<PAGE>[caad 214]
==============================================================================
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 JUNE 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 July 31, 2000 was 35,196,280 shares.
================================================================================
<PAGE>
FORM 10-Q
================================================================================
INSWEB CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1: Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2000 (unaudited) and December 31, 1999 3
Condensed Consolidated Statements of Operations for the three and six months ended
June 30, 2000 and 1999 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 2000 and 1999 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 10
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk 28
PART II OTHER INFORMATION
ITEM 4: Submission of Matters to a Vote of Security Holders 29
ITEM 5: Exhibits and Reports on Form 8-K
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>
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
(UNAUDITED)
----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $30,682,031 $25,688,760
Short-term investments 31,296,861 64,063,070
----------------- ----------------
Total cash, cash equivalents and short-term investments 61,978,892 89,751,830
Accounts receivable, net of allowance of $383,117 and $141,780 at
June 30, 2000 and December 31, 1999, respectively 3,877,531 4,267,691
Prepaid expenses and other current assets 6,011,954 2,974,024
----------------- ----------------
Total current assets 71,868,377 96,993,545
Property and equipment, net 10,002,700 7,356,863
Investment in joint venture 1,336,592 1,449,597
Intangible assets, net 80,000 5,568,094
Long-term investments 4,984,803 4,978,761
Deposits and other assets 1,734,180 1,934,045
----------------- ----------------
Total assets $90,006,652 $118,280,905
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $610,598 $288,974
Accrued expenses 4,701,722 4,891,332
Deferred revenue 783,698 182,618
Restructuring accrual 2,356,350 -
----------------- ----------------
Total current liabilities 8,452,368 5,362,924
Note payable to strategic partner 1,413,228 1,464,558
Deferred rent 411,241 268,601
----------------- ----------------
Total liabilities 10,276,837 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: 35,154,375 shares at June 30, 2000
and 34,742,760 shares at December 31, 1999 35,167 34,743
Paid-in capital 190,101,297 188,222,780
Accumulated other comprehensive income 97,685 112,843
Common stock warrants 113,071 113,071
Deferred stock compensation (1,512,011) (2,887,995)
Accumulated deficit (109,105,394) (74,410,620)
----------------- ----------------
Total stockholders' equity 79,729,815 111,184,822
----------------- ----------------
Total liabilities and stockholders' equity $90,006,652 $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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
(UNAUDITED) (UNAUDITED)
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Transaction fees $4,055,220 $4,455,293 $11,144,729 $7,323,391
Development and maintenance fees 738,485 598,621 2,256,969 1,041,994
Other revenues 14,524 6,432 23,853 6,432
-------------------------------------------------------------------------
Total revenues 4,808,229 5,060,346 13,425,551 8,371,817
Operating expenses:
Product development 2,791,842 2,218,288 5,571,892 3,769,403
Sales and marketing 9,714,899 8,291,138 24,018,214 12,140,351
General and administrative 5,541,255 2,738,839 10,350,354 5,130,818
Amortization of intangible assets 287,420 782,262 1,069,682 1,564,524
Amortization of stock-based compensation 263,609 290,504 610,772 580,504
Impairment of goodwill and other intangibles 4,418,412 - 4,418,412 -
Restructuring charge 4,410,342 - 4,410,342 -
-------------------------------------------------------------------------
Total operating expenses 27,427,779 14,321,031 50,449,668 23,185,600
-------------------------------------------------------------------------
Loss from operations (22,619,550) (9,260,685) (37,024,117) (14,813,783)
Other expense (147,078) - (96,568) -
Interest income (expense), net 1,148,495 283,464 2,425,911 (184,687)
--------------------------------------------------------------------------
Net loss $(21,618,133) $(8,977,221) $(34,694,774) $(14,998,470)
==========================================================================
Net loss per share-basic and diluted $(0.62) $(0.56) $(0.99) $(0.94)
==========================================================================
Weighted average shares used in computing net loss per
share-basic and diluted 35,139,075 16,091,724 35,029,460 16,023,988
