<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-Q
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-26083
------------------------
INSWEB CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-3220749
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
</TABLE>
901 MARSHALL STREET
REDWOOD CITY, CALIFORNIA 94063
(Address of principal executive offices)
------------------------------
(650) 298-9100
(Registrant's telephone number, including area code)
------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE
(TITLE OF CLASS)
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 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. Yes /X/ No / /
The number of outstanding shares of the Registrant's Common Stock, par value
$0.001 per share, on October 31, 1999 was 34,668,686 shares.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
FORM 10-Q
INSWEB CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
--------
<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1: Financial Statements
Condensed Consolidated Balance Sheets....................... 3
Condensed Consolidated Statements of Operations............. 4
Condensed Consolidated Statements of Cash Flow.............. 5
Notes to Condensed Consolidated Financial Statements........ 6
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 10
ITEM 3: Quantitative and Qualitative Disclosures About Market
Risk...................................................... 28
PART II OTHER INFORMATION
ITEM 2: Changes in Securities and Use of Proceeds................... 29
ITEM 6: Exhibits and Reports on Form 8-K............................ 29
Signature................................................... 30
Exhibits.................................................... 31
</TABLE>
2
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INSWEB CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30, 1999
------------------ -------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $ 8,337,133 $ 49,221,771
Short-term investments...................................... -- 54,947,784
----------- ------------
Total cash, cash equivalents and short-term
investments........................................... 8,337,133 104,169,555
Accounts receivable, net of allowance of $0 at December 31,
1998 and September 30, 1999............................... 1,192,174 4,865,859
Prepaid expenses and other current assets................... 653,734 2,656,029
Receivable for sale of preferred stock...................... 22,999,377 --
----------- ------------
Total current assets.................................... 33,182,418 111,691,443
Property and equipment, net................................. 3,998,185 7,007,303
Investment in joint venture................................. 2,089,137 1,306,524
Intangible assets, net...................................... 8,697,141 6,350,356
Deposits and other assets................................... 1,389,867 1,682,685
----------- ------------
Total assets............................................ $49,356,748 $128,038,311
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 524,926 $ 2,280,416
Note payable to officer..................................... 25,000 --
Accrued expenses............................................ 3,119,362 2,649,921
Deferred revenue............................................ 226,251 161,492
Payable to Series B stockholder............................. 4,500,000 --
Line of credit from affiliate............................... 19,290,000 --
----------- ------------
Total current liabilities............................... 27,685,539 5,091,829
Note payable to strategic partner........................... 2,089,137 1,401,869
----------- ------------
Total liabilities....................................... 29,774,676 6,493,698
----------- ------------
Stockholders' equity:
Convertible preferred stock, $0.001 par value.
Authorized: 5,000,000 shares
Issued 492,134 shares in 1998 and no shares in 1999.
Outstanding: 633,347 shares in 1998, no shares in
1999.................................................... 633 --
Common stock, $0.001 par value. Authorized: 150,000,000.
Issued and outstanding: 15,939,823 shares in 1998, and
34,659,322 shares in 1999................................. 15,940 34,659
Paid-in capital............................................. 59,475,314 188,397,185
Cumulative translation adjustment........................... -- 94,890
Common stock warrants....................................... 113,071 113,071
Deferred stock compensation................................. (1,813,082) (3,695,304)
Accumulated deficit......................................... (38,209,804) (63,399,888)
----------- ------------
Total stockholders' equity.............................. 19,582,072 121,544,613
----------- ------------
Total liabilities and stockholders' equity.............. $49,356,748 $128,038,311
=========== ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
INSWEB CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- ---------------------------
1998 1999 1998 1999
----------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Transaction fees...................... $ 1,059,145 $ 6,261,388 $ 1,721,206 $ 13,584,779
Development and maintenance fees...... 204,517 766,521 550,041 1,808,515
Other revenues........................ -- 13,734 19,117 20,166
----------- ------------ ------------ ------------
Total revenues...................... 1,263,662 7,041,643 2,290,364 15,413,460
Operating expenses:
Product development................... 1,232,375 2,783,413 3,272,101 6,552,816
Sales and marketing................... 2,224,145 10,306,281 5,997,275 22,446,632
General and administrative............ 1,757,426 4,232,642 4,651,316 9,943,964
Amortization of intangible assets..... -- 782,261 -- 2,346,785
----------- ------------ ------------ ------------
Total operating expenses............ 5,213,946 18,104,597 13,920,692 41,290,197
Loss from operations................ (3,950,284) (11,062,954) (11,630,328) (25,876,737)
Other income, net....................... -- (238,187) -- (238,187)
Interest income (expense), net.......... (370,269) 1,109,527 (579,745) 924,840
----------- ------------ ------------ ------------
Net loss............................ $(4,320,553) $(10,191,164) $(12,210,073) $(25,190,084)
=========== ============ ============ ============
Net loss per share--basic and diluted... $ (0.29) $ (0.36) $ (0.83) $ (1.25)
=========== ============ ============ ============
Shares used in computing net loss per
share--basic and diluted.............. 14,799,423 28,476,646 14,709,041 20,220,488
=========== ============ ============ ============
Pro forma net loss per share--basic and
diluted............................... $ (0.20) $ (0.31) $ (0.57) $ (0.85)
=========== ============ ============ ============
Shares used in computing pro forma net
loss per share--basic and diluted..... 21,440,313 32,616,714 21,349,931 29,761,909
=========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
INSWEB CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1998 1999
------------- -------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (12,210,073) $ (25,190,084)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 540,199 1,066,636
Amortization of deferred stock compensation............. 373,240 920,543
Amortization of intangible assets....................... -- 2,346,785
Foreign currency transaction gain on note payable....... -- 95,362
Equity loss from joint venture.......................... -- 94,872
Changes in assets and liabilities:
Accounts receivable..................................... (538,124) (3,673,685)
Prepaid expenses and other current assets............... (627,598) (2,002,295)
Deposits and other assets............................... (1,593,323) (292,818)
Accounts payable........................................ 166,233 1,755,488
Accrued expenses........................................ 2,137,991 1,179,562
Deferred revenue........................................ 110,157 (64,759)
Interest received on note receivable from officer......... 68,436 --
Interest paid on note payable to officer.................. (68,436) --
------------- -------------
Net cash used in operating activities..................... (11,641,298) (23,764,393)
------------- -------------
Cash flows from investing activities:
Purchase of short term investments - net.................. -- (54,947,784)
Purchases of property and equipment (3,672,595) (4,075,754)
------------- -------------
Net cash used in investing activities................... (3,672,595) (59,023,538)
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of Series D preferred stock........ -- 22,999,377
Proceeds from issuance of Series E preferred stock........ -- 35,000,010
Payment of issuance costs related to preferred stock
financing............................................... -- (1,720,083)
Proceeds from initial public offering of common stock..... -- 90,907,500
Payment of issuance costs related to initial public
offering................................................ -- (1,346,773)
Proceeds from issuance of common stock.................... -- 296,930
Proceeds from exercise of stock options................... 325,434 1,350,608
Issuance of notes receivable from officer................. (4,000,000) --
Proceeds from repayment of notes receivable from
officer................................................. 5,525,000 --
Payment to Series B stockholder........................... -- (4,500,000)
Payment of note payable to officer........................ (1,525,000) (25,000)
Proceeds from line of credit from affiliate............... 16,700,000 --
Payments on line of credit from affiliate................. (4,000,000) (19,290,000)
------------- -------------
Net cash provided by financing activities............... 13,025,434 123,672,569
------------- -------------
Net increase (decrease) in cash and cash equivalents........ (2,288,459) 40,884,638
Cash and cash equivalents, beginning of period.............. 2,360,153 8,337,133
------------- -------------
Cash and cash equivalents, end of period.................... $ 71,694 $ 49,221,771
============= =============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.................. $ 687,927 $ 1,243,425
============= =============
Supplemental schedule of noncash financing activities:
Deferred stock compensation from issuance of options...... $ 684,169 $ 2,802,765
============= =============
Proceeds from sale of a portion of InsWeb Japan K.K. used to
reduce note payable to the strategic partner.............. $ -- $ 782,630
============= =============
Conversion of preferred stock to common stock............... $ -- $ 633
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
INSWEB CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, InsWeb Insurance Services, Inc. (formerly
Avatar Insurance Services, Inc.) and Benelytics, Inc. Benelytics, Inc. was
purchased on December 31, 1998, and the acquisition was accounted for as a
purchase. Accordingly, the results of operations of Benelytics, Inc. for the
nine months ended September 30, 1998 are not included in the consolidated
financial statements. All significant intercompany accounts and transactions
have been eliminated in the consolidated financial statements. Investments in 20
to 50 percent owned affiliates are accounted for on the equity method. All
common share and per share amounts reflect a 10-for-1 split approved by the
Board of Directors in 1997 and a 3-for-2 split authorized in June 1999.
The accompanying unaudited interim financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly they do not contain all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying unaudited
interim condensed consolidated financial statements reflect all adjustments,
which include only normal recurring adjustments, necessary to present fairly the
Company's financial position as of September 30, 1999 and results of operations
three and nine months ended September 30, 1998 and 1999 and cash flows for the
nine months ended September 30, 1998 and 1999. The financial data and other
information disclosed in these notes to the condensed consolidated financial
statements related to these periods are unaudited. The results for the three and
nine months ended September 30, 1999 are not necessarily indicative of the
results to be expected for the year ending December 31, 1999.
These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Registration Statement on Form S-1 as filed with the
Securities and Exchange Commission on July 22, 1999 and other information filed
with the Commission.
FOREIGN CURRENCY TRANSLATION
The long-term note payable to strategic partner is translated from Japanese
yen into U.S. dollars in accordance with SFAS No. 52, Foreign Currency
Translation. Accordingly, it is translated at the current exchange rate as of
the applicable balance sheet date and the resulting foreign currency gain (loss)
is included in the consolidated statements of operations. The investment in
InsWeb Japan K.K. is translated into U.S. dollars at the applicable balance
sheet rate and the resulting translation adjustment is recorded to a separate
component of stockholders' equity.
