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 June 30, 2003.
[ ] 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(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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). [ ]Yes [x] No
The number of outstanding shares of the registrant's common stock was 4,911,731
net of treasury shares, on August 7, 2003.
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.............................................. 20
Item 4. Controls and Procedures................................................................................. 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................................................... 21
Item 2. Changes in Securities and Use of Proceeds............................................................... 21
Item 3. Defaults Upon Senior Securities......................................................................... 21
Item 4. Submission of Matters to a Vote of Security Holders..................................................... 21
Item 5. Other Information....................................................................................... 21
Item 6. Exhibits and Reports on Form 8-K........................................................................ 22
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QUOTESMITH.COM, INC.
BALANCE SHEETS
JUNE 30, DECEMBER 31,
2003 2002
(UNAUDITED)
------------ ------------
ASSETS
Cash and equivalents ............................................ $ 808,468 $ 1,639,909
Fixed maturity investments -
available for sale at fair value ............................. 2,917,801 8,823,890
Commissions receivable, less allowances (2003 -- $168,000;
2002 -- $197,000) ............................................. 1,162,300 1,125,544
Other assets .................................................... 272,727 324,686
------------ ------------
Total current assets ............................................ 5,161,296 11,914,029
Fixed maturity investments-
available for sale at fair value ............................ 11,824,475 5,843,988
Furniture, equipment, and computer software at cost, less
accumulated depreciation ( 2003--$2,592,000;
2002--$2,284,000) ............................................ 621,565 885,469
Intangible assets at cost, less accumulated amortization
( 2003--$756,000; 2002--$517,000) ............................ 676,539 915,317
------------ ------------
Total assets .................................................... $ 18,283,875 $ 19,558,803
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued
liabilities .................................................. $ 1,004,767 $ 1,428,601
------------ ------------
Total current liabilities ....................................... 1,004,767 1,428,601
Long-term capital lease obligations ............................. 7,984 35,018
------------ ------------
Total liabilities ............................................... 1,012,751 1,463,619
Commitments and contingencies ................................... -- --
Stockholders' equity:
Common stock, $.003 par value;
shares authorized: 60,000,000; shares issued:
2003--7,269,072; 2002--7,268,072 ........................ 21,807 21,804
Additional paid-in capital ................................ 63,973,979 63,972,732
Retained-earnings deficit ................................. (42,909,047) (42,187,861)
Treasury stock at cost: 2,359,341 shares .................. (3,793,985) (3,793,985)
Accumulated other comprehensive income (loss) ............. (21,630) 82,494
------------ ------------
Total stockholders' equity ...................................... 17,271,124 18,095,184
------------ ------------
Total liabilities and stockholders'
equity ....................................................... $ 18,283,875 $ 19,558,803
============ ============
See accompanying notes.
3
QUOTESMITH.COM, INC.
STATEMENTS OF OPERATIONS
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- -------------------
2003 2002 2003 2002
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
Revenues:
Commissions and fees ................. $ 2,511,302 $ 3,150,312 $ 5,068,364 $ 5,647,853
Other ................................ (942) 43,568 13,557 118,081
----------- ----------- ----------- -----------
Total revenues .......................... 2,510,360 3,193,880 5,081,921 5,765,934
Expenses:
Selling and marketing ................ 1,356,387 666,742 2,658,960 1,254,453
Operations ........................... 837,616 2,014,118 1,810,028 3,947,679
General and administrative ........... 815,723 810,627 1,616,688 1,663,693
----------- ----------- ----------- -----------
Total expenses .......................... 3,009,726 3,491,487 6,085,676 6,865,825
----------- ----------- ----------- -----------
Operating loss ......................... (499,366) (297,607) (1,003,755) (1,099,891)
Interest Income ......................... 97,898 75,766 189,495 177,828
Realized gains on sale of securities .... 93,074 -- 93,074 --
----------- ----------- ----------- -----------
