UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 for the fiscal year ended December 31, 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 (IRS Employer
of incorporation or organization) Identification Number)
8205 SOUTH CASS AVENUE, SUITE 102
DARIEN, ILLINOIS 60561
(630) 515-0170
(Address, including zip code, and telephone number, including area
code, of Registrant's principal executive offices)
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Title of Each Class
Common Stock, $.003 par value
Preferred Stock Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by a check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 121-2) [ ] Yes [X] No
Aggregate market value of the Registrant's voting stock held by non-affiliates
on March 21, 2003, based on the closing price of said stock on the Nasdaq
National Market on such date, was $6,690,862.
As of March 21, 2003, 4,909,731 shares of the Registrant's Common Stock, $.003
par value of the Registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement for the annual meeting
of stockholders to be held on April 24, 2003, to be filed pursuant to Regulation
14(A) are incorporated by reference into Part III of this Form 10-K.
PART I
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Because we want to provide you with more meaningful and useful
information, this Annual Report on Form 10-K 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 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 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 expense, 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; 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 if necessary. See Item 7 of this report, "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
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 annual report. All references to "we," "us," "our," "Quotesmith,"
and the "Company" refer to Quotesmith.com, Inc. and its subsidiary. The
information contained on our Web sites, or Web sites that are linked to our Web
sites, is not incorporated herein by reference.
ITEM 1. BUSINESS
OVERVIEW
We are an Internet-based insurance agency and brokerage headquartered in
Darien, Illinois. We own and operate 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. We provide a
large array of comparative auto, life, and health insurance quotes, combined
with insurance information and decision-making tools. Since our inception in
1984, we have 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
a user to purchase insurance from the company of their choice. We generate
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 we produce. We conduct our insurance
agency and brokerage operations using salaried, non-commissioned personnel and
we generate prospective customer interest using traditional direct response
advertising methods conducted primarily offline.
Our stated corporate objective is to become the No. 1 insurance brand on
the Internet. For the six-year period ended December 31, 2002, we have spent a
total of $52.6 million in direct-to-consumer advertising and have sold
approximately 117,000 new policies.
In December 2001, we acquired selected assets of Insurance News Network,
LLC, including its content-rich consumer information Web site, www.insure.com,
which was regularly among the top five most visited insurance sites on the
Internet. Insure.com provided insurance-related information and decision-making
tools, along with library of thousands of insurance articles that are well
organized and served up in an easy-to-navigate format. We have since integrated
the content of the insure.com site with the insurance quoting services of the
Quotesmith.com site, and have begun using Insure.com as a brand name in our
advertising.
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INDUSTRY BACKGROUND
The Traditional Insurance Market in the United States
The insurance market in the United States represents over $1 trillion in
annual paid premiums. Insurance products are widely held by households and
businesses. The United States insurance market is broadly divided into two
categories: life and health insurance and property and casualty insurance. Over
4,000 insurance companies distribute their products through a network of agents
and brokers or sell directly to consumers. There are approximately one million
individuals licensed as agents and brokers to sell insurance in the United
States. A variety of distribution systems have evolved, including "captive"
one-company agents and independent agents and brokers that typically represent
only two to five insurance companies.
Challenges to Purchasing and Delivering Insurance
There are numerous challenges to the informed purchase and delivery of
insurance products. Some of these challenges are due to the specialized nature
of insurance products and other challenges result from the way in which
insurance has been traditionally distributed.
These challenges include:
- Fragmented delivery. Insurance products are available from captive
agents, independent agents and direct distribution channels as well as
new entrants, including banks and other financial institutions. Because
of this fragmentation, there has been no single source of policy
coverage and pricing information from which a consumer can obtain
unbiased and complete information.
- Quantity and variation of products. Insurance policies vary by type of
insurance product, underwriting guidelines, insurance company,
jurisdiction and the particular characteristics and preferences of the
consumer. This creates a complex pricing structure that is not readily
understandable or comparable without the use of technology.
- Information-intensive underwriting process. The underwriting process
requires consumers to submit, and insurance companies to collect, large
amounts of individualized and personal information. This process is
difficult, time consuming and, if not accurately completed, will delay
the approval of a policy.
- Negative consumer perception. Consumers often believe that they paid
too much for their insurance and were not properly informed by
insurance agents. Face-to-face contact with an insurance agent may
convey the sense of a high-pressure sales environment with a lack of
unbiased information.
- Misalignment of interests between insurance agents and consumers.
Commission-based insurance agents represent only a limited number of
insurance companies. Accordingly, they are compensated to promote and
sell a limited range of products, which is in direct conflict with the
consumer's need to obtain insurance at the lowest price.
- Inconvenient and time-consuming purchase. Researching policy coverage,
contacting competing insurance companies, collecting information and
obtaining insurance quotes require large blocks of time usually during
regular working hours. Consumers are often unable to shop for insurance
on their own time and from the convenience of their own home.
Distribution of insurance through traditional agent and broker sales
forces is expensive and inefficient for insurance companies. Traditional agency
distribution methods have high fixed costs associated with establishing and
maintaining numerous branch and local offices, high commission structures,
recurring training costs and high agent turnover. In addition, insurance
companies often do not target all segments of the population because of the
inability to profitably serve these segments through traditional distribution
channels.
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Emergence of the Internet and Electronic Commerce
The Internet has emerged as a global medium for communication, information
and commerce. The Internet possesses a number of unique characteristics that
differentiate it from traditional media and other methods of commerce,
including:
- companies can reach and serve a large and global group of consumers
electronically from a central location;
- companies can provide personalized, low-cost and real time consumer
interaction;
- users communicate or access information without geographic or temporal
limitations;
- users enjoy greater convenience and privacy and face less sales
pressure; and
- users have an enormous diversity of easily accessible content and
commerce offerings.
As a result of these unique characteristics and the Internet's growing
adoption rate, businesses have an enormous opportunity to conduct commerce over
the Internet. The Internet gives companies the opportunity to develop one-to-one
relationships with consumers worldwide without having to make the significant
investments to build and manage a local market presence or develop the printing
and mailing capabilities associated with traditional direct marketing
activities.
Emergence of the Electronic Service Category
A new category of Internet-based electronic service providers has emerged
that offers a focused range of services with special emphasis on providing
relevant content, information and transaction capabilities. Recent examples
include companies operating as online providers of mortgages, online securities
brokers and automobile referral services. These consumer-focused, one-stop,
information-based destinations provide enhanced, high margin services by acting
as independent intermediaries that facilitate interaction and transaction flow
between buyers and sellers. Consumers benefit because they are able to obtain
value-added information services and transaction capabilities on their own time
schedule. Sellers benefit because they are able to deliver targeted offerings
more effectively to consumers.
Online Insurance Opportunity
The growing acceptance of the Internet and electronic commerce presents a
significant opportunity for the insurance industry by allowing consumers to more
efficiently and effectively research and transact with insurance companies. The
fragmentation of the insurance industry and the significant price and product
variation has led consumers to seek alternative means of purchase and insurance
companies to seek alternative means of distribution. We believe that the vast
information sharing and communications power of the Internet will significantly
improve the insurance industry for both consumers and insurance companies.
Characteristics of the insurance product that make it particularly well
suited for delivery over the Internet include:
- insurance is an information-based product that needs no physical
shipment or warehousing of merchandise;
- through a single medium, consumers can access information and compare a
wide variety of insurance companies' products;
- effective two-way communication flow via the Internet allows insurance
companies to interact with consumers and rapidly collect underwriting
information;
- enhanced convenience, privacy and control over the process of
researching and purchasing insurance without the pressure of a
commissioned agent; and
- ability of insurance companies to target and serve segments of the
market which previously were unprofitable through traditional
distribution channels by reducing the need for large sales staff and
costly local offices.
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Many companies are trying to address the online insurance opportunity.
Some companies have created "lead referral" Web sites for the purpose of
capturing consumer name and address information to be forwarded, as a
prospective sales lead, to a specified insurance company or its traditional
sales force. Many of these Web sites are paid up-front referral fees, are
aligned with a limited number of insurance companies and often do not quote many
of the lowest priced insurance policies. Consumers are often still forced to
complete their purchase through a commissioned salesperson. Additionally, these
companies typically do not offer any personalized customer service or insurance
fulfillment capabilities and, therefore, do not offer a complete quote-to-policy
delivery insurance solution.
Existing insurance companies and their agents and brokers have created Web
sites to sell their insurance products online as an alternative to their
traditional sales activities. Some companies have created Web sites with the
primary purpose of creating an insurance sale online for a single insurance
company or group of insurance companies with little or no comparative overview
of prices. These companies perpetuate the fragmentation in the industry by not
offering a comprehensive database of pricing and coverage information.
As a result of the shortcomings inherent in the online lead referral and
single company approaches, we believe there exists a significant market
opportunity for the emergence of a large-scale, comprehensive and unbiased
Internet-based insurance service. Self-directed consumers will be attracted to
the broadest selection of insurance companies and a compelling value proposition
based upon price, time and transaction fulfillment.
THE QUOTESMITH.COM SOLUTION
We believe that Quotesmith.com is the most comprehensive Internet-based
insurance service available. The Quotesmith.com service enables consumers and
business owners to obtain instant quotes from over 300 insurance companies for
twelve different product lines, and we guarantee the accuracy of every quote.
Our Web site provides consumers and business owners with insurance-related
information, and decision-making tools. Combining the reach and efficiency of
the Internet with our proprietary database and industry expertise developed over
the past 19 years, we provide a complete "quote to policy delivery" insurance
solution without the involvement of any commissioned salespeople.
We have created a model that addresses the challenges faced by traditional
insurance distribution methods in a manner that offers significant benefits to
both consumers and insurance companies. The Quotesmith.com model allows
consumers to:
- research and become informed about insurance coverage issues
- efficiently search for, analyze and compare insurance products;
- quickly request and obtain insurance quotes; and
- easily select and purchase insurance from the insurance company of
their choice.
The Quotesmith.com solution provides the following principal advantages to
both consumers and insurance companies:
Comprehensive Source of Insurance Information and Products. Using our
easy-to-navigate Web site, consumers can access insurance-related information,
and decision-making tools, as well as a library of thousands of insurance
articles. Our Web site also provides insurance quotes from over 300 insurance
companies across several types of insurance including individual term life,
private passenger automobile, dental, individual and family medical, long-term
care, disability, Medicare supplement, small group medical, "no exam" whole life
and annuities. We believe we offer consumers access to the largest, most
complete repository of comparative information on insurance products, insurance
pricing and insurance providers. We empower consumers with relevant current
pricing knowledge, coverage information and independent rating information so
consumers can make informed buying decisions.
Guaranteed-Accurate Instant Quotes. Over the past 19 years, we have
developed what we believe to be the most complete, regularly updated database
used to determine insurance quotes. The ability to obtain instant quotes on the
Internet is
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the first priority for consumers purchasing insurance online, according to a
recent survey by an independent research group. We obtain and regularly update
all of our pricing, underwriting and policy coverage information contained in
our databases directly from the insurance company to ensure accuracy. We offer
consumers a unique $500 cash reward guarantee that we provide an accurate quote.
In addition, we also offer a $500 cash reward guarantee that we provide the
lowest price quote available with respect to term life and automobile insurance
policies. These Quotesmith.com guarantees are unmatched by any competitor.
Consumer in Control. We put consumers in control of their insurance
purchase decisions by giving them the ability to efficiently search, analyze and
compare prices of insurance products from multiple insurance companies in
complete privacy, on their own time and free from the pressure to buy associated
with traditional salespeople. Consumers choose from what we believe is the
largest selection of insurance companies using their own preferences regarding
price and insurance company rating. Consumers are able to purchase insurance
directly through us without ever speaking to a commissioned salesperson.