SIGNIFICANT CUSTOMERS
For the three months ended September 30, 1999, three customers accounted for
31.0%, 12.1% and 11.7%, respectively, of total revenues. For the nine months
ended September 30, 1999, three customers accounted for 31.1%, 12.2% and 11.1%,
respectively, of total revenues. For the three months ended September 30, 1998,
three customers accounted for 37.1%, 16.8% and 7.4%, respectively, of total
revenues. For the nine months ended September 30, 1998, three customers
accounted for 36.4%, 15.3% and 11.8%, respectively, of total revenues.
6
<PAGE>
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE - BASIC AND DILUTED
Basic earnings per share is computed using the weighted average number of
shares of common stock outstanding. Diluted earnings per share reflects the
potential dilution that would occur if preferred stock had been converted and
stock options and warrants had been exercised. Common equivalent shares from
preferred stock, stock options and warrants have been excluded from the
computation of net loss per share-diluted as their effect is antidilutive.
Pro forma net loss per share-basic and diluted represents what the net loss
per share-basic and diluted would have been assuming the conversion of the
outstanding preferred stock as of the beginning of such periods.
2. COMPREHENSIVE LOSS
SFAS 130 requires items of other comprehensive income (loss) be classified,
net of income taxes, by their nature in the financial statements. For the
Company, other comprehensive income includes primarily foreign currency
translation adjustments. Total comprehensive loss for the three and nine months
ended September 30, 1999 was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1998 1999
----------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net loss......................................... $(4,320,553) $(10,191,164) $(12,210,073) $(25,190,084)
Other comprehensive income (loss):
Foreign currency translation adjustments......... -- 94,890 -- 94,890
----------- ------------ ------------ ------------
Total comprehensive loss......................... $(4,320,553) $(10,096,274) $(12,210,073) $(25,095,194)
=========== ============ ============ ============
</TABLE>
3. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash, cash equivalents and short-term investments consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30
1998 1999
------------- -------------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents:
Cash...................................................... $ 315,263 $ 676,749
Money market funds........................................ 8,021,870 13,555,061
Commercial paper.......................................... -- 34,989,961
---------- ------------
8,337,133 49,221,771
Short-term investments:
Commercial paper.......................................... -- 54,947,784
---------- ------------
Cash, cash equivalents and short-term investments........... $8,337,133 $104,169,555
========== ============
</TABLE>
7
<PAGE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30
1998 1999
------------- -------------
(UNAUDITED)
<S> <C> <C>
Computer and office equipment............................... $ 1,972,168 $ 4,351,527
Furniture and fixtures...................................... 1,010,266 1,458,968
Leasehold improvements...................................... 1,986,897 2,225,536
Purchased software.......................................... 386,566 1,393,356
----------- -----------
5,355,897 9,429,387
Less accumulated depreciation and amortization.............. (1,357,712) (2,422,084)
----------- -----------
$ 3,998,185 $ 7,007,303
=========== ===========
</TABLE>
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30
1998 1999
------------- -------------
(UNAUDITED)
<S> <C> <C>
Accrued employee compensation............................... $ 309,311 $1,677,635
Employee stock purchase plan................................ -- 368,080
Accrued interest............................................ 652,681 15,899
Accrued expenses for Series D financing..................... 1,649,000 --
Accrued payments to vendors................................. 442,872 1,769
Accrued fee sharing......................................... -- 455,100
Other....................................................... 65,498 131,438
---------- ----------
$3,119,362 $2,649,921
========== ==========
</TABLE>
6. RELATED PARTY TRANSACTIONS
STOCKHOLDER AND CUSTOMER
A stockholder, who is also a customer, accounted for $41,707 and $814,625 of
the Company's revenue for the nine months ended September 30, 1998 and 1999,
respectively. For the three months ended September 30, 1998 and 1999, the
customer accounted for $25,923 and $383,780 of the Company's revenue,
respectively. This customer accounted for $34,600 of accounts receivable at
December 31, 1998 and $334,655 of accounts receivable at September 30, 1999.
JOINT MARKETING AND LICENSE AGREEMENT
At December 31, 1998, the Company owed a stockholder $4,500,000 in
conjunction with an amended joint marketing and license agreement. As of
September 30, 1999, the Company repaid the outstanding balance and no additional
amounts were due under this agreement.
AFFILIATE AND CUSTOMER
An affiliate, who owned a majority interest in a stockholder, is also a
customer and accounted for $247,711 of the company's revenue during 1998. For
the nine months ended September 30, 1998 and 1999, the customer accounted for
$211,860 and $248,697 of the Company's revenue, respectively. For the three
months ended September 30, 1998 and 1999, the customer accounted for $35,620 and
$115,500 of the Company's revenue, respectively. This customer accounted for
$6,405 and $63,867 of accounts receivable at December 31, 1998 and
September 30, 1999, respectively.
8
<PAGE>
6. RELATED PARTY TRANSACTIONS (CONTINUED)
MARKETING AGREEMENTS
During the three and nine months ended September 30, 1999, the Company
recognized $1,244,822 and $3,235,461, respectively, in marketing expense under a
marketing agreement with an Internet company. A beneficial owner of a
significant number of shares of the outstanding stock of the Internet company is
a principal stockholder of the Company.
7. INITIAL PUBLIC OFFERING AND DEFERRED COMPENSATION
INITIAL PUBLIC OFFERING
On July 23, 1999, the Company sold 5,750,000 shares of common stock in an
underwritten public offering which includes the exercise of the underwriters'
over-allotment option. Net proceeds of the offering were approximately $89.6
million, after offering expenses. Simultaneously with the closing of the public
offering, all 819,122 shares of the Company's preferred stock were converted to
common stock on a fifteen for one basis.
DEFERRED COMPENSATION
The Company recorded deferred compensation of $1,123,000 and $2,803,000,
respectively, for the three and nine months ended September 30, 1999,
representing the difference between the exercise price of options granted to
employees and the deemed fair value of the Company's common stock for financial
reporting purposes. The Company's stock option grants and related deemed fair
value are as follows (unaudited):
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED WEIGHTED
OPTIONS AVERAGE AVERAGE DEEMED
GRANTED EXERCISE PRICE FAIR VALUE
--------- -------------- --------------
<S> <C> <C> <C>
For the three months ended September 30, 1999
Options granted at or above deemed fair value.......... 1,616,125 $41.79 $17.48
Options granted below deemed fair value................ 221,250 $15.28 $20.50
---------
Total................................................ 1,837,375 $38.60 $17.85
=========
For the nine months ended September 30, 1999
Options granted at or above deemed fair value.......... 1,939,509 $36.36 $16.11
Options granted below deemed fair value................ 1,653,776 $10.85 $12.53
---------
Total................................................ 3,593,285 $24.62 $14.46
=========
</TABLE>
8. SUBSEQUENT EVENT (UNAUDITED)
In October 1999, the Company signed a 12-year lease for approximately
160,000 square feet to house the Company's future headquarters. Under the terms
of this lease, the Company is responsible for taxes, insurance and maintenance
expenses. As a condition of the lease the Company is required to provide a $9.5
million letter of credit secured by a portion of the company's short term
investments as a security deposit. As of October 31, 1999, future minimum lease
payments under all of the Company's noncancelable operating leases are as
follows for the years noted: 2000 - $5.2 million; 2001 - $8.8 million; 2002 -
$9.0 million; 2003 - $9.2 million; 2004 - $9.4 million; a total of $69.7 million
through the years 2005 to 2011.
9
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
InsWeb has included in this filing certain "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995
concerning InsWeb's business, operations and financial condition. The words or
phrases "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates" and similar expressions are generally intended to identify
forward-looking statements. Such forward-looking statements are subject to
various known and unknown risks and uncertainties and InsWeb cautions you that
any forward-looking information provided by or on behalf of InsWeb is not a
guarantee of future performance. Actual results could differ materially from
those anticipated in such forward-looking statements due to a number of factors,
some of which are beyond InsWeb's control, including but not limited to InsWeb's
limited operating history, anticipated losses, the unpredictability of its
future revenues, competition, risks associated with system development and
operation risks, management of potential growth, and risks of new business
areas, business combinations, and strategic alliances. All forward-looking
statements are based on information available to InsWeb on the date hereof and
InsWeb assumes no obligation to update such statements.
OVERVIEW
InsWeb operates an online insurance marketplace that enables consumers to
shop online for a variety of insurance products, including automobile, term
life, homeowners, renters and individual health insurance, and obtain insurance
company-sponsored quotes for actual coverage. In order to create this
marketplace, InsWeb has established close relationships with more than 46
insurance companies throughout the United States.
InsWeb's principal source of revenues is transaction fees. While quotes
obtained through InsWeb's online insurance marketplace are provided to consumers
free of charge, InsWeb's participating insurance companies pay transaction fees
to InsWeb generally based on qualified leads delivered to them electronically.
Qualified leads are produced in two ways: for insurance companies offering
consumers instant online quotes, a qualified lead is produced when a consumer
requests insurance coverage based on a specific quote; for insurance companies
providing e-mail or other offline quotes, a qualified lead is produced when the
consumer clicks to request the quote itself. In either case, transaction fees
are payable whether or not the consumer actually purchases an insurance policy
from the insurance company, and revenue from transaction fees is recognized at
the time the qualified lead is delivered to the insurance company.
In October 1999, InsWeb began generating revenue as an insurance agent based
on activities it performs relative to the sale of certain automobile insurance
policies in California. InsWeb Insurance Services, Inc. has been appointed as an
authorized automobile insurance agent in California by four participating
insurance companies. InsWeb receives a percentage of the insurance policy
premium relative to each insurance policy sale where InsWeb has acted as the
insurance agent. InsWeb recognizes the revenue from these activities on the
effective date of the policy sold based on a percentage of the policy premium.
InsWeb also generates development and maintenance fees from its
participating insurance companies. InsWeb charges a fee to design and develop
customized interfaces between an insurance company's information system and the
InsWeb site. Development fees are typically recognized when the insurance
company's integration with the InsWeb site becomes operational. Additional
development fees are charged as insurance companies add new products, increase
their geographic coverage and convert to instant quoting capability on InsWeb's
online insurance marketplace, as well as for periodic upgrades and changes to
insurance companies' information resident on the InsWeb site. InsWeb charges
maintenance fees for maintaining and servicing the programs of the individual
insurance
10
<PAGE>
companies and for maintaining any hardware at InsWeb's facility that is
dedicated to specific insurance companies. These maintenance fees are typically
payable monthly and are recognized as revenue ratably over the term of the
maintenance agreement. Prepaid development and maintenance fees are recorded as
deferred revenue until earned. Development and maintenance fees are expected to
account for a declining percentage of total revenues as InsWeb's online
marketplace expands and transaction fees and fees relative to InsWeb's
activities as an agent increase.