Net loss ................................ $ (308,394) $ (221,841) $ (721,186) $ 922,063)
=========== =========== =========== ===========
Net loss per common
share, basic and diluted ............. $ (0.06) $ (0.04) $ (0.15) (0.18)
=========== =========== =========== ===========
Weighted average common
shares and equivalents
outstanding, basic and diluted ....... 4,909,731 4,934,229 4,909,532 5,020,922
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 INCOME (LOSS) EQUITY
------ ----- ------- ------- ----- ------------- ------
2002:
Balance at January 1 ......... 7,253,570 $ 21,761 $ 63,930,061 $(39,461,293) $ (2,595,343) $ 20,096 $ 21,915,282
Net loss ..................... -- -- -- (2,726,568) -- -- (2,726,568)
Other comprehensive gain-
unrealized gain on
investments .............. -- -- -- -- -- 62,398 62,398
------------
Total comprehensive loss .....(2,664,170)
Purchase of 446,050 treasury
shares ..................... -- -- -- -- (1,198,642) -- (1,198,642)
Proceeds from sale of
common stock:
-exercise of stock options.. 14,502 43 26,711 -- -- -- 26,754
Employee stock compensation... -- -- 15,960 -- -- -- 15,960
---------- ---------- ------------ ------------ ------------ ------------ ------------
Balance at December 31 ...... 7,268,072 21,804 63,972,732 (42,187,861) (3,793,985) 82,494 18,095,184
Six months ended
June 30, 2003 (unaudited)
Net loss ..................... -- -- -- (721,186) -- -- (721,186)
Other comprehensive loss-
unrealized loss on
investments .............. -- -- -- -- -- (104,124) (104,124)
------------
Total comprehensive loss ..... (825,310)
Proceeds from sale of
common stock:
-exercise of stock options.. 1,000 3 1,247 -- -- -- 1,250
---------- ---------- ------------ ------------ ------------ ------------ ------------
Balance at June 30, 2003
(unaudited) ................ 7,269,072 $ 21,807 $ 63,973,979 $(42,909,047) $ (3,793,985) $ (21,630) $ 17,271,124
========== ========== ============ ============ ============ ============ ============
See accompanying notes.
5
QUOTESMITH.COM, INC.
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30,
2003 2002
---- ----
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................... $ (721,186) $ (922,063)
Adjustments to reconcile to net cash
used by operating activities:
Depreciation expense ............. 308,862 505,857
Amortization ..................... 261,291 100,712
Accounts payable and
accrued liabilities ............ (426,966) 34,387
Commissions receivable ........... (36,756) (216,076)
Other assets ..................... 51,959 (9,999)
------------ ------------
Net cash used by operating
activities ......................... (562,796) (507,182)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments ............... (11,313,934) (11,882,449)
Proceeds from investment maturities .... 6,900,000 12,400,000
Proceeds from sales of investments ..... 4,212,900 -
Purchases of furniture,
equipment, and computer software ..... (44,958) (51,019)
------------ ------------
Net cash provided (used) by investing
activities ........................... (245,992) 466,532
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of treasury stock ............ - (1,097,742)
Issuance of common stock ............... 1250 -
Payment of capital lease obligation .... (23,903) (21,135)
------------ ------------
Net cash used by financing
activities ........................... (22,653) (1,118,877)
------------ ------------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (831,441) (1,159,527)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD .................... 1,639,909 4,033,192
------------ ------------
CASH AND CASH EQUIVALENTS AT
AT END OF PERIOD ....................... $ 808,468 $ 2,873,665
============ ============
See accompanying notes.
6
QUOTESMITH.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS
Quotesmith.com, Inc. (the Company) is an Internet-based insurance
agency and brokerage. The Company owns and operates a comprehensive, online
consumer insurance information service, accessible at either www.quotesmith.com
or www.insure.com, which caters to the needs of self-directed insurance
shoppers. The Company provides a large array of comparative auto, life,
homeowners and health insurance quotes, combined with information and
decision-making tools. Since its inception in 1984, the Company has been
continuously developing a proprietary and comprehensive insurance price
comparison and order-entry system that provides instant quotes from over 300
insurance companies and allows any user to purchase insurance from the company
of their choice. The Company generates revenues from the receipt of commissions
and fees paid by various sources, that are tied directly to the volume of
insurance sales or traffic that it produces. The Company conducts its insurance
agency and brokerage operations using salaried, non-commissioned personnel, and
it generates prospective customer interest using traditional direct response
advertising methods conducted primarily offline.
