UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the quarterly period ended September 30, 2001.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 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(d) 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 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 registrant's common stock was
5,340,279, net of treasury shares, on October 31, 2001.
INDEX
PAGE
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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....... 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 23
Item 2. Changes in Securities and Use of Proceeds........................ 23
Item 3. Defaults Upon Senior Securities.................................. 23
Item 4. Submission of Matters to a Vote of Security Holders.............. 23
Item 5. Other Information................................................ 24
Item 6. Exhibits and Reports on Form 8-K................................. 24
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QUOTESMITH.COM, INC.
BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2001 2000
(UNAUDITED)
------------- ------------
ASSETS
Cash and cash equivalents .................................... $ 6,183,611 $ 4,269,141
Fixed maturity investments -
available for sale at fair value .......................... 13,897,130 24,027,889
Commissions receivable, less allowances (2001--
$159,000; 2000-- $239,000) ................................ 901,716 1,540,515
Other assets ................................................. 252,562 453,071
------------ ------------
Total current assets ......................................... 21,235,019 30,290,616
Furniture, equipment, and
computer software at cost, less
accumulated depreciation
(2001-- $1,327,055; 2000-- $873,000) ...................... 2,213,369 2,352,147
------------ ------------
Total assets ................................................. $ 23,448,388 $ 32,642,763
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued
liabilities ............................................... $ 988,765 $ 2,847,508
------------ ------------
Total current liabilities .................................... 988,765 2,847,508
Long-term capital lease obligations .......................... 95,751 127,950
------------ ------------
Total liabilities ............................................ 1,084,516 2,975,458
Commitments and contingencies ................................ -- --
Stockholders' equity:
Common stock - par value, $.003 per share;
shares authorized: 60,000,000
shares issued: 2001 and 2000-- 7,253,570 ............. 21,761 21,761
Additional paid-in capital ............................. 63,847,811 63,836,873
Retained-earnings deficit .............................. (38,940,699) (32,828,218)
Treasury stock at cost 2001-- 1,913,291;
2000-- 1,331,667 shares .............................. (2,595,343) (1,360,313)
Accumulated other comprehensive gain (loss) ............ 30,342 (2,798)
------------ ------------
Total stockholders' equity ................................... 22,363,872 29,667,305
------------ ------------
Total liabilities and stockholders'
equity .................................................... $ 23,448,388 $ 32,642,763
============ ============
See accompanying notes.
3
QUOTESMITH.COM, INC.
STATEMENTS OF OPERATIONS
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ----------------------------
2001 2000 2001 2000
---- ---- ---- ----
Revenues:
Commissions and fees...................... $ 1,724,895 $ 3,782,292 $ 6,247,340 $ 12,555,574
Other..................................... 5,179 12,463 34,491 33,775
------------ ------------ ------------- -------------
Total revenues............................... 1,730,074 3,794,755 6,281,831 12,589,349
Expenses:
Selling and marketing..................... 827,713 5,102,532 6,243,822 21,163,750
Operations ............................... 1,395,063 1,786,685 4,280,481 5,881,988
General and administrative ............... 797,084 956,266 2,798,422 3,489,817
------------ ------------ ------------- -------------
Total expenses............................... 3,019,860 7,845,483 13,322,725 30,535,555
------------ ------------ ------------- -------------
Operating loss............................... (1,289,786) (4,050,728) (7,040,894) (17,946,206)
Interest income.............................. 228,144 544,513 928,413 1,729,129
------------ ------------ ------------- -------------
Net loss..................................... $ (1,061,642) $ (3,506,215) $ (6,112,481) $ (16,217,077)
============ ============ ============= =============
Net loss per common
share, basic and diluted ..................... $ (0.20) $ (0.55) $ (1.12) $ (2.53)
============ ============ ============= =============
Weighted average common
shares and equivalents
outstanding, basic and diluted................ 5,345,252 6,408,904 5,474,995 6,408,669
See accompanying notes.
