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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, 2002.
[ ] 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
The number of outstanding shares of the regisrant's common stock was 4,894,229
net of treasury shares, on November 11, 2002.
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets.......................................................................................... 3
Statements of Operations................................................................................ 4
Statements of Stockholders' Equity...................................................................... 5
Statements of Cash Flows................................................................................ 6
Notes to Financial Statements........................................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................................. 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................................................... 21
Item 2. Changes in Securities and Use of Proceeds............................................................... 22
Item 3. Defaults Upon Senior Securities......................................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders..................................................... 22
Item 5. Other Information....................................................................................... 22
Item 6. Exhibits and Reports on Form 8-K........................................................................ 22
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QUOTESMITH.COM, INC.
BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2002 2001
(UNAUDITED)
------------ ------------
ASSETS
Cash and cash equivalents .................................... $ 1,774,349 $ 4,033,192
Fixed maturity investments -
available for sale at fair value .......................... 14,564,380 13,909,110
Commissions receivable, less allowances (2002--
$254,000; 2001-- $162,000) ................................ 1,477,818 1,351,502
Other assets ................................................. 323,786 220,326
------------ ------------
Total current assets ......................................... 18,140,333 19,514,130
Furniture, equipment, and computer software at cost,
less accumulated depreciation
(2002-- $2,102,000; 2001-- $1,633,000) .................... 1,020,201 2,090,568
Intangible assets at cost, less accumulated amortization
(2002-- $398,000; 2001-- $37,500) ......................... 1,034,707 1,395,159
------------ ------------
Total assets ................................................. $ 20,195,241 $ 22,999,857
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued
liabilities ............................................... $ 1,303,634 $ 1,000,235
------------ ------------
Total current liabilities .................................... 1,303,634 1,000,235
Long-term capital lease obligations .......................... 47,923 84,340
------------ ------------
Total liabilities ............................................ 1,351,557 1,084,575
Commitments and contingencies ................................ -- --
Stockholders' equity:
Common stock - par value, $.003 per share;
shares authorized: 60,000,000
shares issued: 2002 and 2001-- 7,253,570 ............. 21,761 21,761
Additional paid-in capital ............................. 63,930,061 63,930,061
Retained-earnings deficit .............................. (41,315,349) (39,461,293)
Treasury stock at cost 2002-- 2,359,341;
2001-- 1,913,291 ..................................... (3,793,985) (2,595,343)
Accumulated other comprehensive income ................. 1,196 20,096
------------ ------------
Total stockholders' equity ................................... 18,843,684 21,915,282
------------ ------------
Total liabilities and stockholders'
equity .................................................... $ 20,195,241 $ 22,999,857
============ ============
See accompanying notes.
3
QUOTESMITH.COM, INC.
STATEMENTS OF OPERATIONS
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
Revenues:
Commissions and fees .......... $ 2,644,410 $ 1,724,895 $ 8,292,263 $ 6,247,340
Other ......................... 22,636 5,179 140,717 34,491
------------ ------------ ------------ ------------
Total revenues ................... 2,667,046 1,730,074 8,432,980 6,281,831
Expenses:
Selling and marketing ......... 622,638 827,713 1,877,091 6,243,822
Operations .................... 2,279,225 1,395,063 6,226,904 4,280,481
General and administrative .... 780,811 797,084 2,444,504 2,798,422
------------ ------------ ------------ ------------
Total expenses ................... 3,682,674 3,019,860 10,548,499 13,322,725
------------ ------------ ------------ ------------
Operating loss .................. (1,015,628) (1,289,786) (2,115,519) (7,040,894)
Interest income .................. 83,634 228,144 261,463 928,413
------------ ------------ ------------ ------------
Net loss ......................... $ (931,994) $ (1,061,642) $ (1,854,056) $ (6,112,481)
============ ============ ============ ============
Net loss per common
share, basic and diluted ...... $ (0.19) $ (0.20) $ (0.37) $ (1.12)
============ ============ ============ ============
Weighted average common
shares and equivalents
