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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1999
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
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INSWEB CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-3220479
(State or other jurisdiction (I.R.S. Employer
of Identification No.)
Incorporation or organization)
901 MARSHALL STREET, REDWOOD CITY, CALIFORNIA 94063
(Address of principal executive offices)
(650) 298-9100
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
------------------- ------------------------------------
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE
(Title of Class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities 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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The aggregate market value of registrant's voting and non-voting common
equity held by nonaffiliates of registrant, based upon the closing sale price of
the common stock on March 17, 2000, as reported on the Nasdaq National Market,
was approximately $133,283,000. Shares of common stock held by each officer,
director and holder of 5% or more of the outstanding common stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
Outstanding shares of registrant's common stock, $0.001 par value, as of
March 17, 2000: 35,006,062.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the definitive Proxy Statement for registrant's 2000 Annual Meeting
of Stockholders to be filed with the Commission pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this Report are
incorporated by reference into Part III of this Form 10-K Report.
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PART I
THIS REPORT INCLUDES A NUMBER OF FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS
REFLECT OUR CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND OUR POTENTIAL
FINANCIAL PERFORMANCE AND ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD
CAUSE OUR ACTUAL RESULTS AND FINANCIAL POSITION TO DIFFER MATERIALLY FROM WHAT
WE SAY IN THIS REPORT. THESE FACTORS INCLUDE, BUT ARE NOT LIMITED TO, OUR
ABILITY TO GENERATE SIGNIFICANT REVENUES FROM OUR CORE BUSINESS; OUR ABILITY TO
ACHIEVE OR MAINTAIN PROFITABILITY; OUR RELIANCE ON AUTOMOBILE INSURANCE; OUR
ABILITY TO EXPAND OUR OPERATIONS; OUR RELIANCE ON A LIMITED NUMBER OF INSURANCE
COMPANIES FOR OUR CURRENT REVENUES; AND THE SUCCESS OF OUR ONLINE RELATIONSHIPS
IN ATTRACTING CONSUMERS TO OUR WEBSITE. WE MORE FULLY DISCUSS THESE AND OTHER
RISK FACTORS IN "ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND OPERATING RESULTS--RISK FACTORS" AND ELSEWHERE IN THIS REPORT, IN
OUR REGISTRATION STATEMENT ON FORM S-1 (333-78095), AS AMENDED, ORIGINALLY FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 23, 1999 AND IN OUR OTHER
FILINGS WITH THE SEC.
ITEM 1. BUSINESS
OVERVIEW
InsWeb operates a leading online insurance marketplace that enables
consumers to comparison shop online and obtain insurance company-sponsored
quotes for a variety of insurance products, including automobile, term life,
homeowners, renters, home warranty, individual health, small group health and
Medicare supplement insurance. InsWeb's marketplace capitalizes upon the
advantages of the Internet to directly link consumers and insurance companies,
providing consumers with the insurance they need and insurance companies with
the customers they want. InsWeb has combined extensive knowledge of the
insurance industry, technological expertise and close relationships with more
than 54 insurance companies to develop a sophisticated, integrated online
delivery platform. InsWeb's platform enables consumers to efficiently research
insurance-related topics, search for, analyze and compare insurance products,
and apply for and receive insurance company-sponsored quotes for actual
coverage. In addition, InsWeb provides insurance companies with pre-qualified
consumers at substantially lower acquisition costs as well as the scalable,
cost-efficient distribution capabilities of InsWeb's Internet-based model.
INDUSTRY BACKGROUND
ELECTRONIC COMMERCE
The Internet has emerged as a global medium for communication, information
and commerce. International Data Corporation estimates that there were
239 million Internet users worldwide at the end of 1999 and anticipates this
number will grow to approximately 602 million users by the end of 2003. The
Internet possesses a number of unique characteristics that differentiate it from
traditional media and methods of commerce:
- users are able to quickly and easily communicate or access information
without geographic or temporal limitations;
- companies can more cost-effectively and efficiently reach and serve a
large and global group of customers electronically from a central
location;
- companies can provide personalized, low-cost and real-time customer
interaction;
- users enjoy greater convenience and privacy and face less sales pressure;
- users can access a vast amount of information regarding the pricing,
quality and specifications of products and services; and
- companies can easily obtain demographic and behavioral data about
customers, increasing opportunities for direct marketing and personalized
services.
As a result of these unique characteristics and the Internet's growing
adoption rate, businesses have a tremendous opportunity to conduct commerce over
the Internet. International Data Corporation estimates that commerce over the
Internet will increase from approximately $130 billion worldwide in 1999 to
approximately $1.6 trillion in 2003. While many companies initially focused on
facilitating and conducting transactions between businesses over the Internet,
more recently, companies have increasingly used the Internet for a wide variety
of consumer transactions, beginning with the distribution of commodity products,
including books, CDs and videocassettes. As consumers have begun to recognize
the advantages of electronic commerce and have become more comfortable with the
reliability and security of the Internet, companies have begun to offer more
complex products and services online. This trend has continued with the
proliferation of online financial services, beginning with comparatively simple
electronic banking transactions, progressing in complexity to stock trading and
mortgage lending and more recently extending to insurance products and services.
THE TRADITIONAL MARKET FOR INSURANCE IN THE UNITED STATES
According to A.M. Best, in 1998 the insurance market in the United States
totaled more than $875 billion of direct premiums written. Approximately half of
this market consists of personal insurance products such as automobile,
homeowners, term life and health insurance, which are sold to consumers by
insurance companies that compete, state-by-state, primarily on the basis of
price and service. Insurance companies have traditionally used one of three
separate and distinct distribution channels to market their products and
services: independent agents, exclusive agents and direct marketing.
Until the 1970s, the distribution of insurance products was dominated by
independent agents, who solicited and sold insurance on behalf of a broad array
of companies from which they received commissions. Historically, these agents
were able to offer consumers the ability to comparison shop by providing access
to information regarding policies available from multiple companies who
accounted for a substantial majority of the policies being sold at that time.
According to Conning and Company, Inc., however, the market share of independent
agency-based insurance companies for the sale of personal lines of insurance
decreased to 53% by 1972 and to 33% by 1996. Insurance companies representing
the remainder of the market distribute their products either through exclusive
agents, who offer only one company's products, or directly to consumers through
mass marketing techniques such as direct mail and telephone solicitation.
The fragmentation of the insurance industry into independent agent,
exclusive agent and direct distribution channels has made comparison shopping
across a broad range of insurance companies an extremely difficult and
frustrating experience for the consumer. Because of this fragmentation, there is
no single source where consumers can access information regarding the products
and services of a competitive sample of insurance companies. In addition, many
insurance products are complex and combine coverage for multiple risks, making
it difficult for the consumer to compare products on an "apples-to-apples"
basis. Price variability among insurance carriers is often significant. For
example, publicly-filed insurance rates posted on the California Department of
Insurance website in June 1999 show that, within some of the major metropolitan
areas in California, for the same consumer, there was up to a 160% price
differential for homeowners insurance premiums, a 408% differential for
automobile insurance premiums and a 415% differential for renters insurance
premiums. Consumers are often unaware of the extent of this potential price
variability because effectively comparing quotes requires them to undertake the
difficult and time-consuming task of separately contacting several companies and
agents, filling out multiple applications and facing repeated sales pressure,
with no guarantee of achieving their objective of a meaningful comparison.
For insurance companies, regardless of the distribution channel they employ,
the cost of acquiring and servicing customers remains a substantial expense and
reduces profitability. Just finding the customers who fit within the company's
specific targeted risk profiles is a very expensive and time-consuming process,
requiring inefficient advertising and marketing techniques that necessarily
target an overly broad range and large number of potential customers. Once these
customers are identified, significant additional resources are usually required
to effect a sale.
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The combination of these factors has led to an inefficient market that
benefits neither the consumer nor the insurance company. Prices are high,
comparison shopping is extremely difficult and the substantial costs of customer
acquisition and servicing continue to put pressure on profitability.
MARKET OPPORTUNITY FOR ONLINE INSURANCE
According to Forrester Research, the market penetration for sales of
personal insurance products which are researched and selected online, but
purchased through any distribution channel, is expected to grow from
$1.0 billion of personal insurance sales in 1999 to over $14.0 billion in 2004,
an annual growth rate of 70%. Insurance products are ideally suited to an
Internet-based distribution and servicing model for the following reasons:
- insurance products are information-based, thus requiring no physical
delivery or warehousing;
- complex insurance products can be made more understandable through readily
accessible supporting information and glossaries;
- through a single medium, consumers can access information regarding, and
compare the products of, insurance companies using any of the three
traditional distribution channels;
- consumers can compare the terms, conditions and exact coverages of various
insurance products at their own pace, without sales pressure;
- customer data can be efficiently captured through a website, allowing
real-time automated underwriting and streamlined overall processing; and
- insurance companies can reduce the high costs associated with distribution
and servicing through traditional channels.
The Internet can be used in a variety of ways to provide consumers with an
accessible source of pricing and explanatory information on insurance products
and services and provide insurance companies with a cost-effective means of
acquiring and servicing customers. To date, most efforts at using the Internet
to achieve these objectives have employed one of the following three models,
none of which fully capitalizes upon the inherent advantages of Internet-based
distribution:
- SINGLE INSURANCE COMPANY WEBSITE. Many insurance companies have
implemented their own proprietary websites to provide quotes and services.
These websites can be convenient for consumers and allow potential cost
savings for insurance companies; however, they typically provide no
comparative shopping opportunity for the consumer and each insurance
company is required to bear all of the initial and ongoing technology and
marketing costs related to its website.
- WEB-BASED INFORMATION DELIVERY. Several companies have established
websites that utilize publicly available rate data from generic filings
made by insurance companies with state regulators to provide estimated
quotes for a number of insurance companies. While offering online access
to information and the appearance of comparison shopping and requiring no
involvement on the part of insurance companies, this model affords no real
online transactional capability. The estimated quotes may differ
significantly from the price of any coverage actually offered by the
insurance companies, and some companies for whom estimated quotes are
given may not be willing to insure the consumer at all. In any case, the
consumer must still go through the tedious process of completing separate
applications for each insurance company in order to receive an actual
quote.
- WEB-ASSISTED AGENCY DISTRIBUTION. A third online model provides an
Internet-based distribution channel for traditional insurance agencies.
This model allows some limited comparison shopping and requires minimal
investment on the part of the agency. However, like the information
delivery model described above, the quotes provided are estimates that
have not been approved by the insurance company and the consumer must work
through the traditional agency process to receive a
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firm quote. In addition, the consumer does not have access to the products
of insurance companies that choose not to distribute their products
through independent agents, which represent approximately two-thirds of
the personal insurance market. Because the agencies must process
applications in the traditional way and must add additional personnel to
process additional applications, there is little opportunity to use
technology to reduce costs.
InsWeb believes that, while each of these models brings some benefits to
consumers and insurance companies, none adequately capitalizes on the powerful
advantages of the Internet. In order to accomplish this, InsWeb believes that a
model is needed that directly links consumers and insurance companies, allowing
consumers to compare insurance company-sponsored quotes for actual coverage from
a variety of companies on an apples-to-apples basis and enabling insurance
companies to take full advantage of the cost-saving potential of the Internet.
THE INSWEB SOLUTION
InsWeb has developed an online marketplace for insurance products and
services that fully capitalizes upon the advantages of the Internet to directly
link consumers and insurance companies, providing consumers with the insurance
they need and insurance companies with the customers they want. InsWeb has
combined extensive knowledge of the insurance industry, technological expertise
and close relationships with a broad array of insurance companies to develop a
sophisticated, integrated online delivery platform. InsWeb's platform enables
consumers to efficiently research insurance-related topics, search for, analyze
and compare insurance products and apply for and receive insurance
company-sponsored quotes for actual coverage. In addition, InsWeb provides
insurance companies with a flow of pre-qualified consumers at substantially
lower acquisition costs as well as an Internet-based model that is largely
automated and therefore cost-efficient and scalable, allowing substantial
increases in the number of transactions on the online marketplace with minimal
increases in costs.
BENEFITS TO CONSUMERS
ONE-STOP COMPARISON SHOPPING FOR MULTIPLE PRODUCTS. InsWeb provides an
online marketplace through which consumers can choose among products offered by
insurance companies using all three traditional distribution channels. To date,
InsWeb has developed relationships with 54 leading insurance companies
throughout the U.S. A consumer shopping for an insurance product at InsWeb's
online marketplace can receive quotes from InsWeb's participating insurance
companies who offer the product in the consumer's state. Consumers can receive
quotes for automobile, homeowners/renters, health and term life insurance
products in an unbiased marketplace in which consumers make their own decisions
based on the reputation of the insurance company, the level of coverage and the
price of the product being offered. Consumers save time, effort and money by
avoiding the need to contact and complete applications with multiple insurance
companies and agents.
ACCURATE, INSURANCE COMPANY-SPONSORED QUOTES. InsWeb works directly with
participating insurance companies to automate their data capture--I.E., the
processes by which they receive consumer data; underwriting--I.E., the
evaluation of consumer data to determine which consumers they are willing to
insure; rating--I.E., determining a price quote based on a consumer's data; and
quote generation--I.E., electronic presentation of price quotes to consumers. As
a result, InsWeb provides consumers accurate, insurance company-sponsored quotes
for actual insurance coverage. By contrast, the quotes provided by most online
quotation and information services are estimated primarily from insurance
companies' public rate filings, and consumers using these services may find
their actual premium to be significantly different from the initial quote they
received, if the quoted company is willing to insure them at all. InsWeb
believes that online consumers expect accurate quotes for actual coverage and is
committed to working directly with insurance companies to meet that expectation.
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EASE OF USE. InsWeb offers consumers who want to purchase insurance a
variety of helpful information in an easy-to-use format. At the click of a
mouse, consumers can access educational materials on insurance, including
answers to frequently asked questions, a glossary, informative articles and
ratings of insurance companies. InsWeb also provides its customers with
interactive website features to assist them in analyzing the type and amount of
insurance coverage that is most suitable for their needs. InsWeb enables
consumers to update and store their profiles after each interaction, so that
repeated visits are more productive.
CONVENIENCE AND CONTROL. InsWeb provides consumers with the convenience of
shopping from home or office, 24 hours a day, 7 days a week. InsWeb rapidly
responds to consumer inquiries with insurance company-sponsored quotes. InsWeb's
technology and systems are designed to seamlessly and automatically feed the
consumer's data to the insurance company, helping minimize the time and effort
required to consummate a transaction. Through InsWeb's online tools and
analyzers, consumers can assess and manage their insurance needs on their own.
Consumers do not face any sales pressure and may proceed at their own pace,
knowing that their information will be safely and privately stored by InsWeb so
that future sessions can be conducted without the need to reenter the
information. InsWeb is a member of the Online Privacy Alliance and a licensee of
the TRUSTe Privacy Program and adheres to their standards regarding the
protection of the confidential information of online consumers. See "--Privacy
Policy."
BENEFITS TO INSURANCE COMPANIES
LOWER COSTS OF CUSTOMER ACQUISITION AND SERVICE. InsWeb's sophisticated,
integrated technology platform allows each insurance company to offer its
products online regardless of the traditional distribution channel that the
company employs. The information systems of InsWeb's participating insurance
companies are closely integrated with InsWeb's website, enabling them to fully
capitalize on the advantages of its Internet-based distribution model. Because
consumers are pre-screened, insurance companies do not waste resources on
unqualified applicants. In addition, the efficiency and scalability of InsWeb's
Internet-based distribution model allows insurance companies to screen and
underwrite additional customers at minimal marginal cost. For insurance
companies that utilize agents, InsWeb frees up agent time and resources for more
productive, value-added uses, such as closing business and servicing customers.
ENHANCED ACCESS TO NEW QUALIFIED CUSTOMERS. InsWeb enables insurance
companies to take advantage of the Internet as part of their strategy to
accelerate growth and improve their market share. InsWeb provides insurance
companies with a flow of new customers that have been pre-screened based on each
company's unique selection criteria. By participating in InsWeb's online
insurance marketplace, insurance companies gain access to a growing population
of technology-oriented consumers who are increasingly turning to the Internet as
a preferred means of researching and purchasing products and services. InsWeb
offers insurance companies the ability to benefit from the growth of the
Internet and changes in consumer purchasing behavior, as well as improve their
competitive position in attracting desirable new customers.
RAPID MARKET FEEDBACK. InsWeb's advanced technology platform enables
insurance companies to obtain rapid feedback on their comparative performance
within the InsWeb insurance marketplace. This information allows insurance
companies to more quickly and easily adjust their product offerings to add or
remove particular products, change product features, adjust underwriting
criteria and distribute current information to prospective customers. InsWeb
believes that this access to market feedback offers its participating insurance
companies a competitive advantage over other insurance companies.
IMPROVED UNDERWRITING PROFITABILITY AND PRODUCT INNOVATION. Through InsWeb,
insurance companies can acquire and service customers at lower costs. Reduced
customer acquisition and servicing costs enable insurance companies to
underwrite their existing products more profitably and potentially to expand
their product offerings, since reduced costs may allow them to profitably
underwrite more and varied risks. In addition, InsWeb's database of consumer
information and behavior provides insurance companies with the ability to more
frequently and easily evaluate the comparative attractiveness of their existing
products, as
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well as the potential means to develop new products focused on previously
unknown or unreachable market opportunities.
INSWEB'S STRATEGY
InsWeb's strategy is to capitalize upon its expertise, technology and
relationships to provide the leading online insurance marketplace for consumers
and insurance companies. The key elements of InsWeb's strategy include:
ENHANCE THE COMPARATIVE SHOPPING EXPERIENCE FOR CONSUMERS. InsWeb's
objective is to provide consumers and small businesses with a comprehensive
selection of insurance products and services. To achieve this objective, InsWeb
intends to:
- add additional insurance companies to the InsWeb online insurance
marketplace;
- increase the number of states where its participating insurance companies
offer coverage online;
- work with its participating insurance companies to expand the products and
services they offer through the InsWeb online insurance marketplace;
- work with both new and existing insurance companies to offer consumers
more instant online quotes;
- offer products and services to small businesses; and
- expand its geographic coverage outside of the United States.
While expanding its products and services, InsWeb intends to continue to provide
the highest quality customer service and to enhance the overall user experience
on its website.
BUILD STRONG RELATIONSHIPS AND EXTENSIVE TECHNOLOGY INTEGRATION WITH
INSURANCE COMPANIES. InsWeb believes that its combination of extensive
technology integration, industry expertise and strong relationships with
insurance companies provides significant competitive advantages. Integrating
each insurance company into the InsWeb platform presents unique technical and
operational challenges and, therefore, requires a close working relationship
between the insurance company and InsWeb. Following the development process,
InsWeb's implementation and technology teams continue to work closely with each
insurance company on an ongoing basis to integrate InsWeb's infrastructure with
each insurance company's systems. InsWeb responds to each insurance company's
unique needs for integration and program development by offering a full array of
services, from software integration to change management and electronic commerce
strategy development. InsWeb also provides insurance companies with performance
feedback through its extensive consumer and transaction database. InsWeb intends
to continue to strengthen its relationships with participating insurance
companies and to work closely with newly added insurance companies to integrate
their systems with its infrastructure.
REDUCE CUSTOMER ACQUISITION AND SERVICING COSTS. InsWeb intends to continue
to develop technology-based solutions aimed at reducing the overall customer
acquisition and servicing costs of insurance companies. By focusing on the
continued development of its fully integrated, scalable technology platform,
InsWeb intends to enable insurance companies to better target and reach
prospective customers and realize economies of scale not attainable through
traditional insurance distribution channels or other Internet-based distribution
models. By continually incorporating and upgrading fully automated processes for
data capture and delivery, filtering, rating and quote generation, InsWeb
believes that it can significantly reduce customer acquisition costs. InsWeb
intends to continue to work with insurance companies in exploring additional
ways to utilize the InsWeb platform to further reduce the costs associated with
acquiring and servicing customers.
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LEVERAGE ITS TECHNOLOGY PLATFORM AND EXTENSIVE CONSUMER DATABASE. InsWeb
has invested significant resources to develop and deploy its technology
platform, as well as its extensive consumer and transaction database. InsWeb
intends to leverage these assets to enhance the breadth and value of its product
and service offerings. Specifically, InsWeb intends to:
- leverage its technology platform and consumer database to create
opportunities for insurance companies to expand their product offerings;
- continue to license its technology to selected insurance companies and
financial institutions to allow these companies to provide quoting
functionality on their websites;
- continue to provide insurance companies with rapid market feedback on new
product configurations and market performance; and
- leverage its technology platform to provide additional services to
consumers and insurance companies.
EXPAND BRAND AWARENESS AND PRESENCE. InsWeb intends to continue to use both
offline and online marketing campaigns to maximize consumer awareness and
enhance its brand recognition. InsWeb's objective is to become the preferred
online marketplace for insurance products and services. InsWeb will continue to
carefully target online companies with strong market reach, such as major
portals, as well as online companies that are a likely source of insurance
shoppers, such as personal finance, automobile purchase or mortgage origination
websites. Where appropriate, InsWeb intends to form co-branded relationships
with full or limited InsWeb functionality.
THE INSWEB ONLINE INSURANCE MARKETPLACE
The InsWeb online insurance marketplace is a Web-based marketplace that
links consumers directly with insurance companies and enables comparison
shopping for insurance coverage in a convenient and pressure-free environment.
Consumers visiting the InsWeb online insurance marketplace can receive insurance
company-sponsored quotes for actual coverage for a variety of insurance
products, and also can use a variety of InsWeb's interactive website features
and insurance-related information to assist them in determining the type and
amount of insurance coverage that is most suitable for their needs. Consumers
can also access their personal insurance profile, allowing them to retrieve
insurance information stored during previous visits.