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 six-month period ended June 30, 2003 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003.
The balance sheet at December 31, 2002 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.
STOCK OPTIONS
The Company accounts for stock option grants in accordance with
Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees" and related interpretations, and, accordingly, recognizes no
compensation expense for stock options granted to employees where the exercise
price is equal to or greater than the market price at the date of the grant.
SFAS 123, "Accounting for Stock Based Compensation", requires disclosure of pro
forma information regarding net income (loss) per share, using pricing models to
estimate the fair value of stock option grants. Had compensation expense for the
Company's stock option plans been determined based on the estimated fair value
at the date of grant consistent with the methodology prescribed under SFAS 123,
approximate net loss and net loss per share would have been as follows:
7
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2003 2002 2003 2002
---- ---- ---- ----
Net loss................................. $ (308,394) $ (221,841) $ (721,186) $ (922,063)
Less pro forma stock compensation
using fair value method............... (48,560) (54,911) (99,237) (109,822)
----------- ------------- ------------- ------------
Pro forma net loss....................... $ (356,954) $ (276,752) $ (820,423) $(1,031,885)
=========== ============= ============= ============
Pro forma net loss per common share,
basic and diluted..................... $ (0.07) $ (0.06) $ (0.17) $ (0.21)
=========== ============= ============= ============
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.
4. COMPREHENSIVE LOSS
For the Company, comprehensive loss includes net loss and net
unrealized investment gain (loss), as follows:
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2003 2002 2003 2002
---- ---- ---- ----
Net loss................................. $ (308,394) $ (221,841) $ (721,186) $ (922,063)
Unrealized gain (loss) on investments.... (141,295) 3,262 (104,124) (27,846)
----------- ------------ ------------ ------------
Comprehensive loss................... $ (449,689) $ (218,579) $ (825,310) $ (949,909)
========== ============= ============ ===========
8
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Because we want to provide you with more meaningful and useful
information, this Quarterly Report on Form 10-Q includes forward-looking
statements that reflect our current expectations and projections about our
future results, performance, prospects, and opportunities. We have attempted to
identify these forward-looking statements by using words such as "may," "will,"
"expects," "anticipates," "believes," "intends," "estimates," "could," or
similar expressions. These forward-looking statements are based on information
currently available to us and are subject to a number of risks in 2003 and
beyond to differ materially from those expressed in, or implied by, these
forward-looking statements. These risks, uncertainties, and other factors
include, without limitation: our ability to achieve and sustain profitability;
demand for life insurance; effects of the hostilities in Iraq and elsewhere on
the purchasing decisions of consumers; consumer acceptance of purchasing
insurance on the Internet; significant fluctuations in our quarterly results;
our ability to develop our brand recognition; our number of agency contracts;
our ability to generate revenue from our strategic relationships; our ability to
manage our growth; providing accurate insurance quotes; our ability to manage
our expenses, quickly respond to changes in our marketplace, and meet consumer
expectations; the complexity of our technology and our use of new technology;
our ability to hire and retain senior management and other qualified personnel;
intense competition in the insurance industry; the rate of acceptance and use of
the Internet as a means for commerce; our ability to keep pace with
technological changes and future regulations affecting our business; the
implementation of the Internet generally; constraints of the systems we employ;
and our ability to raise additional capital. See the section entitled "Factors
That May Affect Our Future Operating Results" for a description of these and
other risks, uncertainties, and factors.
You should not place undue reliance on any forward-looking statements.
Except as required by the federal securities laws, we undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events, changed circumstances, or any other reason after
the date of this quarterly report. All references to "we," "us," "our,"
"Quotesmith," and the "Company" refer to Quotesmith.com, Inc. and its
subsidiary.
OVERVIEW
We generate revenues primarily from the receipt of 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 premium payment. At the time revenue is
recognized, an allowance is recorded based on historical information for
estimated commissions that will not be received due to the non-payment of
installment first year premiums. We recognize commissions on all other lines of
business after we receive notice that the insurance company has 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 or our fiscal year 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. To a lesser
extent, we also generate revenues from the receipt of fees paid by various
sources, that are tied directly to the volume of insurance sales or traffic that
we produce for such third-party entities.
