these companies
typically do not offer any personalized customer service or insurance
fulfillment capabilities and, therefore, do not offer a complete quote to policy
delivery insurance solution.
Existing insurance companies and their agents and brokers have created Web
sites to sell their insurance products online as an alternative to their
traditional sales activities. Some companies have created Web sites with the
primary purpose of creating an insurance sale online for a single insurance
company or group of insurance companies with little or no
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comparative overview of prices. These companies perpetuate the fragmentation in
the industry by not offering a comprehensive database of pricing and coverage
information.
As a result of the shortcomings inherent in the online lead referral and
single company approaches, we believe there exists a significant market
opportunity for the emergence of a large-scale, comprehensive and unbiased
Internet-based insurance service. Self-directed consumers will be attracted to
the broadest selection of insurance companies and a compelling value proposition
based upon price, time and transaction fulfillment.
THE QUOTESMITH.COM SOLUTION
We believe that Quotesmith.com is the most comprehensive Internet-based
insurance service available. The Quotesmith.com service enables consumers and
business owners to obtain instant quotes from over 300 insurance companies, and
we guarantee the accuracy of every quote. Combining the reach and efficiency of
the Internet with our proprietary database and industry expertise developed over
the past 15 years, we provide a complete "quote to policy delivery" insurance
solution without the involvement of any commissioned salespeople.
We have created a model that addresses the challenges faced by traditional
insurance distribution methods in a manner that offers significant benefits to
both consumers and insurance companies. The Quotesmith.com model allows
consumers to: (1) efficiently search for, analyze and compare insurance
products; (2) quickly request and obtain insurance quotes; and (3) easily select
and purchase insurance from the insurance company of their choice.
The Quotesmith.com solution provides the following principal advantages to
both consumers and insurance companies:
Comprehensive Source of Insurance Information and Products. On a single Web
site, we provide insurance quotes from over 300 insurance companies across
several types of insurance including individual term life, private passenger
automobile, dental, individual and family medical, Medicare supplement, small
group medical, "no exam" whole life and fixed annuity. We believe we offer
consumers access to the largest, most complete repository of comparative
information on insurance products, insurance pricing and insurance providers. We
empower consumers with relevant current pricing knowledge, coverage information
and independent rating information so that consumers can make informed buying
decisions.
Guaranteed-Accurate Instant Quotes. Over the past 15 years, we have
developed what we believe to be the most complete, regularly updated database
used to determine insurance quotes. The ability to obtain instant quotes on the
Internet is the first priority for consumers purchasing insurance online,
according to a 1997 survey conducted by Booz-Allen & Hamilton. We obtain and
regularly update all of our pricing, underwriting and policy coverage
information contained in our databases directly from the insurance company to
ensure accuracy. We offer consumers a unique $500 cash reward guarantee that we
provide an accurate quote. In addition, we also offer a $500 cash reward
guarantee that we provide the lowest price quote available with respect to term
life policies. These Quotesmith.com guarantees are unmatched by any competitor.
A No Salesperson Approach. At Quotesmith.com, we provide self-directed
insurance buyers with a "no salesperson" promise. We put consumers in control of
their insurance purchase decisions by giving them the ability to efficiently
search, analyze and compare prices of insurance products from multiple insurance
companies in complete privacy, on their own time and free from the pressure to
buy associated with traditional salespeople. Consumers choose from what we
believe is the largest selection of insurance companies using their own
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preferences regarding price and insurance company rating. Consumers are able to
purchase insurance directly through us without ever speaking to a commissioned
salesperson.
Convenience. Consumers who use Quotesmith.com no longer need to contact
different insurance companies or salespeople, one by one, in order to gather
information to make educated decisions. Unlike traditional agents who only
recommend and promote a limited number of insurance companies' policies, we
provide real time access to a large database of over 300 insurance companies'
products. Our comparison service presents users with a comprehensive listing of
insurance quotes, ranked by price. We believe that this large array of available
insurance providers in a single destination saves consumers time and effort in
searching for and obtaining the most suitable coverage.
Quote to Policy Delivery Support. Consumers purchase insurance directly
through us. Unlike insurance lead referral services, at Quotesmith.com, we do
not abandon the consumer once the insurance company has been selected, but
continue to provide value-added support and service throughout the insurance
purchase process. We facilitate this process by:
- interpreting various pricing, coverage and independent rating information
when asked;
- assisting consumers in completing insurance applications; and
- arranging and monitoring the collection of outside underwriting
information including paramedical examinations, laboratory reports and
medical records.
Focus on Customer Service. Customer service is both our foundation and a
strategic priority. We provide a high level of customer service throughout the
application process and aim to eliminate consumer dissatisfaction and
frustration. Our non-commissioned customer service staff has an average of 11
years of experience in the insurance industry.
We implement our customer service objectives by:
- requiring all new employees to attend "Quotesmith University," a two-week
training course that teaches all of the service tasks we perform for our
customers;
- maintaining our own call center to ensure prompt and consistent responses
to phone, mail and e-mail inquiries;
- providing regular application status reports to our customers on a
consistent basis through policy delivery; and
- offering a 30-day cancellation option on all paid term life policies.
Fully Licensed National Insurance Agency. Unlike traditional insurance
agents who are often only licensed in one or a limited number of states, our
company or one of our employees is licensed to offer life and health insurance
throughout the United States. This allows us to process and offer insurance
policies to consumers nationwide. Over a 15-year period, we have established
vital information-contributor relationships with over 300 insurance companies,
of which we are currently appointed as an authorized agent by 115 insurance
companies. We typically seek and receive formal agency appointment from an
insurance company after we receive a purchase request for that company's product
from a prospective customer.
User Friendly System. At our Web site, www.quotesmith.com, consumers can
access our Internet-based services and initiate purchase requests 24 hours a
day, 7 days a week. Our easy to use Web site is designed for fast viewing, rapid
downloading and general compatibility with most commonly used browsers.
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OUR STRATEGY
Our strategy is to be the leading Internet-based service for all insurance
needs of individuals and small businesses. The key elements of our strategy
include:
Continue to Build the Quotesmith.com Brand. We believe that building
awareness of the Quotesmith.com brand is critical in our effort to be the
leading Internet-based insurance service. To date, we have focused our consumer
marketing efforts on traditional direct response print advertising in personal
finance and special interest magazines. We have recently begun radio advertising
and entered into strategic online agreements with companies such as Intuit
Insurance Services, drkoop.com and XOOM.com. In order to build our brand, we
plan to add to these strategic online relationships and agreements as well as to
continue to develop our traditional advertising efforts, positive press coverage
and strong word of mouth support.
Offer Additional Insurance Products. We will continue to expand into
additional types of insurance. We expect to leverage our brand, proprietary
database and operational infrastructure to expand the breadth of insurance
products we offer to our customers. While historically our primary product has
been term life insurance, we now offer dental, individual and family medical,
Medicare supplement, small group medical, "no-exam" whole life insurance and
fixed annuity. Additionally, we offer access to private passenger automobile
insurance quotes through click-through arrangements with Quicken Insuremarket
and Progressive. We plan to expand these offerings and add additional life and
health insurance and property and casualty insurance products. We plan to market
these products to both new customers and to our existing customer base.
Expand Number of Participating Insurance Companies. We intend to increase
the number of participating insurance companies in our service. A significant
factor in our success has been our ability to demonstrate to an increasing
number of leading insurance companies that we can generate incremental revenues
for them within their existing pricing structures. We plan to extend this
ability to broaden our relationships with major insurance companies based on
reputation, quality and national presence in order to expand our insurance
product offerings.
Leverage Customer Base. We have expanded our insurance product offerings
and believe there is significant opportunity to leverage our existing customer
base and provide new products to them without significant customer acquisition
costs. We plan to tailor our marketing efforts based on consumer profiles
contained in our database of existing customers.
Strengthen and Pursue Strategic Relationships and Agreements. We believe
that strategic joint ventures and licensing arrangements are attractive methods
of expansion, as they will enable us to combine our expertise in Internet-based
insurance offerings with other brand names, complementary services or
technology. We currently have strategic agreements with Intuit Insurance
Services, drkoop.com, XOOM.com and Progressive. We plan to expand these and
pursue additional relationships and agreements in the future. In addition, we
may seek to acquire complementary technologies or businesses.
Continue to Focus on Customer Service. At Quotesmith.com, we provide
insurance products and services for consumers from initial evaluation through
policy delivery. In order to provide the highest level of service throughout the
insurance buying process, we will monitor feedback from consumers and add new
features designed to increase customer usage and loyalty.
THE QUOTESMITH.COM BUSINESS MODEL
We have created a model that enables consumers to shop for and purchase
insurance in a manner that we believe is simpler, faster and more convenient
than traditional methods. We
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provide a complete "quote to policy delivery" insurance solution using our
technology and non-commissioned customer service staff. Our model:
- allows consumers to specify the desired coverage and range of
substitutability among insurance companies and policy features--for
example, consumers may want to purchase insurance from a company rated
"A" or better by A.M. Best;
- allows consumers to choose the premium range they are prepared to pay for
the policy they want;
- allows consumers to purchase insurance without the involvement of a
commissioned salesperson;
- allows us to monitor and care for applicants through the underwriting
process and policy delivery stage;
- allows us to guarantee the initially quoted premium subject to the
accuracy of the information provided by consumers as compared against
each insurance company's published underwriting guidelines; and
- allows insurance companies to offer additional policies within their
existing pricing structures.
Our customer service representatives are motivated to provide value-added
service and assistance and not to generate insurance purchase requests.
Accordingly, we do not assign consumers to individual employees. Instead, we
rely upon our information processing systems to provide each customer service
representative with access to the customer account and market-related
information necessary to respond to any customer's inquiries. We employ a team
approach. If a customer wishes to initiate an insurance application request or
obtain information concerning an application already in process, each and every
customer service representative is able to provide assistance.
Our process at Quotesmith.com is comprised of four primary stages.
Initial Information Evaluation. Consumers visit our user-friendly Web site
and access our comprehensive database of insurance policy price rates,
underwriting guidelines, policy coverage and exclusion information,
claims-paying ability ratings of over 300 insurance companies. To help consumers
understand the underwriting process, our Web site provides information and
helpful tips on how the underwriting process works.
Search, Retrieval and Comparison. Consumers can quickly obtain a customized
cost comparison report in a single search by completing a brief and confidential
questionnaire at the start of the online session. Each anonymous consumer
inquiry triggers a proprietary cost search and comparison algorithm that sorts
through a database of thousands of insurance options that is updated daily. The
search result, delivered in seconds, is a comprehensive comparison of insurance
policies ranked by the lowest price that matches the consumer's criteria.
Consumers can then click to view:
- specific coverage details about the policy;
- exclusions and guarantees (including policy acceptance guidelines); and
- latest claims-paying ability ratings from five independent rating
services.
Application Processing. If a consumer desires to purchase a policy, the
consumer selects an insurance company and policy and requests an application for
that policy while online. We accept requests for applications from consumers
throughout the United States, 24 hours a day, 7 days a week. We also provide
toll-free support during business hours. In response to the
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consumer's request, we promptly mail insurance applications and state mandated
forms to the consumer. After the consumer receives the application, we provide
help in completing and proofreading the application, which the consumer returns
to us to begin the underwriting process.
Within two business days of receiving a completed application, we call to
thank the consumer and review the application. After this telephone discussion,
we submit the application to the insurance company for underwriting on behalf of
the consumer.
Underwriting. During the underwriting process at Quotesmith.com, we
regularly track the progress of the consumer's outstanding items. We also assist
the insurance company by arranging for a paramedical examination and facilitate
the collection of the driver, medical and credit records. We receive weekly
status reports from the insurance company regarding the application and
regularly communicate this information to the consumer. We review all policies
for accuracy prior to delivery to the consumer.
If an insurance company declines to issue the policy or issues a counter
offer at a higher premium, we send a letter to the consumer stating the reasons
that the policy is not being issued as applied for. In this instance, we also
assist the consumer in finding suitable alternative coverage wherever possible
and whenever asked.
Once a policy has been issued and been paid for by the consumer, we receive
a commission from the insurance company. We do not charge consumers for using
our Quotesmith.com technology and do not currently sell banner advertising at
our Web site.
INSURANCE PRODUCTS
Quotesmith.com historically offered quote and policy-related information
regarding term life insurance. For more information refer to "Risk
Factors -- Nearly all of our revenues are currently derived from consumers
purchasing term life insurance through us" on page 7. We recently began offering
instant quotes and related information on additional insurance products for both
individuals and small businesses. Our current product offerings include:
- Individual term life. This is life insurance coverage that has no cash
value and continues for a fixed period of time such as 15, 20 or 25
years. We have been offering instant quotes and delivering term life
policies since 1993.
- Private passenger automobile. This provides collision and liability
insurance to individuals for private cars and vehicles. We provide access
to instant quotes using click-through arrangements with Progressive and
Quicken Insuremarket. We do not currently deliver automobile insurance
policies.
- Dental. This is generally an add-on product to medical insurance. In
second quarter 1999, we began offering instant quotes from a wide variety
of traditional and managed-care dental plans for individuals, families
and small businesses that employ up to 100 people.
- Individual and family medical. This is also known as comprehensive major
medical insurance. We offer instant quotes, delivered policies and track
traditional plans, PPOs, HMOs and Blue Cross and Blue Shield plans.
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- Medicare supplement. This provides health insurance for people ages 65
and older to fill in coverages not provided by Medicare. We offer instant
quotes and deliver supplemental health policies.
- Small group medical. We define small group medical insurance as those
comprehensive medical plans that are offered to firms that employ up to
100 people. We began offering instant quotes from, and tracking
traditional plans of, PPOs, HMOs and Blue Cross and Blue Shield plans in
second quarter 1999.
- "No-exam" whole life. This provides insurance for persons with adverse
health histories who want life insurance coverage without a paramedical
examination. We offer instant quotes and deliver whole life policies.
- Single premium fixed annuity. This product accumulates a lump-sum cash
payment on a tax-deferred basis at fixed interest rates over time. We
offer instant quotes and deliver fixed annuity products.
The following table shows information with respect to the principal product
types currently available through our services. We obtained the information
regarding United States 1998 annual premiums from A.M. Best.
<TABLE>
<CAPTION>
QUOTESMITH.COM SERVICE
AS OF JUNE 16, 1999
-------------------------------------
UNITED STATES NUMBER OF QUOTED
TYPE OF INSURANCE PRODUCT 1998 ANNUAL PREMIUMS STATES COVERED INSURANCE COMPANIES
------------------------- -------------------- -------------- -------------------
<S> <C> <C> <C>
Individual term life.............. $ 7 billion 50 and D.C. 126
Private passenger automobile...... 119 billion 47 44
Dental............................ 2 billion 50 and D.C. 27
Individual and family medical..... 93 billion 39 and D.C. 32
Supplemental health............... 7 billion 49 and D.C. 66
Small group medical............... 520 billion 25 7
"No exam" whole life.............. -- 50 and D.C. 58
Fixed annuities................... 38 billion 50 and D.C. 92
</TABLE>
TECHNOLOGY
Proprietary Insurance Information Databases. We maintain a proprietary
database of premium rates and policy coverage information from over 300
insurance companies. At Quotesmith.com, we do not rely upon state insurance
departments or any other regulatory agencies to obtain any insurance pricing
information. Instead, we obtain and regularly update all of the pricing,
underwriting and policy coverage information contained in our databases directly
from each quoted insurance company. We obtain claims-paying ability ratings from
A.M. Best, Duff & Phelps Credit Rating Co., Moody's, Standard & Poor's, and
Weiss Ratings, Inc. and hold licenses to re-distribute the copyrighted rating of
each company. Our dedicated staff of seven full-time market reporters regularly
contacts the insurance companies quoted on our service and monitors and updates
our databases as market conditions warrant. Each business day we make several
thousand changes to our database.
Technology Systems. Our systems for processing quotes, purchase requests,
application progress tracking, customer notification and revenue recognition are
highly automated and integrated. Customer service representatives equipped with
online computer terminals can access a customer's account information from our
database on demand. Our core technology systems use a combination of our own
proprietary technologies and commercially available, licensed technologies from
Silicon Graphics, Netscape Communications, Santa Cruz Operation (SCO) and
others. We have internally developed and enhanced our proprietary programs over
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a period of 15 years utilizing scalable tools and platforms to allow us to
rapidly expand our network and computing capacity.
An internal programming and system administration staff supports our
technology. In addition to supporting the systems, our staff continually
enhances our software and hardware and develops new systems and services to
better service our customers and business objectives.
Server Hosting and Backup. Our Web site system hardware is hosted at
AboveNet Communications in San Jose, California and Vienna, Virginia. These
grade "A" telecommunications data centers provide redundant communications lines
to the Internet backbone, emergency power backup, and security, as well as
24-hour monitoring and engineering support. In addition, we have implemented
load balancing systems and our own redundant servers to provide for fault
tolerance. These redundancies permit us to perform scheduled maintenance without
taking our Web site offline. Finally, tape backups are performed nightly to
prevent a loss of data.
MARKETING
At Quotesmith.com, we attract new consumers and communicate the
availability of new products and services primarily through direct response
marketing methods. We have established ourselves as a leading Internet-based
insurance brand through an offline marketing campaign consisting primarily of
magazine advertisements, radio and direct mail. We employ in-house volume media
buying and other strategies to minimize the expenses of broad-based advertising.
Using our proprietary information processing systems and consumer database as
well as other resources, we employ statistical analysis to measure the
effectiveness and efficiency of our marketing efforts.
While our brand awareness to date has been achieved without any affiliation
with an Internet portal or search engine, we have recently entered into several
strategic online relationships and agreements. We intend to increase marketing
expenditures and continue to aggressively pursue a marketing strategy designed
to promote our Quotesmith.com brand and consumer awareness of the benefits of
buying insurance through us. We intend to target households and small
businesses.
Our marketing strategy is to promote our brand and attract self-directed
consumers to our Web site. Our marketing initiatives include:
- utilizing direct response print advertisements placed primarily in
financially-oriented magazines and special interest magazines such as
Kiplinger's Personal Finance, Money Magazine, SmartMoney, Smithsonian,
Flying, Forbes, AOPA, Worth, ABA Journal, Mutual Funds, American
Spectator, Discover and Popular Science;
- advertising via television, radio and direct mail; and
- entering into strategic relationships with other Web sites to increase
our access to online consumers.
STRATEGIC RELATIONSHIPS AND AGREEMENTS
At Quotesmith.com, we selectively pursue strategic relationships and
agreements to expand our access to online consumers, to build our brand name
recognition and to expand our products and services. Recently, we entered into
strategic relationships with drkoop.com and XOOM.com. However, to date we have
not derived a material amount of revenues from these arrangements.
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Intuit Inc. In September 1998, we entered into a service agreement with
Intuit Insurance Services (IIS), pursuant to which we license IIS certain of our
insurance quotation technologies and provide IIS and certain of its affiliated
Internet sites our customer service and insurance brokerage capabilities. This
service agreement is for a term of three years. We will pay a fee to IIS for
Quicken Insuremarket customers who purchase insurance through the Quotesmith.com
service. To date, we have not derived a material amount of revenues from this
service agreement. Recently, we entered into a Web linking agreement with Intuit
to provide customers the ability to click-through to Quicken Insuremarket's
private passenger automobile insurance quotation service. Additionally, Intuit
has made a strategic investment in our company.
The Progressive Corporation. In September 1998, we entered into an
agreement with Progressive, the nation's fifth largest private passenger
automobile insurance company, to provide a click-through to their private
passenger automobile insurance service. As a result of this agreement, visitors
from our Web site may click into Progressive's Web site to obtain instant
automobile insurance quotes from State Farm, Allstate, Progressive and other
automobile insurance companies. Progressive compensates us for this traffic
based upon the number of completed quotes. We do not currently deliver
automobile insurance policies.
COMPETITION
We compete with online and traditional providers of insurance products. The
market for selling insurance products over the Internet is new, rapidly evolving
and intensely competitive. Current and new competitors may be able to launch new
sites at a relatively low cost. There are a number of companies that either sell
insurance online, such as Quicken Insuremarket, or provide lead referral
services online, such as InsWeb Corporation.
We also face competition from the traditional distributors of insurance
such as captive agents, independent brokers and agents and direct distributors
of insurance. Insurance companies and distributors of insurance products are
increasingly competing with banks, securities firms and mutual fund companies
that sell insurance or alternative products to similar consumers. Traditionally,
regulation separated the activity in the financial services industry and
protected insurance companies' markets from competition. However, recent
regulatory changes have begun to permit these financial institutions to also
sell insurance.
We potentially face competition from unanticipated alternatives to our
insurance service from a number of large Internet companies and services that
have expertise in developing online commerce and in facilitating Internet
traffic, including America Online, Microsoft and Yahoo!. These potential
competitors could choose to compete with us directly or indirectly through
affiliations with other electronic commerce companies, including direct
competitors. Other large companies with strong brand recognition, technical
expertise and experience in Internet commerce could also seek to compete with
us. Competition from these and other sources could harm our business, results of
operations and financial condition.
We believe that the principal competitive factors in our markets are price,
brand recognition, Web site accessibility, ability to fulfill customer purchase
requests, customer service, reliability of delivery, ease of use, and technical
expertise and capabilities. Many of our current and potential competitors,
including Internet directories and search engines and traditional insurance
agents and brokers, have longer operating histories, larger consumer bases,
greater brand recognition and significantly greater financial, marketing,
technical and other resources than us. Certain of these competitors may be able
to secure products and services on more favorable terms than we can obtain. In
addition, many of these competitors may be able to devote significantly greater
resources than us for developing Web sites and
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<PAGE> 46
systems, marketing and promotional campaigns, attracting traffic to their Web
sites and attracting and retaining key employees.
Increased competition may result in reduced operating margins, loss of
market share and damage to our brand. We cannot assure you that we will be able
to compete successfully against current and future competitors or that
competition will not harm our business, results of operations and financial
condition.
REGULATION
The insurance industry and the marketers of insurance products are subject
to extensive regulation by state governments and by the District of Columbia.
This regulation extends to the operations of insurance companies, insurance
agents and to our service.
Our products are sold throughout the United States through licenses held by
our company and/or one of our employees as is required by each state's insurance
department. In general, state insurance laws establish supervisory agencies with
broad administrative and supervisory powers to:
- grant and revoke licenses to transact business;
- impose continuing education requirements;
- regulate trade practices;
- require statutory financial statements of the 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 regulations require that a firm (or
individual within that firm) must be licensed 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 such matters.
We do not currently sell the types of life insurance (primarily cash value life
insurance policies such as universal life) which are the subject 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 the application of such requirements to specific activities
or transactions. Our company and/or one of our employees is currently licensed
to sell insurance in every state. We do not permit any of our other personnel
who have contact with customers to act as insurance agents. 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. However, we cannot assure you that a state
insurance department will not make a determination that one or more of such
activities constitute the solicitation of insurance and that such personnel must
be licensed. Such a determination could harm our business.
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While no regulatory actions are pending against us, we can give you no
assurance that we would deemed to be in compliance with all applicable insurance
licensing requirements of each jurisdiction in which we operate. Nor can we
assure you that we do not need to obtain any additional licenses.
The federal government does not directly regulate the marketing of most
insurance products. However, certain products, such as variable life insurance,
must be registered under federal securities laws and therefore the entities
selling such products must be registered with the NASD. We do not currently sell
any federally regulated insurance products. If we elect to sell such federally
regulated products in the future, we would be required to qualify for and obtain
the required licenses and registrations. We cannot assure you that we will be
able to obtain such licenses.
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 sell
certain insurance products. In the past, Congress has considered legislation
that could, among other things, eliminate existing restrictions on the
affiliation of insurance companies, banks and securities firms. Such legislation
and other future federal or state legislation, if enacted, could result in
increased regulation of our business.
The future regulation of insurance sales via the Internet as a part of the
new and rapidly growing electronic commerce business sector is unclear. We
believe that we are currently in compliance with all such regulations. However,
if additional state or federal regulations are adopted, they may have an adverse
impact on us.
LEGAL AND REGULATORY PROCEEDINGS
From time to time we have been, and expect to continue to be, subject to
legal proceedings and claims in the ordinary course of business. Such legal
proceedings and claims include claims of alleged infringement of third party
intellectual property rights and notices from state regulators that we may have
violated state regulations. Such claims, even if without merit, could result in
the significant expenditure of our financial and managerial resources. We are
not aware of any legal proceedings or claims that we believe will, individually
or in the aggregate, harm our business, financial condition or results of
operations.
EMPLOYEES
As of May 1, 1999, we had 77 employees. We have never had a work stoppage.
A collective bargaining unit does not represent our employees. We consider our
relations with our employees to be good. Our future success will depend, in
part, on our ability to continue to attract, integrate, retain and motivate
highly qualified technical and managerial personnel, for whom competition is
intense.
FACILITIES
Our executive, administrative and operating offices are located in
approximately 16,000 square feet of leased office space in Darien, Illinois
under a lease that expires on December 31, 2003. We anticipate that we may
require additional space within the next 12 months to accommodate our
anticipated growth and that suitable office space will be available on
commercially reasonable terms.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS, DIRECTOR NOMINEES AND KEY EMPLOYEES
The following table sets forth certain information regarding our executive
officers and key employees, directors and the individuals who have agreed to
join our board of directors upon the completion of this offering.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert S. Bland (1)..................... 45 Chairman of the Board, President and
Chief Executive Officer
William V. Thoms (1).................... 46 Executive Vice President and Director
Thomas A. Munro......................... 38 Vice President, Chief Financial Officer
and Secretary
Burke A. Christensen.................... 53 Vice President of Operations and General
Counsel
Richard C. Claahsen..................... 36 Vice President of Regulatory Affairs
Richard W. Graeber...................... 34 Vice President of Internet Operations
Grant F. Kuphall........................ 45 Vice President of Business Development
Ronald A. Wozniak....................... 45 Vice President of Information Technology
Bruce J. Rueben (2)(3).................. 46 Director
Timothy F. Shannon (2)(3)............... 44 Director
Jeremiah A. Denton, Jr. (4)............. 74 Director Nominee
Richard F. Gretsch (2)(4)............... 46 Director Nominee
John McCartney (3)(4)................... 46 Director Nominee
</TABLE>
- -------------------------
(1) Will become a member of the executive committee upon completion of this
offering
(2) Will become a member of the compensation committee upon completion of this
offering
(3) Will become a member of the audit committee upon completion of this offering
(4) Will become a director upon the completion of this offering
Robert S. Bland has served as our chairman of the board, president and
chief executive officer since he founded Quotesmith.com in 1984. From 1979 to
1984, Mr. Bland was president and sole stockholder of Security Funding
Corporation, an insurance agency. In March 1984, Mr. Bland sold Security Funding
Corporation in order to raise capital to found our company. Mr. Bland holds a
B.S. in marketing from the University of Colorado.
William V. Thoms has served as our executive vice president since 1994.
From 1988 to 1993, Mr. Thoms was responsible for our operations and customer
service departments. Mr. Thoms is a founding stockholder of Quotesmith.com.
Prior to joining us, Mr. Thoms was a sales manager for Western Dressing, Inc., a
privately held salad dressing manufacturing company, from 1972 to 1987.
Thomas A. Munro has served as our vice president, chief financial officer
and secretary since March 1999. From July 1998 to March 1999, Mr. Munro was
chief financial officer of Bowne Business Solutions, a subsidiary of Bowne & Co.
Prior to joining Bowne & Co., Mr. Munro was chief financial officer of Donnelley
Enterprise Solutions, Inc., a public company. In 1997, Mr. Munro was the
Corporate Controller for Donnelley Enterprise Solutions Inc. From 1995 to 1996,
Mr. Munro was controller at R.R. Donnelly & Sons, Donnelley Business Services
Division, which completed its initial public offering during such time. From
1987 to 1995, Mr. Munro was employed in various financial and management
positions at R.R.
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<PAGE> 49
Donnelley & Sons. Mr. Munro holds a B.S. from Brigham Young University and an
M.B.A. from the University of Chicago.
Burke A. Christensen has served as our vice president of operations and
general counsel since January 1999. From 1997 to 1998, Mr. Christensen was
engaged in the private practice of insurance law with Bell, Boyd & Lloyd, a
Chicago-based law firm. From 1995 to 1997, Mr. Christensen was the vice
president and chief operating officer of A.W. Ormiston & Co. insurance agency.
From 1984 to 1995, Mr. Christensen was vice president and general counsel of the
American Society of Chartered Life Underwriters, Bryn Mawr, Pennsylvania. Mr.
Christensen was awarded the Chartered Life Underwriter designation in 1987. He
holds a B.S. in history from Utah State University and a J.D. from the
University of Utah College of Law.
Richard C. Claahsen has served as our vice president of regulatory affairs
since May 1999. From June 1997 to May 1999, Mr. Claahsen served as our director
of regulatory affairs. From October 1996 to June 1997, he was a special agent
with Northwestern Mutual Life Insurance Company. From 1993 to 1996, Mr. Claahsen
was a litigation paralegal at Templeton & Associates of Chicago, Illinois. In
1999, Mr. Claahsen received his Chartered Life Underwriter designation from The
American College of Bryn Mawr, Pennsylvania. Mr. Claahsen holds a B.A. and an
M.A. in philosophy from the Catholic University of America and a J.D. from ITT
Chicago Kent College of Law.
Richard W. Graeber has served as our vice president of Internet operations
since April 1999 with overall responsibility for our Web site operations. From
1998 to 1999, Mr. Graeber was director of Internet services at Package Software
Associates, a consulting firm specializing in Internet and intranet site
development. From 1996 to 1998, Mr. Graeber was head of information technology
at International Bankers School. From 1988 to 1996, Mr. Graeber was manager of
information services at Vector Securities International.
Grant F. Kuphall has served as our vice president of business development
since January 1999. From April 1995 to December 1998, Mr. Kuphall was senior
vice president of Hutchinson, Shockey, Erley & Co., a municipal bond trading and
underwriting firm. From 1987 to 1995, Mr. Kuphall was a principal at Morgan
Stanley & Co. in the municipal bond trading department. Mr. Kuphall holds a B.A.
in economics from Beloit College and an M.B.A. from the University of Chicago.
