<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO _________________________
COMMISSION FILE NUMBER 0-26083
------------
INSWEB CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3220749
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
901 MARSHALL STREET
REDWOOD CITY, CALIFORNIA 94063
(Address of principal executive offices)
-----------
(650) 298-9100
(Registrant's telephone number, including area code)
-----------------------------------
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, 2000 was 35,270,020 shares.
================================================================================
<PAGE>
FORM 10-Q
INSWEB CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------------
<S> <C>
PART I FINANCIAL INFORMATION
ITEM 1: Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2000 (unaudited)
and December 31, 1999 3
Condensed Consolidated Statements of Operations for the three and nine months ended
September 30, 2000 and 1999 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2000 and 1999 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 7
ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 11
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk 28
PART II OTHER INFORMATION
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>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------------- --------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,221,119 $ 25,688,760
Short-term investments 40,117,751 64,063,070
------------------- --------------------
Total cash, cash equivalents and short-term investments 55,338,870 89,751,830
Accounts receivable, net of allowance of $167,484 and $141,780 at
September 30, 2000 and December 31, 1999, respectively 3,236,507 4,267,691
Prepaid expenses and other current assets 5,991,330 2,974,024
------------------- --------------------
Total current assets 64,566,707 96,993,545
Property and equipment, net 9,522,794 7,356,863
Investment in joint venture 2,059,409 1,449,597
Intangible assets, net 39,999 5,568,094
Long-term investments 1,996,882 4,978,761
Deposits and other assets 1,810,335 1,934,045
Capitalized website development costs 664,289 -
------------------- --------------------
Total assets $ 80,660,415 $118,280,905
=================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 519,688 $ 288,974
Accrued expenses 4,258,944 4,891,332
Deferred revenue 460,496 182,618
Restructuring accrual 1,960,439 -
------------------- --------------------
Total current liabilities 7,199,567 5,362,924
Note payable to strategic partner 1,390,176 1,464,558
Deferred rent 480,847 268,601
------------------- --------------------
Total liabilities 9,070,590 7,096,083
------------------- --------------------
Stockholders' equity:
Convertible preferred stock, $0.001 par value.
Authorized: 5,000,000 shares, No shares issued or outstanding - -
Common stock, $0.001 par value. Authorized: 150,000,000
Issued and outstanding: 35,266,628 shares at September 30, 2000
and 34,742,760 shares at December 31, 1999 35,267 34,743
Paid-in capital 189,778,518 188,222,780
Accumulated other comprehensive income 61,572 112,843
Common stock warrants 113,071 113,071
Deferred stock compensation (861,472) (2,887,995)
Accumulated deficit (117,537,131) (74,410,620)
------------------- --------------------
Total stockholders' equity 71,589,825 111,184,822
------------------- --------------------
Total liabilities and stockholders' equity $ 80,660,415 $118,280,905
=================== ====================
</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,
-------------------------------- ---------------------------------
2000 1999 2000 1999
----------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Transaction fees $ 4,697,239 $ 6,261,388 $ 15,841,968 $ 13,584,779
Development and maintenance fees 615,231 766,521 2,872,200 1,808,515
Other revenues 9,166 13,734 33,019 20,166
----------- ----------- ------------ ------------
Total revenues 5,321,636 7,041,643 18,747,187 15,413,460
----------- ----------- ------------ ------------
Operating expenses:
Product development 1,655,948 2,783,413 7,227,840 6,552,816
Sales and marketing 6,995,352 10,306,281 31,013,566 22,446,632
General and administrative 5,421,121 3,892,603 15,771,475 9,023,421
Amortization of intangible assets 40,001 782,261 1,109,683 2,346,785
Amortization of stock-based compensation 185,696 340,039 796,468 920,543
Impairment of goodwill and other intangibles - - 4,418,412 -
Restructuring charge 615,769 - 5,026,111 -
----------- ----------- ------------ ------------
Total operating expenses 14,913,887 18,104,597 65,363,555 41,290,197
----------- ----------- ------------ ------------
Loss from operations (9,592,251) (11,062,954) (46,616,368) (25,876,737)
Other income (expense), net 132,217 (238,187) 35,649 (238,187)
Interest income, net 1,028,297 1,109,527 3,454,208 924,840
----------- ----------- ------------ ------------
Net loss $(8,431,737) $(10,191,614) $(43,126,511) $(25,190,084)
=========== =========== ============ ============
Net loss per share-basic and diluted $ (0.24) $ (0.36) $ (1.23) $ (1.25)
=========== =========== ============ ============
Weighted average shares used in computing net
loss per share-basic and diluted 35,238,431 28,476,646 35,099,625 20,220,488
=========== =========== ============ ============
Pro forma net loss per share-basic and diluted $ (0.31) $ (0.85)
=========== ============
Weighted average shares used in computing pro
forma net loss per share-basic and diluted 32,616,714 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 FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
-----------------------------------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (43,126,511) $ (25,190,084)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 2,588,197 1,066,636
Amortization of stock-based compensation 796,468 920,543
Write-down of fixed assets included in restructuring charge 1,268,891 -
Gain on sale of equipment 39,849 -
Foreign currency translation (gain) loss on note payable (74,382) 95,362
Amortization of intangible assets 1,109,683 2,346,785
Equity loss from joint venture 11,487 94,872
Impairment of goodwill 4,418,412 -
Changes in assets and liabilities:
Accounts receivable 1,031,184 (3,673,685)
Prepaid expenses and other current assets (3,017,306) (2,002,295)
Deposits and other assets 123,710 (292,818)
Accounts payable 230,714 1,755,488
Accrued expenses (632,388) 1,179,562
Restructuring accrual 1,960,439 -
Deferred revenue 277,878 (64,759)
Deferred rent 212,246 -
-----------------------------------------
Net cash used in operating activities (32,781,429) (23,764,393)
-----------------------------------------
Cash flows from investing activities:
Purchases (redemptions) of investments - net 26,973,329 (54,947,784)
Purchases of property and equipment (6,074,019) (4,075,754)
Investment in joint venture (707,550) -
Capitalized website development costs (664,289) -
-----------------------------------------
Net cash provided by (used in) investing activities 19,527,471 (59,023,538)
-----------------------------------------
Cash flows from financing activities:
Proceeds from issuance preferred stock - net - 56,279,304
Proceeds from issuance of common stock - 89,857,657
Proceeds from exercise of stock options 1,850,368 1,350,608
Proceeds from stock issued from Employee Stock Purchase Plan 935,949 -
Payment to Series B stockholder - (4,500,000)
Payment of note payable to officer - (25,000)
Payments on line of credit from affiliate - (19,290,000)
-----------------------------------------
Net cash provided by financing activities 2,786,317 123,672,569
-----------------------------------------
Net (decrease) increase in cash and cash equivalents (10,467,641) 40,884,638
Cash and cash equivalents, beginning of period 25,688,760 8,337,133
-----------------------------------------
Cash and cash equivalents, end of period $ 15,221,119 $ 49,221,771
=========================================
(continued)
5
<PAGE>
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 52,591 $ 1,243,425
=========================================
Supplemental schedule of non-cash financing activities:
Deferred stock compensation from issuance of options $ - $ 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.