outstanding, basic and diluted 4,917,562 5,345,252 4,986,212 5,474,995
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
------ ----- ------- ------- ----- ------------ ------
2001:
Balance at January 1 ......... 7,253,570 $21,761 $63,836,873 $(32,828,218) $(1,360,313) $ (2,798) $29,667,305
Net loss ..................... -- -- -- (6,633,075) -- -- (6,633,075)
Other comprehensive income-
unrealized gain on
investments .............. -- -- -- -- -- 22,894 22,894
Total comprehensive loss ..... (6,610,181)
Stock options issued in
connection with
acquisition .............. -- -- 82,250 -- -- -- 82,250
Purchase of treasury stock ... -- -- -- -- (1,235,030) -- (1,235,030)
Employee stock compensation .. -- -- 10,938 -- -- -- 10,938
---------- ------- ----------- ------------ ----------- -------- -----------
Balance at December 31 ...... 7,253,570 21,761 63,930,061 (39,461,293) (2,595,343) 20,096 21,915,282
Nine months ended
September 30, 2002 (unaudited)
Net loss ..................... -- -- -- (1,854,056) -- -- (1,854,056)
Other comprehensive loss-
unrealized loss on
investments .............. -- -- -- -- -- (18,900) (18,900)
-----------
Total comprehensive loss ..... -- -- -- -- -- -- (1,872,956)
Purchase of treasury stock ... -- -- -- -- (1,198,642) -- (1,198,642)
---------- ------- ----------- ------------ ----------- -------- -----------
Balance at September 30, 2002
(unaudited) ................ 7,253,570 $21,761 $63,930,061 $(41,315,349) $(3,793,985) $ 1,196 $18,843,684
========== ======= =========== ============ =========== ======== ===========
See accompanying notes.
5
QUOTESMITH.COM, INC.
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2002 2001
---- ----
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................ $ (1,854,056) $ (6,112,481)
Adjustments to reconcile to net cash
used by operating activities:
Depreciation expense ...................... 753,868 453,998
Amortization .............................. 196,945 (81,532)
Accounts payable and
accrued liabilities ..................... 299,181 (1,858,743)
Commissions receivable .................... (126,316) 638,799
Stock compensation ........................ -- 10,938
Loss on disposal of equipment and
computer software ....................... 371,516 --
Other assets .............................. (103,460) 200,509
------------ ------------
Net cash used by operating
activities .................................. (462,322) (6,748,512)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments ........................ (16,810,664) (14,254,568)
Proceeds from investment maturities ............. 16,300,000 22,000,000
Proceeds from sales of investments .............. -- 2,500,000
Purchases of furniture,
equipment, and computer software .............. (55,016) (315,221)
------------ ------------
Net cash provided by investing
activities .................................... (565,680) 9,930,211
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of treasury stock ..................... (1,198,642) (1,235,030)
Payment of capital lease obligation ............. (32,199) (32,199)
------------ ------------
Net cash used by financing
activities .................................... (1,230,841) (1,267,229)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,258,843) 1,914,470
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD ............................. 4,033,192 4,269,141
------------ ------------
CASH AND CASH EQUIVALENTS AT
AT END OF PERIOD ................................ $ 1,774,349 $ 6,183,611
============ ============
See accompanying notes.
6
QUOTESMITH.COM, INC.
NOTES TO FINANACIAL STATEMETS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS
Quotesmith.com, Inc. (the Company) is an Internet-based insurance agency and
brokerage. The Company owns and operates two comprehensive, online consumer
insurance information services, www.quotesmith.com and www.insure.com, both of
which cater to the needs of self-directed insurance shoppers. The Company
provides a large array of comparative auto, life, and health insurance quotes,
combined with news, 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 for twelve different product
lines and allows any user to purchase insurance from the company of their
choice. The Company generates revenues from the receipt of commissions, fees,
content licensing, and advertising revenues 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.
In December 2001, the Company acquired selected assets of Insurance News
Network, LLC, including its Web site, www.insure.com. The insure.com Web site
comprises an insurance news organization consisting of consumer insurance news,
information, and decision-making tools, and is intended to provide a new
customer gateway.
The accompanying 2001 financial statements reflect the operations of
Insurance News Network, LLC, from the date of acquisition. The following table
presents unaudited pro forma results as if the acquisition had occurred at the
beginning of 2001.
Quarter Ended Nine Months Ended
September 30, 2001 September 30, 2001
------------------ ------------------
Total revenues $ 2,036,000 $ 7,394,000
Net loss (1,284,000) (6,695,000)
Net loss per common share,
basic and diluted $ (0.24) $ (1.22)
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, 2002
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2002.