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.
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.
9
Selling and marketing expenses consist primarily of direct advertising
costs. The costs of communicating the advertising are expensed in the period the
advertising is communicated.
Intangible assets acquired in 2001 are being amortized on a
straight-line basis over three years.
No income tax credits have been recognized relating to our tax loss
carryforwards due to uncertainties relating to future taxable income.
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS AND SIX MONTHS ENDED JUNE 30, 2003 AND JUNE 30, 2002
Revenues
Revenues for the quarter totaled $2.51 million, a decrease of $684,000
from the same quarter in the prior year. Commissions and fees decreased
$639,000, or 20.3% in the second quarter of 2003 compared 2002. Although
policies sold decreased 35% to 4,110 in 2003 from 6,343 in 2002, average revenue
per policy sold increased to $611 from $504 in the second quarter of 2002, an
increase of 21%. Advertising and content sale revenue declined $44,000 in the
second quarter of 2003 when compared to the second quarter of 2002, as we no
longer sell advertising on our web sites and do not sell our content to others.
Revenues for the six months ended June 30, 2003 totaled $5.08 million, a
decrease of $684,000 from revenues recorded during the same period in the prior
year. Total policies sold declined 3,256, or 29%, from 11,399 during the first
six months of 2002 to 8,143 this year. The effect of this decrease was somewhat
mitigated by an increase in total revenue per policy sold of $112, to $624 in
2003 from $512 in the first six months of last year. In total, commissions and
fees decreased $579,000, while advertising and content sales declined $105,000.
Expenses
Selling and Marketing. We decided to increase selling and marketing
expenses in 2003 in an effort to support our new Insure.com brand name and to
increase our traffic. As a result, selling and marketing expenses increased
$690,000, or 103% during the second quarter of 2003 when compared to the same
period in 2002, and increased $1,405,000, or 112%, in the six months ended June
30, 2003 compared to the first six months of 2002. This included the placement
of several new radio advertisements, a medium we were not using during 2002. We
believed that we were in a position to make this investment in marketing because
of reduced operations costs, as described below. We have found that the first
six months of the year is a better advertising environment than the last six
months of the year for delivering our message to the consumers we wish to reach.
Accordingly, we tend to incur higher advertising expenses in the first two
quarters of the year than in the last two quarters.
Operations. Operations expenses decreased 58% to $838,000 for the
quarter ended June 30, 2003, compared to $2.0 million for the same period in
2002, and decreased $2.1 million, or 54%, for the six months ended June 30,
2003. The decrease in operations expenses is the result of our previously
announced cost reduction measures, including the use of our new online order
fulfillment technology, which has significantly reduced our handling costs per
policy. The operations costs per paid policy decreased to $204 for the quarter
ended June 30, 2003 from $318 per paid policy for the quarter ended June 30,
2002, a decline of 36%. Year to date, our operations costs per policy sold were
$222, a decrease of $128 from the same period in the prior year.
General and Administrative. General and administrative expenses
increased approximately $5,000 or 0.6%, from $811,000 for the quarter ended June
30, 2002, to $816,000 for the quarter ended June 30, 2003, and decreased
$47,000, or 2.8%, during the first six months of 2003 compared to the same
period in 2002.
Investment Income
Interest income was $98,000 in the second quarter of 2003 compared to
$76,000 in the second quarter of 2002. For the six months ended June 30, 2003,
interest income was $189,000, an increase of $12,000 over the prior year. The
increase in interest income reflects a larger fixed income investment portfolio,
primarily as a result of keeping smaller cash balances. During the second
10
quarter, we sold fixed income investments in order to realize gains of $93,000.
The proceeds were reinvested in fixed income securities.
Income Taxes (Credit)
We had no income tax credit for 2003 and 2002 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
$15.6 million at June 30, 2003 will be sufficient to meet our anticipated cash
requirements for at least the next 12 months. The timing and amounts of our
working capital expenditures are difficult to predict, and should we decide to
purchase more shares of our common stock, engage in acquisitions of companies or
their assets, or begin new projects requiring additional resources, we may
require additional financing. 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, investment income, and
sales and maturity proceeds from our fixed income portfolio. The principal uses
of funds are selling and marketing expenses, operations, general and
administrative expenses, purchases of furniture, equipment and software, and the
acquisition of treasury stock.