==========================================================================
Pro forma net loss per share-basic and diluted $(0.62) $(0.32) $(0.99) $(0.53)
==========================================================================
Weighted average shares used in computing pro forma
net loss per share-basic and diluted 35,139,075 28,378,060 35,029,460 28,279,441
==========================================================================
</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 SIX MONTHS ENDED JUNE 30,
2000 1999
---- ----
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(34,694,774) $(14,998,470)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,574,133 683,101
Amortization of stock-based compensation 610,772 580,504
Write-down of fixed assets included in restructuring charge 1,065,647 -
Gain on sale of equipment (10,151) -
Foreign currency translation gain on note payable (51,330) (66,325)
Amortization of intangible assets 1,069,682 1,564,524
Equity loss from joint venture 61,906 18,374
Impairment of goodwill 4,418,412 -
Changes in assets and liabilities:
Accounts receivable 390,160 (3,207,148)
Prepaid expenses and other current assets (3,037,930) (1,146,342)
Deposits and other assets 199,865 (700,097)
Accounts payable 321,624 924,637
Accrued expenses (189,610) 909,589
Restructuring accrual 2,356,350 -
Deferred revenue 601,080 (12,342)
Deferred rent 142,640
-------------------------------------
Net cash used in operating activities (25,171,524) (15,449,995)
-------------------------------------
Cash flows from investing activities:
Sales (purchases) of short term investments - net 32,802,961 (15,839,864)
Purchases of property and equipment (5,287,427) (2,954,461)
Other, net 5,108 -
-------------------------------------
Net cash provided by (used in) investing activities 27,520,642 (18,794,325)
-------------------------------------
Cash flows from financing activities:
Proceeds from issuance preferred stock - net - 56,279,304
Proceeds from issuance of common stock - 296,930
Proceeds from exercise of stock options 1,742,606 556,335
Proceeds from stock issued from Employee Stock Purchase Plan 901,547 -
Payment to Series B stockholder - (2,250,000)
Payment of note payable to officer - (25,000)
Payments on line of credit from affiliate - (19,290,000)
-------------------------------------
Net cash provided by financing activities 2,644,153 35,567,569
-------------------------------------
Net increase in cash and cash equivalents 4,993,271 1,323,249
Cash and cash equivalents, beginning of period 25,688,760 8,337,133
-------------------------------------
Cash and cash equivalents, end of period $30,682,031 $9,660,382
=====================================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 48,277 $1,229,448
=====================================
Supplemental schedule of noncash financing activities:
Receivable for sale of Series E preferred stock $ - $28,097,222
=====================================
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE>
INSWEB CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of InsWeb
Corporation and its wholly owned subsidiaries, InsWeb Insurance Services,
Inc. (formerly Avatar Insurance Services, Inc.) and Benelytics, Inc. (the
"Company"). As of June 30, 2000, InsWeb is in the process of liquidating
Benelytics, Inc. into InsWeb Corporation and expects to have this liquidation
completed by September 30, 2000. All significant intercompany accounts and
transactions have been eliminated in the consolidated financial statements.
Investments in 20 to 50 percent owned affiliates are accounted for on the
equity method. All common share and per share amounts reflect a 10-for-1
split approved by the Board of Directors in 1997 and a 3-for-2 split
authorized in June 1999.
The accompanying unaudited interim financial statements have been
prepared in accordance with 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 June 30, 2000 and results of operations for the
three and six months ended June 30, 2000 and 1999, respectively, and cash
flows for the six months ended June 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 six months ended June 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 June 30, 2000, three customers accounted
for 13%, 12% and 12%, respectively, of total revenues. For the six months
ended June 30, 2000, three customers accounted for 24%, 11% and 9%,
respectively, of total revenues. For the three months ended June 30, 1999,
three customers accounted for 30%, 12% and 11%, respectively, of total
revenues. For the six months ended June 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.