6
<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 InsWeb
Corporation and its wholly-owned subsidiaries, InsWeb Insurance Services, Inc.
(formerly Avatar Insurance Services, Inc.) and Benelytics, Inc. (the "Company").
All significant inter-company 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 accounting principles generally accepted in the
United States 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 accounting principles generally
accepted in the United States 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, 2000 and results of operations for the three and
nine months ended September 30, 2000 and 1999, respectively, and cash flows for
the nine months ended September 30, 2000 and 1999, respectively. 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, 2000 are not
necessarily indicative of the results to be expected for the year ending
December 31, 2000.
These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on March 30, 2000 and other information filed
with the Commission.
SIGNIFICANT CUSTOMERS
For the three months ended September 30, 2000, three customers
accounted for 19%, 12% and 11%, respectively, of total revenues. For the nine
months ended September 30, 2000, three customers accounted for 17%, 11% and 10%,
respectively, of total revenues. For the three months ended September 30, 1999,
three customers accounted for 31%, 12% and 12%, respectively, of total revenues.
For the nine months ended September 30, 1999, three customers accounted for 31%,
12% and 11%, respectively, of total revenues.
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.
RECLASSIFICATIONS
Certain amounts in the 1999 financial statements have been reclassified
to conform with the 2000 classifications.
7
<PAGE>
2. COMPREHENSIVE LOSS
Total comprehensive loss for the three and nine months ended September
30, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------------------------------------------
2000 1999 2000 1999
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net loss $(8,431,737) $ (10,191,164) $ (43,126,511) $ (25,190,084)
Other comprehensive income (loss):
Foreign currency translation adjustments (34,341) 94,890 (86,251) 94,890
Unrealized (loss) gain on investments (1,772) - 34,980 -
----------------------------------------------------------------------------
Total comprehensive loss $(8,467,850) $ (10,096,274) $ (43,177,782) $ (25,095,194)
============================================================================
</TABLE>
3. RELATED PARTY TRANSACTIONS
STOCKHOLDER AND CUSTOMER
A stockholder, who is also a customer, accounted for $600,940 and
$814,625 of the Company's revenues for the nine months ended September 30, 2000
and 1999, respectively. For the three months ended September 30, 2000 and 1999,
the customer accounted for $239,385 and $383,780 of the Company's revenues,
respectively. This customer accounted for $8,800 and $0 of the Company's
accounts receivable at September 30, 2000 and December 31, 1999, respectively.
AFFILIATE AND CUSTOMER
An affiliate, who owns a majority interest in a stockholder, is also a
customer and accounted for $205,065 and $248,697 of the Company's revenues for
the nine months ended September 30, 2000 and 1999, respectively. For the three
months ended September 30, 2000 and 1999, the customer accounted for $66,135 and
$115,500, respectively. This customer accounted for $9,345 and $15,495 of the
Company's accounts receivable at September 30, 2000 and December 31, 1999,
respectively.
MARKETING AGREEMENTS
During the three and nine months ended September 30, 2000, the Company
recognized $1,260,000 and $3,783,782, respectively, in marketing expense under a
marketing agreement with an Internet company compared to $1,244,822 and
$3,235,461 for the comparable periods in 1999. A beneficial owner of a
significant number of shares of the outstanding stock of the Internet company is
a principal stockholder of the Company.
4. INSWEB JAPAN
In 1998, the Company entered into a Joint Venture Agreement with a
strategic partner and significant stockholder to develop, implement and market
an online insurance marketplace in Japan and the Republic of Korea. The joint
venture is carried out exclusively through InsWeb Japan K.K., a Japanese
corporation, in which the Company owns a 25% interest. In conjunction with this
agreement, the Company also entered into an agreement in August 1999 to provide
consulting and hosting services to assist InsWeb Japan K.K. in developing its
Internet strategy. For the three and nine months ended September 30, 2000, $0
and $1,413,608 was billed to InsWeb Japan K.K., respectively, under this
contract and is included in development and maintenance fees. At September 30,
2000, no accounts receivable was due from InsWeb Japan, K.K. Though this
agreement has not been terminated, the Company does not expect to provide future
consulting and hosting services to InsWeb Japan K.K.
The Company's initial interest in InsWeb Japan K.K. was purchased in
exchange for a promissory note due to the Company's strategic partner. Interest
expense related to this note for the three and nine months ended September 30,
2000 was $17,547 and $53,087 compared to $17,666 and $62,651 for the comparable
periods last year. As of September 30, 2000, $1,390,176 was outstanding under
the note. In August 2000, the Company invested an additional $707,550 as
8
<PAGE>
part of an additional sale of capital stock by InsWeb Japan K.K. As a result of
this additional investment, the Company maintained its 25% interest in InsWeb
Japan K.K.
5. RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No.
101 "Revenue Recognition in Financial Statements." SAB No 101 expresses the
views of the SEC staff in applying accounting principles generally accepted in
the United States to certain revenue recognition issues. In June 2000, the SEC
issued SAB No. 101B, "Amendment: Revenue Recognition in Financial Statements."
SAB 101B delays the implementation date of SAB 101 until no later than the
fourth fiscal quarter of fiscal years beginning after December 15, 1999. InsWeb
expects to adopt SAB 101, as required, in the fourth quarter of 2000, however
management has not fully determined the impact that adoption of SAB 101 will
have on the Company's financial position, results of operations and cash flows.
In March 2000, the FASB issued Interpretation No. 44 ("FIN No. 44"),
"Accounting for Certain Transactions Involving Stock Compensation, an
interpretation of APB Opinion No. 25." FIN No. 44 is effective July 1, 2000.
This interpretation provides guidance for applying APB Opinion No. 25,
"Accounting for Stock Issued to Employees." The Company has adopted FIN No. 44,
which had no material impact on the Company's financial position, results of
operations and cash flows as of September 30, 2000.
In March 2000, the Emerging Issues Task Force ("EITF") of the FASB
reached a consensus on Issue No. 00-2, "Accounting for Web Site Development
Costs," which provides guidance on accounting for costs incurred to develop,
enhance, and upgrade a website. The consensus is effective for website
development costs incurred in quarters beginning after June 30, 2000. The
Company implemented this guidance on July 1, 2000, and for the three and nine
months ended September 30, 2000, the Company capitalized $664,289 of costs
relating to the upgrade and enhancement of the Company's website. All other
development costs, not qualifying for capitalization under EITF Issue No. 00-02,
are expensed during the period, which is consistent with prior quarters. Amounts
capitalized under this standard will be amortized over the estimated useful life
of the related upgrade and enhancement, considered to be three years.
6. RESTRUCTURING
In May 2000, the Board of Directors approved a decision to restructure
the Company's operations in order to enhance operating efficiencies and to
further develop its agency operations. The restructuring plan includes the
closure of the Company's facilities in Redwood City, San Carlos and Westlake
Village, California and Bel Air, Maryland, the relocation of the Company's
operations to the Sacramento California area, and the discontinuance of certain
strategic initiatives. The restructuring plan contemplates a total of
approximately 190 individuals leaving the Company across all functions. As a
result of reductions in the workforce, the Company's headcount was 158 at
September 30, 2000 compared to 207 at June 30, 2000 and 293 at March 31, 2000.
It is expected that the restructuring plan will be completed in the first
quarter of 2001.
In the second quarter of 2000, the Company recorded a related
restructuring charge of $4.4 million. The charge consisted of employee
separation costs of $2.8 million, asset impairments of $1.1 million, and other
exit costs of $0.5 million. In the third quarter of 2000, the Company recorded
additional restructuring charges of $0.6 million. The charge consisted of
additional employee separation costs of $0.1 million, asset impairments of $0.2
million, and other exit costs of $0.3 million. Other exit costs recorded in the
third quarter of 2000 primarily represent future rent payments for facilities
being exited, and were incurred due to revisions in our restructuring plan.
The asset impairments of $1.1 million in the second quarter consisted
solely of the write-off of tenant improvements associated with the Company's
facility in San Carlos, California. As the approved restructuring plan calls for
the relocation of the Company's corporate headquarters to the Sacramento
California area, the Company assigned its 12-year lease to an affiliate of the
landlord of the property in exchange for a portion of the future profits, if
any, associated with the releasing of this property through September 2003 and
the release of the Company's letter of credit and security deposit. As a result,
the Company received no future benefit or reimbursement for the tenant
improvements it made to this property and wrote down the value to zero.
Additionally, the landlord agreed to pay to the Company a termination fee of
$1.0 million, if and when, the landlord formally terminates the lease with the
Company and a portion of future profits, if any, upon the landlord's releasing
of the facility. In October 2000, this facility was released by the original
lessor.
9
<PAGE>
Details of the restructuring charge are as follows (in thousands):
<TABLE>
<CAPTION>
Employee Write-down of
Termination Property, Plant
Benefits and Equipment Other Total
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2000 restructuring charge
Second quarter $ 2,808 $ 1,066 $ 536 $ 4,410
Third quarter change in estimate 54 203 359 616
----------------------------------------------------------------------------------------------------------------------------------
Total restructuring charge $ 2,862 $ 1,269 $ 895 $ 5,026
----------------------------------------------------------------------------------------------------------------------------------
Write-down of assets to net realizable value (1,066) (1,066)
Cash payments (1,397) - (603) (2,000)
----------------------------------------------------------------------------------------------------------------------------------
Restructuring liability as of September 30, 2000 $ 1,465 $ 203 $ 292 $ 1,960
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7. IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLES
In April 2000, the Company entered into a linking agreement with
eHealthinsurance.com under which InsWeb customers access eHealthInsurance's
individual health, small group health, and Medicare supplement insurance product
offerings. As a result, the Company evaluated the cost to develop and market its
health care product offerings and decided to discontinue the development of its
health care initiatives, which were primarily being carried out through the
business and assets acquired as a result of the Company's acquisition of
Benelytics, Inc. in 1998. The Company then evaluated the recoverability of the
goodwill and other intangibles recognized in connection with this acquisition,
and determined that the circumstances indicated an inability to recover the
carrying amount of the assets. During the second quarter of 2000, the Company
recorded a one-time non-cash write down of $4,418,412 of goodwill and other
intangible assets, including the assembled workforce and contractual
relationships associated with the Benelytics, Inc. acquisition. At September 30,
2000, the balance of intangible assets was $39,999, which represents the
covenants not to compete entered into with former Benelytics employees. This
balance is being amortized on a straight-line basis over the remaining life of
three months.