Ronald A. Wozniak has served as our vice president of information
technology since December 1997. Mr. Wozniak joined us in November 1996 as a
programmer and analyst. From March 1994 to November 1996, Mr. Wozniak was a
senior financial systems analyst at Loyola University Medical Center in Maywood,
Illinois. From September 1993 to February 1994, he was employed as a programmer
and analyst at Data Control and Research, Ltd. Mr. Wozniak holds a B.S. in
management from Northern Illinois University.
Bruce J. Rueben became a director of Quotesmith.com in January 1998. He has
been president of the Minnesota Hospital and Health Care Partnership,
Minnesota's hospital association, since November 1998. From January 1994 to
November 1998, Mr. Rueben was president of the Maine Hospital Association. From
1989 to 1994, Mr. Rueben was senior vice president and assistant treasurer of
the Virginia Hospital Association. Mr. Rueben holds a B.S. from the Virginia
Commonwealth University School of Business and an M.B.A. from the University of
South Carolina.
Timothy F. Shannon became a director of Quotesmith.com in January 1998.
Since 1991, he has been President of Bradner Smith & Company, a subsidiary of
Bradner Central Company. In 1995, he was appointed to the Bradner Central
Company board of directors. Bradner Central
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Company, headquartered in Chicago, is a wholesale paper distribution company
with annual revenues that exceed $300 million. Mr. Shannon holds a B.S. in
Business Administration from the University of Illinois.
Admiral Jeremiah A. Denton, Jr. will become a director of Quotesmith.com
upon the completion of this offering. He currently serves as president of the
National Forum Foundation. Admiral Denton was elected as a United States Senator
from Alabama in 1980, and served from 1981 to 1987. From 1987 to 1989, Admiral
Denton, after being appointed by President Reagan, served as chairman of the
presidential commission on Merchant Marine and Defense. Admiral Denton holds a
B.S. from the United States Naval Academy and an M.A. in international affairs
from George Washington University.
Richard F. Gretsch will become a director of Quotesmith.com upon the
completion of this offering. He currently serves as global offering manager for
AT&T Global Network Services and has held this position since AT&T purchased the
IBM global network. Mr. Gretsch had been global offering manager for IBM
Internet Connection Service since 1995. From 1977 to 1995, he was employed with
IBM Corporation in various capacities including advisory instructor, systems
engineering, major account development and securities industry client manager.
Mr. Gretsch holds a B.S. in finance and accounting from the University of
Arizona and an M.B.A. from the University of Notre Dame.
John McCartney will become a director of Quotesmith.com upon the completion
of this offering. Since October 1998, Mr. McCartney has served as vice chairman
of Datatec, Ltd, a global provider of Internet-related products and services.
Datatec, with annual revenues of greater than $1 billion, is headquartered in
Johannesburg, South Africa and publicly traded on the Johannesburg stock
exchange. From June 1997 to March 1998, Mr. McCartney was president of the
client access business unit of 3Com Corporation, which merged with U.S. Robotics
Corporation in 1997. Mr. McCartney served on the board of directors of U.S.
Robotics Corporation from 1985 through 1997. He also served in various executive
capacities at U.S. Robotics Corporation, including as president and chief
executive officer. In addition to serving on the board of directors of Datatec,
Mr. McCartney serves on the board of directors of A.M. Castle Corp. (AMEX) and
Altec Lansing Technologies (privately held). Mr. McCartney holds a B.A. in
philosophy from Davidson College and an M.B.A. from the Wharton School,
University of Pennsylvania.
BOARD COMPOSITION
Our board of directors is currently comprised of four directors and will be
expanded to seven directors prior to the completion of this offering. Following
this offering, our board of directors will be divided into three classes serving
staggered three year terms, except for the first term of Class I directors, who
will serve for a one year term and Class II directors, who will serve for a two
year term. Each year, the directors of one class will stand for election as
their terms of office expire. We expect that, after the offering Messrs. Gretsch
and Rueben will be designated as Class I directors, with their terms of office
expiring in 2000, Messrs. Denton and McCartney will be designated as Class II
directors with their terms of office expiring in 2001, and Messrs. Bland,
Shannon and Thoms will be designated as Class III directors with their terms of
office expiring in 2002.
Each officer is elected by, and serves at the discretion of, our board of
directors. Each of our officers and directors, other than non-employee
directors, devotes his full time to our affairs. Our non-employee directors
devote such time to our affairs as is necessary to discharge their duties. The
are no family relationships among our directors, officers or key employees.
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<PAGE> 51
BOARD COMMITTEES
Currently, our board of directors does not have any committees. Upon the
completion of this offering, our board of directors intends to create an
executive committee, an audit committee and a compensation committee.
We expect that our executive committee will consist of Messrs. Bland, Thoms
and a non-employee director who will be named prior to the completion of this
offering. The executive committee will be authorized to exercise, between
meetings of our board of directors, all of the powers and authority of our board
of directors in the direction and management of our company, except to the
extent (1) prohibited by applicable law or our certificate of incorporation, or
(2) another committee shall have been accorded authority over the matter.
We expect that the audit committee will consist of Messrs. McCartney,
Shannon and Rueben. The audit committee will review our financial statements and
accounting practices, make recommendations to our board of directors regarding
the selection of independent auditors and review the results and scope of the
audit and other services provided by our independent auditors.
We expect that the compensation committee will consist of Messrs. Gretsch,
Shannon and Rueben. The compensation committee will make recommendations to the
board of directors concerning salaries and incentive compensation for our
executive officers and administers certain of our employee benefit plans.
DIRECTOR COMPENSATION
Directors who are also employees of Quotesmith.com receive no compensation
for serving on our board of directors. Non-employee directors receive an annual
stipend of $10,000 per year. In addition, we reimburse non-employee directors
for all travel and other expenses incurred in connection with attending board
and committee meetings. Non-employee directors are also eligible to receive
stock option grants under the 1997 Stock Option Plan. Pursuant to such plan,
Messrs. Rueben and Shannon received grants of 25,000 options each on January 1,
1998. Such options are vested and are exercisable at an exercise price of $1.00
per share. Admiral Denton and Messrs. Gretsch and McCartney will each receive
options to purchase 25,000 shares of common stock upon the completion of the
offering. These options will be fully vested at the time of grant with an
exercise price equal to the initial public offering price.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our anticipated members of our compensation committee is an officer
or employee of Quotesmith.com. None of our executive officers serves as a member
of the board of directors or compensation committee of any entity that has one
or more executive officers serving on our compensation committee.
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<PAGE> 52
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation we paid
to our chief executive officer and each of our other executive officers
receiving compensation greater than $100,000 in the fiscal year ended December
31, 1998 (the "named executive officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL NUMBER OF
COMPENSATION SECURITIES
------------------ UNDERLYING
NAME AND POSITION SALARY BONUS OPTIONS
----------------- ------ ----- ----------
<S> <C> <C> <C>
Robert S. Bland
Chief Executive Officer................................ $192,308 $ -- --
William V. Thoms
Executive Vice President............................... 198,077 -- 25,000
Ronald A. Wozniak
Vice President, Information Technology................. 115,702 5,250 --
</TABLE>
Mr. Munro joined us in March 1999 as our vice president, chief financial
officer and secretary and will be compensated at an annual base salary of
$225,000 during the year ended December 31, 1999. Mr. Christensen joined us in
January 1999 as our vice president of operations and general counsel and will be
compensated at an annual base salary of $150,000 for the year ended December 31,
1999.
STOCK OPTIONS
The following table sets forth certain information regarding options to
acquire our common stock granted to our named executive officers in 1998.
OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE AT
PERCENT ASSUMED ANNUAL
NUMBER OF TOTAL RATES OF STOCK PRICE
OF SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(4)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION --------------------
NAME GRANTED 1998(2) SHARE(3) DATE 5% 10%
- ---- ------------- ------------ --------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Robert S. Bland............. -- --% $ -- -- $ -- $ --
William V. Thoms(1)......... 25,000 20 2.00 7/31/98 1,250 2,500
Ronald A. Wozniak........... -- -- -- -- -- --
</TABLE>
- -------------------------
(1) Options were fully vested upon receipt with an exercise price of $2.00 per
share.
(2) Based on an aggregate of 125,000 shares subject to options granted in 1998.
(3) All options were granted at an exercise price equal to the fair market value
of our common stock as determined by our board of directors at the time of
grant. In determining the fair market value of our common stock, our board
of directors considered various factors, including our financial condition
and business prospects, our operating results, the absence of a market for
our common stock and risks regarding our company. Our common stock was not
publicly traded at the time of the grant.
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<PAGE> 53
(4) Potential realizable values are net of exercise price, but before taxes
associated with exercise. Amounts represent hypothetical gains that could be
achieved for the options. The assumed 5% and 10% rates of stock appreciation
are provided in accordance with the rules of the Securities and Exchange
Commission and do not represent our estimate or projection of our future
stock price.
OPTION GRANTS IN 1999
In January 1999, we granted Mr. Christensen options, each of which expires
January 1, 2009, to purchase: 25,000 shares of our common stock with an exercise
price of $3.00 per share, vesting as of November 16, 1999; 25,000 shares of our
common stock with an exercise price of $5.00 per share, vesting as of May 16,
2000; 25,000 shares of our common stock with an exercise price of $7.00 per
share, vesting as of November 16, 2000; and 25,000 shares of our common stock at
an exercise price of $9.00 per share, vesting as of November 16, 2001.
In March 1999, we granted Mr. Munro options, each of which expires March
29, 2009, to purchase: 30,000 shares of our common stock with an exercise price
of $5.00 per share; 30,000 shares of our common stock with an exercise price of
$7.00 per share; and 30,000 shares of our common stock at $9.00 per share. Each
of Mr. Munro's options will vest over a 36-month period by 2.77% of the total
number of shares optioned each month, however, in the 36th month, such options
will vest by 3.05% of the total number of shares optioned.
OPTION EXERCISES AND HOLDINGS
The following table sets forth information concerning the year-end value of
unexercised options held by our named executive officers.
YEAR-END OPTIONS
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
DECEMBER 31, 1998 DECEMBER 31, 1998(2)
------------------------------- -------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Robert S. Bland................... -- -- $ -- $ --
William V. Thoms(1)............... -- -- -- --
Ronald Wozniak.................... 50,000 -- 50,000 --
</TABLE>
- -------------------------
(1) During 1998, Mr. Thoms exercised options to purchase 25,000 shares of our
common stock at an exercise price of $2.00 per share. The deemed value of
the shares at time of exercise was $3.00 per share.
(2) Based upon a deemed value of $3.00 per share.
STOCK BASED PLANS
1997 Stock Option Plan (Amended and Restated). We have established a stock
option plan to provide additional incentive to our employees, officers,
directors and consultants. Pursuant to the stock option plan, we may grant
incentive stock options to our employees and officers and non-qualified stock
options to our employees, officers, directors and consultants. Our board of
directors or a committee to whom the board has delegated authority, selects the
individuals to whom options are granted, interprets and adopts rules for the
operation of the stock option plan and specifies the vesting, exercise price and
other terms of options. There are a total of 1,475,000 shares reserved for
issuance pursuant to the 1997 Stock Option Plan of which, as of May 1, 1999, we
have granted options to purchase an aggregate of 500,000 shares of our common
stock, at a weighted average exercise price of $4.62 per share. Upon completion
of
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<PAGE> 54
this offering, options to purchase 212,000 shares of common stock will be issued
to certain directors and employees at the initial public offering price.
The maximum term of an incentive stock option granted under the options is
generally limited to ten years. If an optionee terminates his or her service
with Quotesmith.com, the optionee generally may exercise only those options
vested as of the date of termination of service. Unless otherwise specified in
the option agreement, the optionee must effect such exercise within three months
of termination of service for any reason other than death or disability. The
exercise price of incentive stock options granted under the stock option plan
must be at least equal to the fair market value of our common stock on the date
of grant and in the case of 10% shareholders, 110% of the fair market value.
Payment of the exercise price may be made by such methods as determined by the
plan administrator and may include cash, check, a promissory note, consideration
under a cashless exercise program or, in certain cases, shares of our common
stock owned by the optionee.
In the event we are acquired or merged with another entity or we transfer
all or substantially all of our assets, then immediately prior to such change of
control all outstanding options will be deemed to be vested and exercisable.
1999 Employee Stock Purchase Plan. On March 29, 1999, our board of
directors established the 1999 Employee Stock Purchase Plan under which a total
of 250,000 shares of common stock will be made available for sale to our
employees. The purchase plan will become effective upon the completion of this
offering. The purchase plan, which is intended to qualify as an employee stock
purchase plan within the meaning of Section 423 of the Internal Revenue Code of
1986, as amended, will be administered by our board of directors or by a
committee appointed by our board of directors. Employees are eligible to
participate if they are employed by us for at least 20 hours per week and for
more than five months in any calendar year. The purchase plan permits eligible
employees to purchase common stock through payroll deductions, which may not
exceed 10% of an employee's compensation, subject to certain limitations.
The purchase period will be implemented in a series of consecutive,
overlapping offering periods, each approximately six months in duration.
Purchase periods will begin on the first trading day on or after January 1 and
July 1 of each year and terminate on the last trading day in the period six
months later. However, the first purchase period will begin on the date on which
the registration statement of which this prospectus is a part is declared
effective by the SEC and will terminate on the last trading day in the period
ending December 31, 1999. Each participant will be entitled through a payroll
deduction account to accumulate amounts for the purchase of common stock on the
last date of each purchase period. The purchase price of each share of common
stock under the purchase plan will be set by the administrator of the plan and
will be no less than 85% of the fair market value per share of common stock on
the start date of that purchase period or, if lower, the fair market value on
the last day of the purchase period. Employees may modify or end their
participation in the offering at any time during the offering period.
Participation ends automatically on termination of employment with us. The
purchase plan will terminate in 2009 unless sooner terminated by our board of
directors.
EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS
We have entered into employment agreements with Messrs. Bland, Thoms,
Munro, Christensen and Wozniak. These agreements set forth each executive's base
annual compensation level, eligibility for salary increases, bonuses and options
and level of benefits.
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In addition, each of the agreements provides for separation benefits if
such executive is terminated without cause or if the executive terminates his
employment for good reason, including a change of control of our company. In the
event of a termination without cause or for good reason, each of Messrs. Bland,
Thoms and Munro is entitled to receive a lump sum payment equal to two times his
base annual salary. In the event of a termination without cause, Messrs.
Kuphall, Christensen and Wozniak are entitled to receive a lump sum payment
equal to his annual base salary. In connection with such separation payment,
Messrs. Bland, Thoms and Munro are entitled to gross up payments for any excise
taxation incurred. In addition, if Mr. Munro is terminated without cause, the
outstanding options that would vest over the next 12 months will vest and become
immediately exercisable.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
Our certificate of incorporation permits us to indemnify our directors and
officers to the fullest extent permitted under Delaware General Corporation Law.
As permitted by Delaware law, our certificate of incorporation includes a
provision that eliminates the personal liability of our directors for monetary
damages for breach of fiduciary duty as a director, except for liability:
- for any breach of the director's duty of loyalty to the company or our
stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- for liability under section 174 of the Delaware General Corporation Law
regarding unlawful dividends and stock purchases; or
- for any transaction from which the director derived an improper personal
benefit.
Such 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.
Further, as permitted by Delaware law, our by-laws provide that we are
required to indemnify our directors and officers to the fullest extent permitted
by Delaware law. In addition, our by-laws provide that:
- we are permitted to indemnify our other employees and agents to the
fullest extent permitted by Delaware law;
- we are required in certain circumstances to advance expenses, as
incurred, to our directors and officers in connection with a legal
proceeding; and
- the rights conferred in the certificate of incorporation and by-laws are
not exclusive.
We have or will enter into agreements to indemnify our directors and
executive officers, in addition to indemnification provided for in our
certificate of incorporation and by-laws. These agreements, among other things,
provide for indemnification of our directors and executive officers for certain
expenses, including attorneys fees, judgments, fines and settlement amounts
incurred by such person in any action or proceeding, including any action by or
in the right of our company or any other company or enterprise to which the
person provides services at our request. We are also required to advance
expenses in certain circumstances. We believe that these provisions and
agreements are necessary to attract and retain qualified persons as directors
and officers.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons pursuant
to the provisions of our certificate of incorporation and by-laws, Delaware law
or the agreements described above, we
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<PAGE> 56
have been informed that in the opinion of the SEC such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
CERTAIN TRANSACTIONS
Since January 1, 1996, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which we were or are a
party in which the amount involved exceeds $60,000 and in which any director,
executive officer or holder of more than 5% of our common stock had or will have
a direct or indirect interest other than the transactions described below.
In February 1999, we sold 1,000,000 shares of common stock to Intuit for
aggregate consideration of $3.0 million. As a part of that transaction, we
granted Intuit certain registration rights. For a description of these
registration rights see "Description of Capital Stock -- Registration Rights"
beginning on page 60. In June 1999, we received a $2.0 million loan from Intuit.
For more information refer to "Use of Proceeds" on page 19. We have also entered
into a service agreement and a Web site linking agreement whereby we have agreed
to pay a fee to Intuit Insurance Services for Quicken Insuremarket customers who
purchase insurance through the Quotesmith.com service. Such amounts paid to
Intuit Insurance Services have not to date exceeded $60,000 in any year, but
could in future years.
We have entered into compensation arrangements with certain of our
directors and officers. See "Management -- Employment Agreements and Change of
Control Arrangements" beginning on page 51. We have entered into indemnification
agreements with our officers and directors. See "Management -- Indemnification
of Directors and Executive Officers and Limitation of Liability" beginning on
page 52.
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<PAGE> 57
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of our common stock as of June 16, 1999, as adjusted to
reflect the sale of shares of common stock in this offering, by:
- each stockholder that is known to us to beneficially own more than 5% of
our common stock;
- each of our directors;
- our chief executive officer and each of the executive officers named in
the summary compensation table; and
- all of our executive officers and directors as a group.
Unless otherwise indicated, the mailing address for each of the named
individuals is c/o Quotesmith.com, Inc., 8205 South Cass Avenue, Suite 102,
Darien, Illinois 60561.
Applicable percentage ownership in the table is based upon 13,515,091
shares of common stock outstanding as of June 16, 1999 and shares outstanding
immediately following the completion of this offering. Beneficial ownership is
determined in accordance with the rules of the SEC. Shares of common stock
subject to options presently exercisable or exercisable within 60 days of June
16, 1999 are deemed to be outstanding for the purpose of computing the
percentage ownership of the person or entity holding such options, but are not
treated as outstanding for the purpose of computing the percentage ownership for
any other person or entity. To the extent that any such shares are issued upon
the exercise of options, warrants or other rights to acquire our capital stock
that are presently outstanding or granted in the future or reserved for future
issuance under our stock plans, new public investors will be subject to further
dilution.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
--------------------------------------
PRIOR TO OFFERING AFTER OFFERING
-------------------- --------------
NUMBER PERCENT PERCENT
------ ------- -------
<S> <C> <C> <C>
OUR CEO, NAMED EXECUTIVE OFFICERS AND DIRECTORS
Robert S. Bland....................................... 7,314,334 54.1% %
William V. Thoms...................................... 2,160,000 16.0
Ronald A. Wozniak(1).................................. 55,281 * *
Timothy F. Shannon(2)................................. 33,333 * *
Bruce J. Rueben(2).................................... 27,000 * *
ALL EXECUTIVE OFFICERS AND DIRECTORS AS A GROUP (10
PERSONS)(3)........................................... 9,625,427 70.6
OTHER FIVE PERCENT STOCKHOLDERS
Intuit Inc.(4)........................................ 1,000,000 7.4
James and Donna Bellinger............................. 761,001 5.6
Gary C. Beede......................................... 700,000 5.2
William G. Schaefer, Jr............................... 700,000 5.2
</TABLE>
- -------------------------
* Less than 1%.
(1) Consists of shares purchasable upon exercise of fully vested options.
(2) Includes options to purchase 25,000 shares that are fully vested.
(3) Includes options to purchase 112,758 shares that are fully vested.
(4) Intuit's address is 2535 Garcia Avenue, Mountain View, California 94043.
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<PAGE> 58
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, our authorized capital stock will consist
of 60,000,000 shares of common stock and 5,000,000 shares of preferred stock.
The following summary of certain provisions of the common stock and preferred
stock is subject to, and qualified in its entirety by, our certificate of
incorporation and by-laws and by the provisions of applicable law.
COMMON STOCK
As of May 1, 1999, we had 13,515,091 shares of common stock outstanding
held of record by 31 stockholders. Subject to preferences that may apply to
shares of preferred stock outstanding at any time, the holders of outstanding
shares of our common stock are entitled to receive dividends out of assets
legally available therefor at such times and in such amounts as the board of
directors may from time to time determine. Each stockholder is entitled to one
vote for each share of common stock held on all matters submitted to a vote of
stockholders. Cumulative voting for the election of directors is not provided
for in our certificate of incorporation, which means that the holders of a
majority of the shares voted can elect all of the directors then standing for
election. Our common stock is not entitled to preemptive rights and is not
subject to conversion or redemption. Upon the occurrence of a liquidation,
dissolution or winding-up of our company, the holders of shares of common stock
would be entitled to share ratably in the distribution of all of our assets
remaining available for distribution after satisfaction of all our liabilities
and the payment of the liquidation preference of any outstanding preferred
stock. Each outstanding share of common stock is, and all shares of common stock
to be outstanding upon completion of this offering will be, fully paid and
non-assessable.
PREFERRED STOCK
As of May 1, 1999, we had no shares of preferred stock outstanding. The
board of directors has the authority, within the limitations and restrictions
stated in the certificate of incorporation, to provide by resolution for the
issuance of shares of preferred stock, in one or more classes or series, and to
fix the rights, preferences, privileges and restrictions thereof, including
dividend rights, conversion rights, voting rights, terms of redemption,
liquidation preferences and the number of shares constituting any series or the
designation of such series. The issuance of preferred stock could have the
effect of decreasing the market price of the common stock and could adversely
affect the voting and other rights of the holders of common stock. See "Risk
Factors -- Our charter documents and Delaware law contain certain provisions
that may discourage takeover attempts which could preclude our stockholders from
receiving a change of control premium" on page 17.
The board of directors has adopted a stockholder rights plan. In connection
with the adoption of the stockholder rights plan, the board of directors has
created one series of preferred stock, consisting of 600,000 shares of Series A
Participating Preferred. No shares of Series A Participating Preferred have been
issued as of the date of this prospectus. Each share of the Series A
Participating Preferred, when and if issued, would entitle the holder to receive
quarterly dividends equal to the greater of $1.00 per share or 100 times the
dividends per share declared with respect to the common stock. Dividends on the
Series A Participating Preferred are cumulative. Holders of the Series A
Participating Preferred would be entitled to exercise 100 votes per share on all
matters submitted to a vote of stockholders and, except as otherwise required by
law, would vote together with the holders of common stock as a single class. In
the event of liquidation, such holders would receive a preference of $1.00 per
share over the
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<PAGE> 59
common stock. In general, each share of the Series A Participating Preferred is
intended to have a value and voting rights equal to 100 shares of common stock,
and appropriate anti-dilutive adjustments will be made in accordance with the
terms of such Series A Participating Preferred in the event of certain changes
in common stock. Except as contemplated in connection with the stockholder
rights plan described below, we have no present plans to issue any of the
preferred stock.
OPTIONS
Under the 1997 Stock Option Plan, as of May 1, 1999 we had granted options
to purchase 500,000 shares of our common stock at a weighted average exercise
price of $4.62 per share. Upon completion of this offering, we will issue
options to purchase 212,000 shares of our common stock to certain directors and
employees at the initial public offering price. After the completion of this
offering, 763,000 shares of common stock will be available for future grant or
issuance under the plan.
RIGHTS PLAN
Our board of directors has declared a dividend distribution of one
preferred share purchase right for each outstanding share of common stock. The
dividend is payable to stockholders of record on , , 1999,
which is the record date for this distribution and with respect to common stock
issued thereafter until the distribution date. Except as set forth below, each
right, when it becomes exercisable, entitles the registered holder to purchase
from us one one-hundredth of a share of the Series A Participating Preferred at
an exercise price equal to five times the initial offering price of our common
stock, subject to adjustment. The description and terms of the rights are set
forth in a rights agreement between us and Harris Trust and Savings Bank, as
rights agent. A copy of the rights agreement is available to stockholders free
of charge from us upon request directed to our corporate secretary.
Initially, the rights will be attached to all certificates representing
shares of common stock then outstanding, and no separate rights certificates
will be distributed. The rights will separate from the common stock upon a
distribution date, which is the earliest to occur of (1) 10 days following
public announcement that an acquiring person, a person or group of affiliated or
associated persons, has acquired beneficial ownership of 15% or more of the
outstanding common stock or (2) 15 business days or such later date as our board
may determine following the commencement of, or announcement of an intention to
make, a tender offer or exchange offer the consummation of which would result in
a person or group becoming an acquiring person. The definition of an acquiring
person includes a person or group that beneficially owns 15% or more of our
outstanding common stock, but excludes any of our employee benefits plans. Each
of Robert S. Bland and William V. Thoms, their extended family, family trusts
and certain other of their affiliates and associates will not be deemed to be an
acquiring person as long as such persons beneficially own less than % of
our outstanding common stock in the case of Mr. Bland and % in the case of Mr.
Thoms. The date that a person or group becomes an acquiring person is the "share
acquisition date." Until a right is exercised, the holder thereof, as such, will
not have any rights as a stockholder, including the right to vote or receive
dividends thereon.
The rights agreement provides that, until the distribution date, the rights
will be transferred with and only with the common stock. Until the distribution
date (or earlier redemption or expiration of the rights) new common stock
certificates issued after the record date upon transfer or new issuance of
common stock will contain a notation incorporating the
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<PAGE> 60
rights agreement by reference. Until the distribution date (or earlier
redemption or expiration of the rights), the surrender for transfer of any
certificates for common stock outstanding as of the record date, even without
such notation or a copy of the summary of rights attached thereto, will also
constitute the transfer of the rights associated with the common stock
represented by such certificate. As soon as practicable following the
distribution date, separate certificates evidencing the rights will be mailed to
holders of record of the common stock as of the close of business on the
distribution date (and to each initial record holder of certain common stock
issued after the distribution date), and such separate rights certificates alone
will evidence the rights.
The rights are not exercisable until the distribution date and will expire
at the close of business on the tenth anniversary of the effective date of the
plan, unless earlier redeemed by us as described below.
In the event that any person becomes an acquiring person, in lieu of
acquiring preferred stock, each holder of a right (other than an acquiring
person) will thereafter have the right to receive upon payment of the exercise
price, the number of shares of common stock, or, in certain circumstances, cash,
property or other of our securities, having a value equal to two times the
exercise price. Notwithstanding the foregoing, following the occurrence of
triggering events described above or in the paragraph below, all rights that
are, or (under certain circumstances specified in the rights agreement) were,
beneficially owned by any acquiring person or any affiliate or associate thereof
will be null and void.
In the event that, at any time following the share acquisition date, (1) we
are acquired in a merger or other business combination transaction, or (2) more
than 50% of our assets or earning power is sold or transferred to any other
person, then each holder of a right (except rights which previously have been
voided as set forth above) shall thereafter have the right to receive, upon
exercise, common stock of the acquiring company having a value equal to two
times the exercise price of the right.
The exercise price and the number of shares of preferred stock or other
securities or property issuable upon exercise of the rights are subject to
adjustment from time to time to as a result of, among other things, a
subdivision, split (other than a stock dividend on the common stock payable in
shares of common stock), combination, consolidation or reclassification of the
Series A Participating Preferred or the common stock, or a reverse split of the
outstanding shares of Series A Participating Preferred or common stock.
At any time prior to the earlier to occur of (1) a person becoming an
acquiring person or (2) the expiration of the rights, and under certain other
circumstances, we may redeem the rights in whole, but not in part, at a price of
$0.01 per right which redemption shall be effective upon the action of the board
of directors. Additionally, at any time after a triggering event and prior to
the time that a person or group acquires 50% or more of the outstanding common
stock, we may exchange the rights (other than those that have become null and
void), in whole or in part, for shares of common stock at an exchange ratio of
one share of common stock per right (subject to adjustment).
The provisions of the rights agreement may be amended by our board of
directors in order to cure any ambiguity, defect or inconsistency, provided that
after such time as any person becomes an acquiring person, the rights agreement
may not be amended in any manner that would adversely affect the interests of
the holders of the rights.
57
<PAGE> 61
DELAWARE ANTI-TAKEOVER AND CERTAIN CERTIFICATE OF INCORPORATION AND BY-LAW
PROVISIONS
Certain provisions of Delaware law and our certificate of incorporation and
by-laws could make more difficult the acquisition of our company by means of a
tender offer, a proxy contest, or otherwise, and the removal of incumbent
officers and directors. These provisions are expected to discourage certain
types of coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of our company to first negotiate
with us. We believe that the benefits of increased protection of our potential
ability to negotiate with the proponent of an unfriendly or unsolicited proposal
to acquire or restructure our company outweighs the disadvantages of
discouraging such proposals. The increased protection is beneficial even if a
proposal is priced above the then-current market value of our common stock,
because negotiation of such proposals could result in an improvement of their
terms.
Section 203 of the Delaware General Corporation Law. We are subject to the
provisions of Section 203 of the Delaware General Corporation Law. This
provision generally prohibits any publicly-held Delaware corporation from
engaging in a business combination with an interested stockholder for a period
of three years after the date of the transaction in which the person became an
interested stockholder, unless:
- the transaction in which the stockholder became an interested stockholder
is approved by the board of directors prior to the date the interested
stockholder attained such status;
- upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction was commenced, excluding those shares owned by persons
who are directors and also officers and stock held by certain employee
stock option plans; or
- on or subsequent to that date, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least two-thirds of the
outstanding voting stock that is not owned by the interested shareholder.