Convenience. Consumers who use Insure.com and Quotesmith.com no longer
need to contact different insurance companies or salespeople, one by one, in
order to gather information to make educated decisions. Unlike traditional
agents who only recommend and promote a limited number of insurance companies'
policies, we provide real time access to a large database of over 300 insurance
companies' products. Our comparison service presents users with a comprehensive
listing of insurance quotes, ranked by price. We believe that this large array
of available insurance providers in a single destination saves consumers time
and effort in searching for and obtaining the most suitable coverage.
Quote to Policy Delivery Support. Consumers purchase insurance directly
through us. Unlike insurance lead referral services, at Quotesmith.com we do not
abandon the consumer once the insurance company has been selected, but continue
to provide value-added support and service throughout the insurance purchase
process. We facilitate this process by:
- providing a licensed agent's explanation of various pricing, coverage
and independent rating information when asked;
- providing access to our licensed agents to assist consumers in
completing insurance applications;
- offering applications that can be filled out online, and;
- arranging and monitoring the collection of outside underwriting
information including paramedical examinations, laboratory reports and
medical records.
Focus on Customer Service. Customer service is both our foundation and a
strategic priority. We provide a high level of customer service throughout the
application process and aim to eliminate consumer dissatisfaction and
frustration. Our non-commissioned customer service staff has an average of
approximately 10 years of experience in the insurance industry.
We implement our customer service objectives by:
- requiring all new employees to attend "Quotesmith University," a
training course that teaches all of the service tasks we perform for
our customers;
- monitoring call centers to ensure prompt and consistent responses to
phone, mail and e-mail inquiries;
- providing regular application status reports and Web access to our
customers on a consistent basis through policy delivery; and
- offering a 30-day cancellation option on term life policies.
Licensed National Insurance Agency. Unlike traditional insurance agents
who are often only licensed in one or a limited number of states, our Company
and/or certain of its employees are licensed to distribute insurance throughout
the United States. This allows us to process and offer insurance policies to
consumers nationwide. Over a 19-year period, we have established vital
information-contributor relationships with over 300 insurance companies, of
which we are currently appointed as an authorized agent by approximately 170
insurance companies.
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User Friendly System. At our Web sites, www.quotesmith.com and
www.insure.com, consumers can access our Internet-based services, research
policy options and initiate purchase requests 24 hours a day, 7 days a week. Our
easy to use Web sites are designed for fast viewing and general compatibility
with all commonly used browsers.
OUR STRATEGY
Our strategy is to be the leading Internet-based service for all insurance
needs of individuals and small businesses. The key elements of our strategy
include:
Continue to Build the Quotesmith.com and Insure.com Brands. We intend to
pursue a cost-effective marketing strategy designed to promote our
Quotesmith.com and Insure.com brands and consumer awareness of the benefits of
researching and buying insurance through us.
Offer Additional Insurance Products. We will continue to expand into
additional types of insurance. We expect to leverage our brand, proprietary
database and operational infrastructure to expand the breadth of insurance
products we offer to our customers. While historically our primary product has
been term life insurance, we now offer long-term care, dental, individual and
family medical, Medicare supplement, small group medical, "no-exam" whole life
insurance, and fixed annuities. We plan to market these products to both new
customers and to our existing customer base.
Expand Number of Participating Insurance Companies. We intend to increase
the number of participating insurance companies in our service. A significant
factor in our strategy has been our ability to demonstrate to an increasing
number of leading insurance companies that we can generate incremental revenues
for them within their existing pricing structures. We plan to extend this
ability to broaden our relationships with major insurance companies based on
reputation, quality and national presence in order to expand our insurance
product offerings.
Leverage Customer Base. We have expanded our insurance product offerings
and believe there is significant opportunity to leverage our existing customer
base and provide new products to them without significant customer acquisition
costs. We plan to tailor our marketing efforts based on consumer profiles
contained in our database of existing customers. We also believe that the
content acquired in the purchase of the insure.com Web site will continue to
provide us with a permanent new customer gateway, thereby allowing us to reduce
our future customer acquisition costs and our reliance on direct-to-consumer
advertising as our primary source of new customers.
Strengthen and Pursue Strategic Relationships and Agreements. We believe
that strategic joint ventures and licensing arrangements are attractive methods
of expansion, as they will enable us to combine our expertise in Internet-based
insurance offerings with other brand names, complementary services or
technology. We plan to pursue additional relationships and agreements in the
future. In addition, we may seek to acquire additional complementary
technologies or businesses.
Continue to Focus on Customer Service. We provide insurance products and
services for consumers from initial evaluation through policy delivery. In order
to provide the highest level of service throughout the insurance buying process,
we will monitor feedback from consumers and add new features designed to
increase customer usage and loyalty.
THE QUOTESMITH.COM BUSINESS MODEL
We have created a model that enables consumers to research, shop for and
purchase insurance in a manner that we believe is simpler, faster and more
convenient than traditional methods. We provide a complete "quote to policy
delivery" insurance solution using our technology and non-commissioned customer
service staff. Our model:
- allows consumers to specify the desired coverage and indicate their
personal medical conditions to generate appropriate individualized
quotes;
- allows consumers to indicate a range of substitutability among
insurance companies and policy features - for example, consumers may
want to purchase insurance from a company rated "A" or better by A.M.
Best;
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- allows consumers to choose the premium range they are prepared to pay
for the policy they want;
- allows consumers to purchase insurance without the involvement of a
commissioned salesperson;
- allows us to monitor and care for applicants through the underwriting
process and policy delivery stage; and
- allows insurance companies to offer additional policies within their
existing pricing structures.
Our salaried customer service representatives provide service and
assistance and are not compensated by direct commission. We employ a team
approach. If a customer wishes to initiate an insurance application request or
obtain information concerning an application already in process, each and every
customer service representative is able to provide assistance.
Our process at Quotesmith.com is comprised of four primary stages.
Initial Information Evaluation. Consumers visit our user-friendly Web site
and access our comprehensive database of insurance policy price rates,
underwriting guidelines, policy coverage and exclusion information, and
financial stability ratings of over 300 insurance companies. To help consumers
understand the underwriting process, our Web site provides information and
helpful tips on how the underwriting process works.
Search, Retrieval and Comparison. Consumers can quickly obtain a
customized cost comparison report in a single search by completing a brief and
anonymous questionnaire at the start of the online session. Each anonymous
consumer inquiry triggers a proprietary cost search and comparison algorithm
that sorts through a database of thousands of insurance options that is updated
daily. The search result, delivered in seconds, is a comprehensive comparison of
insurance policies ranked by the lowest price that matches the consumer's
criteria. Consumers can then click to view:
- specific coverage details about the policy;
- exclusions and guarantees (including policy acceptance guidelines); and
- latest financial stability ratings from five independent rating
services.
Application Processing. If a consumer desires to purchase a policy, the
consumer selects an insurance company and policy, and then fills out an
application while online. We offer online applications to accelerate the
underwriting process for the most popular of the insurance companies within our
term life offerings and have expanded into other product lines. After the
consumer completes, downloads and signs the online application, the consumer
returns the application to us. We then submit the application to the insurance
company for underwriting on behalf of the consumer. We provide toll-free support
during business hours to assist the consumer in completing the application.
Underwriting. During the underwriting process, we regularly track the
progress of the consumer's outstanding items. We also assist the insurance
company by arranging for a paramedical examination and facilitate the collection
of any other outside information needed. We obtain status reports from the
insurance company at least every ten days regarding the application and
regularly communicate this information to the consumer. We review all policies
for accuracy prior to delivery to the consumer.
If an insurance company declines to issue the policy or issues a counter
offer at a higher premium, we send a letter to the consumer stating the reasons
that the policy is not being issued as applied for. In this instance, we also
assist the consumer in finding suitable alternative coverage wherever possible
and whenever asked.
Once a policy has been issued and been paid for by the consumer, we
receive a commission from the insurance company. We do not charge consumers for
using our Quotesmith.com technology and do not currently sell banner advertising
at our quotesmith.com or insure.com Web sites.
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INSURANCE PRODUCTS
Quotesmith.com historically offered quote and policy-related information
regarding term life insurance. We now also offer instant quotes and related
information on additional insurance products for both individuals and small
businesses. Our current product offerings include:
- Individual term life. This is life insurance coverage that has no cash
value and continues for a fixed period of time such as 15, 20 or 25
years. We have been offering instant quotes and delivering term life
policies since 1993.
- Private passenger automobile. This provides collision and liability
insurance to individuals for private cars and vehicles. We provide a
multi-company auto insurance price comparison service using third-party
technology.
- Homeowner's. This provides insurance against fire and other perils for
personal residences. During 2002, we launched our proprietary
homeowner's insurance service in California. We also provide instant
homeowner's insurance quotes in other states using third-party
technology.
- Dental. This is generally sold as an add-on product to medical
insurance. In the second quarter of 1999, we began offering instant
quotes from a wide variety of traditional and managed-care dental plans
for individuals, families and small businesses that employ up to 100
people.
- Individual and family medical. This is also known as comprehensive
major medical insurance. We have been offering instant medical
insurance quotes since 1998. Our offerings include traditional plans,
PPOs and HMOs from Blue Cross and Blue Shield plans and other carriers.
- Medicare supplement. This provides health insurance for people ages 65
and older to fill in coverage gaps not covered by Medicare. We offer
instant quotes and deliver Medicare Supplemental health policies.
- International travel medical. This provides medical insurance for U.S.
citizens traveling abroad and for foreign citizens traveling in the
United States, as well as other risks associated with international
travel. We currently provide a multi-company international medical and
travel insurance price comparison service using third-party technology.
- Small group medical. Small group medical insurance are those
comprehensive medical plans offered to firms that employ from 2 to 100
people. We began offering instant quotes from, and tracking traditional
plans of, PPOs, HMOs and Blue Cross and Blue Shield plans in the second
quarter of 1999.
- "No-exam" life. This provides insurance for persons who want life
insurance coverage without a paramedical examination. We offer instant
quotes and deliver life insurance policies.
- Single premium fixed annuity. We offer instant quotes and deliver
single premium fixed annuity products.
- Renters Insurance. This provides insurance against the perils of fire,
theft and windstorm for renters. We provide instant quotes using third
party technology.
- Boat, Watercraft, RV and Motorcycle Insurance. This provides collision
and liability coverage. We provide instant quotes using third party
technology.
We constantly evaluate our offerings based on a number of factors,
including market acceptance and profitability. We may decide to add or delete
lines of coverage at any time.
The following table shows information with respect to the principal
product types currently available through our services.
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QUOTESMITH.COM SERVICE AS OF MARCH 21, 2003
-------------------------------------------
NUMBER OF QUOTED
TYPE OF INSURANCE PRODUCT STATES COVERED INSURANCE COMPANIES
------------------------- -------------- -------------------
Individual term life........... 50 and D.C. 67
Private passenger automobile... 49 and D.C. 13
Dental......................... 50 and D.C. 39
Individual and family medical.. 49 and D.C. 91
Long-term medical care......... 50 11
Short term individual medical.. 46 and D.C. 15
Medicare Supplement............ 49 and D.C. 29
Small group medical............ 42 and D.C. 26
"No exam" life................. 50 and D.C. 25
Fixed annuities................ 50 and D.C. 17
TECHNOLOGY
Proprietary Insurance Information Databases. We maintain a proprietary
database of premium rates and policy coverage information from over 300
insurance companies. At Quotesmith.com, we do not rely upon state insurance
departments or any other regulatory agencies to obtain any insurance pricing
information. Instead, we obtain and regularly update all of the pricing,
underwriting and policy coverage information contained in our databases directly
from each quoted insurance company. We obtain financial stability ratings from
A.M. Best, Fitch, Inc., Moody's, Standard & Poor's, and Weiss Ratings, Inc. and
hold licenses to distribute the copyrighted rating from each of these ratings
services. Our dedicated staff of full-time market reporters regularly contacts
the insurance companies quoted on our service and monitors and updates our
databases as market conditions warrant. Each business day we make several
thousand changes to our insurance database.
