EXHIBIT 13
INSURQUOTE SYSTEMS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1998
AND ELEVEN MONTHS ENDED JUNE 30, 1997
WITH
REPORT OF INDEPENDENT AUDITORS
INSURQUOTE SYSTEMS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1998
AND ELEVEN MONTHS ENDED JUNE 30, 1997
CONTENTS
Report of Independent Auditors ......................................................................... 1
Consolidated Financial Statements
Consolidated Balance Sheets ............................................................................ 2
Consolidated Statements of Operations .................................................................. 4
Consolidated Statements of Shareholders' Deficit ....................................................... 5
Consolidated Statements of Cash Flows .................................................................. 6
Notes to Consolidated Financial Statements ............................................................. 7
Report of Independent Auditors
Board of Directors
InsurQuote Systems, Inc.
We have audited the accompanying consolidated balance sheets of InsurQuote
Systems, Inc. and subsidiary (the Company) as of June 30, 1998 and June 30,
1997, and the related consolidated statements of operations, shareholders'
deficit, and cash flows for the year ended June 30, 1998 and the eleven months
ended June 30, 1997. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
InsurQuote Systems, Inc. and subsidiary at June 30, 1998 and June 30, 1997, and
the consolidated results of their operations and their cash flows for the year
ended June 30, 1998 and the eleven months ended June 30, 1997 in conformity with
generally accepted accounting principles.
/S/ ERNST & YOUNG LLP
August 21, 1998
INSURQUOTE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30
-------------------------
1998 1997
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 8,032,178 $ 2,931,289
Accounts receivable, less allowance
of $248,775 in 1998 and $135,504 in 1997 903,426 840,040
Other 68,920 65,328
Total current assets 9,004,524 3,836,657
----------- -----------
Equipment:
Office equipment 392,744 344,589
Computer equipment 1,775,673 867,146
Leasehold improvements 164,189 131,522
----------- -----------
2,332,606 1,343,257
Accumulated depreciation (665,946) (273,349)
----------- -----------
1,666,660 1,069,908
Other assets, net of accumulated amortization
of $1,543,191 in 1998 and $295,821 in 1997 3,587,823 4,099,834
----------- -----------
Total assets $14,259,007 $ 9,006,399
----------- -----------
----------- -----------
2
JUNE 30
----------------------
1998 1997
---- ----
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 852,748 $ 156,384
Accrued liabilities 1,962,563 674,245
Current portion of notes payable to related parties -- 6,505,291
Current portion of notes payable and capital lease obligation
229,229 1,726,076
Deferred revenue 1,524,886 1,276,589
----------- -----------
Total current liabilities 4,569,426 10,338,585
Notes payable to related parties, less current portion 9,100,000 214,248
Notes payable and capital lease obligation, less current portion
-- 47,369
Other accrued liabilities 366,759 323,813
Commitments
Series C redeemable convertible preferred stock;
no par value; 1,075,117 shares authorized; 145,414 shares
issued and outstanding 5,000,000 --
Shareholders' deficit:
Series A convertible preferred stock; no par value; 167,399 shares
authorized, 103,500 shares issued and outstanding
279,000 279,000
Series B convertible preferred stock; no par value; 695,485 shares
authorized; 603,164 shares issued and outstanding
2,773,994 2,773,994
Series D convertible preferred stock; no par value; 320,203
shares authorized, issued and outstanding 4,469,886 --
Common stock; no par value; 7,000,000 shares authorized;
970,844 issued in 1998 and 600,000 issued in 1997
1,717,762 146,020
Accumulated deficit (14,015,820) (5,116,630)
Treasury stock, 371 shares (2,000) --
----------- -----------
Total shareholders' deficit (4,777,178) (1,917,616)
----------- -----------
Total liabilities and shareholders' deficit $14,259,007 $ 9,006,399
----------- -----------
----------- -----------
SEE ACCOMPANYING NOTES.