8. COMMITMENTS AND CONTINGENCIES
The Company leases its current office facilities under noncancelable
operating leases which expire at various dates through January 2011. Future
minimum lease payments under noncancelable operating leases for the years ending
December 31, are as follows:
<TABLE>
<S> <C>
2001............................................ $3,312,302
2002............................................ 3,553,417
2003............................................ 3,667,413
2004............................................ 3,638,332
2005............................................ 3,546,193
Thereafter...................................... 14,608,582
------------------
$32,608,582
==================
</TABLE>
In September 2000, InsWeb signed a 10-year lease agreement through 2010
for additional office space in the Sacramento area to house its corporate
headquarters and agency operations. The Company expects to incur additional
costs for leasehold improvements and furniture and equipment associated with
this lease over the next 6 months. The Company plans to sublease its current
operating facilities upon completion of the relocation to the Sacramento area,
and expects any sublease revenue to offset its ongoing lease obligations.
10
<PAGE>
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, reliance on key customers, 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 business relationships with more than 40
insurance companies throughout the United States as of September 30, 2000.
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 generally 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 commission revenue as an
insurance agent based on activities it performs related to the sale of certain
automobile insurance policies in California. During the first six months of
fiscal 2000, InsWeb began expansion of its agency activities to include the sale
of automobile insurance policies in Washington and Arizona. However, in the
third quarter, InsWeb decided to temporarily restrict its agency operations to
California as a result of its relocation to the Sacramento area. InsWeb's
subsidiary, InsWeb Insurance Services, Inc., has been appointed as an authorized
automobile insurance agent by eight participating insurance companies in
California, and by one carrier in both Arizona and Washington. InsWeb receives a
commission based on a percentage of the insurance policy premium related to each
insurance policy sale where InsWeb has acted as the insurance agent. InsWeb
recognizes the revenue from these activities on the later of the billing date or
effective date of the policy. InsWeb also recognizes revenue when an applicable
policy is renewed. As part of its announced restructuring plan, InsWeb intends
to expand its online insurance agency operations.
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. Historically, development fees have been recognized when the
insurance company's integration with the InsWeb site became 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 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
transaction fees and fees related to InsWeb's activities as an agent increase.
As discussed in the notes to the financial statements, management has not yet
fully determined the
11
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impact of Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," will have on its consolidated results of operations and financial
position, although it anticipates that its implementation will not have a
material effect on its consolidated results of operations or financial position.
Product development expenses consist primarily of payroll and related
expenses for development and technology personnel. As discussed in the notes to
the financial statements, management implemented EITF Issue 00-02, "Accounting
for Website Development Costs," during the third quarter of 2000. This resulted
in the capitalization of website development costs directly related to the
enhancement and upgrade of the InsWeb site. Such costs had previously been
expensed as period costs. Consistent with the guidance of EITF Issue 00-02 and
other applicable accounting guidance, all other software development costs have
been expensed as incurred. InsWeb expects that its product development costs
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 contractual relationships.
Through the first quarter of fiscal 2000, InsWeb increased 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. In the second quarter of 2000, InsWeb began
concentrating its consumer marketing program on maintaining key online
relationships and on selective cost effective marketing campaigns designed to
maintain consumer awareness of InsWeb and its online insurance marketplace. As a
result, InsWeb reduced consumer marketing expenses in the second and third
quarters of 2000 from amounts reported in the first quarter of 2000. Consumer
marketing expenses may increase in future quarters as the Company expands its
online relationships.
General and administrative expenses consist primarily of payroll and
related expenses for InsWeb's management, administrative and accounting
personnel, expenses relating to site operations, occupancy expenses,
professional fees and other general corporate expenses. Although general and
administrative expenses have increased in support of the Company's continued
business and its operations as a public company, InsWeb expects that general and
administrative expenses will decrease over the next two quarters due to reduced
headcount and cost containment measures being undertaken as a result of the
announced restructuring plans.
REVENUES
TRANSACTION FEES. Transaction fees accounted for $4.7 million, or
88.3%, and $15.8 million, or 84.5%, of total revenues, for the three and nine
months ended September 30, 2000, respectively, compared to $6.3 million, or
88.9% and $13.6 million, or 88.1% of total revenues, for the comparable periods
in 1999. The decrease for the three months ended September 30, 2000 was
primarily attributable to the loss of State Farm as a participating carrier
effective May 1, 2000. State Farm represented none of the Company's revenues for
the three months ended September 30, 2000 versus 31% in the comparable prior
year period. The increase for the nine months ended September 30, 2000 was
primarily the result of the increased number of leads generated by the
substantial increase in the number of completed shopping sessions, partially
offset by a decline in revenue generated per shopping session and the loss of
State Farm. 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.
During the first nine months of 2000, more than 1.7 million shopping
sessions were completed at InsWeb, a 21% increase over the 1.4 million shopping
sessions completed in the first nine months of 1999. InsWeb recorded more than
2.9 million unique user sessions during the first nine months of 2000, an
increase of 21% over the approximately 2.4 million unique user sessions recorded
in the comparable period in 1999.
DEVELOPMENT AND MAINTENANCE FEES. Development and maintenance fees
accounted for $0.6 million or 11.6% and $2.9 million or 15.3% of total revenues,
for the three and nine months ended September 30, 2000, respectively, compared
to $0.8 million or 10.9% and $1.8 million or 11.7% of total revenues, for the
comparable periods in 1999. The decrease for the three months ended September
30, 2000 was primarily attributable to a decrease in the number of new insurance
companies electing to participate with InsWeb during the period. The increase
for the nine months ended September 30, 2000 primarily resulted from revenue
associated with a development agreement with InsWeb Japan K.K. To a lesser
degree, the increase was attributable to an overall increase in the number of
InsWeb's participating insurance companies.
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OPERATING EXPENSES
PRODUCT DEVELOPMENT. Product development expenses decreased to $1.7
million and increased to $7.2 million for the three and nine months ended
September 30, 2000, respectively, from $2.8 million and $6.6 million for the
comparable periods in 1999. The decrease for the three months ended September
30, 2000 was primarily attributable to the capitalization of website development
costs as required by a recent accounting pronouncement, combined with reduced
headcount in the period resulting from restructuring efforts. The increase for
the nine months ended September 30, 2000 was primarily attributable to a higher
average headcount needed to support the requirements of InsWeb's growing network
of participating insurance companies and online relationships and to design,
test and deploy InsWeb's product offerings. Ins Web expects product development
expenses to decrease slightly over the next two quarters, compared to amounts
recorded in the third quarter of 2000, as a result of reduced headcount.
