<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the quarterly period ended September 30, 1999.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from ________ to _________.
QUOTESMITH.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-3299423
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
8205 SOUTH CASS AVENUE, SUITE 102
DARIEN, ILLINOIS 60561
(630) 515-0170
(ADDRESS AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(b) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [ ]Yes [x] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities and
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. N/A
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of outstanding shares of the regisrant's common stock was
19,224,181, net of treasury shares, on November 15, 1999.
<PAGE> 2
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets (Unaudited).................................... 3
Statements of Operations (Unaudited).......................... 4
Statements of Stockholders' Equity (Unaudited)................ 5
Statements of Cash Flows (Unaudited).......................... 6
Notes to Financial Statements................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 26
Item 2. Changes in Securities and Use of Proceeds..................... 26
Item 3. Defaults Upon Senior Securities............................... 27
Item 4. Submission of Matters to a Vote of Security Holders........... 27
Item 5. Other Information............................................. 27
Item 6. Exhibits and Reports on Form 8-K.............................. 27
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QUOTESMITH.COM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
(UNAUDITED)
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents ........................ $ 9,531,113 $ 518,202
Fixed maturity investments -
available for sale at fair value (Note 4) ..... 46,852,049
Commissions receivable ........................... 1,207,763 1,007,662
Other assets ..................................... 580,747 39,248
------------ ------------
Total current assets ............................. 58,171,672 1,565,112
Furniture, equipment, and
computer software at cost, less
accumulated depreciation
(1999--$271,039; 1998--$166,102) .............. 515,472 240,606
------------ ------------
Total assets ..................................... $ 58,687,144 $ 1,805,718
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued
liabilities ................................... $ 2,786,715 $ 816,327
------------ ------------
Total current liabilities ........................ 2,786,715 816,327
Commitments and contingencies
(Note 5)
Stockholders' equity (Note 3):
Common stock par value, $.001 per share;
shares authorized:
1999 -- 60,000,000; 1998--35,000,000
shares issued: 1999--21,758,181;
1998--14,921,091 ......................... 21,758 14,921
Additional paid-in capital ................. 63,604,381 1,624,061
Retained-earnings deficit .................. (7,451,984) (386,591)
Treasury stock at cost
(2,534,000 shares) ....................... (263,000) (263,000)
Accumulated other comprehensive loss ....... (10,726)
------------ ------------
Total stockholders' equity ....................... 55,900,429 989,391
------------ ------------
Total liabilities and stockholders'
equity ........................................ $ 58,687,144 $ 1,805,718
============ ============
</TABLE>
See accompanying notes.
3
<PAGE> 4
QUOTESMITH.COM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS
SEPTEMBER 30, ENDED SEPTEMBER 30,
------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Commission revenues ...................... $ 2,348,588 $ 1,329,617 $ 5,358,423 $ 3,845,654
Other revenue ............................ 10,430 15,415 50,795 55,179
------------ ------------ ------------ ------------
Total revenues .............................. 2,359,018 1,345,032 5,409,218 3,900,833
Expenses:
Selling and marketing .................... 4,639,136 481,874 6,770,733 1,103,251
Operations ............................... 1,219,648 732,904 3,909,790 1,939,901
General and administrative ............... 870,574 283,540 2,255,781 773,354
------------ ------------ ------------ ------------
Total expenses .............................. 6,729,358 1,498,318 12,936,304 3,816,506
------------ ------------ ------------ ------------
Operating income (loss) ..................... (4,370,340) (153,286) (7,527,086) 84,327
Interest income (expense), net (Note 6) ..... 421,118 5,291 461,693 (4,510)
------------ ------------ ------------ ------------
Income (loss) before income
taxes .................................... (3,949,222) (147,995) (7,065,393) 79,817
Income taxes (credit) ....................... (33,295)
------------ ------------ ------------ ------------
Net income (loss) ........................... $ (3,949,222) $ (114,700) $ (7,065,393) $ 79,817
============ ============ ============ ============
Net income (loss) per common
share, basic and diluted ................. $ (0.23) $ (0.01) $ (0.49) $ 0.01
============ ============ ============ ============
Weighted average common
shares and equivalents
outstanding:
Basic .................................... 16,999,079 12,359,238 14,527,040 12,217,488
Diluted .................................. 16,999,079 12,359,238 14,527,040 12,262,859
</TABLE>
See accompanying notes.