Cash used by operating activities was approximately $563,000 for the
first six months of 2003, compared with cash used by operating activities of
$507,000 for the same period in 2002. Cash was used by operating activities in
the first six months of 2003 primarily to fund the net loss for the period, as
well as to decrease accounts payable and accrued liabilities. In the first six
months of 2002, cash was used to fund the net loss and an increase in
commissions receivable. Non-cash charges for depreciation and amortization
totaled $570,000 in 2003 and $607,000 in 2002.
Cash used by investing activities was $246,000 in the first six months
of 2003, compared with cash provided by investing activities of approximately
$467,000 in the same period of 2002. During 2003, the purchase of investments
exceeded maturities and sales, as we have reduced our cash balance in favor of
having more funds invested in fixed income securities.
Cash used by financing activities was $23,000 in the first six months
of 2003, compared with approximately $1.1 million used by financing activities
for the same period in 2002. The cash used by financing activities in the first
six months of 2002 represents primarily funds used to purchase our common stock
under our share repurchase programs. No shares were repurchased during the same
period of 2003.
FACTORS THAT MAY AFFECT OUR FUTURE OPERATING RESULTS
RISKS RELATED TO OUR BUSINESS
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 each year subsequent to 1997, and
through the quarter ended June 30, 2003. Because of our overhead structure,
including the ongoing
11
costs of employing highly skilled technical personnel, we need to generate
significantly higher revenues in order 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 may introduce a number of
new products and services that may or may not be profitable for us.
IF THE TERM LIFE INSURANCE INDUSTRY DECLINES, OUR BUSINESS WILL SUFFER BECAUSE A
SUBSTANTIAL PORTION OF OUR REVENUES ARE CURRENTLY DERIVED FROM CONSUMERS
PURCHASING TERM LIFE INSURANCE THROUGH US
For the six months ended June 30, 2003, approximately 68% of our
revenue was derived from the sale of new individual term life insurance
policies. Because of this high concentration of revenue from one line of
insurance, our current financial condition is largely dependent on the economic
health of the term life insurance industry. If sales of term life insurance
decline for any reason, our business would be substantially harmed. In addition,
in recent years, term life insurance premiums have been declining and may
continue to decline in 2003. This decline has caused our average commissions 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 will become even 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 future success will depend in large part on widespread consumer
acceptance of purchasing insurance via the Internet. 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 commercial medium generally, and as a
market for consumer financial products and services specifically;
- the continued participation and interest of major, brand-name insurers,
and, in particular, their willingness to have their insurance products
distributed on an e-commerce platform without the involvement of a
face-to-face agent or broker;
- 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 SITES
We generate commission revenues only if a consumer purchases insurance
through our service. Consumers can access our Web sites 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 sites 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 sites for
insurance quote information purposes, we will not generate revenues and our
business would be significantly harmed.
12
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 widely in
the past and we expect them to continue to fluctuate widely in the future.
Causes of these fluctuations could or have included, among other factors:
- dramatic swings in monthly unique visitors from one month to the next
without any forewarning;
- 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, which, 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 from 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 negatively affected.
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 our services. Therefore, we believe that broader recognition
and a favorable consumer perception of the Quotesmith.com and Insure.com brands
are essential to our future success. Accordingly, we intend to continue to
pursue an aggressive, brand-enhancement strategy consisting of 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 DO NOT HAVE AGENCY CONTRACTS WITH ALL OF THE INSURANCE COMPANIES WE QUOTE ON
OUR WEB SITES 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 sites, we
currently hold agency contracts with 189 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 sites have refused
to appoint us as an agent or refused to permit us to publish their quotes for
various reasons, including:
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- 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 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 MAY NOT GENERATE A MATERIAL AMOUNT OF
REVENUES FOR US
As part of our marketing strategy, we have entered into certain
strategic relationships and agreements with third-party Web sites and companies
in order to increase the realized revenue from visitors to our Web sites. During
the first six months of 2003, we generated fee revenues totaling $869,000 from
these sources. 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 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 LOSE ANY OF OUR KEY 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 and Chief Operating Officer, 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 key executive officers could harm our
Company.