Technology Systems. Our systems for processing quotes, purchase requests,
application progress tracking, customer notification and revenue recognition are
highly automated and integrated. Customer service representatives equipped with
online computer terminals can access a customer's account information from our
database on demand. Our core technology systems use a combination of our own
proprietary technologies and commercially available, licensed technologies from
Silicon Graphics, Netscape Communications, Santa Cruz Operation (SCO) and
others. We have internally developed and enhanced our proprietary programs over
a period of 19 years using scalable tools and platforms to allow us to rapidly
expand our network and computing capacity.
An internal programming and system administration staff supports our
technology. In addition to supporting the systems, our staff continually
enhances our software and hardware and develops new systems and services to
better service our customers and business objectives.
Server Hosting and Backup. Our Web sites are hosted by InterNap Network
Services in Chicago, Illinois. This grade "A" telecommunications data center
provides redundant communications lines to the Internet backbone, emergency
power backup, and security, as well as 24-hour monitoring and engineering
support. In addition, we have implemented load balancing systems and our own
redundant servers to provide for fault tolerance. These redundancies permit us
to perform scheduled maintenance without taking our Web sites offline. Finally,
tape backups are performed nightly to prevent a loss of data.
MARKETING
At Quotesmith.com, we attract new consumers and communicate the
availability of new products and services primarily through direct response
marketing methods. We have established ourselves as a leading Internet-based
insurance brand through an offline marketing campaign consisting primarily of
magazine advertisements, radio and direct mail. We employ in-house volume media
buying and other strategies to minimize the expenses of broad-based advertising.
Using our proprietary information processing systems and consumer database as
well as other resources, we employ statistical analyses to measure the
effectiveness and efficiency of our marketing efforts.
9
We intend to aggressively pursue a marketing strategy designed to promote
our Quotesmith.com and Insure.com brands and consumer awareness of the benefits
of buying insurance through us. We intend to target households and small
businesses.
Our marketing strategy is to promote our brands and attract self-directed
consumers to our Web site. Our marketing initiatives include:
- leveraging the insure.com content to increase customer traffic via our
new customer gateway;
- using direct response print advertisements placed primarily in
financially oriented magazines and special interest magazines;
- advertising via radio and direct mail; and
- entering into strategic relationships with other financial services and
general purpose Web sites to increase our access to online consumers.
MATERIAL STRATEGIC RELATIONSHIPS AND AGREEMENTS
At Quotesmith.com, we selectively pursue strategic relationships and
agreements to expand our access to online consumers, to build our brand name
recognition and to expand our products and services with a variety of companies.
Revenue associated with our agreements with strategic partners comprised
approximately 15% of total revenue for the year ended December 31, 2002.
COMPETITION
We compete with online and traditional providers of insurance products.
The market for selling insurance products over the Internet is new, rapidly
evolving and intensely competitive. Current and new competitors may be able to
launch new sites at a relatively low cost. There are a number of companies that
either sell insurance online or provide lead referral services online.
We believe that Quotesmith.com is the most comprehensive Internet-based
insurance service because we provide consumers complete quote to policy delivery
insurance services and instant quotes from over 300 insurance companies for
twelve different product lines. Our Internet-based, lead-referral competitors
generally capture consumer name and address information to be forwarded, as a
prospective sales lead, to a specified insurance company, without personalized
customer service or fulfillment capabilities. Other Internet-based competitors
have created Web sites as alternatives to their traditional sales activities and
offer products from a single insurance company or a relatively small group of
insurance companies with little or no comparative overview of prices. While we
believe that our complete quote to policy delivery service offers a more
comprehensive Internet-based insurance service solution than these competitors,
we nonetheless expect to face intense competition from these other types of
insurance services.
We also face competition from the traditional distributors of insurance
such as captive agents, independent brokers and agents and direct distributors
of insurance. Insurance companies and distributors of insurance products are
increasingly competing with banks, securities firms and mutual fund companies
that sell insurance or alternative products to similar consumers.
We potentially face competition from unanticipated alternatives to our
insurance service from a number of large Internet companies and services that
have expertise in developing online commerce and in facilitating Internet
traffic. These potential competitors could choose to compete with us directly or
indirectly through affiliations with other electronic commerce companies,
including direct competitors. Other large companies with strong brand
recognition, technical expertise and experience in Internet commerce could also
seek to compete with us. Competition from these and other sources could harm our
business, results of operations and financial condition.
10
We believe that the principal competitive factors in our markets are
price, brand recognition, Web site accessibility, ability to fulfill customer
purchase requests, customer service, reliability of delivery, ease of use, and
technical expertise and capabilities. Many of our current and potential
competitors, including Internet directories and search engines and traditional
insurance agents and brokers, have longer operating histories, larger consumer
bases, greater brand recognition and significantly greater financial, marketing,
technical and other resources than us. Several of these competitors may be able
to secure products and services on more favorable terms than we can obtain. In
addition, many of these competitors may be able to devote significantly greater
resources than us for developing Web sites and systems, marketing and
promotional campaigns, attracting traffic to their Web sites and attracting and
retaining key employees.
Increased competition may result in reduced operating margins, loss of
market share and damage to our brand. We cannot assure you that we will be able
to compete successfully against current and future competitors or that
competition will not harm our business, results of operations and financial
condition.
REGULATION
The insurance industry and the marketers of insurance products are subject
to extensive regulation by state governments and by the District of Columbia.
This regulation extends to the operations of insurance companies, insurance
agents and to our service.
Our products are sold throughout the United States through licenses held
by our Company and/or one of our employees, as is required by each state's
insurance department. In general, state insurance laws establish supervisory
agencies with broad administrative and supervisory powers to:
- grant and revoke licenses to transact business;
- impose continuing education requirements;
- regulate trade practices;
- require statutory financial statements of the insurance companies;
- approve individuals and entities to which commissions can be paid;
- monitor the activity of our non-licensed customer service
representatives;
- regulate methods of transacting business and advertising; and
- approve policy forms, and regulate premium rates for some forms of
insurance.
Moreover, existing state insurance regulations require that a firm, or
individual within that firm, must be licensed in order to quote an insurance
premium. State insurance regulatory authorities regularly make inquiries, hold
investigations and administer market conduct examinations with respect to
compliance with applicable insurance laws and regulations by insurance companies
and their agents. In recent years, a number of insurance agents and the life
insurance companies they represent, have been the subject of regulatory
proceedings and litigation relating to alleged improper life insurance pricing
and sales practices. Some of these agents and insurance companies have incurred
or paid substantial amounts in connection with the resolution of these matters.
We do not currently sell the types of life insurance - primarily cash value life
insurance policies such as universal life - that are the subject of these
actions.
In addition, licensing laws applicable to insurance marketing activities
and the receipt of commissions vary by jurisdiction and are subject to
interpretation as to the application of these requirements to specific
activities or transactions. Our Company and/or one of our employees is currently
licensed to sell insurance in every state and the District of Columbia. We do
not permit any of our other personnel who have contact with customers to act as
insurance agents. We monitor the regulatory compliance of our sales, marketing
and advertising practices and the related activities of our employees. We also
provide continuing education and training to our staff in an effort to ensure
compliance with applicable insurance laws and regulations.
11
However, we cannot assure you that a state insurance department will not make a
determination that one or more of these activities constitute the solicitation
of insurance and that personnel must be licensed. Such a determination could
harm our business.
While no regulatory actions are pending against us, we can give you no
assurance that we would be deemed to be in compliance with all applicable
insurance licensing requirements and marketing regulations of each jurisdiction
in which we operate. Nor can we assure you that we do not need to obtain any
additional licenses.
The federal government does not directly regulate the marketing of most
insurance products. However, some products, such as variable life insurance,
must be registered under federal securities laws and therefore the entities
selling these products must be registered with the NASD. We do not currently
sell any federally regulated insurance products. If we elect to sell these
federally regulated products in the future, we would be required to qualify for
and obtain the required licenses and registrations. We cannot assure you that we
will be able to obtain these licenses.
Further, we are subject to various federal laws and regulations affecting
matters such as pensions, age and sex discrimination, financial services,
securities and taxation. Congress recently passed legislation that provides for
national licensing of insurance agents and brokers. The legislation provides an
impetus for states to enact either uniform laws and regulations governing
licensing of individuals and entities authorized to sell and solicit the
purchase of insurance, as well as reciprocity laws and regulations governing the
licensing of non resident individuals. This legislation and other future federal
or state legislation could result in increased regulation of our business.
The future regulation of insurance sales via the Internet as a part of the
new and rapidly growing electronic commerce business sector is unclear. We
believe that we are currently in compliance with all of these regulations.
However, if additional state or federal regulations are adopted, they may have
an adverse impact on us.
EMPLOYEES
As of December 31, 2002, we had 59 employees. We have never had a work
stoppage. Our employees are not represented by a collective bargaining unit. We
consider our relations with our employees to be good. Our future success will
depend, in part, on our ability to continue to attract, integrate, retain and
motivate highly qualified technical and managerial personnel, for whom
competition is intense.
ITEM 2. PROPERTIES
Our executive, administrative and operating offices are located in
approximately 21,000 square feet of leased office space in Darien, Illinois
under a lease that expires on December 31, 2003. We believe that suitable office
space will be available on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
From time to time we have been, and expect to continue to be, subject to
legal and regulatory proceedings and claims in the ordinary course of business.
Legal and regulatory proceedings and claims may include claims of alleged
infringement of third party intellectual property rights, notices from state
regulators that we may have violated state regulations, and litigation
instituted by dissatisfied policy holders. These claims, even if without merit,
could result in the significant expenditure of our financial and managerial
resources. We are not aware of any such claims that we believe will,
individually or in the aggregate, materially affect our business, financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of our stockholders during the
quarter ended December 31, 2002.
12
ITEM 4(a). EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information regarding our executive
officers and certain other key employees.
NAME AGE POSITION
---- --- --------
Robert S. Bland...... 49 Chairman of the Board, President and Chief Executive Officer
William V. Thoms .... 50 Executive Vice President, Chief Operating Officer
Hao Chang............ 43 Senior Vice President, Chief Information Officer
Phillip A. Perillo... 53 Senior Vice President, Chief Financial Officer
Richard C. Claahsen.. 38 Vice President, Corporate Secretary
Robert S. Bland has served as our chairman of the board, president and
chief executive officer since he founded Quotesmith.com in 1984. From 1979 to
1984, Mr. Bland was president and sole stockholder of Security Funding
Corporation, an insurance agency. In March 1984, Mr. Bland sold Security Funding
Corporation in order to raise capital to found our Company. Mr. Bland holds a
B.S. in marketing from the University of Colorado.
William V. Thoms has served as our executive vice president since 1994.
From 1988 to 1993, Mr. Thoms was responsible for our operations and customer
service departments. Mr. Thoms is a founding stockholder of Quotesmith.com.
Prior to joining us, Mr. Thoms was a sales manager for Western Dressing, Inc., a
privately held salad dressing manufacturing company, from 1972 to 1987.
Hao Chang has served as a senior vice president and our Chief Information
Officer since February of 2001. Dr. Chang was most recently manager of
information technology at First Penn-Pacific Life Insurance Company. Dr. Chang
holds a Ph.D. in Geographic Information Systems (Environmental Science) from
Oklahoma State University and a B.S. in Environmental Engineering from Beijing
University of Forestry. He also studied Management Information Systems in the
University of Washington MBA program.