4
QUOTESMITH.COM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK
------------ ACCUMULATED
NUMBER OF ADDITIONAL RETAINED- OTHER TOTAL
SHARES PAR PAID-IN EARNINGS TREASURY COMPREHENSIVE STOCKHOLDERS'
ISSUED VALUE CAPITAL DEFICIT STOCK GAIN (LOSS) EQUITY
------------ ----- ---------- -------- -------- ------------- ------------
2000:
Balance at January 1......... 7,252,727 $ 21,758 $63,683,525 $(14,206,590) $ (263,000) $ (39,218) $ 49,196,475
Net loss..................... -- -- -- (18,621,628) -- -- (18,621,628)
Other comprehensive gain-
unrealized gain on
investments ............. -- -- -- -- -- 36,420 36,420
------------
Total comprehensive loss..... (18,585,208)
Purchase of treasury stock... -- -- -- -- (1,097,313) -- (1,097,313)
Proceeds from sale of common
stock-exercise of
stock options ............. 843 3 7,590 -- -- -- 7,593
Employee stock compensation -- -- 145,758 -- -- -- 145,758
--------- --------- ----------- ------------ ----------- ------------ ------------
Balance at December 31....... 7,253,570 21,761 63,836,873 (32,828,218) (1,360,313) (2,798) 29,667,305
Nine months ended
September 30, 2001
(unaudited)
Net loss..................... -- -- -- (6,112,481) -- -- (6,112,481)
Other comprehensive gain-
unrealized gain on
investments ............. -- -- -- -- -- 33,140 33,140
------------
Total comprehensive loss .... (6,079,341)
Purchase of treasury stock... -- -- -- -- (1,235,030) -- (1,235,030)
Employee stock compensation.. -- -- 10,938 -- -- -- 10,938
--------- --------- ----------- ------------ ----------- ------------ ------------
Balance at September 30,
(unaudited)................ 7,253,570 $ 21,761 $63,847,811 $(38,940,699) $(2,595,343) $ 30,342 $ 22,363,872
========== ========= =========== ============ =========== ============ =============
See accompanying notes.
5
QUOTESMITH.COM, INC.
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30
2001 2000
---- ----
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................... $ (6,112,481) $(16,217,077)
Adjustments to reconcile
to net cash used by operating activities:
Depreciation expense ......................... 453,998 388,635
Amortization ................................. (81,532) (817,564)
Accounts payable and
accrued liabilities ........................ (1,858,743) (2,740,751)
Commissions receivable ....................... 638,799 (165,462)
Stock compensation ........................... 10,938 134,820
Other assets ................................. 200,509 2,220,906
------------ ------------
Net cash used by operating
activities ..................................... (6,748,512) (17,196,493)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments ............................ (14,254,568) (52,320,985)
Proceeds from sales of investments ................. 2,500,000 --
Proceeds from investment maturities ................ 22,000,000 67,900,000
Purchases of furniture,
equipment, and computer software ................. (315,221) (1,156,977)
------------ ------------
Net cash provided by investing
activities ....................................... 9,930,211 14,422,038
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of
common stock ..................................... -- 7,593
Proceeds used to purchase treasury stock ........... (1,235,030) --
Payment of capital lease obligation ................ (32,199) (20,499)
------------ ------------
Net cash used by
financing activities ............................. (1,267,229) (12,906)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ........................................ 1,914,470 (2,787,361)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD....... 4,269,141 8,990,022
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............ $ 6,183,611 $ 6,202,661
============ ============
See accompanying notes.
6
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. The Company's web site 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 using 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 five years, the Company's primary revenue
source has been commissions derived from the sale of individual term life
insurance. Revenue is also generated from the sale of auto insurance. The
majority of auto insurance revenue is generated from referral fees. Customers
seeking auto insurance at the Company's website are referred to certain third
party insurance quotation sites who pay the Company a referral fee. The Company
continues to develop its own internal auto rating engine.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
(GAAP) for interim financial information. Accordingly, they do not include all
of the information and footnotes required by GAAP 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 nine month period ended September 30, 2001
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2001.
The balance sheet at December 31, 2000 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by GAAP for complete financial statements.