A business combination includes a merger, asset sale or other transaction
resulting in a financial benefit to the stockholder. For purposes of Section
203, an interested stockholder is defined to include any person that is:
- the owner of 15% or more of the outstanding voting stock of the
corporation;
- an affiliate or associate of the corporation and was the owner of 15% or
more of the voting stock outstanding of the corporation, at any time
within three years immediately prior to the relevant date; and
- an affiliate or associate of the persons described in the foregoing
bullet points.
The restrictions contained in Section 203 do not apply to Mr. Bland, our
chairman, president and chief executive officer, or Mr. Thoms, our executive
vice president, because each was an interested stockholder before our voting
stock was listed on a national securities exchange or authorized for quotation
on the Nasdaq National Market or held by record by more than 2,000 stockholders.
Stockholders may, by adopting an amendment to the corporation's certificate
of incorporation or bylaws, elect for the corporation not to be governed by
Section 203, effective 12 months after adoption. Neither our certificate of
incorporation nor our by-laws exempt us
58
<PAGE> 62
from the restrictions imposed under Section 203 of the Delaware General
Corporation Law. We anticipate that the provisions of Section 203 of the
Delaware General Corporation Law may encourage companies interested in acquiring
us to negotiate in advance with our board of directors because the stockholder
approval requirement would be avoided if a majority of the directors then in
office approve either the business combination or the transaction that results
in the stockholder becoming an interested stockholder.
Classification and Structure of our Board of Directors. Immediately upon
the completion of this offering, our board of directors will be divided into
three classes of directors serving staggered, three-year terms. The number of
directors will be fixed by resolution of our board of directors consisting of at
least three but not more than nine directors. The size of our board is currently
fixed at four members and will be increased to seven members contemporaneously
with the completion of this offering. The directors shall be elected at the
annual meeting of the stockholders, except for filling vacancies. Directors may
be removed only for cause and only with the approval of the holders of at least
80% of voting power present and entitled to vote at a meeting of stockholders.
Vacancies and newly-created directorships resulting from any increase in the
number of directors may be filled by a majority of the directors then in office,
a sole remaining director, or if a Delaware provision expressly confers power on
stockholders to fill a directorship at a special meeting, by the holders of at
least 80% of the voting power present and entitled to vote at a meeting of
stockholders.
As a result of the classification of our board of directors, approximately
one-third of the members of our board of directors will be elected each year.
When coupled with the provision of our certificate of incorporation authorizing
the board of directors to fill vacant directorships and increase the size of the
board of directors up to nine, these provisions may prevent stockholders from
removing incumbent directors and simultaneously gaining control of the board of
directors by filling the vacancies created by such removals with their own
nominees.
Meetings of Stockholders. Our certificate of incorporation and by-laws
provide that any action required or permitted to be taken by our stockholders
may be effected at a duly called annual or special meeting of our stockholders.
Special meetings of stockholders may be called by the chief executive officer or
by a majority of our board of directors. These provisions may have the effect of
deterring hostile takeovers or delaying changes in control of our management.
Written Consent. Under our certificate of incorporation, our stockholders
will not be allowed to take action in writing outside of an annual or special
meeting of our stockholders.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. Our by-laws require that timely notice in proper form be provided
by stockholders seeking to bring business before, or to nominate candidates for
election as directors at, the annual meeting of stockholders. Such notice must
be received by us 120 calendar days in advance of the date specified in the
previous year's notice of the annual meeting. These provisions may preclude
stockholders from timely bringing matters before, or from making nominations for
directors at, an annual meeting of stockholders.
Amendment of our Certificate of Incorporation and By-Laws. Generally, our
certificate of incorporation may be amended by the approval of the majority of
our board of directors and a majority of our outstanding voting securities.
However, the approval of at least 80% of voting securities is required to amend
a provision in the certificate of incorporation relating to the liability or
indemnification of our officers and directors, the structure and classification
of our board of directors and stockholder actions. Our board of directors is
authorized to amend our by-laws consistent with Delaware law and our certificate
of incorporation.
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<PAGE> 63
REGISTRATION RIGHTS
As part of our sale of common stock to Intuit in February 1999, we entered
into an investor rights agreement with Intuit. This agreement provides Intuit
with the following registration rights:
- If Intuit requests that we file a registration statement covering its
shares of common stock at least 180 days after the consummation of this
offering, we must make our best efforts to file such a statement as soon
as possible. If, however, we find such registration would be detrimental
to our company, we may postpone the requested filing for a period of 90
days.
- Intuit may not sell or transfer any of the shares purchased in February
1999 unless either (A) there is a registration statement in effect
covering such shares or (B)(i) the transferee has agreed to be bound by
all the terms and conditions of the investor rights agreement and (ii)
Intuit has provided us with an opinion of counsel stating that the
transfer will not require the registration of its shares.
- We must notify Intuit of our intention to file a registration statement
covering any securities issued by our company as well as allow them to
include its shares in the registration statement.
- If Intuit requests, we must file a short form registration statement
covering its shares. We must make our best efforts to file such a
statement as soon as possible. If, however, we find such registration is
impermissible under the applicable securities laws, or we have effected
two similar registrations within the preceding 12 months, we may refuse
to initiate the requested filing. Furthermore, if we find the requested
registration would be detrimental to the company, we may postpone the
requested filing for a period of 90 days.
Under the investor rights agreement, we will pay all of Intuit's
registration costs and expenses unless Intuit withdraws a requested filing
initiated by us. We will indemnify Intuit to the full extent allowed by law for
any liabilities to which it may become subject as a result of any registration
filed pursuant to the investor rights agreement, provided such liability arises
out of any act or omission of the company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is Harris Trust and
Savings Bank, Chicago, Illinois.
LISTING
We have applied for quotation of the common stock on the Nasdaq National
Market under the trading symbol "QUOT."
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<PAGE> 64
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have outstanding
shares of common stock, based upon shares outstanding on
, 1999. Excluding the shares of our
common stock offered in this offering and assuming no exercise of the
underwriters' over-allotment option, immediately prior to the effective date of
the registration statement, there will be shares of common stock
outstanding. Nearly all of these shares are subject to lock-up agreements with
the underwriters pursuant to which the holders of the restricted shares have
agreed not to sell, pledge or otherwise dispose of such shares for a period of
at least 180 days after the date of this prospectus. Hambrecht & Quist LLC may
release the shares subject to the lock-up agreements in whole or in part at any
time with or without notice. However, Hambrecht & Quist LLC has no current plans
to do so.
Beginning 180 days after the effective date of the registration statement,
approximately shares will become eligible for sale in the public
market when the underwriter's lock-up agreements expire (unless the underwriters
elect, in their sole discretion, to release these shares from the lock-up
agreements earlier). In addition to the shares described above, after such 180th
day, approximately shares will become available for sale at
various times pursuant to Rule 144.
Certain of the restricted shares that will become available for sale in the
public market beginning 180 days after the effective date will be subject to
certain volume and other resale restrictions pursuant to Rule 144 because the
holders are affiliates of our company. The general provisions of Rule 144 are
described below.
In general, under Rule 144, an affiliate of our company, or a person (or
persons whose shares are aggregated) who has beneficially owned restricted
shares for at least one year, will be entitled to sell in any three-month period
a number of shares that does not exceed the greater of:
- 1% of the then outstanding shares of the common stock (approximately
shares immediately after this offering); or
- the average weekly trading volume during the four calendar weeks
preceding the date on which notice of the sale is filed with the SEC.
Sales pursuant to Rule 144 are subject to certain requirements relating to
manner of sale, notice and availability of current public information about us.
A person (or persons whose shares are aggregated) who is not deemed to have been
an affiliate of ours at any time during the 90 days immediately preceding the
sale and who has beneficially owned his or her shares for at least two years is
entitled to sell such shares pursuant to Rule 144(k) without regard to the
limitations described above.
As of June 16, 1999, options to purchase 500,000 shares of our common stock
had been granted and are outstanding under the 1997 Stock Option Plan of which
187,000 options were then exercisable. Upon the completion of this offering, we
will grant options to purchase 212,000 shares of our common stock under the 1997
Stock Option Plan. After the completion of the offering, options to purchase an
additional 763,000 shares of common stock will be available for future grant or
issuance. Beginning 180 days after the effective date, approximately
shares issuable upon the exercise of vested options will become
eligible for sale and shares issued pursuant to restricted stock
agreements under the 1997 Stock Option Plan will no longer be subject to a
repurchase option and will be eligible for resale. In addition, as of June 16,
1999, 250,000 shares of common stock were reserved for issuance under our 1999
Employee Stock Purchase Plan.
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<PAGE> 65
We intend to file, within 180 days after the date of this prospectus, a
Form S-8 registration statement under the Securities Act to register shares
issued pursuant to restricted stock purchase agreements under the 1997 Stock
Option Plan and the 1999 Employee Stock Purchase Plan, shares issued in
connection with option exercises and shares reserved for issuance under all
stock plans. Shares of common stock issued pursuant to the restricted stock
agreements under the 1997 Stock Option Plan, the 1999 Employee Stock Purchase
Plan or upon exercise of options after the effective date of the Form S-8 will
be available for sale in the public market, subject to Rule 144 volume
limitations applicable to affiliates and lock-up agreements.
LOCK-UP AGREEMENTS
All officers and directors and certain holders of common stock and options
to purchase common stock have agreed pursuant to certain "lock-up" agreements
that they will not offer, sell, contract to sell, pledge, grant any option to
sell, or otherwise dispose of, directly or indirectly, any shares of common
stock or securities convertible or exchangeable for common stock, or warrants or
other rights to purchase common stock for a period of 180 days after the date of
this prospectus without the prior written consent of Hambrecht & Quist LLC.
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<PAGE> 66
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives, Hambrecht & Quist LLC,
PaineWebber Incorporated, ABN AMRO Incorporated and Charles Schwab & Co., Inc.,
have severally agreed to purchase from us the numbers of shares of common stock
set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Hambrecht & Quist LLC.......................................
PaineWebber Incorporated....................................
ABN AMRO Incorporated.......................................
Charles Schwab & Co., Inc. .................................
------
Total..................................................
======
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are subject to certain conditions precedent. These conditions
precedent include the absence of any material adverse change in our business and
the receipt of certain certificates, opinions and letters from us, our counsel
and our independent auditors. The nature of the underwriters' obligation is that
they are committed to purchase all shares of common stock offered by this
prospectus if any of these shares are purchased.
The following table shows the per share and total underwriting discounts
and commissions we will pay to the underwriters. Such amounts are shown assuming
both no exercise and full exercise of the underwriters' over-allotment option to
purchase additional shares of common stock.
UNDERWRITING DISCOUNTS AND COMMISSIONS PAYABLE BY QUOTESMITH.COM
<TABLE>
<CAPTION>
WITH WITHOUT
OVER-ALLOTMENT EXERCISE OVER-ALLOTMENT EXERCISE
----------------------- -----------------------
<S> <C> <C>
Per Share................................. $ $
Total..................................... $ $
</TABLE>
We estimate that the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately $ .
The underwriters propose to offer the shares of common stock directly to
the public at the initial public offering price set forth on the cover page of
this prospectus and to certain dealers at that price less a concession not in
excess of $ per share. The underwriters may allow, and these dealers may
reallow, a concession not in excess of $ per share to certain other dealers.
After the initial public offering of the shares has been completed, the
representatives of the underwriters may change the offering price and other
selling terms. The representatives of the underwriters have informed us that the
underwriters do not intend to confirm discretionary sales in excess of 5% of the
shares of common stock offered by this prospectus.
We have granted to the underwriters an option, exercisable no later than 30
days after the date of this prospectus, to purchase up to
additional shares of common stock at the initial public offering
price set forth on the cover page of this prospectus, less the underwriting
discount. To the extent that the underwriters exercise this option, each of the
underwriters will have a firm commitment to purchase approximately the same
percentage
63
<PAGE> 67
thereof which the number of shares of common stock to be purchased by it shown
in the above table bears to the total number of shares of common stock offered
by this prospectus. We will be obligated, pursuant to the option, to sell shares
to the underwriters to the extent the option is exercised. The underwriters may
exercise this option only to cover over-allotments made in connection with the
sale of shares of common stock offered by this prospectus.
At the request of Quotesmith.com, the underwriters have reserved for sale,
at the initial public offering price, shares of common stock for certain of our
directors, employees and associates. We cannot assure you that any of the
reserved shares will be so purchased. The number of shares available for sale to
the general public in this offering will be reduced by the number of reserved
shares purchased. Any reserved shares not so purchased will be offered to the
general public on the same basis as the other shares offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, and to contribute to
payments the underwriters may be required to make in respect thereof.
We and certain of our stockholders including executive officers and
directors, who will collectively own shares of common stock after
this offering, have agreed that they will not, without the prior written consent
of Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares of
common stock, options or warrants to acquire shares of common stock or
securities exchangeable for or convertible into shares of common stock owned by
them during the 180-day period following the date of this prospectus. We have
agreed that we will not, without the prior written consent of Hambrecht & Quist
LLC, offer, sell or otherwise dispose of any shares of common stock, options or
warrants to acquire shares of common stock or securities exchangeable for or
convertible into shares of common stock during the 180-day period following the
date of this prospectus, except that we may issue shares upon the exercise of
options granted prior to the date hereof, and may grant additional options under
our stock option plans, provided that, without the prior written consent of
Hambrecht & Quist LLC, these additional options shall not be exercisable during
such period.
Prior to this offering, there has been no public market for our common
stock. The initial public offering price for the common stock will be determined
by negotiation among us and the representatives of the several underwriters.
Among the factors to be considered in determining the initial public offering
price of the common stock are:
- prevailing market and economic conditions;
- our revenues and earnings;
- market valuations of other companies engaged in activities similar to us;
- estimates of our business potential and prospects;
- the present state of our business operations;
- our management; and
- other factors we and the representatives of the several underwriters deem
relevant.
64
<PAGE> 68
The estimated initial public offering price range set forth on the cover of
this preliminary prospectus is subject to change as a result of market
conditions or other factors.
Certain persons participating in this offering may over-allot or effect
transactions that stabilize, maintain or otherwise affect the market price of
the common stock at levels above those that might otherwise prevail in the open
market, including by entering stabilizing bids. These transactions may include
entering stabilizing bids, effecting syndicate covering transactions or imposing
penalty bids. A stabilizing bid means the placing of any bid or effecting of any
purchase, for the purpose of pegging, fixing or maintaining the price of the
common stock. A syndicate covering transaction means the placing of any bid on
behalf of the underwriting syndicate or the effecting of any purchase to reduce
a short position created in connection with the offering. A penalty bid means an
arrangement that permits the underwriters to reclaim a selling concession from a
syndicate member in connection with the offering when shares of common stock
sold by the syndicate member are purchased in syndicate covering transactions.
These activities by the underwriters may stabilize, maintain or otherwise affect
the market price of the common stock. As a result, the price of the common stock
may be higher than the price that otherwise might exist in the open market. Such
transactions may be effected on the Nasdaq National Market, in the
over-the-counter market or otherwise. Stabilizing, if commenced, may be
discontinued at any time.
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered hereby
will be passed upon for us by Freeborn & Peters, Chicago, Illinois. Certain
legal matters will be passed upon for the underwriters by Sidley & Austin,
Chicago, Illinois.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at December 31, 1998 and 1997, and for each of the three years in the
period ended December 31, 1998, as set forth in their report. We have included
our financial statements in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority as
experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the shares of common stock offered hereby. This
prospectus does not contain all of the information set forth in the registration
statement and the exhibits thereto. For further information with respect to our
business and the common stock offered by this prospectus, reference is made to
the registration statement and the exhibits thereto. Statements contained in
this prospectus regarding the contents of any contract or any other document to
which reference is made are not necessarily complete, and, in each instance
where a copy of such contract or other document has been filed as an exhibit to
the registration statement, reference is made to the copy so filed, each such
statement being qualified in all respects by such reference. A copy of the
registration statement and the exhibits thereto may be inspected without charge
at the offices of the SEC at Judiciary Plaza, 450 Fifth Street, Washington, D.C.
20549, and copies of all or any part of the registration statement may be
obtained from the Public Reference Section of the SEC, Washington, D.C. 20549
upon the payment of the fees prescribed by the SEC. Please call the SEC at
1-800-SEC-0330 for further information about the public reference rooms. The SEC
maintains a Web site, http://www.sec.gov, that contains
65
<PAGE> 69
reports, proxy and information statements and other information regarding
registrants, such as us, that file electronically with the SEC.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act of 1934, and,
in accordance therewith, will file periodic reports, proxy statements and other
information with the SEC.
66
<PAGE> 70
QUOTESMITH.COM, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Balance Sheets as of December 31, 1997 and 1998, and March
31, 1999.................................................. F-3
Statements of Operations for the Years Ended December 31,
1996, 1997, and 1998, and the Three Months Ended March 31,
1998 and 1999............................................. F-4
Statements of Stockholders' Equity for the Years Ended
December 31, 1996, 1997, and 1998, and the Three Months
Ended March 31, 1999...................................... F-5
Statements of Cash Flows for the Years Ended December 31,
1996, 1997, and 1998, and the Three Months Ended March 31,
1998 and 1999............................................. F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 71
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Quotesmith.com, Inc.
We have audited the accompanying balance sheets of Quotesmith.com, Inc. as
of December 31, 1998 and 1997, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits 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, the financial statements referred to above present fairly,
in all material respects, the financial position of Quotesmith.com, Inc. at
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998 in conformity
with generally accepted accounting principles.
As discussed in Note 2 to the financial statements the Company changed its
method of accounting for commission revenues.
ERNST & YOUNG LLP
Chicago, Illinois
February 22, 1999
F-2
<PAGE> 72
QUOTESMITH.COM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1997 1998 1999
---- ---- ---------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash................................................ $ 3,809 $ 518,202 $ 2,945,982
Commissions receivable, less allowances
(1997 -- $114,000; 1998 -- $127,000;
1999 -- $136,000) (Note 2)........................ 691,023 1,007,662 916,648
Other assets........................................ 14,184 39,248 29,333
---------- ---------- ------------
Total current assets................................ 709,016 1,565,112 3,891,963
Furniture, equipment, and computer software at cost,
less accumulated depreciation (1997 -- $107,304;
1998 -- $166,102; 1999 -- $189,576)............... 121,420 240,606 418,014
---------- ---------- ------------
Total assets........................................ $ 830,436 $1,805,718 $ 4,309,977
========== ========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities............ $ 630,386 $ 816,327 $ 575,633
Notes payable to bank due in one year (Note 4)...... 200,000 -- --
---------- ---------- ------------
Total current liabilities........................... 830,386 816,327 575,633
Notes payable to bank due after one year (Note 4)... 233,330 -- --
---------- ---------- ------------
Total liabilities................................... 1,063,716 816,327 575,633
Commitments and contingencies (Notes 5, 7, and 8)
Stockholders' equity (deficiency in assets) (Notes
4, 5, 6, and 8):
Common stock, $.001 par value; shares
authorized: 1997 and 1998 -- 35,000,000; 1999
- 60,000,000; shares issued:
1997 -- 14,490,000; 1998 -- 14,921,091;
1999 -- 16,049,091........................... 14,490 14,921 16,049
Additional paid-in capital..................... 206,220 1,624,061 5,797,933
Retained-earnings deficit...................... (190,990) (386,591) (1,816,638)
Treasury stock at cost (2,534,000 shares)...... (263,000) (263,000) (263,000)
---------- ---------- ------------
Total stockholders' equity (deficiency in assets)... (233,280) 989,391 3,734,344
---------- ---------- ------------
Total liabilities and stockholders' equity.......... $ 830,436 $1,805,718 $ 4,309,977
========== ========== ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 73
QUOTESMITH.COM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------- --------------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Commission revenues (Note
2)........................ $3,496,805 $ 4,115,809 $ 5,507,596 $ 1,142,269 $ 1,449,563
Other revenue................ 315,331 146,425 68,034 22,516 13,767
---------- ----------- ----------- ----------- -----------
Total revenues................. 3,812,136 4,262,234 5,575,630 1,164,785 1,463,330
Expenses:
Selling and marketing (Note
2)........................ 1,109,283 2,151,996 1,791,145 276,766 681,456
Operations................... 1,550,642 1,794,261 2,689,408 534,431 958,132
General and administrative
(Note 8).................. 786,256 951,519 1,292,481 265,912 1,269,707
---------- ----------- ----------- ----------- -----------
Total expenses................. 3,446,181 4,897,776 5,773,034 1,077,109 2,909,295
---------- ----------- ----------- ----------- -----------
Operating income (loss)........ 365,955 (635,542) (197,404) 87,676 (1,445,965)
Interest income (expense), net
(Note 2)..................... (13,735) (40,851) 1,803 (9,430) 15,918
---------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes........................ 352,220 (676,393) (195,601) 78,246 (1,430,047)
Income taxes (credit) (Note
3)........................... 129,300 (209,800) -- -- --
---------- ----------- ----------- ----------- -----------
Net income (loss).............. $ 222,920 $ (466,593) $ (195,601) $ 78,246 $(1,430,047)
========== =========== =========== =========== ===========
Net income (loss) per common
share, basic and diluted
(Note 2)..................... $ 0.02 $ (0.04) $ (0.02) $ 0.01 $ (0.11)
========== =========== =========== =========== ===========
Weighted average common shares
and equivalents outstanding:
Basic........................ 12,154,493 11,956,000 12,258,064 11,958,093 13,023,265
Diluted...................... 12,154,493 11,956,000 12,258,064 11,983,093 13,023,265
</TABLE>
See accompanying notes.
F-4
<PAGE> 74
QUOTESMITH.COM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
-------------------- STOCKHOLDERS'
NUMBER OF ADDITIONAL RETAINED EQUITY
SHARES PAR PAID-IN EARNINGS TREASURY (DEFICIENCY
ISSUED VALUE CAPITAL (DEFICIT) STOCK IN ASSETS)
--------- ----- ---------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
1996:
Balance at January 1................... 14,490,000 $14,490 $ 206,220 $ 52,683 $ (13,000) $ 260,393
Net income............................. -- -- -- 222,920 -- 222,920
Purchase of treasury stock (Note 5).... -- -- -- -- (250,000) (250,000)
---------- ------- ---------- ----------- --------- ----------
Balance at December 31................. 14,490,000 14,490 206,220 275,603 (263,000) 233,313
1997:
Net loss............................... -- -- -- (466,593) -- (466,593)
---------- ------- ---------- ----------- --------- ----------
Balance at December 31................. 14,490,000 14,490 206,220 (190,990) (263,000) (233,280)
1998:
Net loss............................... -- -- -- (195,601) -- (195,601)
Proceeds from sale of common stock
(Note 5)............................. 431,091 431 1,267,841 -- -- 1,268,272
Effect of stock options granted (Note
6)................................... -- -- 150,000 -- -- 150,000
---------- ------- ---------- ----------- --------- ----------
Balance at December 31................. 14,921,091 14,921 1,624,061 (386,591) (263,000) 989,391
1999 (unaudited):
Net loss............................... -- -- -- (1,430,047) -- (1,430,047)
Proceeds from sale of common stock
(Note 8)............................. 1,128,000 1,128 3,382,872 -- -- 3,384,000
Effect of common stock sold and stock
options granted (Note 8)............. -- -- 791,000 -- -- 791,000
---------- ------- ---------- ----------- --------- ----------
Balance at March 31 (unaudited)........ 16,049,091 $16,049 $5,797,933 $(1,816,638) $(263,000) $3,734,344
========== ======= ========== =========== ========= ==========
</TABLE>
See accompanying notes.
F-5
<PAGE> 75
QUOTESMITH.COM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------- -----------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)................ $ 222,920 $(466,593) $(195,601) $ 78,246 $(1,430,047)
Adjustments to reconcile to
net cash provided (used) by
operating activities:
Depreciation expense..... 30,693 31,204 66,574 10,727 23,472
Accounts payable and
accrued liabilities... (153,062) 516,836 185,941 (58,669) (240,694)
Commissions receivable... (49,515) (383,481) (316,639) (52,736) 91,014
Stock compensation....... -- -- 150,000 50,000 791,000
Deferred taxes
(credit).............. 129,300 (209,800) -- -- --
Amortization of direct-
response advertising
costs................. 848,776 494,074 -- -- --
Deferral of
direct-response
advertising costs..... (988,162) -- -- -- --
Other assets............. (6,670) 7,433 (25,064) 4,407 9,915
--------- --------- --------- -------- -----------
Net cash provided (used) by
operating activities........ 34,280 (10,327) (134,789) 31,975 (755,340)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of furniture,
equipment, and software....... (50,767) (107,454) (185,760) (56,927) (200,880)
--------- --------- --------- -------- -----------
Net cash used by investing
activities.................... (50,767) (107,454) (185,760) (56,927) (200,880)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of common
stock......................... -- -- 1,268,272 75,000 3,384,000
Proceeds from (repayment of)
notes payable................. 232,776 120,830 (433,330) (50,001) --
Purchase of treasury stock....... (250,000) -- -- -- --
--------- --------- --------- -------- -----------
Net cash provided (used) by
financing activities.......... (17,224) 120,830 834,942 24,999 3,384,000
--------- --------- --------- -------- -----------
NET INCREASE (DECREASE) IN CASH.... (33,711) 3,049 514,393 47 2,427,780
CASH AT BEGINNING OF PERIOD........ 34,471 760 3,809 3,809 518,202
--------- --------- --------- -------- -----------
CASH AT END OF PERIOD.............. $ 760 $ 3,809 $ 518,202 $ 3,856 $ 2,945,982
========= ========= ========= ======== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 76
QUOTESMITH.COM, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Quotesmith.com, Inc. (the Company) has developed an Internet-based
insurance service that enables consumers and business owners to obtain instant
quotes from over 300 insurance companies without the involvement of any
commissioned salespeople. The Company's model allows consumers to: (1) search
for, analyze and compare insurance products; (2) request and obtain insurance
quotes; and (3) select and purchase insurance coverage from the insurance
company of their choice.
The Company incorporated and began its operations in March 1984 and during
the period from 1984 to 1994 provided an electronic quotation and policy
information service to insurance agents and brokers. Throughout this period the
Company was not engaged in the marketing of insurance to consumers. In 1994, the
Company began focusing its business strategy on marketing term life insurance to
self-directed consumers utilizing its proprietary insurance price comparison
technology. In May 1996, the Company began providing real-time quotes for term
life insurance on the Internet and began receiving online insurance application
requests from consumers.
Over the last four years, the Company's primary revenue source has been
commissions derived from the sale of individual term life insurance.
Applications are underwritten and commissions are received from numerous life
insurance companies. In 1998, over 50% of the Company's commissions on paid
policies were received from five life insurance companies. Similar
concentrations existed in 1997 and 1996. The Company's business represents one
business segment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Such estimates and assumptions could change as more
information becomes known which could impact the amounts reported and disclosed
herein.
REVENUE RECOGNITION
The Company recognizes annual first year commissions as revenues when the
policy has been approved by the underwriter and an initial premium payment
(which may be annual, semi-annual, quarterly, or monthly) has been made by the
customer. An allowance is provided for estimated commissions that will not be
received due to the nonpayment of installment first year premiums. In the
accompanying financial statements, the aforementioned method has been applied in
all periods.
In previously reported financial statements, the aforementioned method of
accounting for first year commissions had been applied since January 1, 1997. As
of that date, an accounting change was made, and the cumulative effect of the
change was reported in the 1997 statement of operations. In the previously
reported financial statements, prior to 1997, estimated annual first year
commissions were recognized as revenues, after applying a reserve for expected
"not taken" policies, at the time applications were received by the Company
after substantially all
F-7
<PAGE> 77
QUOTESMITH.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
required brokerage services relating to placement of the insurance had been
provided. The change to the current method was made to better reflect when
revenues are realized.
Since the accompanying financial statements were prepared for the initial
public offering of the Company's common stock, the January 1, 1997 accounting
change was applied retroactively. As a result, the $593,000 ($0.05 per share)
cumulative effect of the accounting change, a reduction of income, was removed
from the 1997 statement of operations. Also, 1996 net income previously reported
was reduced by $263,000 ($0.02 per share).
Revenues for renewal and bonus commissions and other revenues are
recognized when the Company receives notification that such revenues have been
earned.
ADVERTISING COSTS
Selling and marketing expenses in the accompanying financial statements are
comprised of advertising costs. Beginning in 1997, advertising costs are
expensed as incurred. In 1996 and 1995 (but not subsequently), direct response
advertising costs qualified for capitalization and were amortized over the
expected period of future benefits, which resulted in such costs being amortized
principally within one year.
Accordingly, in 1997, advertising expense includes 1997 costs incurred plus
amortization of 1996 costs that were unamortized as of December 31, 1996.
STOCK COMPENSATION
The Company uses the intrinsic value method to measure compensation
expense, if any, relating to stock options. Any compensation expense is
determined at the date of grant, or the date of subsequent modification to
option terms, based on any excess of the fair value of the related shares over
the exercise price, and amortized over the options' vesting periods.
FURNITURE, EQUIPMENT, AND COMPUTER SOFTWARE
Furniture, equipment, and capitalized application development costs of
internal-use computer software are depreciated over useful lives of five to
seven years using an accelerated method of depreciation. Repair and maintenance
costs are charged to expense as incurred. Depreciation expense was $31,000 in
1996 and 1997 and $67,000 in 1998.
TREASURY STOCK
The cost of reacquiring the Company's common stock is reported as a
separate component of stockholders' equity.
INCOME TAXES
Deferred income taxes are determined based on the temporary differences
between financial reporting and tax bases of assets and liabilities and the
effect of net operating loss carryforwards and are measured using enacted tax
rates.
F-8
<PAGE> 78
QUOTESMITH.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCIAL INSTRUMENTS
The fair values of financial instruments, principally commissions
receivable, other assets, accounts payable and accrued liabilities, and notes
payable approximate their December 31, 1998 and 1997 carrying values.