3
INSURQUOTE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED ELEVEN MONTHS
JUNE 30, ENDED JUNE 30,
1998 1997
----------- -------------
Net sales $11,907,974 $ 3,499,786
Operating Expenses
Cost of sales 1,673,760 782,551
Selling, general and administrative expenses 16,275,983 4,120,213
Research and development 2,077,394 1,056,125
----------- -----------
Loss from operations (8,119,163) (2,459,103)
Other income (expense):
Interest expense (909,960) (352,575)
Interest income 226,633 63,140
Miscellaneous -- (17,400)
----------- -----------
Net loss (8,802,490) (2,765,938)
Preferred stock dividend (96,700) --
----------- -----------
Net loss applicable to common shareholders $(8,899,190) $(2,765,938)
----------- -----------
----------- -----------
SEE ACCOMPANYING NOTES
4
INSURQUOTE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
PREFERRED STOCK COMMON STOCK TREASURY STOCK
----------------- ----------------- ACCUMULATED --------------
SHARES AMOUNT SHARES AMOUNT DEFICIT SHARES AMOUNT TOTAL
------ ------ ------ ------ ------- ------ ------ -----
Balance at July 31, 1996 ............... 706,664 $3,052,994 600,000 $ 146,020 $ (2,350,692) $ 848,322
Net loss ............................ (2,765,938) (2,765,938)
--------- ---------- ------- ---------- ------------ -----------
Balance at June 30, 1997 ............... 706,664 3,052,994 600,000 146,020 (5,116,630) (1,917,616)
Issuance of Common Stock for the
purchase of certain assets of ACP .. 37,094 71,962 71,962
Issuance of Series D, convertible
preferred Stock .................... 320,203 4,469,886 4,469,886
Issuance of Common Stock, (net of
issuance costs of $130,334) ........ 333,750 1,499,780 1,499,780
Repurchase of shares ................. 371 $(2,000) (2,000)
Preferred stock dividend ............. (96,700) (96,700)
Net Loss ............................. (8,802,490) (8,802,490)
--------- ---------- ------- ---------- ------------ --- ------- -----------
Balance at June 30, 1998 ............... 1,026,867 $7,522,880 970,844 $1,717,762 $(14,015,820) 371 $(2,000) $(4,777,178)
--------- ---------- ------- ---------- ------------ --- ------- -----------
--------- ---------- ------- ---------- ------------ --- ------- -----------
SEE ACCOMPANYING NOTES.
5
INSURQUOTE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED ELEVEN MONTHS
JUNE 30, ENDED JUNE 30,
1998 1997
---------- --------------
OPERATING ACTIVITIES
Net loss $(8,899,190) $(2,765,938)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 392,597 142,553
Amortization 1,247,370 295,821
Impairment of intangible assets 980,000 -
Preferred stock dividend 96,700 -
Changes in operating assets and liabilities:
Accounts receivable 437,179 489,616
Other assets (90,260) 225,310
Accounts payable and accrued liabilities 989,119 356,906
Deferred revenue 248,297 (366,348)
Net cash used in operating activities (4,598,188) (1,622,080)
----------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment (889,173) (313,598)
Acquisitions, net of working capital acquired (512,661) (2,501,000)
-------------------------------------------
Net cash used in investing activities (1,401,834) (2,814,598)
FINANCING ACTIVITIES
Proceeds from notes payable to related parties 8,900,000 6,500,000
Principal payments on notes payable to related parties (6,519,539) (4,291)
Principal payments on notes payable (2,243,518) (35,521)
Net proceeds from issuance of common stock 1,499,780 -
Proceeds from issuance of redeemable convertible preferred stock 5,000,000 -
Proceeds from issuance of convertible preferred stock 4,469,886 -
Purchase of treasury stock (2,000) -
Other (3,698) 83,308
----------- -----------
Net cash provided by financing activities 11,100,911 6,543,496
----------- -----------
Net increase in cash and cash equivalents 5,100,889 2,106,818
Cash and cash equivalents at beginning of year 2,931,289 824,471
----------- -----------
----------- -----------
Cash and cash equivalents at end of year $ 8,032,178 $ 2,931,289
----------- -----------
----------- -----------
SEE ACCOMPANYING NOTES.
6
INSURQUOTE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
1. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
InsurQuote Systems, Inc. (the Company) commenced operations in 1989 and is
engaged in the business of developing, selling and maintaining software used by
independent insurance agents and companies to price and rate insurance coverage
offered by certain insurance companies. In March 1997, the Company acquired
Insurance Automation Systems, Inc. (IAS), a company principally engaged in the
business of providing comparative rating information to the insurance industry.
In July 1997, the Company acquired certain assets of Automated Call Processing
(ACP), a company principally engaged in the business of providing automobile
pricing and insurance information.