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
QUOTESMITH.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
4. COMPREHENSIVE LOSS
For the Company, comprehensive loss includes net loss and net
unrealized investment gains, as follows:
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ----------------------------
2001 2000 2001 2000
---- ---- ---- ----
Net loss................................ $ (1,061,642) $ (3,506,215) $ (6,112,481) $ (16,217,077)
Unrealized gain on investments.......... 6,063 29,451 33,140 24,079
------------ ------------ ------------- -------------
Comprehensive loss.................... $ (1,055,579) $ (3,476,764) $ (6,079,341) $ (16,192,998)
============= ============ ============== =============
5. STOCK SPLIT
On March 5, 2001, the Board of Directors of the Company approved a
one-for-three reverse stock split and a change of par value per share from $.001
to $.003, effective on March 7, 2001. In the accompanying financial statements
and related notes, all share and per share amounts have been retroactively
adjusted to reflect the stock split. The components of stockholders' equity were
not affected by these changes.
8
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONS ABOUT FORWARD-LOOKING STATEMENTS
This announcement may contain forward-looking statements that involve
risks, assumptions and uncertainties pursuant to the safe-harbor provisions of
the Private Securities Litigation Reform Act of 1995. This announcement also
contains forward-looking statements about events and circumstances that have not
yet occurred and may not occur. Expressions of future goals and similar
expressions including, without limitation, "may," "will," "believes," "should,"
"could," "hope," "expects," "expected," "does not currently expect,"
"anticipates," "predicts," "potential" and "forecast," reflecting something
other than historical fact, are intended to identify forward-looking statements,
but are not the exclusive means of identifying such statements. Investors should
be aware that actual results may differ materially from the results predicted
and reported results should not be considered an indication of future
performance. Reported Web site activity and/or quotes are not necessarily
indicative of any present or future revenue. The Company will not necessarily
update the information in this document if any forward-looking statement later
turns out to be inaccurate. Potential risks and uncertainties include, among
others, Quotesmith.com's limited e-commerce operating history, anticipated
losses, unpredictability of future revenues, potential fluctuations in quarterly
operating results, seasonality, consumer trends, competition, risks of system
interruption, the evolving nature of its business model, the increasingly
competitive online commerce environment, dependence on continuing growth of
online commerce and risks associated with capacity constraints and the
management of growth. More information about potential factors that could affect
the Company's financial results is included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2000, which is on file with the United
States Securities and Exchange Commission. Some insurance companies appear at
Quotesmith.com for purely informational purposes only and pay no compensation to
Quotesmith.com and some insurers pay commissions or fees to Quotesmith.com based
upon premium volume or traffic activity produced by Quotesmith.com. Quote
availability by state or any other factor is subject to change without notice.
Quotesmith.com is a service mark of Quotesmith.com, Inc. All other names are
trademarks of their respective owners. Copyright 2001. All rights reserved.
Quotesmith.com, Inc.
OVERVIEW
We generate revenues from commissions paid to us by insurance companies
based upon the policies sold to 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 on
term life insurance 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 may not be
received due to the non-payment of installment first year premiums. The Company
recognizes commissions on all other lines of business after we receive notice
that the insurance company had received payment of the related premium. 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 arrangements with other entities who pay commissions or fees to us
based upon traffic activity produced by us.
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 portion of time is not under our control,
will create fluctuations in our operating results and could harm our business,
operating results and financial condition.
9
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 times an application is submitted to an insurance company 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, 2001 AND
SEPTEMBER 30, 2000
Revenues
Revenues decreased 55% to $1.7 million for the third quarter ended
September 30, 2001 compared to $3.8 million in the third quarter of 2000. For
the nine months ended September 30, 2001 revenues decreased 50% to $6.3 million
from $12.6 million for the nine month period in 2000. The decline in revenues in
the third quarter of 2001 and the nine months ended September 30, 2001 was due
to a 57% and 49% decline in the number of paid policies, respectively, compared
to 2000. The decline in the number of paid policies is largely attributable to a
significant decline in sales and marketing expenses during the same periods. The
impact of the decrease in paid policies during the quarter was partially offset
by an increase in the average first year revenue per term life policy to $454 in
the third quarter of 2001, compared to $403 in the third quarter of 2000. For
the nine month period, the impact of the decrease in paid policies was increased
by a decline in average first year revenue per term life policy to $390 in 2001,
compared to $397 for the same nine month period in 2000. The changes in average
first year revenue per term life policy result from shifts in business mix to
insurance carriers with different levels of first year commissions. We would
expect continued fluctuations due to carrier mix in future quarters.