4
<PAGE> 5
QUOTESMITH.COM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------ ACCUMULATED STOCKHOLDERS'
NUMBER OF ADDITIONAL RETAINED OTHER EQUITY
SHARES PAR PAID-IN EARNINGS TREASURY COMPREHENSIVE (DEFICIENCY
ISSUED VALUE CAPITAL (DEFICIT) STOCK LOSS IN ASSETS)
------ ----- ------- --------- ----- ---- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1998:
Balance at January 1 .......... $ 14,490,000 $14,490 $ 206,220 $ (190,990) $(263,000) $ -- $ (233,280)
Net loss ................... -- -- -- (195,601) -- -- (195,601)
Proceeds from sale
of common stock .......... 431,091 431 1,267,841 -- -- -- 1,268,272
Effect of stock
options granted .......... -- -- 150,000 -- -- -- 150,000
------------ ------- ----------- ----------- --------- -------- ------------
Balance at December 31 ..... 14,921,091 14,921 1,624,061 (386,591) (263,000) -- 989,391
Nine months ended
September 30,1999(unaudited)
Net loss ................... -- -- -- (7,065,393) -- -- (7,065,393)
Other comprehensive loss-
unrealized loss on
investments ............ -- -- -- -- -- (10,726) (10,726)
------------
Total comprehensive loss ... (7,076,119)
Proceeds from sale
of common stock (Note3):
Private placement ...... 1,128,000 1,128 3,382,872 -- -- -- 3,384,000
Public offering, less
expenses of $1,106,512 . 5,709,090 5,709 57,501,770 -- -- -- 57,507,479
Employee stock compensation -- -- 1,095,678 -- -- -- 1,095,678
------------ ------- ----------- ----------- --------- -------- ------------
Balance at September 30
(unaudited) .............. 21,758,181 $21,758 $63,604,381 $(7,451,984) $(263,000) $(10,726) $ 55,900,429
============ ======= =========== =========== ========= ======== ============
</TABLE>
See accompanying notes.
5
<PAGE> 6
QUOTESMITH.COM, INC.
STATEMENTS OF CASH FLOWS
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
1999 1998
---- ----
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................... $ (7,065,393) $ 79,817
Adjustments to reconcile
to net cash provided
(used) by operating
activities:
Depreciation expense .................. 104,935 40,445
Accounts payable and
accrued liabilities ................. 1,970,388 (70,462)
Commissions receivable ................ (200,101) (71,512)
Stock compensation .................... 1,095,678 50,000
Other assets .......................... (541,499) (6,429)
------------ ------------
Net cash provided (used)
by operating activities ................. (4,635,992) 21,859
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Investments ..................... (46,862,775) --
Purchases of furniture,
equipment, and software ................... (379,801) (122,415)
------------ ------------
Net cash used by investing
activities ................................ (47,242,576) (122,415)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of
common stock .............................. 60,891,479 1,224,997
Proceeds from notes payable (Note 3) ........ 2,000,000
Repayment of notes payable (Note 3) ......... (2,000,000) (194,189)
------------ ------------
Net cash provided by
financing activities ...................... 60,891,479 1,030,808
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS ...... 9,012,911 930,252
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 518,202 3,809
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ..... $ 9,531,113 $ 934,061
============ ============
See accompanying notes.
6
<PAGE> 7
QUOTESMITH.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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 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.
2. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended
September 30, 1999 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1999.
The balance sheet at December 31, 1998 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
3. STOCKHOLDERS' EQUITY AND RELATED PARTY TRANSACTIONS
In August of 1999 the Company completed its initial public offering of
its common stock. A total of 5,709,090 shares of the Company's Common Stock were
sold at a price of $11.00 per share. Net proceeds from the initial public
offering totaled $58,613,991. Expenses related to the offering totaled
approximately $1.1 million.
In September 1998, the Company entered into a three year services
agreement with a third party (the Party) under which the Company paid 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 in
a private placement. The Company also sold 272,727 shares of its common stock to
the Investor for proceeds totaling $3,000,000 in the initial public offering.
In June 1999, the Company borrowed $2,000,000 from the Investor.
Interest accrued at an annual rate of 12.5%. The note was paid in full on August
5, 1999 with interest totaling $28,767.
7
<PAGE> 8
4. INVESTMENTS
The company classifies its fixed maturity investments as
available-for-sale and, accordingly, such investments are carried at fair value.