The balance sheet at December 31, 2001 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.
7
QUOTESMITH.COM, INC.
NOTES TO FINANACIAL STATEMETS
(UNAUDITED)
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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------ ------------
2002 2001 2002 2001
---- ---- ---- ----
Net loss................................. $ (931,994) $ (1,061,642) $ (1,854,056) $(6,112,481)
Unrealized gain (loss) on investments.... 8,946 6,063 (18,900) 33,140
---------- ------------ ------------ -----------
Comprehensive loss................... $ (923,048) $ (1,055,579) $ (1,872,956) $(6,079,341)
========== ============= ============ ===========
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.
6. COMPUTER SOFTWARE
We have previously stated our intentions to enter the auto insurance
brokerage business via the launch of a comparative multi-company auto rating
engine and order fulfillment technology that has been under development by us
since early 2000. This project experienced technical complexities resulting in a
delayed launch. We did successfully launch this new technology for residents of
California in January 2002. However, because of market conditions, we were
unable to secure agency appointments with the number of carriers we had hoped to
obtain. Also, the handling costs of this business were higher than we had
anticipated. Therefore we made the decision during the third quarter of 2002 to
discontinue this agency business in favor of using the same outsourced
technology solution for California that we currently use in the other states.
This decision resulted in a write off of $329,000 of computer software costs,
which are included in operations expenses in the third quarter of 2002.
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 2002 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 enter the homeowners brokerage business; our ability
to achieve or sustain profitability; demand for life insurance; consumer
acceptance of purchasing insurance on the Internet; significant fluctuations in
our quarterly results; our ability to develop our brand recognition; our ability
to expand our product offerings; 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 of 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, content licensing,
and advertising revenues 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
9
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.
We have previously stated our intentions to enter the auto insurance
brokerage business via the launch of a comparative multi-company auto rating
engine and order fulfillment technology that has been under development by us
since early 2000. This project experienced technical complexities resulting in a
delayed launch. We did successfully launch this new technology for residents of
California in January 2002. However, because of market conditions, we were
unable to secure agency appointments with the number of carriers we had hoped to
obtain. Also, the handling costs of this business were higher than we had
anticipated. Therefore we made the decision during the third quarter of 2002 to
discontinue this agency business in favor of using the same outsourced
technology solution for California that we currently use in the other states.
This decision resulted in a write off of $329,000 of computer software costs,
which are included in operations expenses in the third quarter of 2002.
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 in connection with the acquisition of
certain assets of Insurance News Network, LLC, 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 NINE MONTHS ENDED SEPTEMBER 30, 2002 AND
SEPTEMBER 30, 2001
Revenues
Revenues increased 54% to $2.7 million in the third quarter of 2002,
compared to $1.7 in the third quarter of 2001. For the nine months ended
September 30, revenues increased 32% in 2002 to $8.4 million from $6.3 million
in 2001. The increases in revenues were due to an increase in commission and fee
revenues per policy sold and an increase in the number of policies sold, as well
as the addition of insure.com advertising revenue to the results of 2002. In the
third quarter of 2002, commission and fees revenues per policy increased 9 % to
$492 from $452 in 2001, and new policies sold increased 40% to 5,379 from 3,830
policies sold in the same quarter a year ago. For the nine months ended
September 30, 2002, commission and fee revenues per policy increased 22% to $494
from $406 in 2001, while new policies sold increased 8% from 15,463 in 2001 to
16,778 in 2002.
Expenses
Selling and Marketing. Selling and marketing expenses decreased 25% to
$623,000 in the third quarter 2002, compared to $828,000 in the third quarter of
2001, and decreased as a percentage of revenue from 48% in the third quarter of
2001 to 23% in the third quarter of 2002. For the nine months ended September
20, 2002, selling and marketing expenses decreased 70% to $1.9 million from $6.2
million a year earlier, and decreased from 99% of revenue to 22% of revenue. The
reduction of selling and marketing expenses reflects management's ongoing
strategy to achieve profitability and conserve capital, in part, through further
marketing efficiencies and expense reductions. Per-policy acquisition costs
(total marketing costs divided by total new policies sold) were substantially
reduced as a result of reduced media rates, more efficient deployment of
marketing dollars, the overall branding effect of past ad expenditures, and
ownership of the insure.com platform. The per-policy acquisition cost in the
third quarter of 2002 dropped by 46% to $116 compared to $216 for the third
quarter of 2001. Per policy acquisition costs dropped by 72% for the nine months
ended September 30, 2002 to $112, compared to $404 in the same period in 2001.