Phillip A.Perillo has served as senior vice president and Chief Financial
Officer since May of 2002. Mr. Perillo has over twenty years of insurance
industry experience, with companies such as the Zurich American Insurance Group
and BCS Life Insurance Company. Mr. Perillo holds an MBA in Finance from DePaul
University and a B.S. in Accounting from the University of Illinois at Chicago.
Richard C. Claahsen has served as our vice president of regulatory affairs
since May 1999. From June 1997 to May 1999, Mr. Claahsen served as our director
of regulatory affairs. From October 1996 to June 1997, he was a special agent
with Northwestern Mutual Life Insurance Company. From 1993 to 1996, Mr. Claahsen
was a litigation paralegal at Templeton & Associates of Chicago, Illinois. In
1999, Mr. Claahsen received his Chartered Life Underwriter designation from The
American College of Bryn Mawr, Pennsylvania. Mr. Claahsen holds a B.A. and an
M.A. in philosophy from the Catholic University of America and a J.D. from ITT
Chicago Kent College of Law.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
All common stock and per share information in this annual report have been
retroactively adjusted to reflect a one-for-three reverse stock split that
became effective on March 7, 2001.
Market Information. Our common stock began trading on the Nasdaq National
Market under the symbol "QUOT" on August 3, 1999, the date of our initial public
offering. Prior to this date, no established public trading market for our
common equity existed. Effective the opening of business on July 20, 2001, our
stock listing was transferred from the Nasdaq National
13
Market to the Nasdaq SmallCap Market, retaining its existing symbol, QUOT. As of
March 21, 2003 the approximate number of record holders of our common stock was
2,300. The last sale price of our common stock on March 21, 2003 was $3.70. The
following table sets forth, for the period indicated, the high and low last sale
price (as adjusted for a one-for-three reverse stock split effective March 7,
2001) of our common stock as reported on the Nasdaq National Market and the
Nasdaq SmallCap Market, as applicable.
HIGH LOW
------ ------
2002:
First Quarter....................... $ 3.20 $ 2.00
Second Quarter...................... 3.08 2.60
Third Quarter....................... 2.85 2.38
Fourth Quarter...................... 4.23 2.41
2001:
First Quarter....................... $ 2.91 $ 1.25
Second Quarter...................... 3.25 0.83
Third Quarter....................... 2.55 1.30
Fourth Quarter...................... 2.30 1.07
Dividends. We have never declared or paid any cash dividends on our common
stock and do not anticipate paying cash dividends on our common stock in the
foreseeable future. We currently intend to retain all future earnings to finance
the growth and development of our business. Any future determination as to the
payment of dividends will be made by our board of directors and will depend on
our results of operations, financial condition, capital requirements, and any
other factors our board of directors considers relevant.
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. During the fiscal year ended December 31, 2002, we
used approximately $520,000 of the proceeds of the initial public offering for
operating activities, approximately $1.2 million for the repurchase of 446,000
shares of our common stock, and approximately $102,000 for the purchase of fixed
assets.
ITEM 6. SELECTED FINANCIAL DATA.
The historical statement of operations data and balance sheet data in the
table below is derived from our financial statements. This data should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and with the financial statements, related notes, and
other financial information included in this annual report. The historical
results presented below are not necessarily indicative of the results to be
expected for any future period.
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues ....................... $ 10,777 $ 8,851 $ 15,236 $ 8,408 $ 5,576
Expenses:
Selling and marketing ......... 2,912 7,052 24,201 14,397 1,791
Operations .................... 7,756 6,004 7,445 5,481 2,690
General and administrative .... 3,194 3,503 4,432 3,570 1,293
-------- -------- -------- -------- --------
Total expenses ............... 13,862 16,559 36,078 23,448 5,774
Operating loss ................. (3,085) (7,708) (20,842) (15,040) (198)
14
Interest income, net ........... 359 1,075 2,220 1,220 2
-------- -------- -------- -------- --------
Net loss ....................... $ (2,726) $ (6,633) $(18,622) $(13,820) $ (196)
======== ======== ======== ======== ========
Basic and diluted net
loss per share ............... $ (0.55) $ (1.22) $ (2.93) $ (2.64) $ (0.05)
======== ======== ======== ======== ========
Weighted average common
shares and equivalents
outstanding, basic and diluted 4,964 5,441 6,366 5,237 4,086
DECEMBER 31,
------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and equivalents ...... $ 1,640 $ 4,033 $ 4,269 $ 8,990 $ 518
Working capital ........... 10,485 18,514 27,443 48,308 749
Total assets .............. 19,559 23,000 32,643 55,178 1,806
Long-term liabilities ..... 35 84 128 -- --
Total liabilities ......... 1,464 1,085 2,976 5,982 817
Total stockholders' equity 18,095 21,915 29,667 49,196 989
YEAR ENDED DECEMBER 31,
----------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
SELECTED OPERATING STATISTICS:
Completed quotes
Term life .................. 1,266,000 1,452,000 2,105,000 1,496,000 784,000
Health and other ........... 1,305,000 876,000 1,993,000 963,000 47,000
---------- ---------- ---------- ---------- ----------
Total completed quotes ... 2,571,000 2,328,000 4,098,000 2,459,000 831,000
Policies sold
Term life .................. 16,498 16,915 33,491 17,039 10,920
Health and other ........... 4,753 3,367 4,029 747 --
---------- ---------- ---------- ---------- ----------
Total policies sold ...... 21,251 20,282 37,520 17,786 10,920
SELECTED QUARTERLY OPERATING RESULTS
The following tables set forth unaudited quarterly statements of
operations data for 2002 and 2001. The information for each of these quarters
has been prepared on substantially the same basis as the audited financial
statements included elsewhere in this annual report, and, in our opinion,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results of operations for these
periods. Historical results are not necessarily indicative of the results to be
expected in the future, and results of interim periods are not necessarily
indicative of results for the entire year.
15
QUARTER ENDED
-------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
--------- --------- --------- ---------
2002 (IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues ................. $ 2,572 $ 3,194 $ 2,667 $ 2,344
Expenses:
Selling and marketing .... 588 667 622 1,035
Operations ............... 1,933 2,014 2,280 1,529
General and administrative 853 811 781 749
--------- --------- --------- ---------
Total expenses ......... 3,374 3,492 3,683 3,313
--------- --------- --------- ---------
Operating loss ........... (802) (298) (1,016) (969)
Interest income, net ..... 102 76 84 97
--------- --------- --------- ---------
Net loss ................. $ (700) $ (222) $ (932) $ (872)
========= ========= ========= =========
Net loss per share
basic and diluted ...... $ (0.14) $ (0.04) $ (0.19) $ (0.18)
QUARTER ENDED
-------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
--------- --------- --------- ---------
2001 (IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues ................. $ 2,407 $ 2,145 $ 1,730 $ 2,569
Expenses:
Selling and marketing .... 2,851 2,565 828 808
Operations ............... 1,489 1,396 1,395 1,724
General and administrative 913 1,089 797 704
--------- --------- --------- ---------
Total expenses ......... 5,253 5,050 3,020 3,236
--------- --------- --------- ---------
Operating loss ........... (2,846) (2,905) (1,290) (667)
Interest income, net ..... 400 300 228 147
--------- --------- --------- ---------
Net loss ................. $ (2,446) $ (2,605) $ (1,062) $ (520)
========= ========= ========= =========
Net loss per share
basic and diluted ...... $ (0.43) $ (0.48) $ (0.20) $ (0.10)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW AND CRITICAL ACCOUNTING POLICIES
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. We also
generate revenues from the
16
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. Our
revenue recognition accounting policy has been applied to all periods presented
in "Selected Financial and Other Data."
The timing between when we submit a consumer's application for insurance
to the insurance company and when we generate revenues has varied over time. The
type of insurance product and the insurance company's backlog are the primary
factors that impact the length of time between submitted applications and
revenue recognition. Over the past three years, the time between application
submission and revenue recognition has averaged approximately four months. Any
changes in the amount of time between submitted application and revenue
recognition, of which a significant part is not under our control, will create
fluctuations in our operating results and could affect 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 sites. The
historical lag between the time an application is submitted to the insurance
companies and when we recognize revenues significantly impacts our operating
results as most of our variable expenses are incurred prior to application
submission.
Selling and marketing expenses consist primarily of direct advertising
costs. The costs of communicating the advertising are expensed in the period the
advertising is communicated.
The Company has established a stock option plan (the Plan) to provide
additional incentives to its employees, officers, and directors. Under the Plan,
an aggregate of 500,000 shares of common stock may be granted to participants in
the Plan. 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.
Stock compensation accounting is discussed more fully in Notes 2 and 7 to the
accompanying financial statements.
On December 7, 2001, the Company acquired selected assets of Insurance
News Network, LLC, including its Web site, www.insure.com. The insure.com Web
site at that time comprised an insurance news organization consisting of
consumer insurance news, information, and decision-making tools. The cost of the
acquisition included $1.4 million in cash, 50,000 stock options with an
estimated fair value of $82,000, and expenses of $79,000. The acquisition was
recorded using the purchase method of accounting. Accordingly, the purchase
price has been allocated to the assets acquired, intangible assets of $1,433,000
and furniture, equipment, and software of $128,000, based on the estimated fair
values at the date of acquisition. Intangible assets 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 YEARS ENDED DECEMBER 31, 2002 AND 2001
Revenues
Revenues increased 22% to $10.8 million in 2002 from $8.9 million in 2001.
This increase is attributable to a 5% increase in the number of policies sold,
from 20,282 in 2001 to 21,251 in 2002, as well as a 16% increase in revenue per
policy sold. In 2001, revenue per policy sold was $436. This figure increased to
$507 in 2002.
Expenses
Selling and Marketing. Selling and marketing expenses decreased $4.1
million, or 59%, to $2.9 million in 2002 from $7.1 million in 2001. During 2002,
we chose to continue the reduction in marketing expenditures that began in 2001,
as we have been able to generate more revenue with less marketing expense. In
2002, we were able to reduce our marketing expense per policy sold (total
selling and marketing costs divided by the number of new policy sales) by 61%,
to $137 per policy sold in 2002 from $348 per policy sold in 2001.
17
Operations. Operations expense increased 29% to $7.8 million in 2002 from
$6.0 million in 2001, and increased as a percentage of revenue to 72% in 2002
from 68% in 2001. This increase resulted from the increased use of third party
administrators to process and complete life insurance applications. There were
also additional costs related to the maintenance and content development of the
Insure.com website as a stand-alone operation for ten months in 2002 versus one
month in 2001. Effective October 31, 2002, the Insure.com office was closed and
the positions were transferred to our headquarters location. In addition, as
discussed in Note 9 to the financial statements, expense in 2002 included
$337,000 for the write off of computer software.
General and Administrative. General and administrative expenses decreased
9% to $3.2 million in 2002 from $3.5 million in 2001, and decreased to 30% of
revenues in 2002 from 40% of revenues in 2001. We reduced wages and payroll
taxes by $858,000, but amortization of intangible assets increased $442,000 as a
result of the acquisition of certain assets of Insurance News Network, LLC, on
December 7, 2001.
Interest Income, Net
Interest income, net was $359,000 in 2002 compared to $1.1 million in
2001. The components of interest income are as follows:
Years ended December 31,
------------------------
2002 2001
------------ ------------
Interest income $ 372,677 $ 1,094,747
Interest Expense (14,002) (19,052)
------------ ------------
Interest income, net $ 358,675 $ 1,075,695
============ ============
The decrease in net interest income is due primarily to a decrease in average
invested assets in 2002, along with lower yields on fixed maturity investments.
Income Taxes (Credit)
We had no income tax credit for 2002 and 2001 due to valuation allowances
provided against net deferred tax assets.