The cost of fixed maturity investments is adjusted for amortization of premiums
and discounts and for declines in value that are other than temporary. Temporary
changes in the fair values of investments are reflected directly in
stockholders' equity with no effect on net income or loss.
At September 30, 1999, short-term investments were classified as
available-for-sale securities and were reported at fair value, as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Government agency bonds .......................... $ 13,652,053 $ 121 $ 175 $ 13,651,999
State and municipal bonds.............................. 10,014,710 -- 11,579 10,003,131
Corporate bonds and commercial paper .................. 23,196,012 907 -- 23,196,919
------------- ----------- ----------- -------------
Total .............................................. $ 46,862,775 $ 1,028 $ 11,754 $ 46,852,049
============= =========== =========== ============
</TABLE>
As of September 30, 1999, based on contractual maturities, the fair
value of investments that mature within one year amount to $43,840,569 and the
fair value that mature in two years amount to $3,011,480.
Money market investments are included as part of cash and cash
equivalents.
5. COMMITMENTS AND CONTINGENCIES
The Company leases office space under an operating lease agreement in
which the Company is committed to annual rent expense of approximately $240,000
through 2003.
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.
6. NON OPERATING INCOME
Interest income and (expense), net, in the accompanying Statement of
Operations includes the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income........................................ $ 445,810 $ 12,148 $ 490,605 $ 19,947
Interest expense....................................... 24,692 6,857 28,912 24,457
------------- ----------- ------------- -------------
Interest income (expense), net......................... $ 421,118 $ 5,291 $ 461,693 $ (4,510)
============= =========== ============= =============
</TABLE>
8
<PAGE> 9
7. COMPREHENSIVE INCOME
For the Company, comprehensive income includes net income or loss and
net unrealized investment gains or losses, as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss)...................................... $ (3,949,222) $ (114,700) $ (7,065,393) $ 79,817
Unrealized loss on investments......................... (10,726) -- (10,726) --
------------- ----------- ------------- ------------
Comprehensive income (loss)............................ $ (3,959,948) $ (114,700) $ (7,076,119) $ 79,817
============= =========== ============= ============
</TABLE>
9
<PAGE> 10
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following "Management's Discussion and Analysis of Financial
Condition and Results of Operations" includes "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. This
Act provides a "safe harbor" for forward-looking statements to encourage
companies to provide prospective information about themselves so long as they
identify these statements as forward-looking and provide meaningful cautionary
statements identifying important factors that could cause actual results to
differ from the projected results. All statements other than statements of
historical fact we make in this Form 10-Q are forward-looking. In particular,
the statements herein regarding industry prospects, our future results of
operations or financial position and statements preceded by, followed by or that
include the words "intends," "estimates," "believes," "expects," "anticipates,"
"should," "could," or similar expressions, are forward-looking statements.
Forward-looking statements reflect our current expectations and are inherently
uncertain. Our actual results may differ significantly from our expectations.
The section entitled "Factors Affecting Future Operating Results" describes
some, but not all, of the factors that could cause these differences.
OVERVIEW
Quotesmith.com is one of the most comprehensive Internet-based
insurance services available. Our service allows consumers to compare insurance
products, obtain instant quotes from over 300 companies and to purchase
insurance from the Company of their choice - all without the involvement of any
commissioned salespeople.
Quotesmith.com is licensed as an agent for life and health insurance in
all 50 states and the District of Columbia. We now provide instant quotes, and
allow customers to apply for, the following types of insurance: term life
insurance, dental, individual and family medical insurance, small group medical
insurance, Medicare supplement insurance, "no-exam" whole life insurance and
fixed annuity insurance. We also have click-through arrangements with
Progressive Corp. and Intuit Insurance Services, Inc., to provide our customers
access to private-passenger automobile insurance quotes.
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 by 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 first year installment premiums. First
year commission revenues per policy can fluctuate due to changing premiums,
commission rates, and types or amount of insurance sold. We occasionally receive
bonuses 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 for term
life 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. 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 these revenues have been earned.
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. 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.
10
<PAGE> 11
Time between the receipt of a completed application to revenue recognition was
approximately 98 days in the quarter ended September 30, 1999 and was
approximately 109 days in the quarter ended September 30, 1998.
In the year ended 1998, over 98% of our revenues were derived from the
sale of term life policies. In the three months ended September 30, 1999, 94.7%
of our revenues were derived from the sale of term life policies compared to
98.9% in the three months ended September 30, 1998.
At September 30, 1999 there were 90 employees, compared to 59 at
September 30, 1998 and 88 at June 30, 1999.