During 1997, the Company changed its fiscal year end from July 31 to June 30.
Accordingly, the statements of operations, cash flows and shareholders' deficit
for fiscal 1997 reflect the results of operations and cash flows for the eleven
months ended June 30, 1997. All references to the year ended June 30, 1997 in
the footnotes reflect the eleven month period then ended.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of the
Company and its subsidiary IAS. All intercompany accounts and transactions have
been eliminated in consolidation.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration of
credit risk consist principally of cash, cash equivalents and accounts
receivable. Risks associated with cash and cash equivalents are mitigated by
banking with creditworthy institutions.
The Company grants credit to substantially all of its customers without
requiring collateral. The Company has established provisions for potential
credit losses that are expected to be incurred.
7
INSURQUOTE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES (CONTINUED)
MAJOR CUSTOMER
The Company had net sales to one customer that represented approximately 22% of
consolidated net sales for the year ended June 30, 1998. For the eleven month
period ended June 30, 1997, the Company had net sales to one customer that
represented approximately 11% of consolidated net sales for that period.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with original maturities of
three months or less to be cash equivalents.
EQUIPMENT
Equipment is stated at cost, less accumulated depreciation. Depreciation is
computed using the straight-line method over the estimated useful lives of the
respective assets, generally three to five years. Leasehold improvements are
depreciated using the straight-line method over the shorter of the estimated
useful lives of the assets or the remaining lives of the related leases.
OTHER ASSETS
Other current assets include prepaid assets and deposits. Other long-term assets
are comprised primarily of purchased intangibles including contracts, software
and copyrights, goodwill and the value assigned to non-compete agreements
acquired in connection with the purchase of IAS and ACP (see Notes 2 and 3).
Software and copyrights of approximately $4.2 million and goodwill are being
amortized over a five year period based on the estimated useful life of the
technology. The value assigned to the non-compete agreements is being amortized
over three years, the term of the agreements. The value assigned to contracts
acquired is being amortized over the life of the contracts, which range from one
to three and a half years.
8
INSURQUOTE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Revenue from product sales is recorded net of estimated returns and is
recognized at the time of shipment. Revenue from services and support is
recognized at the time the services and support are rendered. Revenue from
maintenance contracts and service agreements, which are typically pre-paid, is
deferred when received and recognized ratably over the term of the contract or
agreement.
INCOME TAXES
The Company uses an asset and liability method of accounting for income taxes.
The provision for income taxes is based on income or loss for financial
reporting purposes as required by Statement of Financial Accounting Standards
("SFAS") No. 109, ACCOUNTING FOR INCOME TAXES.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at June 30, 1998 and June 30, 1997, and
revenues and expenses for the year ended and the eleven months ended,
respectively. Actual results could differ from the estimates and assumptions
used.
SOFTWARE DEVELOPMENT COSTS
The Company has estimated that in most cases, software development costs have an
estimated useful life of less than one year. Therefore, the Company expenses all
costs as incurred. Costs incurred generally are immaterial between achievement
of technological feasibility and general release of the software.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
9
INSURQUOTE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, which supersedes portions of SFAS No. 14
FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE. SFAS No. 131 is
effective for the Company commencing in its year ending June 30, 1999. The
Company presently operates in only one segment and, accordingly, management does
not currently believe that there will be any significant effect on the Company's
reporting.
In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME,
which becomes effective for the Company commencing in its year ending June 30,
1999. Company management does not believe, based on current activities, that
adoption of this statement will have a significant effect on its financial
statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year amounts to conform to
the current year presentation.
2. ACQUISITIONS
On July 1, 1997, the Company purchased certain assets of Automated Call
Processing, a company engaged in the business of providing automobile pricing
and insurance information. The aggregate purchase price of approximately $2.2
million consisted of $512,661 in cash, the issuance of a $750,000 promissory
note and 37,094 shares of common stock of the Company to the seller, with the
remaining balance comprised of liabilities assumed by the Company. The
promissory note bears interest at 9%, with interest and principal due in twelve
monthly payments.