Expenses
Selling and Marketing. Selling and marketing expenses decreased to $0.8
million in the third quarter of 2001 compared to $5.1 million in the third
quarter of 2000, and decreased to $6.2 million for the nine months ended
September 30, 2001 compared to $21.1 million for the nine months ended September
30, 2000. Selling and marketing expenses were 48% of revenue in the third
quarter of 2001, a significant decline in percentage from 99% for the entire
nine months ended September 30, 2001. Selling and marketing expenses were 134%
and 168% of revenues for the quarter and nine month period ended September 30,
2000. The decrease in total selling and marketing expenses was due to the
elimination of television advertisements and reductions in print and radio
advertisements. The Company intends to maintain selling and marketing expenses
at levels consistent with the third quarter of 2001.
Operations. Operations expenses decreased 22% to $1.4 million in the third
quarter of 2001 from $1.8 million in the third quarter of 2000, but increased as
a percentage of revenues to 81% from 47%, respectively. Operations expense
decreased 27% to $4.3 million for the nine months ended September 30, 2001,
compared to $5.9 million for the nine months ended September 30, 2000, but
increased as a percentage of revenues to 68% in 2001 from 47% in 2000. The
overall decrease in operating expense for all periods noted is primarily due to
a decrease in employees to 78 at September 30, 2001, from 144 at September 30,
2000. On August 2, 2001, the Company announced a reduction in staff of 25
employees as a result of its decision to shift certain back-office functions
related to the handling of insurance applications to third party administrative
firms.
The operating cost per paid policy was $364 in the third quarter of 2001
compared to $199 in the third quarter of 2000, versus $277 for the nine months
ended September 30, 2001 compared to $193 for the nine months ended September
30, 2000. The number of paid policies rises or falls in line with increases or
decreases in the level of selling and marketing expenses. Operating costs having
a proportionately larger component of semi-variable costs than selling and
marketing costs, increase or decrease at a slower rate. The increasing costs per
paid policy reflect operating costs declining at a slower rate than paid
10
policies. Certain customer service functions formerly performed by Company
personnel have been shifted to certain insurance companies and to third party
administrators thereby increasing the variable nature of certain operating
costs.
General and Administrative. General and administrative expenses decreased
20% to $0.8 million in the third quarter of 2001 from $1.0 million in the third
quarter of 2000, and decreased 20% to $2.8 million for the nine months ended
September 30, 2001 compared to $3.5 million for the nine months ended September
30, 2000. General and administrative expenses increased as a percentage of
revenues to 46% from 25% for the quarters ended September 30, 2001 and 2000
respectively, and increased as a percentage of revenues to 45% from 28% for the
nine months ended September 30, 2001 and 2000 respectively.
Interest Income
Interest income was $228,000 in the third quarter of 2001 compared to
$545,000 in the third quarter of 2000 and $928,000 for the nine months ended
September 30, 2001 compared to $1.7 million for nine months ended September 30,
2000. The decrease in interest income reflects the use of investment principal
to fund operating losses and the overall decline in short term interest rates.
Interest income will continue to decrease as the Company uses its cash to fund
operating losses.
Income Taxes (Credit)
We had no income tax credit for 2001 and 2000 due to valuation allowances
provided against net deferred tax assets.
Loan to Director
During the quarter ended September 30, 2001, a secured loan in the amount
of $80,000 was made to Robert S. Bland, Chairman of the Board, President and
Chief Executive Officer. The Compensation Committee of the Board of Directors
approved the loan. Mr. Bland used the loan in connection with the purchase of a
new home. The loan was outstanding for three calendar days at which time it was
repaid in full with interest calculated at the rate of 10% per annum.
LIQUIDITY AND CAPITAL RESOURCES
We currently expect that the cash and fixed maturity investments of $20.1
million at September 30, 2001 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.
Our sources of funds 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 $6.7 million and $17.2
million, respectively, for the nine months ended September 30, 2001 and 2000.