Operations. Operations expenses increased 64% to $2.3 million for the
quarter ended September 30, 2002, compared to $1.4 million for the same period
in 2001. For the nine months ended September 30, 2002, operations expenses
increased 45% to $6.2 million from $4.3 million in 2001. The increase in
operations expenses is the result of third-party administration fees related to
some customer support functions outsourced during 2002, insure.com salaries and
benefits not present in 2001, and higher depreciation charges. Also included in
Operations expenses in the third quarter of 2002 was the cost of writing off
$329,000 of
10
computer software resulting from our decision to discontinue our California
automobile insurance quoting engine. The operating costs per paid policy
increased 16% to $424 for the quarter ended September 30, 2002 from $364 per
paid policy for the quarter ended September 30, 2001. For the nine months ended
September 30, 2002, operating costs per paid policy were $371, a 34% increase
over the same period in 2001 when the operating costs per paid policy were $277.
General and Administrative. General and administrative expenses declined 2%,
from $797,000 for the quarter ended September 30, 2001, to $781,000 for the
quarter ended September 30, 2002. For the nine months ended September 30, 2002,
general and administrative expenses were $2.4 million, a decrease of 13% from
the expense of $2.8 million in the same period in 2001. Cost benefits realized
in 2002 resulting from the planned reduction of our senior management team
during 2001, were offset in part by higher 2002 amortization expense related to
the December 2001 insure.com acquisition.
Interest Income
Interest income was $84,000 in the third quarter of 2002 compared to
$228,000 in the third quarter of 2001. For the nine months ended September 30,
2002, interest income totaled $261,000, down from $928,000 in the prior year
period. The decrease in interest income reflects the use of investment principal
to fund our operating losses, repurchase shares of our common stock, and fund,
in part, the insure.com acquisition.
Income Taxes (Credit)
We had no income tax credit for 2002 and 2001 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 $16.3
million at September 30, 2002 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 sooner than anticipated. If we require additional
equity financing, it may be dilutive to our stockholders and the equity
securities issued in a subsequent offering may have rights or privileges senior
to the holders of our common stock. If debt financing is available, it may
require restrictive covenants with respect to dividends, raising capital, and
other financial and operational matters, which could impact or restrict our
operations. If we cannot obtain adequate financing on acceptable terms, we may
be required to reduce the scope of our marketing or operations, which could harm
our business, results of operations, and our financial condition.
Our sources of funds will consist primarily of commissions and fee revenue
generated from the sale of insurance products, investment income, and sales and
maturity proceeds from our fixed maturity 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 $462,000 for the first
nine months of 2002, compared with cash used by operating activities of $6.7
million for the same period in 2001. The improvement in the first nine months of
2002 primarily resulted of a decreased net loss for the period reflecting the
planned decrease in marketing expenditures, offset by an increase in commissions
receivable versus a decrease in these accounts for the same period of the prior
year.
Cash flows used by investing activities were $566,000 in the first nine
months of 2002, compared with cash flows provided by investing activities of
approximately $9.9 million in the first nine months of 2001. The decrease in
cash provided by investing activities in 2002 is primarily due to the
reinvestment of substantially all of the proceeds of investments maturing during
the first nine months of 2002 versus the use of some of the proceeds from
investments maturing during the first nine months of 2001 to fund operating
losses for that period.
11
Cash used by financing activities was approximately $1.2 million in the
first nine months of 2002, compared with $1.3 million used by financing
activities for the same period in 2001. The cash used by financing activities in
both 2002 and 2001 represents funds used to purchase our common stock under the
Company's share repurchase programs.
FACTORS THAT MAY AFFECT OUR FUTURE OPERATING RESULTS
RISKS RELATED TO OUR BUSINESS
IF WE DO NOT SUCCESSFULLY IMPLEMENT OUR NEW HOMEOWNERS INSURANCE RATING ENGINES,
OUR REVENUES AND BUSINESS COULD BE HARMED
We have previously stated our intentions to enter the homeowners insurance
brokerage business via the launch of a comparative multi-company homeowners
rating engine and order fulfillment technology that has been under development
by us since mid-2001. This project experienced technical complexities resulting
in a delayed launch. While we did launch this new technology for residents of
California in May 2002, and believe that additional rollouts into other high
population states will occur during 2003, we may again experience additional
difficulties that could further delay or prevent our successful entry into the
homeowners insurance brokerage business in other states, and that could result
in additional expenditures and the loss of revenue.