6
<PAGE>
2. COMPREHENSIVE LOSS
Total comprehensive loss for the three and six months ended June 30,
2000 and 1999 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 2000 1999 2000
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net loss $(8,977,221) $(21,618,133) $(14,998,470) $(34,694,774)
Other comprehensive income (loss):
Foreign currency translation adjustments - (48,138) - (51,910)
Unrealized gain on investments - 2,552 - 36,752
---------------------------------------------------------------------------
Total comprehensive loss $(8,977,221) $(21,663,719) $(14,998,470) $(34,709,932)
===========================================================================
</TABLE>
3. CASH AND INVESTMENTS
Cash and investments consist of the following:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31,
2000 1999
---- ----
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents:
Cash $250,841 $1,131,558
Money market funds 10,953,656 13,655,335
Taxable municipal securities 4,700,000 5,000,000
Commercial paper 14,777,534 5,901,867
----------------- ---------------
31,682,031 25,688,760
Short-term investments:
Certificates of deposit 5,498,285 1,500,000
Taxable municipal securities 16,400,000 -
Commercial paper 9,398,576 62,563,070
----------------- --------------
31,296,861 64,063,070
----------------- --------------
Cash, cash equivalents and short-term investments $61,978,892 $89,751,830
================= ==============
Long-term investments - U.S. agency securities $4,984,803 $4,978,761
================= ==============
</TABLE>
4. RELATED PARTY TRANSACTIONS
STOCKHOLDER AND CUSTOMER
A stockholder, who is also a customer, accounted for $361,555 and
$430,845 of the Company's revenues for the six months ended June 30, 2000 and
1999, respectively. For the three months ended June 30, 2000 and 1999, the
customer accounted for $157,080 and $254,670 of the Company's revenue,
respectively. This customer accounted for $31,850 and $0 of the Company's
accounts receivable at June 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 $138,930 and $133,187 of the Company's revenue
for the six months ended June 30, 2000 and 1999, respectively. For the three
months ended June 30, 2000 and 1999, the customer accounted for $62,590 and
$84,730, respectively. This customer accounted for $2,000 and $15,495 of the
Company's accounts receivable at June 30, 2000 and December 31, 1999,
respectively.
7
<PAGE>
MARKETING AGREEMENTS
During the three and six months ended June 30, 2000, the Company
recognized $1,260,000 and $2,526,790, respectively, in marketing expense
under a marketing agreement with an Internet company compared to $1,536,895
and $1,990,897 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.
5. 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 a newly formed Japanese
corporation, InsWeb Japan K.K. in which the Company owns a 25% interest. In
conjunction with this agreement, the Company also entered into an agreement
to provide consulting and hosting services to assist InsWeb Japan K.K. in
developing its Internet strategy. For the three and six months ended June 30,
2000, $210,913 and $1,413,608 was billed to InsWeb Japan K.K., respectively,
under this contract and is included in development and maintenance fees. At
June 30, 2000, $52,372 of accounts receivable was due from InsWeb Japan, K.K.
The Company's interest in InsWeb Japan K.K. was purchased in
exchange for a promissory note due to the Company's strategic partner. The
promissory note is payable in Yen and accrues interest at 5% per annum, which
is payable quarterly on the last day of each calendar quarter. The promissory
note, together with all accrued and unpaid interest, is due and payable on
the earlier of the closing date of an initial public offering of the
securities of InsWeb Japan K.K. or December 15, 2002. Interest expense
related to this note for the three and six months ended June 30, 2000 was
$17,837 and $35,301. As of June 30, 2000, $1,413,228 was outstanding under
the note.
6. 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
101until 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. Though 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, management anticipates that its
implementation will not have a material effect on its consolidated results of
operations and financial position.
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 will be effective July 1,
2000. This interpretation provides guidance for applying APB Opinion No. 25
"Accounting for Stock Issued to Employees." Management expects that adoption
of FIN No. 44 will not have a material impact on the Company's financial
position, results of operations and cash flows.
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 when to capitalize versus expense costs
incurred to develop a web site. The consensus is effective for web site
development costs in quarters beginning after June 30, 2000. The Company has
not yet determined the impact, if any, this Issue will have on the Company's
financial statements.
7. 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 Sacramento, California 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 initial reductions in the workforce, the Company's headcount was
207 at June 30, 2000 compared to 293 at March 31, 2000. It is expected that
8
<PAGE>
the restructuring plan will be completed over the following nine months
and is targeted for completion in the first quarter of 2001. During this
period, the Company expects a further decline in its workforce.