Product development expenses consist primarily of payroll and related
expenses for development and technology personnel. To date, InsWeb has not
capitalized any of its software development costs. Because the timing of the
commercial release of its products has substantially coincided with their
technological feasibility, all software development costs have been expensed as
incurred. InsWeb intends to continue to expand its online insurance marketplace
by adding additional product offerings and participating insurance companies and
expects that these activities will require additional personnel. Accordingly,
InsWeb expects that its product development expenses will continue to increase
for the foreseeable future.
Sales and marketing expenses consist primarily of payroll and related
expenses for InsWeb's sales and marketing personnel as well as consumer
marketing expenditures for advertising, public relations, promotions and fees
paid to online companies with which InsWeb has relationships. InsWeb has
increased its investment and intends to continue to significantly increase its
sales and marketing expenses in order to establish and maintain relationships
with insurance companies, attract increased consumer traffic to the InsWeb site,
and develop the InsWeb brand. InsWeb has increased its investment and intends to
continue to invest substantially in an integrated consumer marketing program
including the expansion and enhancement of its network of online relationships
as well as traditional offline and online advertising campaigns designed to
increase consumer awareness of InsWeb and its online insurance marketplace. In
September 1999, InsWeb announced its intention to commit at least $75 million
over the next two years in support of these initiatives. At the same time,
InsWeb intends to continue to devote substantial resources to market the InsWeb
online marketplace to insurance companies, to add new insurance companies and
expand relationships with participating companies so that it can offer consumers
greater comparison shopping opportunities over an increasingly broad selection
of products.
General and administrative expenses consist primarily of payroll and related
expenses for InsWeb's management, administrative and accounting personnel,
expenses relating to site operations, professional fees and other general
corporate expenses. InsWeb expects that, in support of the continued growth of
its business and its operations as a public company, general and administrative
expenses will continue to increase for the foreseeable future.
REVENUES
TRANSACTION FEES. Transaction fees accounted for $6.3 million, or 88.9%,
and $13.6 million, or 88.1%, of total revenues for the three and nine months
ended September 30, 1999, respectively compared to $1.1 million or 83.8%, and
$1.7 million, or 75.1%, for the comparable periods in 1998. This increase was
primarily the result of a substantial increase in the number of completed
shopping sessions. The increase in shopping sessions resulted from increased
consumer traffic due to InsWeb's consumer marketing activities and the addition
of a substantial number of online relationships.
DEVELOPMENT AND MAINTENANCE FEES. Development and maintenance fees
accounted for $767,000, or 10.9%, and $1.8 million, or 11.7%, of total revenues
for the three and nine months ended September 30, 1999, respectively, compared
to $205,000, or 16.2% and $550,000, or 24.0%, for the comparable periods in
1998. The increase in development fees resulted primarily from an increased
number of participating insurance companies whose integration with the InsWeb
online insurance marketplace became operational during the nine months ended
September 30, 1999, compared to the
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comparable period in 1998. Maintenance fees increased as a result of the
expansion in the overall number of InsWeb's participating insurance companies.
OPERATING EXPENSES
PRODUCT DEVELOPMENT. Product development expenses increased to $2.8 million
and $6.6 million for the three and nine months ended September 30, 1999,
respectively from $1.2 million and $3.3 million for the comparable periods in
1998. This increase was primarily attributable to the hiring of personnel to
support the requirements of InsWeb's growing network of participating insurance
companies and online relationships and to design, test and deploy InsWeb's
expanding line of product offerings.
SALES AND MARKETING. Sales and marketing expenses increased to $10.3
million and $22.4 million for the three and nine months ended September 30,
1999, respectively, from $2.2 million and $6.0 million for the comparable
periods in 1998. This increase was due to substantial increases in consumer
marketing expenses, including increased costs and fees associated with new and
existing online relationships, costs related to national radio and television
campaigns, an increase in sales and marketing personnel and operating costs
associated with establishing InsWeb's customer care center to provide additional
customer service, as well as associated insurance agency activities.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
to $4.2 million and $9.9 million for the three and nine months ended
September 30, 1999, respectively, from $1.7 million and $4.7 million for the
comparable periods in 1998. This increase was primarily due to increased
personnel and related costs, increased office and occupancy costs associated
with additional leased office facilities and increased depreciation related to
capital expenditures.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets during
the three and nine months ended September 30, 1999 were $782,000 and $2.3
million, respectively. This amount was attributable to the acquisition of
Benelytics in December 1998.
INTEREST INCOME (EXPENSE), NET
Interest income (expense), net includes income earned on InsWeb's invested
cash and expense related to its outstanding debt obligations. Net interest
income for the three and nine months ended September 30, 1999 was $1,110,000 and
$925,000, respectively, compared to net interest expense of $(370,000) and
$(580,000) for the comparable periods in 1998. The increase in net interest
income was primarily a result of the repayment of the line of credit and the
investment of the proceeds from the issuances of preferred and common stock.
LIQUIDITY AND CAPITAL RESOURCES
InsWeb has financed its operations primarily through private placements of
equity securities, borrowings from an affiliate of one of its investors and an
initial public offering of its common stock, which raised net proceeds of
$89.6 million in July 1999. At September 30, 1999, InsWeb's principal source of
liquidity was $104.2 million in cash, cash equivalents and short-term
investments.
In each period, the use of cash primarily consisted of InsWeb's operating
loss before noncash items. For the nine months ended September 30, 1999, net
cash used in operating activities was $23.8 million compared to $11.6 million in
the comparable period in 1998. For the nine months ended September, 1999,
noncash items included amortization of intangibles of $2.3 million associated
with the acquisition of Benelytics, Inc. in December, 1998. Increases in
accounts receivable and deposits, partially offset by increases in accounts
payable and accrued expenses, also contributed to the cash used in operations
for the nine months ended September 30, 1998 and 1999.
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For the nine months ended September 30, 1999, net cash used in investing
activities primarily consisted of the purchase of short-term investments with
the proceeds from the issuances of preferred and common stock. Net cash used in
investing activities was $59.0 million in the first nine months of 1999 and $3.7
million for the comparable period in 1998. Net cash used in investing activities
for nine months ended September 1998 primarily consisted of investments in
leasehold improvements and purchases of equipment and furniture.
At September 30, 1999, InsWeb had no material commitments for capital
expenditures but expects such expenditures to total approximately $5.0 million
in 1999 primarily consisting of equipment, software, furniture and leasehold
improvements. In October 1999, InsWeb signed a 12-year lease agreement through
2011, which, in conjunction with all other lease agreements, has total minimum
lease obligations of $111.3 million. InsWeb also expects to spend approximately
$4.6 million in leasehold improvements in fiscal year 2000 related to this new
facility. In addition, under various marketing agreements with its online
partners, InsWeb is obligated to make minimum payments totaling $10.3 million
through April 2001.
YEAR 2000 READINESS
Year 2000 issues may adversely affect InsWeb's business. Many existing
computer programs and installed computer systems include computer code that uses
only two digits to identify a year. These systems could fail to function or
produce delayed or erroneous results if they interpret "00" to mean 1900 rather
than 2000. As a result of this problem, commonly referred to as the "year 2000"
problem, older computer programs or systems may need to be upgraded or replaced.
Any year 2000-related failure of InsWeb's internal systems, the systems that
carry Internet traffic on InsWeb's online marketplace or those of insurance
companies or online companies with which it has relationships could harm its
business.
InsWeb has implemented a year 2000 program to review and assure the year
2000 readiness of InsWeb's information technology, or IT, systems, which consist
of a combination of internally-developed software and third-party software and
hardware. The year 2000 program is being run by a year 2000 team led by members
of InsWeb's senior management and technical staff.
InsWeb has internally developed most of the systems used in the operation of
its online insurance marketplace and believes that its internally-developed
software is year 2000 compliant. These systems include software used to
interconnect InsWeb with the IT systems of its participating insurance companies
and software that runs InsWeb's consumer interaction and transaction processing
functions. InsWeb has completed its assessment of these systems and is in the
process of addressing the limited remediation issues identified during that
phase. InsWeb completed all significant remediation and testing work on these
systems before the end of the third quarter of 1999 and expects to complete
final testing by December 17, 1999.
InsWeb is also assessing the year 2000 readiness of its third-party-supplied
hardware and software. The failure of such software and systems to be year 2000
compliant could adversely impact InsWeb's internal business functions as well as
the operation of its website. As part of its assessment program, InsWeb has
contacted third-party vendors and licensors of software and computer technology
to seek their assurance that their products and services are year 2000
compliant. InsWeb has been informed by the vendors of InsWeb's material
third-party software and hardware components that the products being used by
InsWeb are year 2000 compliant. The assessment process was substantially
completed during the first quarter of 1999. InsWeb expects to fix, replace or
upgrade any noncompliant components by November 30, 1999.
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In addition, InsWeb is performing full end-to-end testing of all key
business functions in a closed, simulated operating environment each calendar
quarter to ensure that hardware and software systems previously verified to be
year 2000 compliant maintain such compliance as changes are made to these
systems.
To date, InsWeb has not incurred any material expenditures in connection
with the assessment of its year 2000 readiness and related remediation. Most of
its expenses have consisted of personnel costs that have been incurred since
October 1998 and have been expensed as incurred. The total expenses associated
with the completion of InsWeb's assessment program and any further remediation
that may be required is inherently difficult to determine, although InsWeb
currently expects that the total amount of such expenses will be approximately
$700,000.