SALES AND MARKETING. Sales and marketing expenses decreased to $7.0
million and increased to $31.0 million for the three and nine months ended
September 30, 2000, respectively, from $10.3 and $22.4 million for the
comparable periods in 1999. The decrease for the three months ended September
30, 2000 was primarily attributed to significant reductions in offline
advertising relationships combined with a reduction in headcount resulting from
restructuring efforts. The increase for the nine months ended September 30, 2000
was due to substantial increases in consumer marketing expenses, including
increased costs and fees associated with new and existing online relationships,
costs incurred in the first half of the year related to national radio and
television campaigns, an increase in the average number of sales and marketing
personnel, and operating costs associated with InsWeb's customer care center and
associated insurance agency activities. Although InsWeb reduced its sales and
marketing expenses in the third quarter of 2000 below amounts reported for the
three months ended June 30 and March 31, 2000, sales and marketing expenses may
nevertheless increase in future periods as the Company expands online
partnership programs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased to $5.4 and $15.8 million for the three and nine months ended
September 30, 2000, respectively, from $4.2 and $9.9 million for the comparable
periods in 1999. 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. InsWeb expects that general and administrative expenses in all
categories will decrease over the next two quarters due to reduced headcount and
cost containment measures being undertaken as a result of the announced
restructuring plans. Nevertheless, general and administrative expenses may
increase compared to prior periods if the restructuring and other cost
containment measures are not successful.
OTHER OPERATING EXPENSES
AMORTIZATION OF STOCK-BASED COMPENSATION. Amortization of stock-based
compensation for the three and nine months ended September 30, 2000 was $186,000
and $796,000, respectively, compared to $340,000 and $921,000 for the comparable
periods in 1999. This decrease is attributable to the reduction in employees in
conjunction with the Company's restructuring plans.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
during the three and nine months ended September 30, 2000 was $40,000 and $1.1
million, respectively, compared to amortization of $0.8 million and $2.3 million
for the comparable periods in 1999. The decrease in expense is attributable to
the write-down of the Benelytics, Inc. intangible asset resulting from the
Company's partnership with eHealthInsurance.
RESTRUCTURING CHARGE. In May 2000, the Board of Directors approved a
decision to restructure InsWeb's operations in order to enhance operating
efficiencies and to further develop its agency operations. The restructuring
plan includes the closure of the Company's facilities in Redwood City, San
Carlos and Westlake Village, California and Bel Air, Maryland, the relocation of
the Company's entire operations to the Sacramento California area, and the
discontinuance of certain strategic initiatives. The restructuring plan is
targeted for completion in the first quarter of 2001. As a result of the
Company's restructuring plan, in the second quarter of 2000, the Company
recorded a restructuring charge of $4.4 million. The charge consisted of
employee separation costs of $2.8 million, asset impairments related to its San
Carlos facility of $1.1 million, and other exit costs of $0.5 million. In the
third quarter of 2000, the Company recorded additional restructuring charges of
$0.6 million. The charge consisted of additional employee separation costs of
$0.1 million, asset impairments of $0.2 million, and other exit costs of $0.3
million. Other exit costs recorded in the third quarter of 2000, primarily
represent future rent payments for closed facilities. As a result of the release
of the San Carlos facility in October 2000, the Company expects to recognize a
$1.0 million termination fee.
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As the Company completes its restructuring plan, additional expenses may be
incurred due to changes in the estimates in realizable value of assets to be
disposed and other costs.
Separately, the Company recorded charges in the third quarter of 2000
of approximately $2.6 million for retention agreements with key employees,
relocation expenses, and other restructuring costs. These charges were recorded
in product development, sales and marketing, and general and administrative
expenses. The Company anticipates additional charges of approximately $4.0
million representing additional retention payments to key employees, individual
and corporate relocation expenses, and recruiting. Retention costs will be
expensed over the period that services are rendered. Other costs will be
expensed as incurred through the completion of the restructuring period in the
first quarter of 2001. Though InsWeb's operating expenditures are expected to
decline as a result of this restructuring plan through reduced headcount, a
reduction of depreciation from assets disposed of and reduced occupancy
expenses, operating expenses nevertheless may increase if our planned
construction of our new facility is delayed further or costs exceed the original
estimates and if our restructuring plan is not ultimately successful.
IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLES. The Company evaluated the
recoverability of the goodwill and other intangibles recognized in connection
with its acquisition of Benelytics, Inc. and determined, as a result of its
announced new partnership with eHealthInsurance, that the circumstances
indicated an inability to recover the carrying amount. During the second quarter
of 2000, the Company recorded a one-time non-cash write-down of $4.4 million of
goodwill and other intangible assets, including the assembled workforce and
contractual relationships, associated with the Benelytics, Inc. acquisition.
INTEREST INCOME, NET
Interest income, net, includes income earned on InsWeb's invested cash
and investments, and expense related to its outstanding debt obligations. Net
interest income for the three and nine months ended September 30, 2000 was $1.0
and $3.5 million, respectively, compared to net interest income of $1.1 and $0.9
for the comparable periods in 1999. The increase in net interest income was
primarily a result of the repayment of the line of credit in fiscal 1999 with
the proceeds of the Company's initial public offering of common stock in July
1999 and increased interest income on cash and short-term investments in fiscal
2000.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, InsWeb's principal source of liquidity was $55.3
million in cash, cash equivalents and short-term investments.