THE QUOTE GENERATION AND PURCHASE PROCESS
The quote generation and purchase process involves the following steps:
- data entry by the consumer;
- electronic underwriting;
- electronic rating and generation of price quotes;
- presentation of quotes to the consumer;
- delivery of leads to the insurance companies; and
- subsequent purchase of the insurance policy.
Quotes obtained through the online marketplace are free to consumers, while
participating insurance companies pay transaction fees to InsWeb generally based
on the delivery of qualified leads.
DATA ENTRY. To initiate a shopping session, a consumer completes an online
form that requests information such as the consumer's age, address and coverage
requirements, a process that InsWeb estimates takes approximately 10 to 25
minutes, depending on the type of insurance sought and the
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complexity of the consumer's profile. The quote form captures a comprehensive
set of information designed to address each of the participating insurance
companies' filtering and rating criteria. To assist consumers in evaluating and
fulfilling their insurance needs, InsWeb provides consumers a variety of
interactive website features and insurance-related information. In addition,
InsWeb provides online help throughout the data entry process. The consumer is
required to complete only one form to obtain quotes for a particular type of
insurance from all participating companies offering that type of insurance in
the consumer's state. Throughout the data entry process, consumers are presented
with the option of saving their data into their personal insurance profile.
Consumers who are returning to the online marketplace can simply enter their
user name and password to retrieve information they entered during previous
visits. This information can be used to automatically complete portions of the
quote form for other insurance products. Because the information insurance
companies use to filter, rate and provide quotes to a consumer is entered
directly by the consumer, the insurance companies can reduce or eliminate the
expense associated with collecting consumer data. Moreover, information entered
directly by consumers typically contains fewer errors than information provided
orally to an agent or insurance company representative, who must then enter that
information manually into the insurance company's system.
UNDERWRITING. InsWeb's software uses criteria set by each participating
insurance company to analyze a consumer's data and determine whether it fits
within the company's targeted risk profiles. InsWeb's system can provide rapid
feedback to an insurance company regarding the impact that particular criteria
are having on the number of leads being directed to that company, and also
permits individual criteria to be easily added or removed. Electronic
underwriting eliminates the expense of screening and quoting risks that an
insurance company ultimately may not want to accept. Electronic underwriting
also ensures that consumers are only presented with quotes from companies who
are interested in doing business with them. For a consumer who is not offered
coverage by an insurance company, no quote from that company is presented, thus
preserving the insurance company's opportunity to do business with the consumer
in the future.
RATING. InsWeb's rating process compares a consumer's data against criteria
used in an insurance company's underwriting process to generate insurance
company-sponsored quotes. InsWeb integrates each of its participating insurance
companies' rating criteria into its online marketplace through one of several
rating solutions, depending on the company's preference. These solutions
include:
- a customized interface between InsWeb's site and the company's own rating
engine, which may be housed on the company's legacy system or at InsWeb's
facility;
- an interface between InsWeb's site and a third-party rating engine of the
company's choice; or
- an integration of the company's rating criteria into one of InsWeb's
proprietary rating engines.
In each case, the rating process is developed in conjunction with the
participating insurance company.
PRESENTATION OF QUOTES. After a consumer has completed the form for a
particular product and requested quotes, the consumer is presented with a "quote
pad." The quote pad contains the logos of insurance companies interested in
providing quotes, along with prices for the companies offering instant quotes.
The quote pad also informs the consumer which companies will provide quotes on a
delayed basis, either via e-mail, mail or telephone. The response method varies
among insurance products and companies. Currently, substantially all term life
and health quotes are provided through instant quotes, while most quotes for
automobile insurance are delivered by e-mail. InsWeb is working with its
participating insurance companies to increase implementation of instant quoting
capability.
DELIVERY OF LEADS. InsWeb's participating insurance companies pay
transaction fees to InsWeb generally based on the delivery of qualified leads.
Qualified leads are produced in two ways: for insurance companies providing
instant online quotes, a qualified lead is produced when a consumer clicks to
request insurance coverage based on a specific quote; for insurance companies
providing e-mail or other offline
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quotes, a qualified lead is produced when a consumer clicks to request the quote
itself. In either case, InsWeb is paid a transaction fee whether or not the
consumer actually purchases a policy. Once a lead is generated by the consumer's
request for an application or offline quote, InsWeb transmits the lead to the
selected insurance company by e-mail, file transfer or direct connection to the
insurance company's information system. InsWeb provides each participating
insurance company with custom-formatted lead information based on the company's
individual requirements.
PURCHASE OF POLICY. After InsWeb generates and delivers a qualified lead,
insurance companies may respond directly to the interested consumer by e-mail,
mail or telephone to close the purchase of the policy or direct the lead to an
agent for follow-up. This portion of the transaction does not require further
involvement by InsWeb, although InsWeb monitors insurance company responses and
works with companies and agents to ensure that they are responding to leads
generated from the online insurance marketplace in a timely fashion. In
addition, InsWeb will perform the closing services, in both a traditional agency
and an online setting, for some participating insurance companies.
CUSTOMER CARE. InsWeb provides assistance to consumers throughout the data
entry, quote-generation, delivery and purchase process through embedded help
icons, which link to explanations of the various steps in the process and
through e-mail support. In August 1999, InsWeb introduced its Customer Care
Center to provide additional help to consumers working through the process of
shopping for insurance online. The Customer Care Center provides additional
consumer assistance through real-time chat and live telephone support.
AGENCY OPERATIONS
InsWeb, through its licensed affiliate, began providing closing services
comparable to traditional insurance agencies in October 1999. These closing
services include advising consumers about coverage options, confirming consumer
information, selling the policy, and taking a premium deposit. The InsWeb
affiliate receives a percentage of the premium for each policy sold. The agency
operations were initially limited to closing business on behalf of four auto
insurance companies in the state of California, but are intended to expand to
other states and product lines in 2000. Ten individual agents are employed by
the affiliate to perform these services.
PRODUCTS AND SERVICES
Insurance companies participating in InsWeb's online insurance marketplace
offer automobile, term life, homeowners, renters, and individual and small group
health insurance, as well as motorcycle insurance, and fixed annuities.
AUTOMOBILE INSURANCE. Automobile insurance comprises the largest segment of
the consumer insurance market, and, to date, has accounted for most of the
consumer traffic on InsWeb's online marketplace and a substantial majority of
its revenues. InsWeb believes that, for the foreseeable future, most of its
consumer traffic will continue to be generated by prospective purchasers of
automobile insurance. The number of automobile insurance companies participating
in the InsWeb online marketplace has grown rapidly; since January 1997, the
number of participating insurance companies has grown from two to 31. The
following table shows, as of March 31, 2000, the percentage of the U.S.
population residing in states where at least two companies offer automobile
insurance quotes on the InsWeb online marketplace:
PERCENTAGE OF U.S. POPULATION
NUMBER OF COMPANIES RESIDING IN STATES AND
OFFERING AUTO QUOTES NUMBER OF STATES JURISDICTIONS COVERED
- -------------------- ---------------- -----------------------------
2 or more............................. 46 plus D.C. 94.8%
3 or more............................. 37 85.5%
4 or more............................. 25 72.5%
5 or more............................. 18 55.9%
9
TERM LIFE INSURANCE. InsWeb began offering term life insurance quotes in
April 1996 through a single insurance company. The InsWeb online marketplace
currently offers comparative quotes for term life insurance from six or more
companies in all 50 states plus D.C. The following table shows, as of March 31,
2000, the percentage of the U.S. population residing in states where at least
six companies offer term life insurance quotes on the InsWeb online marketplace:
PERCENTAGE OF U.S. POPULATION
NUMBER OF COMPANIES RESIDING IN STATES AND
OFFERING TERM LIFE QUOTES NUMBER OF STATES JURISDICTIONS COVERED
- ------------------------- ---------------- -----------------------------
6 or more............................. 50 plus D.C. 100.0%
7 or more............................. 49 plus D.C. 93.3%
8 or more............................. 48 plus D.C. 92.9%
INDIVIDUAL HEALTH INSURANCE. InsWeb began offering individual health
insurance quotes in August 1998. Individual health insurance is available in the
form of preferred provider organization plans, health maintenance organization
plans and traditional indemnity plans. As of March 31, 2000, the InsWeb online
marketplace offered quotes for individual health insurance from at least one
insurance company in 40 states plus D.C. (representing 85.1% of the population)
and two insurance companies in 25 states (representing 69.1% of the population).
HOMEOWNERS/RENTERS INSURANCE. InsWeb began offering homeowners and renters
insurance quotes in July 1998. As of March 31, 2000, the InsWeb online
marketplace offered quotes for homeowners insurance from at least one insurance
company in 49 states plus D.C. (representing 98.8% of the population), two or
more insurance companies in 15 states (representing 34.8% of the population) and
three or more insurance companies in 8 states (representing 9.1% of the
population). The online marketplace offers quotes for renters insurance from at
least one insurance company in 48 states plus D.C. (representing 98.4% of the
population), two or more insurance companies in 9 states (representing 21.9% of
the population) and three insurance companies in 1 state (representing 1.8% of
the population).
OTHER PRODUCTS AND SERVICES. InsWeb's online marketplace allows consumers
to shop for other types of insurance in most states. These product lines include
small group health, motorcycle insurance and fixed annuities. At present, the
InsWeb online marketplace does not offer multiple quotes with respect to these
types of insurance, which are each offered by a single insurance company in the
state or states in which they are available. InsWeb's strategy is to expand the
range of insurance products and services offered through its online insurance
marketplace. From time to time, InsWeb licenses its insurance quoting
functionality to insurance companies and financial institutions on a selected
basis.
NON-U.S. MARKETS. In December 1998, InsWeb entered into a joint venture
with SOFTBANK Corp. to create an online insurance marketplace for the Japanese
market. InsWeb currently holds a 25% equity interest in the joint venture. The
joint venture is in the early stages of developing its online marketplace, which
is scheduled to be operational in mid-2000.
In April 1999, InsWeb added automobile insurance quoting functionality for
consumers to its online marketplace through one insurance company in Alberta,
New Brunswick and Ontario, Canada.
INSWEB DATA SERVICES. InsWeb's extensive database currently contains more
than 5,800,000 consumer profiles generated during the consumer shopping
sessions, with approximately 1,200,000 profiles being added each quarter. InsWeb
provides specialized reports summarizing this information to insurance companies
that participate in the InsWeb marketplace for an additional charge. The reports
contain only aggregated data about consumers; no personally identifiable
information is available to the insurance company. The InsWeb data reports are
more timely and Internet-focused than other marketing reports available to
insurance companies. Currently, data products are available to participating
insurance companies for auto insurance and term life insurance.
10
INSURANCE COMPANY RELATIONSHIPS
As of March 31, 2000, InsWeb had relationships with 54 insurance companies,
including many large companies with established brand names that InsWeb believes
are attractive to consumers. These companies include:
TYPE OF INSURANCE INSURANCE COMPANIES
- ----------------- --------------------------------------------------------------------
Automobile.................. AAA Michigan Hartford
AIG Kemper
American Family Nationwide
Amica New York Central Mutual
Allstate Progressive
Avomark (Ohio Casualty) RelianceDirect
CNA Reliant
Country Mutual State Farm
Electric Insurance The Commerce Group
Explorer Travelers
GE Financial Assurance Tri-State
Term Life................... Amica MONY Life Insurance Company
CNA Ohio National
John Hancock State Farm
Lincoln Benefit (Allstate) Western Southern
GE Financial Assurance* Old Republic Life
Midland Life Zurich Kemper
Homeowners/Renters.......... AIG Nationwide
American Family State Farm
Homesite
Individual Health........... Blue Cross/Blue Shield of Florida Golden Rule
Blue Cross/Blue Shield of New Mutual of Omaha
Jersey
Blue Cross/Blue Shield of Virginia Pacificare
Central States
Healthnet*
- ------------------------
* Agreement signed and implementation in process.
To date, InsWeb has been dependent on a limited number of insurance
companies for substantially all of its revenues. The amount of revenues
generated from a given company depends upon a number of variables that are
difficult for InsWeb to control, such as the degree to which the insurance
company's quotes are competitive with those of other insurance companies, and
the proportion of consumers that fit within the insurance company's targeted
risk profiles, as determined by the filtering criteria that the insurance
company is using at any given time. Accordingly, the amount of revenue that
InsWeb generates from a given insurance company is likely to fluctuate from year
to year, both in absolute terms and as a percentage of total revenues. Revenues
from State Farm, AIG and American Family accounted for approximately 31%, 11%
and 11%, respectively, of InsWeb's revenues for the year ended December 31,
1999, and revenues from State Farm, AIG and RelianceDirect accounted for
approximately 40%, 16% and 10% of revenues for the year ended December 31, 1998.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
11
INTERACTIVE WEBSITE FEATURES AND INFORMATION
To assist consumers in evaluating and fulfilling their insurance needs,
InsWeb provides consumers with a variety of interactive website features and
insurance-related information, including:
- tools to help consumers estimate their coverage requirements for auto and
term life insurance;
- research capabilities to help consumers review the financial strength of
insurance companies nationwide;
- frequently asked questions on insurance;
- articles on a wide variety of insurance and personal finance topics; and
- glossaries of insurance-related terms.
MARKETING AND SALES
InsWeb's marketing program consists of a two-pronged effort, with
substantial resources directed both at attracting increased consumer traffic to
the InsWeb website and building and expanding relationships with participating
insurance companies. InsWeb believes that increased traffic will encourage
insurance companies to develop and expand their relationship with InsWeb, and
that enhancing the comparative shopping opportunities available through
increased insurance company participation will drive further increases in
consumer traffic.
CONSUMER MARKETING
InsWeb's consumer marketing program seeks to increase consumer traffic and
brand awareness through the establishment of relationships with online companies
as well as through direct offline and online consumer marketing.
ONLINE RELATIONSHIPS. InsWeb believes that relationships with high-profile
online companies can drive significant traffic to its site. InsWeb seeks out
relationships with companies whose websites feature a high volume of traffic or
a substantive focus that is related to the purchase of insurance coverage, such
as sites related to automobiles or homes. Agreements with these online companies
typically provide that InsWeb and the online company will share revenue from
transaction fees generated through the relationship, and some require InsWeb to
also pay a fixed fee to the online company. Online companies integrate links
into their websites connecting to InsWeb's marketplace. InsWeb provides
functionality to further integrate with online companies and, in some cases,
provides co-branding functionality whereby the online company's logo is
presented on the InsWeb marketplace to those consumers directed to InsWeb's
marketplace from a company's site. For some of InsWeb's more significant online
relationships, including those with Yahoo!, Snap.com and GO Network (Infoseek),
InsWeb has further integrated its functionality with these companies' sites by
customizing the look and feel of InsWeb's insurance-related content and
marketplace to replicate the design characteristics of the company's site.
Additionally, some of these companies have developed customized interfaces on
their own site to link to the InsWeb marketplace. InsWeb's agreements with
online companies typically have a 12-month term, with either party having a
right to terminate the agreement on 30 to 90 days' notice. Notwithstanding the
foregoing, the integration process requires a significant investment of the
company's time and resources, which InsWeb believes motivates the company to
maintain a long-term relationship with InsWeb.
InsWeb and Yahoo! have entered into an agreement pursuant to which Yahoo!
offers a co-branded version of the InsWeb online insurance marketplace on the
Yahoo! website. The agreement provides for InsWeb to be the exclusive provider
of online insurance quotation services on the Yahoo! site. Under the agreement,
InsWeb has agreed to pay to Yahoo! fixed fees plus a referral fee for each user
delivered to an InsWeb quote form from the co-branded site. This agreement
expires in September 2000.
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In December 1999, InsWeb and Microsoft entered into a two-year agreement
pursuant to which Microsoft's MSN Insurance Center on MSN MoneyCentral offers
co-branded comparative shopping services provided by InsWeb. The agreement
provides for InsWeb to be the exclusive provider of online insurance quotation
services on the MSN Insurance Center. Under the agreement, InsWeb has agreed to
pay to MSN fixed fees for certain traffic guarantees plus a fee for each user
delivered to an InsWeb quote form from the co-branded site in excess of certain
minimums.
In February 2000, InsWeb and America On-line entered into a two-year
agreement pursuant to which America Online offers a co-branded version of the
InsWeb online insurance marketplace across the Netscape Netcenter, Compuserve
and Digital City websites. The agreement provides for InsWeb to be the exclusive
provider of online insurance quotation services on the Netscape website and
premier insurance comparison-shopping aggregator of insurance offerings for
Compuserve and Digital City. Under the agreement, InsWeb has agreed to pay to
AOL fixed fees for certain impression targets plus a fee for each click-through
over a certain cumulative minimum threshold.
At December 31, 1999, future minimum payments under these three agreements
were $12,212,500 in 2000 and $9,925,000 in 2001.
As of December 31, 1999, InsWeb had agreements with 139 online companies.
The principal online companies with which InsWeb has relationships, based on the
fees InsWeb has incurred for their services during the six months ended
December 31, 1999, are as follows:
AutoMall InfoSpace.com
CarClub.com Looksmart
CarPrices.com Microsoft
E*Trade Snap.com
GO Network (Infoseek) Yahoo!
TRADITIONAL CONSUMER MARKETING. As part of its branding effort, InsWeb has
developed a consumer marketing campaign, which began in 1998 with radio
advertising in selected metropolitan markets and which was expanded in 1999 to
include national television and syndicated radio advertising. InsWeb also
conducts other consumer marketing activities, such as sweepstakes contests and
other promotional activities.
ONLINE DIRECT-RESPONSE ADVERTISING. InsWeb's online direct-response
advertising is intended to create a presence for InsWeb on a wide range of
websites whose audiences closely match its target audience. InsWeb's key
advertisements are delivered through content sponsorships, banners and keywords
on financial, news, real estate, classifieds, automobile, directory and general
interest sites. InsWeb's advertisements are targeted primarily to consumers who
are actively seeking insurance.
INSWEB REWARDS PROGRAM. In March 2000, InsWeb began a new initiative to
increase the value of a consumer's visit to the InsWeb site even if the consumer
does not obtain an insurance quote. The InsWeb Rewards Program presents
participating consumers with highly targeted offers for products and services at
preferential terms. Companies that participate in this program have the ability
to target particular market segments by defining various criteria to be met by
consumers in order to be presented with their offer. Consumers also will be able
to select the type of offers in which they are interested, including Auto, Home,
Financial Services, Health/Fitness, Travel and Entertainment/Dining. The offer
will be in the form of direct links to the rewards sponsor's website, submitting
the consumer's contact information to the reward sponsor for follow-up, or
electronic coupons that the consumer can print directly from the InsWeb site.
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BUILDING AND MAINTAINING RELATIONSHIPS WITH INSURANCE COMPANIES
InsWeb believes that establishing long-term relationships with reputable
insurance companies is essential to its ability to offer a desirable insurance
marketplace on its website. Accordingly, a significant portion of InsWeb's sales
and marketing organization consists of Client Development Group, whose role is
to market the online marketplace to insurance companies. The focus of this group
is to maintain and expand the product offerings available on the online
marketplace by selling InsWeb's services to new companies and expanding InsWeb's
relationship with participating insurance companies.
An insurance company's decision to participate in the online marketplace
typically involves significant discussions between InsWeb and the insurance
company regarding the types of products and services the insurance company wants
to offer, the markets in which the insurance company wants to initially
participate and the terms of the agreement between InsWeb and the insurance
company. In addition, both InsWeb and the insurance company devote significant
resources to complete the integration of the insurance company into InsWeb's
website. This integration process typically takes from three to six months to
complete.
Once an insurance company decides to participate in InsWeb's online
insurance marketplace, InsWeb's implementation team of more than 20 people work
with the company to integrate its insurance product information, which entails a
process of specification development, education, planning and activation.
Because of the complexity of interfacing with an insurance company's legacy
computer systems, the implementation team conducts a thorough assessment of the
company's business processes, technical capabilities and desired interface to
develop a comprehensive integration plan. Although the implementation process
can be costly and time-consuming for both InsWeb and the insurance company,
InsWeb believes that it represents a significant commitment by the company and
that the company typically views this expenditure of time and resources as an
investment in a long-term relationship with InsWeb. Once an insurance company's
initial implementation is complete, InsWeb works with the company to expand its
geographic coverage and add insurance products.
InsWeb pursues its relationship-building strategy with insurance companies
at three levels: executive management, middle management and operations
personnel. By investing in relationships at all three of these levels, InsWeb
believes that it will have greater success in maintaining and potentially
expanding those relationships. Additionally, InsWeb believes that strong
relationships at each level of an organization are important to ensure effective
coordination and product implementation.
InsWeb markets its online marketplace to insurance companies employing each
of the three traditional distribution channels. InsWeb believes its online
insurance marketplace provides significant benefits to insurance companies
regardless of the distribution channel they use. InsWeb has also developed
programs targeted at the needs of specific channels. For example, InsWeb's
prototype AGENT IN THE MIDDLE software enables participating insurance companies
who employ an agency-based distribution model to present online quotes through
an agent rather than directly to the consumer. InsWeb's E-AGENT CERTIFICATION is
an Internet-based training program that provides agents with training in the use
of the Internet to process insurance quote requests.
TECHNOLOGY
ARCHITECTURE AND INTERFACES
Since its inception, InsWeb has invested significant resources to develop
and deploy its proprietary technology platform that InsWeb believes constitutes
a significant competitive advantage.
InsWeb's software architecture facilitates interoperability among software
components to maximize responsiveness, flexibility and reliability. This
architecture enables InsWeb to efficiently develop and deploy new insurance
company-specific modules for filtering, rating and data delivery. It also
simplifies the process of providing InsWeb's core marketplace functionality for
use on insurance company sites. In order
14
to speed implementation for each participating insurance company, InsWeb has
developed transmission software components which allow consumer data to be
custom-formatted for delivery to each insurance company based on the
requirements of the insurance company's computer system. InsWeb has developed
custom communication software to provide multiple types of real-time
telecommunication links to its participating insurance companies. These
components provide a variety of solutions to the insurance companies to best
meet their needs and interface with their legacy systems. InsWeb has devoted
significant time and resources to maximize the efficiency of integrating new
insurance companies into its online marketplace and to create a flexible,
customizable Web interface. InsWeb's front-end user interface is accessible to
consumers via standard Web browsers and is designed without unnecessary graphics
that would increase download time.