NON-OPERATING INCOME AND EXPENSE
Interest income (expense), net in the accompanying statements of operations
includes the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Interest income.............................. $ -- $ 3,049 $29,531
Interest expense............................. (13,735) (43,900) (27,728)
-------- -------- -------
Interest income (expense), net............... $(13,735) $(40,851) $ 1,803
======== ======== =======
</TABLE>
NET INCOME (LOSS) PER SHARE
Basic net income or loss per share and diluted net loss per share reflect
net income or loss divided by the weighted average number of common shares
outstanding. Diluted net income per share reflects net income divided by the
weighted average number of common shares outstanding plus common share
equivalents, computed using the treasury stock method, due to the dilutive
effect of stock options. Diluted net loss per share does not include the effect
of the common share equivalents because the effect would be antidilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Board Executive Committee (AcSEC)
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 requires specific
accounting treatment for internal use software which is effective for fiscal
years beginning after December 15, 1998. Accordingly, the Company has adopted
SOP 98-1 in 1999, and does not expect that SOP 98-1 will have a material effect
on the Company's results of operations or financial position.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 133, "Accounting for
Derivative Instruments and Hedging Activities," which is effective for fiscal
years beginning after June 15, 1999. The Company does not expect the adoption of
SFAS 133 will have a material effect on the Company's results of operations or
financial position.
UNAUDITED INTERIM INFORMATION
The accompanying financial statements and notes as of March 31, 1999 and
for the three months ended March 31, 1998 and 1999 are unaudited. In the opinion
of management, such information contains all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the Company's
financial statements. The results of
F-9
<PAGE> 79
QUOTESMITH.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
operations for the interim period are not necessarily indicative of results that
may be expected for the entire year.
3. INCOME TAXES
A reconciliation of income taxes (credit) based on the federal tax rate to
amounts reported in the statements of operations is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Pre-tax income (loss) times federal rate............ $119,800 $(230,000) $(66,500)
State income taxes (credit)......................... 14,200 (32,500) (9,400)
Increase (decrease) in valuation allowance.......... (9,400) 55,000 56,000
Stock compensation.................................. -- -- 19,400
Other............................................... 4,700 (2,300) 500
-------- --------- --------
Income taxes (credit)............................... $129,300 $(209,800) $ --
======== ========= ========
</TABLE>
The components of the provision (credit) for deferred income taxes are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Federal............................................. $115,100 $(183,800) $ --
State............................................... 14,200 (26,000) --
-------- --------- --------
$129,300 $(209,800) $ --
======== ========= ========
</TABLE>
Deferred income taxes reflect the net tax effect of temporary differences
between the amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes and the effect of net operating
loss carryforwards. Significant components of the Company's deferred tax assets
and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1998
---- ----
<S> <C> <C>
Deferred tax liabilities:
Commissions receivable............................. $ 268,000 $ 391,000
Other assets....................................... 7,000 9,000
--------- ---------
Total deferred tax liabilities....................... 275,000 400,000
Deferred tax assets:
Net operating loss carryforwards................... 123,000 155,000
Accounts payable................................... 207,000 317,000
Stock compensation................................. -- 39,000
--------- ---------
Total gross deferred tax assets...................... 330,000 511,000
Valuation allowance.................................. (55,000) (111,000)
--------- ---------
Net deferred tax assets.............................. 275,000 400,000
--------- ---------
Net deferred tax amounts............................. $ -- $ --
========= =========
</TABLE>
F-10
<PAGE> 80
QUOTESMITH.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. INCOME TAXES (CONTINUED)
As of December 31, 1998, the Company had net operating loss carryforwards
of $400,000 available to offset future taxable income, which expire $76,000 in
2001 and the remainder in 2006 to 2018. There were no income taxes paid or
recovered in 1996, 1997, or 1998.
4. NOTES PAYABLE
Interest paid under a bank line-of-credit agreement amounted to $12,000 in
1996, $43,000 in 1997, and $31,000 in 1998 at an interest rate of 9% payable
monthly. Amounts previously borrowed under the agreement had been repaid as of
December 31, 1998, and the agreement was terminated. Amounts drawn under the
line-of-credit agreement had been collateralized by substantially all the assets
of the Company and guaranteed personally by officers of the Company.
5. STOCKHOLDERS' EQUITY AND RELATED PARTY TRANSACTIONS
During 1998, the Company sold 431,091 shares of its common stock for
proceeds of $1,268,272, resulting in credits to common stock of $431 and
additional paid-in capital of $1,267,841. Also, in 1998, the Company's
stockholders agreed to terminate an agreement under which the Company previously
had commitments and options to purchase its common stock from stockholders.
In September 1998, the Company entered into a three year services agreement
with a third party (the Party) under which the Company will pay a fee to the
Party for its customers who purchase insurance through the Company's service. In
February 1999, the Company sold 1,000,000 shares of its common stock to the
parent company of the Party (the Investor) for proceeds of $3,000,000 and
entered into stockholder agreements with the Investor and other major Company
stockholders. The stockholder agreements give the Investor the right to acquire
any new shares issued by the Company and the right to request the Company to
file a registration statement with the Securities and Exchange Commission
relating to the Investor's shares. The Investor's right to acquire any new
shares issued by the Company terminates upon a public offering of the Company's
common stock.
During 1996, the Company purchased 1,750,000 shares of its common stock at
a cost of $250,000.
As of December 31, 1998, other assets includes $10,000 due from an officer
on which interest was accruing at 10%. The amount was repaid in January 1999.
F-11
<PAGE> 81
QUOTESMITH.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCK OPTIONS
A summary of the Company's common stock option activity with employees and
directors for 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE PER SHARE
-------------------------------
FAIR VALUE OF
OPTIONS
SHARES EXERCISE PRICE GRANTED
------ -------------- -------------
<S> <C> <C> <C>
1997
Granted and outstanding at December
31, 1997.......................... 75,000 $2.00 $1.09
1998
Granted with exercise price:
Less than stock value............. 50,000 1.00 2.35
Equal to stock value.............. 50,000 2.50 0.05
Greater than stock value.......... 75,000 7.00 --
-------
175,000 4.00 0.40
Exercised............................ (25,000) 2.00
Forfeited............................ (25,000) 2.00
-------
Outstanding at December 31, 1998..... 200,000 3.75
=======
</TABLE>
In 1998, the Company recorded compensation expense, reported in general and
administrative expense, of $150,000 relating to stock options with a
corresponding credit to additional paid-in capital.
The fair value of options granted in the foregoing table was computed using
the minimum value method. Weighted average assumptions used in the computation
include a risk free interest rate of 5% and an expected option life of 5 years.
If stock-based compensation cost in the accompanying financial statements had
been computed using the fair value method, the net loss would have been $248,000
($0.02 per share) in 1998 and unchanged in 1997 and 1996.
F-12
<PAGE> 82
QUOTESMITH.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCK OPTIONS (CONTINUED)
Share and per share information relating to options outstanding is as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
AS OF PRICES SHARES LIFE(YEARS) PRICE SHARES PRICE
----- -------- ------ ----------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997...... $2.00 75,000 7 $2.00 25,000 $2.00
======= =======
December 31, 1998...... 1.00 50,000 9 1.00 50,000 1.00
2.00 50,000 9 2.00 50,000 2.00
3.00 25,000 10 3.00 25,000 3.00
5.00 25,000 10 5.00
7.00 25,000 10 7.00
9.00 25,000 10 9.00
------- -------
1.00-9.00 200,000 8 3.75 125,000 1.80
======= =======
</TABLE>
The unexercisable options become exercisable in one to three years. As of
December 31, 1998, the Company had 500,000 shares reserved for issuance of
options and, accordingly, as of December 31, 1998, had an additional 300,000
options reserved for issuance with varying terms, including expiration dates of
up to ten years from date of grant. See Note 8 for 1999 activity.
7. COMMITMENTS AND CONTINGENCIES
As of December 31, 1998, the Company leases office space under an operating
lease agreement in which the Company is committed to annual rent expense of
approximately $100,000 through 2003. In addition, the Company must pay its
proportionate share of taxes and operating costs. Rent expense was $41,000 in
1996, $61,000 in 1997, and $100,000 in 1998.
The Company has employment agreements with certain of its executives under
which the Company would be required to pay severance of one to two years of
annual salary to terminate those agreements.
The Company is subject to legal proceedings and claims in the ordinary
course of business. The Company is not aware of any legal proceedings or claims
that are believed to have a material effect on the Company's financial position.
8. INTERIM FINANCIAL INFORMATION (UNAUDITED)
COMMON STOCK SOLD AND OPTIONS GRANTED
For the three months ended March 31, 1999, the Company sold 1,128,000
shares of common stock at $3.00 per share for proceeds of $3,384,000. Such sales
included 1,000,000 shares sold to an Investor as described in Note 5 and shares
sold to employees of 100,000 in January 1999 and 28,000 in March 1999.
In January 1999, the Company issued 175,000 stock options to employees with
an average exercise price of $6.43 per share, and 100,000 stock options with an
average exercise price of
F-13
<PAGE> 83
QUOTESMITH.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INTERIM FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
$6.00 per share were forfeited. In March and April 1999, the Company issued
225,000 stock options to employees with an average exercise price of $4.60 per
share.
For common stock sold and stock options granted to employees in March and
April 1999, compensation expense of $1,411,000 has been measured based on an
estimated fair value of the Company's common stock of $10.00 per share.
Compensation expense of $791,000 ($0.06 per share) relating to common stock sold
and vested options granted in March 1999 was charged to general and
administrative expense in the three months ended March 31, 1999, with a
corresponding credit to additional paid-in capital. Unamortized compensation
expense of $270,000 as of March 31, 1999 relating to nonvested stock options
granted in March 1999, along with compensation of $350,000 relating to nonvested
options granted in April 1999, will be amortized over the vesting period of the
options. The expense amortization will be $390,000 in the remainder of 1999,
$190,000 in 2000 and $40,000 in 2001.
The Company has committed to grant 212,000 options to directors and
employees upon completion of the public offering of the Company's common stock.
The options will have an exercise price equal to the initial public offering
price.
Shares reserved for exercise of stock options were increased to 1,475,000
in May 1999.
EMPLOYEE STOCK PURCHASE PLAN
In March 1999, the Company adopted a plan under which employees may
purchase shares of the Company's common stock through payroll deductions of up
to 10% of each employee's compensation. The first offering period during which
shares may be purchased will begin at the effective date of the Company's
initial public offering of its common stock and end on December 31, 1999.
Subsequent offering periods will be in six-month intervals. Shares may be
purchased at 85% of the lower of the fair value of the common stock on the first
or the last day of each offering period. The Company reserved 250,000 shares for
purchase under the plan.
PREFERRED STOCK
In May 1999, the Company authorized 5,000,000 shares of $0.001 par value
preferred stock. No shares have been issued.
STOCKHOLDER RIGHTS PLAN
In May 1999, the Company declared a distribution of one preferred stock
purchase right for each outstanding share of its common stock, and the Company
intends to issue those rights along with future issuances of common shares. The
rights become exercisable only if a person or group acquires or announces the
intent to acquire 15% or more of the Company's common stock. Prior to the rights
becoming exercisable, the Company may redeem the rights for $0.01 per right. If
the rights become exercisable, the Company may exchange each right for one share
of common stock providing that 50% of the Company has not been acquired. The
rights expire in 2009.
If the rights become exercisable and they have not been exchanged, holders
of each right, other than the acquiring person or group, would be entitled to
acquire one hundredth of a share of the Company's preferred stock at an exercise
price equal to five times the initial offering price of the Company's common
stock. If issued, each preferred share would entitle
F-14
<PAGE> 84
QUOTESMITH.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INTERIM FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
the holder to cumulative quarterly dividends of the greater of $1.00 per share
or 100 times the common share dividends. The preferred shareholders would
receive 100 votes per share and have a liquidation preference of $1.00 per share
over the common shares.
In lieu of purchasing preferred shares, holders of each right, other than
the acquiring person or group, on payment of the exercise price, would be
entitled to acquire the number of shares of the Company's common stock or other
assets with a value of two times the exercise price. In addition, if 50% of the
Company is acquired, the holders of each right would be entitled to acquire the
number of shares of the acquiring company's common stock having a value of two
times the exercise price.
LEASE AGREEMENT
In April 1999, the Company entered into an operating lease agreement in
which the Company is committed to additional annual rent expense of $100,000
through 2003.
NOTE PAYABLE
In June 1999, the Company borrowed $2,000,000 from the Investor referred to
in Note 5. The loan must be repaid at the earlier of December 2000 or the date
of a sale of the Company's common stock registered under the Securities Act of
1933, as amended. Additionally, the loan must be repaid to the extent of the net
proceeds to the Company from any sale of common stock or securities convertible
into common stock. Interest accrues at an annual rate of 12.5% payable
quarterly.
F-15
<PAGE> 85
INSIDE BACK COVER
Top of Page: Capital Letters, "BUYER-DRIVEN (circular stock photo, fades)
COMMERCE
Headline: Term life purchase example...
Subheading: In just four steps, Quotesmith.com customers can search the
market, select a company and policy, review underwriting
guidelines and request an application
Picture of Quotesmith.com home page
STEP 1: Request instant quotes...
Caption: Simply enter basic information and let our computer do the rest.
At Quotesmith.com we search the marketplace and guarantee the
accuracy of every quote.
STEP 2: Review available term life premiums and companies.....
Caption: Quotesmith.com shows you available companies and plans, all
conveniently ranked by lowest cost
STEP 3: Choose a company and plan...
Caption: Quotesmith.com's policy description screen shows the latest
independent ratings, underwriting guidelines, important policy
provisions and underwriting requirements.
STEP 4: Request an application...
Caption: At Quotesmith.com we provide self-directed insurance Buyers with
a "no-salesperson" promise and make it easy for you to apply to
the company of your choice.
<PAGE> 86
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHARES
QUOTESMITH LOGO
COMMON STOCK
------------------------
PROSPECTUS
------------------------
HAMBRECHT & QUIST
PAINEWEBBER INCORPORATED
ABN AMRO ROTHSCHILD
A DIVISION OF ABN AMRO INCORPORATED
CHARLES SCHWAB & CO., INC.
------------------------
, 1999
------------------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell and seeking offers to buy,
shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
No action is being taken in any jurisdiction outside the United States to
permit a public offering of our common stock or possession or distribution of
this prospectus in any such jurisdiction. Persons who come into possession of
this prospectus in jurisdictions outside the United States are required to
inform themselves about and to observe any restrictions as to this offering and
the distribution of this prospectus applicable to that jurisdiction.
Until , 1999, all dealers that buy, sell or trade in our common
stock, whether or not participating in this offering, may be required to deliver
a prospectus. This delivery requirement is in addition to the dealers'
obligation to deliver a prospectus when acting as underwriters and with respect
to their unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 87
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Registrant in connection with
the sale of shares of common stock being registered hereby. All amounts are
estimates except the SEC registration fee, the NASD filing fee and the Nasdaq
National Market Listing Fee.
<TABLE>
<S> <C>
SEC Registration Fee........................................ $22,240
NASD Filing Fee............................................. 8,500
NASDAQ National Market Listing Fee.......................... 95,000
Blue Sky Fees and Expenses.................................. *
Printing and Engraving Expenses............................. *
Legal Fees and Expenses..................................... *
Accounting Fees and Expenses................................ *
Director and Officer Securities Act Liability Insurance..... *
Transfer Agent and Registrar Fees........................... *
Miscellaneous Expenses...................................... *
-------
Total.................................................. $ *
=======
</TABLE>
- -------------------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL") authorizes
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, Article Sixth of the Registrant's certificate of
incorporation and Article VI of the Registrant by-laws together provide that (i)
the Registrant shall indemnify its directors and officers to the fullest extent
permitted by the DGCL, subject to certain very limited exceptions; (ii) the
Registrant is permitted to indemnify its other employees to the maximum extent
and in the manner permitted by applicable Delaware law (iii) the Registrant is
required to advance expenses, as incurred, to its directors and officers in
connection with a legal proceeding, subject to certain limited exceptions; and
(iv) the rights conferred in the By-Laws are not exclusive. As permitted by the
DGCL, the Registrant's certificate of incorporation includes a provision that
eliminates the personal inability of its directors for monetary damages for
breach of fiduciary duty as a director, to the fullest extent permitted by
Delaware law. This provision in the certificate of incorporation does not
eliminate the directors' fiduciary duty, and in appropriate circumstances
equitable remedies such as injunctive or other forms of non-monetary relief will
remain available under Delaware law. In addition, each director will continue to
be subject to liability for breach of the director's duty of loyalty to the
Registrant for acts or omissions not in good faith or involving intentional
misconduct, for knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are unlawful under Delaware law. The
provision also does not affect a director's responsibilities under any other
law, such as the federal securities laws or state or federal environmental laws.
II-1
<PAGE> 88
The Registrant has entered into indemnification agreements with its
directors. These directorship agreements provide that the directors will be
indemnified against expenses (including attorneys' fees), judgments, fines,
amounts paid in settlement such (if settlement is approved by the Registrant) in
any action or proceeding, including any derivative action, on account of their
service as directors of the Registrant or of any subsidiary of the Registrant or
of any other company or enterprise in which they are serving at the request of
the Registrant. No indemnity will be provided to any director under these
agreements if the director did not act in good faith or in the best interests of
Registrant, or in a criminal action if the Directors had reasonable cause to
believe its conduct was unlawful. In addition, no indemnification will be
provided for which payment is made to or on behalf of the director under any
insurance policy, or in connection with any proceeding initiated by the
director, or if a proceeding was initiated by the director not in good faith or
claims under Section 16(b) of the Securities Exchange Act of 1954, as amended,
or if such indemnification is determined by a court of competent jurisdiction to
be contrary to public policy.
Under Article VI of the Registrant's by-laws, the Registrant is authorized
to insurance covering the Registrant's directors and officers against liability
asserted against them in their capacity as such.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since May 26, 1996, we have sold and issued the following unregistered
securities:
(1) On February 28, 1998, we sold 5,000 shares of common stock to William
V. Thoms for $10,000.
(2) On March 31, 1998, we sold 20,000 shares of our common stock to William
V. Thoms for $40,000.
(3) On March 31, 1998, we sold 8,333.33 shares of common stock to Timothy
Shannon for $25,000.
(4) On April 2, 1998, we sold 4,000 shares of common stock to John M.
Conness, D.D.S. and Mary Lu Conness, as tenants-in-common, for $12,000.
(5) On April 3, 1998, we sold 50,000 shares of common stock to Harris Bank
Palatine as custodian for Gerald F. Fitzgerald for 150,000.
(6) On April 3, 1998, we sold 150,000 shares of common stock to Catholic
Order of Foresters for $450,000.
(7) On April 8, 1998, we sold 8,333 shares of common stock to each of Grace
Reilly, Kevin Reilly, John Reilly and Chris Reilly for aggregate
consideration of $100,000.
(8) On April 8, 1998, we sold 8,333.33 shares of common stock to First
National Bank of LaGrange, IRA #3530, for $25,000.
(9) On April 8, 1998, we sold 91,668 shares of common stock to Reimark
Capital, LLC for $275,000.
(10) On April 13, 1998, we sold 2,000 shares of common stock to Denise D.
Rueben and Bruce J. Rueben, as tenants-in-common, for $6,000.
(11) On April 13, 1998, we sold 16,000 shares of common stock to Kevin
Dolehide, D.O. and Mary Eileen Dolehide, as tenants-in-common, for
$48,000.
(12) On April 20, 1998, we sold 2,000 shares of common stock to Thomas R.
Lang and Electa Lang, as joint tenants with rights of survivorship,
for $6,000.
(13) On May 1, 1998, we sold 3,000 shares of common stock to William W.
Hembrough and Jean A. Hembrough, as tenants-in-common, for $9,000.
II-2
<PAGE> 89
(14) On July 21, 1998, we sold 1,666 shares of common stock to James
Haggerty and Noreen Haggerty, as tenants-in-common, for $4,998.
(15) On August 11, 1998, we sold 3,333 shares of common stock to Peter C.
Poisson for $9,999.
(16) On August 20, 1998, we sold 3,000 shares of common stock to John M.
Conness, D.D.S. and Mary Lu Conness, as tenants-in-common, for $9,000.
(17) On August 31, 1998, we sold 15,000 shares of common stock to John
Dolehide, D.O. for $45,000.
(18) On October 31, 1998, we sold 2,425 shares of common stock to Robert C.
and Beth S. Dolehide, as tenants-in-common, for $7,275.
(19) On November 30, 1998, we sold 12,000 shares of common stock to Robert
Chaps and Eileen M. Hayes, as joint tenants with rights of
survivorships, for $36,000.
(20) On January 17, 1999, we sold 100,000 shares of common stock to Grant
F. Kuphall for $300,000.
(21) On February 10, 1999, we sold 1,000,000 shares of common stock to
Intuit, Inc. for $3,000,000.
(22) On March 29, 1999, we sold 28,000 shares of common stock to Thomas A.
Munro and Francis M. Munro, as tenants in common, for $84,000.
The issuances described above in this Item 15 were deemed exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act as transactions by an issuer not involving any public offering.
II-3
<PAGE> 90
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1+ Form of Restated Certificate of Incorporation of Registrant
3.2+ Form of Amended and Restated By-Laws of Registrant
4.2+ Specimen Certificate for Registrant's common stock
4.3 Form of Rights Agreement
4.3(a) Form of Certificate of Designation, Preferences and Rights
4.4+ Investor Rights Agreement, dated February 10, 1999, between
Registrant and Intuit Inc.
5.1* Opinion of Freeborn & Peters
10.1+ Form of Quotesmith.com 1997 Stock Option Plan (as amended
and restated March 29, 1999) of Registrant
10.2+ Form of Quotesmith.com 1999 Employee Stock Purchase Plan
10.3+ Form of Employment Agreement between Registrant and Robert
S. Bland
10.4+ Form of Employment Agreement between Registrant and William
V. Thoms
10.5+ Form of Employment Agreement between Registrant and Ronald
A. Wozniak
10.6+ Form of Employment Agreement between Registrant and Thomas
A. Munro
10.7+ Form of Employment Agreement between Registrant and Burke A.
Christensen
10.8+ Form of Director Indemnification Agreement
10.9+ Lease dated as of August 1994, between Registrant and
LaSalle National Trust N.A.
10.10+ Lease Amendment Agreement dated as of November 1995, between
Registrant and LaSalle National Trust N.A.
10.11+ Lease Amendment Agreement as of September 1997, between
Registrant and LaSalle National Trust N.A.
10.12+ Lease Amendment Agreement dated as of July 1998, between
Registrant and LaSalle National Trust N.A.
10.13 Note Purchase Agreement, dated as of June 23, 1999, by and
between the Registrant and Intuit Inc.
23.1 Consent of Ernst & Young LLP
23.2+ Consent of Admiral Jeremiah A. Denton, Jr.
23.3+ Consent of Richard F. Gretsch
23.4+ Consent of John McCartney
23.5 Consent of Freeborn & Peters (included in Exhibit 5.1)
24.1+ Power of Attorney (See page II-6)
27.1+ Financial Data Schedule
</TABLE>
- -------------------------
* To be filed by amendment.
+ Previously filed
II-4
<PAGE> 91
(B) FINANCIAL STATEMENT SCHEDULES:
All schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the combined financial statements
or notes thereto.
ITEM 17. UNDERTAKINGS
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.
Insofar as indemnification for liabilities arising under the Securities Act
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 SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby further undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 92
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Chicago, State of Illinois, on June 24, 1999.
QUOTESMITH.COM, INC.
By: /s/ ROBERT S. BLAND
------------------------------------
Name: Robert S. Bland,
Title: Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities indicated on June 24, 1999:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ ROBERT S. BLAND Chairman, President and Chief Executive Officer
- --------------------------------------------- (Principal Executive Officer)
Robert S. Bland
/s/ WILLIAM V. THOMS Executive Vice President and Director
- ---------------------------------------------
William V. Thoms
/s/ THOMAS A. MUNRO Vice President, Chief Financial Officer and
- --------------------------------------------- Secretary (Principal Financial and Accounting
Thomas A. Munro Officer)
* Director
- ---------------------------------------------
Bruce J. Rueben
* Director
- ---------------------------------------------
Timothy F. Shannon
* /s/ ROBERT S. BLAND
- ---------------------------------------------
Robert S. Bland
Pursuant to Power of Attorney
</TABLE>
II-6
<PAGE> 93
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
4.3 Form of Rights Agreement
4.3(a) Form of Certificate of Designation, Preferences and Rights
10.13 Note Purchase Agreement, dated as of June 23, 1999, by and
between Registrant and Intuit Inc.
23.1 Consent of Ernst & Young LLP
</TABLE>
II-7
<PAGE> 1
EXHIBIT 4.3
- --------------------------------------------------------------------------------
RIGHTS AGREEMENT
between
QUOTESMITH.COM, INC.
and
HARRIS TRUST AND SAVINGS BANK,
Rights Agent
Dated as of June __, 1999
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
Page
----
Section 1. Certain Definitions........................................... 1
Section 2. Appointment of Rights Agent................................... 6
Section 3. Issue of Right Certificates................................... 6
Section 4. Form of Right Certificates.................................... 8
Section 5. Countersignature and Registration............................. 9
Section 6. Transfer, Split Up, Combination and
Exchange of Right Certificates;
Mutilated, Destroyed, Lost or
Stolen Right Certificates................................... 9
Section 7. Exercise of Rights; Purchase Price;
Expiration Date of Rights...................................10
Section 8. Cancellation and Destruction of
Right Certificates..........................................12
Section 9. Availability of Preferred Shares..............................13
Section 10. Preferred Shares Record Date..................................13
Section 11. Adjustment of Purchase Price, Number of
Shares or Number of Rights..................................13
Section 12. Certificate of Adjusted Purchase Price
or Number of Shares.........................................20
Section 13. Consolidation, Merger or Sale or Transfer
of Assets or Earning Power..................................20
Section 14. Fractional Rights and Fractional Shares.......................23
Section 15. Rights of Action..............................................24
Section 16 Agreement of Right Holders....................................24
-i-
<PAGE> 3
Page
----
Section 17. Right Certificate Holder Not Deemed a
Stockholder..................................................25
Section 18. Concerning the Rights Agent....................................25
Section 19. Merger or Consolidation or Change of
Name of Rights Agent.........................................26
Section 20. Duties of Rights Agent.........................................26
Section 21. Change of Rights Agent.........................................29
Section 22. Issuance of New Right Certificates.............................29
Section 23. Redemption.....................................................30
Section 24. Exchange.......................................................31
Section 25. Notice of Certain Events.......................................32
Section 26. Notices........................................................33
Section 27. Supplements and Amendments.....................................33
Section 28. Successors.....................................................34
Section 29. Benefits of This Agreement.....................................34
Section 30. Severability...................................................34
Section 31. Governing Law..................................................34
Section 32. Counterparts...................................................34
Section 33. Descriptive Headings...........................................34
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Page
Section 34. Determinations and Actions by the
Board of Directors..........................................34
Exhibit A - Form of Certificate of Designation, Preferences and
Rights
Exhibit B - Form of Right Certificate
Exhibit C - Summary of Rights Plan
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<PAGE> 5
RIGHTS AGREEMENT
This Rights Agreement, dated as of June __, 1999 ("Agreement"), between
QUOTESMITH.COM, INC., a Delaware corporation (the "Company"), and HARRIS TRUST
AND SAVINGS BANK, an Illinois banking corporation (the "Rights Agent").
W I T N E S S E T H:
WHEREAS, the Board of Directors of the Company authorized and declared
a dividend distribution of one Right (as hereinafter defined) for each Common
Share (as such term is hereinafter defined) of the Company outstanding as of the
Close of Business on [ ] (the "Record Date"), each Right representing the right
to purchase one one-hundredth of a Preferred Share (as such term is hereinafter
defined) having the rights, powers and preferences set forth in the form of
Certificate of Designations attached hereto as Exhibit A, upon the terms and
subject to the conditions herein set forth, and has further authorized and
directed the issuance of one Right with respect to each Common Share that shall
become outstanding between the Record Date and the earlier of the Distribution
Date and the Expiration Date (as such terms are hereinafter defined) or, in
certain circumstances provided in Section 22 hereof, after the Distribution
Date.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement, the
following terms have the meanings indicated:
"Acquiring Person" shall mean any Person (as such term is
hereinafter defined) who or which, together with all Affiliates and Associates
(as such terms are hereinafter defined) of such Person, shall be the Beneficial
Owner (as such term is hereinafter defined) of 15% or more of the Common Shares
of the Company then outstanding, but shall not include the Company, any
Subsidiary (as such term is hereinafter defined) of the Company, any employee
benefit plan of the Company or any Subsidiary of the Company, any Person holding
Common Shares for or pursuant to the terms of any such plan, or any
Grandfathered Person. Notwithstanding the foregoing, no Person (including,
without limitation, any Grandfathered Person) shall become an "Acquiring Person"
as the result of (a) an acquisition of Common Shares by the Company which, by
reducing the number of shares outstanding, increases the proportionate number of
shares beneficially owned by such Person to 15% or more of the Common Shares of
the Company then outstanding or (b) the acquisition by such Person of newly
issued Common Shares directly from the Company (it being understood that a
purchase from an underwriter or other intermediary is not directly
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from the Company); provided, however, that if a Person shall become the
Beneficial Owner of 15% or more of the Common Shares of the Company then
outstanding by reason of share purchases by the Company or the receipt of newly
issued Common Shares directly from the Company and shall, after such share
purchases or direct issuance by the Company, become the Beneficial Owner of any
additional Common Shares of the Company, then such Person shall be deemed to be
an "Acquiring Person"; provided, further, that any transferee from such Person
who becomes the Beneficial Owner of 15% or more of the Common Shares of the
Company then outstanding shall nevertheless be deemed to be an "Acquiring
Person." Notwithstanding the foregoing, if the Board of Directors of the Company
determines in good faith that a Person who would otherwise be an "Acquiring
Person," as defined pursuant to the foregoing provisions of this paragraph, has
become such inadvertently, and such Person divests as promptly as practicable
(and in any event within ten business days after notification by the Company) a
sufficient number of Common Shares so that such Person would no longer be an
Acquiring Person, as defined pursuant to the foregoing provisions of this
paragraph, then such Person shall not be deemed to be an "Acquiring Person" for
any purposes of this Agreement.
"Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Exchange Act (as such term is hereinafter defined), as in effect on the date
of this Agreement.
A Person shall be deemed the "Beneficial Owner" of and shall
be deemed to have "beneficial ownership" of or "beneficially own" any securities
which:
(a) such Person or any of such Person's Affiliates or
Associates beneficially owns, directly or indirectly;
(b) such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has (A) the right to acquire
(whether such right is exercisable immediately or only after the
passage of time) pursuant to any agreement, arrangement or
understanding, whether written or oral (other than customary agreements
with and between underwriters and selling group members with respect to
a bona fide public offering of securities), or upon the exercise of
conversion rights, exchange rights, rights (other than these Rights),
warrants or options, or otherwise; provided, however, that a Person
shall not be deemed the Beneficial Owner of, or to beneficially own,
securities tendered pursuant to a tender or exchange offer made by or
on behalf of such Person or any of such Person's Affiliates or
Associates until such tendered securities are accepted for purchase or
exchange; (B) the sole or shared right to vote or dispose of (including
any such right pursuant to any agreement, arrangement or understanding,
whether written or oral); provided, however, that a Person shall not be
deemed the Beneficial Owner of, or to beneficially own, any security if
the agreement, arrangement or understanding to vote such security (1)
arises solely from a revocable proxy or consent given to such Person in
response to a public proxy or consent solicitation made pursuant to,
and in accordance with, the applicable
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<PAGE> 7
rules and regulations promulgated under the Exchange Act and (2) is not
also then reportable on Schedule 13D under the Exchange Act (or any
comparable or successor report); or (c) "beneficial ownership" of (as
determined pursuant to Rule 13d-3 (or any successor rule) of the
General Rules and Regulations under the Exchange Act); or
(c) are beneficially owned, directly or indirectly, by any
other Person (or any Affiliate or Associate thereof) with which such
Person or any of such Person's Affiliates or Associates has any
agreement, arrangement or understanding, whether written or oral (other
than customary agreements with and between underwriters and selling
group members with respect to a bona fide public offering of
securities) for the purpose of acquiring, holding, voting (except to
the extent contemplated by the proviso to clause (B) of subparagraph
(b) of this definition) or disposing of any securities of the Company.
Notwithstanding anything in this definition of Beneficial
Ownership to the contrary, the phrase "then outstanding," when used with
reference to a Person's Beneficial Ownership of securities of the Company, shall
mean the number of such securities then issued and outstanding together with the
number of such securities not then actually issued and outstanding which such
Person would be deemed to own beneficially hereunder.
"Business Day" shall mean any day other than a Saturday, a
Sunday or a day on which banking institutions in Illinois are authorized or
obligated by law or executive order to close.
"Close of Business" on any given date shall mean 5:00 P.M.,
Chicago time, on such date; provided, however, that if such date is not a
Business Day it shall mean 5:00 P.M., Chicago time, on the next succeeding
Business Day.
"Common Shares" when used with reference to the Company shall
mean the shares of common stock, par value $.001 per share (as such shares may
be constituted or designated, or as such par value may be changed, from time to
time during the term of this Agreement), of the Company. "Common Shares" when
used with reference to any Person other than the Company shall mean the capital
stock (or equity interest) with the greatest voting power of such other Person
or the equity securities or other equity interest having power to control or
direct the management of such other Person.
"Distribution Date" shall have the meaning set forth in
Section 3 hereof.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
"Exchange Ratio" shall have the meaning set forth in Section
24 hereof.
"Expiration Date" shall have the meaning set forth in Section
7 hereof.
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<PAGE> 8
"Final Expiration Date" shall have the meaning set forth in
Section 7 hereof.
"Grandfathered Person" shall mean:
(a) Robert S. Bland and/or William V. Thoms;
(b) Any former or future spouse of any Person described in
subparagraph (a) of this definition;
(c) Any child, grandchild or great-grandchild, whether by
birth or adoption, whether now living or hereafter born, of any Person
described in subparagraph (a) or (b) of this definition;
(d) Any spouse (including any former or future spouse) of any
Person described in subparagraph (c) of this definition;
(e) Any estate of, or the executor or administrator of any
estate of, or any guardian or custodian for, any Person described in
subparagraphs (a) through (d) of this definition (so long as such
executor, administrator, guardian or custodian is acting in his or her
capacity as such);
(f) Any legal advisor of any Person described in subparagraphs
(a) through (e), (g) or (h) of this definition who is given a revocable
proxy by such Person with respect to voting securities of the Company
of which such Person is the Beneficial Owner or who is or becomes an
attorney-in-fact or agent of such Person;
(g) any organization (whether now existing or hereafter
formed) described in Section 501(c)(3) of the Internal Revenue Code of
1986, as amended;
(h) Any corporation, limited liability company, trust
(including any voting trust), general partnership, limited partnership,
organization or other entity (whether now existing or hereafter formed)
of which substantially all of the outstanding beneficial, voting or
equity interests are beneficially owned, directly or indirectly, either
(A) by one or more of the Persons described in subparagraphs (a)
through (e) of this definition, or (B) by any combination of one or
more of the Persons described in subparagraphs (a) through (e) of this
definition and one or more organizations described in subparagraph (g)
of this definition; and
(i) Any other Person (A) who or which is or becomes an
Affiliate or Associate of any Person described in subparagraphs (a)
through (h) of this definition, or (B) of which any Person described in
subparagraphs (a) through (h) of this definition is or becomes an
Affiliate or Associate; provided, in either case (A) or case (B), such
other
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<PAGE> 9
Person is not the Beneficial Owner of 5% or more of the Common Shares
then outstanding (for purposes of determining the number of Common
Shares of which such other Person is the Beneficial Owner under this
subparagraph (i), such other Person shall not be deemed to beneficially
own Common Shares solely by reason of an Affiliate or Associate
relationship of the kind described in (A) or (B) above in this
subparagraph (i)).
Notwithstanding the foregoing, a Grandfathered Person shall cease to be
deemed a Grandfathered Person if, without the prior approval of the Company, in
the case of Robert S. Bland he becomes the Beneficial Owners of __% or more of
the Common Shares outstanding or in the case of William V. Thoms he becomes the
Beneficial Owners of __% or more of the Common Shares outstanding, other than
(i) pursuant to dividends or rights (including the Rights) paid or offered to
stockholders of the Company generally (other than an Acquiring Person or
Persons), or (ii) options or grants of shares by the Company pursuant to an
employment agreement or other compensatory arrangement including, without
limitation, the Company's employee stock ownership plan and stock option plans.
"Person" shall mean any individual, firm, corporation or other
entity, and shall include any successor (by merger or otherwise) of such entity.
"Preferred Shares" shall mean shares of Series A Participating
Preferred Stock, par value $.001 per share, of the Company having the rights and
preferences set forth in the Form of Certificate of Designation, Preferences and
Rights attached to this Agreement as Exhibit A.
"Principal Party" shall have the meaning set forth in Section
13 hereof.
"Purchase Price" shall have the meaning set forth in Section 4
hereof.
"Redemption Date" shall have the meaning set forth in Section
7 hereof.
"Right Certificate" shall have the meaning set forth in
Section 3 hereof.
"Securities Act" shall mean the Securities Act of 1933, as
amended.
"Shares Acquisition Date" shall mean the first date of public
announcement (which, for purposes of this definition, shall include, without
limitation, a report filed pursuant to Section 13(d) promulgated under the
Exchange Act) by the Company or an Acquiring Person that an Acquiring Person has
become such.
"Subsidiary" shall mean, with reference to any Person, any
corporation or other entity of which a majority of the voting power of the
voting equity securities or equity interest is owned, directly or indirectly, by
such Person.
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<PAGE> 10
"Trading Day" shall have the meaning set forth in Section
11(d)(I) hereof.
"Triggering Event" shall mean any event described in Section
11(a)(ii) or Section 13(a) hereof.
Any determination or interpretation required in connection with any of
the definitions contained in this Section 1 shall be made by the Board of
Directors of the Company in their good faith judgment, which determination shall
be final and binding on the Rights Agent.
Section 2. Appointment of Rights Agent. The Company hereby appoints the
Rights Agent to act as agent for the Company and the holders of the Rights (who,
in accordance with Section 3 hereof, shall prior to the Distribution Date also
be the holders of the Common Shares) in accordance with the terms and conditions
hereof, and the Rights Agent hereby accepts such appointment. The Company may
from time to time appoint such co-Rights Agents as it may deem necessary or
desirable upon ten (10) days' prior written notice to the Rights Agent;
provided, however, that the Rights Agent shall have no duty to supervise, and
shall in no event be liable for, the acts or omissions of any such co-Rights
Agent.
Section 3. Issue of Right Certificates.
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<PAGE> 11
(a) Until the earlier of (i) the Close of Business on the tenth day
after the Shares Acquisition Date or (ii) the Close of Business on the tenth
Business Day (or such later date as may be determined by action of the Board of
Directors prior to such time as any Person becomes an Acquiring Person) after
the date that a tender or exchange offer by any Person (other than the Company,
any Subsidiary of the Company, any employee benefit plan of the Company or of
any Subsidiary of the Company or any entity holding Common Shares for or
pursuant to the terms of any such plan, or any Grandfathered Person) is first
published or sent or given within the meaning of Rule 14d-2(a) of the General
Rules and Regulations under the Exchange Act, of which tender or exchange offer
would result in any Person becoming the Beneficial Owner of Common Shares
aggregating 15% or more of the then outstanding Common Shares (including any
such date which is after the date of this Agreement and prior to the issuance of
the Rights; the earlier of (i) or (ii) being herein referred to as the
"Distribution Date"), (x) the Rights will be evidenced (subject to the
provisions of Section 3(b) hereof) by the certificates for Common Shares
registered in the names of the holders thereof (which certificates shall also be
deemed to be certificates for Rights) and not by separate certificates, and (y)
the Rights will be transferable only in connection with the transfer of the
underlying Common Shares (including a transfer to the Company). The Company
shall give the Rights Agent prompt written notice of the Distribution Date. As
soon as practicable after the Distribution Date, the Company will prepare and
execute, the Rights Agent will countersign, and the Company will cause to be
sent (and the Rights Agent will, if requested, send) by first-class, insured,
postage-prepaid mail, to each record holder of Common Shares as of the close of
business on the Distribution Date, at the address of such holder shown on the
records of the Company, a Right Certificate, in substantially the form of
Exhibit B hereto (a "Right Certificate"), evidencing one Right for each Common
Share so held. In the event that an adjustment in the number of Rights per
Common share has been made pursuant to Section 11(n) hereof, at the time of
distribution of Rights Certificates, the Company shall make the necessary and
appropriate rounding adjustments (in accordance with Section 14 (a) hereof) so
that Rights Certificates only representing whole numbers of Rights are
distributed and cash is paid in lieu of any fractional Rights. As of and after
the Distribution Date, the Rights will be evidenced solely by such Right
Certificates.
(b) As promptly as possible after the Record Date, the Company will
send a copy of a Summary of Rights Plan, in substantially the form of Exhibit C
hereto (the "Summary of Rights Plan"), by first class, postage-prepaid mail, to
each record holder of Common Shares as of the close of business on the Record
Date (other than any Acquiring Person or any Associate or Affiliate of any
Acquiring Person), at the address of such holder shown on the records of the
Company. With respect to certificates for Common Shares outstanding as of the
Record Date, until the Distribution Date, the Rights will be evidenced by such
certificates registered in the names of the holders thereof together with the
Summary of Rights Plan, and registered holders of Common Shares shall also be
the registered holders of the associated Rights. Until the Distribution Date (or
the earlier of the Redemption Date or the Final Expiration Date), the transfer
of any certificate for Common Shares outstanding on the Record Date, with or
without a
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<PAGE> 12
copy of the Summary of Rights Plan, shall also constitute the transfer of the
Rights associated with the Common Shares represented thereby.
(c) Rights shall be issued in respect of all Common Shares which are
issued (whether originally issued or delivered from the Company's treasury)
after the Record Date but prior to the earliest of the Distribution Date, the
Redemption Date, the Final Expiration Date or, in certain circumstances provided
in Section 22 hereof, after the Distribution Date. Certificates representing
such Common Shares shall also be deemed to be certificates for Rights.
Certificates representing both Common Shares and Rights in accordance with this
Section 3 which are executed and delivered (whether the Common Shares
represented thereby are originally issued, delivered from the Company's treasury
or are presented for transfer) by the Company (including, without limitation,
certificates representing reacquired Common Shares referred to in the last
sentence of this paragraph (c)) after the Record Date but prior to the earliest
of the Distribution Date, the Redemption Date or the Final Expiration Date or,
in certain circumstances provided in Section 22 hereof, after the Distribution
Date, shall have impressed on, printed on, written on or otherwise affixed to
them a legend substantially equivalent to the following:
This certificate also evidences and entitles the holder hereof to
certain rights as set forth in the Rights Agreement between
Quotesmith.com, Inc. (the "Company") and Harris Trust and Savings Bank
dated as of June __, 1999 (the "Rights Agreement"), the terms of which
are hereby incorporated herein by reference and a copy of which is on
file at the principal offices of the Company. Under certain
circumstances, as set forth in the Rights Agreement, such Rights will
be evidenced by separate certificates and will no longer be evidenced
by this certificate. The Company will mail to the holder of this
certificate a copy of the Rights Agreement, as in effect on the date of
mailing, without charge promptly after receipt of a written request
therefor. Under certain circumstances set forth in the Rights
Agreement, Rights issued to, or held by, any Person who is, was or
becomes an Acquiring Person or an Affiliate or Associate thereof (as
such terms are defined in the Rights Agreement), whether currently held
by or on behalf of such Person or by any subsequent holder, shall
become null and void.
With respect to such certificates bearing the foregoing legend, until the
earlier of (i) the Distribution Date or (ii) the Final Expiration Date, the
Rights associated with the Common Shares shall be evidenced by the certificates
representing the associated Common Shares alone, and the transfer of any such
certificate shall also constitute the transfer of the Rights associated with the
Common Shares represented thereby. In the event that the Company purchases or
acquires any Common Shares after the Record Date but prior to the Distribution
Date, any Rights associated with such Common Shares shall be deemed canceled and
retired so that the Company shall not be entitled to exercise any Rights
associated with the Common Shares which are no longer outstanding.
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Section 4. Form of Right Certificates.
(a) The Right Certificates (and the forms of election to purchase
Preferred Shares and of assignment to be printed on the reverse thereof) shall
each be substantially in the form set forth in Exhibit B hereto and may have
such marks of identification or designation and such legends, summaries or
endorsements printed thereon as the Company may deem appropriate and as are not
inconsistent with the provisions of this Agreement, or as may be required to
comply with any applicable law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange on which the Rights
may from time to time be listed, or to conform to usage. Subject to the
provisions of Section 11 and Section 22 hereof, the Right Certificates shall
entitle the holders thereof to purchase such number of one one-hundredths of a
Preferred Share as shall be set forth therein at the price per one one-hundredth
of a Preferred Share set forth therein (the "Purchase Price"), but the amount
and type of securities purchasable upon the exercise of each Right and the
Purchase Price thereof shall be subject to adjustment as provided herein.
(b) Any Right Certificate issued pursuant to Section 3(a) or Section 22
hereof that represents Rights beneficially owned by: (i) an Acquiring Person or
any Associate or Affiliate of an Acquiring Person, (ii) a transferee of an
Acquiring Person (or such Associate or Affiliate) who becomes a transferee after
the Acquiring Person becomes an Acquiring Person, or (iii) a transferee of an
Acquiring Person (or such Associate or Affiliate) who becomes a transferee prior
to or concurrently with the Acquiring Person becoming such and receives such
Rights pursuant to either (A) a transfer (whether or not for consideration) from
the Acquiring Person to holders of equity interests in such Acquiring Person or
to any Person with whom the Acquiring Person has any continuing agreement,
arrangement or understanding, whether written or oral, regarding the transferred
Rights or (B) a transfer which is part of a plan, arrangement or understanding,
whether written or oral, which has as a primary purpose or effect avoidance of
Section 7(e) hereof, and any Right Certificate issued pursuant to Section 6 or
Section 11 hereof upon transfer, exchange, replacement or adjustment of any
other Right Certificate referred to in this sentence, shall contain (to the
extent feasible and otherwise reasonably identifiable as such) the following
legend:
The Rights represented by this Right Certificate are or were
beneficially owned by a Person who was or became an Acquiring Person or
an Affiliate or Associate of an Acquiring Person (as such terms are
defined in the Rights Agreement). Accordingly, this Right Certificate
and the Rights represented hereby may become void in the circumstances
specified in Section 7(e) of such Agreement.
The provisions of Section 7(e) shall apply whether or not any Right Certificate
actually contains the foregoing legend.
Section 5. Countersignature and Registration. The Right Certificates
shall be executed on behalf of the Company by any of its Chairman of the Board,
its Chief Executive Officer, its President, its Executive Vice President, or its
Chief Financial Officer, either manually or by
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<PAGE> 14
facsimile signature, shall have affixed thereto the Company's seal or a
facsimile thereof, and shall be attested by the Secretary or an Assistant
Secretary of the Company, either manually or by facsimile signature. The Right
Certificates shall be manually countersigned by the Rights Agent and shall not
be valid for any purpose unless countersigned. In case any officer of the
Company who shall have signed any of the Right Certificates shall cease to be
such officer of the Company before countersignature by the Rights Agent and
issuance and delivery by the Company, such Right Certificates, nevertheless, may
be countersigned by the Rights Agent and issued and delivered by the Company
with the same force and effect as though the person who signed such Right
Certificates had not ceased to be such officer of the Company; and any Right
Certificate may be signed on behalf of the Company by any person who, at the
actual date of the execution of such Right Certificate, shall be a proper
officer of the Company to sign such Right Certificate, although at the date of
the execution of this Agreement any such person was not such an officer.
Following the Distribution Date, the Rights Agent will keep or cause to
be kept, at its office designated for such purpose, books for registration and
transfer of the Right Certificates issued hereunder. Such books shall show the
names and addresses of the respective holders of the Right Certificates, the
number of Rights evidenced on its face by each of the Right Certificates and the
date of each of the Right Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of Right
Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates.
(a) Subject to the provisions of Sections 4(b), 7(e), 14 and 24 hereof,
at any time after the close of business on the Distribution Date, and at or
prior to the close of business on the earlier of the Redemption Date or the
Final Expiration Date, any Right Certificate or Right Certificates may be
transferred, split up, combined or exchanged for another Right Certificate or
Right Certificates, entitling the registered holder to purchase a like number of
Preferred Shares (or, following a Triggering Event, Common Shares, other
securities or property, as the case may be) as the Right Certificate or Right
Certificates surrendered then entitled such holder to purchase. Any registered
holder desiring to transfer, split up, combine or exchange any Right Certificate
or Right Certificates shall make such request in writing delivered to the Rights
Agent, and shall surrender the Right Certificate or Right Certificates to be
transferred, split up, combined or exchanged at the office of the Rights Agent
designated for such purpose. Neither the Rights Agent nor the Company shall be
obligated to take any action whatsoever with respect to the transfer of any such
surrendered Right Certificate until the registered holder shall have completed
and signed the certificate contained in the form of assignment on the reverse
side of such Right Certificate accompanied by such documents as the Rights Agent
may deem appropriate and the Company shall have been provided with such
additional evidence of the identity of the Beneficial Owner (or former
Beneficial Owner) or Affiliates or Associates thereof as the Company shall
reasonably request. Thereupon the Rights Agent shall, subject to Sections 4 and
7 hereof, countersign and deliver to the person entitled thereto a Right
Certificate or Right Certificates, as the case may be, as so requested. The
Company may require payment of a sum sufficient to cover
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<PAGE> 15
any tax or governmental charge that may be imposed in connection with any
transfer, split up, combination or exchange of Right Certificates.
(b) Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation of
a Right Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them, and, at the Company's request,
reimbursement to the Company and the Rights Agent of all reasonable expenses
incidental thereto, and upon surrender to the Rights Agent and cancellation of
the Right Certificate if mutilated, the Company will make and deliver a new
Right Certificate of like tenor to the Rights Agent for countersignature and
delivery to the registered holder in lieu of the Right Certificate so lost,
stolen, destroyed or mutilated.
Section 7. Exercise of Rights; Purchase Price; Expiration Date of
Rights.
(a) Subject to Section 7(e) hereof, the registered holder of any Right
Certificate may exercise the Rights evidenced thereby (except as otherwise
provided herein) in whole or in part at any time after the Distribution Date
upon surrender of the Right Certificate, with the form of election to purchase
on the reverse side thereof duly executed, to the Rights Agent at the office of
the Rights Agent designated for such purpose, together with payment of the
Purchase Price with respect to each surrendered Right for the total number of
Preferred Shares (or other securities or property, as the case may be) as to
which the Rights are exercised, at or prior to the earliest of (i) the close of
business on the tenth anniversary of the effective date of this Agreement (the
"Final Expiration Date"), (ii) the time at which the Rights are redeemed as
provided in Section 23 hereof (the "Redemption Date") (the earlier of (i) and
(ii) being herein referred to as the "Expiration Date") and (iii) the time at
which such Rights are exchanged as provided in Section 24 hereof.
Notwithstanding anything herein to the contrary, the Rights will lapse and be of
no further effect if there is not on file with the Securities and Exchange
Commission prior to [ ] an effective Form S-1 Registration Statement relating to
the initial public offering of the Company's Common Shares.
(b) The Purchase Price for each one one-hundredth of a Preferred Share
pursuant to the exercise of a Right shall initially be five times the initial
offering price of one share of the Company's common stock pursuant to an
effective S-1 Registration Statement and shall be subject to adjustment from
time to time as provided in Sections 11 and 13 hereof and shall be payable in
lawful money of the United States of America in accordance with paragraph (c)
below.
(c) Upon receipt of a Right Certificate representing exercisable
Rights, with the form of election to purchase and the certificate on the reverse
side of the Right Certificate duly executed, accompanied by such documents as
the Rights Agent may deem appropriate, payment of the Purchase Price for the
shares (or other securities or property, as the case may be) to be purchased and
an amount equal to any applicable transfer tax required to be paid by the holder
of such Right Certificate in accordance with Section 9 hereof by certified
check, cashier's check or money order payable to the order of the Company, the
Rights Agent shall thereupon promptly (i)
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<PAGE> 16
(A) requisition from any transfer agent of the Preferred Shares (or make
available, if the Rights Agent is the transfer agent of the Preferred Shares)
certificates for the number of Preferred Shares to be purchased and the Company
hereby irrevocably authorizes its transfer agent to comply with all such
requests, or (B) if the Company shall have elected to deposit the Preferred
Shares issuable upon exercise of the Rights with a depositary agent, requisition
from the depositary agent depositary receipts representing such number of one
one-hundredths of a Preferred Share as are to be purchased (in which case
certificates for the Preferred Shares represented by such receipts shall be
deposited by the transfer agent with the depositary agent) and the Company will
direct the depositary agent to comply with such request; (ii) when appropriate,
requisition from the Company the amount of cash to be paid in lieu of issuance
of fractional shares in accordance with Section 14 hereof; (iii) after receipt
of such certificates or depositary receipts, cause the same to be delivered to
or upon the order of the registered holder of such Right Certificate, registered
in such name or names as may be designated by such holder; and (iv) when
appropriate, after receipt, deliver such cash to or upon the order of the
registered holder of such Right Certificate. In the event that the Company is
obligated to issue other securities (including Common Shares) of the Company,
pay cash and/or distribute other property pursuant to Section 11(a) hereof, the
Company will make all arrangements necessary so that such other securities, cash
and/or property are available for distribution by the Rights Agent, if and when
appropriate.
(d) In case the registered holder of any Right Certificate shall
exercise less than all the Rights evidenced thereby, a new Right Certificate
evidencing Rights equivalent to the Rights remaining unexercised shall be issued
by the Rights Agent and delivered to the registered holder of such Right
Certificate or to his duly authorized assigns, subject to the provisions of
Section 14 hereof.
(e) Notwithstanding anything in this Agreement to the contrary, from
and after the occurrence of a Triggering Event, any Rights beneficially owned by
(i) an Acquiring Person or an Associate or Affiliate of an Acquiring Person,
(ii) a transferee of an Acquiring Person (or of any such Associate or Affiliate)
who becomes a transferee after the Acquiring Person becomes an Acquiring Person,
or (iii) a transferee of an Acquiring Person (or such Associate or Affiliate)
who becomes a transferee prior to or concurrently with the Acquiring Person
becoming an Acquiring Person and receives such Rights pursuant to either (A) a
transfer (whether or not for consideration) from the Acquiring Person to holders
of equity interests in such Acquiring Person or to any Person with whom the
Acquiring Person has any continuing agreement, arrangement or understanding,
whether written or oral, regarding the transferred Rights or (B) a transfer
which the Board of Directors otherwise concludes in good faith is part of a
plan, arrangement or understanding (whether written or oral) which has as a
primary purpose or effect the avoidance of this Section 7(e), shall become null
and void without any further action, and any holder of such Rights shall
thereupon have no rights whatsoever with respect to such Rights, whether under
any provision of this Agreement or otherwise, from and after the occurrence of a
Triggering Event. The Company shall use all reasonable efforts to ensure that
the provisions of this Section 7(e) hereof are complied with, but shall have no
liability to any holder of Rights for the inability to
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<PAGE> 17
make any determinations with respect to an Acquiring Person or its Affiliates,
Associates or transferees hereunder.
(f) Notwithstanding anything in this Agreement to the contrary, neither
the Rights Agent nor the Company shall be obligated to undertake any action with
respect to a registered holder upon the occurrence of any purported exercise as
set forth in this Section 7 unless the certificate contained in the form of
election to purchase set forth on the reverse side of the Right Certificate
surrendered for such exercise shall have been completed and signed by the
registered holder thereof and the Company shall have been provided with such
additional evidence of the identity of the Beneficial Owner (or former
Beneficial Owner) or Affiliates or Associates thereof as the Company shall
reasonably request.
(g) The Company covenants and agrees that it will cause to be reserved
and kept available out of its authorized and unissued Preferred Shares (and,
following the occurrence of a Triggering Event, Common Shares and/or other
securities) or any Preferred Shares (and, following the occurrence of a
Triggering Event, Common Shares and/or other securities) held in its treasury,
the number of Preferred Shares (and, following the occurrence of a Triggering
Event, Common Shares and/or other securities) that will be sufficient to permit
the exercise in full of all outstanding Rights.
(h) Notwithstanding any statement to the contrary contained in this
Agreement or in any Right Certificate, if the Distribution Date or the Shares
Acquisition Date shall occur prior to the Record Date, the provisions of this
Agreement, including (without limitation) Sections 3 and 11(a)(ii), shall be
applicable to the Rights upon their issuance to the same extent such provisions
would have been applicable if the Record Date were the date of this Agreement.
Section 8. Cancellation and Destruction of Right Certificates. All
Right Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or to any of its
agents, be delivered to the Rights Agent for cancellation or in canceled form,
or, if surrendered to the Rights Agent, shall be canceled by it, and no Right
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Agreement. The Company shall deliver to the Rights
Agent for cancellation and retirement, and the Rights Agent shall so cancel and
retire, any other Right Certificate purchased or acquired by the Company
otherwise than upon the exercise thereof. The Rights Agent shall deliver all
canceled Right Certificates to the Company, or shall, at the written request of
the Company, cause such canceled Right Certificates to be destroyed, and in such
case cause a certificate of destruction to be delivered to the Company.
Section 9. Reservation and Availability of Preferred Shares. The
Company covenants and agrees that it will take all such action as may be
necessary to ensure that all Preferred Shares (and, following the occurrence of
a Triggering Event, Common Shares and/or other securities) delivered upon
exercise of Rights shall, at the time of delivery of the certificates for such
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<PAGE> 18
Preferred Shares (and, following the occurrence of a Triggering Event, Common
Shares and/or other securities), subject to payment of the Purchase Price, be
duly and validly authorized and issued and fully paid and nonassessable shares.
The Company further covenants and agrees that it will pay when due and
payable any and all federal and state transfer taxes and charges which may be
payable in respect of the issuance or delivery of the Right Certificates or of
any Preferred Shares (or Common Shares and/or other securities, as the case may
be) upon the exercise of Rights. The Company shall not, however, be required to
pay any transfer tax which may be payable in respect of any transfer or delivery
of Right Certificates to a person other than, or the issuance or delivery of
certificates or depositary receipts for the Preferred Shares (or Common Shares
and/or other securities, as the case may be) in a name other than that of, the
registered holder of the Right Certificate evidencing Rights surrendered for
exercise or to issue or to deliver any certificates or depositary receipts for
Preferred Shares (or Common Shares and/or other securities, as the case may be)
upon the exercise of any Rights until any such tax shall have been paid (any
such tax being payable by the holder of such Right Certificate at the time of
surrender) or until it has been established to the Company's reasonable
satisfaction that no such tax is due.
Section 10. Preferred Shares Record Date. Each person in whose name any
certificate for Preferred Shares (or Common Shares and/or other securities, as
the case may be) is issued upon the exercise of Rights shall for all purposes be
deemed to have become the holder of record of the shares or securities
represented thereby on, and such certificate shall be dated, the date upon which
the Right Certificate evidencing such Rights was duly surrendered and payment of
the Purchase Price (and any applicable transfer taxes) was made; provided,
however, that if the date of such surrender and payment is a date upon which the
Preferred Shares (or Common Shares and/or other securities, as the case may be)
transfer books of the Company are closed, such person shall be deemed to have
become the record holder of such shares or securities on, and such certificate
shall be dated, the next succeeding Business Day on which the Preferred Shares
(or Common Shares and/or other securities, as the case may be) transfer books of
the Company are open. Prior to the exercise of the Rights evidenced thereby, the
holder of a Right Certificate shall not be entitled to any rights of a holder of
Preferred Shares (or Common Shares and/or other securities, as the case may be)
for which the Rights shall be exercisable, including, without limitation, the
right to vote, to receive dividends or other distributions or to exercise any
preemptive rights, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided herein.