COMPARISON OF YEARS ENDED DECEMBER 31, 2001 AND 2000
Revenues
Revenues decreased 42% to $8.9 million in 2001 compared with $15.2 million
in 2000. The revenue decrease is mostly attributable to a decrease in the number
of insurance policies sold as a result of a planned decrease in advertising
expenses in 2001. The number of policies sold declined to 20,282 in 2001, from
37,520 in 2000, a decrease of 46%.
Expenses
Selling and Marketing. Selling and marketing expenses decreased $17.1
million, or 71% to $7.1 million in 2001 from $24.2 million in 2000. During 2001,
we chose to reduce marketing expenditures until our planned expansion into
additional lines of insurance had been implemented. As a result, we realized
cost savings associated with direct advertising expenses, agency fees, and
production costs. The average new policy acquisition cost (total selling and
marketing costs divided by the number of new policy sales), decreased 46% to
$348 in 2001 from $645 in 2000.
Operations. Operations expenses decreased 19% to $6.0 million in 2001 from
$7.4 million in 2000, but increased as a percentage of revenues to 68% in 2001
from 49% in 2000. The decrease was primarily due to lower payroll and related
expenses resulting from the Company's August 2001 staff reduction.
18
General and Administrative. General and administrative expenses decreased
21% to $3.5 million in 2001 from $4.4 million in 2000, and increased as a
percentage of revenues to 40% in 2001 from 29% in 2000. Expenses were lower in
2001 as a result of our decision to reduce the size of our senior management
team in order to reduce our general and administrative overhead costs.
Interest Income, Net
Interest income, net was $1.1 million in 2001 compared to $2.2 million in
2000. The components of interest income are included in Note 2 to our financial
statements, included in this report. The decrease in net interest income is due
primarily to a decrease in average invested assets in 2001.
Income Taxes (Credit)
We had no income tax credit for 2001 and 2000 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 December 31, 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 if they vary
materially, 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 from 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, and acquisitions of furniture, equipment, software, and
treasury stock.
Cash used in operating activities was approximately $520,000, $7.5 million
and $19.6 million, in 2002, 2001 and 2000, respectively, as shown in our
Statements of Cash Flows included in this report. The decrease in cash used in
2002 was primarily a result of a lower operating loss.
Cash used for investing activities totaling $658,000 in 2002 consisted of
the purchase of fixed income investments in excess of maturities of $556,000 and
the purchase of fixed assets of $102,000. Cash provided by investing activities
totaling $8.5 million in 2001 consisted of net proceeds from the maturity and
sale of investments totaling approximately $10.3 million, offset by purchases of
fixed assets totaling $0.5 million and purchases of intangibles in connection
with the December 2001 Insurance News Network, LLC acquisition totaling $1.3
million. Cash provided by investing activities was $16.0 million in 2000, and
comprised $17.8 million in net proceeds from the maturity of investments,
reduced by $1.8 million in purchases of fixed assets.
Cash used in financing activities in 2002, 2001 and 2000, was primarily
the result of a Company stock buy back. During 2002, the Company bought back
approximately 446,000 shares at an average cost of $2.69 per share. During 2001,
the Company bought back approximately 582,000 shares at an average cost of $2.12
per share. During 2000, the Company bought back 487,000 shares at an average
cost of $2.25 per share.
19
FACTORS THAT MAY AFFECT OUR FUTURE OPERATING RESULTS
RISKS RELATED TO OUR BUSINESS
OUR INTERNET-BASED INSURANCE BROKERAGE BUSINESS 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,
through the year ended December 31, 2002. Because of our overhead structure,
including the ongoing costs of employing highly-skilled technical personnel, we
will need to generate higher revenues than we did in 2002 in order to achieve
profitability. Even if we achieve profitability, we may not be able to maintain
profitability in the future.
IF THE TERM LIFE INSURANCE INDUSTRY DECLINES, OUR BUSINESS WILL SUFFER BECAUSE
71% OF OUR 2002 REVENUES WERE DERIVED FROM THE SALE OF TERM LIFE INSURANCE
For the year ended December 31, 2002, approximately 71% 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 are continuing to decline into the early months
of 2003. 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 the insurance content and tools of
Insure.com who then migrate to our insurance price comparison engines in order
to engage in an insurance transaction. Business risks associated with owning
this site include:
- Failure to maintain or grow the core Insure.com visitor base;
- Poor conversion of the Insure.com visitor base from visitor status to
insurance buyer status; and
- Loss of key traffic sources that send traffic to the Insure.com services.
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 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 commerce 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;
20
- 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 COMMISSION 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.
WE EXPECT TO 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 our Web sites 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, who, due to volume, have longer and more unpredictable
underwriting time frames;
- changes in selling and marketing expenses, as well as other operating
expenses;
- volatility in bonus commissions paid to us by insurance companies which
typically are highest in the fourth quarter;
- volatility in renewal commission income;
- the conversion and fulfillment rates of consumers' applications, which
vary according to insurance product;
- new Web 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 matching 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.
21
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 other 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 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 on our Web site, we
currently only hold agency contracts with 170 of these insurance companies. 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 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 2002, we
generated fee revenues totaling $1.6 million 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,
22
which is likely to continue. To manage our future growth, we will need to
attract, hire and retain highly skilled and motivated officers, managers and
employees and improve existing systems and/or implement new systems for:
- transaction processing;
- operational and financial management; and
- training, integrating and managing our growing employee base.
We may not be successful in managing or expanding our operations or
maintaining adequate management, financial and operating systems and controls.
IF 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 INSURANCE 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 insurance quote. 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 year ended
December 31, 2002, we paid $10,000 in such 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 operation results.
RISKS RELATED TO THE INSURANCE INDUSTRY
OUR BONUS COMMISSION REVENUES ARE HIGHLY UNPREDICTABLE AND 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 may be higher than if the same policies were purchased from a larger
number of insurance companies. The decision to purchase a policy from a
particular insurance company typically relates to, among other factors, price of
the policy and rating of the insurance company, both are factors over which we
have no control. Insurance companies often change their prices in the middle of
the year for competitive reasons. This may reduce the number of policies placed
with that insurance company which may then reduce our potential bonus
commissions. In addition, we have no control over the bonus commission rates
that are set by each individual insurance company. As a result of these factors,
we are unable to control the amount and timing of bonus commission revenues 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
23
recognition, technical expertise and experience in online commerce and direct
marketing could also seek to compete in the online insurance market.
There can be no assurance that we will be able to successfully compete
with any of these current or potential insurance providers.
RISKS RELATED TO REGULATION
OUR COMPLIANCE WITH THE STRICT REGULATORY ENVIRONMENT APPLICABLE TO THE
INSURANCE INDUSTRY IS COSTLY, AND IF WE FAIL TO COMPLY WITH THE NUMEROUS LAWS
AND REGULATIONS THAT GOVERN THE INDUSTRY WE COULD BE SUBJECT TO PENALTIES
We must comply with the complex rules and regulations of each
jurisdiction's insurance department which impose strict and burdensome
guidelines on us regarding our operations. Compliance with these rules and
regulations imposes significant costs on our business. Each jurisdiction's
insurance department typically has the power, among other things, to:
- authorize how, by which personnel and under what circumstances an
insurance premium can be quoted and published;
- approve which entities can be paid commissions from insurance companies;
- license insurance agents and brokers;
- monitor the activity of our non-licensed customer service representatives;
and
- approve policy forms and regulate some premium rates.
Due to the complexity, periodic modification and differing statutory
interpretations of these laws, we may not have always been and we may not always
be in compliance with all these laws. Failure to comply with these numerous laws
could result in fines, additional licensing requirements or the revocation of
our license in the particular jurisdiction. These penalties could significantly
increase our general operating expenses and harm our business. In addition, even
if the allegations in any regulatory action against us turn out to be false,
negative publicity relating to any allegations could result in a loss of
consumer confidence and significant damage to our brand. We believe that because
many consumers and insurance companies are not yet comfortable with the concept
of purchasing insurance online, the publicity relating to any such regulatory or
legal issues could harm our business.
REGULATION OF THE SALE OF INSURANCE OVER THE INTERNET AND OTHER ELECTRONIC
COMMERCE IS UNSETTLED, AND FUTURE REGULATIONS COULD FORCE US TO CHANGE THE WAY
WE DO BUSINESS OR MAKE OPERATING OUR BUSINESS MORE COSTLY
As a company involved in the sale of insurance over the Internet, we are
subject to additional regulatory risk as insurance regulations have not been
fully modified to cover Internet transactions. Currently, many state insurance
regulators are exploring the need for specific regulation of insurance sales
over the Internet. Any new regulation could dampen the growth of the Internet as
a means of providing insurance services. Moreover, the laws governing general
commerce on the Internet remain largely unsettled, even in areas where there has
been some legislative action. It may take years to determine whether and how
existing laws such as those governing intellectual property, privacy and
taxation apply to the Internet. In addition, the growth and development of the
market for electronic commerce may prompt calls for more stringent consumer
protection laws that may impose additional burdens on companies conducting
business over the Internet. Any new laws or regulations or new interpretations
of existing laws or regulations relating to the Internet could harm our
business.
IF WE BECOME SUBJECT TO LEGAL LIABILITY FOR THE INFORMATION WE DISTRIBUTE ON OUR
WEB SITE OR COMMUNICATE TO OUR CUSTOMERS, OUR BUSINESS COULD BE HARMED
Our customers rely upon information we provide regarding insurance quotes,
coverage, exclusions, limitations and ratings. To the extent that the
information we provide is not accurate, we could be liable for damages from both
consumers and insurance companies. These types of claims have been brought,
sometimes successfully, against agents, online services and print publications
in the past. These types of claims could be time-consuming and expensive to
defend, divert management's
24
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 170 of the over
300 insurance companies quoted on our Web site, we do not have contractual
authorization to publish information regarding the policies from insurance
companies for whom we are not appointed. Several of these insurance companies
have in the past demanded that we cease publishing their policy information and
others may do so in the future. In some cases we have published information
despite these demands. If we are required to stop publishing information
regarding some of the insurance policies that we track in our database, it could
harm us.
RISKS RELATED TO THE INTERNET AND ELECTRONIC COMMERCE
ANY FAILURES OF, OR CAPACITY CONSTRAINTS IN, OUR SYSTEMS OR THE SYSTEMS OF THIRD
PARTIES ON WHICH WE RELY COULD REDUCE OR LIMIT VISITORS TO OUR WEB SITE AND HARM
OUR ABILITY TO GENERATE REVENUE
We use both internally developed and third-party systems to operate our
service. If the number of users of our service increases substantially, we will
need to significantly expand and upgrade our technology, transaction processing
systems and network infrastructure. We do not know whether we will be able to
accurately project the rate or timing of any 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
25
current and prospective customers and must achieve significant market
acceptance. We could also incur substantial costs if we need to modify our
service or infrastructures or adapt our technology to respond to these changes.
DEMAND FOR OUR SERVICES MAY BE REDUCED IF WE ARE UNABLE TO SAFEGUARD THE
SECURITY AND PRIVACY OF OUR CUSTOMER'S INFORMATION
A significant barrier to electronic commerce and online communications has
been the need for secure transmission of confidential information over the
Internet. Our ability to secure the transmission of confidential information
over the Internet is essential in maintaining consumer and insurance company
confidence in our service. In addition, because we handle confidential and
sensitive information about our customers, any security breaches would damage
our reputation and could expose us to litigation and liability. We cannot
guarantee that our systems will prevent security breaches.