InsWeb's server software operates on servers running the Microsoft Windows
NT operating system. The software is designed for a high-volume transaction
processing environment, with a focus on reliability, redundancy and
around-the-clock availability. It is designed to enable the system to respond
rapidly and to simultaneously underwrite and rate a consumer's profile against
all participating insurance companies' criteria. The software is also designed
for scalability, enabling InsWeb to expand processing capacity through the
addition of more processors and servers as transaction volumes increase.
SECURITY
InsWeb employs third-party firewall technology to protect its corporate
network from intrusion and uses proprietary designs to isolate confidential data
on its network so that only selected information is publicly available on its
website. Consumer information is transmitted to InsWeb's site using Secure
Socket Layer encryption technology, a widely-used technology for transmitting
encoded data via a Web browser. InsWeb employs a number of other encryption
methods for delivery of consumer information to insurance companies. InsWeb
protects its system management functions using security models integrated with
the operating system. Additionally, some sensitive software applications
incorporate proprietary authentication schemes.
SITE OPERATIONS
InsWeb's hardware servers, storage systems, Internet connections, back-up
strategies and network are designed to allow its online marketplace to operate
continuously. InsWeb's main Web servers are located at its headquarters facility
in Redwood City, California. InsWeb uses multiple service providers to access
the Internet over multiple dedicated communication lines. InsWeb uses a separate
server to operate the software for each primary insurance product, as well as at
least one redundant server for each core product. InsWeb uses a number of
internally-developed and third-party software products to monitor the
performance and availability of its website and core products. InsWeb
continuously monitors consumer traffic, response times and capacity to ensure a
high quality of service for consumers and insurance companies. InsWeb maintains
a back-up facility in Irvine, California through a third-party service provider
to ensure the continuous operation of its online marketplace in case of a
failure at its main facility.
PRODUCT DEVELOPMENT
InsWeb devotes significant resources to improving the structure of its
products and delivering additional tools that allow insurance companies to
effectively reach consumers. InsWeb generally follows a semi-quarterly release
schedule for new versions of its online user interface, which may incorporate
technology advances, new product features and improvements in consumer
interactivity. InsWeb also devotes significant resources to refining its online
consumer tools and research materials and developing new support products.
During 1999, InsWeb implemented more than 60 site upgrades and product releases
for its core products in order to add new insurance companies to its online
marketplace, add new states for participating insurance companies and improve
the functionality and consumer experience of its website.
15
InsWeb is also researching new methods of designing more useful
insurance-related material and presenting it to the consumer in a more
meaningful context.
InsWeb's product development expenses were approximately $3.2 million in
1997, $10.1 million in 1998 and $8.9 million in 1999. Product development
expenses in 1998 included approximately $5.5 million of purchased software
licenses that were expensed due to InsWeb's decision not to integrate the
software into its products. As of December 31, 1999, InsWeb had a product
development staff of 101 full-time employees, all located at its headquarters in
Redwood City, California.
PRIVACY POLICY
InsWeb believes that the privacy of personally identifiable information of
Internet users is becoming increasingly important as the use of the Internet for
electronic commerce continues to grow. InsWeb has adopted a privacy policy for
information of users of its online marketplace. InsWeb does not disclose any
personally identifiable information of a user to InsWeb's participating
insurance companies until the user specifically requests insurance coverage
based on an instant online quote, or requests an offline quote or requests to
participate in an InsWeb Rewards Program. InsWeb does not sell or otherwise make
available to any other party any personally identifiable information concerning
its users. However, InsWeb does compile user information in its databases. This
aggregated statistical information is analyzed internally by InsWeb for
marketing purposes and to improve the content and site layout of its website.
This information is made available in aggregate form only, without individual
identification of consumers, to InsWeb's participating insurance companies for
their use in adjusting, refining and expanding their product offerings. InsWeb
is a member of the Online Privacy Alliance and a licensee of the TRUSTe Privacy
Program and adheres to their standards regarding the protection of the
personally identifiable information of Internet users.
COMPETITION
The online insurance distribution market is a new industry and, like the
broader electronic commerce market, is rapidly evolving and is highly
competitive. Increased competition, particularly by companies offering online
insurance distribution, could reduce the fees InsWeb is able to charge its
participating insurance companies or increase the fees it is required to pay to
online companies with which it has relationships, resulting in reduced margins
or loss of market share, any of which could harm its business.
InsWeb competes with:
- single insurance company websites that offer quotes for the company's own
insurance products online or by telephone;
- Web-based information delivery services that use generic filings with
state regulators to deliver estimated price quotes from various insurance
companies;
- Web-assisted agency distribution services, such as Quotesmith.com, that
provide an Internet-based distribution channel for traditional insurance
agencies;
- Intuit, Inc.'s InsureMarket website, which offers some insurance
company-generated insurance quotes;
- companies that provide quotes and sell insurance policies online;
- online workplace marketers that sell insurance to employees over their
employer's intranet; and
- providers of software technology to insurance companies and other
competitors that may target electronic commerce solutions for the
insurance industry.
16
InsWeb believes the principal bases for competition in the online insurance
distribution market include:
- brand awareness;
- variety and quality of insurance company selection;
- strength of relationships and depth of technology integration with
insurance companies;
- accuracy of insurance quotes;
- breadth and pricing of insurance product selection;
- speed, accessibility and convenience;
- quality and quantity of website content; and
- relationships with other online companies.
Based on published reports by Media Metrix concerning recent site visit
data, published estimates by Forrester Research and Cyber Dialogue regarding the
total number of consumers shopping online for insurance, and publicly available
financial and operational data of other companies offering online insurance
quotes, InsWeb believes that its website is one of the three leading insurance
marketplaces in the United States. InsWeb believes that, other than
InsureMarket, which offers insurance company-sponsored quotes for term life
insurance and a limited selection of such quotes for automobile insurance, no
competitors currently offer the opportunity to comparison shop from among
competing insurance company-generated quotes. InsWeb believes that its ability
to offer competing insurance company-sponsored quotes gives it an advantage over
companies that may provide estimated quotes, or insurance company websites that
only offer quotes from a single insurance company.
Notwithstanding the foregoing, some of InsWeb's current competitors have
longer operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing and other resources than InsWeb does.
In addition, InsWeb believes it will face increasing competition as the online
financial services industry develops and evolves. InsWeb's 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, companies with which
we have distribution relationships and third-party service providers.
Accordingly, InsWeb may not be able to maintain or grow consumer traffic to its
website and its base of participating insurance companies, its competitors may
grow faster than it does, or companies with which it has strategic relationships
may discontinue their relationships with it, any of which would harm its
business.
GOVERNMENT REGULATION
The insurance industry is subject to extensive regulation under state laws.
Insurance laws and regulations cover all aspects of the insurance process,
including sales techniques, underwriting for eligibility, rates, compensation,
claim payments and record keeping by licensed insurance companies and insurance
agents. InsWeb performs functions for licensed insurance companies and is,
therefore, required to comply with a complex set of rules and regulations that
often vary from state to state. If InsWeb fails to comply with these rules and
regulations, InsWeb, an insurance company doing business with InsWeb, 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 require changes to InsWeb's business or
otherwise
17
harm InsWeb's business. Furthermore, because the application of online commerce
to the insurance market is relatively new, the impact of current or future
regulations on InsWeb's business is difficult to anticipate.
A company that does business as an insurance agent is generally required to
be licensed in any state in which it conducts that business. Although InsWeb
does not believe that its historical activities constitute doing business as an
insurance agent under existing laws and regulations, InsWeb has received direct
and indirect inquiries from insurance regulatory authorities in several states
suggesting that its activities may be considered to fall under their licensing
jurisdiction. Should these or other regulatory authorities pursue inquiries and
ultimately determine that InsWeb's activities required licensure, InsWeb's
business could be harmed.
In order to provide its current and future closing services and conduct
other future business activities that require a license, InsWeb has caused a
wholly-owned subsidiary to be licensed as an insurance agent. This subsidiary is
currently licensed in 39 states and in the remaining eleven states where
corporations are not eligible to become licensed, InsWeb is licensed through its
officers or through resident agents that contract with InsWeb. InsWeb intends to
post prominently on its website the jurisdictions in which the subsidiary is
licensed. Links to agents that contract with InsWeb will be established to
afford consumers access to licensed agencies. InsWeb's operations depend on the
validity of and its continued good standing under the licenses and approvals
pursuant to which InsWeb's subsidiary, licensed officers and resident agents
operate. Licensing laws and regulations vary from jurisdiction to jurisdiction.
The applicable licensing laws and regulations are subject to amendment or
interpretation by regulatory authorities. Such authorities generally are vested
with broad discretion concerning the allowance, renewal and revocation of
licenses and approvals. The inability to obtain the requisite agent licenses or
other necessary licenses, permits, or authorizations could harm InsWeb's
business.
InsWeb transferred to its licensed subsidiary responsibility for the ongoing
operation of InsWeb's website in April 1999, and intends to conduct business
activities that require a license through this subsidiary and InsWeb's licensed
officers and agents. Offering services through this licensed subsidiary or
through licensed officers and agents could create conflicts with insurance
companies that have policies prohibiting them from employing insurance agents or
from selling insurance through agents that compete with their own exclusive
agents. These conflicts could result in a loss of business from these insurance
companies and could harm InsWeb's business.
InsWeb developed its Customer Care Center to provide assistance to consumers
who visit InsWeb's website through real-time chat and live telephone support.
InsWeb believes that the defined responsibilities of the service representatives
staffing the Customer Care Center should not require licensure; however, InsWeb
intends to comply with any licensing requirement of the jurisdictions served by
the Customer Care Center.
InsWeb faces additional regulatory risk because most of the laws and
regulations governing insurance agents contemplate or assume paper-based
transactions and do not currently address the delivery of required disclosures
or other documents through electronic communications. Until these laws and
regulations are revised to clarify their applicability to electronic commerce,
any company offering insurance products and services through the Internet or
other means of electronic commerce will face uncertainty as to compliance with
these laws and regulations. Moreover, there are a number of bills pending before
Congress that could fundamentally change the traditional role of state
regulation of insurance. InsWeb's policies and procedures may not be deemed
acceptable by any regulatory body examining its activities in light of these
potentially different laws and regulations. Any adverse regulatory actions could
seriously harm InsWeb's business.
In addition, many state insurance codes limit the collection and use of
personal information by insurance companies, agents, or insurance service
organizations and, under certain circumstances, the payment of insurance-related
compensation to unlicensed persons. If InsWeb does not comply with these
18
state laws, InsWeb could be subject to fines or other enforcement proceedings
that could harm its business. To date, InsWeb has not been notified by any
regulatory authority that its information practices or compensation
methodologies do not comply with these state laws.
INTELLECTUAL PROPERTY
InsWeb regards its intellectual property as critical to its success, and
relies upon trademark, copyright and trade secrets laws in the United States and
other jurisdictions to protect its proprietary rights. The INSWEB mark has been
registered in the United States, France, Germany, South Korea and the United
Kingdom, and applications are pending in several other countries. Other U.S. and
worldwide trademark applications include, but are not limited to, eAgent,
InsWeb.com, Powered by InsWeb, and Where You and Your Insurance Really Click.
InsWeb has applied for patents on its core technology and related patentable
subject matter, however no patent has yet issued, and thus InsWeb cannot yet
legally prevent a competitor from independently using similar functionality.
InsWeb's pending 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. In addition, effective
patent, copyright, trademark, and trade secret protection may be unavailable or
limited in some foreign countries. InsWeb also seeks to protect its proprietary
rights through physical and technological security measures, and through the use
of confidentiality or license agreements with its business partners, employees,
consultants, advisors and others, and generally to control access to, and
distribution and use of, its software, documentation, business and other
proprietary information. Despite InsWeb's efforts to protect its proprietary
rights from unauthorized use or disclosure, employees, consultants, advisors or
others may not maintain the confidentiality of InsWeb's proprietary information,
and this proprietary information may otherwise become known, or be independently
developed, by competitors. The steps InsWeb has taken may not prevent
misappropriation of its proprietary rights, particularly in foreign countries
where laws or law enforcement practices may not protect its proprietary rights
as fully as in the U.S.
InsWeb licenses its trademarks and similar proprietary rights to third
parties. While InsWeb attempts to ensure that the quality of its brand is
maintained by these companies, they may take actions that could harm the value
of InsWeb's proprietary rights or the reputation of InsWeb or its services.
InsWeb may receive notice of claims of infringement of other parties'
proprietary rights or claims that its own patents or other intellectual property
rights are invalid. From time to time InsWeb has been subject to infringement
claims in the ordinary course of its business, including claims of alleged
infringement of the trademark rights of third parties by InsWeb and the
companies with which it does business. Any of these claims, with or without
merit, could be time consuming to defend, result in costly litigation, divert
management attention and resources or require InsWeb to enter into royalty or
licensing agreements. Licenses may not be available on reasonable terms, if at
all, and the assertion or prosecution of any infringement claims could
significantly harm InsWeb's business.
EMPLOYEES
As of December 31, 1999, InsWeb had 297 full-time employees, including 101
employees primarily engaged in product development, 125 in sales and marketing
and 71 in management and administration. InsWeb has never had a work stoppage,
and none of its employees are currently represented under collective bargaining
agreements. InsWeb considers its relations with its employees to be good. InsWeb
believes that its future success will depend in part on the continued service of
its senior management and key technical personnel and its ability to attract,
integrate, retain and motivate highly qualified technical and managerial
personnel. Competition for qualified personnel in InsWeb's industry and
geographical location is intense. InsWeb may not continue to be successful in
attracting and retaining a sufficient number of qualified personnel to conduct
its business in the future.
19
EXECUTIVE OFFICERS OF THE REGISTRANT
As of March 7, 2000, our executive officers were as follows:
NAME POSITION WITH THE COMPANY AGE
- ---- ----------------------------------------------------------- --------
Hussein A. Enan............... Chairman of the Board, President and Chief Executive 53
Officer
James M. Corroon.............. Vice Chairman of the Board 60
Mark P. Guthrie............... Executive Vice President, Chief Operating Officer and 38
Acting Chief Financial Officer
Marian C. Taylor.............. Senior Vice President, Secretary 51
HUSSEIN A. ENAN co-founded InsWeb in February 1995 and has served as its
Chairman of the Board and Chief Executive Officer since its inception and as its
President since May 1999. From March 1992 to November 1994, Mr. Enan was a
general partner at E.W. Blanch, a reinsurance intermediary that merged with his
own wholly-owned company, Enan & Company, a reinsurance intermediary, in
March 1992. Mr. Enan founded Enan & Company in February 1979. From
November 1970 to March 1979, Mr. Enan held various executive positions at BEP
International, a Canadian reinsurance intermediary.
JAMES M. CORROON has been a director of InsWeb since August 1996 and has
served as its Vice Chairman of the Board since August 1999. Mr. Corroon has been
a director of Willis Corroon of California, an insurance services firm, since
January 1996. From October 1966 to December 1995 Mr. Corroon held various
management positions with Willis Corroon and its predecessor entity, Corroon &
Black Corporation.
MARK P. GUTHRIE joined InsWeb in September 1997 as Senior Vice President of
Strategic Partnerships and has served as its Executive Vice President since
July 1998 and as its Chief Operating Officer since January 2000. From July 1995
to August 1997, Mr. Guthrie held various positions with Industrial Indemnity, a
nationwide property and casualty insurance company, most recently as senior
operating officer of national programs.
MARIAN C. TAYLOR joined InsWeb in July 1997 as Senior Vice President,
General Counsel and Secretary and currently serves as Senior Vice President and
Secretary. From April 1993 to June 1997, Ms. Taylor was engaged in the private
practice of law. From March 1992 to March 1993, Ms. Taylor was a vice president
of E.W. Blanch. From September 1990 to March 1993, Ms. Taylor was vice president
and corporate counsel of Enan & Company.
ITEM 2. PROPERTIES.
InsWeb's corporate headquarters and its principal administrative, product
development, sales and marketing operations are located in approximately 75,500
square feet of office space in Redwood City, California, which InsWeb occupies
under a lease expiring in September 2008, subject to InsWeb's option to extend
the term for an additional 10 years. InsWeb currently subleases approximately
15,180 square feet of this space. In October 1999, InsWeb entered into a 12-year
lease for approximately 160,000 square feet in San Carlos, California to house
InsWeb's future headquarters. InsWeb intends to move its executive,
administrative and marketing personnel to the San Carlos facility in the first
six months of 2000 with the technical staff scheduled to move later in 2000.
After the completion of these moves, InsWeb expects to sublease the office space
it currently leases in Redwood City.
InsWeb's Customer Care Center and agency operations is located in
approximately 17,000 square feet of office space in Westlake Village,
California, which InsWeb occupies under a lease expiring in July 2004, subject
to InsWeb's option to extend the term for an additional 10 years. InsWeb also
leases sales offices in Chicago, Illinois and Abindon, Maryland. InsWeb believes
that its existing facilities are adequate to meet
20
its needs for the immediate future and that future growth can be accommodated
through the leasing of additional or alternative space near its current
facilities.
ITEM 3. LEGAL PROCEEDINGS.
InsWeb is not a party to any pending legal proceedings which it believes
will materially affect its financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
InsWeb did not submit any matters to a vote of its security holders during
the quarter ended December 31, 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
InsWeb consummated its initial public offering on July 23, 1999. Our common
stock is quoted on the Nasdaq National Market under the symbol "INSW." As of
December 31, 1999, there were approximately 212 stockholders of record. Because
many shares are held by brokers and other institutions on behalf of
stockholders, we are unable to estimate the total number of stockholders
represented by these record holders. The following table sets forth, for the
quarters indicated, the high and low sales price per share of our common stock
as reported on the Nasdaq National Market:
PRICE RANGE
------------------------------------------
THIRD QUARTER FOURTH QUARTER
-------------------- -------------------
HIGH LOW HIGH LOW
-------- --------- -------- --------
Year Ended December 31, 1999................. $44.00 $15.44 $35.69 $16.00
We have not paid any cash dividends on our capital stock. We currently
intend to retain our earnings for use in the operation and expansion of our
business and, therefore, we do not anticipate paying any cash dividends in the
foreseeable future.
21
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Operating results" and the consolidated financial statements and the notes
thereto included elsewhere in this Form 10-K.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1995(1) 1996 1997 1998 1999
----------- ----------- ----------- ------------ ------------
CONSOLIDATED STATEMENT OF OPERATIONS
DATA
Revenues:
Transaction fees................... $ -- $ 6,617 $ 115,758 $ 3,151,423 $ 19,137,713
Development and maintenance fees... 199,351 551,406 789,337 2,673,450
Other revenues..................... 41,936 82,507 369,416 29,375
----------- ----------- ----------- ------------ ------------
Total revenues................... -- 247,904 749,671 4,310,176 21,840,538
Operating expenses:
Product development................ 773,713 2,899,737 3,209,587 10,077,497 8,870,530
Sales and marketing................ 551,964 2,009,701 3,166,644 8,953,700 33,477,172
General and administrative......... 699,690 2,730,066 3,258,881 6,639,816 13,474,201
Amortization of stock-based
compensation..................... -- -- 470,455 540,489 1,272,106
Amortization of intangible
assets........................... -- -- -- -- 3,129,047
----------- ----------- ----------- ------------ ------------
Total operating expenses......... 2,025,367 7,639,504 10,105,567 26,211,502 60,223,056
----------- ----------- ----------- ------------ ------------
Loss from operations................. (2,025,367) (7,391,600) (9,355,896) (21,901,326) (38,382,518)
Other income (expense), net.......... -- -- -- 600,000 (165,841)
Interest income (expense), net....... (5,851) 121,584 293,173 (1,188,550) 2,347,543
----------- ----------- ----------- ------------ ------------
Net loss............................. $(2,031,219) $(7,270,016) $(9,062,723) $(22,489,876) $(36,200,816)
=========== =========== =========== ============ ============
Net loss per share basic and
diluted............................ $ (677.07) $ (0.56) $ (0.62) $ (1.52) $ (1.52)
=========== =========== =========== ============ ============
Shares used in computing net loss per
share--basic and diluted........... 3,000 13,054,716 4,601,318 14,813,013 23,863,850
=========== =========== =========== ============ ============
Pro forma net loss per share--basic
and diluted........................ $ (677.07) $ (0.40) $ (0.43) $ (0.92) $ (1.17)
=========== =========== =========== ============ ============
Shares used in computing pro forma
net loss per share--basic and
diluted............................ 3,000 18,348,845 21,242,209 24,408,089 31,000,310
=========== =========== =========== ============ ============
- --------------------------
(1) Represents period from February 28, 1995 (Inception) to December 31, 1995
DECEMBER 31
-------------------------------------------------------------
1995 1996 1997 1998 1999
---------- --------- --------- ---------- -----------
CONSOLIDATED BALANCE SHEET DATA
Cash and equivalents......................... 6,150 6,806,899 2,360,153 8,337,133 $25,688,760
Short-term investments....................... -- -- -- -- 64.063,830
Working capital (deficit).................... (1,564,389) 6,738,942 2,039,789 5,496,879 91,362,020
Total assets................................. 423,294 9,352,924 5,139,749 49,356,748 118,280,904
Long term debt............................... -- -- -- 2,089,137 1,464,558
Total stockholders' equity (deficit)......... (1,184,168) 7,476,248 3.062,630 19,582,072 111,184,822
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS ANNUAL REPORT ON FORM 10-K AND IN PARTICULAR MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTAINS
FORWARD-LOOKING STATEMENTS WITH RESPECT TO INSWEB'S FUTURE FINANCIAL
PERFORMANCE. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO VARIOUS RISKS AND
UNCERTAINTIES, INCLUDING THE FACTORS DESCRIBED BELOW UNDER THE CAPTION "RISK
FACTORS," AS WELL AS IN INSWEB'S REGISTRATION STATEMENT ON FORM S-1 AND OTHER
DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, THAT COULD CAUSE
INSWEB'S ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR THOSE
CURRENTLY ANTICIPATED.