Section 11. Adjustment of Purchase Price, Number and Kind of Shares or
Number of Rights. The Purchase Price, the number of Preferred Shares covered by
each Right and the number of Rights outstanding are subject to adjustment from
time to time as provided in this Section 11.
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<PAGE> 19
(a) (i) In the event the Company shall at any time after the
date of this Agreement (A) declare a dividend on the Preferred Shares
payable in Preferred Shares, (B) subdivide the outstanding Preferred
Shares, (C) combine the outstanding Preferred Shares into a smaller
number of Preferred Shares or (D) issue any shares of its capital stock
in a reclassification of the Preferred Shares (including any such
reclassification in connection with a consolidation or merger in which
the Company is the continuing or surviving corporation), except as
otherwise provided in this Section 11(a) and Section 7(e) hereof, the
Purchase Price in effect at the time of the record date for such
dividend or of the effective date of such subdivision, combination or
reclassification, and the number and kind of shares of capital stock
issuable on such date, shall be proportionately adjusted so that the
holder of any Right exercised after such time shall be entitled to
receive the aggregate number and kind of shares of capital stock which,
if such Right had been exercised immediately prior to such date and at
a time when the Preferred Shares transfer books of the Company were
open, he would have owned upon such exercise and been entitled to
receive by virtue of such dividend, subdivision, combination or
reclassification; provided, however, that in no event shall the
consideration to be paid upon the exercise of one Right be less than
the aggregate par value of the shares of capital stock of the Company
issuable upon exercise of one Right. If an event occurs which would
require an adjustment under both Section 11(a)(i) and Section
11(a)(ii), the adjustment provided for in this Section 11(a)(i) shall
be in addition to, and shall be made prior to, any adjustment required
pursuant to Section 11(a)(ii).
(ii) Subject to Section 24 of this Agreement, in the event any
Person becomes an Acquiring Person, each holder of a Right, except as
provided below and in Section 7(e) hereof, shall thereafter have a
right to receive, upon exercise thereof at a price equal to the then
current Purchase Price multiplied by the number of one one-hundredths
of a Preferred Share for which a Right is then exercisable, in
accordance with the terms of this Agreement and in lieu of Preferred
Shares, such number of Common Shares of the Company as shall equal the
result obtained by (x) multiplying the then current Purchase Price by
the number of one one-hundredths of a Preferred Share for which a Right
is then exercisable and dividing that product by (y) 50% of the then
current per share market price of the Company's Common Shares
(determined pursuant to Section 11(d) hereof) on the date of the
occurrence of such event. In the event that any Person shall become an
Acquiring Person and the Rights shall then be outstanding, the Company
shall not take any action which would eliminate or diminish the
benefits intended to be afforded by the Rights.
(iii) In lieu of issuing Common Shares of the Company in
accordance with Section 11(a)(ii) hereof, the Company may, in the sole
discretion of the Board of Directors, elect to (and, in the event that
the Board of Directors has not exercised the exchange right contained
in Section 24 hereof and there are not sufficient issued but not
outstanding and authorized but unissued Common Shares to permit the
exercise in full of the Rights in
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<PAGE> 20
accordance with the foregoing subparagraph (ii), the Company shall)
take all such action as may be necessary to authorize, issue or pay,
upon the exercise of the Rights, cash (including by way of a reduction
of the Purchase Price), property, other securities or any combination
thereof having an aggregate value equal to the value of the Common
Shares of the Company which otherwise would have been issuable pursuant
to Section 11(a)(ii), which aggregate value shall be determined by a
majority of the Board of Directors. For purposes of the preceding
sentence, the value of the Common Shares shall be determined pursuant
to Section 11(d) hereof and the value of any equity securities which a
majority of the Board of Directors determines to be a "common stock
equivalent" (including the Preferred Shares, in such ratio as the Board
of Directors shall determine) shall be deemed to have the same value as
the Common Shares. Any such election by the Board of Directors must be
made and publicly announced within 60 days following the date on which
the event described in Section 11(a)(ii) shall have occurred. Following
the occurrence of the event described in Section 11(a)(ii), a majority
of the Board of Directors then in office may suspend the exercisability
of the Rights for a period of up to 60 days following the date on which
the event described in Section 11(a)(ii) shall have occurred to the
extent that such directors have not determined whether to exercise the
company's right of election under this Section 11(a)(iii). In the event
of any such suspension, the Company shall issue a public announcement
stating that the exercisability of the Rights has been temporarily
suspended.
(b) In case the Company shall fix a record date for the issuance of
rights, options or warrants to all holders of Preferred Shares entitling them
(for a period expiring within 45 calendar days after such record date) to
subscribe for or purchase Preferred Shares (or shares having the same rights,
privileges and preferences as the Preferred Shares ("equivalent preferred
shares")) or securities convertible into Preferred Shares or equivalent
preferred shares at a price per Preferred Share or equivalent preferred share
(or having a conversion price per share, if a security convertible into
Preferred Shares or equivalent preferred shares) less than the then current per
share market price of the Preferred Shares (as defined in Section 11(d)) on such
record date, the Purchase Price to be in effect after such record date shall be
determined by multiplying the Purchase Price in effect immediately prior to such
record date by a fraction, the numerator of which shall be the number of
Preferred Shares outstanding on such record date plus the number of Preferred
Shares which the aggregate offering price of the total number of Preferred
Shares and/or equivalent preferred shares so to be offered (and/or the aggregate
initial conversion price of the convertible securities so to be offered) would
purchase at such current market price, and the denominator of which shall be the
number of Preferred Shares outstanding on such record date plus the number of
additional Preferred Shares and/or equivalent preferred shares to be offered for
subscription or purchase (or into which the convertible securities so to be
offered are initially convertible); provided, however, that in no event shall
the consideration to be paid upon the exercise of one Right be less than the
aggregate par value of the shares of capital stock of the Company issuable upon
exercise of one Right. In case such subscription price may be paid in a
consideration part or all of which shall be in a form other than cash, the value
of such
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<PAGE> 21
consideration shall be as determined in good faith by the Board of Directors of
the Company, whose determination shall be described in a statement filed with
the Rights Agent and shall be binding on the Rights Agent. Preferred Shares
owned by or held for the account of the Company shall not be deemed outstanding
for the purpose of any such computation. Such adjustment shall be made
successively whenever such a record date is fixed; and in the event that such
rights, options or warrants are not so issued, the Purchase Price shall be
adjusted to be the Purchase Price which would then be in effect if such record
date had not been fixed.
(c) In case the Company shall fix a record date for the making of a
distribution to all holders of the Preferred Shares (including any such
distribution made in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation) of evidences of indebtedness
or assets (other than a regular quarterly cash dividend or a dividend payable in
Preferred Shares) or subscription rights or warrants (excluding those referred
to in Section 11(b) hereof), the Purchase Price to be in effect after such
record date shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the then current per share market price of the Preferred Shares on such
record date, less the fair market value (as determined in good faith by the
Board of Directors of the Company, whose determination shall be described in a
statement filed with the Rights Agent) of the portion of the assets or evidences
of indebtedness so to be distributed or of such subscription rights or warrants
applicable to one Preferred Share, and the denominator of which shall be such
current per share market price of the Preferred Shares; provided, however, that
in no event shall the consideration to be paid upon the exercise of one Right be
less than the aggregate par value of the shares of capital stock of the Company
to be issued upon exercise of one Right. Such adjustments shall be made
successively whenever such a record date is fixed; and in the event that such
distribution is not so made, the Purchase Price shall again be adjusted to be
the Purchase Price which would then be in effect if such record date had not
been fixed.
(d) (i) For the purpose of any computation hereunder, other
than under Section 11(a)(iii) hereof, the "current per share market
price" of any security (a "Security" for the purpose of this Section
11(d)(i)) on any date shall be deemed to be the average of the daily
closing prices per share of such Security for the 30 consecutive
Trading Days (as such term is hereinafter defined) immediately prior to
such date, and for the purpose of any computation under Section
11(a)(iii) hereof, the "current per share market price" of a Security
on any date shall be deemed to be the average of the daily closing
prices per share of such Security for thirty (30) consecutive Trading
Days immediately following such date; provided, however, that in the
event that the current per share market price of the Security
is determined during a period following the announcement by the issuer
of such Security of (A) a dividend or distribution on such Security
payable in shares of such Security or securities convertible into such
shares (other than the Rights), or (B) any subdivision, combination or
reclassification of such Security and prior to the expiration of 30
Trading Days after the ex-dividend date for such dividend or
distribution, or the record date for such subdivision, combination or
reclassification, then, and in each such case, the
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<PAGE> 22
"current per share market price" shall be appropriately adjusted to
reflect the current market price per share equivalent (ex-dividend) of
such Security. The closing price for each day shall be the last sale
price, regular way, or, in case no such sale takes place on such day,
the average of the closing bid and asked prices, regular way, in either
case as reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading on the
New York Stock Exchange or, if the Security is not listed or admitted
to trading on the New York Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to securities
listed on the principal national securities exchange on which the
Security is listed or admitted to trading or, if the Security is not
listed or admitted to trading on any national securities exchange, the
last quoted price or, if not so quoted, the average of the high bid and
low asked prices in the over-the-counter market, as reported by the
National Association of Securities Dealers, Inc. Automated Quotation
System ("Nasdaq") or such other system then in use, or, if on any such
date the Security is not quoted by any such organization, the average
of the closing bid and asked prices as furnished by a professional
market maker making a market in the Security selected by the Board of
Directors of the Company. If on any such date no market maker is making
a market in the Security, the fair value of such Security on such date
(as determined in good faith by the Board of Directors of the Company)
shall be used. The term "Trading Day" shall mean a day on which the
principal national securities exchange on which the Security is listed
or admitted to trading is open for the transaction of business or, if
the Security is not listed or admitted to trading on any national
securities exchange, a Business Day.
(ii) For the purpose of any computation hereunder, the
"current per share market price" of the Preferred Shares shall be
determined in accordance with the method set forth in Section 11(d)(i).
If the Preferred Shares are not publicly traded, the "current per share
market price" of the Preferred Shares shall be conclusively deemed to
be the current per share market price of the Common Shares of the
Company as determined pursuant to Section 11(d)(i) (appropriately
adjusted to reflect any stock split or similar transaction, other than
a stock dividend, occurring after the date hereof), multiplied by one
hundred. If neither the Common Shares of the Company nor the Preferred
Shares are publicly held or so listed or traded, "current per share
market price" shall mean the fair value per share as determined in good
faith by the Board of Directors of the Company, whose determination
shall be described in a statement filed with the Rights Agent.
(e) Anything herein to the contrary notwithstanding, no adjustment in
the Purchase Price shall be required unless such adjustment would require an
increase or decrease of at least 1% in the Purchase Price; provided, however,
that any adjustments which by reason of this Section 11(e) are not required to
be made shall be carried forward and taken into account in any subsequent
adjustment. All calculations under this Section 11 shall be made to the nearest
cent or to the nearest one one-millionth of a Preferred Share or one
ten-thousandth of any other share or
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<PAGE> 23
security, as the case may be. Notwithstanding the first sentence of this Section
11(e), any adjustment required by this Section 11 shall be made no later than
the earlier of (i) three years from the date of the transaction which requires
such adjustment or (ii) the date of the expiration of the right to exercise any
Rights.
(f) If as a result of an adjustment made pursuant to Section 11(a) or
Section 13(a) hereof, the holder of any Right thereafter exercised shall become
entitled to receive any shares of capital stock of the Company other than
Preferred Shares, thereafter the number of such other shares so receivable upon
exercise of any Right shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions with
respect to the Preferred Shares contained in this Section 11, and the provisions
of Sections 7, 9, 10, 13 and 14 with respect to the Preferred Shares shall apply
on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one one-hundredths of a
Preferred Share purchasable from time to time hereunder upon exercise of the
Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as provided in
Section 11(i), upon each adjustment of the Purchase Price as a result of the
calculations made in Sections 11(b) and (c), each Right outstanding immediately
prior to the making of such adjustment shall thereafter evidence the right to
purchase, at the adjusted Purchase Price, that number of one one-hundredths of a
Preferred Share (calculated to the nearest one one-millionth of a Preferred
Share) obtained by (i) multiplying (x) the number of one one-hundredths of a
share covered by a Right immediately prior to this adjustment by (y) the
Purchase Price in effect immediately prior to such adjustment of the Purchase
Price and (ii) dividing the product so obtained by the Purchase Price in effect
immediately after such adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any adjustment of the
Purchase Price to adjust the number of Rights, in substitution for any
adjustment in the number of one one-hundredths of a Preferred Share purchasable
upon the exercise of a Right. Each of the Rights outstanding after such
adjustment of the number of Rights shall be exercisable for the number of one
one-hundredths of a Preferred Share for which a Right was exercisable
immediately prior to such adjustment. Each Right held of record prior to such
adjustment of the number of Rights shall become that number of Rights
(calculated to the nearest one ten-thousandth) obtained by dividing the Purchase
Price in effect immediately prior to adjustment of the Purchase Price by the
Purchase Price in effect immediately after adjustment of the Purchase Price. The
Company shall make a public announcement of its election to adjust the number of
Rights, indicating the record date for the adjustment, and, if known at the
time, the amount of the adjustment to be made. This record date may be the date
on which the Purchase Price is adjusted or any day thereafter, but, if the Right
Certificates have been issued, shall be at least 10 days later than the date of
the public announcement. If Right Certificates have been issued, upon each
adjustment of the number of
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<PAGE> 24
Rights pursuant to this Section 11(i), the Company shall, as promptly as
practicable, cause to be distributed to holders of record of Right Certificates
on such record date Right Certificates evidencing, subject to Section 14 hereof,
the additional Rights to which such holders shall be entitled as a result of
such adjustment, or, at the option of the Company, shall cause to be distributed
to such holders of record in substitution and replacement for the Right
Certificates held by such holders prior to the date of adjustment, and upon
surrender thereof, if required by the Company, new Right Certificates evidencing
all the Rights to which such holders shall be entitled after such adjustment.
Right Certificates so to be distributed shall be issued, executed and
countersigned in the manner provided for herein and shall be registered in the
names of the holders of record of Right Certificates on the record date
specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or
the number of one one-hundredths of a Preferred Share issuable upon the exercise
of the Rights, the Right Certificates theretofore and thereafter issued may
continue to express the Purchase Price and the number of one one-hundredths of a
Preferred Share which were expressed in the initial Right Certificates issued
hereunder.
(k) Before taking any action that would cause an adjustment reducing
the Purchase Price below one one-hundredth of the then par value, if any, of the
Preferred Shares issuable upon exercise of the Rights, the Company shall take
any corporate action which may, in the opinion of its counsel, be necessary in
order that the Company may validly and legally issue fully paid and
nonassessable Preferred Shares at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuing to the holder of any Right exercised after such record date of
the Preferred Shares and other capital stock or securities of the Company, if
any, issuable upon such exercise over and above the Preferred Shares and other
capital stock or securities of the Company, if any, issuable upon such exercise
on the basis of the Purchase Price in effect prior to such adjustment; provided,
however, that the Company shall deliver to such holder a due bill or other
appropriate instrument evidencing such holder's right to receive such additional
shares upon the occurrence of the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary notwithstanding, the
Company shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this Section 11, as and to
the extent that it in its sole discretion shall determine to be advisable in
order that any consolidation or subdivision of the Preferred Shares, issuance
wholly for cash of any Preferred Shares at less than the current market price,
issuance wholly for cash of Preferred Shares or securities which by their terms
are convertible into or exchangeable for Preferred Shares, dividends on
Preferred Shares payable in Preferred Shares or issuance of rights, options or
warrants referred to hereinabove in Section 11(b), hereafter made by the Company
to holders of its Preferred Shares shall not be taxable to such stockholders.
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<PAGE> 25
(n) In the event that at any time after the date of this Agreement and
prior to the Distribution Date, the Company shall effect a subdivision,
combination or consolidation of the Common Shares (by reclassification or
otherwise, other than by payment of dividends in Common Shares) into a greater
or lesser number of Common Shares, then in any such case (i) the number of one
one-hundredths of a Preferred Share purchasable after such event upon proper
exercise of each Right shall be determined by multiplying the number of one
one-hundredths of a Preferred Share so purchasable immediately prior to such
event by a fraction, the numerator of which is the number of Common Shares
outstanding immediately before such event, and the denominator of which is the
number of Common Shares outstanding immediately after such event, and (ii) each
Common Share outstanding immediately after such event shall have issued with
respect to it that number of Rights which each Common Share outstanding
immediately prior to such event had issued with respect to it. The adjustments
provided for in this Section 11(n) shall be made successively whenever such a
subdivision, combination or consolidation is effected.
(o) So long as the shares issuable upon the exercise of the Rights may
be listed on any national securities exchange, the Company shall use its best
efforts to cause, from and after such time as the Rights become exercisable, all
shares reserved for such issuance to be listed on such exchange upon official
notice of issuance upon such exercise.
(p) The Company shall use its best efforts to (i) file, as soon as
practicable following the first occurrence of a Triggering Event, a registration
statement under the Securities Act with respect to the securities purchasable
upon exercise of the Rights on an appropriate form, (ii) cause such registration
statement to become effective as soon as practicable after such filing and (iii)
cause such registration statement to remain effective (with a prospectus at all
times meeting the requirements of the Securities Act) until the date of the
expiration of the Rights. The Company will also take such action as may be
appropriate under the blue sky laws of the various states. The Company may
temporarily suspend, for a period of time not to exceed 90 days, the
exercisability of the Rights in order to prepare and file such registration
statement or in order to comply with such blue sky laws. Upon any such
suspension, the Company shall issue a public announcement stating that the
exercisability of the Rights has been temporarily suspended.
Section 12. Certificate of Adjusted Purchase Price or Number of Shares.
Whenever an adjustment is made as provided in Section 11 or Section 13 hereof,
the Company shall promptly (a) prepare a certificate setting forth such
adjustment, and a brief statement of the facts accounting for such adjustment,
(b) promptly file with the Rights Agent and with each transfer agent for the
Common Shares or the Preferred Shares a copy of such certificate and (c) mail a
brief summary thereof to each holder of a Right Certificate in accordance with
Section 25 hereof. The Rights Agent shall be fully protected in relying on any
such certificate and on any adjustment therein contained and may assume that no
adjustment has been made unless and until it shall have received such
certificate.
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<PAGE> 26
Notwithstanding the foregoing sentence, the failure of the Company to
make such certificate or give such notice shall not affect the validity or the
force or effect of the requirement for such adjustment. Any adjustment to be
made pursuant to Section 11 or Section 13 shall be effective as of the date of
the event giving rise to such adjustment.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or
Earning Power.
(a) If after the Shares Acquisition Date, directly or indirectly, (x)
the Company shall consolidate with, or merge with and into, any other Person,
(y) any Person shall consolidate with the Company, or merge with and into the
Company and the Company shall be the continuing or surviving corporation of such
merger and, in connection with such merger, all or part of the Common Shares
shall be changed into or exchanged for stock or other securities of any other
Person (or the Company) or cash or any other property, or (z) the Company shall
sell or otherwise transfer (or one or more of its Subsidiaries shall sell or
otherwise transfer), in one or more transactions, assets or earning power
aggregating 50% or more of the assets or earning power of the Company and its
Subsidiaries (taken as a whole) to any Person or Persons other than the Company
or one or more of its wholly-owned Subsidiaries, then, and in each such case,
proper provision shall be made so that (i) each holder of a Right (except as
otherwise provided herein) shall thereafter have the right to receive, upon the
exercise thereof at a price equal to the then current Purchase Price multiplied
by the number of one one-hundredths of a Preferred Share for which a Right is
then exercisable, in accordance with the terms of this Agreement and in lieu of
Preferred Shares, such number of validly authorized and issued, fully paid,
nonassessable and freely tradeable Common Shares of the Principal Party (as
hereinafter defined), free and clear of all liens, rights of call or first
refusal, encumbrances or other adverse claims, as shall equal the result
obtained by (A) multiplying the then current Purchase Price by the number of one
one-hundredths of a Preferred Share for which a Right is then exercisable (or,
if such Right is not then exercisable for a number of one one-hundredths of a
Preferred Share, the number of such fractional shares for which it was
exercisable immediately prior to an event described under Section 11(a)(ii)
hereof) and dividing that product by (B) 50% of the then current per share
market price of the Common Shares of such Principal Party (determined pursuant
to Section 11(d) hereof) on the date of consummation of such consolidation,
merger, sale or transfer; (ii) such Principal Party shall thereafter be liable
for, and shall assume, by virtue of such consolidation, merger, sale or
transfer, or otherwise, all the obligations and duties of the Company pursuant
to this Agreement; (iii) the term "Company" shall thereafter be deemed to refer
to such Principal Party and (iv) such Principal Party shall take such steps
(including, but not limited to, the reservation of a sufficient number of its
Common Shares in accordance with Section 9 hereof) in connection with such
consummation as may be necessary to assure that the provisions hereof shall
thereafter be applicable, as nearly as reasonably may be, in relation to its
Common Shares thereafter deliverable upon the exercise of the Rights.
(b) "Principal Party" shall mean:
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(i) In the case of any transaction described in (x) or (y) of
the first sentence of Section 13(a), the Person that is the issuer of
any securities into which Common Shares of the Company are converted in
such merger or consolidation, and if no securities are so issued, the
Person that is the surviving entity of such merger or consolidation
(including the Company if applicable); and
(ii) in the case of any transaction described in (z) of the
first sentence in Section 13(a), the Person that is the party receiving
the greatest portion of the assets or earning power transferred
pursuant to such transaction or transactions;
provided, however, that in any such case described in clauses (b)(i) and
(b)(ii): (1) if the Common Shares of such Person are not at such time and have
not been continuously over the preceding 12-month period registered under
Section 12 of the Exchange Act, and such Person is a direct or indirect
Subsidiary of another Person the Common Shares of which is and has been so
registered, "Principal Party" shall refer to such other Person; (2) in case such
Person is a Subsidiary, directly or indirectly, of more than one Person, the
Common Shares of two or more of which are and have been so registered,
"Principal Party" shall refer to whichever of such Persons is the issuer of the
Common Shares having the greatest aggregate market value; and (3) in case such
Person is owned, directly or indirectly, by a joint venture formed by two or
more Persons that are not owned, directly or indirectly, by the same Person, the
rules set forth in (1) and (2) above shall apply to each of the chains of
ownership having an interest in such joint venture as if such party were a
"Subsidiary" of both or all of such joint venturers and the Principal Parties in
each such chain shall bear the obligations set forth in this Section 13 in the
same ratio as their direct or indirect interests in such Person bear to the
total of such interests.
(c) The Company shall not consummate any such consolidation, merger,
sale or transfer unless the Principal Party shall have sufficient Common Shares
authorized to permit the full exercise of the Rights and prior thereto the
Company and such Principal Party shall have executed and delivered to the Rights
Agent a supplemental agreement providing for the terms set forth in paragraphs
(a) and (b) of this Section 13 and further providing that, as soon as
practicable after the date of any consolidation, merger or sale of assets
mentioned in paragraph (a) of this Section 13, the Principal Party will:
(i) prepare and file a registration statement under the
Securities Act, with respect to the Rights and the securities
purchasable upon exercise of the Rights on an appropriate form, and
will use its best efforts to cause such registration statement to (A)
become effective as soon as practicable after such filing and (B)
remain effective (with a prospectus at all times meeting the
requirements of the Securities Act) until the Expiration Date;
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(ii) deliver to holders of the Rights historical financial
statements for the Principal Party and each of its Affiliates which
comply in all respects with the requirements for registration on Form
10 under the Exchange Act (whether or not the Principal Party would
otherwise be required to file such form);
(iii) take such actions as may be necessary or appropriate
under the blue sky laws of the various states;
(iv) use its best efforts, if the Common Stock of the
Principal party shall be listed or admitted to trading on the Nasdaq
National Market or on a national securities exchange, to list or admit
to trading the Rights and the securities purchasable upon exercise of
the Rights on the Nasdaq National Market or such securities exchange;
and
(v) obtain waivers of any rights of first refusal or
preemptive rights in respect of Common Stock of the Principal Party
subject to purchase upon exercise of outstanding rights.
(d) The provisions of this Section 13 shall similarly apply to
successive mergers or consolidations or sales or other transfers. In the event
that one of the transactions described in Section 13(a) shall occur at any time
after the occurrence of a transaction described in Section 11(a)(ii) hereof, the
Rights which have not theretofore been exercised shall thereafter become
exercisable in the manner described in Section 13(a).
(e) In no event shall the Rights Agent have liability in respect of any
such Principal Party transactions, including, without limitation, the propriety
thereof. The Rights Agent may rely and be fully protected in relying upon a
certificate of the Company stating that the provisions of this Section 13 have
been fulfilled. The Rights Agent shall not be obligated to enter into any
supplemental agreement referenced in Section 13(c) if such supplemental
agreement would change or increase the duties, liabilities or obligations of the
Rights Agent hereunder.
Section 14. Fractional Rights and Fractional Shares.
(a) The Company shall not be required to issue fractional Rights or to
distribute Right Certificates which evidence fractional Rights. In lieu of such
fractional Rights, there may be paid to the registered holders of the Right
Certificates with regard to which such fractional Rights would otherwise be
issuable, an amount in cash equal to the same fraction of the current market
value of a whole Right. For the purposes of this Section 14(a), the current
market value of a whole Right shall be the closing price of the Rights for the
Trading Day immediately prior to the date on which such fractional Rights would
have been otherwise issuable. The closing price of the Rights for any day shall
be the last sale price, regular way, or, in case no such sale takes place on
such day, the average of the closing bid and asked prices, regular way, in
either case as reported in the principal consolidated transaction reporting
system with respect to securities listed
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or admitted to trading on the New York Stock Exchange or, if the Rights are not
listed or admitted to trading on the New York Stock Exchange, as reported in the
principal consolidated transaction reporting system with respect to securities
listed on the principal national securities exchange on which the Rights are
listed or admitted to trading, or if the Rights are not listed or admitted to
trading on any national securities exchange, the last quoted price or, if not so
quoted, the average of the high bid and low asked prices in the over-the-counter
market, as reported by Nasdaq or such other system then in use or, if on any
such date the Rights are not quoted by any such organization, the average of the
closing bid and asked prices as furnished by a professional market maker making
a market in the Rights selected by the Board of Directors of the Company. If on
any such date no such market maker is making a market in the Rights, the fair
value of the Rights on such date as determined in good faith by the Board of
Directors of the Company shall be used.
(b) The Company shall not be required to issue fractions of Preferred
Shares (other than fractions which are integral multiples of one one-hundredth
of a Preferred Share) upon exercise of the Rights or to distribute certificates
which evidence fractional Preferred Shares (other than fractions which are
integral multiples of one one-hundredth of a Preferred Share). Fractions of
Preferred Shares in integral multiples of one one-hundredth of a Preferred Share
may, at the election of the Company, be evidenced by depositary receipts,
pursuant to an appropriate agreement between the Company and a depositary
selected by it; provided, that such agreement shall provide that the holders of
such depositary receipts shall have all the rights, privileges and preferences
to which they are entitled as beneficial owners of the Preferred Shares
represented by such depositary receipts. In lieu of fractional Preferred Shares
that are not integral multiples of one one-hundredth of a Preferred Share, the
Company may pay to the registered holders of Right Certificates at the time such
Rights are exercised as herein provided an amount in cash equal to the same
fraction of the current market value of one one-hundredth of a Preferred Share.
For the purposes of this Section 14(b), the current market value of one
one-hundredth of a Preferred Share shall be one one-hundredth of the closing
price of a Preferred Share (as determined pursuant to the second sentence of
Section 11(d)(I) hereof) for the Trading Day immediately prior to the date of
such exercise.
(c) Following the occurrence of a Triggering Event, the Company shall
not be required to issue fractions of Common Shares upon exercise of the Rights
or to distribute certificates which evidence fractional Common Shares. In lieu
of fractional Common Shares, the Company may pay to the registered holders of
Right Certificates at the time such Rights are exercised as herein provided an
amount in cash equal to the same fraction of the current market value of one
Common Share. For purposes of this Section 14(c), the current market value of
one Common Share shall be the closing price of one Common Share (as determined
pursuant to the second sentence of Section 11(d)(i) hereof) for the Trading Day
immediately prior to the date of such exercise.
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(d) The holder of a Right by the acceptance of the Right expressly
waives his right to receive any fractional Rights or any fractional shares upon
exercise of a Right (except as provided above).
Section 15. Rights of Action. All rights of action in respect of this
Agreement, excepting the rights of action given to the Rights Agent under
Section 18 hereof, are vested in the respective registered holders of the Right
Certificates (and, prior to the Distribution Date, the registered holders of the
Common Shares); and any registered holder of any Right Certificate (or, prior to
the Distribution Date, of the Common Shares), without the consent of the Rights
Agent or of the holder of any other Right Certificate (or, prior to the
Distribution Date, of the Common Shares), may, in his own behalf and for his own
benefit, enforce, and may institute and maintain any suit, action or proceeding
against the Company to enforce, or otherwise act in respect of, his right to
exercise the Rights evidenced by such Right Certificate in the manner provided
in such Right Certificate and in this Agreement. Without limiting the foregoing
or any remedies available to the holders of Rights, it is specifically
acknowledged that the holders of Rights would not have an adequate remedy at law
for any breach of this Agreement and will be entitled to specific performance of
the obligations under, and injunctive relief against actual or threatened
violations of the obligations of any Person subject to, this Agreement.