The year 2000 readiness of the general infrastructure necessary to support
InsWeb's operations is difficult to assess. For instance, InsWeb depends on the
integrity and stability of the Internet to provide its services. InsWeb also
depends on the year 2000 compliance of the computer systems used by insurance
companies and online companies with which it has relationships as well as the
computer networks and services used by consumers who seek to use InsWeb's online
marketplace. Thus, the infrastructure necessary to support InsWeb's operations
consists of a network of computers and telecommunications systems located
throughout the United States and operated by numerous unrelated entities and
individuals, none of which has the ability to control or manage the potential
year 2000 issues that may impact the entire infrastructure. InsWeb's ability to
assess the reliability of this infrastructure is limited and is based solely on
generally available news reports, surveys and similar industry data. Based on
these sources, InsWeb believes that most entities and individuals that rely
significantly on the Internet are carefully reviewing and attempting to
remediate issues relating to year 2000 compliance, but it is not possible to
predict whether these efforts will be successful in reducing or eliminating the
potential negative impact of the year 2000 problem. A significant disruption in
the ability of consumers to reliably access the Internet or portions of it would
have an adverse effect on demand for InsWeb's services and would harm its
business.
InsWeb believes that its most reasonably likely worst-case scenarios related
to the year 2000 problem are:
- a significant year 2000 problem encountered by one or more of InsWeb's key
participating insurance companies whose systems are linked electronically
to InsWeb's online insurance marketplace, which could result in such
companies' quotes being unavailable on the online marketplace, or in the
inability of such companies to respond to consumers' requests for
coverage;
- a significant year 2000 problem encountered by one or more online
companies with which InsWeb has a relationship, which could result in a
material reduction in consumer traffic to InsWeb's online insurance
marketplace; or
- a failure of or degradation in performance due to year 2000 issues
encountered by a substantial proportion of the systems that carry Internet
traffic, which could adversely affect traffic to and performance of
InsWeb's website.
InsWeb's contingency plan in the event of a significant problem on the part
of a participating insurance company is to remove that company from the online
marketplace until the problem is addressed. InsWeb has not yet developed and
does not intend to develop contingency plans to address its other potential
worst-case scenarios because, in the case of its own systems, it believes such
systems are year 2000 compliant, and, in the case of systems of online companies
with which InsWeb has relationships and the systems that carry Internet traffic,
it knows of no practical way to overcome a failure of such a system that
materially affects the operation of the online marketplace. Any year
2000-related failure of the mission-critical systems of InsWeb, or any insurance
companies or online
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companies with which InsWeb has relationships or a failure of a substantial
proportion of the systems that carry Internet traffic could result in a
significant slowdown in the rate at which traffic is transmitted to or from
InsWeb's website, a reduction in the traffic that is directed to InsWeb's
website by other online companies, or a temporary shut-down of its online
marketplace, any of which could materially harm InsWeb's business.
FACTORS THAT MAY AFFECT OUR FUTURE PERFORMANCE
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE DID NOT BEGIN TO GENERATE
SIGNIFICANT REVENUES FROM OUR CORE BUSINESS UNTIL 1998
We were incorporated in February 1995, but we did not begin to generate
significant transaction fees from our online marketplace until 1998. Our limited
operating history makes an evaluation of our future prospects very difficult. An
investor in our common stock must consider the uncertainties frequently
encountered by early stage companies in new and rapidly evolving markets. These
uncertainties include:
- an evolving and unpredictable business model, which makes prediction of
future results uncertain and an investment in our common stock highly
speculative;
- the lack of a well-developed brand identity, which may limit our ability
to draw consumers to our website;
- the potential development of comparable services by competitors, which may
reduce our market share;
- the uncertainty of the extent to which the consumer market will adopt the
Internet as a medium for comparison shopping for insurance, which may
limit our ability to generate revenue from consumers that visit our online
marketplace; and
- our potential inability to successfully manage our anticipated growth,
which could lead to management distractions and increased operating
expenses.
To address these uncertainties, we must, among other things:
- enhance the brand identity of our online insurance marketplace;
- maintain and increase our strategic alliances with other online businesses
to increase traffic to our website;
- maintain, increase and geographically diversify our base of participating
insurance companies;
- continue to ensure that our participating insurance companies offer
competitive insurance products;
- satisfy legal and regulatory requirements applicable to the insurance
industry; and
- continue to address consumer privacy concerns.
Our business strategy may not be successful and we may not be able to
successfully address these uncertainties. Moreover, our ability to take the
foregoing steps may be hampered by our limited financial resources should we
fail to rapidly increase revenues or should increased revenues be more than
offset by increased operating expenses.
WE HAVE A HISTORY OF LOSSES, WE EXPECT FUTURE LOSSES AND WE MAY NOT ACHIEVE OR
MAINTAIN PROFITABILITY
Given planned investment levels, our ability to achieve profitability will
depend upon our ability to generate and sustain substantially increased
revenues. As a result, we believe that we will incur substantial operating
losses for the foreseeable future. We incurred operating losses of $21.9 million
for
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the year ended December 31, 1998 and $25.9 million for the nine months ended
September 30, 1999, and as of September 30, 1999, our accumulated deficit was
$63.4 million. We intend to make significant expenditures related to marketing,
hiring of additional personnel and development of our website, technology and
infrastructure. Although we have experienced significant revenue growth in
recent periods, this growth rate is not sustainable and will decrease in the
future. Our operating results for future periods are subject to numerous
uncertainties, and we may not achieve sufficient revenues to become profitable.
Even if we achieve profitability, we may not sustain or increase profitability
on a quarterly or annual basis in the future. If we are unable to achieve
profitability, we will need to seek additional financing to continue our
business operations. Such financing could be on terms that are dilutive to our
existing stockholders or could involve the issuance of securities that have
rights and preferences that are senior to those associated with our common
stock. Moreover, if such financing were not available or were available only
upon terms that were unacceptable to us, we could be required to significantly
curtail our operations.
OUR FUTURE REVENUES ARE UNPREDICTABLE, OUR OPERATING RESULTS ARE LIKELY TO
FLUCTUATE FROM QUARTER TO QUARTER, AND IF WE FAIL TO MEET THE EXPECTATIONS OF
SECURITIES ANALYSTS OR INVESTORS, OUR STOCK PRICE COULD DECLINE SIGNIFICANTLY
Due to our limited operating history, the emerging nature of the market in
which we compete and the high proportion of our revenues that are derived from
consumer traffic on our website, our future revenues are inherently difficult to
forecast. We believe that period-to-period comparisons of our operating results
may not be meaningful, and you should not rely upon them as an indication of our
future performance. Moreover, our expense levels are based largely on our
investment plans and estimates of future revenues. We may be unable to adjust
our spending to compensate for an unexpected shortfall in revenues. Accordingly,
any significant shortfall in revenues relative to our planned expenditures would
harm our results of operations and could cause our stock price to fall sharply,
particularly following quarters in which our operating results fail to meet the
expectations of securities analysts or investors.
Factors that may cause fluctuations in our operating results include the
following, many of which are outside our control:
- We may experience consumer dissatisfaction with our online marketplace as
we add or change features, or as the insurance coverage offered by
participating insurance companies varies;
- Consumer traffic on our online marketplace may decline as a result of the
announcement or introduction of a competing online insurance marketplace
or other new websites, products or services offered by our competitors;
- Such consumer traffic may also fluctuate as a result of changes in
consumer acceptance of Internet commerce, particularly in connection with
shopping for insurance;
- Our revenues may be harmed if we lose a significant insurance company
relationship or if any of our participating insurance companies merge with
one another;
- Use of the Internet by consumers may fluctuate due to seasonal factors or
other uncontrollable factors affecting consumer behavior and may be
affected by occasional slow Internet performance due to technical problems
or traffic bottlenecks on the network;
- Our ability to convert site visits into transaction fees and/or revenue
from insurance agency activities may fluctuate due to changes in our user
interface or other features on our site or changes in the filtering
criteria used by our participating insurance companies to determine which
consumers will be offered quotes; and
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- Our ability to generate transaction fees and/or revenue from insurance
agency activities may also be harmed due to technical difficulties on our
website that hamper a consumer's ability to start or complete a shopping
session.
SEASONALITY AFFECTING INSURANCE SHOPPING AND INTERNET USAGE MAY CAUSE
FLUCTUATIONS IN OUR OPERATING RESULTS
We have in the past experienced some seasonality in our business and expect
to continue to experience seasonality as our business matures. If this occurs,
investors may not be able to predict our annual operating results based on a
quarter-to-quarter comparison of our operating results. We believe seasonality
will have some impact on our business, however, to date, our quarter-to-quarter
growth in revenues has offset any effects due to seasonality, and therefore it
has not been possible thus far to assess the degree to which our business may be
seasonal.
BECAUSE SUBSTANTIALLY ALL OF OUR REVENUE IS ATTRIBUTABLE TO AUTOMOBILE INSURANCE
SHOPPING ON OUR ONLINE MARKETPLACE, WE ARE ESPECIALLY VULNERABLE TO RISKS
RELATED TO THE ONLINE MARKET FOR AUTOMOBILE INSURANCE OR THE AUTOMOBILE
INSURANCE INDUSTRY GENERALLY
Automobile insurance accounted for approximately 75% of our revenues in the
year ended December 31, 1998 and approximately 82% in the nine months ended
September 30, 1999. We anticipate that automobile insurance will continue to
account for a substantial portion of our revenues for the foreseeable future. As
a result, if we fail to attract a broad base of consumers to shop for automobile
insurance on our site, or if changes in the automobile insurance industry make
electronic commerce a less attractive means to shop for this type of insurance,
our ability to generate revenue will be reduced and our business will be harmed.
In addition, our business is likely to be affected by any events or changes that
affect the automobile insurance industry as a whole.
IF WE ARE UNABLE TO PROMOTE OUR BRAND AND EXPAND OUR BRAND RECOGNITION, OUR
ABILITY TO DRAW CONSUMERS TO OUR WEBSITE WILL BE LIMITED
A growing number of websites offer services that are similar to and
competitive with the services offered on our online insurance marketplace.
