<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, 2000.
[ ] 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. [x]Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING 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 registrant's common stock was
19,001,711, net of treasury shares, on November 5, 2000.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets.......................................................................................... 3
Statements of Operations................................................................................ 4
Statements of Stockholders' Equity...................................................................... 5
Statements of Cash Flows................................................................................ 6
Notes to Financial Statements........................................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................................. 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................................................... 22
Item 2. Changes in Securities and Use of Proceeds............................................................... 22
Item 3. Defaults Upon Senior Securities......................................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders..................................................... 22
Item 5. Other Information....................................................................................... 22
Item 6. Exhibits and Reports on Form 8-K........................................................................ 22
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QUOTESMITH.COM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
2000 DECEMBER 31,
(UNAUDITED) 1999
------------ ------------
ASSETS
<S> <C> <C>
Cash and cash equivalents .................................... $ 6,202,661 $ 8,990,022
Fixed maturity investments -
available for sale at fair value .......................... 25,933,454 40,670,825
Commissions receivable, less allowances (2000 -
$296,000: 1999 - $273,000) ................................ 1,860,842 1,695,380
Other assets ................................................. 712,497 2,933,403
------------ ------------
Total current assets ......................................... 34,709,454 54,289,630
Furniture, equipment, and
computer software at cost, less
accumulated depreciation
(2000--$714,000; 1999--$326,000) .......................... 1,852,786 888,516
------------ ------------
Total assets ................................................. $ 36,562,240 $ 55,178,146
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued
liabilities ............................................... $ 3,278,311 $ 5,981,671
------------ ------------
Total current liabilities .................................... 3,278,311 5,981,671
Long-term capital lease obligations .......................... 138,039 --
Commitments and contingencies ................................ -- --
------------ ------------
Total Liabilities ............................................ 3,416,350 5,981,671
Stockholders' equity:
Common stock - par value, $.001 per share;
shares authorized: 60,000,000
shares issued: 2000--21,760,711;
1999--21,758,181 ..................................... 21,761 21,758
Additional paid-in capital ............................. 63,825,935 63,683,525
Retained-earnings deficit .............................. (30,423,667) (14,206,590)
Treasury stock at cost
(2,534,000 shares) ................................... (263,000) (263,000)
Accumulated other comprehensive loss ................... (15,139) (39,218)
------------ ------------
Total stockholders' equity ................................... 33,145,890 49,196,475
------------ ------------
Total liabilities and stockholders'
equity .................................................... $ 36,562,240 $ 55,178,146
============ ============
</TABLE>
See accompanying notes.
3
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QUOTESMITH.COM, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Commissions and fees...................... $ 3,782,292 $ 2,348,588 $ 12,555,574 $ 5,358,423
Other..................................... 12,463 10,430 33,775 50,795
------------ ------------ ------------- ------------
Total revenues............................... 3,794,755 2,359,018 12,589,349 5,409,218
Expenses:
Selling and marketing..................... 5,102,532 4,639,136 21,163,750 6,770,733
Operations ............................... 1,786,685 1,219,648 5,881,988 3,909,790
General and administrative ............... 956,266 870,574 3,489,817 2,255,781
------------ ------------ ------------- ------------
Total expenses............................... 7,845,483 6,729,358 30,535,555 12,936,304
------------ ------------ ------------- ------------
Operating loss............................... (4,050,728) (4,370,340) (17,946,206) (7,527,086)
Interest income ............................. 544,513 421,118 1,729,129 461,693
------------- ------------ ------------- ------------
Net loss..................................... $ (3,506,215) $ (3,949,222) $( 16,217,077) $ (7,065,393)
============ ============ ============= ============
Net loss per common
share, basic and diluted ................. $ (0.18) $ (0.23) $ ( 0.84) $ (0.49)
============ ============ ============= ============
Weighted average common
shares and equivalents
outstanding, basic and diluted............ 19,226,711 16,999,079 19,226,008 14,527,040
</TABLE>
See accompanying notes.