The decrease in cash used in 2001 was primarily a result of reduced marketing
expenditures.
Cash flows provided by investing activities were $9.9 million and $14.4
million, respectively, for the nine months ended September 30, 2001 and 2000.
Cash flows provided by investing activities in the first nine months of 2001
were used to fund the operating loss and to fund the purchase of $1.2 million in
treasury stock.
11
Cash used by financing activities was approximately $1.3 million in the
nine month period ended September 30, 2001, compared to $12,906 used by
financing activities for the same period in 2000. Approximately all of the cash
used in 2001 reflects monies expended to purchase treasury stock under a
previously announced share repurchase program. The Company repurchased 581,624
shares during the first nine months of 2001 at an average price of $2.12 per
share.
12
FACTORS THAT MAY AFFECT OUR FUTURE OPERATING RESULTS
RISKS RELATED TO OUR BUSINESS
IF THE TERRORIST ATTACKS OF SEPTEMBER 11, 2001 RESULT IN AN ECONOMIC DOWNTURN,
OUR REVENUES AND OUR BUSINESS COULD BE HARMED
The impact of the events of September 11 upon our business is still
uncertain. Subsequent to that date the Company has experienced an increase in
the volume of term life insurance quotation requests. We are unable to determine
if this increased volume is a temporary reaction to the terrorism of September
11 or if it represents a sustainable increase in our business. If there is a
significant economic downturn, demand for term life insurance may decrease and
our business could be harmed.
IF WE DO NOT SUCCESSFULLY IMPLEMENT OUR NEW AUTO RATING ENGINE, OUR REVENUES AND
BUSINESS COULD BE HARMED
The Company intends to participate in the auto insurance brokerage business
via a proprietary comparative multi-company auto rating engine. Launch of the
auto rating engine for customers in Illinois occurred in July 2001. Subsequent
to the Illinois launch, customer access to the engine was restricted until
further technical enhancements can be implemented. We have entered into a
referral agreement with ComparisonMarket Inc. allowing our customers to obtain
auto insurance quotations in 41 states using ComparisonMarket's service.
ComparisonMarket pays us a fee for successful referrals.
We may experience additional difficulties that could further delay or
prevent the successful transition into the auto brokerage business using our
proprietary product, which could result in additional expenditures and the loss
of revenue.
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 $15.0 million in 1999,
$20.8 million in 2000 and $7.0 million in the first nine months of 2001. Because
we plan to continue to incur high levels of marketing expenses, compared to
revenue, 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 take time and money to develop and may or may not be
profitable for us.
IF THE TERM LIFE INSURANCE INDUSTRY DECLINES, OUR BUSINESS WILL SUFFER BECAUSE A
SUBSTANTIAL PORTION OF OUR REVENUES ARE CURRENTLY DERIVED FROM CONSUMERS
PURCHASING TERM LIFE INSURANCE THROUGH US
For the nine month period ended September 30, 2001, approximately 78% 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, on
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
13
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 commercial 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:
- 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;
- changes 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
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- 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 our sales and marketing
expenses fail to produce the expected revenue, 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 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 a brand-enhancement
strategy consisting of our traditional print advertising, as well as 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, including auto insurance, in addition to our traditional term life
product and will 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 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.
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 161 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
15
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. However,
during the nine months ending September 30, 2001, we have substantially reduced
our staffing levels in response to decreases in revenue. These fluctuations in
our operations growth continue to place significant demands on our management
and other resources and are 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 employee base.
We may not be successful in managing or expanding our operations or
maintaining adequate management, financial and operating systems and controls.
IF WE DO NOT MANAGE OUR THIRD PARTY SERVICE PROVIDERS EFFECTIVELY, OUR BUSINESS
COULD BE HARMED
Certain customer service functions formerly performed by Company personnel
have been shifted to third party administrators thereby increasing the variable
nature of certain operating costs. If our oversight of the actions of these
third party administrators is not effective, resulting in lost revenue
opportunities or increased operating costs, we could be harmed. Our contractual
agreements with these third party administrators are automatically renewed for
additional successive twelve month terms unless either party shall give the
other written notice not to renew at least 90 days prior to the expiration of
the current term. If the third party administrators chose not to renew the
agreement and we are unable to reassume those customer service functions within
90 days, revenue opportunities could be lost and we could be harmed.