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.
The asset impairments of $1.1 million consisted solely of the
write-off of tenant improvements associated with Company's facility in San
Carlos, California. As the approved restructuring plan calls for the
relocation of the Company's corporate headquarters to Sacramento, California,
the Company assigned its l2-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 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.
Details of the restructuring charge are as follows (in thousands):
<TABLE>
<CAPTION>
Charges Utilized in
Three Months Ended
Charge to Operations June 30, 2000 Restructuring
in Three Months ---------------------- Accrual Balance at
Ended June 30, 2000 Cash Non Cash June 30, 2000
------------------- ----- --------- ------------------
<S> <C> <C> <C> <C>
Write-down of long-lived assets $1,066 $ - $1,066 $ -
Employee severance and
termination benefits 2,808 468 - 2,340
Other 536 520 - 16
---------------------------------------------------------------------
Total $4,410 $988 $1,066 $2,356
=====================================================================
</TABLE>
8. IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLES
In April 2000, the Company entered into a linking agreement with
eHealthinsurance.com under which InsWeb customers will 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 writedown of $4,418,412 of goodwill and other intangible assets,
including the assembled workforce and contractual relationships, associated
with the Benelytics, Inc. acquisition. At June 30, 2000, the balance of
intangible assets was $80,000 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 six months.
9
<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.
RECENT DEVELOPMENTS
Effective May 1, 2000, State Farm Insurance, which accounted for
approximately 29% and 24% of all InsWeb revenues for the three and six months
ended March 31 and June 30, 2000, respectively, is no longer a participant in
InsWeb's marketplaces for auto, term life, homeowners, condominium and
renters insurance. With State Farm's nonrenewal, auto insurance coverage is
no longer available to consumers in three Canadian provinces, and homeowners
and renters insurance is available in significantly fewer states. Term life
offerings were not significantly affected in any state.
To address our situation and other market conditions, InsWeb
initiated strategic objectives to address our short-term business plans in
order to manage our expenses and our portfolio of cash and short-term
investments, including an initial reduction of our workforce in April 2000 by
approximately 10% and a significant reduction in our consumer marketing
expenses beginning in the second quarter of fiscal 2000.
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
of 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 Sacramento, California and the discontinuance
of certain strategic initiatives. It is expected that the restructuring plan
will be completed over the following nine months and is targeted for
completion in the first quarter of 2001.
In April 2000, InsWeb and eHealthInsurance announced the formation
of an online partnership designed to leverage the companies' respective
strengths in marketing, product offerings and customer service. Through this
effort, InsWeb customers shopping for health insurance access
eHealthInsurance's selection of leading insurers, products and service
offerings. The exclusive, two-year agreement includes the marketing of
individual health, small-group health and Medicare supplement insurance
offerings from among the insurers participating with eHealthInsurance. As a
result of this new agreement, InsWeb has negotiated termination agreements
with its participating health insurance carriers.
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
August 1, 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
10
<PAGE>
insurance company, and revenue from transaction fees is recognized at
the time the qualified lead is delivered to the insurance company.
In October 1999, InsWeb began generating revenue as an insurance
agent based on activities it performs 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. 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. Development fees are typically recognized when the insurance
company's integration with the InsWeb site becomes operational. Additional
development fees are charged as insurance companies add new products,
increase their geographic coverage and convert to instant quoting capability
on InsWeb's online insurance marketplace, as well as for periodic upgrades
and changes to insurance companies' information resident on the InsWeb site.
InsWeb charges maintenance fees for maintaining and servicing the programs of
the individual insurance 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 impact of "Staff Accounting
Bulletin No. 101 - Revenue Recognition in Financial Statements" will have on
its consolidated results of operations and financial position though 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. To date, InsWeb
has not capitalized any of its software development costs. Because the timing
of the commercial release of its products has substantially coincided with
their technological feasibility, all software development costs have been
expensed as incurred. InsWeb expects that its product development expenses
will continue to increase for the foreseeable future. As discussed in the
notes to the financial statements, management has not yet determined the
impact, if any, "EITF" Issue 00-2, "Accounting for Website Development Costs"
will have on the financial statements.