4
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QUOTESMITH.COM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------ 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>
1999:
Balance at January 1 ......... 14,921,091 $ 14,921 $ 1,624,061 $ (386,591) $(263,000) $ -- $ 989,391
Net loss ..................... -- -- -- (13,819,999) -- -- (13,819,999)
Other comprehensive loss-
unrealized loss on
investments .............. -- -- -- -- -- (39,218) (39,218)
------------
Total comprehensive loss ..... (13,859,217)
Proceeds from sale
of common stock:
Private placement and
employees .............. 1,128,000 1,128 3,382,872 -- -- -- 3,384,000
Public offering, less
expenses of $1,110,449... 5,709,090 5,709 57,497,833 -- -- -- 57,503,542
Employee stock compensation .. -- -- 1,178,759 -- -- -- 1,178,759
---------- ------------ ------------ ------------ --------- --------- ------------
Balance at December 31 ....... 21,758,181 21,758 63,683,525 (14,206,590) (263,000) (39,218) 49,196,475
Nine months ended
September 30, 2000 (unaudited)
Net loss ..................... -- -- -- (16,217,077) -- -- (16,217,077)
Other comprehensive loss-
unrealized gain on
investments .............. -- -- -- -- -- 24,079 24,079
------------
Total comprehensive loss ..... (16,192,998)
Proceeds from sale
of common stock:
Exercise of Stock options 2,530 3 7,590 -- -- -- 7,593
Employee stock compensation .. -- -- 134,820 -- -- -- 134,820
---------- ------------ ------------ ------------ --------- --------- ------------
Balance at September 30,
(unaudited) ................ 21,760,711 $ 21,761 $ 63,825,935 $(30,423,667) $(263,000) $ (15,139) $ 33,145,890
========== ============ ============ ============ ========= ========= ============
</TABLE>
See accompanying notes.
5
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QUOTESMITH.COM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2000 1999
---- ----
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................ $(16,217,077) $ (7,065,393)
Adjustments to reconcile
to net cash used by operating activities:
Depreciation expense ...................... 388,635 104,935
Accounts payable and
accrued liabilities ..................... (2,740,751) 1,970,388
Commissions receivable .................... (165,462) (200,101)
Stock compensation ........................ 134,820 1,095,678
Other assets .............................. 2,220,906 (541,499)
------------ ------------
Net cash used by operating
activities .................................. (16,378,929) (4,635,992)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments ......................... (53,138,549) (46,862,775)
Proceeds from investment maturities ............. 67,900,000
Purchase of furniture,
equipment, and computer software ................ (1,156,977) (379,801)
------------ ------------
Net cash provided (used) by investing
activities .................................... 13,604,474 (47,242,576)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of
common stock .................................. 7,593 60,891,479
Proceeds from notes payable ..................... 2,000,000
Payment of capital obligation ................... (20,499)
Repayment of notes payable ...................... (2,000,000)
------------ ------------
Net cash (used) provided by
financing activities .......................... (12,906) 60,891,479
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,787,361) 9,012,911
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ... 8,990,022 518,202
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ......... $ 6,202,661 $ 9,531,113
============ ============
</TABLE>
See accompanying notes.
6
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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. In the accompanying financial statements, the Company's
primary revenue source has been commissions derived from the sale of individual
term life insurance.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 period ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2000
The balance sheet at December 31, 1999 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.
ASSETS HELD UNDER CAPITAL LEASE
Assets held under capital leases are recorded at the net present value
of the minimum lease payments at the inception of the lease. Amortization
expense is computed using the straight-line method over the shorter of the
estimated useful lives of the assets or the period of the related lease.
3. COMMITMENTS AND CONTINGENCIES
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.
7
<PAGE> 8
4. COMPREHENSIVE LOSS
For the Company, comprehensive loss includes net loss and net
unrealized investment gains and losses, as follows:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss................................. $ (3,506,215) $ (3,949,222) $(16,217,077) $ (7,065,393)
Unrealized gain (loss) on investments.... 29,451 (10,726) 24,079 (10,726)
------------- ------------- ------------ -------------
Comprehensive loss................... $ (3,476,764) $ (3,959,948) $(16,192,998) $ (7,076,119)
============= ============= ============ =============
</TABLE>
5. FURNITURE, EQUIPMENT AND COMPUTER SOFTWARE
OBLIGATIONS UNDER CAPITAL LEASE
Furniture, equipment and computer software includes gross assets
acquired under capital lease of $196,000 at September 30, 2000. Related
amortization included in accumulated depreciation was approximately $15,000 at
September 30, 2000. Amortization of assets under capital lease is included in
depreciation expense.