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 1999 we paid $12,000, for the year ended December 31, 2000 we paid
$11,500, and for the nine months ended September 30, 2001, we paid $8,000 in
guarantees. 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
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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. 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. Burke A. Christensen, our Vice
President of Operations and General Counsel, announced his plans to leave the
Company during the fourth quarter of 2001.
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 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 InsWeb, which has relationships with Yahoo! and Quicken.
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.
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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;
- monitor the activity of our non-licensed customer service representatives;
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 OR COMMUNICATE TO OUR CUSTOMERS, OUR BUSINESS COULD BE HARMED
Our customers rely upon information we provide 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 agents, 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.
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In addition, because we are appointed as an agent for only 161 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, denial-of-service attacks, 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 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. We have not searched to determine if any actions or products
infringe upon the 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.
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
19
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 TO OWNERSHIP OF OUR COMMON STOCK
OUR STOCK COULD BECOME DELISTED IF WE FAIL TO MEET THE MINIMUM FINANCIAL
REQUIREMENTS FOR CONTINUED LISTING ON THE NASDAQ SMALLCAP MARKET
Effective at the opening of business on July 20, 2001, the Company's stock
listing transferred from the Nasdaq National Market to the Nasdaq SmallCap
Market. This transfer was mandated by Nasdaq because the Company's public float
was unable to sustain a value in excess of $5.0 million for 30 consecutive
trading days, making our shares ineligible for continued Nasdaq National Market
listing. The shares continue to be listed under the existing symbol QUOT.
In response to the extraordinary market conditions following the tragedies
of September 11, 2001, The Nasdaq Stock Market, Inc. implemented an
across-the-board moratorium on the minimum bid and public float requirements for
continued listing on the Nasdaq. The temporary suspension of these requirements
is effective from September 27, 2001 until January 2, 2002. Upon expiration of
this temporary suspension, our common stock must maintain a minimum bid price of
$1.00 per share in order to remain eligible for continued listing on the Nasdaq
SmallCap Market. On October 31, 2001, the closing bid price of our common stock
on the Nasdaq SmallCap Market was $1.97 per share. There can be no assurance
that we will be able to maintain a bid price in excess of $1.00 per share.
In addition to the $1.00 minimum bid price per share requirement described
above, the continued listing of our common stock on the Nasdaq SmallCap Market
is subject to the maintenance of the other quantitative and qualitative
requirements set forth in the Nasdaq SmallCap Market Listing Requirements. In
particular, the Nasdaq SmallCap Market Listing Requirements require that a
company currently included in the Nasdaq SmallCap Market meet each of the
following standards to maintain its continued listing:
(1) either (a) net tangible assets of $2,500,000, (b) net income in two of
the last three years of $500,000, or (c) a market capitalization of
$35,000,000;
20
(2) a public float of 500,000 shares;
(3) a market value of public float of $1,000,000;
(4) a minimum bid price of $1 per share;
(5) 300 round lot shareholders;
(6) two market makers; and
(7) compliance with Nasdaq corporate governance rules.
Inclusion in the Nasdaq SmallCap Market increases liquidity and may
potentially minimize the spread between the "bid" and "asked" prices quoted by
market makers. Further, a Nasdaq SmallCap Market listing may enhance our access
to capital and increase our flexibility in responding to anticipated capital
requirements.
We believe that the current per share price level of the common stock has
reduced the effective marketability of our shares of common stock because of the
reluctance of many leading brokerage firms to recommend low-priced stock to
their clients. Certain investors view low-priced stock as speculative and
unattractive. In addition, a variety of brokerage house policies and practices
tend to discourage individual brokers within those firms from dealing in
low-priced stock. Such policies and practices pertain to the payment of brokers'
commissions and to time-consuming procedures that make the handling of
low-priced stocks unattractive to brokers from an economic standpoint.