In each period, the use of cash primarily consisted of InsWeb's
operating loss before non-cash items. For the nine months ended September 30,
2000, net cash used in operating activities was $32.8 million compared to $23.8
million in the comparable period in 1999. For the nine months ended September
30, 2000, non-cash items included amortization and write-off of intangibles of
$5.5 million, depreciation of fixed assets of $2.6 million, write-down of fixed
assets as a result of the restructuring of $1.3 million and amortization of
deferred stock compensation of $0.8 million. Increases in prepaid assets
associated with the prepayment of online partnership agreements, partially
offset by a decrease in accounts receivable and an increase in the restructuring
accrual, also contributed to the cash used in operations for the nine months
ended September 30, 2000.
For the nine months ended September 30, 2000, net cash provided by
investing activities was $19.5 million, which primarily consisted of the sale of
short-term investments offset by purchases of equipment and furniture, website
development costs, and the investment in a joint venture. At September 30, 2000,
InsWeb had no material commitments for capital expenditures, but expects such
expenditures to total approximately $6.3 million in 2000, primarily consisting
of equipment, software, furniture and leasehold improvements.
In September 2000, InsWeb signed a 10-year lease agreement through 2010
for additional office space in the Sacramento area to house its corporate
headquarters and agency operations. The Company expects to incur additional
costs for leasehold improvements and furniture and equipment associated with
this lease over the next six months. The Company plans to sublease its current
operating facilities upon completion of the relocation to the Sacramento area,
and expects any sublease revenue to offset its ongoing lease obligations. Future
minimum lease payments under the Sacramento lease are $10.6 million for the term
of the lease.
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In addition, under various marketing agreements with its online
partners, InsWeb is obligated to make minimum payments totaling $16.8 million
through October 2001.
We believe that our current level of cash, cash equivalents and
short-term investments will be sufficient to meet our anticipated liquidity
needs for working capital and capital expenditures through 2001. Although we do
not anticipate the need for additional financing, we nevertheless may need
additional funds to meet all of our anticipated operating needs or to expand
business internally or through acquisition. Our forecast of the period of time
through which our financial resources will be adequate to support our
operations, involves significant risks and uncertainties, and actual results
could vary materially as a result of the factors described above. If we require
additional capital resources, we cannot assure you that any financing
arrangements will be available in amounts or on terms acceptable to the Company
and any such available financing arrangements could result in dilution to our
stockholders.
FACTORS THAT MAY AFFECT OUR FUTURE PERFORMANCE
OUR FUTURE BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION ARE
SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING THOSE DESCRIBED BELOW.
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 and
purchase of insurance products, which may limit our ability to
generate revenue from consumers that visit our online marketplace;
- our potential inability to successfully manage our anticipated
growth, which could lead to management distractions and increased
operating expenses;
- our ability to retain key employees; and
- our reliance on key customers and ability to retain customers.
To address these uncertainties, we must, among other things:
- refine our business model;
- work to expand the efficiencies and geographic coverage of our
agency activities;
- 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.
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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 the year ended December 31, 1998,
$38.4 million for the year ended December 31, 1999, and $43.1 million
for the nine months ended September 30, 2000. As of September 30, 2000,
our accumulated deficit was $117.5 million. Although we experienced
significant revenue growth in earlier periods, this growth rate is not
sustainable and revenues may decrease from comparable prior year
periods. 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, or if our profitability is
delayed we may 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 one or more significant
insurance company relationships 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 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 experienced seasonality in our business associated with general
slowness in the insurance industry during the year-end holiday period.
We expect to continue to experience seasonality as our business
matures. Because of this seasonality, 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
an ongoing impact on our business.
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 78% of our total
revenues in the year ended December 31, 1999 and approximately 72% in
the nine months ended September 30, 2000. 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, through
the first quarter of fiscal 2000, we increased our financial commitment
to creating and maintaining prominent brand awareness. Beginning in the
second quarter of fiscal 2000, our consumer marketing program has been
reduced and currently consists of the maintenance of certain network
online relationships, and other selective cost, effective marketing
campaigns, designed to maintain consumer awareness of InsWeb and our
online insurance marketplace. 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.
OUR PLANS TO OFFER ADDITIONAL SERVICES COULD RESULT IN SIGNIFICANT EXPENDITURES,
AND WE MAY NOT GENERATE SUFFICIENT REVENUE TO OFFSET THESE EXPENDITURES
We intend to offer additional services including, among other things:
- performing selected activities on behalf of insurance companies as
an authorized agent;
- 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;
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- continuing 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 offer these additional services 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 both rapidly evolving and
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.
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.
OUR PLAN TO EXPAND OUR ONLINE INSURANCE AGENCY OPERATIONS WILL REQUIRE
SIGNIFICANT RESOURCES AND WE MAY NOT BE ABLE TO GENERATE SUFFICIENT REVENUES TO
RECOVER OUR EXPENSES
Since October 1999, InsWeb has been operating an online insurance
agency business in California. Our online agency receives a commission
on the sale and renewal of the automobile insurance polices sold though
its offices.
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During the nine months ended September 30, 2000, our online agency sold
3,654 new automobile insurance policies for nine carriers in four
western states. Due to the company's restructuring activities and its
relocation to Sacramento, however, the number of policies sold is
expected to decline in the fourth quarter. The number of policies sold
is expected to increase in future quarters after the agency operations
are expanded.
Our plan to expand the online agency operations requires that we
attract and retain highly skilled sales agents and customer care
personnel. We will face competition from other agencies and insurance
companies for these agents. In addition, we will need additional
carriers to appoint us as an agent and pay us commissions. Although the
agency infrastructure is already in place, integration of additional
carriers into our online agency operations may take more time and be
more expensive than we project. If we are unable to implement our
expansion in a timely and cost-effective manner, we may not be able to
recover our costs and our business will 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
approximately 9% of our outstanding common stock, and Richard D.