Therefore, establishing and maintaining our brand is critical to attracting
additional consumers to our website, strengthening our relationships with
participating insurance companies and attracting new insurance companies. If our
brand does not achieve positive recognition in the market, our ability to draw
consumers to our website will be limited. In order to attract and retain
consumers and insurance companies and to promote and maintain our brand, we have
increased and intend to continue to increase our financial commitment to
creating and maintaining prominent brand awareness. We currently use online
advertising and marketing, and print, radio and television advertisements in
national and key local markets to promote our brand. In addition, we are
continuously expanding our offline mass-marketing campaign, which includes
increasing spending on a combination of radio, television and print media. In
September 1999, we announced our intention to commit at least $75 million over
the next two years in support of our consumer marketing program including these
advertising initiatives. If our marketing efforts do not generate a
corresponding increase in revenues or we otherwise fail to successfully promote
our brand, or if these efforts require excessive expenditures, our business will
be harmed. Moreover, if visitors to our website do not perceive our existing
services or the products and services of our participating insurance companies
to be of high quality, or if we alter or modify our brand image, introduce new
services or enter into new business ventures that are not favorably received,
the value of our brand could be harmed.
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OUR PLANS TO EXPAND OUR OPERATIONS COULD RESULT IN SIGNIFICANT EXPENDITURES, AND
WE MAY NOT GENERATE SUFFICIENT REVENUE TO OFFSET THESE EXPENDITURES
We intend to expand our operations by, among other things:
- offering new and complementary products and/or services such as performing
selected activities on behalf of insurance companies as an authorized
agent, small group health insurance and small business property and
casualty insurance;
- adding new insurance companies and helping our existing insurance
companies to expand the number of states in which they are offering
coverage in our online marketplace;
- increasing the level of technology integration between our platform and
the systems of our participating insurance companies;
- expanding our geographic coverage outside the United States; and
- extending our market presence through relationships with Internet portals,
financial institutions, websites oriented to activities that involve the
purchase of insurance, such as automobile shopping sites, and other online
companies.
We may not be able to accomplish this expansion in a cost-effective or
timely manner, or these efforts may not increase the overall market acceptance
of our products and services. Expansion of our operations in this manner could
also require significant additional expenditures and strain our management,
financial and operational resources. The lack of market acceptance of these
efforts, regulatory issues, or our inability to generate enough revenue from
these expanded services or products to offset their cost could harm our
business.
COMPETITION IN THE MARKET FOR ONLINE DISTRIBUTION OF INSURANCE IS INTENSE, AND
IF WE ARE UNABLE TO COMPETE EFFECTIVELY WITH CURRENT COMPETITORS OR NEW
COMPETITORS THAT ENTER THE MARKET, THE FEES PAID TO US BY PARTICIPATING
INSURANCE COMPANIES MAY FALL, THE FEES CHARGED BY ONLINE COMPANIES WITH WHICH WE
HAVE STRATEGIC RELATIONSHIPS MAY RISE, AND OUR MARKET SHARE MAY SUFFER
The online insurance distribution market is a new industry and, like the
broader electronic commerce market, is rapidly evolving and is highly
competitive. Increased competition, particularly by companies offering online
insurance distribution, could reduce the fees we are able to charge our
participating insurance companies or increase the fees we are required to pay to
online companies with which we have strategic relationships, resulting in
reduced margins or loss of market share, any of which could harm our business.
Some of our current competitors have longer operating histories, larger
customer bases, greater brand recognition and significantly greater financial,
marketing and other resources than we do. In addition, we believe we will face
increasing competition as the online financial services industry develops and
evolves. Our current and future competitors may be able to:
- undertake more extensive marketing campaigns for their brands and
services;
- devote more resources to website and systems development;
- adopt more aggressive pricing policies; and
- make more attractive offers to potential employees, online companies and
third-party service providers.
- Accordingly, we may not be able to maintain or grow consumer traffic to
our website and our base of participating insurance companies, our
competitors may grow faster than we do, or companies with whom we have
strategic relationships may discontinue their relationships with us, any
of which would harm our business.
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IF OUR PARTICIPATING INSURANCE COMPANIES DO NOT CONTINUE TO PROVIDE HIGH-QUALITY
PRODUCTS AND SERVICE TO CONSUMERS, OUR BRAND WILL BE HARMED AND OUR ABILITY TO
ATTRACT CONSUMERS TO OUR WEBSITE WILL BE LIMITED
Our ability to provide a high-quality shopping experience to consumers
depends in part on the quality of the products and services consumers receive
from our participating insurance companies, including timely response to
requests for quotes or coverage. If our participating insurance companies do not
provide consumers with high-quality products and services, the value of our
brand may be harmed and the number of consumers using our services may decline.
We have from time to time received complaints from consumers who have not
received a timely response to a request for an insurance quote. Although we have
taken steps and proposed methods to encourage our participating insurance
companies to be responsive to consumer requests, these steps and/or proposed
methods may not be successful. In addition, if any of our major participating
insurance companies were to discontinue their business, be downgraded by
insurance company rating services or be financially harmed by trends in the
insurance industry, our brand may be harmed.
BECAUSE SEVERAL OF THE INSURANCE COMPANIES WITH WHICH WE HAVE RELATIONSHIPS ARE
MAJOR STOCKHOLDERS OR ARE ASSOCIATED WITH MEMBERS OF OUR BOARD OF DIRECTORS, WE
MAY FIND IT DIFFICULT TO TERMINATE OR SUSPEND THE PARTICIPATION OF ONE OF THESE
INSURANCE COMPANIES BASED UPON THE QUALITY OF ITS SERVICE. THIS COULD, IN TURN,
CAUSE THE QUALITY OF OUR SERVICES TO DECREASE AND HARM OUR BRAND IMAGE WITH
CONSUMERS
Several insurance companies participating in our online marketplace own
significant portions of our outstanding stock, are affiliated with members of
our board of directors or have close business relationships with members of our
board. One insurance company, Nationwide, holds 9.2% of our outstanding common
stock, and Richard D. Headley, senior vice president and chief information
officer of Nationwide Insurance Enterprise, an affiliate of Nationwide, is a
member of our board. Another insurance company, CNA, is affiliated with
Insurance Information Exchange, L.L.C., which holds 7.2% of our outstanding
common stock. David W. Wroe, Senior Vice President and Chief Technology Officer
of the CNA insurance companies, is a member of our board. Most of our other
outside directors are affiliated with companies, such as insurance brokerage
firms, that may have substantial business dealings with many of the insurance
companies with which we have relationships. As a result of such affiliations or
relationships, we may find it difficult to terminate or suspend the
participation of one of these insurance companies based upon the quality of its
service. This could, in turn, cause the quality of our services to decrease and
harm our brand image with consumers.
BECAUSE A LIMITED NUMBER OF INSURANCE COMPANIES ACCOUNT FOR A MAJORITY OF OUR
REVENUES, THE LOSS OF A SINGLE INSURANCE COMPANY RELATIONSHIP COULD RESULT IN A
SUBSTANTIAL DROP IN OUR REVENUES
Revenues from State Farm, AIG and American Family accounted for
approximately 31%, 12% and 11%, respectively, of our revenues for the nine
months ended September 30, 1999, and revenues from State Farm, AIG and
RelianceDirect accounted for approximately 40%, 16% and 10%, respectively, of
our revenues for the year ended December 31, 1998. Should one of these insurance
companies cease to participate in our online marketplace, or should it change
its filtering criteria in a way that reduces the proportion of consumers that
are offered quotes from that insurance company, our operating results could be
materially harmed. Because of the broad market presence of some of our
participating insurance companies, we expect to continue to generate a
substantial portion of our revenues from a limited number of insurance companies
for the foreseeable future.
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IN MOST JURISDICTIONS, WE RELY ON THE PARTICIPATION OF A LIMITED NUMBER OF
INSURANCE COMPANIES ON OUR ONLINE MARKETPLACE, AND THE LOSS OF ANY OF THESE
INSURANCE COMPANIES COULD MAKE OUR ONLINE MARKETPLACE LESS ATTRACTIVE TO
CONSUMERS
Consumer demand for the services offered on our website in any jurisdiction
is substantially dependent upon the participation of competing brand-name
insurance companies offering competitive quotes for a given insurance product in
that jurisdiction. Accordingly, the success of our business depends on our
ability to attract and retain well-known insurance companies to participate in
our marketplace. Although we currently have relationships with 46 insurance
companies overall, in individual jurisdictions where competing quotes for
comparable products are available on our online marketplace, the number of
companies offering quotes ranges from two to 15. If we are unable to increase
the number of insurance companies that participate in our online marketplace,
particularly in the jurisdictions where we currently offer comparable insurance
products from only two or three insurance companies, we may not be able to
attract additional consumers or may lose our existing consumers to other online
competitors offering a wider variety of insurance companies. Of the 27
jurisdictions in which there are three or fewer insurance companies offering
automobile insurance quotes on our online marketplace, State Farm is a
participant in 23 jurisdictions and AIG is a participant in 13 jurisdictions. If
either of these insurance companies discontinued or significantly reduced its
participation in our online marketplace, the attractiveness of the marketplace
to consumers in these jurisdictions would be diminished.
In addition, we believe that there is a general trend toward consolidation
in the insurance industry. For example, Allstate Corp. recently announced an
agreement to acquire the personal lines business of CNA Financial Corp., one of
our participating insurance companies. In the jurisdictions where we currently
offer comparable insurance products from three or fewer insurance companies, the
loss of one or more of these companies, whether due to industry consolidation or
otherwise, could materially reduce the selection of insurance companies
available to consumers on our website, substantially reducing the attraction of
our online marketplace to consumers.
WE MAY HAVE DIFFICULTY INTEGRATING NEW INSURANCE COMPANIES INTO OUR ONLINE
MARKETPLACE, WHICH COULD HURT OUR ABILITY TO OFFER IMPROVED COMPARISON SHOPPING
OPPORTUNITIES AND THUS LIMIT THE ATTRACTIVENESS OF OUR SERVICE TO CONSUMERS
Integration of an insurance company into our online marketplace requires a
significant commitment of time and resources on our part and on the part of the
insurance company, and is a technologically difficult process. This integration
process typically takes from three to six months to complete and typically
requires us to expend between 160 and 2,000 man-hours. Potential participating
insurance companies may not be willing to invest the time and resources
necessary to achieve this integration, or we may not be able to overcome the
technological difficulties associated with, or devote the time and resources
necessary to, successfully integrate the insurance company into our online
marketplace.