In addition, because brokerage commissions on low-priced stock generally
represent a higher percentage of the stock price than commissions on
higher-priced stock, the current share price of the common stock can result in
individual stockholders paying transaction costs (commissions, markups or
markdowns) that represent a higher percentage of their total share value than
would be the case if the share price were substantially higher. This factor also
may limit the willingness of institutions to purchase the common stock at its
current low share price.
In addition, if the common stock is not listed on the Nasdaq SmallCap
Market and the trading price of the common stock were to fall below $1.00 per
share, trading in the common stock would also be subject to the requirements of
certain rules promulgated under the Securities Exchange Act of 1934 which
require additional disclosures by broker-dealers in connection with any trades
involving a stock defined as a "penny stock" (generally, a non-Nasdaq equity
security that has a market price of less than $5.00 per share, subject to
certain exceptions). In such event, the additional burdens imposed upon
broker-dealers to effect transactions in the common stock could further limit
the market liquidity of the common stock and the ability of investors to trade
the common stock.
If our common stock were delisted from the Nasdaq SmallCap Market, sales of
our common stock would likely be conducted only in the over-the-counter market
or potentially in regional exchanges. This may have a negative impact on the
liquidity and price of the common stock and investors may find it more difficult
to purchase or dispose of, or to obtain accurate quotations as to the market
value 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 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
21
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.
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 October 31, 2001, Robert Bland, our Chairman, President and Chief
Executive Officer directly or indirectly controls 44.59% of our outstanding
common stock, and William Thoms, our Executive Vice President, directly controls
13.49% 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 additional 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 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
22
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 our investment activities is to preserve principal
while at the same time maximizing yields without significantly increasing risk.
To achieve this objective, we maintain a 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 and unrealized gains on those
investments totaled $33,140 in the first nine months of 2001, and totaled
$36,420 for the year ended December 31, 2000.
We did not hold any derivative financial instruments as of September 30,
2001, and we have never held such instruments in the past. Additionally, all 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 our investments by an immaterial amount.
24
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 1,903,030 shares of common stock were sold at a price
of $33.00 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, 2001, our balance sheet reflected
approximately $13.9 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
(a) The Company held a Special Meeting of Stockholders on March 5, 2001.
(b) At the Special Meeting of Shareholders, the stockholders voted to
effect a reverse stock split of the Company's outstanding common stock
based upon the following ratios: 3:1 or 6:1. The aggregate number of
votes cast for, or withheld, for a reverse stock split of the
Company's outstanding common stock of 6:1 was as follows: 12,983,328
for and none withheld. The aggregate number of votes cast for or
withheld, for a reverse stock split of the Company's outstanding
common stock of 3:1 was as follows: 13,011,647 for and none withheld.
(c) The Company's Annual Meeting of Stockholders was held on May 24, 2001.
(d) At the Annual Meeting, the stockholders reelected to the Company's
Board of Directors Mr. Jeremiah A. Denton and Mr. John McCartney, both
Class II Directors. Messrs. Denton and McCartney will serve three-year
terms ending upon the election of Class II Directors at the 2004
annual meeting of stockholders. The aggregate number of votes cast
for, or withheld, for the election of Mr. Denton was as follows:
5,164,139 for and 14,077 abstained. The aggregate number of votes cast
for or withheld, for the election of Mr. McCartney was as follows:
5,170,404 for and 7,812 abstained.
The Board of Directors of the Company is composed of two Class I
Directors, Messrs. Gretsch and Rueben, whose terms expire in 2003, two
Class II Directors, named above, and three Class III Directors,
Messrs. Bland, Shannon and Thoms, whose terms expire at the 2002
Annual Meeting of Stockholders.
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(e) At the Annual Meeting the stockholders also ratified the appointment of
Ernst & Young, LLP as auditors of the Company for the 2001 fiscal
year. The aggregate number of votes cast for, against or abstained,
for the ratification of Ernst & Young LLP was 5,167,892 for, 8,661
against and 1,663 abstained.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a).Exhibits
Exhibit Number Description
-------------- -----------
None ----
(b). Reports on Form 8-K
No reports were filed on Form 8-K for the quarter ended September 30,
2001.
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 5, 2001.
By: /s/ Walter B. Kulikowski
Walter B. Kulikowski
Chief Financial Officer,
Vice President and Secretary
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