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. As this strategy proved not to be cost
effective, beginning in the second quarter of 2000, InsWeb has concentrated
its consumer marketing program on maintaining key online relationships and on
selective marketing campaigns designed to maintain consumer awareness of
InsWeb and its online insurance marketplace. As a result, InsWeb has reduced
consumer marketing expenses from amounts reported in the first quarter of
2000. InsWeb intends to selectively market the InsWeb online marketplace in
order to add new insurance companies and expand and maintain relationships
with participating companies.
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. Though 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 three quarters due to
reduced headcount and cost containment measures being undertaken as a result
of the announced restructuring plans.
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REVENUES
TRANSACTION FEES. Transaction fees accounted for $4.1 million, or
84.3%, and $11.1 million, or 83.0%, of total revenues, for the three and six
months ended June 30, 2000, respectively, compared to $4.5 million, or 88.0%
and $7.3 million, or 87.5% of total revenues, for the comparable periods in
1999. The decrease for the three months ended June 30, 2000 as compared to
the comparable prior year period was primarily attributable to the loss of
State Farm as a participating carrier effective May 1, 2000. State Farm
represented 13% of the Company's revenues for the three months ended June 30,
2000 versus 30% in the comparable prior year period. The increase for the six
months ended June 30, 2000 compared to prior year was primarily the result of
the 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 six months of 2000, more than 1,291,000 shopping
sessions were completed at InsWeb, a 58% increase over the 817,000 shopping
sessions completed in the first six months of 1999. InsWeb recorded more than
7.0 million unique user sessions during the first six months of 2000, an
increase of 169% over the approximately 2.6 million unique user sessions
recorded in the comparable period in 1999.
DEVELOPMENT AND MAINTENANCE FEES. Development and maintenance fees
accounted for $738,000 or 15.4% and $2.3 million or 16.8% of total revenues,
for the three and six months ended June 30, 2000, respectively, compared to
$599,000, or 11.8% and $1.0 million or 12.4% of total revenues, for the
comparable periods in 1999. The increase in development and maintenance fees
as compared to the comparable prior year period, 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.
OPERATING EXPENSES
PRODUCT DEVELOPMENT. Product development expenses increased to $2.8
and $5.6 million for the three and six months ended June 30, 2000,
respectively, from $2.2 and $3.8 million for the comparable periods in 1999.
This increase was primarily attributable to the hiring of additional
personnel to support the requirements of InsWeb's growing network of
participating insurance companies and online relationships and to design,
test and deploy InsWeb's product offerings. InsWeb expects product
development expenses to decrease over the next three quarters as a result of
reduced headcount.
SALES AND MARKETING. Sales and marketing expenses increased to $9.7
and $24.0 million for the three and six months ended June 30, 2000,
respectively, from $8.3 and $12.1 million for the comparable periods in 1999.
This increase was due to substantial increases in consumer marketing
expenses, including increased costs and fees associated with new and existing
online relationships, costs related to national radio and television
campaigns, an increase in sales and marketing personnel, and operating costs
associated with InsWeb's customer care center and associated insurance agency
activities. Although InsWeb reduced its sales and marketing expenses in the
second quarter of 2000 below amounts reported for the three months ended
March 31, 2000, sales and marketing expenses may nevertheless increase in
future periods.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased to $5.5 and $10.4 million for the three and six months ended June
30, 2000, respectively, from $2.7 and $5.1 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 three 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 six months ended June 30, 2000 was
$0.3 and $0.6 million respectively, compared to $0.3 and $0.6 million for the
comparable periods in 1999.
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AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
during the three and six months ended June 30, 2000 was $0.3 million and $1.1
million, respectively, compared to amortization of $0.8 million and $1.6
million for the comparable periods in 1999. This expense was attributable to
the acquisition of Benelytics in December 1998.