OUR BUSINESS ASSUMES THE CONTINUED DEPENDABILITY OF THE INTERNET INFRASTRUCTURE
Our success will depend upon the development and maintenance of the
Internet's infrastructure to cope with its significant growth and increased
traffic. This will require a reliable network backbone with the necessary speed,
data capacity and security, and the timely development of complementary
products, such as high-speed modems, for providing reliable Internet access and
services. The Internet has experienced a variety of outages and other delays as
a result of damage to portions of its infrastructure and could face outages and
delays in the future. Outages and delays are likely to cause a loss of business
by affecting the level of Internet usage and the processing of insurance quotes
and applications requests made through our Web site. We are unlikely to make up
for this loss of business.
RISKS RELATED OWNERSHIP OF OUR COMMON STOCK
OUR STOCK 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, 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 500,000 shares;
(3) a market value of public float of $1,000,000;
(4) a minimum bid price of $1.00 per share;
(5) two market makers;
(6) 300 round lot shareholders; and
26
(7) compliance with Nasdaq corporate governance rules.
We believe that the current per share price level of the common stock has
reduced the effective marketability of our shares of common stock because of the
reluctance of many leading brokerage firms to recommend low-priced stock to
their clients. Certain investors view low-priced stock as speculative and
unattractive, 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
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 the 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 has been highly volatile and 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, particularly following an initial
public offering, frequently reach levels that bear no relationship to the
operating performance of such companies. These market prices generally are not
sustainable and are subject to wide variations. If our common stock trades to
unsustainably high levels, it likely will thereafter experience a material
decline.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of their
securities. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs, divert management's attention and
resources, and harm our financial condition and results of operations.
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 March 21, 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;
27
- amend certain 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.
OUR CHARTER DOCUMENTS AND DELAWARE LAW CONTAIN PROVISIONS THAT MAY DISCOURAGE
TAKEOVER ATTEMPTS, WHICH COULD PRECLUDE OUR STOCKHOLDERS FROM RECEIVING A CHANGE
OF CONTROL PREMIUM
Our certificate of incorporation and bylaws and Delaware law contain
anti-takeover provisions that could have the effect of delaying or preventing
changes in control that a stockholder may consider favorable. The provisions in
our charter documents include the following:
- a classified board of directors with three-year staggered terms;
- the ability of our board of directors to issue shares of preferred stock
and to determine the price and other terms, including preferences and
voting rights, of those shares without stockholder approval;
- stockholder action may 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 could 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 begun military action in Iraq. Terrorist attacks and
potential 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 its customers or suppliers.
28
ITEM 7A. 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 marketable securities, including
both government and corporate obligations.
Substantially all of our investments are subject to interest rate risk. We
consider all of our investments as available-for-sale and unrealized gains on
those investments totaled $82,494 at December 31, 2002, and $20,096 at December
31, 2001.
We did not hold any derivative financial instruments as of December 31,
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 not decrease the fair market value of our investments by a material
amount.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are indexed in the Index to Financial Statements,
which appear on Pages F-1 through F-15 hereof, and are incorporated in this Item
by reference thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
There were no disagreements on accounting and financial disclosures.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The sections entitled "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" are incorporated herein by reference
from our proxy statement to be filed with the Securities and Exchange Commission
in connection with our 2003 annual meeting of stockholders scheduled for April
24, 2003. Information about our executive officers is set forth in Item 4(a) in
Part I of this Report.
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation," excluding the Board
Compensation Committee Report and the stock price performance graph, is
incorporated herein by reference from our proxy statement to be filed with the
Securities and Exchange Commission in connection with our 2003 annual meeting of
stockholders scheduled for April 24, 2003.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Ownership of Securities" is incorporated herein by
reference from our proxy statement to be filed with the Securities and Exchange
Commission in connection with our 2003 annual meeting of stockholders scheduled
for April 24, 2003.
29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Transactions" is incorporated herein by
reference from our proxy statement to be filed with the Securities and Exchange
Commission in connection with our 2003 annual meeting of stockholders scheduled
for April 24, 2003.
ITEM 14. DISCLOSURE CONTROLS AND PROCEDURES
The Chief Executive Officer and the Chief Financial Officer of the Company (its
principal executive officer and principal financial officer, respectively) have
concluded, based on their evaluation as of a date within 90 days prior to the
date of the filing of this Report, that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in the reports filed or submitted by it under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms, and
include controls and procedures designed to ensure that information required to
be disclosed by the Company in such reports is accumulated and communicated to
the Company's management, including the Chairman and Chief Executive Officer and
the Chief Financial Officer of the Company, as appropriate to allow timely
decisions regarding required disclosure.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
such evaluation.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K:
(a) 1. Financial Statements:
The financial statements, which appear on Pages F-1 through F-15 hereof,
are indexed in the Index to Financial Statements and are incorporated herein by
reference in this Item by reference thereto.
2. Financial Statement Schedules:
No schedules are required due to the absence of conditions under which
they are required or because the required information is provided in the
financial statements or notes thereto.
3. Executive Compensation Plans and Arrangements.
The following management contracts or compensatory plans or arrangements
are listed as exhibits to this annual report.
Quotesmith.com 1997 Stock Option Plan (as amended and restated March 29,
1999).
Quotesmith.com 1999 Employee Stock Purchase Plan.
Employment Agreement between the Company and Robert S. Bland.
Employment Agreement between the Company and William V. Thoms.
Employment Agreement between the Company and Phillip A. Perillo.
Form of Director Indemnification Agreement
See Exhibit Index (immediately following the signature pages) for exhibits
filed with this annual report.
(b) Reports on Form 8-K:
No reports were filed on Form 8-K for the quarter ended December 31, 2002.
30
(c) Exhibits
See Exhibits Index (immediately following the signature pages).
(d) Schedules
All required schedules are included.
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on March 22, 2003.
QUOTESMITH.COM, INC.
By: /s/ Robert S. Bland
----------------------------
Name: Robert S. Bland,
Title: Chairman, President and Chief
Executive Officer
POWER OF ATTORNEY
Know all men by these presents that each person whose signature appears
below constitutes and appoints Robert S, Bland and William V. Thoms and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this report and to
file the same with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them or their or he substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on March 22, 2003:
SIGNATURE TITLE
--------- -----
/s/ ROBERT S. BLAND Chairman, President and Chief Executive Officer
--------------------------- (Principal Executive Officer)
Robert S. Bland
/s/ WILLIAM V. THOMS Executive Vice President, Chief Operating Officer,
--------------------------- and Director
William V. Thoms
/s/ PHILLIP A. PERILLO Senior Vice President and Chief Financial Officer
--------------------------- (Principal Financial and Accounting Officer)
Phillip A. Perillo
/s/ BRUCE J. RUEBEN Director
---------------------------
Bruce J. Rueben
/s/ TIMOTHY F. SHANNON Director
---------------------------
Timothy F. Shannon
/s/ JEREMIAH A. DENTON, JR. Director
---------------------------
Jeremiah A. Denton, Jr.
/s/ RICHARD F. GRETSCH Director
---------------------------
Richard F. Gretsch
32
STATEMENT OF CHIEF EXECUTIVE OFFICER
I, Robert S. Bland, certify that:
1. I have reviewed this annual report on Form 10-K of Quotesmith.com, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual
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 annual
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 annual 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
annual 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: March 22, 2003
/s/ ROBERT.S.BLAND
------------------------
Robert S. Bland
Chief Executive Officer
33
STATEMENT OF CHIEF FINANCIAL OFFICER
I, Phillip A. Perillo, certify that:
1. I have reviewed this annual report on Form 10-K of Quotesmith.com, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual
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 annual
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 annual report (the "Evaluation Date"); and
c. presented in this annual 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
annual 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: March 22, 2003
/s/ PHILLIP A. PERILLO
-------------------------
Phillip A. Perillo
Chief Financial Officer
34
EXHIBITS
FORM 10-K
INDEX TO EXHIBITS
Exhibit
Number Description of Document
------- -----------------------
3.1++ Restated Certificate of Incorporation of Company.
3.2++ Amended and Restated By-Laws of the Company.
4.3++ Form of Rights Agreement.
4.3(a)++ Certificate of Designation, Preferences and Rights.
10.1++ Quotesmith.com 1997 Stock Option Plan (as amended and restated March
29, 1999) of Registrant
10.2++ Quotesmith.com 1999 Employee Stock Purchase Plan.
10.3++ Employment Agreement between the Company and Robert S. Bland.
10.4++ Employment Agreement between the Company and William V. Thoms.
10.5 Employment Agreement between the Company and Hao Chang
10.6 Employment Agreement between the Company and Phillip A. Perillo.
10.7++ Form of Director Indemnification Agreement.
10.8++ Lease dated as of August 1994, between the Company and LaSalle
National Trust N.A.
10.9++ Lease Amendment Agreement dated as of November 1995, between the
Company and LaSalle National Trust N.A.
10.10++ Lease Amendment Agreement as of September 1997, between the Company
and LaSalle National Trust N.A.
10.11++ Lease Amendment Agreement dated as of July 1998, between the Company
and LaSalle National Trust N.A..
10.12++ Services Agreement, dated as of September 9, 1998, by and between
the Company and Intuit Insurance Services, Inc.
10.13++ Investor Rights Agreement, dated February 10, 1999, between the
Company and Intuit Inc.
21.0 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP(filed herewith)
24.0 Powers of Attorney (See signature page to this report )
99.1 Statement of Chief Executive Officer, Pursuant to Section 1350 of
Title 18 of the United States Code
99.2 Statement of Chief Financial Officer, Pursuant to Section 1350 of
Title 18 of the United States Code
++ Incorporated by reference to the Company's Registration statement on Form S-1
(Registration no. 333-79355), initially filed with the Securities and Exchange
Commission on May 26, 1999, as amended.
35
QUOTESMITH.COM, INC.
INDEX TO FINANCIAL STATEMENTS
AUDITED FINANCIAL STATEMENTS PAGE
----
Report of Independent Auditors............................................... F-2
Balance Sheets as of December 31, 2002 and 2001.............................. F-3
Statements of Operations for the Years Ended December 31, 2002,
2001, and 2000............................................................ F-4
Statements of Stockholders' Equity for the Years Ended December 31,
2002, 2001, and 2000...................................................... F-5
Statements of Cash Flows for the Years Ended December 31, 2002, 2001,
and 2000.................................................................. F-6
Notes to Financial Statements................................................ F-7
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Quotesmith.com, Inc.
We have audited the accompanying balance sheets of Quotesmith.com, Inc. as
of December 31, 2002 and 2001, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2002. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Quotesmith.com, Inc. at
December 31, 2002 and 2001, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2002 in conformity
with accounting principles generally accepted in the United States.
/s/ERNST & YOUNG LLP
Chicago, Illinois
January 17, 2003
F-2
QUOTESMITH.COM, INC.
BALANCE SHEETS
DECEMBER 31,
2002 2001
-------------- -------------
ASSETS
Cash and equivalents............................................... $ 1,639,909 $ 4,033,192
Fixed maturity investments -
available for sale at fair value (Note 3)........................ 8,823,890 13,909,110
Commissions receivable, less allowances (2002 -- $197,000;
2001 -- $162,000).................................................. 1,125,544 1,351,502
Other assets......................................................... 324,686 220,326
-------------- -------------
Total current assets................................................. 11,914,029 19,514,130
Fixed maturity investments-
available for sale at fair value (Note 3)....................... 5,843,988 --
Furniture, equipment, and computer software at cost, less
accumulated depreciation ( 2002--$2,284,000; 2001--$1,633,000).... 885,469 2,090,568
Intangible assets at cost, less accumulated amortization
( 2002--$517,000; 2001--$37,500) (Note 2)......................... 915,317 1,395,159
-------------- -------------
Total assets......................................................... $ 19,558,803 $ 22,999,857
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued
liabilities....................................................... $ 1,428,601 $ 1,000,235
-------------- -------------
Total current liabilities............................................ 1,428,601 1,000,235
Long-term capital lease obligations (Note 5)......................... 35,018 84,340
-------------- -------------
Total liabilities.................................................... 1,463,619 1,084,575
Commitments and contingencies (Note 8)...............................