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 NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30,
------------------ -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Commission................................................... 99.6% 98.9% 99.1% 98.6%
Other ...................................................... 0.4 1.1 0.9 1.4
------ ------ ------ -----
Total revenues............................................. 100.0 100.0 100.0 100.0
Expenses:
Selling and marketing........................................ 196.7 35.8 125.2 28.3
Operations................................................... 51.7 54.5 72.3 49.7
General and administrative................................... 36.9 21.1 41.7 19.8
------ ------ ------ -----
Total expenses............................................. 285.3 111.4 239.2 97.8
------ ------ ------ -----
Operating income (loss).........................................(185.3) (11.4) (139.2) 2.2
Interest income (expense), net.................................. 17.9 0.4 8.5 (0.1)
------ ------ ------ -----
Income (loss) before taxes......................................(167.4) (11.0) (130.7) 2.1
Income taxes (credit)........................................... 0.0 2.5 0.0 0.0
------ ------ ------ -----
Net income (loss)...............................................(167.4)% (8.5)% (130.7)% 2.1%
====== ====== ====== =====
</TABLE>
COMPARISON OF THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND
SEPTEMBER 30, 1998
Revenues
Revenues increased to $2.4 million for the three months ended September
30, 1999 from $1.3 million for the three months ended September 30, 1998 and
increased to $5.4 million in the nine months ended September 30, 1999 from $3.9
million in the nine months ended September 30, 1998. These increases resulted
primarily from the growth in the number of insurance policies sold. During the
three months ended September 30, 1999 the Company sold 5,053 insurance policies
compared to 2,788 policies in the September 1998 quarter. This increase in paid
policies was greater than anticipated, based on historical averages, due to a
higher percentage of applications received resulting in paid policies. In future
quarters, the Company is uncertain regarding the continuation of the recent
increase in applications received resulting in paid policies. For the nine
months ended September 30, 1999 the Company sold 11,053 insurance policies
compared to 7,973 policies in the nine months ended September 30, 1998.
11
<PAGE> 12
Operating Expenses
Selling and Marketing. Selling and marketing expenses consist primarily
of direct advertising costs. Selling and marketing expenses increased to $4.6
million for the three months ended September 30, 1999 from $482,000 for the
three months ended September 30, 1998 and increased to $6.8 million in the nine
months ended September 30, 1999 from $1.1million in the nine months ended
September 30, 1998. Selling and marketing expenses increased as a percentage of
revenues from 35.8% for the three months ended September 30, 1998 to 196.7% for
the three months ended September 30, 1999. Selling and marketing expenses also
increased for the comparable nine-month periods from 28.3% to 125.2%. The
increase in selling and marketing expenses was primarily due to the expansion of
our national direct advertising campaign. Over the next two years, we intend to
significantly increase our advertising and marketing efforts in an attempt to
build greater brand awareness, drive more quote volume and increase the number
of insurance policies sold.
Operations. 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.
Operations expenses increased to $1.2 million for the three months ended
September 30, 1999 from $733,000 for the three months ended September 30, 1998
and increased to $3.9 million in the nine months ended September 30, 1999 from
$1.9 million in the nine months ended September 30, 1998. Operations expenses
decreased as a percentage of revenues from 54.5% for the three months ended
September 30, 1998 to 51.7% for the three months ended September 30, 1999, and
increased from 49.7% for the nine months ended September 30, 1998 to 72.3% for
the nine months ended September 30, 1999. Operations expenses increased over the
comparable nine-month period due to an increased number of employees and due to
compensation expense of $549,000 relating to stock options granted in 1999.
General and Administrative. General and administrative expenses consist
primarily of executive compensation and benefits, financial and legal expenses
and office expenses. General and Administrative expenses increased to $871,000
for the three months ended September 30, 1999 from $284,000 for the three months
ended September 30, 1998. General and Administrative expenses increased to $2.3
million in the nine months ended September 30, 1999 from $773,000 in the nine
months ended September 30, 1998. General and Administrative expenses increased
as a percentage of revenues from 21.1% for the three months ended September 30,
1998 to 36.9% for the three months ended September 30, 1999. Expenses related to
General and Administrative also increased for the comparable nine-month periods
from 19.8% to 41.7%. The increase was primarily due to increases in staffing and
compensation expenses relating to the issuance of stock options. For the nine
months ended September 30, 1998, we recorded compensation expense of $50,000 for
the issuance of stock options to employees compared to $547,000 in the nine
months ended September 30, 1999. Additional unearned compensation expense will
be amortized over the remaining vesting period of the applicable options in the
amounts of $83,000 for the remainder of 1999, $192,000 in 2000 and $39,000 in
2001.