WE DO NOT HAVE EXCLUSIVE RELATIONSHIPS OR LONG-TERM CONTRACTS WITH INSURANCE
COMPANIES, WHICH MAY LIMIT OUR ABILITY TO RETAIN THESE INSURANCE COMPANIES AS
PARTICIPANTS IN OUR MARKETPLACE AND MAINTAIN THE ATTRACTIVENESS OF OUR SERVICES
TO CONSUMERS
We do not have an exclusive relationship with any of the insurance companies
whose insurance products are offered on our online marketplace, and thus,
consumers may obtain quotes and coverage from these insurance companies without
using our website. Our participating insurance companies offer their products
directly to consumers through insurance agents, mass marketing campaigns or
through other traditional methods of insurance distribution. These insurance
companies can also offer their products and services over the Internet, either
directly to consumers or through one or more of our
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online competitors, or both. In addition, most of our agreements with our
participating insurance companies are cancelable at the option of either party
upon 90 days' notice or less.
TRAFFIC ON OUR WEBSITE IS HEAVILY DEPENDENT ON OUR ONLINE RELATIONSHIPS. THESE
RELATIONSHIPS MAY NOT GENERATE SUFFICIENT REVENUES TO JUSTIFY THE FEES WE PAY TO
ONLINE COMPANIES, AND OUR CONSUMER TRAFFIC MAY DECLINE IN THE EVENT AN ONLINE
RELATIONSHIP IS UNSUCCESSFUL
We rely on relationships with a variety of Internet portals, financial
institutions, and other online companies to attract consumers to our website. In
a typical arrangement, the online company includes a "link" on its website on
which a user can click to jump to our website or to a site that we operate under
the online company's name; as part of the arrangement, we typically pay the
online company a portion of the resulting transaction fees and in some cases a
fixed fee. These relationships may not continue to generate a substantial amount
of new traffic on our website, or the revenues generated by these relationships
may be insufficient to justify our payment obligations. Furthermore, the value
of these relationships is based on the continued positive market presence,
reputation and growth of these online companies' websites and services. Any
decline in the market presence, business or reputation of these online
companies' websites and services will reduce the value of these relationships to
us and could harm our business.
We have entered into an arrangement with Yahoo! Inc. under which our site is
the exclusive insurance site included in the Yahoo! Insurance Information
Center. In the nine months ended September 30, 1999, we received approximately
18% of our website traffic from our online relationship with Yahoo!, and
approximately 43% of our traffic from all of our online relationships combined.
Our ability to increase our revenues will depend, in part, on increased traffic
to our website that we expect to generate through these online relationships.
Our relationships with online companies typically have a 12-month term and
do not provide us with automatic renewal rights upon termination. In addition,
these agreements are typically terminable by either party on 30 to 90 days'
notice. The termination, nonrenewal or renewal on unfavorable terms of a
relationship from which we generate significant traffic to our website, such as
our relationship with Yahoo!, would harm our business. Additionally, an online
company's failure to maintain efficient and uninterrupted operation of its
computer and communications hardware systems would likely reduce the amount of
traffic we receive from the company's site, harming our business.
LAWS AND REGULATIONS THAT GOVERN THE INSURANCE INDUSTRY COULD EXPOSE US, OR OUR
PARTICIPATING INSURANCE COMPANIES, OUR OFFICERS, OR AGENTS WITH WHOM WE CONTRACT
TO LEGAL PENALTIES IF WE FAIL TO COMPLY, AND COULD REQUIRE CHANGES TO OUR
BUSINESS
We perform functions for licensed insurance companies and are, therefore,
required to comply with a complex set of rules and regulations that often vary
from state to state. If we fail to comply with these rules and regulations, we,
an insurance company doing business with us, our officers, or agents with whom
we contract could be subject to various sanctions, including censure, fines, a
cease-and-desist order or other penalties. This risk, as well as changes in the
regulatory climate or the enforcement or interpretation of existing law, could
expose us to additional costs, including indemnification of participating
insurance companies for their costs, and could require changes to our business
or otherwise harm our business. Furthermore, because the application of online
commerce to the consumer insurance market is relatively new, the impact of
current or future regulations on InsWeb's business is difficult to anticipate.
21
<PAGE>
OUR INTENDED EXPANSION OF OUR BUSINESS WILL SUBJECT US TO ADDITIONAL REGULATIONS
WHICH MAY DELAY OR PREVENT OUR EXPANSION AND HARM OUR BUSINESS
We intend to expand our operations to include new products and services and
to offer existing and new products in new jurisdictions within and outside the
United States, which may require us to comply with additional laws and
regulations. If we fail to adequately comply with these laws and regulations,
our ability to offer some of our products or services in a particular
jurisdiction could be delayed or prevented and our business could be harmed. For
example, we recently introduced our automobile insurance shopping service in
several provinces in Canada. This expansion will require us to comply with the
laws and regulations of the various provinces or the Canadian national insurance
regulatory scheme. Compliance with these laws and regulations and those of other
jurisdictions into which we expand may require us to obtain appropriate business
licenses, make necessary filings and obtain necessary bonds, appoint foreign
agents and make periodic business reports.
IF WE ARE UNABLE TO SAFEGUARD THE SECURITY AND PRIVACY OF CONSUMERS' AND
PARTICIPATING INSURANCE COMPANIES' CONFIDENTIAL DATA, CONSUMERS AND INSURANCE
COMPANIES MAY NOT USE OUR SERVICES AND OUR BUSINESS MAY BE HARMED
A significant barrier to electronic commerce and communications is the
secure transmission of personally identifiable information of Internet users as
well as other confidential information over public networks. If any compromise
or breach of security were to occur, it could harm our reputation and expose us
to possible liability. A party who is able to circumvent our security measures
could misappropriate proprietary information or cause interruptions in our
operations. We may be required to make significant expenditures to protect
against security breaches or to alleviate problems caused by any breaches. To
date, we have experienced no breaches in our network security. We rely on
encryption and authentication technology licensed from third parties to provide
the security and authentication necessary to effect secure transmission of
confidential information, such as names, addresses, Social Security and credit
card numbers, user names and passwords and insurance company rate information.
Advances in computer capabilities, new discoveries in the field of cryptography,
or other events or developments could result in a compromise or breach of the
algorithms we use to protect consumers' and insurance companies' confidential
information.
UNCERTAINTY IN THE MARKETPLACE REGARDING THE USE OF INTERNET USERS' PERSONAL
INFORMATION, OR PROPOSED LEGISLATION LIMITING SUCH USE, COULD REDUCE DEMAND FOR
OUR SERVICES AND RESULT IN INCREASED EXPENSES
Concern among consumers and legislators regarding the use of personal
information gathered from Internet users could create uncertainty in the
marketplace. This could reduce demand for our services, increase the cost of
doing business as a result of litigation costs or increased service delivery
costs, or otherwise harm our business. Legislation has been proposed that would
limit the uses of personally identifiable information of Internet users gathered
online or require online services to establish privacy policies. Many state
insurance codes limit the collection and use of personal information by
insurance companies, agents, or insurance service organizations. Moreover, the
Federal Trade Commission has recently settled a proceeding against one online
service that agreed in the settlement to limit the manner in which personal
information could be collected from users and provided to third parties.
SYSTEM FAILURES COULD REDUCE OR LIMIT TRAFFIC ON OUR WEBSITE AND HARM OUR
ABILITY TO GENERATE REVENUE
Since launching our online marketplace, we have experienced occasional minor
system failures or outages which have resulted in the online marketplace being
out of service for a period ranging from several minutes to three hours while
our technicians brought backup systems online. We may experience further system
failures or outages in the future that could disrupt the operation of our
website and could harm our business. Our revenues depend in large part on the
volume of traffic on our website and, more particularly, on the number of
insurance quotes generated by our website in
22
<PAGE>
response to consumer inquiries. Accordingly, the performance, reliability and
availability of our website, quote-generating systems and network infrastructure
are critical to our reputation and our ability to attract a high volume of
traffic on our website and to attract and retain participating insurance
companies. Moreover, we believe that consumers who have a negative experience
with an electronic commerce website may be reluctant to return to that site.
Thus, a significant failure or outage affecting our systems could result in
severe long-term damage to our business.
IF WE DO NOT SUCCESSFULLY ENHANCE OR EXPAND OUR TECHNOLOGY INFRASTRUCTURE TO
ACCOMMODATE INCREASES IN THE VOLUME OF TRAFFIC ON OUR WEBSITE, OUR WEBSITE MAY
NOT PERFORM AT LEVELS THAT ARE SATISFACTORY TO CONSUMERS
We are continually enhancing and expanding our technology, quote generating
systems, network infrastructure and other technologies to accommodate a
substantial increase in the volume of traffic on our website. We may be
unsuccessful in these efforts or we may be unable to accurately project the rate
or timing of increases in the volume of traffic on our website. In addition, we
cannot predict whether additional network capacity will be available from third
party suppliers as we need it. Also, our network or our suppliers' networks
might be unable to timely achieve or maintain a sufficiently high capacity of
data transmission to timely process orders or effectively download data,
especially if our website traffic increases. Our failure to achieve or maintain
high capacity data transmission could significantly reduce consumer demand for
our services.
OUR FACILITIES AND SYSTEMS ARE VULNERABLE TO NATURAL DISASTERS AND OTHER
UNEXPECTED LOSSES, AND WE MAY NOT HAVE ADEQUATE INSURANCE TO COVER SUCH LOSSES
Our computer hardware operations are located in leased facilities in Redwood
City. A full backup system is located in Irvine, California. Each of these areas
is susceptible to earthquakes. If both of these locations experienced a system
failure, the performance of our website would be harmed. These systems are also
vulnerable to damage from fire, floods, power loss, telecommunications failures,
break-ins and similar events. If we seek to replicate our systems at other
locations, we will face a number of technical challenges, particularly with
respect to database replications, which we may not be able to address
successfully. Although we carry property and business interruption insurance,
our coverage may not be adequate to compensate us for all losses that may occur.
Our servers may also be vulnerable to computer viruses, physical or electronic
break-ins and similar disruptions.