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 health insurance, and obtain insurance
company-sponsored quotes for actual coverage. In order to create this
marketplace, InsWeb has established close relationships with more than 49
insurance companies throughout the United States.
InsWeb was incorporated in February 1995. During 1995 and 1996, InsWeb's
operating activities principally involved the design of its online marketplace
and the development of a technology platform capable of handling the complex
processing requirements of numerous insurance companies as well as heavy volumes
of consumer traffic. From late 1996 through early 1998, InsWeb focused its
efforts on establishing relationships with leading insurance companies,
assisting them with the development of their online distribution strategies and
building custom interfaces between their information systems and InsWeb's
technology platform. In the second quarter of 1998, InsWeb initiated activities
designed to attract consumer traffic to its website, including commencing local
advertising campaigns and the establishment of strategic relationships with key
Internet portals such as Yahoo!, as well as other online businesses that are
sources of insurance shoppers, such as personal finance, automobile purchase and
mortgage origination websites. As a result of these activities, consumer visits
to the InsWeb site and completed shopping sessions (site visits in which a
consumer completes a quote form for a particular insurance product) have
increased substantially in subsequent quarters.
InsWeb's principal source of revenues is transaction fees. While quotes
obtained through InsWeb's online insurance marketplace are provided to consumers
free of charge, InsWeb's participating insurance companies pay transaction fees
to InsWeb generally based on qualified leads delivered to them electronically.
Qualified leads are produced in two ways: for insurance companies offering
consumers instant online quotes, a qualified lead is produced when a consumer
requests insurance coverage based on a specific quote; for insurance companies
providing e-mail or other offline quotes, a qualified lead is produced when the
consumer clicks to request the quote itself. In either case, transaction fees
are payable whether or not the consumer actually purchases an insurance policy
from the insurance company, and revenue from transaction fees is recognized at
the time the qualified lead is delivered to the insurance company.
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.
23
Development and maintenance fees are expected to account for a declining
percentage of total revenues as InsWeb's online marketplace expands and
transaction fees increase.
InsWeb initially focused its efforts on developing insurance company
coverage for automobile insurance in order to be able to offer true comparative
online shopping for this important segment of the insurance market. Automobile
insurance accounted for approximately 64% of total revenues in 1997, 75% in 1998
and 78% in 1999. Automobile insurance is expected to continue to account for a
substantial portion of InsWeb's revenues for the foreseeable future and may
continue to increase as a percentage of revenues as transaction fees account for
a greater portion of InsWeb's revenues. However, InsWeb intends to continue to
expand its online insurance marketplace by adding new products and additional
insurance companies and expects fees related to automobile insurance to
eventually decrease as a percentage of revenues as additional insurance
companies and products are brought online.
Despite the ongoing addition of new insurance companies to its online
insurance marketplace, InsWeb has been dependent on a limited number of
insurance companies for a majority of its revenues. Revenues from State Farm,
AIG and American Family accounted for approximately 31%, 11% and 11%,
respectively, of InsWeb's revenues for the year ended December 31, 1999, and
revenues from State Farm, AIG and RelianceDirect accounted for approximately
40%, 16% and 10%, respectively, of InsWeb's revenues for the year ended
December 31, 1998. InsWeb expects its revenues to become less concentrated as
new insurance companies are added to its online insurance marketplace. However,
because of the broad market presence of some of InsWeb's participating insurance
companies, InsWeb expects to continue to generate a substantial portion of its
revenues from a limited number of insurance companies for the foreseeable
future.
Product development expenses consist primarily of payroll and related
expenses for development and technology personnel. To date, InsWeb has not
capitalized any of its software development costs. Because the timing of the
commercial release of its products has substantially coincided with their
technological feasibility, all software development costs have been expensed as
incurred. InsWeb intends to continue to expand its online insurance marketplace
by adding additional product offerings and participating insurance companies and
expects that these activities will require additional personnel. Accordingly,
InsWeb expects that its product development expenses will continue to increase
for the foreseeable future.
Sales and marketing expenses consist primarily of payroll and related
expenses for InsWeb's sales and marketing personnel as well as consumer
marketing expenditures for advertising, public relations, promotions and fees
paid to online companies with which InsWeb has relationships and expenses
related to its customer care and insurance agency operations. InsWeb intends to
significantly increase its sales and marketing expenses in order to establish
and maintain relationships with insurance companies, attract increased consumer
traffic to the InsWeb site, and develop the InsWeb brand. InsWeb intends to
invest substantially in an integrated consumer marketing program including the
expansion and enhancement of its network of online relationships as well as
traditional offline and online advertising campaigns designed to increase
consumer awareness of InsWeb and its online insurance marketplace. At the same
time, InsWeb intends to continue to devote substantial resources to market the
InsWeb online marketplace to insurance companies, to add new insurance companies
and expand relationships with participating companies so that it can offer
consumers greater comparison shopping opportunities over an increasingly broad
selection of products.
General and administrative expenses consist primarily of payroll and related
expenses for InsWeb's management, administrative and accounting personnel,
expenses relating to site operations, professional fees and other general
corporate expenses. InsWeb expects that, in support of the continued growth of
its business and its operations as a public company, general and administrative
expenses will continue to increase for the foreseeable future.
24
In order to accelerate the development of its health insurance product
offerings, InsWeb acquired Benelytics, Inc., a developer of employee health
benefits selection and management software and reference data products. The
acquisition was effective on December 31, 1998 and was accounted for using the
purchase method of accounting. Accordingly, the purchase price was allocated to
the tangible and intangible assets acquired and liabilities assumed on the basis
of their respective fair values as of the acquisition date. The total purchase
price of $8.7 million consisted of 908,561 shares and warrants to purchase an
aggregate of 12,246 shares of the Company's common stock with an estimated fair
value of approximately $8.5 million and acquisition-related expenses and assumed
liabilities. Of the total purchase price, $7.3 million was allocated to goodwill
and $1.4 million to software and other intangible assets. The goodwill will be
amortized over three years, and the other intangible assets will be amortized
over two years.
Since its inception, InsWeb has incurred significant losses, and as of
December 31, 1999, InsWeb had an accumulated deficit of $74.4 million. These
losses and this accumulated deficit have resulted from the significant costs
incurred in the development of InsWeb's technology platform, the establishment
of relationships with insurance companies, their integration with the InsWeb
site, and InsWeb's marketing and sales activities. InsWeb intends to continue to
invest heavily in product development, sales and marketing and in its
administrative infrastructure. As a result, InsWeb believes that it will
continue to incur substantial operating losses for the foreseeable future.
Although InsWeb has experienced significant revenue growth in recent periods,
its operating results for future periods are subject to numerous uncertainties,
and there can be no assurance that InsWeb's revenue growth will continue or that
it will be able to achieve or sustain profitability. In view of the rapidly
evolving nature of InsWeb's business and its limited operating history, InsWeb
believes that period-to-period comparisons of its operating results are not
necessarily meaningful and should not be relied upon as an indication of future
performance.
RESULTS OF OPERATIONS
The following table sets forth statement of operations data as a percentage
of total revenues for the periods indicated:
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
-------- -------- --------
Revenues:
Transaction fees.............................. 15.4% 73.1% 87.6%
Development and maintenance fees.............. 73.6 18.3 12.2
Other revenues................................ 11.0 8.6 0.2
-------- ------ ------
Total revenues.............................. 100.0 100.0 100.0
Operating expenses:
Product development........................... 428.1 233.8 40.6
Sales and marketing........................... 422.4 207.7 153.3
General and administrative.................... 434.7 154.1 61.7
Amortization of stock-based compensation...... 62.8 12.5 5.8
Amortization of intangible assets............. -- -- 14.3
Total operating expenses.................... 1,348.0 608.1 275.7
-------- ------ ------
Loss from operations............................ (1,248.0) (508.1) (175.7)
Other income, net............................... -- 13.9 (0.8)
Interest income (expense), net.................. 39.1 (27.6) 10.7
-------- ------ ------
Net loss........................................ (1,208.9)% (521.8)% (165.8)%
======== ====== ======
25
YEARS ENDED DECEMBER 31, 1999 AND 1998
REVENUES
TRANSACTION FEES. Transaction fees accounted for $19.1 million, or 87.6%,
of total revenues in 1999, compared to $3.2 million, or 73.1%, in 1998. This
increase was the result of a substantial increase in the number of completed
shopping sessions and, to a lesser extent, increased revenues per completed
shopping session. 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. The increase in revenues per
completed shopping session was due to increased insurance company coverage and,
to a lesser degree, increases in the average transaction fee per qualified lead.
Although transaction fees are expected to increase in fiscal 2000, they may not
grow at as high a rate as in prior periods.
DEVELOPMENT AND MAINTENANCE FEES. Development and maintenance fees
accounted for $2.7 million, or 12.2%, of total revenues in 1999, compared to
$789,000, or 18.3% in 1998. The increase in development fees resulted primarily
from an increased number of participating insurance companies whose integration
with the InsWeb online insurance marketplace became operational during 1999
compared to 1998. Maintenance fees increased as a result of the expansion in the
overall number of InsWeb's participating insurance companies.
OPERATING EXPENSES
PRODUCT DEVELOPMENT. Product development expenses decreased to
$8.9 million in 1999 from $10.1 million in 1998. This decrease was primarily due
to the $5.5 million cost of software licenses that were expensed in 1998 due to
InsWeb's decision not to integrate the software into its products. Exclusive of
this expense, product development expenses increased in 1999 over 1998,
primarily due to the hiring of personnel to support the requirements of InsWeb's
growing network of participating insurance companies and online relationships
and to design, test and deploy InsWeb's expanding line of product offerings.
SALES AND MARKETING. Sales and marketing expenses increased to
$33.5 million in 1999 from $9.0 million in 1998. This increase was due to
substantial increases in consumer marketing expenses, including increased costs
and fees associated with new and existing online relationships, costs related to
national radio and television campaigns, an increase in sales and marketing
personnel and operating costs associated with establishing the Company's
Customer Care Center to provide additional customer service.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
to $13.5 million in 1999 from $6.6 million in 1998. This increase was primarily
due to increased personnel and related costs, increased office and occupancy
costs associated with additional leased office facilities and increased
depreciation related to capital expenditures.
AMORTIZATION OF STOCK-BASED COMPENSATION. Amortization of stock-based
compensation was $1.3 million in 1999 compared to $500,000 in 1998. This
increase was attributable to the amortization of additional deferred
compensation charges related to certain stock option grants where the Company
has determined that the deemed fair market value on the date of grant was in
excess of the exercise price of the options.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets was
$3.1 million in 1999. This amount was attributable to the acquisition of
Benelytics in December 1998.
OTHER INCOME, NET
Other expense in 1999 primarily consisted of InsWeb's equity share of the
net loss of InsWeb Japan K.K. As of December 31, 1999, InsWeb owned a 25% equity
interest in InsWeb Japan K.K. Other income, net in 1998 represented income from
the sale of assets of InsWeb's property and casualty agents line of business,
net of a $50,000 non-compete fee. Additionally, the Company has a $5.5 million
letter of credit
26
securing the lease which is collateralized by a portion of the Company's
investments. This line increases to $9.0 million in May 2000.
INTEREST INCOME (EXPENSE), NET
Interest income (expense), net includes income earned on InsWeb's invested
cash and investments and expenses related to its outstanding debt obligations.
Net interest income was $2.3 million in 1999, compared to net interest expense
of $1.2 million in 1998. The increase in net interest income was primarily a
result of the repayment of the line of credit and the investment of the proceeds
from the issuances of preferred and common stock.
YEARS ENDED DECEMBER 31, 1998 AND 1997
REVENUES
TRANSACTION FEES. Transaction fees increased to $3.2 million in 1998 from
$116,000 in 1997. These increases were primarily due to substantial increases in
the number of completed shopping sessions and, to a lesser extent, increased
revenues per completed shopping session. The increase in shopping sessions
resulted from increased consumer traffic due to InsWeb's consumer marketing
activities that were initiated in the second quarter of 1998 and the addition of
a substantial number of online relationships. The increase in revenues per
completed shopping session was due to increased insurance company coverage and,
to a lesser degree, increases in the average transaction fee per qualified lead.
DEVELOPMENT AND MAINTENANCE FEES. Development and maintenance fees
increased to $789,000 in 1998 from $551,000 in 1997. These increases were
primarily the result of increases in the number of new insurance carriers added
to the InsWeb online insurance marketplace.
OTHER REVENUES. Other revenues of $369,000 in 1998 related primarily to
fees received under a non-recurring license of software technology. Other
revenues of $83,000 in 1997 related to services that InsWeb no longer offers.
OPERATING EXPENSES
PRODUCT DEVELOPMENT. Product development expenses increased to
$10.1 million in 1998 from $3.2 million in 1997. The increase in 1998 was
primarily due to the $5.5 million cost of software licenses that were expensed
due to InsWeb's decision not to integrate the software into its products. The
remainder of the increase was due to the continued hiring of personnel to
support the requirements of InsWeb's growing network of participating insurance
companies and online relationships and to design, test and deploy InsWeb's
expanding line of product offerings.
SALES AND MARKETING. Sales and marketing expenses increased to
$9.0 million in 1998 from $3.2 million in 1997. These increases were due to a
substantial increase in consumer marketing expenses, including costs and fees
associated with new online relationships, as well as an increase in sales and
marketing personnel and related costs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
to $6.6 million in 1998 from $3.3 million in 1997. These increases were
primarily due to increased personnel and related costs, increased office and
occupancy costs and increased depreciation related to capital expenditures.
AMORTIZATION OF STOCK-BASED COMPENSATION. Amortization of stock-based
compensation was $0.5 million in 1998 compared to $0.5 million in 1997. The
amortization is attributable to the amortization of deferred compensation
charges related to certain stock option grants where the Company has determined
that the deemed fair market value on the date of grant was in excess of the
exercise price of the options.
27
OTHER INCOME, NET
Other income, net in 1998 represented income from the sale of assets of
InsWeb's property and casualty agents line of business, net of a $50,000
non-compete fee.
INTEREST INCOME (EXPENSE), NET
Net interest expense of $1.2 million in 1998 was due to interest paid on
increased borrowings. Net interest income in 1997 resulted from InsWeb's
investment of proceeds received from the sale of preferred and common stock.
LIQUIDITY AND CAPITAL RESOURCES
InsWeb has financed its operations primarily through private placements of
equity securities, borrowings from an affiliate of one of its investors and an
initial public offering of its common stock, which raised net proceeds of
$89.6 million in July 1999. At December 31, 1999, InsWeb's principal source of
liquidity was $89.8 million in cash, cash equivalents and short-term
investments.
Net cash used in operating activities was $32.4 million in 1999 compared to
$18.0 million in 1998. In each period, the use of cash primarily consisted of
InsWeb's operating loss before noncash items. In 1999, the noncash items
included amortization of intangibles of $3.1 million associated with the
acquisition of Benelytics, Inc. in December 1998, amortization of deferred
compensation of $1.2 million and depreciation and amortization of fixed assets
of $1.8 million. In 1998, the noncash items included a loss on software licenses
of $5.5 million, $650,000 from the sale of property and casualty agents line of
business and $350,000 of revenue from an agreement to license software.
Increases in accounts receivable and deposits, partially offset by increases in
accounts payable and accrued expenses, also contributed to the cash used in
operations in 1998 and 1999.
Net cash used in investing activities was $74.2 million in 1999 and
$3.9 million in 1998. Net cash used in investing activities in 1999 primarily
consisted of the purchase of short-term investments with the proceeds from the
issuances of preferred and common stock. Net cash used in investing activities
in 1998 primarily consisted of investments in leasehold improvements and
purchases of equipment and furniture.
Net cash provided by financing activities was $124.0 million in 1999 and
$27.9 million in 1998. Net cash provided by financing activities during 1999
primarily consisted of net proceeds of $56.3 million from the issuance of
preferred stock, offset by the repayment of $19.3 million in borrowings under
the line of credit and net proceeds of $89.6 million from the public offering of
common stock. Net cash provided during 1998 primarily consisted of
$19.3 million in net borrowings under the line of credit and $8.0 million in
proceeds from the issuance of preferred stock.
InsWeb had no material commitments for capital expenditures at December 31,
1999 but expects such expenditures to total approximately $17.6 million in 2000.
Such expenditures will primarily be for equipment, software, furniture and
leasehold improvements, including approximately $11.3 million related to its new
headquarters facility. To secure its obligations under its principal lease,
InsWeb has provided the lessor with a $5.5 million letter of credit which is
collateralized by a portion of InsWeb's investment portfolio. This letter of
credit will be increased to $9.0 million in May, 2000. InsWeb also has total
minimum lease obligations of $112.0 million through 2011 under noncancelable
operating leases. In addition, InsWeb is obligated to make minimum payments
totaling $22.1 million through April 2001 under various marketing agreements
with its online partners.
InsWeb currently anticipates that its balances of cash and cash equivalents
and short-term investments, together with cash generated by its operations, will
be sufficient to meet its anticipated cash needs for working capital and capital
expenditures for at least the next 12 months. InsWeb may require additional
capital prior to the end of this period if, for example, it were to experience
greater than expected losses from operations or if it were to pursue one or more
business acquisitions or investments. InsWeb cannot be
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certain that additional financing will be available when required, on favorable
terms or at all. If InsWeb is not successful in raising additional capital as
required, its business could be materially harmed. If additional funds are
raised through the issuance of equity securities, the percentage ownership of
InsWeb's then-current stockholders would be reduced.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES, or SFAS No. 133. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and hedging activities. SFAS
No. 133 is effective for fiscal years beginning after June 15, 2000. The
adoption of SFAS No. 133 did not have a material effect on InsWeb's results of
operations or financial condition.
In December 1998, the American Institute of Certified Public Accountants, or
AICPA, issued SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition,
with respect to certain transactions. SOP 98-9 amends SOP 97-2 and SOP 98-4 by
extending the deferral of the application of certain provisions of SOP 97-2
amended by SOP 98-4 through fiscal years beginning on or before March 15, 1999.
All other provisions of SOP 98-9 are effective for transactions entered into in
fiscal years beginning after March 15, 1999. InsWeb does not expect adoption of
this statement to have a material effect on its financial position, results of
operations or cash flows.
In November 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No 100, Restructuring and Impairment Charges. In
December 1999, the SEC issued SAB No. 101 Revenue Recognition in Financial
Statements. SAB No. 100 expresses the views of the SEC staff regarding the
accounting for and disclosure of certain expenses not commonly reported in
connection with exit activities and business combinations. This includes the
accrual of exit and employee termination costs and the recognition of impairment
charges. 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. InsWeb is assessing the impact of these SABs on its
financial position, results of operations and cash flows.
RISK FACTORS
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 insurance, which may
limit our ability to generate revenue from consumers that visit our online
marketplace; and
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- our potential inability to successfully manage our anticipated growth,
which could lead to management distractions and increased operating
expenses.
To address these uncertainties, we must, among other things:
- enhance the brand identity of our online insurance marketplace;
- maintain and increase our strategic alliances with other online businesses
to increase traffic to our website;
- maintain, increase and geographically diversify our base of participating
insurance companies;
- continue to ensure that our participating insurance companies offer
competitive insurance products;
- satisfy legal and regulatory requirements applicable to the insurance
industry; and
- continue to address consumer privacy concerns.
Our business strategy may not be successful and we may not be able to
successfully address these uncertainties. Moreover, our ability to take the
foregoing steps may be hampered by our limited financial resources should we
fail to rapidly increase revenues or should increased revenues be more than
offset by increased operating expenses.
WE HAVE A HISTORY OF LOSSES, WE EXPECT FUTURE LOSSES AND WE MAY NOT ACHIEVE OR
MAINTAIN PROFITABILITY
Given planned investment levels, our ability to achieve profitability will
depend upon our ability to generate and sustain substantially increased
revenues. As a result, we believe that we will incur substantial operating
losses for the foreseeable future. We incurred operating losses of
$21.9 million for the year ended December 31, 1998 and $38.4 million for the
year ended December 31, 1999, and as of December 31, 1999, our accumulated
deficit was $74.4 million. We intend to make significant additional expenditures
related to marketing, hiring of additional personnel and development of our
website, technology and infrastructure. Although we have experienced significant
revenue growth in recent periods, this growth rate is not sustainable and will
decrease in the future. Our operating results for future periods are subject to
numerous uncertainties, and we may not achieve sufficient revenues to become
profitable. Even if we achieve profitability, we may not sustain or increase
profitability on a quarterly or annual basis in the future. If we are unable to
achieve profitability, we will need to seek additional financing to continue our
business operations. Such financing could be on terms that are dilutive to our
existing stockholders or could involve the issuance of securities that have
rights and preferences that are senior to those associated with our common
stock. Moreover, if such financing were not available or were available only
upon terms that were unacceptable to us, we could be required to significantly
curtail our operations.
OUR FUTURE REVENUES ARE UNPREDICTABLE, OUR OPERATING RESULTS ARE LIKELY TO
FLUCTUATE FROM QUARTER TO QUARTER, AND IF WE FAIL TO MEET THE EXPECTATIONS OF
SECURITIES ANALYSTS OR INVESTORS, OUR STOCK PRICE COULD DECLINE SIGNIFICANTLY
Due to our limited operating history, the emerging nature of the market in
which we compete and the high proportion of our revenues that are derived from
consumer traffic on our website, our future revenues are inherently difficult to
forecast. We believe that period-to-period comparisons of our operating results
may not be meaningful, and you should not rely upon them as an indication of our
future performance. Moreover, our expense levels are based largely on our
investment plans and estimates of future revenues. We may be unable to adjust
our spending to compensate for an unexpected shortfall in revenues. Accordingly,
any significant shortfall in revenues relative to our planned expenditures would
harm our results of operations and could cause our stock price to fall sharply,
particularly following quarters in which our operating results fail to meet the
expectations of securities analysts or investors.