On March 7, 1997, the Company completed the purchase of IAS. Accordingly, the
results of operations of IAS have been included in the Company's financial
statements since the date of acquisition. IAS is engaged in the business of
designing, developing and selling comparative rating software. The aggregate
purchase price was approximately $5.1 million consisting of $2.5 million paid at
closing, the issuance of a $1.8 million one year promissory note to the seller
with the remaining balance comprised of liabilities assumed by the Company. The
promissory note bears interest at 9%, with interest and principal due on March
7, 1998, and is secured by substantially all of the assets of IAS.
10
INSURQUOTE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. OTHER ASSETS
Other assets relate primarily to intangible assets acquired in the purchase of
IAS and ACP and are comprised of the following:
1998 1997
---- ----
Software and copyrights $4,170,655 $4,170,655
Goodwill, contract rights and
other assets 960,359 225,000
---------- ----------
5,131,014 4,395,655
Accumulated amortization (1,543,191) (295,821)
---------- ----------
$3,587,823 $4,099,834
---------- ----------
---------- ----------
Accumulated amortization for software and copyrights was approximately $1.1
million and $0.3 million at June 30, 1998 and 1997, respectively.
During fiscal year 1998 certain intangible assets purchased in conjunction with
the acquisition of ACP became impaired when a customer failed to renew contracts
which would have provided the Company with a future revenue stream. As a result,
the accompanying financial statements reflect a charge to selling, general and
administrative expenses of $980,000 to adjust the value of the intangible assets
to their estimated fair values based on a discounted cash flow projection of
expected future revenues from remaining contracts with the customer. Revenue and
expenses associated with the impairment represented approximately 27% of 1998
net sales and 10% of total operating expenses.
11
INSURQUOTE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. NOTES PAYABLE
Notes payable to related parties represent amounts that are payable to
stockholders, certain officers and directors of the Company and consisted of the
following:
JUNE 30,
--------
1998 1997
---- ----
Unsecured note payable, interest at 12.683%, payable in monthly
installments of $500 through March 11, 2001. -- $ 18,272
Secured note payable, interest at 12%, interest payable monthly, principal
payable in full on February 25, 1998. Note secured by InsurQuote stock held
by three of the directors. -- 6,000,000
Unsecured note payable, interest at 12%, interest payable
monthly, principal payable in full on December 23, 1997.
-- 500,000
Unsecured note payable, interest at 10.5%, interest payable
monthly, principal due in full on June 6, 2000. 100,000 100,000
Unsecured note payable, interest at 10.5%, interest payable
monthly, principal due in full on March 28, 2000.
100,000 100,000
Unsecured subordinated note payable, interest at 7.5%,
interest payable quarterly, principal due in full on
February 10, 2003. 8,900,000 --
Other unsecured note payable -- 1,267
---------- ----------
9,100,000 6,719,539
Less current portion -- 6,505,291
---------- ----------
$9,100,000 $ 214,248
---------- ----------
---------- ----------
12
INSURQUOTE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. NOTES PAYABLE (CONTINUED)
Notes payable to third parties consisted of the following:
JUNE 30,
--------------------
1998 1997
---- ----
Note payable, interest at prime plus 4% (12.5% at June 30, 1998 and June
30, 1997) due in monthly installments of $1,730 through September 30, 1998.
Secured by certain equipment and other assets of the Company.
$ -- $ 28,193
Note payable, interest at 9.5%, payable in monthly
installments of $2,073 through July 1, 1997. Secured by
certain equipment and other assets of the Company. -- 25,510
Note payable, interest at 9%, principal and interest due on
March 7, 1998. Secured by substantially all assets of a
subsidiary of the Company. -- 1,633,666
Note payable, interest at 9%, payable in monthly
installments of $65,589. The note was paid in full during
July 1998. 193,851 --
------ ------------------------------
193,851 1,687,369
Less current portion 193,851 1,675,384
--------- -----------
$ -- $ 11,985
--------- -----------
--------- -----------
Maturities of notes payable and notes payable to related parties for each of the
next five fiscal years ended June 30 and thereafter are as follows:
1999 $ 193,851
2000 200,000
2001 -
2002 -
2003 and thereafter 8,900,000
-----------
$ 9,293,851
-----------
-----------
The Company paid approximately $950,000 and $234,000 in cash for interest for
the year ended June 30, 1998 and the eleven months ended June 30, 1997,
respectively.