Interest Income (Expense), Net
The Company's interest income and expense, net, increased from $5,000
of net income for the three months ended September 30, 1998 to $421,000 of net
income for the three months ended September 30, 1999. Interest income and
expense increased from $5,000 net expense for the nine months ended September
30, 1998 to $462,000 of net interest income in the nine months ended September
30, 1999. The increase for all periods presented was the result of interest
earned on cash, cash equivalents and investments, particularly the interest
earned on the net proceeds from the Company's initial public offering completed
in August 1999. Interest income is expected to increase during the three months
ended December 31, 1999 as the result of a full quarter of interest relative to
the initial public offering proceeds.
Income Taxes (Credit)
We had no income tax credit or limited credits for the periods
presented due to valuation allowances provided against net deferred tax assets.
The company anticipates the need for valuation allowances for all net deferred
taxes over the next two years.
12
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
Since 1995, our primary sources of operating funds have been
commissions from the sale of insurance policies. The Company has obtained
additional financing from bank borrowings, private financing and the sale of
common stock. In August of 1999, the Company completed its initial public
offering of shares of common stock, pursuant to which it issued 5,709,090 shares
of its common stock at a price of $11.00 per share. The company received
approximately $57.5 million in cash, net of underwriting discounts and costs
associated with the initial public offering.
At September 30, 1999 the Company's principal sources of liquidity
consisted of $9.5 million in cash and cash equivalents and $46.9 million in
marketable securities, compared to $518,000 in cash at December 31, 1998.
Net cash used in operating activities was $4.6 million for the nine
months ended September 30, 1999, compared to $22,000 of cash provided by
operating activities for the nine months ended September 30, 1998. The increase
in cash used in the 1999 period was primarily a result of a net loss and
increases in commissions receivable and other assets. These increases were
partially offset by non-cash charges for depreciation and stock compensation, in
addition to an increase in accounts payable.
Net cash used in investing activities was $47.2 million for the nine
months ended September 30, 1999, compared to $122,000 for the nine months ended
September 30, 1998. Net cash used in investing activities consisted of net
purchases of marketable securities and the purchase of fixed assets.
Net cash provided by financing activities of $60.9 million for the nine
months ended September 30, 1999 resulted from proceeds from the initial public
offering of common stock in August of 1999. On June 24, 1999, we borrowed $2.0
million from Intuit, Inc. at an interest rate, payable quarterly, of 12.5%. This
loan was repaid on August 5, 1999 with proceeds from the initial public
offering.
We currently expect that the cash proceeds we received from our initial
public 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 working capital expenditures are difficult to predict,
and if they vary materially, we may require additional financing sooner than
anticipated. If we require additional equity financing, it may be dilutive to
our stockholders and the equity securities issued in a subsequent offering may
have rights or privileges senior to the holders of our common stock. If debt
financing is available, it may require 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.
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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 these products or the delivery of
these services as applicable at any time hereafter.
Our year 2000 project encompasses both information and non-information
systems within Quotesmith.com as well as the investigation of our strategic
suppliers/business partners. To date, we have not experienced any material year
2000 problems. We have internally performed and evaluated all year 2000
compliance evaluation, remediation, testing and compliance certification. We
have relied completely on internal resources and not used any third party with
respect to our year 2000 efforts.
We have inventoried and assessed the year 2000 readiness of the
following:
In-house Applications. We have internally developed most of the systems
used in the operation of our business and believe that these systems are year
2000 compliant. On March 31, 1999, we completed the assessment, remediation and
testing of all of our internally developed production systems.
Third Party Software and Hardware. We have assessed 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 adversely affect
business functions as well as the operations of our Web site. As part of our
assessment program, we have contacted third party vendors and licensors of
software and computer technology to seek assurances that their products are year
2000 compliant. We have not used any independent verification processes to
assure the year 2000 compliance of third parties. We completed the assessment
process in the second quarter of 1999.
As a result of our evaluation of third party supplied hardware and
software, we did not discover any material issues. However, we determined that
we needed to apply several software upgrade patches to achieve year 2000
compliance. We obtained and installed all software upgrades.