RESTRUCTURING CHARGE. As a result of the Company's restructuring
plan, 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 related to its San Carlos
facility of $1.1 million, and other exit costs of $0.5 million. 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 second quarter of
2000 of approximately $0.9 million for retention agreements with key
employees. These charges were recorded in product development, sales and
marketing, and general and administrative expenses. The Company anticipates
additional charges of approximately $7.0 million representing additional
retention charges to key employees; individual and corporate relocation
expenses; recruiting and training of new employees and other transition
costs. Retention costs will be expensed over the period that services are
rendered. Other costs will be expensed as incurred through the completion of
the transition period in the first quarter of 2001. Though Ins Web'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
may increase if our planned construction of our new facility is delayed 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 online 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
writedown 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 (EXPENSE), NET
Interest income (expense), 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 six months ended June 30,
2000 was $1.1 and $2.4 million respectively, compared to net interest income
(expense) of $283,000 and ($185,000) 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
InsWeb has financed its operations primarily through private
placements of equity securities, borrowings from an affiliate of one of its
investors and its initial public offering of its common stock. At June 30,
2000, InsWeb's principal source of liquidity was $62.0 million in cash, cash
equivalents and short-term investments.
In each period, the use of cash primarily consisted of InsWeb's
operating loss before noncash items. For the six months ended June 30, 2000,
net cash used in operating activities was $25.2 million compared to $15.4
million in the comparable period in 1999. For the six months ended June 30,
2000, noncash items included amortization and write-off of intangibles of
$5.5 million, depreciation of fixed assets of $1.6 million, write-down of
fixed assets as a result of the restructuring of $1.1million and amortization
of deferred stock compensation of $0.6 million. Increases in prepaid assets
associated with the prepayment of online partnership agreements, partially
offset by increases in accounts payable and the restructuring accrual, also
contributed to the cash used in operations for the six months ended June 30,
2000.
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For the six months ended June 30, 2000, net cash provided from
investing activities was $27.5 million, which primarily consisted of the sale
of short-term investments offset by purchases of equipment and furniture. At
June 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 October 1999, InsWeb signed a 12-year lease agreement through
2011 for additional office space. As discussed above, InsWeb's restructuring
plan calls for the relocation of the Company's entire operations to
Sacramento. As a result, the Company assigned this 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.
InsWeb anticipates leasing additional space in the Sacramento area to house
its corporate headquarters and agency operations and incurring additional
costs for leasehold improvements, and furniture and equipment.
In addition, under various marketing agreements with its online
partners, InsWeb is obligated to make minimum payments totaling $14.3 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. 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.
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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 $37.0 million for the six months ended June 30,
2000. Additionally, as of June 30, 2000, our accumulated deficit was $109.1
million. Although we experienced significant revenue growth in earlier
periods, this growth rate is not sustainable and revenues may decrease form
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 73% in the six months
ended June 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. As this
strategy proved not to be cost effective, beginning in the second quarter of
fiscal 2000, our continued consumer marketing program will include the
maintenance of certain network online relationships, and other selective
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 second quarter of 2000, our online agency sold 1,983 new automobile
insurance policies for nine carriers in four western states, a 7% increase
over the number of policies sold during the first quarter. Due to the
company's restructuring activities and its relocation to Sacramento, however,
the number of policies sold is expected to decline in the third 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 24%, 11% and 9%, respectively, of our revenues
for the six months ended June 30, 2000. Effective May 1, 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. Until additional agreements with new
carriers can be negotiated and these carriers are integrated into InsWeb's
marketplaces, we expect a decline in revenues 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 nonrenewal. 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 two to 15. If we are unable
to increase the number of insurance companies that participate in our online
marketplace, particularly in the jurisdictions where we currently offer
comparable insurance products from only two or three insurance companies, we
may not be able to attract additional consumers or may lose our existing
consumers to other online competitors offering a wider variety of insurance
companies. As of the date this report, 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. Subsequent to State Farm's nonrenewal of its contract
effective on May 1, 2000, there were 6 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 October 1999 Allstate Corp. announced
an agreement to acquire the personal lines business of CNA Financial Corp.,
one of our participating insurance companies. In the jurisdictions where we
currently offer comparable insurance products from three or fewer insurance
companies, the loss of one or more of these companies, whether due to
industry consolidation or otherwise, could materially reduce the selection of
insurance companies available to consumers on our website, 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 carriers own rating system,
accessing a third party rating engine of the carriers 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' notice or less.