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Factors that may cause fluctuations in our operating results include the
following, many of which are outside our control:
- We may experience consumer dissatisfaction with our online marketplace as
we add or change features, or as the insurance coverage offered by
participating insurance companies varies;
- Consumer traffic on our online marketplace may decline as a result of the
announcement or introduction of a competing online insurance marketplace
or other new websites, products or services offered by our competitors;
- Such consumer traffic may also fluctuate as a result of changes in
consumer acceptance of Internet commerce, particularly in connection with
shopping for insurance;
- Our revenues may be harmed if we lose a significant insurance company
relationship or if any of our participating insurance companies merge with
one another;
- Use of the Internet by consumers may fluctuate due to seasonal factors or
other uncontrollable factors affecting consumer behavior and may be
affected by occasional slow Internet performance due to technical problems
or traffic bottlenecks on the network;
- Our ability to convert site visits into transaction fees and/or revenue
from insurance agency activities may fluctuate due to changes in our user
interface or other features on our site or changes in the filtering
criteria used by our participating insurance companies to determine which
consumers will be offered quotes; and
- 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 some 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 75% of our revenues in the
year ended December 31, 1998 and approximately 78% in the year ended
December 31, 1999. We anticipate that automobile insurance will continue to
account for a substantial portion of our revenues for the foreseeable future. As
a result, if we fail to attract a broad base of consumers to shop for automobile
insurance on our site, or if changes in the automobile insurance industry make
electronic commerce a less attractive means to shop for this type of insurance,
our ability to generate revenue will be reduced and our business will be harmed.
In addition, our business is likely to be affected by any events or changes that
affect the automobile insurance industry as a whole.
IF WE ARE UNABLE TO PROMOTE OUR BRAND AND EXPAND OUR BRAND RECOGNITION, OUR
ABILITY TO DRAW CONSUMERS TO OUR WEBSITE WILL BE LIMITED
A growing number of websites offer services that are similar to and
competitive with the services offered on our online insurance marketplace.
Therefore, establishing and maintaining our brand is critical
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to attracting additional consumers to our website, strengthening our
relationships with participating insurance companies and attracting new
insurance companies. If our brand does not achieve positive recognition in the
market, our ability to draw consumers to our website will be limited. In order
to attract and retain consumers and insurance companies and to promote and
maintain our brand, we have increased and intend to continue to increase our
financial commitment to creating and maintaining prominent brand awareness. We
currently use online advertising and marketing, and print, radio and television
advertisements in national and key local markets to promote our brand. In
addition, we are continuously expanding our offline mass-marketing campaign,
which includes increasing spending on a combination of radio, television and
print media. In September 1999, we announced our intention to commit at least
$75 million over the next two years in support of our consumer marketing program
including these advertising initiatives. If our marketing efforts do not
generate a corresponding increase in revenues or we otherwise fail to
successfully promote our brand, or if these efforts require excessive
expenditures, our business will be harmed. Moreover, if visitors to our website
do not perceive our existing services or the products and services of our
participating insurance companies to be of high quality, or if we alter or
modify our brand image, introduce new services or enter into new business
ventures that are not favorably received, the value of our brand could be
harmed.
OUR PLANS TO EXPAND OUR OPERATIONS COULD RESULT IN SIGNIFICANT EXPENDITURES, AND
WE MAY NOT GENERATE SUFFICIENT REVENUE TO OFFSET THESE EXPENDITURES
We intend to expand our operations by, among other things:
- offering new and complementary products such as small group health
insurance and small business property and casualty insurance, and services
such as 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;
- expanding our geographic coverage outside the United States; and
- extending our market presence through relationships with Internet portals,
financial institutions, websites oriented to activities that involve the
purchase of insurance, such as automobile shopping sites, and other online
companies.
We may not be able to accomplish this expansion in a cost-effective or
timely manner, or these efforts may not increase the overall market acceptance
of our products and services. Expansion of our operations in this manner could
also require significant additional expenditures and strain our management,
financial and operational resources. The lack of market acceptance of these
efforts, regulatory issues, or our inability to generate enough revenue from
these expanded services or products to offset their cost could harm our
business.
COMPETITION IN THE MARKET FOR ONLINE DISTRIBUTION OF INSURANCE IS INTENSE, AND
IF WE ARE UNABLE TO COMPETE EFFECTIVELY WITH CURRENT COMPETITORS OR NEW
COMPETITORS THAT ENTER THE MARKET, THE FEES PAID TO US BY PARTICIPATING
INSURANCE COMPANIES MAY FALL, THE FEES CHARGED BY ONLINE COMPANIES WITH WHICH WE
HAVE STRATEGIC RELATIONSHIPS MAY RISE, AND OUR MARKET SHARE MAY SUFFER
The online insurance distribution market is a new industry and, like the
broader electronic commerce market, is rapidly evolving and is highly
competitive. Increased competition, particularly by companies offering online
insurance distribution, could reduce the fees we are able to charge our
participating insurance companies or increase the fees we are required to pay to
online companies with which we have
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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.
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, senior vice president and
chief information officer of Nationwide Insurance Enterprise, an affiliate of
Nationwide, is a member of our board. Another insurance company, CNA, 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.
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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 RelianceDirect
accounted for approximately 40%, 16% and 10%, respectively, of our revenues for
the year ended December 31, 1998. Should one of these insurance companies cease
to participate in our online marketplace, or should it change its underwriting
criteria or geographic coverage in a way that reduces the proportion of
consumers that are offered quotes from that insurance company, our operating
results could be materially harmed. Because of the broad market presence of some
of our participating insurance companies, we expect to continue to generate a
substantial portion of our revenues from a limited number of insurance companies
for the foreseeable future.
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 49 insurance
companies overall, in individual jurisdictions where competing quotes for
comparable products are available on our online marketplace, the number of
companies offering quotes ranges from two to 15. If we are unable to increase
the number of insurance companies that participate in our online marketplace,
particularly in the jurisdictions where we currently offer comparable insurance
products from only two or three insurance companies, we may not be able to
attract additional consumers or may lose our existing consumers to other online
competitors offering a wider variety of insurance companies. Of the 50
jurisdictions including D.C. in which there are three or fewer insurance
companies offering automobile insurance quotes on our online marketplace, State
Farm is a participant in 49 jurisdictions and AIG is a participant in 36
jurisdictions. If either of these insurance companies discontinued or
significantly reduced its participation in our online marketplace, the
attractiveness of the marketplace to consumers in these jurisdictions would be
diminished.
In addition, we believe that there is a general trend toward consolidation
in the insurance industry. For example, in October 1999 Allstate Corp. announced
an agreement to acquire the personal lines business of CNA Financial Corp., one
of our participating insurance companies. Also, in March 2000, CNA announced its
intention to sell its life insurance and reinsurance units. In the jurisdictions
where we currently offer comparable insurance products from three or fewer
insurance companies, the loss of one or more of these companies, whether due to
industry consolidation or otherwise, could materially reduce the selection of
insurance companies available to consumers on our website, substantially
reducing the attraction of our online marketplace to consumers.
WE MAY HAVE DIFFICULTY INTEGRATING NEW INSURANCE COMPANIES INTO OUR ONLINE
MARKETPLACE, WHICH COULD 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. 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.
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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.
TRAFFIC ON OUR WEBSITE IS HEAVILY DEPENDENT ON OUR ONLINE RELATIONSHIPS. THESE
RELATIONSHIPS MAY NOT GENERATE SUFFICIENT REVENUES TO JUSTIFY THE FEES WE PAY TO
ONLINE COMPANIES, AND OUR CONSUMER TRAFFIC MAY DECLINE IN THE EVENT AN ONLINE
RELATIONSHIP IS UNSUCCESSFUL
We rely on relationships with a variety of Internet portals, financial
institutions, and other online companies to attract consumers to our website. In
a typical arrangement, the online company includes a "link" on its website on
which a user can click to jump to our website or to a site that we operate under
the online company's name; as part of the arrangement, we typically pay the
online company a portion of the resulting transaction fees and in some cases a
fixed fee. These relationships may not continue to generate a substantial amount
of new traffic on our website, or the revenues generated by these relationships
may be insufficient to justify our payment obligations. Furthermore, the value
of these relationships is based on the continued positive market presence,
reputation and growth of these online companies' websites and services. Any
decline in the market presence, business or reputation of these online
companies' websites and services will reduce the value of these relationships to
us and could harm our business.
We have entered into an arrangement with Yahoo! Inc. under which our site is
the exclusive insurance site included in the Yahoo! Insurance Information
Center. In the year ended December 31, 1999, we received approximately 10.1% of
our website traffic from our online relationship with Yahoo!, and approximately
33.7% of our traffic from all of our online relationships combined. 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. Our ability to increase our revenues will depend, in
part, on increased traffic to our website that we expect to generate through
these online relationships.
Our relationships with online companies typically have a 12-month term and
do not provide us with automatic renewal rights upon termination. In addition,
these agreements are typically terminable by either party on 30 to 90 days'
notice. The termination, nonrenewal or renewal on unfavorable terms of a
relationship from which we generate significant traffic to our website, such as
our relationship with Yahoo!, would harm our business. Additionally, an online
company's failure to maintain efficient and uninterrupted operation of its
computer and communications hardware systems would likely reduce the amount of
traffic we receive from the company's site, harming our business.
LAWS AND REGULATIONS THAT GOVERN THE INSURANCE INDUSTRY COULD EXPOSE US, OR OUR
PARTICIPATING INSURANCE COMPANIES, OUR OFFICERS, OR AGENTS WITH WHOM WE CONTRACT
TO LEGAL PENALTIES IF WE FAIL TO COMPLY, AND COULD REQUIRE CHANGES TO OUR
BUSINESS
We perform functions for licensed insurance companies and are, therefore,
required to comply with a complex set of rules and regulations that often vary
from state to state. If we fail to comply with these rules and regulations, we,
an insurance company doing business with us, our officers, or agents with whom
we contract could be subject to various sanctions, including censure, fines, a
cease-and-desist order or other
35
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.
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 impacted by the
federal regulatory requirements pertaining to banks or securities firms.
OUR INTENDED EXPANSION OF OUR BUSINESS WILL SUBJECT US TO ADDITIONAL REGULATIONS
WHICH MAY DELAY OR PREVENT OUR EXPANSION AND HARM OUR BUSINESS
We intend to expand our operations to include new products and services and
to offer existing and new products in new jurisdictions within and outside the
United States, which may require us to comply with additional laws and
regulations. If we fail to adequately comply with these laws and regulations,
our ability to offer some of our products or services in a particular
jurisdiction could be delayed or prevented and our business could be harmed. For
example, we recently introduced our automobile insurance shopping service in
several provinces in Canada. This expansion will require us to comply with the
laws and regulations of the various provinces or the Canadian national insurance
regulatory scheme. Compliance with these laws and regulations and those of other
jurisdictions into which we expand may require us to obtain appropriate business
licenses, make necessary filings and obtain necessary bonds, appoint foreign
agents and make periodic business reports.
IF WE ARE UNABLE TO SAFEGUARD THE SECURITY AND PRIVACY OF CONSUMERS' AND
PARTICIPATING INSURANCE COMPANIES' CONFIDENTIAL DATA, CONSUMERS AND INSURANCE
COMPANIES MAY NOT USE OUR SERVICES AND OUR BUSINESS MAY BE HARMED
A significant barrier to electronic commerce and communications is the
secure transmission of personally identifiable information of Internet users as
well as other confidential information over public networks. If any compromise
or breach of security were to occur, it could harm our reputation and expose us
to possible liability. A party who is able to circumvent our security measures
could misappropriate proprietary information or cause interruptions in our
operations. We may be required to make significant expenditures to protect
against security breaches or to alleviate problems caused by any breaches. To
date, we have experienced no breaches in our network security. We rely on
encryption and authentication technology licensed from third parties to provide
the security and authentication necessary to effect secure transmission of
confidential information, such as names, addresses, Social Security and credit
card numbers, user names and passwords and insurance company rate information.
Advances in computer capabilities, new discoveries in the field of cryptography,
or other events or developments could result in a compromise or breach of the
algorithms we use to protect consumers' and insurance companies' confidential
information.
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UNCERTAINTY IN THE MARKETPLACE REGARDING THE USE OF INTERNET USERS' PERSONAL
INFORMATION, OR PROPOSED LEGISLATION LIMITING SUCH USE, COULD REDUCE DEMAND FOR
OUR SERVICES AND RESULT IN INCREASED EXPENSES
Concern among consumers and legislators regarding the use of personal
information gathered from Internet users could create uncertainty in the
marketplace. This could reduce demand for our services, increase the cost of
doing business as a result of litigation costs or increased service delivery
costs, or otherwise harm our business. Legislation has been proposed that would
limit the uses of personally identifiable information of Internet users gathered
online or require online services to establish privacy policies. Many state
insurance codes limit the collection and use of personal information by
insurance companies, agents, or insurance service organizations. Moreover, the
Federal Trade Commission has recently settled a proceeding against one online
service that agreed in the settlement to limit the manner in which personal
information could be collected from users and provided to third parties.
SYSTEM FAILURES COULD REDUCE OR LIMIT TRAFFIC ON OUR WEBSITE AND HARM OUR
ABILITY TO GENERATE REVENUE
Since launching our online marketplace, we have experienced occasional minor
system failures or outages which have resulted in the online marketplace being
out of service for a period ranging from several minutes to three hours while
our technicians brought backup systems online. We may experience further system
failures or outages in the future that could disrupt the operation of our
website and could harm our business. Our revenues depend in large part on the
volume of traffic on our website and, more particularly, on the number of
insurance quotes generated by our website in response to consumer inquiries.
Accordingly, the performance, reliability and availability of our website,
quote-generating systems and network infrastructure are critical to our
reputation and our ability to attract a high volume of traffic on our website
and to attract and retain participating insurance companies. Moreover, we
believe that consumers who have a negative experience with an electronic
commerce website may be reluctant to return to that site. Thus, a significant
failure or outage affecting our systems could result in severe long-term damage
to our business.
IF WE DO NOT SUCCESSFULLY ENHANCE OR EXPAND OUR TECHNOLOGY INFRASTRUCTURE TO
ACCOMMODATE INCREASES IN THE VOLUME OF TRAFFIC ON OUR WEBSITE, OUR WEBSITE MAY
NOT PERFORM AT LEVELS THAT ARE SATISFACTORY TO CONSUMERS
We are continually enhancing and expanding our technology, quote generating
systems, network infrastructure and other technologies to accommodate a
substantial increase in the volume of traffic on our website. We may be
unsuccessful in these efforts or we may be unable to accurately project the rate
or timing of increases in the volume of traffic on our website. In addition, we
cannot predict whether additional network capacity will be available from third
party suppliers as we need it. Also, our network or our suppliers' networks
might be unable to timely achieve or maintain a sufficiently high capacity of
data transmission to timely process orders or effectively download data,
especially if our website traffic increases. Our failure to achieve or maintain
high capacity data transmission could significantly reduce consumer demand for
our services.
OUR FACILITIES AND SYSTEMS ARE VULNERABLE TO NATURAL DISASTERS AND OTHER
UNEXPECTED LOSSES, AND WE MAY NOT HAVE ADEQUATE INSURANCE TO COVER SUCH LOSSES
Our computer hardware operations are located in leased facilities in Redwood
City. A full backup system is located in Irvine, California. Each of these areas
is susceptible to earthquakes. If both of these locations experienced a system
failure, the performance of our website would be harmed. These systems are also
vulnerable to damage from fire, floods, power loss, telecommunications failures,
break-ins and similar events. If we seek to replicate our systems at other
locations, we will face a number of technical challenges, particularly with
respect to database replications, which we may not be able to address
successfully. Although we carry property and business interruption insurance,
our coverage may not be
37
adequate to compensate us for all losses that may occur. Our servers may also be
vulnerable to computer viruses, physical or electronic break-ins and similar
disruptions.
WE MAY EXPERIENCE TECHNOLOGICAL PROBLEMS OR SERVICE INTERRUPTIONS WITH
INDIVIDUAL INSURANCE COMPANIES, WHICH COULD HARM THE QUALITY OF SERVICE ON OUR
WEBSITE
Several of our participating insurance companies have chosen a technical
solution that requires that our Web servers communicate with these insurance
companies' computer systems in order to perform the filtering and risk analysis
functions required to generate quotes. Thus, the availability of quotes from a
given insurance company may depend in large part upon the reliability of that
insurance company's own computer systems, over which we have no control. A
malfunction in an insurance company's computer system or in the Internet
connection between our Web servers and the insurance company's system, or an
excess of data traffic on that system could result in a delay in the delivery of
e-mail quotes or could cause an insurance company that provides instant quotes
to go offline until the problem can be remedied. Further, a computer malfunction
could cause an insurance company to quote erroneous rates, in which case the
insurance company would be required to take itself offline until the malfunction
can be corrected. Any technological problems with or interruption of
communications with an insurance company's computer systems could materially
reduce the number of competing insurance companies available to provide quotes,
and therefore the level of service perceived by consumers, on our online
marketplace.
OUR RECENT GROWTH HAS PLACED A SIGNIFICANT STRAIN ON OUR MANAGEMENT, SYSTEMS AND
RESOURCES, AND WE MAY EXPERIENCE DIFFICULTIES IN MANAGING OUR EXPECTED GROWTH IN
THE FUTURE
We are currently experiencing growth and expansion which has placed, and
will likely continue to place, a strain on our administrative, operational and
financial resources and increased demands on our systems and controls. If our
management is unable to manage this growth effectively, our business will be
harmed. This growth has resulted in a continuing increase in the level of
responsibility for our management personnel. We anticipate that continued growth
will require us to recruit, hire, train and retain a substantial number of new
managerial, technical, sales and marketing personnel. Of our 297 employees as of
December 31, 1999, 213 have been with us less than 18 months, and we expect that
our rate of hiring will continue at a very high pace. Our ability to manage our
growth successfully will also require us to continue to expand and improve our
operational, management and financial systems and controls on a timely basis.
WE RELY ON THE SERVICES OF OUR EXECUTIVE OFFICERS AND OTHER KEY PERSONNEL, WHOSE
KNOWLEDGE OF OUR BUSINESS AND THE INSURANCE INDUSTRY AND TECHNICAL EXPERTISE
WOULD BE EXTREMELY DIFFICULT TO REPLACE
Our future success is substantially dependent on the continued services and
continuing contributions of our senior management and other key personnel,
particularly Hussein A. Enan, our Chairman, President and Chief Executive
Officer. The loss of the services of any of our executive officers or other key
employees could harm our business. We have no long-term employment agreements
with any of our key personnel other than Mr. Enan, whose employment agreement
expires in July 2002. We maintain a $2 million life insurance policy on
Mr. Enan that names us as the beneficiary, but maintain no similar insurance on
any of our other key employees.
BECAUSE OF INTENSE COMPETITION FOR TECHNICAL PERSONNEL, WE MAY NOT BE ABLE TO
RECRUIT OR RETAIN NECESSARY PERSONNEL, WHICH COULD SLOW THE PROCESS OF ADDING
NEW INSURANCE COMPANIES TO OUR WEBSITE OR OTHERWISE HARM OUR BUSINESS
Our future success depends on our continuing to attract, retain and motivate
highly skilled employees, particularly with respect to technology development
and implementation, including integration of insurance companies into our online
marketplace. If we are not able to attract and retain new personnel,
particularly to expand our technology development and implementation team, our
business will be harmed. The implementation of new insurance companies on our
site is a technologically complex and labor-
38
intensive process. Accordingly, any difficulty we face in attracting and
retaining talented development and implementation personnel could slow the
process of adding new insurance companies to our online marketplace and
therefore limit our ability to increase the attractiveness of our services to
consumers. Competition for personnel in our industry is intense. We may be
unable to retain our key employees or attract, assimilate or retain other highly
qualified employees in the future. We have from time to time experienced, and we
expect to continue to experience in the future, difficulty in hiring and
retaining employees with appropriate qualifications.
OUR SUCCESS DEPENDS ON CONTINUED GROWTH OF ELECTRONIC COMMERCE, WHICH MAY NOT
ACHIEVE BROAD ACCEPTANCE BY CONSUMERS
Our future revenues and profits are substantially dependent upon the
widespread acceptance and use of the Internet by consumers as an effective
medium for commerce. Rapid growth in the use of the Internet is a recent
phenomenon, and it may not continue, or the Internet may not be adopted as a
medium of commerce by a broad base of consumers. If a broad base of consumers do
not adopt the Internet as a medium of commerce, our business may fail.
OUR SUCCESS DEPENDS ON THE WILLINGNESS OF CONSUMERS TO SHOP FOR INSURANCE ON THE
INTERNET INSTEAD OF BY MORE TRADITIONAL MEANS; CONSUMERS MAY NOT BE WILLING TO
DO THIS
Shopping for insurance on the Internet is a relatively untested concept, and
if it does not gain widespread acceptance, our business may fail. Demand and
market acceptance for recently introduced services and products on the Internet
are subject to a high level of uncertainty, and there are few proven services
and products. Our success will depend on our ability to engage consumers who
have historically shopped for insurance through traditional distribution
channels. In order for us to be successful, many of these consumers must be
willing to utilize new ways of conducting business and exchanging information.
In addition, a substantial proportion of the consumers who use our website may
be using our service because it is new and different rather than because they
believe that it offers a better way to shop for insurance. Such consumers may
use our service only once or twice and then return to more familiar means of
shopping for insurance.