Business Partners. We have contacted our material insurance company
participants whose products or services are sold through our service to
determine if they are year 2000 compliant. We have received responses from 95%
of the insurance companies we have contacted. All of the respondents have stated
that they have year 2000 programs in place and currently are or will be year
2000 compliant.
Non-information Technology Facilities and Utilities. This category
includes components in our office support systems including copy machines, fax
machines, telephone and communications systems, postage machines, electrical,
and air handlers. We have completed our evaluation of our non-information
technology systems for year 2000 compliance.
As a result of this evaluation, we did not discover any material
hardware issues. However, we determined that we needed to apply a software
upgrade to our voice mail system to achieve year 2000 compliance. The
approximate cost of that upgrade was $1,000 and the upgrade has been completed.
We have contacted our property management firm and obtained a statement
from this firm that our office space is year 2000 compliant.
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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 $55,000. We do not expect to incur
additional material expenses for Y2K readiness. The additional costs to make any
other products or services year 2000 compliant by December 31, 1999 will be
expensed as incurred.
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 some
products and services from being offered through our service, or have other
unforeseen, harmful consequences to us.
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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FACTORS THAT MAY AFFECT OUR FUTURE OPERATING RESULTS
RISKS RELATED TO OUR BUSINESS
YOU MAY HAVE DIFFICULTY EVALUATING OUR BUSINESS BECAUSE OF OUR LIMITED
ELECTRONIC COMMERCE HISTORY
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. Investment in the Company 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 $7.5 million for the nine months ended September 30,
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.
IF THE TERM LIFE INSURANCE INDUSTRY DECLINES, OUR BUSINESS WILL SUFFER BECAUSE
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.
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
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- - our ability to overcome a perception among many consumers that
obtaining insurance online is risky.
We cannot assure you 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 we expect, 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 these 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;
- - 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.
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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 IN ORDER TO REMAIN COMPETITIVE
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 $6.8 million for the nine months ended September 30, 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 these additional selling and marketing expenses, our business, results of
operations and financial condition would be harmed.
WE MUST SUCCESSFULLY EXPAND INTO ADDITIONAL INSURANCE PRODUCTS IN ORDER TO
REMAIN COMPETITIVE
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.
PURSUANT TO OUR AGREEMENT WITH INTUIT INSURANCE SERVICES, WE MAY NOT PURSUE SOME
STRATEGIC RELATIONSHIPS OR AGREEMENTS WITHOUT ITS PRIOR CONSENT WHILE INTUIT
INSURANCE SERVICES MAINTAINS A WEB SITE THAT IS COMPETITIVE WITH OUR SERVICE
Pursuant to the services agreement we have with Intuit Insurance
Services, in some situations we may not enter into strategic relationships or
agreements with some 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.
BECAUSE WE GENERATE A SIGNIFICANT AMOUNT OF REVENUE FROM A SMALL NUMBER OF
INSURANCE COMPANIES, WE COULD EXPERIENCE A SUBSTANTIAL DROP IN OUR REVENUES IF
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 59.6% of the paid policies we sold for the nine months ended
September 30, 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.
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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 133 of these 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.
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 133
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
strategic relationships and agreements to increase our access to online
consumers. 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
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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:
- - transaction processing;
- - operational and financial management; and
- - 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 nine months ended September 30, 1999 we paid $8,500. 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 BECAUSE WE RELY
ON THEIR KNOWLEDGE OF OUR BUSINESS
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 executive officers could harm our company.
SOME OF OUR EXECUTIVE OFFICERS AND KEY EMPLOYEES HAVE ONLY RECENTLY BEGUN
EMPLOYMENT WITH US AND MAY NOT WORK WELL TOGETHER
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. If these individuals do not work together
effectively, our business would suffer.
RISKS RELATED TO THE INSURANCE INDUSTRY
OUR BONUS COMMISSION REVENUES ARE HIGHLY UNPREDICTABLE WHICH MAY CAUSE
FLUCTUATIONS IN OUR OPERATING RESULTS
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
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control the amount of bonus commission we receive in any particular quarter or
year and these 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, some 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.
RISKS RELATED TO REGULATION
OUR COMPLIANCE WITH THE STRICT REGULATORY ENVIRONMENT APPLICABLE TO THE
INSURANCE INDUSTRY IS COSTLY, AND IF WE FAIL TO COMPLY WITH THE NUMEROUS LAWS
AND REGULATIONS THAT GOVERN THE INDUSTRY WE COULD BE SUBJECT TO PENALTIES
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 some 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. These 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 allegations 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.