The future minimum lease payments required under the capital lease and
the present value of the net minimum lease payments as of September 30, 2000 are
as follows:
Year Ending
December 31, Amount
------------ ------
2000 $ 14,403
2001 57,612
2002 57,612
2003 57,612
2004 37,040
----------
Total minimum lease payments 224,279
Imputed interest (48,849)
----------
Present value of net minimum lease payments 175,430
Current lease obligation (37,391)
----------
Long-term lease obligations $ 138,039
==========
8
<PAGE> 9
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements made in this Form 10-Q, including the following
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," include "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
We believe that Quotesmith.com is the most comprehensive
Internet-based insurance service available. Our service allows consumers to
compare insurance products, obtain instant quotes from over 300 companies and
purchase insurance from the company of their choice -- all without having to
speak to commissioned salespeople. The Quotesmith.com model offers significant
benefits to buyers of insurance who are able to obtain information from an
unbiased source, as well as benefits to insurance companies who are able to
efficiently market their products to a large group of interested consumers.
We incorporated and began our operations in May 1984 and during the
period from 1984 to 1994, we provided an electronic quotation and policy
information service to insurance agents and brokers. During this period, we
built our proprietary database and price comparison technology, and we began
securing key insurance company support and recruiting and training employees.
Throughout this period we were not engaged in the marketing of insurance to
consumers. In 1994, we began focusing our business strategy on marketing term
life insurance to self-directed consumers utilizing our proprietary insurance
price comparison technology. In May 1996, we began providing real time quotes
for term life insurance on the Internet and began receiving online insurance
application requests from consumers.
We are licensed as an agent for life and health insurance throughout
the United States. We continue to expand our Internet service offerings which
now include instant quotes for several types of insurance, including dental,
individual, small group and family medical insurance, Medicare supplement
insurance, "no-exam" whole life insurance, annuities and, through a
click-through arrangement with Progressive, 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 product. We recognize the full first year
commission revenues after the insurance company approves the policy and accepts
the initial payment. At the time revenue is recognized, an allowance is recorded
based on historical information for estimated commissions that will not be
received due to the non-payment of installment first year premiums. 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 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 arrangement with Progressive.
9
<PAGE> 10
The timing between when we submit a consumer's application for
insurance to the insurance company and when we generate revenues has varied over
time. The type of insurance product and the insurance company's backlog are the
primary factors that impact the length of time between submitted applications
and revenue recognition. Over the past three years, the time between application
submission and revenue recognition has averaged approximately four months. Any
changes in the amount of time between submitted application and revenue
recognition, of which a significant part is not under our control, will create
fluctuations in our operating results and could harm our business, operating
results and financial condition.
The insurance industry is heavily regulated and prices are set by the
insurance companies typically after they have registered changes with the state
insurance departments. Insurance agents are precluded from discounting or
rebating commissions, and they are not allowed to set premium or commission
levels.
Operations expenses are comprised of both variable and semi-variable
expenses, including wages, benefits and expenses associated with processing
insurance applications and maintaining our database and Web site. The historical
lag between the time an application is submitted to the insurance companies and
when we recognize revenues, significantly impacts our operating results as most
of our variable expenses are incurred prior to application submission.
Selling and marketing expenses consist primarily of direct advertising
costs.
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER
30, 1999
Revenues
Revenues increased 61% to $3.8 million for the third quarter of 2000
compared to $2.4 million in the third quarter of 1999. For the nine months ended
September 30, 2000 revenues increased 133% to $12.6 million from $5.4 million
for the same nine month period in 1999. The growth in revenues in the third
quarter of 2000 over the third quarter of 1999, and the growth in the revenues
for the nine months ended September 30, 2000 over the same period in 1999 was
due to a 78% and 176% growth in the number of paid policies, respectively. The
increase in paid policies was partially offset by a decline in the average first
year revenue per term life policy to $403 in the third quarter of 2000, compared
to $445 in the third quarter of 1999. For the nine month period ending September
30, first year revenue per term life policy dropped to $397 for 2000, compared
to $466 for 1999. The reduction in average first year revenue per term life
policy was due to a shift in business mix to insurance carriers with lower
levels of first year commissions.
Expenses
Selling and Marketing. Selling and marketing expenses increased to
$5.1 million in the third quarter of 2000 compared to $4.6 million in the third
quarter of 1999, and increased to $21.2 million for the nine months ended
September 30, 2000 compared to $6.8 million for the nine months ended September
30, 1999. The increase for the quarter ended September 30, 2000 represents a
decrease in selling and marketing expense as a percentage of revenues to 134%
compared to 197% for the same period in 1999. The increase in marketing expense
for the nine month period ended September 30, 2000 represents an increase in
selling and marketing expense as a percentage of revenues to 168% compared to
125% for the nine months ended September 30, 1999. The increase in marketing
expense, in total and as a percentage of total revenues, was due to the
expansion of television, print and radio advertisements beginning in the third
quarter of 1999. The decline in marketing expense as a percentage of revenue in
the third quarter of 2000 versus the third quarter of 1999 reflects management's
decision to cut back on advertising expenditures in the third quarter of 2000.