13
INSURQUOTE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INCOME TAXES
As of June 30, 1998, the Company had federal and state net operating loss
carryforwards of approximately $12,769,000 and $13,095,000, respectively. The
Company also had federal research and development tax credit carryforwards of
approximately $180,000. The net operating loss and credit carryforwards will
expire at various dates beginning in 2008 through 2013, if not utilized.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the "change in ownership" provisions of the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
As of June 30, 1998 and June 30, 1997, the Company had deferred tax assets of
approximately $5,371,000 and $1,976,000, respectively, and deferred tax
liabilities of approximately $16,000 and $24,000 as of June 30, 1998 and June
30, 1997, respectively. The net deferred tax assets have been fully offset by a
valuation allowance. The net valuation allowance was increased by $3,419,000
during the year ended June 30, 1998. Deferred tax assets relate primarily to: 1)
net operating loss carry forwards; 2) research credits; and 3) use of extended
tax amortization periods for intangible assets.
6. COMMITMENTS
The Company has various operating and capital lease commitments. Future minimum
lease payments under these commitments for each of the next five fiscal years
and thereafter are as follows:
OPERATING CAPITAL
--------- -------
1999 $ 873,372 $ 36,652
2000 947,099 --
2001 942,039 --
2002 487,566 --
2003 and thereafter - --
------------ ----------
Total future minimum lease payments $ 3,250,076 36,652
------------
------------
Less amount representing interest 1,274
----------
35,378
Less current portion 35,378
----------
Long-term capital lease obligation $ --
----------
----------
14
INSURQUOTE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. COMMITMENTS (CONTINUED)
The operating lease agreements are subject to predetermined rate increases in
accordance with the signed rental agreements. Rent expense under operating
leases for the year ended June 30, 1998 and eleven months ended June 30, 1997
was approximately $618,000 and $191,000, respectively.
Equipment under capital lease, net of accumulated amortization of $45,000 and
$12,000, was approximately $135,000 and $168,000 at June 30, 1998 and June 30,
1997.
7. SHAREHOLDERS' DEFICIT
PREFERRED STOCK
The Company has authorized 3,000,000 shares of preferred stock without par
value, of which 167,399 shares have been designated as Series A and 695,485
shares have been designated as Series B, 1,075,117 shares have been designated
as Series C, 320,203 shares have been designated as Series D, 100 shares have
been designated as Series E and 741,696 shares are undesignated.
The Series A, Series B, Series D and Series E preferred stock are non-cumulative
voting shares that are entitled to receive an annual dividend at a rate of
$0.2426, $0.4139, $0.8250, and $0.8065 per share, respectively. Series C
shareholders purchasing shares in the initial sale of these shares are entitled
to an annual dividend rate of $1.7190 per share and purchasers of Series C
shares in a subsequent offering are entitled to an annual dividend rate of
$0.8065 per share. Dividends on preferred stock Series A, B, D and E, are
non-cumulative and are not payable unless declared. Dividends on Series C
preferred stock are cumulative and are accrued quarterly from the date of
issuance. The Company cannot make distributions nor declare dividends on its
common stock unless and until dividends, including accrued but unpaid dividends
on Series C preferred stock, are paid or declared and set apart, upon all shares
of preferred stock. As of June 30, 1998, the Board has not declared any
dividends payable on preferred or common stock.
Each share of preferred stock is convertible at any time, at the option of the
holder, into fully paid and nonassessable shares of common stock that is equal
to the original issue price for such series divided by the conversion price. The
conversion rate is subject to adjustment in a number of circumstances, including
subsequent issuances of common stock. At June 30, 1998 and June 30, 1997 each
share of preferred stock was convertible into one share of common stock.
15
INSURQUOTE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. SHAREHOLDERS' DEFICIT (CONTINUED)
Each share of Series A and B preferred stock automatically will be converted
into shares of common stock, based upon the current conversion rate, immediately
upon the closing of a fully underwritten public offering under the Securities
Act of 1933, as amended, that results in net proceeds to the Company of at least
$20 million.
Each share of Series D preferred automatically shall be converted into shares of
common stock at the then-effective conversion rate, immediately prior to the
consummation of the purchase of securities of the Company by the holder of the
Series D preferred stock pursuant to the exercise of the option held by that
investor to purchase additional stock of the Company, or upon the closing of the
exercise by this investor of the warrants issued in connection with the
$8,900,000 note payable.