Stockholders' equity (Notes 6 and 7): Common stock, $.003 par value;
shares authorized:
2002 & 2001--60,000,000; shares issued:
2002--7,268,072; 2001--7,253,570............................. 21,804 21,761
Additional paid-in capital..................................... 63,972,732 63,930,061
Retained-earnings deficit...................................... (42,187,861) (39,461,293)
Treasury stock at cost: 2002 -- 2,359,341 shares;
2001 -- 1,913,291 shares..................................... (3,793,985) (2,595,343)
Accumulated other comprehensive income ........................ 82,494 20,096
-------------- -------------
Total stockholders' equity........................................... 18,095,184 21,915,282
-------------- -------------
Total liabilities and stockholders'
equity............................................................ $ 19,558,803 $ 22,999,857
============== =============
See accompanying notes.
F-3
QUOTESMITH.COM, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
-----------------------------------------------
2002 2001 2000
------------- ------------- -------------
Revenues:
Commissions and fees (Note 1).................... $ 10,631,467 $ 8,743,286 $ 15,190,010
Other ........................................... 145,327 107,249 46,410
------------- ------------- -------------
Total revenues...................................... 10,776,794 8,850,535 15,236,420
Expenses:
Selling and marketing (Note 2)................... 2,912,547 7,051,893 24,200,846
Operations (Notes 7 and 9)....................... 7,755,693 6,004,239 7,445,235
General and administrative (Note 7).............. 3,193,797 3,503,173 4,431,730
------------- ------------- -------------
Total expenses...................................... 13,862,037 16,559,305 36,077,811
------------- ------------- -------------
Operating loss...................................... (3,085,243) (7,708,770) (20,841,391)
Interest income, net (Note 2)....................... 358,675 1,075,695 2,219,763
------------- ------------- --------------
Loss before income taxes............................ (2,726,568) (6,633,075) (18,621,628)
Income tax credit (Note 4).......................... -- -- --
------------- ------------- -------------
Net loss............................................ $ (2,726,568) $ (6,633,075) $ (18,621,628)
============= ============= =============
Net loss per common
share, basic and diluted......................... $ (0.55) $ (1.22) $ (2.93)
============= ============= =============
Weighted average common
shares and equivalents
outstanding, basic and diluted................... 4,964,500 5,441,039 6,366,045
See accompanying notes.
F-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
--------- --------- ----------- ------------- -------------- ------------- ---------------
2000:
Balance at January 1.......... 7,252,727 $ 21,758 $63,683,525 $(14,206,590) $ (263,000) $ (39,218) $ 49,196,475
Net loss............... -- -- -- (18,621,628) -- -- (18,621,628)
Other comprehensive gain-
unrealized gain on
investments .............. -- -- -- -- -- 36,420 36,420
--------------
Total comprehensive loss (18,585,208)
Purchase of 487,000 treasury
shares.................... -- -- -- -- (1,097,313) -- (1,097,313)
Proceeds from sale
of common stock:
-exercise of stock options.. 843 3 7,590 -- -- -- 7,593
Employee stock compensation... -- -- 145,758 -- -- -- 145,758
--------- --------- ----------- ------------ ------------- ------------ --------------
Balance at December 31........ 7,253,570 21,761 63,836,873 (32,828,218) (1,360,313) (2,798) 29,667,305
2001:
Net loss...................... -- -- -- (6,633,075) -- -- (6,633,075)
Other comprehensive gain-
unrealized gain on
investments .............. -- -- -- -- -- 22,894 22,894
--------------
Total comprehensive loss (6,610,181)
Stock options issued in
connection with acquisition
(See Note 1)............. -- -- 82,250 -- -- -- 82,250
Purchase of 581,624 treasury
shares.............. -- -- -- -- (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
2002:
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
========= ========= =========== ============ ============= ============ ==============
See accompanying notes.
F-5
QUOTESMITH.COM, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
----------------------------------------------
2002 2001 2000
------------ ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................... $ (2,726,568) $ (6,633,075) $ (18,621,628)
Adjustments to reconcile to net cash
used by operating activities:
Depreciation expense......................... 924,700 760,136 547,526
Amortization................................. 339,253 (157,759) (1,126,663)
Impairment of computer software.............. 336,582 -- --
Accounts payable and accrued liabilities .... 422,654 (1,852,324) (3,172,722)
Commissions receivable....................... 225,958 189,013 154,865
Stock compensation........................... 15,960 10,938 145,758
Other assets................................. (58,267) 232,745 2,480,332
------------ ------------- -------------
Net cash used by
operating activities........................... (519,728) (7,450,326) (19,592,532)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments.......................... (23,455,781) (21,263,056) (64,853,981)
Proceeds from investment maturities............. 22,900,000 29,100,000 82,660,000
Proceeds from sales of investments............... -- 2,500,000 --
Purchase of intangible assets.................... -- (1,350,421) --
Purchase of furniture, equipment
and software................................... (102,276) (498,557) (1,815,228)
------------ ------------- -------------
Net cash provided (used) by investing activities. (658,057) 8,487,966 15,990,791
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of
common stock................................... 26,754 -- 7,593
Purchase of treasury stock....................... (1,198,642) (1,235,030) (1,097,313)
Payment of capital lease obligation.............. (43,610) (38,559) (29,420)
------------ ------------- -------------
Net cash used by financing activities............ (1,215,498) (1,273,589) (1,119,140)
------------ ------------- -------------
NET DECREASE IN CASH AND EQUIVALENTS................ (2,393,283) (235,949) (4,720,881)
CASH AND EQUIVALENTS AT
BEGINNING OF YEAR................................ 4,033,192 4,269,141 8,990,022
------------ ------------- -------------
CASH AND EQUIVALENTS AT
END OF YEAR...................................... $ 1,639,909 $ 4,033,192 $ 4,269,141
=========== ============= ==============
See accompanying notes.
F-6
QUOTESMITH.COM, INC.
NOTES TO FINANCIAL STATEMENTS
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, 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 for twelve different
product lines and allows any user to purchase insurance from the company of
their choice. The Company generates revenue 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.
On December 7, 2001, the Company acquired selected assets of Insurance
News Network, LLC, including its Web site, www.insure.com. The insure.com Web
site at that time comprised an insurance news organization consisting of
consumer insurance news, information, and decision-making tools. The cost of the
acquisition included $1.4 million in cash, 50,000 stock options with an
estimated fair value of $82,000, and expenses of $79,000. The acquisition was
recorded using the purchase method of accounting. Accordingly, the purchase
price has been allocated to the assets acquired, intangible assets of $1,433,000
and furniture, equipment, and software of $128,000, based on the estimated fair
values at the date of acquisition.
The accompanying 2002 and 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 2000 and 2001, respectively.
YEARS ENDED DECEMBER 31,
-------------------------------------
2001 2000
---------- ---------
(in thousands, except per share data)
Total revenues................... $ 10,179 $ 16,854
Net loss......................... (7,341) (19,952)
Net loss per common share,
basic and diluted............ $ (1.35) $ (3.13)
The unaudited pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the acquisition occurred at the beginning
of the respective years, nor is it necessarily indicative of future operating
results.
In the period covered in the accompanying financial statements, the
Company's primary revenue source has been commissions derived from the sale of
individual term life insurance. Applications are underwritten and commissions
are received from numerous life insurance companies. Revenues from some of these
companies have exceeded ten percent of the Company's total revenues. In 2000,
these included two companies with revenues of $2.3 million and $4.1 million. In
2001, these included two companies with revenues of $1.1 million and $975,000.
In 2002, there were no companies that provided more than ten percent of the
Company's total revenues. The Company's business represents one business
segment.
F-7
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Such estimates and assumptions could change,
as more information becomes known, which could impact the amounts reported and
disclosed herein.
REVENUE RECOGNITION
The Company recognizes annual first year commissions for term-life
business as revenues when the policy has been approved by the underwriter and an
initial premium payment (which may be annual, semi-annual, quarterly, or
monthly) has been made by the customer. An allowance is provided for estimated
commissions that will not be received due to the nonpayment of installment first
year premiums.
Revenues on all other lines of business, as well as for renewal and bonus
commissions and other revenues, are recognized when the Company receives
notification that such revenues have been earned.
ADVERTISING COSTS
Selling and marketing expenses in the accompanying financial statements
are comprised of advertising costs. The costs of producing advertising are
expensed in the first period that the advertising takes place. The costs of
communicating the advertising are expensed in the period the advertising is
communicated.
INVESTMENTS
The Company classifies its fixed maturity investments as
available-for-sale and, accordingly, such investments are carried at fair value.
The cost of fixed maturity investments is adjusted for amortization of premiums
and discounts and for declines in value that are other than temporary. Temporary
changes in the fair values of investments are reflected directly in
stockholders' equity as accumulated other comprehensive income or loss net of
income taxes with no effect on net income or loss.
CASH AND EQUIVALENTS
Money market and certificate of deposit investments are included as part
of cash and equivalents.
STOCK COMPENSATION
The Company uses the intrinsic value method to measure compensation
expense, if any, relating to stock options. Any compensation expense is
determined at the date of grant, or the date of subsequent modification to
option terms, based on any excess of the fair value of the related shares over
the exercise price, and amortized over the options' vesting periods.
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FURNITURE, EQUIPMENT, AND COMPUTER SOFTWARE
Furniture, equipment, and capitalized application development costs of
internal-use computer software are depreciated over useful lives of three to
five years using principally the straight-line method of depreciation. Repair
and maintenance costs are charged to expense as incurred.
INTANGIBLE ASSETS
Intangible assets represent the value assigned to the acquired insure.com
Web site and are being amortized on a straight-line basis over three years.
Amortization expense was $38,000 in 2001, $480,000 in 2002, and is expected to
be $480,000 in 2003 and $435,000 in 2004.
ASSETS HELD UNDER CAPITAL LEASE
Assets held under capital leases are recorded at the net present value of
the minimum lease payments at the inception of the lease. Amortization expense
is computed using the straight-line method over the shorter of the estimated
useful lives of the assets or the period of the related lease.
TREASURY STOCK
The cost of reacquiring the Company's common stock is reported as a
separate component of stockholders' equity.
INCOME TAXES
Deferred income taxes are determined based on the temporary differences
between financial reporting and tax bases of assets and liabilities and the
effect of net operating loss carryforwards, and are measured using enacted tax
rates.
NON-OPERATING INCOME AND EXPENSE
Interest income, net in the accompanying statements of operations includes
the following:
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
2002 2001 2000
-------------- --------------- --------------
Interest income........................................ $ 372,677 $ 1,094,747 $ 2,242,835
Interest expense....................................... (14,002) (19,052) (23,072)
-------------- --------------- --------------
Interest income, net................................ $ 358,675 $ 1,075,695 $ 2,219,763
============== =============== ==============
NET LOSS PER SHARE
Basic and diluted net loss per share reflects net loss divided by the
weighted average number of common shares outstanding. Diluted net loss per share
does not include the effect of common share equivalents because the effect would
be antidilutive.
COMPREHENSIVE INCOME OR LOSS
Comprehensive loss includes net loss and unrealized gain or loss on
investments.