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REGULATION OF THE SALE OF INSURANCE OVER THE INTERNET AND OTHER ELECTRONIC
COMMERCE IS UNSETTLED, AND FUTURE REGULATIONS COULD FORCE US TO CHANGE THE WAY
WE DO BUSINESS OR MAKE OPERATING OUR BUSINESS MORE COSTLY
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. Any new 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.
IF WE BECOME SUBJECT TO LEGAL LIABILITY FOR THE INFORMATION WE DISTRIBUTE ON OUR
WEB SITE, OUR BUSINESS COULD BE HARMED
Our customers rely upon information we publish regarding insurance
quotes, coverage, 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 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 133 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. Several 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 REDUCE OR LIMIT VISITORS TO OUR WEB SITE AND HARM
OUR ABILITY TO GENERATE REVENUE
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 these increases, or expand and
upgrade our systems and infrastructure to accommodate these 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.
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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. Unauthorized third parties may 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 MAY BE SUBJECT TO CLAIMS OF INFRINGEMENT THAT MAY BE COSTLY TO RESOLVE AND,
IF SUCCESSFUL, COULD HARM OUR BUSINESS
Our business activities and products may infringe upon the proprietary
rights of others. Parties may assert valid or invalid infringement claims
against us. On July 28, 1999, we received notice from TechSearch L.L.C. that it
believes our Web site is inducing the infringement of a patent it allegedly
holds. 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.
IF WE ARE UNABLE TO ADAPT TO THE RAPID TECHNOLOGICAL CHANGE IN OUR INDUSTRY, WE
WILL NOT REMAIN COMPETITIVE AND OUR BUSINESS WILL SUFFER
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.
IF THE YEAR 2000 PROBLEM HARMS OUR INSURANCE COMPANY SUPPLIERS WE MAY FACE
DIFFICULTY COLLECTING REVENUE AND MAINTAINING CONSUMER CONFIDENCE IN OUR SERVICE
The risks posed by year 2000 issues could adversely affect our business
in a number of significant ways. If insurance companies are unable to track the
receipt of premiums or the payment of insurance benefits, we will face
difficulty collecting commissions and maintaining our customer's confidence in
our service. We believe that this is the most reasonably likely worst case
scenario that could result from a year 2000 problem. Year 2000 problems that any
third parties or we experience could harm our business. 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. 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."
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DEMAND FOR OUR SERVICES MAY BE REDUCED 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 outages and
delays in the future. 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.
RISKS RELATED OWNERSHIP OF OUR COMMON STOCK
OUR STOCK PRICE MAY HAVE WIDE FLUCTUATIONS, AND INTERNET-RELATED STOCKS HAVE
BEEN PARTICULARLY VOLATILE
The market price of our common stock is highly volatile and is 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. These market prices generally are
not sustainable and are subject to wide variations. If our common stock trades
to unsustainably high levels, 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
We have 19,224,091 shares of common stock outstanding and have an
additional 712,000 shares of common stock reserved for issuance pursuant to
outstanding stock options. 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
our initial public offering to resell their shares. Also, our directors,
officers and substantially all of our current stockholders have agreed, subject
to limited exceptions, not to sell their shares for a period of 180 days after
the initial public offering.
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> 25
TWO OF OUR OFFICERS AND DIRECTORS OWN A MAJORITY OF OUR STOCK AND CONTINUE TO
CONTROL OUR COMPANY AND THEIR INTERESTS MAY NOT BE THE SAME AS OUR PUBLIC
STOCKHOLDERS
Robert Bland, our chairman, president and chief executive officer
directly or indirectly controls 39.5% of our outstanding common stock, and
William Thoms, our executive vice president, directly controls 11.7% 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 several 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 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 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 specific conditions are met.
OUR MANAGEMENT TEAM HAS BROAD DISCRETION OVER THE USE OF PROCEEDS FROM THE
INITIAL PUBLIC OFFERING
The net proceeds of our initial public offering totaled approximately
$57,507,000 after deducting the 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.
25
<PAGE> 26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of Quotesmith.com's investment activities is to
preserve principal while at the same time maximizing yields without
significantly increasing risk. To achieve this objective, the Company maintains
its portfolio of cash and equivalents and short-term investments in a variety of
securities, including both government and corporate obligations and money market
funds.