Each share of Series E preferred automatically shall be converted to common
stock at the then-effective conversion rate, immediately prior to any sale,
assignment, transfer, pledge, encumbrance or disposition of the Company to any
person or entity other than the holder of the Series E preferred, its parent or
majority-owned subsidiary.
Series A and B preferred shareholders are entitled to vote on all matters with
the common shareholders and are entitled to the number of votes equal to the
number of common shares into which their preferred shares are convertible.
Series C and D preferred shareholders are not entitled to vote such shares for
the election of directors or on any other matter except (i) any amendment to the
Articles of Incorporation that alters the rights, preferences or privileges of
that series of preferred stock and (ii) following the closing of the exercise of
the option described above, each holder of shares of Series C preferred shall be
entitled to the number of votes equal to the number of common stock into which
such shares of Series C preferred held by such holder of Series C preferred
could then be converted.
Series E preferred shareholders are entitled to vote on all matters with common
shareholders and are entitled to a number of votes based on a calculation of
Series E preferred outstanding and total common stock outstanding.
Except as outlined above, preferred shareholders are entitled to vote on all
matters with the common shareholders. Each share of common stock is entitled to
one vote.
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, holders of preferred stock are entitled to
payment in an amount equal to approximately $2.69 per share or $279,000, $4.60
per share
16
INSURQUOTE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. SHAREHOLDERS' DEFICIT (CONTINUED)
or $2,774,000, $34.38 per share or $4,999,333, $13.96 per share or $4,470,033
and $10.00 per share for Series A, Series B, Series C, Series D, and Series E
respectively, plus all declared and unpaid dividends, or accrued but unpaid
dividends for Series C preferred stock, before any payment will be made to
common shareholders. If the assets to be distributed to the holders of preferred
stock are insufficient, then the assets will be distributed ratably to the
holders of the preferred stock.
On the fifth anniversary of the issuance of Series C preferred stock, the
Company is to redeem all outstanding shares of Series C preferred at a
redemption price per share equal to the liquidation preferences together with
accrued and unpaid dividends. In the event the Company anticipates a public
offering and to the extend the Company has sufficient funds, the Company may
elect to redeem any or all of the outstanding shares of Series C preferred
stock.
In February 1998, the Company entered into a securities purchase agreement with
an investor where in the Company received $20,000,000 in exchange for 145,414
shares of Series C preferred stock, 320,203 shares of Series D preferred stock,
333,750 shares of common stock and a promissory note for $8,900,000.
Additionally, under the terms of the securities purchase agreement, at any time
after July 1, 2000 and until as late as July 1, 2010, under certain conditions,
the investor has the option to purchase sufficient shares of the Company's
common stock at the then fair market value to cause the investor to have at
least a 51% voting interest in the Company. This right may be terminated or be
converted to a fixed number of shares subject to a warrant with a strike price
equal to 120% of a public offering price, if not exercised earlier in connection
with a sale of the Company or on an initial public offering of the Company's
common stock. If this right is exercised, Series E preferred stock carrying
super voting rights will be issued to the investor. All classes of stock issued
in this transaction are subject to certain anti-dilution provisions. Further,
the transaction has an "earn-out" component measured on or before June 30, 2000,
that may have the effect of (i) decreasing the percentage ownership of the buyer
or (ii) increasing the size of the investment by the buyer. The Company also
issued a warrant to purchase 440,350 shares of common stock in connection with
this agreement.
STOCK OPTIONS
The Company has an Employee Stock Option Plan (the Plan) for which 1,046,500
common shares have been reserved. The Plan allows grants of incentive options
and nonqualified options to purchase common shares at a price that is not less
than the fair market value on the date of grant. The option prices are
determined by the Board of
17
INSURQUOTE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. SHAREHOLDERS' DEFICIT (CONTINUED)
STOCK OPTIONS (CONTINUED)
Directors. Generally, the options have a ten year life from the date of grant
and vest pursuant to the following schedule year 5-40%; year 6-40%; year 7-20%.
Pro forma information regarding net income and earnings per share has been
determined as if the Company had accounted for its employee stock options under
the fair market value method. The fair value of these options was estimated at
the date of grant using a Minimum Value option pricing model with the following
weighted average assumptions for fiscal years ended June 30, 1998 and June 30,
1997, respectively; risk-free interest rate of approximately 6.1% and 6.3%;
dividend yield of 0% and a weighted-average expected life of the option of 8
years.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized over the options' vesting period. Because the effect of SFAS No.