The Company anticipates a further reduction of marketing expenditures in the
fourth quarter of 2000. The Company will maintain reduced marketing expenditures
until our planned expansion into auto and long-term care insurance is fully
implemented. This reduction in marketing expenses is expected to result in
reduced levels of revenue in the fourth quarter of 2000 over the third quarter
of 2000.
10
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Operations. Operations expenses increased 46% to $1.8 million in the
third quarter of 2000 from $1.2 million in the third quarter of 1999, and
decreased as a percentage of revenues to 47% from 52%, respectively. Operations
expense increased 50% to $5.9 million for the nine months ended September 30,
2000, compared to $3.9 million for the nine months ended September 30, 1999,
which represents a decrease as a percentage of revenues to 47% in 2000 from 72%
in 1999. The overall increase in operating expense for all periods noted is
primarily due to an increase in employees, and increased depreciation expense
related to the expansion of the corporate facilities. The increase in operating
expenses for the nine months ended September 30 was partially offset by a
$549,000 charge relating to stock options granted in the first quarter of 1999.
The operating cost per paid policy was $199 in the third quarter of 2000
compared to $241 in the third quarter of 1999 verses $193 for the nine months
ended September 30, 2000 compared to $304 for the nine months ended September
30, 1999. Declining operating costs per paid policy are due to the shifting of
specified customer service functions to certain insurance companies and the
realization of operational leverage with the growth in paid policies.
General and Administrative. General and administrative expenses
increased 10% to $956,000 in the third quarter of 2000 from $871,000 in the
third quarter of 1999, and increased 55% to $3.5 million for the nine months
ended September 30, 2000 compared to $2.3 million for the nine months ended
September 30, 1999. General and administrative expenses decreased as a
percentage of revenues to 25% from 37% for the quarter ended September 30, 2000
and 1999 respectively, and decreased as a percentage of revenues to 28% form 42%
for the nine months ended September 30, 2000 and 1999 respectively. The 1999
general and administrative expense for the nine months ended September 30, 1999
included compensation expense of $242,000 relating to stock options granted in
the first quarter of 1999. The level of general and administrative expenses was
consistent with first and second quarter levels.
Interest Income
Interest income was $545,000 in the third quarter of 2000 compared to
$421,000 in the third quarter of 1999 and $1.7 million for the nine months ended
September 30, 2000 compared to $462,000 for nine months ended September 30,
1999. The increase in net interest income is due to the investment of the net
proceeds of $57.5 million received from the August 1999 initial public offering.
Income Taxes (Credit)
We had no income tax credit for 2000 and 1999 due to valuation
allowances provided against net deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
We currently expect that the cash and fixed maturity investments of
$32.1 million at September 30, 2000 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, expand the stock repurchase program, 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.
Our sources of funds will consist primarily of commissions and fee
revenue generated from the sale of insurance products and investment income from
our cash and fixed maturity portfolio. The principal uses of funds are marketing
and advertising expenses, operations, and general and administrative expenses.
Cash used in operating activities was approximately $16.4 million and
$4.6 million, respectively, for the nine months ended September 30, 2000 and
1999 as shown in the Statements of Cash Flows. The increase in cash used in 2000
was primarily a result of a net loss for the period reflecting the increase in
marketing expenditures.
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<PAGE> 12
Cash flows provided by investing activities were $13.6 million in the
first nine months of 2000, compared to cash flow used by investing activities of
approximately $47.2 million in the first nine months of 1999. The change in cash
provided by investing activities in 2000 versus the use of proceeds in 1999 is
primarily due to the use of the proceeds from the Company's initial public
offering used to purchase investments in 1999. Proceeds from the sale of
investments, net of cash used to purchase investments, were used to fund the
Company's operating losses.
Cash used by financing activities was approximately $13,000 in the
nine month period ended September 30, 2000, compared to net cash provided by
investing activities of $60.9 million for the same period in 1999. The 1999 cash
provided by financing activities represents proceeds from the Company's initial
public offering and the private sales of our common stock.