Section 16. Agreement of Right Holders. Every holder of a Right, by
accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be transferable
only in connection with the transfer of the Common Shares;
(b) after the Distribution Date, the Right Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the office of the Rights Agent designated for such purposes, duly endorsed or
accompanied by a proper instrument of transfer and with appropriate forms and
certificates fully executed;
(c) the Company and the Rights Agent may deem and treat the person in
whose name the Right Certificate (or, prior to the Distribution Date, the
associated Common Shares certificate) is registered as the absolute owner
thereof and of the Rights evidenced thereby (notwithstanding any notations of
ownership or writing on the Right Certificates or the associated Common Shares
certificate made by anyone other than the Company or the Rights Agent) for all
purposes whatsoever, and neither the Company nor the Rights Agent shall be
affected by any notice to the contrary; and
(d) notwithstanding anything in this Agreement to the contrary, neither
the Company nor the Rights Agent shall have any liability to any holder of a
Right or any other Person as a result of its inability to perform any of its
obligations under this Agreement by reason of any
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<PAGE> 31
preliminary or permanent injunction or other order, decree or ruling issued by a
court of competent jurisdiction or by a governmental, regulatory or
administrative agency or commission, or any statute, rule, regulation or
executive order promulgated or enacted by any governmental authority prohibiting
or otherwise restraining performance of such obligation.
Section 17. Right Certificate Holder Not Deemed a Stockholder. No
holder, as such, of any Right Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the Preferred Shares or any
other securities of the Company which may at any time be issuable on the
exercise of the Rights represented thereby, nor shall anything contained herein
or in any Right Certificate be construed to confer upon the holder of any Right
Certificate, as such, any of the rights of a stockholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
stockholders (except as provided in Section 25 hereof), or to receive dividends
or subscription rights, or otherwise, until the Right or Rights evidenced by
such Right Certificate shall have been exercised in accordance with the
provisions hereof.
Section 18. Concerning the Rights Agent. The Company agrees to pay to
the Rights Agent reasonable compensation for all services rendered by it
hereunder and, from time to time, on demand of the Rights Agent, its reasonable
expenses and counsel fees and other disbursements (including any taxes other
than income taxes) incurred in the administration and execution of this
Agreement and the exercise and performance of its duties hereunder. The Company
also agrees to indemnify the Rights Agent for, and to hold it harmless against,
any loss, liability, or expense, incurred without negligence, bad faith or
willful misconduct on the part of the Rights Agent, for anything done or omitted
by the Rights Agent in connection with the acceptance and administration of this
Agreement, including the costs and expenses of defending against any claim of
liability arising, directly or indirectly, therefrom. The reasonable costs and
expenses incurred in enforcing this indemnity shall be paid by the Company.
The Rights Agent shall be protected and shall incur no liability for,
or in respect of any action taken, suffered or omitted by it in connection with,
its administration of this Agreement in reliance upon any Right Certificate or
certificate for the Preferred Shares or Common Shares or for other securities of
the Company, instrument of assignment or transfer, power of attorney,
endorsement, affidavit, letter, notice, direction, consent, certificate,
statement, or other paper or document believed by it to be genuine and to be
signed, executed and, where necessary, verified or acknowledged, by the proper
person or persons, or otherwise upon the advice of counsel as set forth in
Section 20 hereof.
Section 19. Merger or Consolidation or Change of Name of Rights Agent.
Any corporation into which the Rights Agent or any successor Rights Agent may be
merged or with which it may be consolidated, or any corporation resulting from
any merger or consolidation to which the Rights Agent or any successor Rights
Agent shall be a party, or any corporation succeeding to the stock transfer or
corporate trust business of the Rights Agent or any successor
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<PAGE> 32
Rights Agent, shall be the successor to the Rights Agent under this Agreement
without the execution or filing of any paper or any further act on the part of
any of the parties hereto; provided, that such corporation would be eligible for
appointment as a successor Rights Agent under the provisions of Section 21
hereof. In case at the time such successor Rights Agent shall succeed to the
agency created by this Agreement, any of the Right Certificates shall have been
countersigned but not delivered, any such successor Rights Agent may adopt the
countersignature of the predecessor Rights Agent and deliver such Right
Certificates so countersigned; and in case at that time any of the Right
Certificates shall not have been countersigned, any successor Rights Agent may
countersign such Right Certificates either in the name of the predecessor Rights
Agent or in the name of the successor Rights Agent; and in all such cases such
Right Certificates shall have the full force provided in the Right Certificates
and in this Agreement.
In case at any time the name of the Rights Agent shall be changed and
at such time any of the Right Certificates shall have been countersigned but not
delivered, the Rights Agent may adopt the countersignature under its prior name
and deliver Right Certificates so countersigned; and in case at that time any of
the Right Certificates shall not have been countersigned, the Rights Agent may
countersign such Right Certificates either in its prior name or in its changed
name; and in all such cases such Right Certificates shall have the full force
provided in the Right Certificates and in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Right Certificates,
by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel satisfactory to it
(who may be legal counsel for the Company), and the opinion of such counsel
shall be full and complete authorization and protection to the Rights Agent, and
the Rights Agent shall incur no liability or responsibility to the Company or to
any holder of any Right Certificate in respect of any action taken or omitted by
it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this Agreement the
Rights Agent shall deem it necessary or desirable that any fact or matter be
proved or established by the Company prior to taking or suffering or omitting
action hereunder, such fact or matter (unless other evidence in respect thereof
be herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by any one of the Chairman of the Board, the
Chief Executive Officer, the President, any Vice President, the Treasurer or the
Secretary of the Company and delivered to the Rights Agent; and such certificate
shall be full authorization to the Rights Agent for any action taken, suffered
or omitted in good faith by it under the provisions of this Agreement in
reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder to the Company only for,
and shall indemnify and hold harmless the Company from and against, any and all
losses, liabilities, costs,
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damages and expenses (including attorneys' fees) arising out of or in connection
with, the Rights Agent's negligence, bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of any of the
statements of fact or recitals contained in this Agreement or in the Right
Certificates (except its countersignature thereof) or be required to verify the
same, but all such statements and recitals are and shall be deemed to have been
made by the Company only.
(e) The Rights Agent shall not be under any responsibility in respect
of the validity of this Agreement or the execution and delivery hereof (except
the due execution hereof by the Rights Agent) or in respect of the validity or
execution of any Right Certificate (except its countersignature thereof); nor
shall it be responsible for any breach by the Company of any covenant or
condition contained in this Agreement or in any Right Certificate; nor shall it
be responsible for any change in the exercisability of the Rights (including the
Rights becoming void pursuant to Section 7(e) hereof) or any adjustment in the
terms of the Rights (including the manner, method or amount thereof) provided
for in Section 3, 11, 13, 23 or 24, or the ascertaining of the existence of
facts that would require any such change or adjustment (except with respect to
the exercise of Rights evidenced by Right Certificates after receipt of a
certificate furnished pursuant to Section 12 describing a change or adjustment);
nor shall it by any act hereunder be deemed to make any representation or
warranty as to the authorization or reservation of any Preferred Shares or
Common Shares to be issued pursuant to this Agreement or any Right Certificate
or as to whether any Preferred Shares or Common Shares will, when issued, be
validly authorized and issued, fully paid and nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be required
by the Rights Agent for the carrying out or performing by the Rights Agent of
the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from any
one of the Chairman of the Board, the Chief Executive Officer, the President,
any Vice President, the Secretary or the Treasurer of the Company, and to apply
to such officers for advice or instructions in connection with its duties, and
it shall not be liable for any action taken or suffered by it in good faith in
accordance with instructions of any such officer or for any delay in acting
while waiting for those instructions. Any application by the Rights Agent for
written instructions from the Company may, at the option of the Rights Agent,
set forth in writing any action proposed to be taken or omitted by the Rights
Agent under this Agreement and the date on and/or after which such action shall
be taken or such omission shall be effective. The Rights Agent shall not be
liable for any action taken by, or omission of, the Rights Agent in accordance
with a proposal included in any such application on or after the date specified
in such application (which date shall not be less than five Business Days after
the date such application is given, unless any such officer shall have consented
in writing to
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<PAGE> 34
an earlier date) unless, prior to taking any such action (or the
effective date in the case of an omission), the Rights Agent shall have received
written instructions in response to such application specifying the action to be
taken or omitted.
(h) The Rights Agent and any stockholder, director, officer or employee
of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or its Subsidiaries or become pecuniarily interested
in any transaction in which the Company or its Subsidiaries may be interested,
or contract with or lend money to the Company or its Subsidiaries or otherwise
act as fully and freely as though it were not Rights Agent under this Agreement.
Nothing herein shall preclude the Rights Agent from acting in any other capacity
for the Company or its Subsidiaries or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys or agents, and the Rights Agent shall not be answerable or
accountable for any act, default, neglect or misconduct of any such attorneys or
agents or for any loss to the Company resulting from any such act, default,
neglect or misconduct, provided reasonable care was exercised in the selection
and continued employment thereof.
(j) No provision of this Agreement shall require the Rights Agent to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of its rights if
there shall be reasonable grounds for believing that repayment of such funds or
adequate indemnification against such risk or liability is not reasonably
assured to it.
(j) If, with respect to any Rights Certificate surrendered to the
Rights Agent for exercise, transfer, split up, combination or exchange, the
certificate attached to the form of assignment or form of election to purchase,
as the case may be, has either not been completed or indicates an affirmative
response to clause 1 and/or 2 thereof, the Rights Agent shall not take any
further action with respect to such requested exercise, transfer, split up,
combination or exchange without first consulting with the Company.
(k) The Rights Agent shall not be under any duty or responsibility to
ensure compliance with any applicable federal or state securities laws in
connection with the issuance, transfer or exchange of Right Certificates.
(l) The Rights Agent shall be under no obligation to institute any
action, suit or legal proceeding or to take any other action likely to involve
expense unless the Company or one or more holders of Right Certificates shall
furnish the Rights Agent with security and indemnity to its satisfaction for any
costs and expenses which may be incurred.
(m) The Rights Agent shall not be liable for failure to perform any
duties except as specifically set forth herein, and no implied covenants or
obligations shall be read into this
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<PAGE> 35
Agreement against the Rights Agent whose duties and obligations are ministerial
and shall be determined solely by the express provisions hereof.
Section 21. Change of Rights Agent. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon 30 days' notice in writing mailed to the Company and to each transfer agent
of the Common Shares or Preferred Shares by registered or certified mail, and to
the holders of the Right Certificates by first-class mail. The Company may
remove the Rights Agent or any successor Rights Agent upon 30 days' notice in
writing, mailed to the Rights Agent or successor Rights Agent, as the case may
be, and to each transfer agent of the Common Shares or Preferred Shares by
registered or certified mail, and to the holders of the Right Certificates by
first-class mail. If the Rights Agent shall resign or be removed or shall
otherwise become incapable of acting, the Company shall appoint a successor to
the Rights Agent. If the Company shall fail to make such appointment within a
period of 30 days after giving notice of such removal or after it has been
notified in writing of such resignation or incapacity by the resigning or
incapacitated Rights Agent or by the holder of a Right Certificate (who shall,
with such notice, submit his Right Certificate for inspection by the Company),
then the registered holder of any Right Certificate may apply to any court of
competent jurisdiction for the appointment of a new Rights Agent. Any successor
Rights Agent, whether appointed by the Company or by such a court, shall be a
corporation or bank organized and doing business under the laws of the United
States or of any other state of the United States, which is authorized under
such laws to exercise corporate trust or stock transfer powers and is subject to
supervision or examination by federal or state authority and which has at the
time of its appointment as Rights Agent a combined capital and surplus of at
least $100 million. After appointment, the successor Rights Agent shall be
vested with the same powers, rights, duties and responsibilities as if it had
been originally named as Rights Agent without further act or deed; but the
predecessor Rights Agent shall deliver and transfer to the successor Rights
Agent any property at the time held by it hereunder, and execute and deliver any
further assurance, conveyance, act or deed necessary for the purpose. Not later
than the effective date of any such appointment, the Company shall file notice
thereof in writing with the predecessor Rights Agent and each transfer agent of
the Common Shares or Preferred Shares, and mail a notice thereof in writing to
the registered holders of the Right Certificates. Failure to give any notice
provided for in this Section 21, however, or any defect therein, shall not
affect the legality or validity of the resignation or removal of the Rights
Agent or the appointment of the successor Rights Agent, as the case may be.
Section 22. Issuance of New Right Certificates. Notwithstanding any of
the provisions of this Agreement or of the Rights to the contrary, the Company
may, at its option, issue new Right Certificates evidencing Rights in such form
as may be approved by its Board of Directors to reflect any adjustment or change
in the Purchase Price and the number or kind or class of shares or other
securities or property purchasable under the Right Certificates made in
accordance with the provisions of this Agreement. In addition, in connection
with the issuance or sale of its Common Shares following the Distribution Date
and prior to the redemption or expiration of the Rights, the Company (a) shall,
with respect to Common Shares so issued or sold pursuant to the
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exercise of stock options or under any employee plan or arrangement, granted or
awarded prior to the Distribution Date, or upon the exercise, conversion or
exchange of securities hereinafter issued by the Company, and (b) may, in any
other case, if deemed necessary or appropriate by the Board of Directors of the
Company, issue Rights Certificates representing an appropriate number of Rights
in connection with such issuance or sale; provided, however, that (i) no such
Rights Certificate shall be issued if, and to the extent that, the Company shall
be advised by counsel that such issuance would create a significant risk of
material adverse tax consequences to the company or the Person to whom such
Rights Certificate would be issued, and (ii) no such Rights Certificate shall be
issued if, and to the extent that, appropriate adjustment shall otherwise have
been made in lieu of the issuance thereof.
Section 23. Redemption.
(a) The Board of Directors of the Company may, at its option, at any
time prior to such time as any Person becomes an Acquiring Person, redeem all
but not less than all the then outstanding Rights at a redemption price of $.01
per Right, appropriately adjusted to reflect any stock split or similar
transaction (other than a stock dividend) occurring after the date hereof (such
redemption price being hereinafter referred to as the "Redemption Price").
Notwithstanding anything contained in this Agreement to the contrary, the Rights
shall not be exercisable after the first occurrence of an event specified in
Section 11(a)(ii) until such time as the Company's right of redemption hereunder
has expired. The redemption of the Rights by the Board of Directors may be made
effective at such time, on such basis and with such conditions as the Board of
Directors in its sole discretion may establish. If redemption of the Rights is
to be effective as of a future date, the Rights shall continue to be
exercisable, subject to Section 7 hereof, until the effective date of the
redemption, provided that nothing contained herein shall preclude the Board of
Directors from subsequently causing the Rights to be redeemed at a date earlier
than the previously scheduled effective date of the redemption. The Company may,
at its option, pay the Redemption Price in cash, Common Shares (based on the
current per share market price of the Common Shares at the time of redemption)
or any other form of consideration deemed appropriate by the Board of Directors.
(b) Immediately upon the action of the Board of Directors of the
Company ordering the redemption of the Rights (or at the effective time of such
redemption established by the Board of Directors of the Company pursuant to
paragraph (a) of this Section 23), and without any further action and without
any notice, the right to exercise the Rights will terminate and the only right
thereafter of the holders of Rights shall be to receive the Redemption Price.
The Company shall promptly give public notice of any such redemption; provided,
however, that the failure to give, or any defect in, any such notice shall not
affect the validity of such redemption. Within 10 days after such action of the
Board of Directors ordering the redemption of the Rights or, if later, the
effectiveness of the redemption of the Rights pursuant to paragraph (a) of this
Section 23, the Company shall mail a notice of redemption to all the holders of
the then outstanding Rights at their last addresses as they appear upon the
registry books of the Rights Agent or, prior to the
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<PAGE> 37
Distribution Date, on the registry books of the transfer agent for the Common
Shares. Any notice which is mailed in the manner herein provided shall be deemed
given, whether or not the holder receives the notice. Each such notice of
redemption will state the method by which the payment of the Redemption Price
will be made. The Company may, at its option, discharge all of its obligations
with respect to the Rights by (i) issuing a press release announcing the manner
of redemption of the Rights, (ii) depositing with a bank or trust company having
a capital and surplus of at least $100,000,000, funds necessary for such
redemption, in trust, to be applied to the redemption of the Rights so called
for redemption and (iii) arranging for the mailing of the Redemption Price to
the registered holders of the Rights; then, and upon such action, all
outstanding Rights Certificates shall be null and void without further action by
the Company. Neither the Company nor any of its Affiliates or Associates may
redeem, acquire or purchase for value any Rights at any time in any manner other
than that specifically set forth in this Section 23, in Section 24 hereof, or in
connection with the purchase of Common Shares prior to the Distribution Date.
Section 24. Exchange.
(a) The Board of Directors of the Company may, at its option, at any
time after a Triggering Event, exchange all or part of the then outstanding and
exercisable Rights (which shall not include Rights that have become void
pursuant to the provisions of Section 7(e) hereof) for Common Shares at an
exchange ratio of one Common Share per Right, appropriately adjusted to reflect
any stock split or similar transaction (other than a stock dividend) occurring
after the date hereof (such exchange ratio being hereinafter referred to as the
"Exchange Ratio"). Notwithstanding the foregoing, the Board of Directors shall
not be empowered to effect such exchange at any time after any Person (other
than the Company, any Subsidiary of the Company, any employee benefit plan of
the Company or any such Subsidiary, or any entity holding Common Shares for or
pursuant to the terms of any such plan, or any Grandfathered Person), together
with all Affiliates and Associates of such Person, becomes the Beneficial Owner
of 50% or more of the Common Shares then outstanding.
(b) Immediately upon the action of the Board of Directors of the
Company ordering the exchange of any Rights pursuant to paragraph (a) of this
Section 24 and without any further action and without any notice, the right to
exercise such Rights shall terminate and the only right thereafter of a holder
of such Rights shall be to receive that number of Common Shares equal to the
number of such Rights held by such holder multiplied by the Exchange Ratio. The
Company shall promptly give public notice of any such exchange; provided,
however, that the failure to give, or any defect in, such notice shall not
affect the validity of such exchange. The Company promptly shall mail a notice
of any such exchange to all of the holders of such Rights at their last
addresses as they appear upon the registry books of the Rights Agent. Any notice
which is mailed in the manner herein provided shall be deemed given, whether or
not the holder receives the notice. Each such notice of exchange will state the
method by which the exchange of the Common Shares for Rights will be effected
and, in the event of any partial exchange, the number
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<PAGE> 38
of Rights which will be exchanged. Any partial exchange shall be effected pro
rata based on the number of Rights (other than Rights which have become void
pursuant to the provisions of Section 7(e) hereof) held by each holder of
Rights.
(c) In any exchange pursuant to this Section 24, the Company, at its
option, may substitute Preferred Shares (or equivalent preferred shares, as such
term is defined in Section 11(b) hereof) for Common Shares exchangeable for
Rights, at the initial rate of one one-hundredth of a Preferred Share (or
equivalent preferred share) for each Common Share, as appropriately adjusted to
reflect adjustments in the voting rights of the Preferred Shares pursuant to the
terms thereof, so that the fraction of a Preferred Share delivered in lieu of
each Common Share shall have the same voting rights as one Common Share.
(d) In the event that there shall not be sufficient Common Shares or
Preferred Shares issued but not outstanding or authorized but unissued to permit
any exchange of Rights as contemplated in accordance with this Section 24, the
Company shall take all such action as may be necessary to authorize additional
Common Shares or Preferred Shares for issuance upon exchange of the Rights.
(e) The Company shall not be required to issue fractions of Common
Shares or to distribute certificates which evidence fractional Common Shares. In
lieu of such fractional Common Shares, the Company shall pay to the registered
holders of the Right Certificates with regard to which such fractional Common
Shares would otherwise be issuable an amount in cash equal to the same fraction
of the current market value of a whole Common Share. For the purposes of this
paragraph (e), the current market value of a whole Common Share shall be the
closing price of a Common Share (as determined pursuant to the second sentence
of Section 11(d)(i) hereof) for the Trading Day immediately prior to the date of
exchange pursuant to this Section 24.
Section 25. Notice of Certain Events.
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<PAGE> 39
(a) In case the Company shall propose at any time after the
Distribution Date (i) to pay any dividend payable in stock of any class to the
holders of its Preferred Shares or to make any other distribution to the holders
of its Preferred Shares (other than a regular quarterly cash dividend), (ii) to
offer to the holders of its Preferred Shares rights or warrants to subscribe for
or to purchase any additional Preferred Shares or shares of stock of any class
or any other securities, rights or options, (iii) to effect any reclassification
of its Preferred Shares (other than a reclassification involving only the
subdivision of outstanding Preferred Shares), (iv) to effect any consolidation
or merger into or with, or to effect any sale or other transfer (or to permit
one or more of its Subsidiaries to effect any sale or other transfer), in one or
more transactions, of 50% or more of the assets or earning power of the Company
and its Subsidiaries (taken as a whole) to, any other Person, (v) to effect the
liquidation, dissolution or winding up of the Company, or (vi) to effect a
subdivision, combination or consolidation of the Common Shares (by
reclassification or otherwise, other than by payment of dividends in Common
Shares), then, in each such case, the Company shall give to each holder of a
Right Certificate, in accordance with Section 26 hereof, a notice of such
proposed action, which shall specify the record date for the purposes of such
stock dividend, or distribution of rights or warrants, or the date on which such
reclassification, consolidation, merger, sale, transfer, liquidation,
dissolution, or winding up is to take place and the date of participation
therein by the holders of the Common Shares and/or Preferred Shares, if any such
date is to be fixed, and such notice shall be so given, in the case of any
action covered by clause (i) or (ii) above, at least 10 days prior to the record
date for determining holders of the Preferred Shares for purposes of such
action, and in the case of any such other action, at least 10 days prior to the
date of the taking of such proposed action or the date of participation therein
by the holders of the Common Shares and/or Preferred Shares, whichever shall be
the earlier.
(b) In case any of the events set forth in Section 11(a)(ii) hereof
shall occur, then the Company shall, as soon as practicable thereafter, give to
each holder of a Right Certificate, in accordance with Section 26 hereof, a
notice of the occurrence of such event, which notice shall describe such event
and the consequences of such event to holders of Rights under Section 11(a)(ii)
hereof.
Section 26. Notices. Notices or demands authorized by this Agreement to
be given or made by the Rights Agent or by the holder of any Right Certificate
to or on the Company shall be sufficiently given or made if sent by first-class
mail, postage prepaid, addressed (until another address is filed in writing with
the Rights Agent) as follows:
Quotesmith.com, Inc.
8205 South Cass Avenue
Suite 102
Darien, Illinois 60561
Attention: Corporate Secretary
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<PAGE> 40
Subject to the provisions of Section 21 hereof, any notice or demand authorized
by this Agreement to be given or made by the Company or by the holder of any
Right Certificate to or on the Rights Agent shall be sent by registered or
certified mail, and shall be deemed given upon receipt, addressed (until another
address is filed in writing with the Company) as follows:
Harris Trust and Savings Bank
311 West Monroe Street
Chicago, Illinois 60606
Attention: Shareholder Services Department
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Right Certificate shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the registry
books of the Company. Notices or demands sent by mail shall be deemed given or
made three Business Days after the date they are sent.
Section 27. Supplements and Amendments. The Company may from time to
time supplement or amend this Agreement without the approval of any holders of
Right Certificates in order to cure any ambiguity, to correct or supplement any
provision contained herein which may be defective or inconsistent with any other
provisions herein, or to make any other provisions with respect to the Rights
which the Company may deem necessary or desirable, any such supplement or
amendment to be evidenced by a writing signed by the Company and the Rights
Agent; provided, however, that from and after such time as any Person becomes an
Acquiring Person, this Agreement shall not be amended in any manner which would
adversely affect the interests of the holders of Rights.
Section 28. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 29. Benefits of This Agreement. Nothing in this Agreement shall
be construed to give to any person or corporation other than the Company, the
Rights Agent and the registered holders of the Right Certificates (and, prior to
the Distribution Date, the Common Shares) any legal or equitable right, remedy
or claim under this Agreement; but this Agreement shall be for the sole and
exclusive benefit of the Company, the Rights Agent and the registered holders of
the Right Certificates (and, prior to the Distribution Date, the Common Shares).
Section 30. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated;
provided, however, that notwithstanding anything in this Agreement to the
contrary, if any such term,
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<PAGE> 41
provision, covenant or restriction is held by such court or authority to be
invalid, void or unenforceable and the Board of Directors of the Company
determines in its good faith judgment that severing the invalid language from
this Agreement would adversely affect the purpose or effect of this Agreement,
the right of redemption set forth in Section 23 hereof shall be reinstated and
shall not expire until the Close of Business on the tenth day following the date
of such determination by the Board of Directors of the Company.
Section 31. Governing Law. This Agreement and each Right Certificate
issued hereunder shall be deemed to be a contract made under the laws of the
State of Delaware and for all purposes shall be governed by and construed in
accordance with the laws of such State applicable to contracts to be made and
performed entirely within such State.
Section 32. Counterparts. This Agreement may be executed in any number
of counterparts, and each of such counterparts shall for all purposes be deemed
to be an original, and all such counterparts shall together constitute but one
and the same instrument.
Section 33. Descriptive Headings. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
Section 34. Determinations and Actions by the Board of Directors. The
Board of Directors of the Company shall have the exclusive power and authority
to administer this Agreement and to exercise all rights and powers specifically
granted to the Board or the Company or as may be necessary or advisable in the
administration of this Agreement, including, without limitation, the right and
power to (i) interpret the provisions of this Agreement, and (ii) make all
determinations deemed necessary or advisable for the administration of this
Agreement (including a determination to redeem or not redeem the Rights or to
amend the Agreement). All such actions, interpretations and determinations
(including, for purpose of clause (y) below, all omissions with respect to the
foregoing) which are done or made by the Board in good faith, shall (x) be
final, conclusive and binding on the Company, the Rights Agent, the holders of
the Right Certificates and all other parties, and (y) not subject the Board of
Directors to any liability to the holders of the Right Certificates.
[Signatures appear on the following page]
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<PAGE> 42
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and attested, all as of the day and year first above written.
Attest: QUOTESMITH.COM, INC.
By: By:
------------------------------------- ---------------------------
Title: Corporate Secretary Name:
----------------------
Title:
---------------------
Attest: HARRIS TRUST AND SAVINGS BANK
By: By:
------------------------------------- ---------------------------
Title: Name:
----------------------
Title:
---------------------
<PAGE> 1
EXHIBIT 4.3(a)
FORM OF
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS
OF SERIES A PARTICIPATING PREFERRED STOCK
of
QUOTESMITH.COM, INC.
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
We, Robert S. Bland, Chairman, President and Chief Executive Officer,
and Thomas A. Munro, Secretary of Quotesmith.com, Inc., a corporation organized
and existing under the General Corporation Law of the State of Delaware (the
"Corporation"), in accordance with the provisions of Section 103 thereof, DO
HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors by
the Certificate of Incorporation of the Corporation, the Board of Directors on
June __, 1999 adopted the following resolution creating a series of 300,000
shares of preferred stock designated as Series A Participating Preferred Stock:
RESOLVED, that pursuant to the authority vested in the Board of
Directors of the Corporation in accordance with the provisions of its
Certificate of Incorporation, as amended, a series of preferred stock, par value
$.001 per share, of the Corporation (such preferred stock being herein referred
to as "Preferred Stock," which term shall include any additional shares of
preferred stock of the same class heretofore or hereafter authorized to be
issued by the Corporation), consisting of 300,000 shares is hereby created, and
the voting powers, preferences and relative, participating, optional or other
special rights, and the qualifications, limitations or restrictions thereof, are
as follows:
Section 1. Designation and Amount. There shall be a series of Preferred
Stock of the Corporation which shall be designated as "Series A Participating
Preferred Stock," par value $.001 per share (hereinafter called "Series A
Preferred Stock"), and the number of shares constituting such series shall be
300,000. Such number of shares may be increased or decreased by resolution of
the Board of Directors and by the filing of a certificate pursuant to the
provisions of the General Corporation Law of the State of Delaware stating that
such increase or reduction has been so authorized; provided, however, that no
decrease shall reduce the number of shares of Series A Preferred Stock to a
number less than that of the shares then outstanding plus the number of shares
of Series A Preferred Stock issuable upon exercise of outstanding rights,
options or warrants or upon conversion of outstanding securities issued by the
Corporation.
<PAGE> 2
Section 2. Dividends and Distributions.
(A) Subject to the prior and superior rights of the holders of any
shares of any series of Preferred Stock ranking prior and superior to the shares
of Series A Preferred Stock with respect to dividends, the holders of shares of
Series A Preferred Stock shall be entitled to receive, when, as and if declared
by the Board of Directors out of funds legally available for the purpose,
quarterly dividends payable in cash to holders of record on the last business
day of March, June, September and December in each year (each such date being
referred to herein as a "Quarterly Dividend Payment Date"), commencing on the
first Quarterly Dividend Payment Date after the first issuance of a share or
fraction of a share of Series A Preferred Stock, in an amount per share (rounded
to the nearest cent) equal to the greater of (a) $1.00 or (b) subject to the
provision for adjustment hereinafter set forth, 100 times the aggregate per
share amount of all cash dividends, and 100 times the aggregate per share amount
(payable in kind) of all non-cash dividends or other distributions other than a
dividend payable in shares of Common Stock (hereinafter defined) or a
subdivision of the outstanding shares of Common Stock (by reclassification or
otherwise), declared on the Common Stock, par value $.001 per share, of the
Corporation (the "Common Stock") since the immediately preceding Quarterly
Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment
Date, since the first issuance of any share or fraction of a share of Series A
Preferred Stock. In the event the Corporation shall at any time following June
__, 1999 effect a subdivision, split, combination or consolidation of the Common
Stock (by reclassification or otherwise than by payment of dividends in Common
Stock), then in each such case the amount to which holders of shares of Series A
Preferred Stock were entitled immediately prior to such event under clause (b)
of the preceding sentence shall be adjusted by multiplying each such amount by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
(B) The Corporation shall declare a dividend or distribution on the
Series A Preferred Stock as provided in paragraph (A) above at the time it
declares a dividend or distribution on the Common Stock (other than a dividend
payable in shares of Common Stock).