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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 the date this report, we have 202 online relationships, over 50 of
which were added during the first six 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 an arrangement with Yahoo! Inc. under which our site is
the exclusive insurance site included in the Yahoo! Insurance Information
Center. For the year ended December 31, 1999 and six months ended June 30,
2000, we received approximately 10.1% and 9.7% of our website traffic from
our online relationship with Yahoo!, respectively, and approximately 33.7%
and 40.0% of our traffic from all of our online relationships combined,
respectively. In addition, in December 1999, we entered into a marketing
agreement with Microsoft and in February 2000, we entered into a marketing
agreement with certain properties owned by America Online. For the six months
ended June 30, 2000, we received approximately 6.4% of our website traffic
from our online relationship with Microsoft. Our ability to increase our
revenues will depend, in part, on increased traffic to our website that we
expect to generate through these online relationships.
Our relationships with online companies typically have a 12-month term and do
not provide us with automatic renewal rights upon termination. For example,
our agreement with Yahoo! expires in the third quarter of fiscal 2000. 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, nonrenewal or renewal on unfavorable terms of a
relationship from which we generate significant traffic to our website, such
as our relationship with Yahoo!, would harm our business. Additionally, an
online company's failure to maintain efficient and uninterrupted operation of
its computer and communications hardware systems would likely reduce the
amount of traffic we receive 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 30%.
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; James
M. Corroon, Vice Chairman of the Board; 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 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. Mr. Enan and Mr. Corroon opted not to participate in this program. 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 July 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, which will be amortized
over a period of three years, and $1.4 million to software and other
intangible assets, which will be amortized over two years. 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, 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 and are
currently 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 certain U.S. agency securities whose maturity is two years. 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 June
30, 2000:
<TABLE>
<CAPTION>
2000 2001 TOTAL
---- ---- -----
<S> <C> <C> <C>
(In thousands, except interest rates)
Cash and money market funds $11,204 -- $11,204
Average interest rate 6.3% -- 6.3%
Investments $46,777 $8,983 $55,760
Average interest rate 6.5% 6.4% 6.5%
Total investment securities $57,981 $8,983 $66,964
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 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 June 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders, held on June 6, 2000, the
stockholders elected the following individuals to the Board of Directors who
will serve until InsWeb's Annual Meeting of Stockholders in 2003 and until
their successors are elected and qualified: Bruce A. Bunner; M. Gordon Gaddy;
Robert C. Nevins; Donald K. Morford and Robert A. Puccinelli. These five
individuals received the highest number of votes of those eligible to vote,
voting either in person or by proxy.
In addition, the following matter was voted upon by the Stockholders:
To ratify the appointment of PricewaterhouseCoopers LLP as independent public
accountants for the Company for the fiscal year ending December 31, 2000.
<TABLE>
<CAPTION>
Votes
------------------------------------------
<S> <C> <C>
For Against Abstain
27,346,871 18,524 5,633
</TABLE>
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.21 Assignment of Lease and Profit Sharing Agreement by and
between Registrant and Spieker Properties L.P. dated June 28, 2000
10.22 Retention Agreement between Registrant and Mark P.
Guthrie dated June 23, 2000
27 Financial Data Schedule
(b) Reports on Form 8-K.
Current Report dated June 6, 2000 regarding the announcement of the
Company's restructuring and plans to significantly expand its insurance
agency operations and further reduction of operating costs
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.
INSWEB CORPORATION
(REGISTRANT)
Dated: August 15, 2000 /s/ Mark P. Guthrie
------------------------
Mark P. Guthrie
President, Chief Operating
Officer and Chief Financial Officer (acting)
30
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
-------
<S> <C>
10.21 Assignment of Lease and Profit Sharing Agreement by and between Registrant and Spieker Properties L.P.
dated June 28, 2000
10.22 Retention Agreement between Registrant and Mark P. Guthrie dated June 23, 2000
27 Financial Data Schedule
</TABLE>
31