123, ACCOUNTING FOR STOCK BASED COMPENSATION is prospective, the initial impact
on pro forma net income (loss) may not be representative of compensation expense
in future years. The effect on the Company's pro forma results for each of the
fiscal year ended June 30, 1998 and the eleven months ended June 30, 1997 was
not material (less than $2,500 in each year).
A summary of stock option activity, and related information for the years ended
June 30, 1998 and 1997 follows:
1998 1997
-------------------- --------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
------- -------- ------- --------
Outstanding at beginning of year 401,224 $0.15 395,724 $0.13
Granted 5,137 1.94 5,500 1.94
Exercised -- -- -- --
Canceled 7,725 0.10 -- --
------- -------
Outstanding at end of year 398,636 $0.18 401,224 $ .15
------- -------
------- -------
Weighted-average fair value of options granted
during the year $0.75 $0.77
18
INSURQUOTE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. SHAREHOLDERS' DEFICIT (CONTINUED)
Exercise prices for options outstanding as of June 30, 1998 ranged from $0.10 to
$1.94. There were 7,428 exercisable options outstanding at June 30, 1998. The
weighted average remaining contractual life of the options is 6 years. Below are
the segregated exercise prices as of June 30, 1998:
RANGE OF EXERCISE PRICES
---------------------------------------
$0.10-$0.11 $0.46- $0.51 $1.94
----------- ------------ -----
Options outstanding 358,420 29,579 10,637
Weighted-average exercise price of
options outstanding $0.10 $0.49 $1.94
Weighted-average remaining contractual
life of options outstanding
6 years 7 years 9 years
WARRANTS
During 1995, the Company received $300,000 from an investor upon the issuance of
three $100,000 promissory notes. Attached to each of these notes are warrants to
purchase shares of Series A preferred stock at $3.13 per share. As of June 30,
1998, warrants to purchase 63,899 shares of Series A preferred stock remain
outstanding. The warrants expire five years from debt issuance dates which were
December 30, 1994, March 28, 1995 and June 6, 1995.
In connection with previous debt agreements, the Company issued warrants to
purchase 7,693 and 84,628 shares of Series B preferred stock which expire on
December 23, 2001 and February 25, 2002, respectively. Under the terms of each
issuance, half of the shares are exercisable at $16.13 per share and the
remaining shares are exercisable at $48.87 per share.
During fiscal 1998, in connection with the issuance of a $8,900,000 promissory
note, the Company issued a warrant to the investor to acquire an additional
440,350 shares of common stock at a price of $20.21 per share. The warrant is
exercisable by the holder through February 10, 2008.
19
INSURQUOTE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. SHAREHOLDERS' DEFICIT (CONTINUED)
As of June 30, 1998, the Company had reserved an additional 1,756,468 shares of
its common stock for issuance upon conversion of outstanding convertible
preferred shares and warrants.
8. EMPLOYEE BENEFIT PLAN
In 1997, the Company formally adopted a retirement plan that is qualified under
Section 401(k) of the Internal Revenue Code, which covers all eligible
employees. Participants may contribute a portion of their compensation not
exceeding a limit set annually by the Internal Revenue Service. The Company
makes a matching contribution based on the contribution made by the employee.
Total expense under the plan was approximately $61,700 and $10,300 for the year
ended June 30, 1998 and the eleven months ended June 30, 1997.
9. RELATED PARTY TRANSACTION
The Company is obligated to pay one of its shareholders commissions for the sale
of certain of its products and services under a sales agreement. Commissions
incurred during the year ended June 30, 1998 totaled approximately $1.7 million.
In addition, the Company incurred interest expense totaling approximately
$256,000 on a note payable to the same shareholder. See Note 4.
10. SUBSEQUENT EVENT
Subsequent to year end, the Company entered into agreements with two software
suppliers to purchase approximately $260,000 in software over the next two
years. This software will be used in and distributed with some of the Company's
products.
11. YEAR 2000 ISSUE--UNAUDITED
The Company has developed a plan to modify its information technology to be
ready for the year 2000 and has begun converting critical data processing
systems. The Company currently expects the project to be substantially complete
by early 1999 and to cost less than $50,000. This estimate includes internal
costs, and the costs to upgrade and replace systems in the normal course of
business. The Company does not expect this project to have a significant effect
on operations.
20