On October 30,2000, the Company's Board of Directors authorized the
repurchase of up to 3.5 million shares of common stock representing up to 18% of
the total 19.2 million shares outstanding. The Board approved immediate
commencement of the repurchase program as conditions warrant. As of November 5,
2000, the Company repurchased 225,000 shares of its stock for approximately
$169,000.
IMPACT OF YEAR 2000
In prior years, we have discussed the nature and progress of our plans
to become Year 2000 ready. In late 1999, we completed our remediation and
testing of systems. As a result of those planning and implementation efforts, we
experienced no significant disruptions in mission critical information
technology and non-information technology systems and believe those systems
successfully responded to the Year 2000 date change. We expensed approximately
$55,000 during 1999 in connection with remediating our systems. We are not aware
of any material problems resulting from Year 2000 issues, either with our
products, our internal systems, or the products of third parties. We will
continue to monitor our mission critical computer applications and those of our
suppliers and vendors throughout the remainder of the year 2000 to ensure that
any latent Year 2000 matters that may arise are addressed promptly.
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. An investment in Quotesmith.com 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, $15 million for the year ended December 31, 1999 and
$16.2 million for the nine months ended September 30, 2000. Because we plan to
continue to incur high levels of marketing 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.
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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
For the nine month period ended September 30, 2000, approximately 89%
of our revenue was derived from consumers purchasing 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
- 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 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:
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- 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.
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. 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.
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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 194 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. 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 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 may be required to realize our growth
strategy. Our operations growth has placed significant demands on our management
and other resources, which is likely to continue. To manage our future growth,
we will need to attract, hire and retain highly skilled and motivated officers,
managers and employees and improve existing systems and/or implement new systems
for:
- 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.
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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, for the year ended December 31, 1999 we paid $12,000,and for the
nine months ended September 30, 2000, we paid $9,000. If our quotes or those of
services with respect to which we have click-through arrangements are inaccurate
and we are required to pay a substantial number of cash reward guarantees, we
could be harmed.
IF WE LOSE ANY OF OUR EXECUTIVE OFFICERS OUR BUSINESS MAY SUFFER 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
David I. Vickers, our Vice President and Chief Financial Officer;
Willard L. Hemsworth II, our Senior Vice President of Marketing and Jay Angoff;
our Vice President of Strategic Planning, all began employment with us in the
last eleven months. These individuals have not previously worked together, or
with other members of our senior management team 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 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 site 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
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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.
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
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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 194 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.
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. Any infringement claims and resulting litigation, should it occur,
could subject us to significant liability for damages and could result in
invalidation of our proprietary rights. Even if we eventually won, any resulting
litigation could be time-consuming and expensive to defend and could divert our
management's attention.
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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.
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.
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TWO OF OUR OFFICERS AND DIRECTORS OWN A SIGNIFICANT PORTION OF OUR STOCK AND
CONTINUE TO CONTROL OUR COMPANY AND THEIR INTERESTS MAY NOT BE THE SAME AS OUR
PUBLIC STOCKHOLDERS
As of November 5, 2000, Robert Bland, our chairman, President and Chief
Executive Officer directly or indirectly controls 37.6% of our outstanding
common stock, and William Thoms, our Executive Vice President, directly controls
11.4% 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 many additional 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.
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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, we maintain the
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 our investments are subject to interest rate risk.
We consider all investments as available-for-sale. Unrealized gains on those
investments totaled $24,079 for the nine months ended September 30, 2000.
We do not hold any derivative financial instruments as of September 30,
2000, and have never held such instruments in the past. Additionally, all of our
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 our investments, a 1% increase in
interest rates would decrease the fair value of the investments by an immaterial
amount.
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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 our first registration
statement, filed on Form S-1 under the Securities Act of 1933 (No. 333-79355)
relating to Quotesmith.com's initial public offering of its Common Stock, was
August 3, 1999. A total of 5,709,090 shares of 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. Net
proceeds 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 of Quotesmith.com, or to any persons owning ten percent or more of our
common stock, or any of our affiliates.
Use of Proceeds. As of September 30, 2000, our balance sheet reflected
approximately $25.9 million in investments and $6.2 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). Exhibits
Exhibit Number Description
-------------- -----------
27.01 Financial Data Schedule
(b). Reports on Form 8-K
No reports were filed on Form 8-K for the quarter ended September
30, 2000.
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Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
QUOTESMITH.COM, INC.
Date: November 13, 2000.
By: /s/ David I. Vickers
------------------------------------
David I. Vickers
Chief Financial Officer,
Senior Vice President and Secretary
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