(C) No dividend or distribution (other than a dividend payable in
shares of Common Stock) shall be paid or payable to the holders of shares of
Common Stock unless, prior thereto, all accrued but unpaid dividends to the date
of such dividend or distribution shall have been paid to the holders of shares
of Series A Preferred Stock.
<PAGE> 3
(D) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares of Series A Preferred Stock, unless
the date of issue of such shares is prior to the record date for the first
Quarterly Dividend Payment Date, in which case dividends on such shares shall
begin to accrue from the date of issue of such shares, or unless the date of
issue is a Quarterly Dividend Payment Date or is a date after the record date
for the determination of holders of shares of Series A Preferred Stock entitled
to receive a quarterly dividend and before such Quarterly Dividend Payment Date,
in either of which events such dividends shall begin to accrue and be cumulative
from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall
not bear interest. Dividends paid on the shares of Series A Preferred Stock in
an amount less than the total amount of such dividends at the time accrued and
payable on such shares shall be allocated pro rata on a share-by-share basis
among all such shares at the time outstanding. The Board of Directors may fix a
record date for the determination of holders of shares of Series A Preferred
Stock entitled to receive payment of a dividend or distribution declared
thereon, which record date shall be no more than 30 days prior to the date fixed
for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series A Preferred
Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each
one one-hundredth of a share of Series A Preferred Stock shall entitle the
holder thereof to one vote on all matters submitted to a vote of the
stockholders of the Corporation. In the event the Corporation shall at any time
following June __, 1999 effect a subdivision, split, combination or
consolidation of the Common Stock (by reclassification or otherwise than by
payment of dividends in Common Stock), then in each such case the number of
votes per share to which holders of shares of Series A Preferred Stock were
entitled immediately prior to such event shall be adjusted by multiplying such
number by a fraction the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.
(B) Except as otherwise provided herein or by law, the holders of
shares of Series A Preferred Stock and the holders of shares of Common Stock and
any other capital stock of the Corporation having general voting rights shall
vote together as one class on all matters submitted to a vote of stockholders of
the Corporation.
(C) (i) Whenever, at any time or times, dividends payable on any share
or shares of Series A Preferred Stock shall be in arrears in an amount
equal to at least six full quarterly dividends (whether or not declared
and whether or not consecutive), the holders of record of the
outstanding Preferred Stock shall have the exclusive right, voting
separately as a single class, to elect two directors of the Corporation
at a special meeting of stockholders of the Corporation or at the
Corporation's next annual meeting of stockholders, and at each
subsequent annual meeting of stockholders, as provided below. At
elections for such directors, the holders of shares of Series A
Preferred Stock shall be entitled to cast one vote for each one
one-hundredth of a share of Series A Preferred Stock held.
<PAGE> 4
(ii) Upon the vesting of such right of the holders of the
Preferred Stock, the maximum authorized number of members of the Board
of Directors shall automatically be increased by two and the two
vacancies so created shall be filled by vote of the holders of the
outstanding Preferred Stock as hereinafter set forth. A special meeting
of the stockholders of the Corporation then entitled to vote shall be
called by the Chairman or the President or the Secretary of the
Corporation, if requested in writing by the holders of record of not
less than 10% of the Preferred Stock then outstanding. At such special
meeting, or, if no such special meeting shall have been called, then at
the next annual meeting of stockholders of the Corporation, the holders
of the shares of the Preferred Stock shall elect, voting as above
provided, two directors of the Corporation to fill the aforesaid
vacancies created by the automatic increase in the number of members of
the Board of Directors. At any and all such meetings for such election,
the holders of a majority of the outstanding shares of the Preferred
Stock shall be necessary to constitute a quorum for such election,
whether present in person or by proxy, and such two directors shall be
elected by the vote of at least a plurality of shares held by such
stockholders present or represented at the meeting. Any director
elected by holders of shares of the Preferred Stock pursuant to this
Section may be removed at any annual or special meeting, by vote of a
majority of the stockholders voting as a class who elected such
director, with or without cause. In case any vacancy shall occur among
the directors elected by the holders of the Preferred Stock pursuant to
this Section, such vacancy may be filled by the remaining director so
elected, or his successor then in office, and the director so elected
to fill such vacancy shall serve until the next meeting of stockholders
for the election of directors. After the holders of the Preferred Stock
shall have exercised their right to elect Directors in any default
period and during the continuance of such period, the number of
Directors shall not be further increased or decreased except by vote of
the holders of Preferred Stock as herein provided or pursuant to the
rights of any equity securities ranking senior to or pari passu with
the Series A Preferred Stock.
(iii) The right of the holders of the Preferred Stock, voting
separately as a class, to elect two members of the Board of Directors
of the Corporation as aforesaid shall continue until, and only until,
such time as all arrears in dividends (whether or not declared) on the
Preferred Stock shall have been paid or declared and set apart for
payment, at which time such right shall terminate, except as herein or
by law expressly provided, subject to revesting in the event of each
and every subsequent default of the character above-mentioned. Upon any
termination of the right of the holders of the shares of the Preferred
Stock as a class to vote for directors as herein provided, the term of
office of all directors then in office elected by the holders of
Preferred Stock pursuant to this Section shall terminate immediately.
Whenever the term of office of the directors elected by the holders of
the Preferred Stock pursuant to this Section shall terminate and the
special voting powers vested in the holders of the Preferred Stock
pursuant to this Section shall have expired, the maximum number of
members of the Board of Directors of the Corporation shall be such
number as may be provided for in the By-laws of the Corporation
irrespective of any increase made pursuant to the provisions of this
Section.
<PAGE> 5
(D) Except as set forth herein, holders of Series A Preferred Stock
shall have no special voting rights and their consent shall not be required
(except to the extent they are entitled to vote with holders of Common Stock as
set forth herein) for taking any corporate action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Preferred Stock as provided in Section 2 are in arrears,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of Series A Preferred Stock outstanding shall have
been paid in full, the Corporation shall not:
(i) declare or pay dividends on, make any other distributions on,
or redeem or purchase or otherwise acquire for consideration any shares
of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Stock;
(ii) declare or pay dividends on or make any other distributions
on any shares of stock ranking on a parity (either as to dividends or
upon liquidation, dissolution or winding up) with the Series A
Preferred Stock, except dividends paid ratably on the Series A
Preferred Stock and all such parity stock on which dividends are
payable or in arrears in proportion to the total amounts to which the
holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Preferred
Stock, provided that the Corporation may at any time redeem, purchase
or otherwise acquire shares of any such parity stock in exchange for
shares of any stock of the Corporation ranking junior (either as to
dividends or upon dissolution, liquidation or winding up) to the Series
A Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any shares of
Series A Preferred Stock, except in accordance with a purchase offer
made in writing or by publication (as determined by the Board of
Directors) to all holders of such shares upon such terms as the Board
of Directors, after consideration of the respective annual dividend
rates and other relative rights and preferences of the respective
series and classes, shall determine in good faith will result in fair
and equitable treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the Corporation
to purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (A) of this Section,
purchase or otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of
<PAGE> 6
Preferred Stock to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth
herein.
Section 6. Liquidation, Dissolution or Winding Up. (A) Upon any
voluntary liquidation, dissolution or winding up of the Corporation, no
distribution shall be made to the holders of shares of stock ranking junior
(either as to dividends or upon liquidation, dissolution or winding up) to the
Series A Preferred Stock unless, prior thereto, the holders of shares of Series
A Preferred Stock shall have received $1.00 per share, plus an amount equal to
accrued and unpaid dividends and distributions thereon, whether or not declared,
to the date of such payment (the "Series A Liquidation Preference"). Following
the payment of the full amount of the Series A Liquidation Preference, no
additional distributions shall be made to the holders of shares of Series A
Preferred Stock unless, prior thereto, the holders of shares of Common Stock
shall have received an amount per share (the "Common Adjustment") equal to the
quotient obtained by dividing (i) the Series A Liquidation Preference by (ii)
100 (as appropriately adjusted as set forth in subparagraph C below to reflect
such events (other than stock dividends) as stock splits and recapitalizations
with respect to the Common Stock) (such number in clause (ii), the "Adjustment
Number"). Following the payment of the full amount of the Series A Liquidation
Preference and the Common Adjustment in respect of all outstanding shares of
Series A Preferred Stock and Common Stock, respectively, holders of Series A
Preferred Stock and holders of shares of Common Stock shall receive their
ratable and proportionate share of the remaining assets to be distributed in the
ratio, on a per share basis, of the Adjustment Number to 1 with respect to such
Preferred Stock and Common Stock, on a per share basis, respectively.
(B) In the event, however, that there are not sufficient assets
available to permit payment in full of the Series A Liquidation Preference and
the liquidation preferences of all other series of Preferred Stock, if any,
which rank on a parity with the Series A Preferred Stock, then such remaining
assets shall be distributed ratably to the holders of such parity shares in
proportion to their respective liquidation preferences.
(C) In the event the Corporation shall at any time following June __,
1999 effect a subdivision, split, combination or consolidation of the Common
Stock (by reclassification or otherwise than by payment of dividends in Common
Stock), then in each such case the Adjustment Number in effect immediately prior
to such event shall be adjusted by multiplying such Adjustment Number by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
<PAGE> 7
Section 7. Consolidation, Merger, etc. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the shares of
Series A Preferred Stock shall at the same time be similarly exchanged or
changed in an amount per share (subject to the provision for adjustment
hereinafter set forth) equal to 100 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
In the event the Corporation shall at any time effect a subdivision, split,
combination or consolidation of the Common Stock (by reclassification or
otherwise than by payment of dividends in Common Stock), then in each such case
the amount set forth in the preceding sentence with respect to the exchange or
change of shares of Series A Preferred Stock shall be adjusted by multiplying
such amount by a fraction the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding immediately
prior to such event.
Section 8. Redemption. The shares of a Series A Preferred Stock shall
not be redeemable by the Corporation. The preceding sentence shall not limit the
ability of the Corporation to purchase or otherwise deal in such shares of stock
to the extent permitted by law.
Section 9. Ranking. The Series A Preferred Stock shall rank junior to
all other series of the Corporation's preferred stock (whether with or without
par value) as to the payment of dividends and the distribution of assets, unless
the terms of any such series shall provide otherwise.
Section 10. Amendment. The Certificate of Incorporation of the
Corporation shall not be amended in any manner which would materially alter or
change the powers, preferences or special rights of the Series A Preferred Stock
so as to affect them adversely without the affirmative vote of the holders of a
majority or more of the outstanding shares of Series A Preferred Stock, voting
separately as a class.
Section 11. Fractional Shares. Series A Preferred Stock may be issued
in fractions of a share which shall entitle the holder, in proportion to such
holder's fractional shares, to exercise voting rights, receive dividends,
participate in distributions and to have the benefit of all other rights of
holders of Series A Preferred Stock.
<PAGE> 8
IN WITNESS WHEREOF, Quotesmith.com has caused its corporate seal to be
hereunto affixed and this Certificate to be signed by Robert S. Bland, its
Chairman, President and Chief Executive Officer, and the same to be attested by
Thomas A. Munro, its Secretary, this ____ day of __________.
QUOTESMITH.COM, INC.
By:
-------------------------
Robert S. Bland
Chairman, President and
Chief Executive Officer
(SEAL)
Attest:
By:
-----------------------
Thomas A. Munro
Secretary
[Signature Page to Certificate of Designation]
<PAGE> 1
NOTE PURCHASE AGREEMENT
This Note Purchase Agreement, dated as of June 23, 1999
(this "AGREEMENT"), is entered into by and between QUOTESMITH.COM, INC., a
Delaware corporation (the "COMPANY"), and INTUIT INC., a Delaware corporation
(the "PURCHASER").
RECITAL
On the terms and subject to the conditions set forth herein, Purchaser
is willing to purchase from the Company and the Company is willing to sell to
Purchaser a Promissory Note (the "NOTE") in the form attached hereto as Exhibit
A for an aggregate purchase price of $2,000,000.00.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, and the
representations, warranties and conditions set forth below, the parties hereto,
intending to be legally bound, hereby agree as follows:
1. The Note.
(a) Issuance of the Note. In reliance upon the representations,
warranties and covenants of the parties set forth herein, the Company agrees to
issue, sell and deliver to the Purchaser, and the Purchaser agree to purchase
from the Company, the Note. The purchase price for the Note shall be payable in
immediately available funds.
(b) Terms of the Note. The terms and conditions of the Note are
set forth in the form of Note attached as Exhibit A hereto. Capitalized terms
not otherwise defined herein shall have the meaning set forth in the Note.
(c) Delivery. The Company will deliver to the Purchaser an
executed version of the Note against receipt by the Company of the purchase
price of $2,000,000.00 for such Note.
2. Representations and Warranties of the Company. The Company hereby
represents and warrants to the Purchaser that the statements contained in the
following paragraphs of this Section 2 are all true and correct as of the time
of issuance of the Note:
(a) Organization and Standing: Articles and Bylaws. The Company is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and has all requisite corporate power and
authority to carry on its business as now conducted and proposed to be
conducted.
(b) Corporate Power. The Company has all requisite legal and
corporate power to enter into, execute and deliver this Agreement and the Note.
This Agreement is, and upon issuance the Note will be, a valid and binding
obligation of the Company, each of the Agreement and the Note (upon its
issuance) being enforceable against the Company in accordance with its
respective terms.
- 1 -
<PAGE> 2
(c) Authorization.
(1) Corporate Action. All corporate and legal action on the
part of the Company and its officers, directors and stockholders necessary for
the execution and delivery of this Agreement and the Note, the sale and issuance
of the Note and the performance of the Company's obligations hereunder and
thereunder have been taken.
(2) Valid Issuance. The Note, when issued in compliance with
the provisions of this Agreement, will be validly issued, fully paid and
nonassessable and will be free of any liens or encumbrances; provided, however,
that the Note may be subject to restrictions on transfer under state and/or
federal securities laws as set forth herein, and as may be required by future
changes in such laws.
(d) Financial Statements. With respect to the financial statements
of the Company (the "FINANCIAL STATEMENTS") which were included in the
Registration Statement on Form S-1 filed by the Company with the Securities and
Exchange Commission on May 26, 1999 (the "REGISTRATION STATEMENT"), such
Financial Statements fairly present the financial condition and operating
results of the Company as of the dates, and for the periods, indicated therein.
Except as set forth in the Financial Statements or as otherwise disclosed in the
prospectus portion of the Registration Statement, the Company has no material
liabilities, contingent or otherwise, other than (i) liabilities incurred in the
ordinary course of business subsequent to March 31, 1999 or (ii) obligations
under contracts or commitments incurred in the ordinary course of business and
not required under generally accepted accounting principles to be reflected in
the Financial Statements, which, in the case of both the foregoing clauses (i)
and (ii), individually or in the aggregate, are not material to the financial
condition or operating results of the Company.
(e) No Materially Adverse Change. Since March 31, 1999, no
transaction, arrangement, event or other circumstance has occurred or existed
which (i) has had a material adverse effect on the business, assets, properties,
operations or condition (financial or otherwise) of the Company or (ii) is, as
of the date hereof, reasonably expected to result in any such effect.
(f) Government Consent, Etc. No consent, approval, order or
authorization of, or designation, registration, declaration or filing with, any
federal, state, local or provincial or other governmental authority on the part
of the Company is required in connection with the valid execution, delivery and
performance of this Agreement or the Note, or the offer, sale or issuance of the
Note, other than, if required, filings or qualifications under applicable blue
sky laws, which filings or qualifications, if required, will be timely filed or
obtained by the Company.
(g) Disclosure. The Registration Statement contains all
information which a reasonable investor would consider appropriate in deciding
whether to purchase the Note as well as all information which the Company
believes is reasonably necessary to enable the Purchaser to make such a
decision. When considered together with the Registration Statement, neither this
Agreement nor any other statement or certificate made or delivered in connection
with this Agreement and the transactions contemplated hereby contains any untrue
statement of a material fact or omits to state a material fact necessary to make
the statements herein or therein not misleading.
- 2 -
<PAGE> 3
3. Representations and Warranties by the Purchaser. The Purchaser
represents and warrants to the Company as of the time of issuance of the Note as
follows:
(a) Investment Intent: Authority. This Agreement is made with the
Purchaser in reliance upon the Purchaser's representation to the Company, as
evidenced by Purchaser's execution of this Agreement, that Purchaser is
acquiring the Note for the Purchaser's own account, not as nominee or agent, for
investment and not with a view to, or for resale in connection with, any
distribution or public offering thereof within the meaning of the Securities Act
of 1933, as amended (the "SECURITIES ACT"). The Purchaser has the full right,
power, authority and capacity to enter into and perform this Agreement, and this
Agreement will constitute a valid and binding obligation upon the Purchaser,
except as the same may be limited by bankruptcy, insolvency, moratorium and
other laws of general application affecting the enforcement of creditors'
rights.
(b) Not Registered. The Purchaser understands and acknowledges
that the offering and sale of the Note pursuant to this Agreement will not be
registered under the Securities Act on the grounds that the offering and sale of
the Note are exempt from registration under the Securities Act, and that the
Company's reliance upon such exemption is predicated upon the Purchaser's
representations set forth in this Agreement. The Purchaser acknowledges and
understands that resale of the Note may be restricted indefinitely unless the
Note is subsequently registered under the Securities Act or an exemption from
such registration is available.
(c) No Transfer. Purchaser covenants that in no event will it
dispose of the Note other than in conjunction with an effective registration
statement under the Securities Act or pursuant to an exemption therefrom (e.g.,
Rule 144 promulgated under the Securities Act) or to an entity affiliated with
the Purchaser.
(d) Knowledge and Experience. Purchaser (i) has such knowledge and
experience in financial and business matters as to be capable of evaluating the
merits and risks of the Purchaser's prospective investment in the Note; (ii) has
the ability to bear the economic risks of the Purchaser's prospective
investment; (iii) has had all questions which have been asked by the Purchaser
satisfactorily answered by the Company; and (iv) has not been offered the Note
by any form of advertisement, article, notice or other communication published
in any newspaper, magazine or similar media or broadcast over television or
radio, or any seminar or meeting whose attendees have been invited by any such
media.
4. Miscellaneous.
(a) Waivers and Amendments. Any provision of this Agreement may be
amended, waived or modified upon the written consent of the Company and the
Purchaser.
(b) Governing Law. This Agreement and all actions arising out of
or in connection with this Agreement shall be governed by and construed in
accordance with the laws of the State of Illinois, without regard to the
conflicts of law provisions of the State of Illinois or of any other state.
(c) Entire Agreement. This Agreement, together with the form of
the Note
- 3 -
<PAGE> 4
attached hereto, constitutes the full and entire understanding and agreement
between the parties with regard to the subjects hereof and thereof.
(d) Notices, Etc. All notices and other communications required or
permitted hereunder shall be in writing and shall be sent via overnight courier
service or mailed by certified or registered mail, postage prepaid, return
receipt requested, addressed or sent (a) if to the Purchaser, at the address of
the Purchaser set forth below such party's name on the signature page hereto, or
at such other address or number as the Purchaser shall have furnished to the
Company in writing, or (b) if to the Company, at 8205 South Cass Avenue, Suite
102, Darien, Illinois 60561, or at such other address or number as the Company
shall have furnished to the Purchaser in writing.
(e) Validity. If any provision of this Agreement or the Note shall
be judicially determined to be invalid, unlawful or unenforceable, the validity,
lawfulness and enforceability of the remaining provisions shall not in any way
be affected or impaired thereby.
(f) Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall be deemed to constitute one instrument.
(g) Disclosure. The Company shall not issue any press release or
make any other announcement regarding this Agreement or any of the terms hereof
without the prior written consent of the Purchaser; provided, however, that the
Company may disclose, in any amendment to the Registration Statement, such
information concerning the terms of this Agreement as may be required, in the
opinion of the Company's counsel, to satisfy the disclosure obligations of the
Company under the Securities Act so long as the Purchaser is given advance
notice of such disclosure and a reasonable advance opportunity to comment upon
and modify any such disclosure.
- 4 -
<PAGE> 5
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered by their proper and duly authorized officers as of the
date and year first written above.
THE COMPANY:
Quotesmith.com, Inc.,
a Delaware corporation
By: /s/ ROBERT S. BLAND
Its: Chairman, President and Chief Executive Officer
By: /s/ THOMAS A. MUNRO
Its: Secretary, Vice President and Chief Financial Officer
THE PURCHASER:
Intuit Inc.,
a Delaware corporation
By: /s/ KRISTEN BROWN
Kristen Brown
Vice President, Business Development
Address: Intuit Inc.
Attn: Kristen Brown
Vice President, Business Development
2535 Garcia Avenue
Mountain View, CA 94043
- 5 -
<PAGE> 6
EXHIBIT A
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
IT MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THE NOTE UNDER SAID ACT OR AN OPINION OF COUNSEL
SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.
PROMISSORY NOTE
$2,000,000.00 June , 1999
- ------------ Darien, Illinois
FOR VALUE RECEIVED, Quotesmith.com, Inc., a Delaware corporation (the
"COMPANY"), promises to pay to Intuit Inc., a Delaware corporation (the
"HOLDER"), or its registered assigns, the principal sum of $2,000,000.00, or
such lesser amount as shall then equal the outstanding principal amount hereof,
together with interest from the date of this Note on the unpaid principal
balance at a rate equal to twelve and one-half percent (12.5%) per annum. All
accrued and unpaid interest hereunder shall be payable in quarterly installments
commencing on the date which is three (3) months after the date hereof and
continuing every three (3) months thereafter. The interest rate shall be
computed on the basis of the actual number of days elapsed and a year of 365
days. All unpaid principal, together with the balance of accrued and unpaid
interest and any other amounts payable hereunder, shall be due and payable on
demand at any time after the earlier of (i) , 2000, [18 MONTHS FROM
THE DATE OF THIS NOTE] (ii) a Public Offering (defined below) or (iii) an Event
of Default (defined below). Moreover, promptly upon the Company's receipt of
the same, the Company shall prepay all unpaid principal, together with the
balance of accrued and unpaid interest and any other amounts payable hereunder,
to the extent of the net proceeds to the Company from any Financing (defined
below).
The following is a statement of the rights of the Holder and the
conditions to which this Note is subject, and to which the Holder hereof, by the
acceptance of this Note, agrees:
1. Definitions. As used in this Note, the following capitalized terms
have the following meanings:
(a) "FINANCING" shall mean any sale of the Company's equity
securities or any other securities which are exchangeable for the Company's
equity securities, excepting any such sale to one or more employees of the
Company pursuant to any stock option, stock purchase or other employee benefit
plan maintained by the Company.
(b) "OBLIGATIONS" shall mean all principal and accrued interest
due hereunder.
(c) "PUBLIC OFFERING" shall mean the closing of any sale of the
Company's common stock in a public offering registered under the Securities Act
of 1933, as amended (the "SECURITIES ACT").
A-1
<PAGE> 7
2. Events of Default. The occurrence of any of the following shall
constitute an "EVENT OF DEFAULT" under this Note:
(a) Failure to Pay. The Company shall fail to pay when due any
amount of principal or interest hereunder or any other amount payable by the
Company hereunder;
(b) Breach of Representation. Any representation or warranty of
the Company made in this Note or with respect to or in connection with the
issuance of this Note (including, without limitation, any representation or
warranty of the Company set forth in that certain Note Purchase Agreement
between the Company and the Holder with respect to this Note - the "NOTE
PURCHASE AGREEMENT") shall have been false in any respect when made.
(c) Breach of Covenant. Without limiting the foregoing, the
Company shall fail in any respect to perform or observe when required any
covenant, condition or agreement for performance or observance by the Company
where the same (i) is either set forth in this Note or in any document or
instrument entered into or delivered by the Company with respect to or in
connection with the issuance of this Note (including, without limitation, any
covenant, condition or agreement set forth in the Note Purchase Agreement) and,
(ii) if capable of being remedied in fifteen (15) or fewer days, has not been
remedied within fifteen (15) days after the Company's receipt of written notice
with respect thereto.
(d) Voluntary Bankruptcy or Insolvency Proceedings. The Company
shall (i) apply for or consent to the appointment of a receiver, trustee,
liquidator or custodian of itself or of all or a substantial part of its
property, (ii) be unable, or admit in writing its inability, to pay its debts
generally as they mature, (iii) make a general assignment for the benefit of its
or any of its creditors, (iv) be dissolved or liquidated in full or in part, (v)
become insolvent (as such term may be defined or interpreted under any
applicable statute), (vi) commence a voluntary case or other proceeding seeking
liquidation, reorganization or other relief with respect to itself or its debts
under any bankruptcy, insolvency or other similar law now or hereafter in effect
or consent to any such relief or to the appointment of or taking possession of
its property by any official in an involuntary case or other proceeding
commenced against it, or (vii) take any action for the purpose of effecting any
of the foregoing; or
(e) Involuntary Bankruptcy or Insolvency Proceedings. Proceedings
for the appointment of a receiver, trustee, liquidator or custodian of the
Company or of all or a substantial part of the assets thereof, or an involuntary
case or other proceedings seeking liquidation, reorganization or other relief
with respect to the Company or the debts thereof under any bankruptcy,
insolvency or other similar law now or hereafter in effect shall be commenced,
and such proceedings shall not have been stayed or dismissed within sixty (60)
days after commencement of the same.
3. Rights of Holder Upon Default. Upon the occurrence or existence of
any Event of Default and at any time thereafter during the continuance of such
Event of Default, the Holder may declare all outstanding Obligations payable by
the Company hereunder to be immediately due and payable without presentment,
demand, protest or any other notice of any kind, all of which are hereby
expressly waived. In addition to the foregoing remedies, upon the occurrence or
existence of any
A-2
<PAGE> 8
Event of Default, the Holder may exercise any other right, power or remedy
granted to it or otherwise permitted to it by law, either by suit in equity or
by action at law, or both.
4. Successors and Assigns. Subject to the restrictions on transfer
described in Sections 6 and 7 below, the rights and obligations of the Company
and the Holder of this Note shall be binding upon and benefit the successors,
assigns, heirs, administrators and transferees of the parties.
5. Waiver and Amendment. Any provision of this Note may be amended,
waived or modified upon the written consent of the Company and the Holder.
6. Transfer of this Note. This Note may not be transferred or
assigned in violation of any restrictive legend set forth hereon; provided,
however, that the Company acknowledges and agrees that any transfer or
assignment by the Holder of this Note to any affiliate of the Holder shall not
be deemed to be a violation of such legend and, notwithstanding any other
provision of this Note to the contrary, any such transfer or assignment shall be
permitted without the performance or observance of any requirements by the
Holder (except for notice to the Company). Each new Note issued upon transfer or
assignment of this Note shall bear a legend as to the applicable restrictions on
transferability in order to ensure compliance with the Securities Act, unless in
the opinion of counsel for the Company such legend is not required in order to
ensure compliance with the Securities Act. Prior to presentation of this Note
for registration of transfer or assignment, the Company shall treat the
registered holder hereof as the owner and holder of this Note for the purpose of
receiving all payments of principal and interest hereon and for all other
purposes whatsoever, whether or not this Note shall be overdue, and the Company
shall not be affected by notice to the contrary.
7. Assignment by the Company. Neither this Note nor any of the
rights, interests or obligations hereunder may be assigned, by operation of law
or otherwise, in whole or in part, by the Company without the prior written
consent of the Holder.
8. Treatment of Note. To the extent permitted by generally accepted
accounting principles, the Company will treat, account and report this Note as
debt and not equity for accounting purposes and with respect to any returns
filed with federal, state or local tax authorities.
9. Notices. Any notice, request or other communication required or
permitted hereunder shall be in writing and shall be deemed to have been duly
given if personally delivered or mailed by registered or certified mail, postage
prepaid, or by recognized overnight courier or personal delivery at the
principal executive offices of the Company, in the instance of the Company, or
the address of the Holder as set forth in the records maintained by the Company,
in the instance of the Holder. Any party hereto may by notice so given change
its address for future notice hereunder. Notice shall conclusively be deemed to
have been given when received.
10. Payment. Payment shall be made in lawful tender of the United
States.
11. Expenses; Waivers. If any action or other proceeding is instituted
to collect this Note, the Company shall pay all costs and expenses, including,
without limitation, reasonable attorneys' fees and costs, incurred by the Holder
or its transferees or assigns in connection with such action or other
proceeding. The Company hereby waives notice of default, presentment or demand
for payment,
A-3
<PAGE> 9
protest or notice of nonpayment or dishonor and all other notices or demands
relative to this instrument.
12. Governing Law. This Note and all actions arising out of or in
connection with this Note shall be governed by and construed in accordance with
the laws of the State of Illinois, without regard to the conflicts of law
provisions of the State of Illinois or of any other state.
13. Validity. If any provision of this Note shall be judicially
determined to be invalid, unlawful or unenforceable, the validity, lawfulness
and enforceability of the remaining provisions shall not in any way be affected
or impaired thereby.
14. Excessive Interest. Notwithstanding any other provision herein to
the contrary, this Note is hereby expressly limited so that the interest rate
charged hereunder shall at no time exceed the maximum rate permitted by
applicable law. If, for any circumstance whatsoever, the interest rate charged
exceeds the maximum rate permitted by applicable law, the interest rate shall be
reduced to the maximum rate permitted, and if the Holder shall have received an
amount that would cause the interest rate charged to be in excess of the maximum
rate permitted, such amount that would be excessive interest shall be applied to
the reduction of the principal amount owing hereunder (without charge for
prepayment) and not to the payment of interest, or if such excessive interest
exceeds the unpaid balance of principal, such excess shall be refunded to the
Company.
IN WITNESS WHEREOF, the Company has caused this Note to be issued as of
the date first written above.
QUOTESMITH.COM, INC.,
a Delaware corporation
A-4
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 22, 1999 in Amendment No. 1 to the Registration
Statement (Form S-1 No. 333-65973) and the related Prospectus of Quotesmith.com,
Inc.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
June 24, 1999