IF OUR QUOTES ARE INACCURATE AND WE MUST PAY OUT CASH REWARD GUARANTEES, OUR
BUSINESS COULD BE HARMED
14
We offer consumers a $500 cash reward guarantee that we provide an
accurate quote. In 1999 we paid $12,000, in 2000 we paid $11,500, in 2001 we
paid $7,500 and for the year ended December 31, 2002, we paid $10,000 in such
cash rewards. During the first six months of 2003, we paid $6,500 in cash
rewards. 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 material
number of cash reward guarantees, it could have a negative effect on our
operating results.
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 factors over which we have
no control. Insurance companies often change their prices during 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
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. 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;
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- 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;
- regulate the methods by which we conduct our sales efforts; 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, the revocation of our
license in the particular jurisdiction or limits on our ability to operate in
some states. 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 premium
quoting and/or 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 SITES 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.
In addition, because we are appointed as an agent for only 189 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 SITES AND
HARM OUR ABILITY TO GENERATE REVENUE
16
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 of 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 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.
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 CUSTOMERS' 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
17
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 COULD BECOME DELISTED IF WE FAIL TO MEET THE MINIMUM FINANCIAL
REQUIREMENTS FOR CONTINUED LISTING ON THE NASDAQ SMALLCAP MARKET
In March 2001, the staff of the Nasdaq Stock Market (Nasdaq), notified
our Company that it was not in compliance with one of its maintenance standards,
requiring at least $5.0 million in value of public float over the previous 30
consecutive trading days, defined as total shares outstanding less any shares
held by officers, directors, or beneficial owners of 10 percent or more. In
March 2001, Nasdaq gave the Company 90 calendar days to comply with this
standard. Although in compliance with all other Nasdaq National Market
maintenance requirements, our public float was unable to sustain a value in
excess of $5.0 million for 30 consecutive trading days, making its shares
ineligible for continued Nasdaq National Market listing. Effective the opening
of business on July 20, 2001, our stock listing was transferred from the Nasdaq
National Market to the Nasdaq SmallCap Market, retaining its existing symbol,
QUOT.
The requirements for listing on the Nasdaq SmallCap Market are listed
below:
Nasdaq SmallCap Market Listing Considerations:
(1) either (a) net tangible assets of $2,000,000, (b) net income
in two of the last three years of $500,000, or (c) a market
capitalization of $35,000,000;
(2) a public float of 5,000,000 shares;
(3) a market value of public float of $1,000,000;
(4) a minimum bid price of $1 per share;
(5) two market makers;
(6) 300 round lot shareholders; and
(7) compliance with Nasdaq corporate governance rules.
We believe that the current per price share 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, although certain other investors may be attracted to low-priced
stock because of the greater trading volatility sometimes associated with such
securities. 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 function to 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
18
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, as the common stock is not listed on the Nasdaq National
Stock Market, were the trading price of the common stock 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 Exchange Act 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 ability of investors to trade the common stock.
There can be no assurance that we will continue to satisfy all of the
listing requirements of the Nasdaq Small-Cap Market. In the event that we do not
qualify for listing on 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, the
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. The Nasdaq Small-Cap 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, war or other
hostilities could adversely affect the market price of our common stock. In
addition, the market prices for stocks of Internet-related and technology
companies 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.
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 August 7, 2003, Robert Bland, our Chairman, President and Chief
Executive Officer directly or indirectly controls 48.3% of our outstanding
common stock, and William Thoms, our Executive Vice President and Chief
Operating Officer, directly controls 14.7% of our outstanding common stock. As a
result, if Messrs. Bland and Thoms act together, they will be able to take any
of the following actions without the approval of additional public stockholders:
- elect our directors;
- amend several provisions of our certificate of incorporation;
- 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.
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OUR CHARTER DOCUMENTS AND DELAWARE LAW CONTAIN PROVISIONS THAT MAY DISCOURAGE
TAKEOVER ATTEMPTS THAT 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.