IF THE INTERNET DOES NOT CONTINUE TO DEVELOP AND RELIABLY SUPPORT THE DEMANDS
PLACED ON IT BY ELECTRONIC COMMERCE AND OTHER HIGH-VOLUME APPLICATIONS, OUR
BUSINESS WILL SUFFER
The Internet may not become a viable medium for commerce or comparison
insurance shopping for a number of reasons, including potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and performance improvements. If the Internet continues to
experience significant growth in the number of users, levels of traffic or
networks' capacities for transmitting large amounts of data, the Internet's
infrastructure may not be able to support the demands placed upon it. The
Internet has experienced a variety of outages and other delays as a result of
damage to portions of its infrastructure, and it could face additional outages
and delays in the future. These 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
39
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.
OUR PLANNED INTERNATIONAL EXPANSION MAY BE DIFFICULT AND WILL EXPOSE US TO RISKS
ASSOCIATED WITH INTERNATIONAL OPERATIONS, INCLUDING RECESSIONS IN FOREIGN
ECONOMIES, DIFFICULTIES IN COLLECTIONS AND REGULATORY REQUIREMENTS
A component of our strategy is to expand our international operations.
However, our investments in establishing these operations may not produce enough
revenue to justify our investments. We have recently entered into a joint
venture to develop an online insurance marketplace in Japan through InsWeb Japan
K.K., of which we currently own a 25% equity interest. We also recently began
offering automobile insurance quoting services in some provinces of Canada. Our
international operations are subject to other inherent risks, including:
- the impact of recessions in foreign economies on the level of consumers'
insurance shopping and purchasing behavior;
- greater difficulty in accounts receivable collection and longer collection
periods;
- unexpected changes in regulatory requirements, particularly with respect
to the insurance industry;
- difficulties and costs of staffing and managing foreign operations;
- reduced protection for intellectual property rights in some countries;
- seasonal reductions in business activity during the summer months in
Europe and other parts of the world;
- potentially adverse tax consequences; and
- political and economic instability.
To the extent we do business with foreign insurance companies, our
international revenues may be denominated in foreign currencies. Accordingly,
fluctuations in currency exchange rates may reduce revenues from international
sales.
OUR PLANNED INTERNATIONAL EXPANSION MAY BE UNSUCCESSFUL AS A RESULT OF OUR
LIMITED EXPERIENCE WITH INTERNATIONAL OPERATIONS
We have limited experience with the insurance industry outside the United
States and with marketing and selling our products and services internationally.
Accordingly, our planned international expansion may not be successful. We
cannot be sure that we will be able to attract insurance companies in these or
other jurisdictions or that we will be able to successfully adapt our online
insurance marketplace model to the regulatory system of, and insurance products
and services offered in, these jurisdictions. In addition, competitors which
have greater local market knowledge or regulatory understanding may exist or
arise in other markets and impede our ability to successfully expand in these
markets.
40
OUR ENTRY INTO ADDITIONAL INTERNATIONAL MARKETS WILL REQUIRE SIGNIFICANT
MANAGEMENT ATTENTION AND FINANCIAL RESOURCES, WHICH MAY LESSEN OUR ABILITY TO
MANAGE OUR EXISTING BUSINESS EFFECTIVELY
Our entry into additional international markets will require significant
management attention and financial resources, which may lessen our ability to
manage our existing business effectively. Entry into new markets will involve
increases in the level of responsibility of our management personnel. It may
also require us to hire additional management personnel and integrate them with
our existing management team. Our ability to successfully enter into additional
markets will also require us to continue to expand and improve our operational
and management systems. If our management is unable to manage this process
effectively, or if expenses associated with such expansion are not offset by
revenues from such markets, our business will be harmed.
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.
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 U.S. 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 U.S. Our
trademark registration and patent applications may not be approved or granted,
or, if granted, may be successfully challenged by others or invalidated through
administrative process or litigation. Notwithstanding these laws, we may be
unsuccessful in protecting our intellectual property rights or in obtaining
patents or registered trademarks for which we apply.
WE MAY BE SUBJECT TO CLAIMS FOR INFRINGEMENT OF INTELLECTUAL PROPERTY, WITH OR
WITHOUT MERIT, WHICH COULD BE COSTLY TO DEFEND OR SETTLE
We may from time to time be subject to claims of infringement of other
parties' proprietary rights or claims that our own trademarks, patents or other
intellectual property rights are invalid. We have been subject to infringement
claims in the ordinary course of business, including claims of alleged
infringement of the patent and trademark rights of third parties by us and
companies with which we have business relationships. Any claims of this type,
with or without merit, could be time consuming to defend, result in costly
litigation, divert management attention and resources or require us to enter
into royalty or license agreements. License agreements may not be available on
reasonable terms, if at all, and the assertion or prosecution of any
infringement claims could significantly harm our business.
41
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, conditions and trends in the electronic commerce and insurance
industries, changes in financial estimates by securities analysts, general
market conditions and other factors. The trading prices of many Internet stocks
have experienced extreme price and volume fluctuations. These fluctuations often
have been unrelated or disproportionate to the operating performance of these
companies. These fluctuations may continue and could harm our stock price. Any
negative change in the public's perception of the prospects of Internet or
electronic commerce companies could also depress our stock price regardless of
our results.
DELAWARE LAW AND OUR CHARTER DOCUMENTS CONTAIN PROVISIONS THAT COULD DISCOURAGE
OR PREVENT A POTENTIAL TAKEOVER, EVEN IF SUCH A TRANSACTION WOULD BE BENEFICIAL
TO OUR STOCKHOLDERS
Provisions of Delaware law and our certificate of incorporation and bylaws
could make more difficult the acquisition of us by means of a tender offer, a
proxy contest, or otherwise, and the removal of incumbent officers and
directors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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
impacted 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 which are designated to support our letter of credit 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:
2000 2001 TOTAL
-------- -------- --------
(In thousands, except interest rates)
Cash and equivalents............................. $25,688 $25,688
Average interest rate............................ 5.67% 5.67%
Investments...................................... $64,105 $ 4,979 $69,084
Average interest rate............................ 5.93% 5.93% 5.93%
Total investment securities...................... $89,793 $ 4,979 $94,772
Average interest rate.......................... 5.86% 5.93% 5.86%
42
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
December 31, 1999 a near-term 10% appreciation or depreciation would have an
immaterial affect on InsWeb's operating results or financial condition.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Financial Statements and Supplementary Data required by this item are
set forth at the pages indicated at Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
The SEC allows us to include information required in this report by
referring to other documents or reports we have already or will soon be filing.
This is called "incorporation by reference." We intend to file our definitive
proxy statement pursuant to Regulation 14A not later than 120 days after the end
of the fiscal year covered by this report, and certain information therein is
incorporated in this report by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is incorporated by reference to
information set forth in our definitive proxy statement under the heading
"Proposal No. 1--Election of Directors" and in Part I of this report under the
heading "Executive Officers of the Registrant."
The information required by this Item with respect to compliance with
Section 16(a) of the Securities Exchange Act of 1934 is incorporated by
reference to information set forth in our definitive proxy statement under the
heading "Executive Compensation and Other Matters."
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to
information set forth in our definitive proxy statement under the heading
"Executive Compensation and Other Matters."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated by reference to
information set forth in our definitive proxy statement under the heading "Stock
Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference to
information set forth in our definitive proxy statement under the heading
"Certain Relationships and Related Transactions."
43
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Form:
1. Financial Statements:
PAGE
--------
Report of Independent Public Accountants.................... 46
Consolidated Balance Sheets................................. 47
Consolidated Statements of Operations....................... 48
Consolidated Statements of Stockholders' Equity............. 49
Consolidated Statements of Cash Flows....................... 50
Notes to Consolidated Financial Statements.................. 52
2. Financial Statement Schedules:
The following financial statement schedule of InsWeb Corporation for
the years ended December 31, 1999, 1998 and 1997 is filed as part of this
report and should be read in conjunction with the consolidated financial
statements of Insweb Corporation.
Schedule II--Valuation and Qualifying Accounts
Other schedules have been omitted because the required information is
not present or not present in amounts sufficient to require submission of
the schedules or because the information required is included in the
consolidated financial statements or notes thereto.
3. Exhibits:
See Index to Exhibits. The Exhibits listed in the accompanying Index
are filed as part of this report.
(b) Reports on Form 8-K:
Current Report on Form 8-K dated March 16, 2000, relating to the
Company's announcement of the resignation of Stephen I. Robertson as
Executive Vice President and Chief Financial Officer.
44
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The report of Independent Accountants, Consolidated Financial Statements and
Notes to Consolidated Financial Statements follow below on pages 46 to 67.
45
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
INSWEB CORPORATION AND SUBSIDIARIES:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of InsWeb
Corporation and Subsidiaries (the Company) at December 31, 1999 and 1998, and
the results of their operations and of their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
January 21, 2000
46
INSWEB CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------ ------------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 25,688,760 $ 8,337,133
Short-term investments.................................... 64,063,070 --
------------ ------------
Total cash, cash equivalents and short-term
investments........................................... 89,751,830 8,337,133
Accounts receivable, net of allowance of $141,780 and
$0...................................................... 4,267,691 1,192,174
Prepaid expenses and other current assets................. 2,974,024 653,734
Receivable for sale of preferred stock.................... -- 22,999,377
------------ ------------
Total current assets.................................... 96,993,545 33,182,418
Property and equipment, net............................... 7,356,863 3,998,185
Investment in joint venture............................... 1,449,597 2,089,137
Long-term investments in securities....................... 4,978,761 --
Intangible assets, net of accumulated amortization of
$3,129,047 and $0....................................... 5,568,094 8,697,141
Deposits.................................................. 1,934,045 1,389,867
------------ ------------
Total assets............................................ $118,280,905 $ 49,356,748
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 288,974 $ 524,926
Note payable to officer................................... -- 25,000
Accrued expenses.......................................... 5,159,933 3,119,362
Deferred revenue.......................................... 182,618 226,251
Payable to former Series B stockholder.................... -- 4,500,000
Line of credit from affiliate............................. -- 19,290,000
------------ ------------
Total current liabilities............................... 5,631,525 27,685,539
Note payable to strategic partner........................... 1,464,558 2,089,137
------------ ------------
Total liabilities....................................... 7,096,083 29,774,676
Commitments and contingencies (Note 8)
Stockholders' equity:
Convertible preferred stock, $0.001 par value. Authorized:
5,000,000 shares. Issued no shares in 1999 and 492,134
shares in 1998. Outstanding: no shares in 1999, 633,347
shares in 1998 -- 633
Common stock, $0.001 par value. Authorized: 150,000,000;
Issued and outstanding: 34,742,784 shares in 1999, and
15,939,823 shares in 1998................................. 34,743 15,940
Paid-in capital............................................. 188,222,780 59,475,314
Accumulated other comprehensive income...................... 112,843 --
Common stock warrants....................................... 113,071 113,071
Deferred stock compensation................................. (2,887,995) (1,813,082)
Accumulated deficit......................................... (74,410,620) (38,209,804)
------------ ------------
Total stockholders' equity.............................. 111,184,822 19,582,072
------------ ------------
Total liabilities and stockholders' equity.............. $118,280,905 $ 49,356,748
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
47
INSWEB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
------------ ------------ -----------
Revenues:
Transaction fees................................... $ 19,137,713 $ 3,151,423 $ 115,758
Development and maintenance fees................... 2,673,450 789,337 551,406
Other revenues..................................... 29,375 369,416 82,507
------------ ------------ -----------
Total revenues................................... 21,840,538 4,310,176 749,671
Operating expenses:
Product development................................ 8,870,530 10,077,497 3,209,587
Sales and marketing................................ 33,477,172 8,953,700 3,166,644
General and administrative......................... 13,474,201 6,639,816 3,258,881
Amortization of stock-based compensation........... 1,272,106 540,489 470,455
Amortization of intangible assets.................. 3,129,047 -- --
------------ ------------ -----------
Total operating expenses......................... 60,223,056 26,211,502 10,105,567
Loss from operations............................. (38,382,518) (21,901,326) (9,355,896)
Other income (expense), net.......................... (165,841) 600,000 --
Interest income (expense), net....................... 2,347,543 (1,188,550) 293,173
------------ ------------ -----------
Net loss........................................... $(36,200,816) $(22,489,876) $(9,062,723)
============ ============ ===========
Net loss per share--basic and diluted................ $ (1.52) $ (1.52) $ (0.62)
============ ============ ===========
Weighted average used in computing net loss per
share--basic and diluted........................... 23,863,850 14,813,013 14,601,318
============ ============ ===========
Pro forma net loss per share--basic and diluted...... $ (1.17) (0.92) (0.43)
============ ============ ===========
Weighted average shares used in computing pro forma
net loss per share--basic and diluted.............. 31,000,310 24,408,089 21,242,209
============ ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
48
INSWEB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CONVERTIBLE
PREFERRED STOCK COMMON STOCK COMMON DEFERRED
------------------- --------------------- PAID-IN STOCK STOCK
SHARES AMOUNT SHARES AMOUNT CAPITAL WARRANTS COMPENSATION
-------- -------- ---------- -------- ------------ -------- ------------
Balances, December 31, 1996....... 352,942 $ 352 14,596,305 $14,596 $ 14,118,505 $ $
Issuance of preferred stock for
cash, net of $38,252 in issuance
costs........................... 89,784 90 4,159,060
Exercise of stock options......... 15,000 15 19,485
Deferred stock compensation....... 1,206,098 (1,206,098)
Amortization of deferred stock
compensation.................... 470,455
Net loss..........................
-------- ----- ---------- ------- ------------ -------- -----------
Balances, December 31, 1997....... 442,726 442 14,611,305 14,611 19,503,148 (735,643)
Issuance of preferred stock for
cash and receivable, net of
$1,649,000 in issuance costs.... 190,621 191 29,398,204
Issuance of common stock for
acquisition..................... 908,561 909 8,388,133
Issuance of common stock warrants
in connection with
acquisition..................... 113,071
Exercise of stock options......... 419,957 420 567,901
Deferred stock compensation....... 1,617,928 (1,617,928)
Amortization of deferred stock
compensation.................... 540,489
Net loss..........................
-------- ----- ---------- ------- ------------ -------- -----------
Balances, December 31, 1998....... 633,347 633 15,939,823 15,940 59,475,314 113,071 (1,813,082)
Issuance of preferred stock for
cash and receivable, net of
71,083 in issuance costs........ 185,775 186 34,928,741
Issuance of common stock for
cash............................ 32,159 32 296,898
Issuance of common stock in
initial public offering......... 5,750,000 5,750 89,548,727
Conversion of preferred shares to
common shares related to initial
public offering................. (819,122) (819) 12,286,830 12,287 (11,468)
Deferred stock compensation....... 2,347,019 (2,347,019)
Amortization of deferred stock
compensation.................... 1,272,106
Exercise of stock options......... 733,948 734 1,637,549
Comprehensive income:
Cumulative translation
adjustment......................
Unrealized loss on investments....
Net loss..........................
Comprehensive loss................
-------- ----- ---------- ------- ------------ -------- -----------
Balances, December 31, 1999....... -- $ -- 34,742,760 $34,743 $188,222,780 $113,071 $(2,887,995)
======== ===== ========== ======= ============ ======== ===========
ACCUMULATED
OTHER
COMPREHENSIVE ACCUMULATED
INCOME DEFICIT TOTAL
------------- ------------ ------------
Balances, December 31, 1996....... $ $ (6,657,205) $ 7,476,248
Issuance of preferred stock for
cash, net of $38,252 in issuance
costs........................... 4,159,150
Exercise of stock options......... 19,500
Deferred stock compensation.......
Amortization of deferred stock
compensation.................... 470,455
Net loss.......................... (9,062,723) (9,062,723)
-------- ------------ ------------
Balances, December 31, 1997....... (15,719,928) 3,062,630
Issuance of preferred stock for
cash and receivable, net of
$1,649,000 in issuance costs.... 29,398,395
Issuance of common stock for
acquisition..................... 8,389,042
Issuance of common stock warrants
in connection with
acquisition..................... 113,071
Exercise of stock options......... 568,321
Deferred stock compensation....... --
Amortization of deferred stock
compensation.................... 540,489
Net loss.......................... (22,489,876) (22,489,876)
-------- ------------ ------------
Balances, December 31, 1998....... (38,209,804) 19,582,072
Issuance of preferred stock for
cash and receivable, net of
71,083 in issuance costs........ 34,928,927
Issuance of common stock for
cash............................ 296,930
Issuance of common stock in
initial public offering......... 89,554,477
Conversion of preferred shares to
common shares related to initial
public offering................. --
Deferred stock compensation....... --
Amortization of deferred stock
compensation.................... 1,272,106
Exercise of stock options......... 1,638,283
Comprehensive income:
Cumulative translation
adjustment...................... 155,086 155,086
Unrealized loss on investments.... (42,243) (42,243)
Net loss.......................... (36,200,816) (36,200,816)
------------
Comprehensive loss................ (36,087,973)
-------- ------------ ------------
Balances, December 31, 1999....... $112,843 $(74,410,620) $111,184,822
======== ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
49
INSWEB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
------------ ------------ -----------
Cash flows from operating activities:
Net loss.................................................. $(36,200,816) $(22,489,876) $(9,062,723)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 1,812,845 984,877 411,339
Amortization of stock-based compensation................ 1,272,106 540,489 470,455
Amortization of intangible assets....................... 3,129,047 -- --
Foreign currency translation gain on note payable to
strategic partner...................................... 158,053 -- --
Equity loss from joint venture.......................... 11,993 -- --
Loss on disposal of equipment........................... 3,074
Loss on software license................................ -- 5,450,000 --
Income from sale of property and casualty agents
business............................................... -- (650,000) --
Revenue from software license agreement................. -- (350,000) --
Non compete agreement expense........................... -- 50,000 --
Changes in assets and liabilities:
Accounts receivable..................................... (3,075,517) (1,054,272) (58,257)
Prepaid expenses and other current assets............... (2,320,290) (559,881) 33,010
Deposits................................................ (544,178) (1,366,353) (23,514)
Accounts payable........................................ (235,952) 261,475 24,940
Accrued expenses........................................ 3,689,572 1,022,171 211,193
Deferred revenue........................................ (43,633) 152,556 33,248
Interest received on note receivable from officers........ -- 68,436 77,211
Interest paid on note payable to officer.................. -- (68,436) (68,938)
------------ ------------ -----------
Net cash used in operating activities................. (32,343,696) (18,008,814) (7,952,036)
Cash flows from investing activities:
Purchase of short term investments--net................... (64,105,313) -- --
Purchase of held-to-maturity securities................... (4,978,761) -- --
Sales of property and equipment........................... 15,020 35,334 11,313
Purchases of property and equipment....................... (5,189,617) (3,972,587) (684,673)
Cash acquired in acquisition.............................. -- 16,708 --
------------ ------------ -----------
Net cash used in investing activities................. (74,258,671) (3,920,545) (673,360)
Cash flows from financing activities:
Proceeds from issuance of preferred stock, net............ 56,279,304 8,048,018 4,159,150
Proceeds from initial public offering of common stock,
net..................................................... 89,554,477 -- --
Proceeds from issuance of common stock.................... 296,930 -- --
Proceeds from exercise of stock options................... 1,638,283 568,321 19,500
Issuance of notes receivable from officer................. -- (4,000,000) --
Proceeds from repayment of notes receivable from
officer................................................. -- 5,525,000 --
Payment to former Series B stockholder.................... (4,500,000) -- --
Payment of note payable to officer........................ (25,000) (1,525,000) --
Proceeds from line of credit from affiliate............... -- 23,290,000 --
Payments on line of credit from affiliate................. (19,290,000) (4,000,000) --
------------ ------------ -----------
Net cash provided by financing activities............. 123,953,994 27,906,339 4,178,650
------------ ------------ -----------
Net increase (decrease) in cash and cash equivalents........ 17,351,627 (5,976,980) (4,446,746)
Cash and cash equivalents, beginning of period.............. 8,337,133 2,360,153 6,806,899
------------ ------------ -----------
Cash and cash equivalents, end of period.................... $ 25,688,760 $ 8,337,133 $ 2,360,153
============ ============ ===========
50
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
------------ ------------ -----------
Supplemental disclosure of cash activities:
Cash paid during the period for interest.................. $ 1,229,448 $ 794,406 $ 192,493
============ ============ ===========
Supplemental schedule of noncash financing activities:
Deferred stock compensation from issuance of options........ $ 2,347,019 $ 1,617,928 $ 1,206,098
============ ============ ===========
Note payable to strategic partner for initial investment in
joint venture............................................. $ -- $ 2,089,137 $ --
============ ============ ===========
Proceeds from sale of a portion of investment in joint
venture used to reduce note payable to the strategic
partner................................................... $ 782,630 $ -- $ --
============ ============ ===========
Issuance of common stock for acquisition of Benelytics, Inc. $ -- $ 8,389,042 $ --
============ ============ ===========
Issuance of common stock warrants in connection with
acquisition of Benelytics, Inc............................ $ -- $ 113,071 $ --
============ ============ ===========
Receivable for sale of preferred stock...................... $ -- $ 22,999,377 $ --
============ ============ ===========
Preferred stock issuance costs accrued but not paid......... $ -- $ 1,649,000 $ --
============ ============ ===========
Conversion of preferred stock to common stock............... $ 819 $ -- $ --
============ ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
51
INSWEB CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS OF THE COMPANY
InsWeb Corporation, formerly Strategic Concepts Corporation (the Company),
was incorporated in the State of California on February 28, 1995 to provide,
through InsWeb's site, a centralized interactive marketplace for insurance
information and electronic quotation. In November 1996, the Company was
reincorporated as a Delaware corporation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, InsWeb Insurance Services, Inc. (formerly
Avatar Insurance Services, Inc.) and Benelytics, Inc. Benelytics, Inc. was
purchased on December 31, 1998, and the acquisition was accounted for as a
purchase. Accordingly, the results of operations of Benelytics, Inc. for the
year ended December 31, 1998 are not included in the consolidated financial
statements. All significant intercompany accounts and transactions have been
eliminated in the consolidated financial statements. Investments in 20 to 50
percent owned affiliates are accounted for on the equity method.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less at the date of purchase to be cash equivalents. Cash and cash
equivalents are stated at cost, which approximates market.