WE MAY EXPERIENCE TECHNOLOGICAL PROBLEMS OR SERVICE INTERRUPTIONS WITH
INDIVIDUAL INSURANCE COMPANIES, WHICH COULD HARM THE QUALITY OF SERVICE ON OUR
WEBSITE
Several of our participating insurance companies have chosen a technical
solution that requires that our Web servers communicate with these insurance
companies' computer systems in order to perform the filtering and risk analysis
functions required to generate quotes. Thus, the availability of quotes from a
given insurance company may depend in large part upon the reliability of that
insurance company's own computer systems, over which we have no control. A
malfunction in an insurance company's computer system or in the Internet
connection between our Web servers and the insurance company's system, or an
excess of data traffic on that system could result in a delay in the delivery of
e-mail quotes or could cause an insurance company that provides instant quotes
to go offline until the problem can be remedied. Further, a computer malfunction
could cause an insurance company to quote erroneous rates, in which case the
insurance company would be required to take itself offline until the malfunction
can be corrected. Any technological problems with or interruption of
communications with an insurance company's computer systems could materially
reduce the number of competing insurance companies available to provide quotes,
and therefore the level of service perceived by consumers, on our online
marketplace.
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<PAGE>
OUR RECENT GROWTH HAS PLACED A SIGNIFICANT STRAIN ON OUR MANAGEMENT, SYSTEMS AND
RESOURCES, AND WE MAY EXPERIENCE DIFFICULTIES IN MANAGING OUR EXPECTED GROWTH IN
THE FUTURE
We are currently experiencing growth and expansion which has placed, and
will likely continue to place, a strain on our administrative, operational and
financial resources and increased demands on our systems and controls. If our
management is unable to manage this growth effectively, our business will be
harmed. This growth has resulted in a continuing increase in the level of
responsibility for our management personnel. We anticipate that continued growth
will require us to recruit, hire, train and retain a substantial number of new
managerial, technical, sales and marketing personnel. Of our 268 employees as of
September 30, 1999, 203 have been with us less than 18 months, and we expect
that our rate of hiring will continue at a very high pace. Our ability to manage
our growth successfully will also require us to continue to expand and improve
our operational, management and financial systems and controls on a timely
basis.
WE RELY ON THE SERVICES OF OUR EXECUTIVE OFFICERS AND OTHER KEY PERSONNEL, WHOSE
KNOWLEDGE OF OUR BUSINESS AND THE INSURANCE INDUSTRY AND TECHNICAL EXPERTISE
WOULD BE EXTREMELY DIFFICULT TO REPLACE
Our future success is substantially dependent on the continued services and
continuing contributions of our senior management and other key personnel,
particularly Hussein A. Enan, our Chairman, President and Chief Executive
Officer. The loss of the services of any of our executive officers or other key
employees could harm our business. We have no long-term employment agreements
with any of our key personnel other than Mr. Enan, whose employment agreement
expires in July 2002. We maintain a $2 million life insurance policy on
Mr. Enan that names us as the beneficiary, but maintain no similar insurance on
any of our other key employees.
BECAUSE OF INTENSE COMPETITION FOR TECHNICAL PERSONNEL, WE MAY NOT BE ABLE TO
RECRUIT OR RETAIN NECESSARY PERSONNEL, WHICH COULD SLOW THE PROCESS OF ADDING
NEW INSURANCE COMPANIES TO OUR WEBSITE OR OTHERWISE HARM OUR BUSINESS
Our future success depends on our continuing to attract, retain and motivate
highly skilled employees, particularly with respect to technology development
and implementation, including integration of insurance companies into our online
marketplace. If we are not able to attract and retain new personnel,
particularly to expand our technology development and implementation team, our
business will be harmed. The implementation of new insurance companies on our
site is a technologically complex and labor-intensive process. Accordingly, any
difficulty we face in attracting and retaining talented development and
implementation personnel could slow the process of adding new insurance
companies to our online marketplace and therefore limit our ability to increase
the attractiveness of our services to consumers. Competition for personnel in
our industry is intense. We may be unable to retain our key employees or
attract, assimilate or retain other highly qualified employees in the future. We
have from time to time experienced, and we expect to continue to experience in
the future, difficulty in hiring and retaining employees with appropriate
qualifications.
OUR SUCCESS DEPENDS ON CONTINUED GROWTH OF ELECTRONIC COMMERCE, WHICH MAY NOT
ACHIEVE BROAD ACCEPTANCE BY CONSUMERS
Our future revenues and profits are substantially dependent upon the
widespread acceptance and use of the Internet by consumers as an effective
medium for commerce. Rapid growth in the use of the Internet is a recent
phenomenon, and it may not continue, or the Internet may not be adopted as a
medium of commerce by a broad base of consumers. If a broad base of consumers do
not adopt the Internet as a medium of commerce, our business may fail.
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<PAGE>
OUR SUCCESS DEPENDS ON THE WILLINGNESS OF CONSUMERS TO SHOP FOR INSURANCE ON THE
INTERNET INSTEAD OF BY MORE TRADITIONAL MEANS; CONSUMERS MAY NOT BE WILLING TO
DO THIS
Shopping for insurance on the Internet is a relatively untested concept, and
if it does not gain widespread acceptance, our business may fail. Demand and
market acceptance for recently introduced services and products on the Internet
are subject to a high level of uncertainty, and there are few proven services
and products. Our success will depend on our ability to engage consumers who
have historically shopped for insurance through traditional distribution
channels. In order for us to be successful, many of these consumers must be
willing to utilize new ways of conducting business and exchanging information.
In addition, a substantial proportion of the consumers who use our website may
be using our service because it is new and different rather than because they
believe that it offers a better way to shop for insurance. Such consumers may
use our service only once or twice and then return to more familiar means of
shopping for insurance.
IF THE INTERNET DOES NOT CONTINUE TO DEVELOP AND RELIABLY SUPPORT THE DEMANDS
PLACED ON IT BY ELECTRONIC COMMERCE AND OTHER HIGH-VOLUME APPLICATIONS, OUR
BUSINESS WILL SUFFER
The Internet may not become a viable medium for commerce or comparison
insurance shopping for a number of reasons, including potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and performance improvements. If the Internet continues to
experience significant growth in the number of users, levels of traffic or
networks' capacities for transmitting large amounts of data, the Internet's
infrastructure may not be able to support the demands placed upon it. The
Internet has experienced a variety of outages and other delays as a result of
damage to portions of its infrastructure, and it could face additional outages
and delays in the future. These delays might include outages and delays
resulting from year 2000 readiness issues. If the systems supporting the
Internet infrastructure are not year 2000 ready, our business could be seriously
harmed. These outages and delays could reduce the level of traffic and therefore
the number of consumer insurance inquiries on our website. In addition, the
Internet could lose its viability due to delays in the development or adoption
of new standards and protocols required to handle increased levels of Internet
activity, or due to increased governmental regulation. Changes in or
insufficient availability of telecommunications services to support the Internet
could also result in slower response times and reduced use of the Internet.
REGULATION OF THE INTERNET IS UNSETTLED, AND FUTURE REGULATIONS COULD INHIBIT
THE GROWTH OF THE INTERNET AND OTHERWISE HARM OUR BUSINESS
The laws governing the Internet remain largely unsettled, even in areas
where there has been some legislative action. Furthermore, the growth and
development of the market for electronic commerce may prompt the enactment of
more stringent consumer protection laws that may impose additional burdens on
companies conducting business online. The adoption of additional laws or
regulations may inhibit the growth of the Internet as a medium for commerce and
comparison insurance shopping, which could, in turn, decrease demand for our
services, increase our cost of doing business, or otherwise harm our business.
In addition, applicability to the Internet of existing laws governing issues
including property ownership, copyrights and other intellectual property issues,
taxation, libel and personal privacy is uncertain. The vast majority of these
laws were adopted prior to the advent of the Internet and related technologies
and, as a result, do not contemplate or address the unique issues of the
Internet and related technologies.
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<PAGE>
OUR PLANNED INTERNATIONAL EXPANSION MAY BE DIFFICULT AND WILL EXPOSE US TO RISKS
ASSOCIATED WITH INTERNATIONAL OPERATIONS, INCLUDING RECESSIONS IN FOREIGN
ECONOMIES, DIFFICULTIES IN COLLECTIONS AND REGULATORY REQUIREMENTS
A component of our strategy is to expand our international operations.
However, our investments in establishing these operations may not produce enough
revenue to justify our investments. We have recently entered into a joint
venture to develop an online insurance marketplace in Japan through InsWeb Japan
K.K., of which we currently own a 25% equity interest. We also recently began
offering automobile insurance quoting services in some provinces of Canada. Our
international operations are subject to other inherent risks, including:
- the impact of recessions in foreign economies on the level of consumers'
insurance shopping and purchasing behavior;
- greater difficulty in accounts receivable collection and longer collection
periods;
- unexpected changes in regulatory requirements, particularly with respect
to the insurance industry;
- difficulties and costs of staffing and managing foreign operations;
- reduced protection for intellectual property rights in some countries;
- seasonal reductions in business activity during the summer months in
Europe and other parts of the world;
- potentially adverse tax consequences; and
- political and economic instability.
To the extent we do business with foreign insurance companies, our
international revenues may be denominated in foreign currencies. Accordingly,
fluctuations in currency exchange rates may reduce revenues from international
sales.
OUR PLANNED INTERNATIONAL EXPANSION MAY BE UNSUCCESSFUL AS A RESULT OF OUR
LIMITED EXPERIENCE WITH INTERNATIONAL OPERATIONS
We have limited experience with the insurance industry outside the United
States and with marketing and selling our products and services internationally.
Accordingly, our planned international expansion may not be successful. We
cannot be sure that we will be able to attract insurance companies in these or
other jurisdictions or that we will be able to successfully adapt our online
insurance marketplace model to the regulatory system of, and insurance products
and services offered in, these jurisdictions. In addition, competitors which
have greater local market knowledge or regulatory understanding may exist or
arise in other markets and impede our ability to successfully expand in these
markets.