Headley, President and Managing Director of Nationwide Global Holdings,
is a member of our board. Another insurance company, CNA, holds
approximately 6% of our outstanding common stock. 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%, 11% and 11%, respectively, of our revenues for the
year ended December 31, 1999, and revenues from State Farm, AIG, and GE
Financial Assurance accounted for approximately 17%, 11% and 10%,
respectively, of our revenues for the nine months ended September 30,
2000. Effective May 1, 2000, State Farm is no longer participating in
InsWeb's marketplaces for auto, term life, homeowners, condominium and
renters insurance. As a result of State Farm's withdrawal, revenues for
the second quarter of 2000 from State Farm declined to approximately
13% of total revenues, and no revenue from State Farm was recognized
for the third quarter of 2000. Until additional agreements with new
carriers can be negotiated and these carriers are integrated into
InsWeb's marketplaces, revenues may decline in the near term. In
addition, one participating company was removed from our marketplace in
July 2000, by mutual agreement because of a serious decline in its
financial rating. Should one or more of our other key insurance company
partners cease to participate in our online marketplace, change its
underwriting criteria or geographic coverage in a way that reduces the
proportion of consumers that are offered quotes from that insurance
company, or suffer a significant decline in its ratings, 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. In
addition, although new carriers may be signed up to participate in our
online marketplace, these new carriers may not replace revenues lost as
a result of State Farm's non-renewal. Moreover, there can be no
assurance we will be able to add any new carriers.
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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 more than 40 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 one 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 three or fewer
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. At the end of the third
quarter, 2000, there were 26 jurisdictions in which three or fewer
insurance companies were offering automobile insurance quotes on our
online marketplace. Of those, AIG is a participant in 14 jurisdictions.
No automobile insurance quotes are available in New Jersey, and as of
September 30, 2000, there were eight jurisdictions in which only one
insurance company is offering automobile quotes on our online
marketplace. If any other insurance company participating in a number
of jurisdictions discontinued or significantly reduced its
participation in our online marketplace, the attractiveness of the
marketplace to consumers in these jurisdictions would be greatly
diminished.
In addition, we believe that there is a general trend toward
consolidation in the insurance industry. For example, in the first
quarter of 2000, Kemper Direct acquired the personal lines business of
Reliance Direct, 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, thereby substantially reducing the
attraction of our online marketplace to consumers.
WE MAY HAVE DIFFICULTY INTEGRATING NEW INSURANCE COMPANIES INTO OUR ONLINE
MARKETPLACE OR AGENCY OPERATIONS, WHICH COULD HARM 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. To develop company-sponsored quotes for
consumers, the integration requires either the development of a
customized interface with the carrier's own rating system, accessing a
third party rating engine of the carrier's choice, or adding the
carrier's rating information into InsWeb's proprietary rating engines.
Though integration into our agency operations may require fewer
resources to implement than integration of an insurance company into
our online marketplace, 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 or our agency operations.
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 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'
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notice or less. As discussed above, effective May 1, 2000, State Farm
Insurance is no longer a participant on InsWeb's online insurance
marketplace.
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. FURTHER, 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. As of September 30, 2000, we have 214 online relationships,
over 70 of which were added during the first nine months of this year.
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 exclusive arrangements with Yahoo! Inc. and MSN
under which our website is the exclusive insurance site included in
their website, and a significant marketing agreement with AOL. For the
year ended December 31, 1999 and nine months ended September 30, 2000,
we received approximately 10.1% and 27.7 % of our website traffic from
these online relationships, respectively, and approximately 33.7% and
67.7% of our traffic from all of our online relationships combined,
respectively. Our ability to increase our revenues will depend, in
part, on increased traffic to our website that we expect to generate
through these very significant 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. There can be no assurance we will be able to
negotiate or renew marketing agreements with online companies on terms
that are acceptable to us. The termination, non-renewal or renewal on
unfavorable terms of a relationship from which we generate significant
traffic to our website 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 at our 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.
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THE RECENTLY ENACTED GRAMM-LEACH-BLILEY ACT MAY ALTER THE TRADITIONAL STRUCTURE
OF INSURANCE REGULATION AND IMPOSE NEW OR ADDITIONAL LEGAL REQUIREMENTS ON OUR
BUSINESS
The November 1999 passage of the Gramm-Leach-Bliley Act (S.900)
increased the potential for significant changes in the structure and
regulation of the insurance industry. Traditionally, regulation of
insurance has been almost exclusively the province of the states,
including regulation of sales practices, underwriting requirements and
claims payments. Moreover, with limited exceptions, securities firms
and banking institutions historically were prohibited from engaging in
the business of insurance, and were regulated by federal agencies. The
Gramm-Leach-Bliley Act eliminated these legislative barriers between
segments of the financial services industry. Although insurance will
still be regulated primarily by the states, insurance entities that
become part of a financial services institution may be indirectly
affected by the federal regulatory requirements pertaining to banks or
securities firms.
OUR INTENDED EXPANSION OF OUR BUSINESS, INCLUDING, IN PARTICULAR, OUR AGENCY
ACTIVITIES, WILL SUBJECT US TO ADDITIONAL REGULATIONS WHICH MAY DELAY OR PREVENT
OUR EXPANSION AND HARM OUR BUSINESS
Over time, we intend to expand our operations to include new products
and services and to offer existing and new products in new
jurisdictions, 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. 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 at both the federal and state levels that would limit the
uses of personally identifiable information of Internet users gathered
online or require online services to establish privacy policies. In
addition, the Federal Trade Commission has adopted regulations
affecting the information gathering practices of online companies, and
it has brought suit against several high profile companies for failing
to adhere to the privacy policies posted on their websites. Many state
insurance codes limit the collection and use of personal information by
insurance companies, agents, or insurance service organizations.
Failure to adhere to the growing body of privacy regulations could
result in administrative actions or private litigation and harm our
business.
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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 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 to 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 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 and rating 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. Moreover, the malfunction could cause the carrier to
dispute the number of leads it received from InsWeb. 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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OUR RECENT GROWTH AND SUBSEQUENT REDUCTION IN FORCE HAS PLACED A SIGNIFICANT
STRAIN ON OUR MANAGEMENT, SYSTEMS AND RESOURCES, AND WE MAY EXPERIENCE
DIFFICULTIES IN MANAGING OUR OPERATIONS IN THE FUTURE
Through the quarter ended March 31, 2000, we experienced growth and
expansion which placed a strain on our administrative, operational and
financial resources and increased demands on our systems and controls.