INVESTMENTS IN SECURITIES
The Company accounts for its short-term investments under Statement of
Financial Accounting Standards No. 115 (SFAS No. 115), ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES. SFAS No. 115 requires the
classification of investments in debt and equity securities with readily
determined fair values as "held-to-maturity," "available-for-sale," or
"trading." The Company's policy is to protect the value of investment portfolio
and to minimize principal risk by earning returns based on current interest
rates. Management determines the appropriate classification of its debt and
equity securities at the time of purchase and reevaluates such designation as of
each balance sheet date. Securities are classified as held-to-maturity when the
Company has the positive intent and ability to hold the securities to maturity.
Securities classified as held-to-maturity are carried at amortized cost, which
is adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in interest income. Securities not classified as
held-to-maturity are classified as available-for-sale and are carried at fair
value based on quoted market prices, with unrealized gains and losses reported
as a component of other comprehensive income (loss) in stockholder's equity. The
cost of securities sold is based on the specific identification method. The
Company did not recognize any material gains or losses upon the sale of
securities.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, short-term investments, accounts
receivable, accounts payable and accrued expenses, approximate fair value due to
their short maturities. In addition, the carrying amounts of the note receivable
from and notes payable to officer, line of credit from affiliate and note
payable to the Series B stockholder approximate fair value due to their short
maturities.
52
INSWEB CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Transaction fee revenue is recognized when a qualified consumer lead is
delivered to an insurance company customer. Revenue from development fees is
recognized when the development work is completed and the insurance company's
integration with the Company's site becomes operational. Maintenance revenue is
recognized ratably over the term of the customer agreement. Other revenue
represents revenue from operating activities which are nonrecurring in nature
and is recognized when the service is performed and no additional significant
obligations exist. Deferred revenue represents prepayment for development and
maintenance services which will be rendered in the future.
PRODUCT DEVELOPMENT COSTS
Product development costs and costs of enhancing existing products are
charged to technology costs as incurred. Software development costs are required
to be capitalized beginning when a product's technological feasibility has been
established by completion of a working model of the product and ending when the
product is available for general lease to customers. To date, completion of a
working model of the Company's products and general release have substantially
coincided. As a result, the Company has not capitalized any software development
costs since these costs have not been significant.
ONLINE MARKETING FEES
The Company enters into marketing agreements, which require revenue sharing
from transaction fees, fixed fee payments or per unit based charges with various
participating online companies. Revenue sharing from transaction fees are
expensed in the period the related qualified consumer lead is delivered to an
insurance company customer. Fixed fee payments are capitalized and expensed on a
straight-line basis over the term of the agreement.
ADVERTISING COSTS
Costs related to advertising and promotion of products are charged to sales
and marketing expense as incurred. Advertising costs charged to expense for the
years ended December 31, 1999, 1998 and 1997 were $13,040,000, $2,338,378 and
$41,579, respectively.
INCOME TAXES
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation on computer and office equipment, furniture and fixtures and
purchased software is calculated using the straight-line method over the
estimated useful lives of the assets, generally two to five years. Amortization
on leasehold improvements is calculated using the straight-line method over the
estimated useful lives of the improvements or the remaining life of the lease,
whichever is shorter. When property and equipment are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from the
accounts and
53
INSWEB CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the resulting gain or loss is included in income. Expenditures for maintenance
and repairs are charged to expense as incurred.
LONG-LIVED ASSETS
The Company evaluates the recoverability of its long-lived assets in
accordance with SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. SFAS No. 121 requires recognition
of impairment losses related to long-lived assets in the event the net carrying
value of such assets exceeds the future undiscounted cash flows attributable to
such assets. The Company assesses the impairment of its long-lived assets when
events or changes in circumstances indicate that the carrying value of an asset
may not be recoverable.
INTANGIBLE ASSETS
Intangible assets are recorded at cost. Amortization is provided on a
straight-line method over the estimated useful lives of the related assets.
Management estimates the useful lives of the purchased software, non-compete
agreements, assembled workforce and contractual relationships to be two years.
Unidentified assets allocated to goodwill are being amortized over three years.
DEPOSITS
Payments to collateralize certain lease commitments have been recorded as
deposits.
FOREIGN CURRENCY TRANSLATION
The long-term note payable to strategic partner is translated from Japanese
yen into U.S. dollars in accordance with SFAS No. 52, FOREIGN CURRENCY
TRANSLATION. Accordingly, it is translated at the current exchange rate as of
the applicable balance sheet date and the resulting foreign currency gain (loss)
is included in the consolidated statements of operations. The investment in
InsWeb Japan K.K. is translated into U.S. dollars at the applicable balance
sheet rate and the resulting translation adjustment is recorded to a separate
component of stockholders' equity.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration
of credit risk, as defined by SFAS No. 105, DISCLOSURE OF INFORMATION ABOUT
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH
CONCENTRATIONS OF CREDIT RISK, consist principally of cash, cash equivalents,
short-term investments and accounts receivable. The Company deposits its cash
and cash equivalents with a single major bank, which deposits may exceed federal
deposit insurance limits.
The Company's short- and long-term investments consist of diversified
investment grade securities. The Company's investment policy limits the amount
of credit exposure to investments in any one issue, and the Company believes no
significant concentration of credit risk exists with respect to these
investments.
The Company's customer base is dispersed across many different geographic
areas, most customers are in a single industry in the United States. Collection
of trade receivables may be affected by changes in economic or other industry
conditions and may, accordingly, impact the Company's overall credit risk. The
Company performs ongoing credit evaluations of its customers and generally does
not require collateral.
54
INSWEB CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company reviews the need for allowances for potential credit losses and
reserves for potential credit losses are maintained.
SIGNIFICANT CUSTOMERS
For the year ended December 31, 1999, three customers accounted for 11.2%,
11.3% and 30.8%, respectively, of total revenues. For the year ended
December 31, 1998, three customers accounted for 10.3%, 16.3% and 39.5%,
respectively, of total revenues. For the year ended December 31, 1997, one
customer accounted for 19.4% of total revenues. At December 31, 1999 two
customers accounted for 22.3% and 20.6% of accounts receivable, respectively. At
December 31, 1998, one customer accounted for 48.9% of accounts receivable.
STOCK SPLITS
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. All
common share and per common share amounts in the accompanying consolidated
financial statements have been restated to give retroactive effect to the stock
split for all periods. Prior to giving retroactive effect to the June 1999 stock
split, net loss per share--basic and diluted was $0.93 and $2.28 for the years
ended December 31, 1997 and 1998.
EARNINGS PER SHARE
Basic earnings per share is computed using the weighted average number of
shares of common stock outstanding while 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 or at the
original date of issuance, if later.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions of SFAS
No. 130, REPORTING COMPREHENSIVE INCOME. SFAS 130 requires items of other
comprehensive income (loss) be classified, net of income taxes, by their nature
in the financial statements. For the Company, other comprehensive income
includes
55
INSWEB CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
primarily foreign currency translation adjustments and unrealized losses on
investments. Prior to December 31, 1998, accumulated other comprehensive income
was not significiant The change in the components of accumulated other
comprehensive income, net of taxes, is summarized as follows.
FOREIGN ACCUMULATED
CURRENCY UNREALIZED OTHER
TRANSLATION LOSSES ON COMPREHENSIVE
ADJUSTMENTS INVESTMENTS INCOME
----------- ----------- -------------
Balance, December 31, 1998............................... $ -- $ -- $ --
Other comprehensive income (loss)........................ 155,086 (42,243) 112,843
-------- -------- --------
Balance, December 31, 1999............................... $155,086 $(42,243) $112,843
======== ======== ========
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES, and complies with the disclosure provisions of
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. Under APB No. 25,
compensation expense is based on the difference, if any, between the fair value
of the Company's stock and the exercise price of the option on the measurement
date, which is typically the date of grant.
The Company accounts for options granted to non-employees in accordance with
the provisions of SFAS No. 123 and under Emerging Issues Task Force No. 96-18,
ACCOUNTING FOR EQUITY INSTRUMENTS THAT ARE ISSUED TO OTHER THAN EMPLOYEES FOR
ACQUIRING, OR IN CONJUNCTION WITH SELLING GOODS AND SERVICES. Under these
provisions, options are recorded at their fair value on the measurement date,
which is typically the date of grant. The Company amortizes stock based
compensation recorded in connection with certain stock option grants over the
vesting periods of the related options.
RISKS AND UNCERTAINTIES
The Company is subject to all of the risks inherent in an early stage
business in the electronic commerce industry. These risks include, but are not
limited to, a limited operating history, limited management resources,
dependence upon consumer acceptance of the Internet, Internet related security
risks and the changing nature of the electronic commerce industry. Due to the
foregoing factors, the Company's operating results may be materially affected.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. SFAS
No. 133 is effective for fiscal years beginning after June 15, 2000. The
Company's adoption of SFAS No. 133 is not expected to not have material effect
on the Company's results of operations, financial condition or cash flows.
56
In December 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2,
SOFTWARE REVENUE RECOGNITION WITH RESPECT TO CERTAIN TRANSACTIONS. SOP 98-9
amends SOP 97-2 and SOP 98-4 by extending the deferral of the application of
certain provisions of SOP 97-2 amended by SOP 98-4 through fiscal years
beginning on or before March 15, 1999. All other provisions of SOP 98-9 are
effective for transactions entered into in fiscal years beginning after
March 15, 1999. The Company does not anticipate adoption of this statement to
have a material effect on the Company's financial position, results of
operations or cash flows.
In November 1999, the Securities and Exchange Commission (SEC) issued Staff
accounting Bulletin (SAB) No 100, Restructuring and Impairment Charges, SAB No.
100 expresses the views of the SEC staff regarding the accounting for and
disclosure of certain expenses not commonly reported in connection with exit
activities and business combinations. This includes the accrual of exit and
employee termination costs and the recognition of impairment charges. In
December 1999, the SEC issued 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. The Company is assessing the impact of these SABs on its
financial position, results of operations and cash flows.
RECLASSIFICATIONS
Certain amounts in the prior years' financial statements have been
reclassified to conform to the December 31, 1999 presentation. These
reclassifications did not change previously reported total assets, liabilities,
stockholders' equity or net loss.
3. CASH AND INVESTMENTS
Cash and investments consist of the following:
DECEMBER 31,
------------------------
1999 1998
----------- ----------
Cash and cash equivalents:
Cash.............................................. $ 1,131,558 $ 315,263
Money market funds................................ 13,655,335 8,021,870
Taxable municipal securities...................... 5,000,000 --
Commercial paper.................................. 5,901,867 --
----------- ----------
25,688,760 8,337,133
Short-term investments:
Certificates of deposit........................... 1,500,000 --
Commercial paper.................................. 62,563,070 --
----------- ----------
64,063,070 --
Cash, cash equivalents and short-term investments... $89,751,830 $8,337,133
=========== ==========
Long-term investments--U.S. Agency securities....... $ 4,978,761 $ --
=========== ==========
The Company's investments in short-term securities are classified as
available-for-sale. At December 31, 1999, the carrying value of short-term
available-for sale securities is shown net of gross unrealized losses of $42,243
which are included as a component of stockholder's equity and are attributable
to the Company's investments in commercial paper. The fair value of all other
short-term securities approximates cost due to the short maturities of these
instruments. At December 31, 1999, all cash, cash equivalents and short-term
investments mature in 2000.
57
3. CASH AND INVESTMENTS (CONTINUED)
Long-term investments are treated as held-to-maturity for financial
reporting purposes. At December 31, 1999, the fair value of the Company's long
term investments in debt securities was $4,947,040 which included gross
unrealized losses of $31,721. The Company's long term investments at December
31, 1999 mature in 2001.
4. PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets consist of the following:
DECEMBER 31,
---------------------
1999 1998
---------- --------
Prepaid marketing fees................................ $1,200,000 $425,000
Prepaid insurance..................................... 824,000 64,253
Prepaid rent.......................................... 128,287 --
Interest receivable................................... 343,864 --
Other................................................. 477,873 164,481
---------- --------
$2,974,024 $653,734
========== ========
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31,
-------------------------
1999 1998
----------- -----------
Computer and office equipment...................... $ 4,807,243 $ 1,972,168
Furniture and fixtures............................. 1,665,678 1,010,266
Leasehold improvements............................. 2,325,952 1,986,897
Purchased software................................. 1,510,267 386,566
Construction in progress........................... 66,181 --
----------- -----------
10,375,321 5,355,897
Less accumulated depreciation and amortization..... (3,018,458) (1,357,712)
----------- -----------
$ 7,356,863 $ 3,998,185
=========== ===========
Depreciation and amortization expense was $1,812,845, $984,877 and $411,339
for the years ended December 31, 1999, 1998 and 1997, respectively.
6. INSWEB JAPAN
On December 15, 1998, the Company entered into a Joint Venture Agreement
with a strategic partner and significant stockholder. The purpose of the joint
venture is to develop, implement and market an online insurance marketplace in
Japan and the Republic of Korea. The joint venture contemplated by the agreement
will be carried out exclusively through a newly-formed Japanese corporation,
InsWeb Japan K.K. On December 30, 1998, the Company purchased a 40% interest in
InsWeb Japan K.K in exchange for a promissory note in the principal amount of
$2,089,137 from the strategic partner. In conjunction with this agreement, the
Company also entered into an agreement to provide consulting and hosting
services to assist the Joint Venture in developing their internet strategy. For
the year ended December 31, 1999, $354,970 was billed and under this contract
and is included in development and maintenance fees. At December 31, 1999,
$170,561 of accounts receivable was due from Insweb Japan, K.K.
58
6. INSWEB JAPAN (CONTINUED)
On May 14, 1999, the Company sold a portion of its interest in InsWeb Japan
K.K. to a common stockholder for $782,630. As a result of this sale, the
Company's interest in this joint venture decreased from 40% to 25%. The Company
used the proceeds from the sale to partially repay the note payable to the
strategic partner.
The promissory note due to the strategic partner 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 year ended December 31, 1999 was
$42,977. As of December 31, 1999 and 1998, $1,464,558 and $2,089,137 was
outstanding under the note, respectively
7. ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
Accrued employee compensation........................ $1,439,130 $ 309,311
Employee stock purchase plan......................... 796,303 --
Accrued interest..................................... 16,289 652,681
Accrued expenses for preferred stock financing....... -- 1,649,000
Accrued payments to vendors.......................... 1,818,862 442,872
Accrued fee sharing.................................. 733,774 --
Deferred rent........................................ 268,601 --
Other................................................ 86,974 65,498
---------- ----------
$5,159,933 $3,119,362
========== ==========
8. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its current office facilities under noncancelable
operating leases which expire at various dates through August 2012.
At December 31, 1999, future minimum lease payments under noncancelable
operating leases are as follows:
2000........................................................ $ 5,387,400
2001........................................................ 8,921,900
2002........................................................ 9,197,200
2003........................................................ 9,335,400
2004........................................................ 9,449,300
Thereafter.................................................. 69,728,100
------------
$112,019,300
============
Rent expense for the years ended December 31, 1999, 1998 and 1997 was
$1,458,296, $1,093,735, $474,104 (net of sublease rental income of $671,586,
$26,222 and $40,485), respectively.
59
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
One of the office leases is for a 65,000 square foot building in Redwood
City, California. Under the terms of this lease, the Company is responsible for
taxes, insurance and maintenance expenses. This lease includes the option to
extend the term for two consecutive five-year periods at the expiration of the
initial term and at the end of the first five-year extension period.
In October 1999, the Company signed a 12-year lease for approximately
160,000 square feet to house the Company's future headquarters in San Carlos,
California. Under the terms of this lease, the Company is responsible for taxes,
insurance and maintenance expenses. As a condition of the lease the Company is
required to provide a $5.0 million letter of credit secured by a portion of the
Company's investments as a security deposit. In May 2000, the letter of credit
will increase to $9.5 million.
MARKETING AGREEMENTS
The Company is required to make fixed payments under various marketing
agreements, which expire at various dates through 2002. At December 31, 1999,
future minimum payments under these agreements, including the AOL agreement (See
Note 16), are as follows:
2000........................................................ $12,212,500
2001........................................................ 9,925,000
-----------
$22,137,500
===========
In addition to the fixed fees certain of these agreements require the
Company to pay fees for each user delivered to the Company's website in excess
of certain minimums.
LITIGATION
From time to time, the Company is subject to legal proceedings and claims in
the ordinary course of business. The Company currently is not aware of any legal
proceedings or claims that it believes will have, individually or in the
aggregate, a material adverse effect on its business, prospects, financial
condition and operating results.
9. RELATED PARTY TRANSACTIONS
STOCKHOLDER AND CUSTOMER
A stockholder, who is also a customer, accounted for $430,845, $133,517 and
$163,175 of the Company's revenue during 1999, 1998 and 1997, respectively. At
December 31, 1999 and 1998, this customer accounted for $0 and $34,600 of
accounts receivable, respectively.
NOTES PAYABLE TO OFFICERS
From the Company's inception through March 1996, the Company borrowed from
its Chief Executive Officer an aggregate of $1,721,569 to cover start-up costs.
The loan was evidenced by an uncollateralized demand promissory note bearing
interest at 6% per annum. The Company paid $196,569 on the note in 1996 and paid
the remaining balance of $1,525,000 in September 1998.
In December 1998, Benelytics, Inc. borrowed $25,000 from its President in
exchange for an uncollateralized demand promissory note bearing interest at
4.33% per annum. The note was paid in full by the Company in January 1999.
60
9. RELATED PARTY TRANSACTIONS (CONTINUED)
NOTES RECEIVABLE FROM OFFICERS
In February 1996, the Company lent the Chief Executive Officer $1,525,000.
The loan was evidenced by an uncollateralized demand promissory note bearing
interest at 6% per annum. The Chief Executive Officer paid the note in full in
September 1998 along with accrued interest.
In August 1998, the Company lent the Chief Executive Officer and the
President $3,000,000 and $1,000,000, respectively, in exchange for promissory
notes. The notes accrued interest at 15% per annum and were collateralized by
shares of the Company's common stock owned by the officers. The officers used
the proceeds of these loans to acquire another stockholder's interest in 885,000
shares of the Company's common stock. These notes and accrued interest were paid
in full in September 1998.
AFFILIATE AND CUSTOMER
An affiliate, who owns a majority interest in a significant stockholder of
the Company, is also a customer and accounted for $133,187 and $247,711 of the
Company's revenue during 1999 and 1998. This customer accounted for $15,495 and
$6,405 of accounts receivable at December 31, 1999 and 1998.
STOCKHOLDER AGREEMENTS
In November 1996, the Company entered into the following agreements with the
then Series B preferred stockholder (the Series B stockholder).
LINE OF CREDIT AGREEMENT
The Company obtained a five-year line of credit totaling $25,000,000 from
the Series B stockholder. In April 1998, the line of credit commitment was
assigned to and assumed by the majority stockholder of the Series B stockholder,
who is also a customer of the Company. The amount available under the line of
credit commitment was reduced to $12,500,000 in May 1999 and was subsequently
cancelled in conjunction with the closing of the Company's initial public
offering in July 1999.
Under the line of credit agreement, all borrowings were uncollateralized and
bore interest at 15% per annum. As of December 31, 1998, the Company had a
balance of $19,290,000 outstanding, which it repaid in March 1999. Interest
expense related to the line of credit was $538,513 and $1,311,119 for the years
ended December 31, 1999 and 1998, respectively. At December 31, 1999 and 1998,
there was $0 and $623,191, respectively, of accrued interest payable.
ASSET PURCHASE AGREEMENT
In March 1997, the Company sold the assets of its Property and Casualty
Agents line of business to the Series B stockholder in accordance with an Asset
Purchase Agreement. The Company recognized the associated income of $650,000,
net of the related noncompete agreement payment, in December 1998 as other
income on the statement of operations.
JOINT MARKETING AND LICENSE AGREEMENT
In accordance with a Joint Marketing and License Agreement, the Company and
the Series B stockholder agreed to license certain software to each other. The
transfers of the licensed software were completed in December 1998 and the
Company is under no further obligation to deliver additional software or
documentation or to provide any maintenance for previously delivered software.
The agreement specified the following cross-licensing fees: (i) the Company was
to pay the Series B stockholder $50,000 and $5,450,000 for a non-compete
agreement and five-year non-exclusive licenses to certain
61
9. RELATED PARTY TRANSACTIONS (CONTINUED)
software owned by the Series B stockholder, respectively, and (ii) the Series B
stockholder was to pay the Company $350,000 for five-year non-exclusive licenses
to certain software owned by the Company. In addition, the agreement provided
for the payment of transaction fees by each party to the other based on revenues
resulting from the joint marketing efforts and utilization of each other's
software.
Under the terms of the Joint Marketing and License Agreement, the Company's
payments to the Series B stockholder of $5,500,000 were to be offset against the
Series B stockholder's payments to the Company of $1,000,000, consisting of the
$350,000 license fee payable under the agreement and of the $650,000 purchase
price payable under the Asset Purchase Agreement. Payment was originally to be
made in November 1998.
In December 1998, the parties agreed to amend the Joint Marketing and
License Agreement. The amendment eliminated the payment of transaction fees and
revised the payment terms to allow the Company to make four quarterly payments
to the Series B stockholder of $1,125,000 each, due on the first day of each
quarter beginning January 1, 1999. The remaining amounts were paid in full
during 1999. In 1998 the Company determined that it would not be integrating the
software licensed from the Series B stockholder into its products. As a result,
the $5,450,000 software licenses were recorded as product development expense.