OUR ENTRY INTO ADDITIONAL INTERNATIONAL MARKETS WILL REQUIRE SIGNIFICANT
MANAGEMENT ATTENTION AND FINANCIAL RESOURCES, WHICH MAY LESSEN OUR ABILITY TO
MANAGE OUR EXISTING BUSINESS EFFECTIVELY
Our entry into additional international markets will require significant
management attention and financial resources, which may lessen our ability to
manage our existing business effectively. Entry into new markets will involve
increases in the level of responsibility of our management personnel. It may
also require us to hire additional management personnel and integrate them with
our existing management team. Our ability to successfully enter into additional
markets will also require us to continue to expand and improve our operational
and management systems. If our management is unable to manage this process
effectively, or if expenses associated with such expansion are not offset by
revenues from such markets, our business will be harmed.
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<PAGE>
ANY ACQUISITIONS THAT WE UNDERTAKE, INCLUDING OUR RECENT ACQUISITION OF
BENELYTICS, INC., COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE
STOCKHOLDER VALUE AND HARM OUR OPERATING RESULTS
We may acquire or make investments in complementary businesses,
technologies, services or products if appropriate opportunities arise. For
example, in December 1998, we acquired Benelytics, Inc., a developer of employee
health benefits selection and management software and reference data products.
The process of integrating any acquired business, technology, service or product
into our business and operations may result in unforeseen operating difficulties
and expenditures. Integration of an acquired company also may consume much of
our management's time and attention that would otherwise be available for
ongoing development of our business. Moreover, the anticipated benefits of any
acquisition, including Benelytics, may not be realized. We currently do not have
any understandings, commitments or agreements with respect to any other material
acquisition, and we are not currently pursuing any other material acquisition.
We may be unable to identify, negotiate or finance future acquisitions
successfully, or to integrate successfully any acquisitions with our current
business. Future acquisitions could result in potentially dilutive issuances of
equity securities or the incurrence of debt, contingent liabilities or
amortization expenses related to goodwill and other intangible assets, any of
which could harm our business. For example, in connection with the Benelytics
acquisition, we recorded $7.3 million in goodwill, which will be amortized over
a period of three years, and $1.4 million to software and other intangible
assets, which will be amortized over two years.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS
We regard our intellectual property as critical to our success. We rely on
trademark, copyright and trade secret laws to protect our proprietary rights. We
have registered the INSWEB mark in the U.S. and have also applied for
registration in the U.S. of the InsWeb logo and the marks InsWeb.com,
Simplifying Your Insurance Decisions, Where You And Your Insurance Really Click,
EAgent, Benelytics and Powered by InsWeb. We have also applied for registration
of the InsWeb logo and the marks InsWeb and InsWeb.com in several foreign
jurisdictions, including Japan and Korea. We have patent applications on file in
the U.S. Our trademark registration and patent applications may not be approved
or granted, or, if granted, may be successfully challenged by others or
invalidated through administrative process or litigation. Notwithstanding these
laws, we may be unsuccessful in protecting our intellectual property rights or
in obtaining patents or registered trademarks for which we apply.
WE MAY BE SUBJECT TO CLAIMS FOR INFRINGEMENT OF INTELLECTUAL PROPERTY, WITH OR
WITHOUT MERIT, WHICH COULD BE COSTLY TO DEFEND OR SETTLE
We may from time to time be subject to claims of infringement of other
parties' proprietary rights or claims that our own trademarks, patents or other
intellectual property rights are invalid. We have been subject to infringement
claims in the ordinary course of business, including claims of alleged
infringement of the patent and trademark rights of third parties by us and
companies with which we have business relationships. Any claims of this type,
with or without merit, could be time consuming to defend, result in costly
litigation, divert management attention and resources or require us to enter
into royalty or license agreements. License agreements may not be available on
reasonable terms, if at all, and the assertion or prosecution of any
infringement claims could significantly harm our business.
WE INCORPORATE THIRD-PARTY TECHNOLOGIES AND SERVICES INTO OUR ONLINE
MARKETPLACE, AND IF THE PROVIDERS OF THESE TECHNOLOGIES AND SERVICES FAIL IN A
TIMELY MANNER TO DEVELOP, LICENSE OR SUPPORT TECHNOLOGY NECESSARY TO OUR
SERVICES, MARKET ACCEPTANCE OF OUR ONLINE MARKETPLACE COULD BE HARMED
We have incorporated technology developed by third parties into our online
marketplace, and we will continue to incorporate third-party technology in our
future products and services. We have limited control over whether or when these
third-party technologies will be developed or enhanced. If a third-
27
<PAGE>
party fails to timely develop, license or support technology necessary to our
services, market acceptance of our online marketplace could be harmed.
IF OUR INTERNAL SYSTEMS, OR THE INTERNAL SYSTEMS OF OUR PARTICIPATING INSURANCE
COMPANIES OR OTHER ONLINE COMPANIES, ARE NOT YEAR 2000 READY, THE OPERATION OF
OUR WEBSITE COULD BE DISRUPTED AND OUR BUSINESS COULD BE SERIOUSLY HARMED
Many existing computer programs and installed computer systems include
computer code that uses only two digits to identify a year. These systems could
fail to function or produce delayed or erroneous results if they interpret "00"
to mean 1900 rather than 2000. As a result of this problem, commonly referred to
as the "year 2000" problem, older computer programs or systems may need to be
upgraded or replaced. Any failure of our internal systems, the systems that
carry Internet traffic on our online marketplace or those of our participating
insurance companies or online companies with which we have relationships as a
result of the year 2000 problem could harm our business.
We know of no practicable way to overcome a third-party system failure or a
failure of the systems that carry Internet traffic. Because of this view, and
because we believe that our own mission-critical systems are year 2000
compliant, we have not developed and do not intend to develop contingency plans
to address our potential worst-case scenarios associated with a failure of such
systems related to the year 2000 problem. Any such failure could result in a
significant slowdown in the rate at which traffic is transmitted to or from our
website, a reduction in the traffic that is directed to our website by other
online companies, or a temporary shutdown of our online marketplace, any of
which would materially harm our business. See "Item 2: Management's Discussion
and Analysis of Financial Condition and Results of Operations--Year 2000
Readiness."
OUR STOCK PRICE MAY FLUCTUATE WIDELY, AND INTERNET STOCKS IN PARTICULAR HAVE
BEEN EXTREMELY VOLATILE
The trading price of our common stock has been highly volatile and may be
significantly affected by factors including actual or anticipated fluctuations
in our operating results, new products or new contracts by us or our
competitors, conditions and trends in the electronic commerce and insurance
industries, changes in financial estimates by securities analysts, general
market conditions and other factors. The trading prices of many Internet stocks
have experienced extreme price and volume fluctuations. These fluctuations often
have been unrelated or disproportionate to the operating performance of these
companies. These fluctuations may continue and could harm our stock price. Any
negative change in the public's perception of the prospects of Internet or
electronic commerce companies could also depress our stock price regardless of
our results.
DELAWARE LAW AND OUR CHARTER DOCUMENTS CONTAIN PROVISIONS THAT COULD DISCOURAGE
OR PREVENT A POTENTIAL TAKEOVER, EVEN IF SUCH A TRANSACTION WOULD BE BENEFICIAL
TO OUR STOCKHOLDERS
Provisions of Delaware law and our certificate of incorporation and bylaws
could make more difficult the acquisition of us by means of a tender offer, a
proxy contest, or otherwise, and the removal of incumbent officers and
directors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
InsWeb's exposure to market risk for changes in interest rates relates
primarily to InsWeb's investment portfolio. InsWeb places its investments with
high credit issuers in short-term securities with maturities of three to twenty
four months. The average maturity of the portfolio is expected not to exceed
twelve months. The portfolio includes only marketable securities with active
secondary or resale markets to ensure portfolio liquidity. InsWeb has no
investments denominated in foreign country currencies and therefore its
investment portfolio is not subject to foreign exchange risk.
28
<PAGE>
PART II: OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
The effective date of InsWeb's first registration statement, filed on Form
S-1 under the Securities Act of 1933 (File No. 333-78095) relating to InsWeb's
initial public offering of its Common Stock, was July 22, 1999. A total of
5,750,000 shares of InsWeb's common stock were sold to an underwriting
syndicate, including 750,000 shares sold upon exercise of the underwriters'
over-allotment option. The managing underwriter was Goldman, Sachs & Co. The
offering commenced and completed on July 22, 1999, at an initial public offering
price of $17.00 per share. The initial public offering resulted in gross
proceeds of $97.8 million, $6.8 million of which was applied to the underwriting
discount and approximately $1.3 million of which was applied to related
expenses. As a result, net proceeds of the offering to InsWeb were approximately
$89.6 million. Net proceeds of the initial public offering are being used to
promote InsWeb's brand, expand InsWeb's sales and marketing and for working
capital. $34.7 million of the net proceeds were applied to cash and cash
equivalents while $54.9 million was invested in short-term, interest-bearing,
investment-grade securities. None of the net proceeds of the offering were paid
by InsWeb, directly or indirectly, to any director, officer or general partner
of InsWeb or any of their associates, or to any persons owning ten percent or
more of any class of InsWeb's equity securities, or any affiliates of InsWeb.
Item 6. Exhibits and Reports on Form 8-K.
<TABLE>
<CAPTION>
EXHIBITS
(A) --------
<S> <C> <C>
27.1 Financial Data Schedule
</TABLE>
29
<PAGE>
INSWEB CORPORATION
(REGISTRANT)
<TABLE>
<S> <C>
Dated: November 12, 1999 /s/ STEPHEN I. ROBERTSON
--------------------------------------------
Stephen I. Robertson
Chief Financial Officer
</TABLE>
30
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
- ---------------------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
31
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001077370
<NAME> INSWEB CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 49,222
<SECURITIES> 54,948
<RECEIVABLES> 4,866
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 111,691
<PP&E> 9,429
<DEPRECIATION> 2,422
<TOTAL-ASSETS> 128,038
<CURRENT-LIABILITIES> 5,092
<BONDS> 1,402
0
0
<COMMON> 35
<OTHER-SE> 121,510
<TOTAL-LIABILITY-AND-EQUITY> 128,038
<SALES> 15,413
<TOTAL-REVENUES> 15,413
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 41,290
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 606
<INCOME-PRETAX> (25,190)
<INCOME-TAX> 0
<INCOME-CONTINUING> (25,190)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (25,190)
<EPS-BASIC> (1.25)
<EPS-DILUTED> (1.25)
</TABLE>