Substantially all of the Company's investments are subject to interest
rate risk. The Company considers all investments as available-for-sale and
unrealized losses on those investments totaled $10,726 for the quarter.
Quotesmith.com did not hold any derivative financial instruments as of
September 30, 1999, and has never held such instruments in the past.
Additionally, all the Company's transactions have been denoted in U.S. currency,
and do not have any risk associated with foreign currency transactions.
Due to the short term nature of the Company's investments, a 1%
increase in interest rates would decrease the fair value of the Company's
investments by an immaterial amount.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Initial Public Offering. The effective date of the Company's first
registration statement, filed on Form S-1 under the Securities Act of 1933 (No.
333-79355) relating to the Company's initial public offering of its Common
Stock, was August 3, 1999. A total of 5,709,090 shares of the Company's Common
Stock were sold at a price of $11.00 per share to an underwriting syndicate led
by Hambrecht & Quist, Paine Webber Incorporated, ABN AMRO Rothschild and Charles
Schwab & Co., Inc. The initial offering commenced on August 3, 1999, and closed
on August 6, 1999. Additionally, the underwriters exercised their over allotment
on August 31st, 1999. The initial public offering and exercise of the over
allotment option resulted in gross proceeds $62.8 million of which $4.2 million
was applied toward the underwriting discount. Expenses related to the offering
totaled approximately $1.1 million. Net proceeds to the Company from the
offering were approximately $57.5 million. We did not pay any of the net
proceeds of the offering, directly or indirectly, to any director, officer or
affiliate of Quotesmith.com, or to any persons owning ten percent or more of our
common stock, or any of our affiliates.
As of September 30, 1999, the Company's balance sheet reflected
approximately $46.8 million in investments and $6.3 million in cash equivalents
with respect to proceeds received from the initial public offering. Proceeds
from the initial public offering have been used for the repayment of a loan from
Intuit, Inc. totaling $2.0 million, for general corporate purposes and the
expansion of our marketing efforts, totaling approximately $2.4 million.
Rights Plan. In conjunction with the initial public offering, the
Company declared a dividend distribution of one preferred share purchase right
for each outstanding share of common stock. The dividend was payable to
stockholders of record immediately prior to the closing of the offering. With
exceptions, when each right becomes exercisable, the holder is entitled to
purchase from the Company on one-hundredth of a share of Series A Participating
Preferred Stock at an exercise price equal to five times the initial offering
price. Pursuant to this rights plan, the Company has entered into a Rights
Agreement with Harris Trust and Savings Bank, as Rights Agent.
26
<PAGE> 27
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Pursuant to Actions by Written Consent of the Stockholders in Lieu of a
Meeting, each dated July 7, 1999, the following matters were approved by the
holders of a majority of the shares of the Company's Common Stock:
(a) Election of Robert S. Bland, William V. Thoms, Bruce J.
Rueben and Timothy F. Shannon as directors for 1999;
(b) Adoption of the Restated Certificate of Incorporation of the
Company, which became effective upon completion of the
Company's initial public offering of common stock;
(c) Upon the effective date of the Company's registration
statement on Form S-1 filed with the Securities and Exchange
Commission, the election of Richard F. Gretsch and Bruce J.
Rueben as Class I Directors; Jeremiah A. Denton, Jr. and John
McCartney as Class II Directors; and Robert S. Bland, William
V. Thoms and Timothy F. Shannon as Class III Directors;
(d) Approval of the Company's 1997 Stock Option Plan (As Amended
and Restated March 29, 1999);
(e) Approval of the 1999 Employee Stock Purchase Plan; and
(f) Approval of the Directorship Indemnification Agreement.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
We did not file any reports on Form 8-K during the quarter ended
September 30, 1999.
Exhibit Number Description
-------------- -----------
27.01 Financial Data Schedule
27
<PAGE> 28
In accordance with the requirements of the Securities Exchange Act, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Quotesmith.com, Inc.
Date: November 15, 1999
By: /s/ THOMAS A. MUNRO
----------------------------
Thomas A. Munro
Chief Financial Officer and
Vice President and Secretary
28
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
QUOTESMITH.COM, INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C> <C>
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<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> SEP-30-1998 SEP-30-1999
<CASH> 934,061 9,531,113
<SECURITIES> 0 46,852,049
<RECEIVABLES> 887,534 1,460,763
<ALLOWANCES> 125,000 253,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,717,209 58,171,672
<PP&E> 351,266 786,511
<DEPRECIATION> 147,877 271,039
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