Even though we have now technically launched our new homeowners insurance
service in 2002, there can be no assurance that such new service will ever
become commercially successful for us or that such new service will produce any
significant new revenues.
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 September 30, 2002. In 2002, we are further reducing marketing
expenses in order to reduce our net losses and conserve our capital. Because of
our overhead structure, we need to generate 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
expect to introduce a number of new products and services that may or may not be
profitable for us.
IF THE TERM LIFE INSURANCE INDUSTRY DECLINES, OUR BUSINESS WILL SUFFER BECAUSE A
SUBSTANTIAL PORTION OF OUR REVENUES ARE CURRENTLY DERIVED FROM CONSUMERS
PURCHASING TERM LIFE INSURANCE THROUGH US
For the quarter ended September 30, 2002, approximately 81% of our revenue
was derived from the sale of individual term life insurance. 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 continue to decline in 2002. 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.
WE MAY GENERATE LIMITED REVENUES FROM THE INSURE.COM WEB SITE, UNLESS WE CAN
SUCCESSFULLY MIGRATE ITS BUSINESS MODEL FROM AN ADVERTISER-SUPPORTED MODEL TO AN
INSURANCE-TRANSACTION MODEL
Our success will depend in part upon our ability to realize commission and
fee revenue derived from visitors to insure.com, who then migrate to our
insurance price comparison engines to engage in an insurance transaction. We are
now beginning to advertise the insure.com name in connection with our insurance
product offerings, and are re-directing on-line visitors who enter insure.com
into their Internet Browsers to our insurance quoting website. Business risks
associated with owning this site include:
- failure to maintain or grow the core insure.com visitor base;
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- poor conversion of the insure.com visitor status to insurance buyer
status;
- on-line visitors looking for the insure.com news and information site
may not return after being re-directed to the insurance quoting site;
- failure to manage the technical systems and computer platforms that are
necessary for the smooth and uninterrupted operation of the inusre.com
Web site;
- loss of key traffic sources that send traffic to or promote the
insure.com services; and
- we may not be able to successfully integrate into our Illinois office
the operations previously carried out by our Connecticut office.
We cannot assure you that we will be successful in migrating the insure.com
business model from an advertiser-supported revenue business model into an
insurance transaction business model, or that such migration can occur rapidly
enough to generate revenues or profits at an acceptable level.
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 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 SITE
We generate commission revenues only 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
insurance quote information purposes, we will not generate revenues and our
business would be significantly harmed.
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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 to insure.com 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 paid to us by insurance companies which
typically are highest in the fourth quarter;
- volatility in renewal commission income;
- the conversion and fulfillment rates of consumers' applications, which
vary according to insurance product;
- new sites, services and products by our competitors;
- price competition by insurance companies in the sale of insurance
policies; and
- the level of Internet usage for insurance products and services.
In addition, we have a very long revenue cycle. As a result, substantial
portions of our expenses, including selling and marketing expenses, are incurred
well in advance of potential revenue generation. If revenues do not meet our
expectations as a result of these selling and marketing expenses, our results of
operations will be 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 MUST SUCCESSFULLY EXPAND INTO ADDITIONAL INSURANCE PRODUCTS IN ORDER TO
REMAIN COMPETITIVE
We have recently expanded our product offerings to include additional types
of insurance and will continue to do so in the future. Expanding our product
offering has required significant expenditures, and further expansion, if any,
will also 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 only small amounts of revenues from our new
product types. If our new product
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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 181 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 purchase a material number of policies
from insurance companies with whom we are not appointed as an agent, and these
insurance companies refuse to enter into agency contracts with us, it could harm
our business and results of operations.
OUR STRATEGIC RELATIONSHIPS AND AGREEMENTS DO NOT CURRENTLY, AND MAY NEVER,
GENERATE A MATERIAL AMOUNT OF REVENUES FOR US
As part of our marketing strategy, we 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. However, to
date we have derived only a minimal amount of revenues from these arrangements.