F-9
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:
YEARS ENDED DECEMBER 31,
----------------------------------------
2002 2001 2000
----------- ---------- ----------
(in thousands, except per share data)
Net loss as reported $ (2,727) $ (6,633) $ (18,622)
Add back stock compensation, as reported 16 11 146
Less pro forma stock compensation using
fair value method (235) (374) (1,992)
----------- ---------- ----------
Pro forma net loss $ (2,946) $ (6,996) $ (20,468)
=========== ========== ==========
Pro forma net loss per common share,
basic and diluted $ (0.59) $ (1.29) $ (3.22)
=========== ========== ==========
3. INVESTMENTS
Investments are classified as available-for-sale securities and are
reported at fair value, as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- ----------- ----------- -------------
DECEMBER 31, 2002:
U.S. Government agency bonds ......................... $ 7,526,079 $ 21,821 $ 729 $ 7,547,171
Corporate commercial paper ............................ 7,059,305 66,571 5,169 7,120,707
------------- ----------- ----------- -------------
Total ............................................. $ 14,585,384 $ 88,392 $ 5,898 $ 14,667,878
============= =========== =========== =============
DECEMBER 31, 2001:
U.S. Government agency bonds ......................... $ 8,920,817 $ 14,457 $ 2,014 $ 8,933,260
Corporate commercial paper ............................ 4,968,197 7,908 255 4,975,850
------------- ----------- ----------- -------------
Total ............................................. $ 13,889,014, $ 22,365 $ 2,269 $ 13,909,110
============= =========== =========== =============
As of December 31, 2002, investments maturities are as follows:
F-10
QUOTESMITH.COM, INC.
NOTES TO FINANCIAL STATEMENTS
AMORTIZED FAIR
COST VALUE
------------- ------------
Due in one year or less................................ $ 8,812,234 $ 8,823,890
Due in 1-2 years....................................... 5,773,150 5,843,988
------------- ------------
Total............................................. $ 14,585,384 $ 14,667,878
============= ============
4. INCOME TAXES
A reconciliation of income taxes (credit) based on the federal tax rate to
amounts reported in the statements of operations is as follows:
YEARS ENDED DECEMBER 31,
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
Pre-tax loss times federal rate . $ (927,000) $(2,255,200) $(6,331,400)
State income tax credit ....... (130,900) (318,400) (893,800)
Increase in valuation allowance 966,000 2,540,000 7,164,200
Stock compensation ............ 6,200 4,200 55,600
Other ...................... 85,700 29,400 5,400
----------- ----------- -----------
Income tax credit .......... $ -- $ -- $ --
=========== =========== ===========
Deferred income taxes reflect the net tax effect of temporary differences
between the amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes and the effect of net operating
loss carryforwards. In 2000, the Company converted from a cash basis to accrual
basis for tax purposes.
Significant components of the Company's deferred tax assets and liabilities are
as follows
DECEMBER 31,
------------------------------
2002 2001
------------ ------------
Deferred tax liabilities - other assets . $ 32,000 $ 8,000
Deferred tax assets:
Net operating loss carryforwards ..... 15,759,000 14,633,000
Unamortized cash to accrual adjustment 243,000 485,000
Depreciation ......................... 199,000 78,000
Other ................................ 112,000 127,000
------------ ------------
Total gross deferred tax assets ......... 16,313,000 15,323,000
Valuation allowance ..................... (16,281,000) (15,315,000)
------------ ------------
Net deferred tax assets ................. 32,000 8,000
------------ ------------
Net deferred tax amounts ................ $ -- $ --
============ ============
As of December 31, 2002, the Company had net operating loss carryforwards
of approximately $40,617,000 available to offset future taxable income, which
expire in 2006 to 2022. There were no income taxes paid or recovered in 2000,
2001 or 2002.
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QUOTESMITH.COM, INC.
NOTES TO FINANCIAL STATEMENTS
5. OBLIGATIONS UNDER CAPITAL LEASE
Furniture, equipment and computer software at December 31, 2002 and
2001 includes gross assets acquired under capital lease of $196,000. Related
amortization included in accumulated depreciation was $103,000 and $64,000 at
December 31, 2002 and 2001, respectively. Amortization of assets under capital
lease is included in depreciation expense.
The future minimum lease payments required under the capital lease and
the present value of the net minimum lease payments as of December 31, 2002 are
as follows:
YEAR ENDING
DECEMBER 31, AMOUNT
------------ --------
2003 $ 57,612
2004 37,040
--------
Total minimum lease payments 94,652
Imputed interest (10,312)
--------
Present value of net minimum lease payments 84,340
Current lease obligation (49,322)
--------
Long-term lease obligations $ 35,018
========
6. STOCKHOLDERS' EQUITY
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 from $.001 to $.003,
effective on March 7, 2001. In the accompanying financial statements and related
notes, all share and per share amounts were retroactively adjusted to reflect
the stock split. The components of stockholders' equity were not affected by
these changes.
TREASURY STOCK
As of December 31, 2002, the Company is authorized to repurchase 652,000
additional shares of its common stock.
PRIVATE PLACEMENT AND RELATED PARTY TRANSACTIONS
In 1999, the Company sold 333,333 shares of its common stock to a company
(the Investor) for proceeds of $3,000,000 in a private placement and sold 90,909
shares of its common stock to the Investor for proceeds totaling $3,000,000 in
the initial public offering. In 2001, the Company repurchased its shares from
the Investor.
EMPLOYEE STOCK PURCHASE PLAN
The Company has a plan under which employees may purchase shares of the
Company's common stock through payroll deductions of up to 10% of each
employee's compensation. Shares may be purchased at 85% of the lower of the fair
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QUOTESMITH.COM, INC.
NOTES TO FINANCIAL STATEMENTS
value of the common stock on the first or the last day of each six-month
offering period. The Company reserved 83,333 shares for purchase under the plan,
of which 65,325 were available at December 31, 2002.
PREFERRED STOCK
The Company has 5,000,000 authorized shares of $0.001 par value preferred
stock. No shares have been issued.
STOCKHOLDER RIGHTS PLAN
One preferred stock purchase right is outstanding for each outstanding
share of the Company's common stock, and the Company intends to issue those
rights along with future issuances of common shares. The rights become
exercisable only if a person or group acquires or announces the intent to
acquire 15% or more of the Company's common stock. Prior to the rights becoming
exercisable, the Company may redeem the rights for $0.03 per right. If the
rights become exercisable, the Company may exchange each right for one share of
common stock providing that 50% of the Company has not been acquired. The rights
expire in 2009.
If the rights become exercisable and they have not been exchanged, holders
of each right, other than the acquiring person or group, would be entitled to
acquire three hundredths of a share of the Company's preferred stock at an
exercise price equal to five times the initial offering price of the Company's
common stock. If issued, each preferred share would entitle the holder to
cumulative quarterly dividends of the greater of $1.00 per share or 33.3 times
the common share dividends. The preferred shareholders would receive 33 votes
per share and have a liquidation preference of $0.333 per share over the common
shares.
In lieu of purchasing preferred shares, holders of each right, other than
the acquiring person or group, on payment of the exercise price, would be
entitled to acquire the number of shares of the Company's common stock or other
assets with a value of two times the exercise price. In addition, if 50% of the
Company is acquired, the holders of each right would be entitled to acquire the
number of shares of the acquiring company's common stock having a value of two
times the exercise price.
7. STOCK OPTIONS
The Company has established a stock option plan (the Plan) to provide
additional incentives to its employees, officers, and directors. Under the Plan,
an aggregate of 500,000 shares of common stock may be granted to participants in
the Plan.
For purposes of the pro forma disclosures presented in Note 2, the
estimated fair values of the option grants are amortized to expense over the
options' vesting period. The fair value of options at the date of grant was
estimated using the Black-Scholes option pricing model for grants made
subsequent to the Company's initial public offering in August 1999, and the
minimum value method in all prior periods, with the following weighted-average
assumptions:
YEARS ENDED DECEMBER 31,
----------------------------------
2002 2001 2000
---- ---- -----
Dividend yield................................... 0.0% 0.0% 0.0%
Risk-free interest rate.......................... 2.5% 4.5% 5.0%
Volatility....................................... 93.5% 105.3% 95.0%
Expected life (years)............................ 5.0 5.0 to 7.0 5.0
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QUOTESMITH.COM, INC.
NOTES TO FINANCIAL STATEMENTS
In 2002, 2001 and 2000, the Company recorded compensation expense of
$15,960, $10,938 and $145,758, respectively relating to stock options granted
below the estimated fair value of the Company's common stock, with a
corresponding credit to additional paid-in capital.
Transactions related to all stock options are as follows:
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------
2002 2001 2000
---------------------- ------------------------ -----------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
Under Exercise Under Exercise Under Exercise
Option Price Option Price Option Price
---------- -------- ----------- ---------- ----------- ---------
Beginning Balance......................... 712,131 $ 7.03 377,996 $ 19.86 268,241 $ 21.33
Granted with exercise price...............
equal to stock value.................. 156,500 3.04 522,000 2.00 157,000 17.76
Exercised................................. (14,502) 1.84 -- -- (843) 9.00
Forfeited................................. (494,082) 6.41 (187,865) 19.03 (46,402) 21.42
---------- ----------- -----------
Outstanding............................... 360,047 $ 6.28 712,131 $ 7.03 377,996 $ 19.86
============ =========== ===========
Exercisable at end of year............ 129,538 164,056 196,339
========== =========== ===========
Of the options granted in 2001, 50,000 options, with an exercise price of
$2.00 per share, were issued as part of the cost of the acquisition discussed in
Note 1. Of the options outstanding at December 31, 2002, 12,500, with an
exercise price of $2.00 per share, vest in 2007, or if performance targets are
met, in 2003. The majority of the remaining unexercisable options vest in 2003
and 2004.
Information regarding options outstanding and exercisable at December 31,
2002 is summarized as follows:
Options Outstanding Options Exercisable
-------------------------------- ---------------------------------
Weighted Average
Remaining Weighted Weighted
Number Contractual Life Average Number Average Exercisable
Exercise Price Outstanding (in years) Exercise Price Exercisable Price
-------------- ----------- ---------------- -------------- ----------- ------------------
$ 1.25 16,500 8.25 $ 1.25 5,500 $ 1.25
$ 2.00 - $ 2.78 138,000 8.69 2.22 35,334 2.20
$ 2.99 - $ 6.38 155,749 8.63 3.89 39,402 4.95
$ 9.00 - $10.32 13,132 6.37 9.15 12,636 9.11
$33.00 36,666 6.59 33.00 36,666 33.00
--------- -----------
360,047 8.34 $ 6.28 129,538 $ 12.39
========= ===========
The options have terms of ten years. Under the Company's Plan, 166,275
shares were available for grant as awards or options at December 31, 2002.
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QUOTESMITH.COM, INC.
NOTES TO FINANCIAL STATEMENTS
The weighted average fair value per share of options granted were as
follows:
2002 2001 2000
------ ------ -------
$ 2.20 $ 1.64 $ 13.05
8. COMMITMENTS AND CONTINGENCIES
As of December 31, 2002, the Company leases office space in Darien, IL
under an operating lease agreement in which the Company is committed to rent
expense of approximately $302,000 in 2003. In addition, the Company must pay its
proportionate share of taxes and operating costs for the Darien lease site.
Rent expense was $268,000 in 2000, $320,000 in 2001 and $428,000 in 2002.
The Company has employment agreements with two of its executives under
which the Company would be required to pay severance of one to two years of
annual salary to terminate those agreements. The Company has an employment
agreement with one additional executive under which the Company would be
required to pay severance of one year of annual salary in the event of a change
in control.
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.
9. COMPUTER SOFTWARE
In connection with its auto insurance brokerage business, the Company had
developed an auto rating engine and order fulfillment technology that was
launched in January 2002. However, the Company was unable to secure an adequate
number of agency appointments and the handling costs of this business were
higher than anticipated. Therefore, in the third quarter of 2002, the Company
discontinued the use of this software in favor of using an outsourced technology
solution. This decision resulted in an impairment of $337,000 representing the
entire remaining amount of these computer software costs, included in operations
expenses in 2002.
F-15