As a result of our restructuring plans, our workforce has declined by
approximately 45%. This reduction has occurred through a combination of
InsWeb initiated terminations and voluntary resignations. If our
management is unable to manage our resources effectively, our business
will be harmed. This prior growth and subsequent reduction in force has
resulted in a continuing increase in the level of responsibility for
our management personnel. We anticipate that our continued operations
will require us to retain our current personnel and to recruit, hire,
train and retain new managerial, technical, sales and marketing
personnel based on the attrition of our current employee base. Our
ability to manage our operations successfully will also require us to
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 and Chief
Executive Officer; and Mark P. Guthrie, President, Chief Operating
Officer and Chief Financial Officer (acting). The loss of the services
of any of our executive officers or other key employees could harm our
business. For example, in March 2000, Stephen Robertson, our Chief
Financial Officer, resigned to pursue other professional interests.
This resignation has put additional pressure on our executive
management team to fulfill his functional responsibilities. As of the
date of this report, we have not recruited a new Chief Financial
Officer.
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. Additionally, we have granted
additional cash and stock option incentives in order to retain certain
of our executive officers, including Mr. Guthrie, and certain other key
personnel. Payment of these incentives is subject to these individuals
completing service terms from six months to one year from April 2000.
As the value of these incentives are highly dependent on an increase in
the market price of our common stock, there can be no assurance we will
be able to retain such key employees through or after their retention
period nor retain or recruit other officers and key employees in the
future.
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 ability 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 and we have had a high
turnover rate of employees over the last two quarters. 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.
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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 be materially adversely affected.
OUR SUCCESS DEPENDS ON THE WILLINGNESS OF CONSUMERS TO SHOP FOR AND PURCHASE
INSURANCE ON THE INTERNET INSTEAD OF BY MORE TRADITIONAL MEANS; CONSUMERS MAY
NOT BE WILLING TO DO THIS
Shopping for and purchasing 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 and purchased 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 and purchasing 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 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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OUR INTERNATIONAL OPERATIONS ARE SUBJECT TO VARIOUS RISKS
As of September 30, 2000, our international operations consist of
activities with and through our joint venture partner, InsWeb Japan
K.K. (of which we currently own a 25% equity interest) to develop and
maintain an online insurance marketplace in Japan. Though our foreign
operations are limited they 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;
- potentially adverse tax consequences; and
- political and economic instability.
ANY ACQUISITIONS THAT WE UNDERTAKE 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 may not be realized. 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, and $1.4 million to software and other
intangible assets. In the second quarter of 2000, we wrote off the
remainder of the goodwill from the Benelytics acquisition.
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 United
States, Japan, France, Germany, South Korea and the United Kingdom and
applications are pending in several other countries. Other United
States and worldwide trademark applications include, but are not
limited to, eAgent, InsWeb.com, Powered by InsWeb, and Where You and
Your Insurance Really Click. We have patent applications on file in the
United States. 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.
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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-party fails to timely develop, license or
support technology necessary to our services, market acceptance of our
online marketplace could be harmed.
OUR STOCK PRICE MAY FLUCTUATE WIDELY, AND INTERNET STOCKS IN GENERAL 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, loss of key customers, 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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
InsWeb is exposed to financial market risks including changes in
interest rates and, to a lesser degree, foreign currency exchange
rates. The fair value of InsWeb's investment portfolio or related
income would not be significantly affected by either a 10% increase or
decrease in interest rates due mainly to the short term nature of the
major portion of InsWeb's investment portfolio. InsWeb's interest
income is sensitive to changes in the general level of U.S. interest
rates, particularly since the majority of our funds are invested in
instruments with maturities less than one year, except for one U.S.
agency security whose maturity is greater than one year. InsWeb's
policy is to limit the risk of principal loss and ensure the safety of
invested funds by limiting market and credit risk. Funds in excess of
current operating requirements are invested in obligations of the U.S.
government and its agencies and investment grade obligations of state
and local governments and large corporations.
The table below represents carrying amounts and related
weighted-average interest rates by year of maturity of InsWeb's
investment portfolio at September 30, 2000:
<TABLE>
<CAPTION>
2000 2001 TOTAL
------------------------------------------
<S> <C> <C> <C>
(In thousands, except interest rates)
Cash and money market funds $ 5,181 $ - $ 5,181
Average interest rate 6.1% 0.0% 6.1%
Investments $ 43,167 $ 8,988 $ 52,155
Average interest rate 6.6% 6.4% 6.5%
Total $ 48,348 $ 8,988 $ 57,336
Average interest rate 6.5% 6.4% 6.5%
</TABLE>
InsWeb's revenue and capital spending is transacted in U.S. dollars. As
discussed in the notes to the condensed consolidated financial
statements, InsWeb investment in InsWeb Japan K.K. and the note payable
to strategic partner and shareholder is denominated in Japanese Yen.
InsWeb has not engaged in hedging transactions to reduce its exposure
to fluctuations that may arise from changes in foreign exchange rates.
Based on InsWeb's overall currency rate exposure at September 30, 2000
a near-term 10% appreciation or depreciation would have an immaterial
affect on InsWeb's operating results or financial condition.
28
<PAGE>
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.23 Lease Between Registrant and Oates/Allegheny
Venture I, LLC Dated September 29, 2000
27 Financial Data Schedule
(b) Reports on Form 8-K:
InsWeb did not file any reports on Form 8-K during the quarter
ended September 30, 2000
29
<PAGE>
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 13, 2000 INSWEB CORPORATION
(REGISTRANT)
/s/ Mark P. Guthrie
------------------------
Mark P. Guthrie
President, Chief Operating
Officer and Chief Financial Officer (acting)
30
<PAGE>
EXHIBIT INDEX
EXHIBIT
-------
10.23 Lease Between Registrant and Oates/Allegheny Venture I,
LLC Dated September 29, 2000
27 Financial Data Schedule
31