In addition, most of these strategic agreements permit either party to terminate
the agreement with short notice. As a result, we cannot assure you that any of
these relationships or agreements will be profitable or generate any material
amount of revenues in the future. If our strategic relationships and agreements
do not meet our expectations regarding revenues and earnings, our business could
be harmed.
IF WE DO NOT MANAGE OUR GROWTH EFFECTIVELY, OUR BUSINESS COULD BE HARMED
We have expanded our operations significantly since May 1996 and anticipate
that further expansion may be required to realize our growth strategy. Our
operations growth has placed significant demands on our management and other
resources, which is likely to continue. To manage our future growth, we will
need to attract, hire and retain highly skilled and motivated officers,
managers, and employees and improve existing systems and/or implement new
systems for:
- transaction processing;
- operational and financial management; and
- training, integrating, and managing our growing employee base.
We may not be successful in managing or expanding our operations or
maintaining adequate management, financial, and operating systems and controls.
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IF 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. Philip Moeller,
our Senior Vice President, Content and Business Development, resigned effective
October 31, 2002, in connection with the relocation of the insure.com office to
Illinois. We can give no assurance that we will be able to successfully
integrate the insure.com operation into our Illinois location.
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, for the year ended December 31, 2001, we paid $7,500, and for the nine
months ended September 30, 2002, we paid $2,000 in cash rebates. 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 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. 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 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 181 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.
17
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
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
18
sensitive information about our customers, any security breaches would damage
our reputation and could expose us to litigation and liability. We cannot
guarantee that our systems will prevent security breaches.
OUR BUSINESS ASSUMES THE CONTINUED DEPENDABILITY OF THE INTERNET INFRASTRUCTURE
Our success will depend upon the development and maintenance of the
Internet's infrastructure to cope with its significant growth and increased
traffic. This will require a reliable network backbone with the necessary speed,
data capacity, and security, and the timely development of complementary
products, such as high-speed modems, for providing reliable Internet access and
services. The Internet has experienced a variety of outages and other delays as
a result of damage to portions of its infrastructure and could face outages and
delays in the future. Outages and delays are likely to cause a loss of business
by affecting the level of Internet usage and the processing of insurance quotes
and applications requests made through our Web site. We are unlikely to make up
for this loss of business.
RISKS RELATED OWNERSHIP OF OUR COMMON STOCK
OUR STOCK 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.
19
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, as the common stock is not listed on the Nasdaq National
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 SmallCap 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 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, 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 November 11, 2002, Robert Bland, our Chairman, President and Chief
Executive Officer directly or indirectly controls 48.7% 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.
20
This control could discourage others from initiating a potential merger,
takeover, or another change of control transaction that could be beneficial to
our public stockholders. As a result, the market price of our common stock could
be harmed.
OUR CHARTER DOCUMENTS AND DELAWARE LAW CONTAIN PROVISIONS THAT MAY DISCOURAGE
TAKEOVER ATTEMPTS 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.
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 $1,196 at September 30, 2002, and $20,096 at December 31,
2001.
We did not hold any derivative financial instruments as of September 30,
2002, 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
21
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 September 30, 2002, our balance sheet reflected
approximately $14.5 million in investments and $1.8 million 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 1,514,674 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
None
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). Exhibits
Exhibit Number Description
-------------- -----------
99.1 Statement of Chief Executive Officer
Pursuant to Section 1350
99.2 Statement of Chief Financial Officer
Pursuant to Section 1350
(b). Reports on Form 8-K
No reports were filed on Form 8-K for the quarter ended
September 30, 2002.
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: November 11, 2002
By: /s/ PHILLIP A. PERILLO
-----------------------
Phillip A. Perillo
Senior Vice President and
Chief Financial Officer
22
STATEMENT OF CHIEF EXECUTIVE OFFICER
------------------------------------
I, Robert S. Bland, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Quotesmith.com,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 11, 2002
/s/ ROBERT.S.BLAND
-----------------------
Robert S. Bland
Chief Executive Officer
23
STATEMENT OF CHIEF FINANCIAL OFFICER
------------------------------------
I, Phillip A. Perillo, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Quotesmith.com,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 11, 2002
/s/ PHILLIP A. PERILLO
-----------------------
Phillip A. Perillo
Chief Financial Officer
24