CONTINUED TERRORIST ATTACKS OR WAR COULD LEAD TO FURTHER ECONOMIC INSTABILITY
AND ADVERSELY AFFECT OUR STOCK PRICE, OPERATIONS, AND PROFITABILITY.
The terrorist attacks that occurred in the United States on
September 11, 2001 caused periodic major instability in the U.S. and other
financial markets. Possible further acts of terrorism and current and future war
risks could have a similar impact. The United States continues to take military
action against terrorism and has recently taken military action in Iraq.
Terrorist attacks and war in the Middle East may lead to additional armed
hostilities or to further acts of terrorism and civil disturbance in the United
States or elsewhere, which may further contribute to economic instability. Any
such attacks could, among other things, cause further instability in financial
markets and could directly, or indirectly through reduced demand, negatively
affect our facilities and operations or those of our customers or suppliers.
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 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 losses on
those investments totaled $21,630 at June 30, 2003, and there were unrealized
gains of $82,494 at December 31, 2002.
We did not hold any derivative financial instruments as of June 30,
2003, and 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.
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ITEM 4. CONTROLS AND PROCEDURES
The Chief Executive Officer and Chief Financial Officer of
Quotesmith.com, Inc, have reviewed and evaluated the disclosure controls and
procedures of the Company and found them to be both adequate and effective. This
review was conducted within 90 days of the filing date of this quarterly report.
There have been no significant changes in internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the aforementioned evaluations.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Use of Initial Public Offering Proceeds. On August 3, 1999, our
registration statement on Form S-1 (File No. 333-79355), relating to the initial
public offering of our common stock, was declared effective by the Securities
and Exchange Commission. After payment of underwriting discounts and expenses of
approximately $5.3 million, we received net proceeds of approximately $57.5
million from the offering. As of June 30, 2003, our balance sheet reflected
approximately $14.7 in investments and $800,000 in cash and 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 cash payments of approximately $1.4
million in connection with the December 2001 purchase of selected assets of
Insurance News Network, LLC, for the repurchase of 1,514,659 shares of our
common stock at a cost of approximately $3.5 million, and for general operating
activities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Meeting of Stockholders was held on April
24, 2003.
(b) At the Annual Meeting, the stockholders reelected to the
Company's Board of Directors Mr. Richard F. Gretsch and Mr.
Bruce J. Rueben, both Class I Directors. Messrs. Gretsch and
Rueben will serve three year terms ending upon the election of
Class I Directors at the 2006 annual meeting of stockholders.
The aggregate number of votes cast for or withheld for the
election of Mr. Gretsch was as follows: 3,238,531 for and
31,849 abstained. The aggregate number of votes cast for or
withheld for the election of Mr. Rueben was as follows:
3,238,500 for and 31,880 abstained.
(c) The Board of Directors of the Company is composed of two Class
I Directors, named above, one Class II Director, Mr. Denton,
whose term expires in 2004, and three Class III Directors,
Messrs. Bland, Thoms and Shannon, whose terms expire in 2005.
Each Director will remain in office until his successor has
been elected, or until his death, resignation or retirement.
(d) At the Annual Meeting, the stockholders also ratified the
appointment of Ernst & Young, LLP, as auditors of the Company
for the 2003 fiscal year. The aggregate number of votes cast
for, against and withheld for the ratification of Ernst &
Young, LLP, was 3,269,931 for, 116 against and 333 abstained.
ITEM 5. OTHER INFORMATION
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Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a).Exhibits
Exhibit Number Description
-------------- -----------
31.01 Statement of Chief Executive Officer Pursuant to Section 302
31.02 Statement of Chief Financial Officer Pursuant to Section 302
32.01 Statement of Chief Executive Officer Pursuant to Section 1350
32.02 Statement of Chief Financial Officer Pursuant to Section 1350
(b). Reports on Form 8-K
The Company filed its first quarter, 2003 earnings press
release on Form 8-K, dated May 12, 2003.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
QUOTESMITH.COM, INC.
Date: August 8, 2003
By: /s/ PHILLIP A. PERILLO
---------------------------
Phillip A. Perillo
Senior Vice President and Chief Financial
Officer
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