MARKETING AGREEMENTS
For the year ended December 31, 1999, the Company recognized $4,548,776 in
marketing expense under a marketing agreement with an Internet company. An
affiliate of the Internet company became a principal stockholder of the Company
on December 30, 1998.
10. STOCKHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
In July 1999, the Company sold 5,750,000 shares of common stock including
the exercise of the underwriters' over-allotment option in an underwritten
public offering at a price per share of $17.00 per share. The Company received
net proceeds of approximately $89,554,477, after underwriting discount and
offering expenses. Simultaneously with the closing of the public offering, all
819,122 shares of the Company's preferred stock were converted to common stock
on a fifteen for one basis. Prior to the conversion the Series A, A-1, B, C, D
and E preferred stockholders held certain voting, dividend, liquidation and
conversion rights. No dividends were declared by the Board of Directors through
the date of conversion. In accordance with its line of credit agreement with its
affiliate (see Note 9), the Company did not declare or pay any dividends while
the line of credit was in effect.
STOCK OPTION PLANS
In September 1995, the Company authorized the 1995 Stock Option Plan (the
1995 Plan) under which the Board of Directors was authorized to grant stock
options to employees, officers, directors, independent contractors and
consultants of the Company and its subsidiaries. In 1997, the Board of Directors
terminated the 1995 Plan and provided that no further options would be granted
pursuant to the 1995 Plan, but that the terms of the 1995 Plan would continue to
govern the options then outstanding under the 1995 Plan. No options remain
outstanding under the 1995 plan as of December 31, 1999.
In July 1997, the Company authorized the 1997 Stock Option Plan (the 1997
Option Plan) and the Senior Executive Option Plan (the Executive Plan). Under
the 1997 Option Plan the Board of Directors may issue incentive stock options to
employees of the Company and its subsidiaries and may also issue nonqualified
stock options to employees, officers, directors, independent contractors and
consultants of
62
10. STOCKHOLDERS' EQUITY (CONTINUED)
the Company and its subsidiaries. Under the Executive Plan the Board of
Directors may issue nonqualified stock options to employees, officers and
directors of the Company and its subsidiaries. Following attendance at each
regularly scheduled meeting of the Board of Directors, each eligible director is
granted a fully-vested option to purchase 750 shares of common stock at the fair
market value on the date of grant.
As of December 31, 1999, 6,183,030 total shares of the Company's common
stock have been reserved for issuance upon exercise of stock options under the
1997 Option Plan and the Executive Plan. The 1997 Option Plan was amended in
August 1998, providing an automatic annual increase in the share reserve, to be
effective on the first day of each fiscal year, by a number of shares equal to
5% of the number of common shares outstanding as of the last day of the
preceding fiscal year.
Options granted under the Plans generally vest in equal monthly installments
over a three-year period, except for certain options granted to members of the
Company's Board of Directors, which vest immediately. The options expire ten
years from the date of grant.
Activity under all the Plans is as follows:
SHARES AVAILABLE NUMBER OF AGGREGATE WEIGHTED AVERAGE
FOR GRANT SHARES EXERCISE PRICE PRICE EXERCISE PRICE
---------------- --------- -------------- ----------- ----------------
Balances, December 31, 1996...... 1,804,455 363,945 $0.016-$0.50 $ 117,202 $ 0.32
Options granted.................. (1,228,650) 1,228,650 $1.30-$2.65 2,528,147 $ 2.06
Options exercised................ -- (15,000) $1.30 (19,500) $ 1.30
Options canceled................. 31,575 (31,575) $0.50-$2.65 (22,228) $ 0.70
---------- --------- -----------
Balances, December 31, 1997...... 607,380 1,546,020 $0.016-$2.65 2,603,621 $ 1.68
Additional shares reserved....... 750,000 --
Options granted.................. (1,171,388) 1,171,388 $2.65-$5.00 4,513,065 $ 3.85
Options exercised................ -- (419,957) $1.30-$2.65 (568,321) $ 1.35
Options canceled................. 200,636 (200,636) $0.50-$2.65 (476,626) $ 2.38
---------- --------- -----------
Balances, December 31, 1998...... 386,628 2,096,815 $0.016-$5.00 6,071,739 $ 2.90
Additional shares reserved....... 5,337,083 --
Options granted.................. (3,845,408) 3,845,408 $9.23-$60.00 93,958,445 $24.43
Options exercised................ -- (733,948) $0.016-$10.67 (1,637,549) $ 2.23
Options canceled................. 544,200 (544,200) $0.50-$45.00 (7,728,228) $14.20
---------- --------- -----------
Balances, December 31, 1999...... 2,422,503 4,664,075 $0.50-$60.00 $90,664,407 $19.43
========== ========= ===========
Options outstanding and currently exercisable by exercise price at
December 31, 1999 are as follows:
OPTIONS CURRENTLY
OPTIONS OUTSTANDING EXERCISABLE
------------------------------ ----------------------------
WEIGHTED AVERAGE WEIGHTED
NUMBER REMAINING NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE OUTSTANDING EXERCISE PRICE
- --------------- ----------- ---------------- ----------- --------------
$0.50--$3.12.............................. 816,268 8.06 446,927 2.54
$3.12--$7.50.............................. 360,401 8.76 140,920 4.99
$9.23..................................... 663,302 9.25 128,188 9.23
$10.67.................................... 865,514 9.40 123,584 10.67
$10.67--$17.32............................ 503,215 9.58 7,962 14.77
$17.50--$31.75............................ 322,875 9.78 10,584 23.46
$45.00.................................... 810,000 9.55 -- --
$60.00.................................... 322,500 9.55 -- --
--------- ---- ------- ------
4,664,075 9.18 858,165 $ 5.48
========= ==== ======= ======
63
10. STOCKHOLDERS' EQUITY (CONTINUED)
The Company accounts for employee and board of director stock options in
accordance with the provisions of APB No. 25 and complies with the disclosure
provisions of SFAS No. 123.
Under APB No. 25, compensation expense is recognized based on the amount by
which the fair value of the underlying common stock exceeds the exercise price
of the stock options at the measurement date, which in the case of employee
stock options is typically the date of grant. For financial reporting purposes,
the Company has determined that the deemed fair market value on the date of
grant of certain employee stock options was in excess of the exercise price of
the options. This amount is recorded as deferred compensation and is classified
as a reduction of stockholders' equity and is amortized as a charge to
operations over the vesting period of the applicable options, which is generally
three years. Consequently, the Company recorded deferred stock compensation of
$2,347,019, $1,617,928 and $1,206,098, net of terminations, during the years
ended December 31, 1999, 1998 and 1997, respectively. Amortization of stock
compensation expense recognized for the years ended December 31, 1999, 1998 and
1997 totaled $1,272,106, $540,489, and $470,455, respectively. The Company's
stock option grants and related deemed fair value are as follows:
WEIGHTED AVERAGE
NUMBER OF OPTIONS WEIGHTED AVERAGE DEEMED FAIR
GRANTED EXERCISE PRICE VALUE
----------------- ---------------- ----------------
For year ended December 31, 1997
Options granted at deemed fair value.......... 168,750 $1.317 $1.317
Options granted below deemed fair value....... 1,059,900 $2.178 $3.117
--------- ------ ------
Total....................................... 1,228,650 $2.060 $2.869
========= ====== ======
For year ended December 31, 1998
Options granted at deemed fair value.......... 502,838 $4.188 $4.188
Options granted below deemed fair value....... 668,550 $3.548 $6.019
--------- ------ ------
Total....................................... 1,171,388 $3.850 $5.233
========= ====== ======
For year ended December 31, 1999
Options granted above deemed fair value....... 1,251,374 $48.40 $17.00
Options granted at deemed fair value.......... 992,627 $15.51 $15.51
Options granted below deemed fair value....... 1,601,407 $11.23 $12.98
--------- ------ ------
Total....................................... 3,845,408 $24.43 $12.94
========= ====== ======
Stock compensation is being amortized over the vesting periods of the
options on a graded vesting method. This compensation expense relates to options
awarded to individuals in all operating expense categories. The amortization of
deferred compensation will approximate $1,350,000 for 2000, $1,158,000 for 2001,
and $380,000 for 2002.
Had compensation cost for option grants to employees been determined
consistent with SFAS No. 123, the Company's net loss would have been as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1998
------------ ------------ -----------
Net loss as reported................................. $(36,200,816) $(22,489,876) $(9,062,723)
Net loss per share as reported....................... $ (1.52) $ (1.52) $ (0.62)
Net loss--pro forma (computed using SFAS No. 123).... $(37,663,442) $(22,538,660) $(9,078,246)
Net loss per share--pro forma (computed using SFAS
No. 123)........................................... $ (1.58) $ (1.52) $ (0.62)
64
10. STOCKHOLDERS' EQUITY (CONTINUED)
The above pro forma disclosures are not necessarily representative of the
effects on reported income or loss for future years as additional grants are
made each year and options vest over several years.
The per share weighted average fair value of options granted for the years
ended December 31, 1999, 1998 and 1997 was $2.94, $0.56 and $1.37, respectively,
as estimated on the date of grant using the Black-Scholes options pricing model
with the following assumptions:
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
Risk-free interest rate.................................... 4.6-6.19% 4.6-5.6% 4.6-6.2%
Expected life.............................................. 2.5 years 3 years 3 years
Expected dividend yield.................................... -- -- --
Volatility................................................. 0%-147% -- --
The risk-free interest rate range represents the low and high end of the
range used at different points during the year. Prior to the Company's initial
public offering in July 1999, the Company did not have actively traded equity
securities, and, accordingly, volatility is not considered in determining the
value of options granted to employees.
EMPLOYEE STOCK PURCHASE PLAN
On June 24, 1999, the Company authorized the 1999 Employee Stock Purchase
Plan (the 1999 Plan) under which employees may acquire common stock of the
Company. The maximum number of shares of common stock issuable under the 1999
Plan is 450,000 shares, to be increased by 300,000 shares each year beginning on
January 1, 2000 and through January 1, 2008. The 1999 Plan will be implemented
during sequential six-month offering periods, the first of commenced on the
effective date of an initial public offering and will terminate on January 31,
2000. After the effective date of the initial public offering, offering periods
will generally begin on February 1 and August 1 of each year. Employees may
purchase common stock of the Company at a price equal to 85% of the fair market
value of the common stock on either the first or the last day of the offering
period, whichever is lower. The 1999 Plan will terminate upon the earlier of its
termination by the Board of Directors or the date on which all of the shares of
common stock available for issuance have been issued.
11. COMMON STOCK WARRANTS
In connection with the acquisition of Benelytics, Inc., the Company assumed
all warrants then outstanding to purchase common stock of Benelytics, Inc. and
converted them into warrants to purchase an aggregate of 12,246 shares of the
Company's common stock at an exercise price of $10.86 per share. The warrants
are fully exerciseable and expire on June 1, 2003. At December 31, 1999 and
1998, respectively, no warrants had been exercised and remained outstanding. The
fair value of these warrants was accounted for as part of the purchase price for
Benelytics, Inc.
12. INCOME TAXES
As of December 31, 1999, the Company had net operating loss carryforwards of
approximately $73,400,000 for both federal and $45,100,000 state income tax
purposes. The federal and state net operating loss carryforwards begin to expire
in the years 2011 and 2004, respectively. The Company's ability to utilize its
net operating loss carryforwards to offset future taxable income may be subject
to restrictions attributable to equity transactions that result in changes in
ownership as defined in the Tax Reform Act of 1986. These restrictions may
limit, on an annual basis, the Company's future use of its net operating loss
carryforwards. The amount, if any, of such limitations has not yet been
determined.
65
12. INCOME TAXES (CONTINUED)
The components of the net deferred tax assets and liabilities are presented
below:
DECEMBER 31,
---------------------------
1999 1998
------------ ------------
Net operating loss carryforwards................. $ 27,590,917 $ 15,372,116
Tax credit carryforwards......................... 31,247 31,247
Accruals and reserves............................ 266,943 116,958
Other............................................ 335,128 39,643
------------ ------------
28,224,235 15,559,964
Less valuation allowance......................... (28,224,235) (15,559,964)
------------ ------------
Net deferred tax asset........................... $ -- $ --
============ ============
Due to uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, the Company has placed a valuation allowance
against its net deferred tax asset. The valuation allowance recorded for the
years ended December 31, 1999 and 1998 increased by $12,664,271 and $9,504,563,
respectively.
The difference between the income tax benefit at the federal statutory rate
of 34% and the Company's effective tax rate is due primarily to the valuation
allowance established to offset the deferred tax assets. The provision for
income taxes is different than the amount computed using the applicable
statutory federal income tax rate with the difference for each year summarized
below:
DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
Federal tax benefit at statutory rate................ (34)% (34)% (34)%
State taxes, net of federal benefit.................. (3) (6) (6)
Nondeductible goodwill amortization.................. 4 -- --
Nondeductible stock compensation..................... 1 -- --
Adjustment due to increase in valuation allowance.... 32 40 40
--- --- ---
Provision for income taxes........................... 0% 0% 0%
=== === ===
13. EMPLOYEE BENEFIT PLAN
The Company has a deferred contribution plan offered to all eligible
employees and is qualified under section 401(k) of the Internal Revenue code.
The Company will match 50% of the first 6% of elective contributions made by
each qualifying employee. Each participant is 100% vested in elective
contributions and is incrementally vested one-third at the end of each of
three years of service in employer contributions. Employer contributions for
the years ended December 31, 1999 and 1998 were $282,162 and $180,751,
respectively.
14. BENELYTICS, INC. ACQUISITION
On December 31, 1998, the Company acquired all of the outstanding shares of
Benelytics, Inc. in exchange for 908,561 shares and warrants to purchase an
aggregate of 12,246 shares of the Company's common stock valued at $9.23 per
share. Transaction costs of $85,800 were incurred. The acquisition has been
accounted for under the purchase method of accounting. The aggregate purchase
price of $8,587,913, together with $172,418 of liabilities assumed, has been
allocated based on the fair value of the assets acquired. The tangible assets of
$63,190 comprise cash and fixed assets. Intangible assets of $1,380,000
66
14. BENELYTICS, INC. ACQUISITION (CONTINUED)
comprise purchased software, non-compete agreements, assembled workforce and
contractual relationships and are being amortized over two years. Goodwill of
$7,317,141 is being amortized over three years. Amortization expense was
$3,129,047 and $0 for the years ended December 31, 1999 and 1998, respectively.
The following pro forma results of operations reflect the combined results
of the Company and Benelytics, Inc. for the fiscal years ended December 31, 1998
and 1997 and have been prepared as though the entities had been combined as of
January 1, 1997 and 1998. The proforma results do not reflect any nonrecurring
charges which resulted directly from the transaction.
YEAR ENDED DECEMBER 31,
---------------------------
1998 1997
------------ ------------
(UNAUDITED)
Revenues......................................... $ 4,315,126 $ 749,671
Net loss......................................... $(26,968,212) $(12,820,740)
Net loss per share............................... $ (1.72) $ (0.83)
Shares used in computing net loss per share...... 15,677,903 15,509,879
15. SEGMENT INFORMATION
The Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, in fiscal 1999. SFAS No. 131 supercedes SFAS
No. 14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE and
establishes standards for reporting information about operating segments.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance.
The Company operates in one segment, business-to-consumer electronic
insurance services. The Company markets its online marketplace in the United
States and Canada. The Chief Executive Officer has been identified as the Chief
Operating Decision Maker ("CODM") because he has final authority over resource
allocation decisions and performance assessment. The CODM does not receive
discrete financial information about individual components of the Company's
operations.
16. SUBSEQUENT EVENT (UNAUDITED)
In February 2000, the Company and America Online (AOL) entered into a
two-year agreement pursuant to which America Online offers a co-branded version
of the InsWeb online insurance marketplace across the Netscape Netcenter ,
CompuServe and Digital City websites. The agreement provides for InsWeb to be
the exclusive provider of online insurance quotation services on the Netscape
website and premier insurance comparison-shopping aggregator of insurance
offerings for CompuServe and Digital City. Under the agreement, InsWeb has
agreed to pay to AOL fixed fees for certain impression targets plus a fee for
each click over a certain cumulative minimum threshold.
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934 the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 29, 2000.
INSWEB CORPORATION
By: /s/ HUSSEIN A. ENAN
-----------------------------------------
Hussein A. Enan
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
Chairman of the Board,
/s/ HUSSEIN A. ENAN President and Chief
------------------------------------------- Executive Officer (Principal March 29, 2000
Hussein A. Enan Executive Officer)
/s/ JAMES M. CORROON
------------------------------------------- Vice Chairman of the Board March 29, 2000
James M. Corroon
/s/ MARK P. GUTHRIE Acting Chief Financial Officer
------------------------------------------- (Principal Financial and March 29, 2000
Mark P. Guthrie Accounting Officer)
/s/ BRUCE A. BUNNER
------------------------------------------- Director March 29, 2000
Bruce A. Bunner
/s/ RONALD FISHER
------------------------------------------- Director March 29, 2000
Ronald Fisher
/s/ RICHARD J. FREEMAN
------------------------------------------- Director March 29, 2000
Richard J. Freeman
/s/ M. GORDON GADDY
------------------------------------------- Director March 29, 2000
M. Gordon Gaddy
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RICHARD D. HEADLEY
------------------------------------------- Director March 29, 2000
Richard D. Headley
/s/ YOSHITAKA KITAO
------------------------------------------- Director March 29, 2000
Yoshitaka Kitao
/s/ DONALD K. MORFORD
------------------------------------------- Director March 29, 2000
Donald K. Morford
/s/ ROBERT C. NEVINS
------------------------------------------- Director March 29, 2000
Robert C. Nevins
/s/ ROBERT A. PUCCINELLI
------------------------------------------- Director March 29, 2000
Robert A. Puccinelli
/s/ DARRELL J. TICEHURST
------------------------------------------- Vice Chairman of the Board March 29, 2000
Darrell J. Ticehurst
INSWEB CORPORATION AND SUBSDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ----------- ---------- ---------- ---------- ---------- ----------
Year ended December 31, 1999:
Allowance for doubtful accounts.......... $ -- $302,189 $ -- $(160,409) $141,780
====== ======== ==== ========= ========
Year ended December 31, 1998:
Allowance for doubtful accounts.......... $5,000 $ -- $ -- $ (5,000) $ --
====== ======== ==== ========= ========
Year ended December 31, 1997:
Allowance for doubtful accounts.......... $7,200 $ -- $ -- $ (2,200) $ 5,000
====== ======== ==== ========= ========
S-1
INSWEB CORPORATION
EXHIBITS
TO
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED
DECEMBER 31, 1999
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
*3.1 Amended and Restated Certificate of Incorporation of
Registrant.
*3.2 Bylaws of Registrant.
*4.1 Third Amended and Restated Investor Rights Agreement among
Registrant and certain Stockholders of Registrant, dated
as of March 31, 1999.
*10.1 Form of Indemnification Agreement between Registrant and
Registrant's directors and officers.
*10.2 1997 Stock Option Plan.
*10.3 1999 Employee Stock Purchase Plan.
*10.4 Series A Preferred Stock Purchase Agreement between
Registrant and Nationwide Mutual Insurance Company, dated
as of January 30, 1996.
*10.5 Stock Purchase Agreement between Registrant and Insurance
Information Exchange, L.L.C., dated as of November 22,
1996.
*10.6 Non-Exclusive Joint Marketing and License Agreement between
Registrant and Insurance Information Exchange, L.L.C.,
dated as of November 22, 1996.
*10.7 Asset Purchase Agreement between Registrant and Insurance
Information Exchange, L.L.C., dated as of November 22,
1996.
*10.8 Letter of Credit Agreement between Registrant and AMS
Services, Inc., dated as of November 22, 1996.
*10.9 Assignment and Assumption Agreement by and among Registrant,
AMS Services, Inc. and Continental Casualty Company, dated
as of April 10, 1998.
*10.10 Employment Agreement between Registrant and Hussein A. Enan,
dated November 22, 1996.
*10.11 Option Agreement between Insurance Information Exchange,
L.L.C. and Hussein A. Enan, dated as of November 22, 1996.
*10.12 Series C Stock Purchase Agreement between Registrant and
Century Capital Partners, L.P., dated as of February 21,
1997.
*10.13 Subscription Agreement between Registrant and Nationwide
Mutual Insurance Company, dated as of May 15, 1997.
*10.14 Series D Preferred Stock Purchase Agreement by and among
Registrant, SOFTBANK Ventures, Inc., SOFTVEN No. 2
Investment Enterprise Partnership and Century Capital
Partners, L.P., dated as of December 15, 1998, as amended.
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
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*10.15 Agreement and Plan of Reorganization by and among
Registrant, Benelytics Acquisition Corporation and
Benelytics, Inc., dated as of December 31, 1998.
*10.16 Joint Venture Agreement by and between Registrant and
SOFTBANK Corp., dated as of December 15, 1998.
*10.17 Series E Preferred Stock Purchase Agreement by and between
Registrant and SOFTBANK America Inc., dated as of February
26, 1999.
*10.18+ License Agreement between Registrant and Yahoo! Inc. dated
as of February 12, 1999.
*10.19+ Services Agreements between Registrant and State Farm Mutual
Automobile Insurance Company dated as of September 15,
1998.
10.20 Lease between Registrant and Spieker Properties, L.P. dated
October 27, 1999.
21.1 Subsidiaries of Registrant.
23.1 Consent of Independent Accountants.
23.2 Report of Independent Accountants on Financial Statement
Schedule.
27.1 Financial Data Schedule.
- ------------------------
* Previously filed with InsWeb's Registration Statement on Form S-1 (File
No. 333-78095), as amended.
+ Confidential treatment has been granted as to a portion of this Exhibit.