** **

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

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**FORM10-Q**

 
| **ý**                                       |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                                                               |
|--------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **For the quarterly period ended June 30, 2003** |
|                                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **or**                                           |
|                                             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **o**                                            |   | **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**

(Exactname of Registrant as specified in its charter)

 

| **Delaware**                                                     |   | **94-3220749**                         |
|------------------------------------------------------------------|--------|----------------------------------------|
| (State  or other jurisdiction of  incorporation or organization) |   | (IRS  Employer  Identification Number) |

 

**11290 Pyrites Way, Suite 200****Gold River,California 95670**

(Addressof principal executive offices)

 

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**(916) 853-3300**

(Registrant’stelephone number, including area code)

 

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Indicate by check markwhether the Registrant (1) has filed all reports required to be filed bySections 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ý  No o

 

Indicate by check markwhether the Registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act. Yes o  No ý

 

The number of outstandingshares of the Registrant’s Common Stock, par value $0.001 per share, on July31, 2003 were 4,687,679 shares.

 

 

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**FORM 10-Q**

**INSWEB CORPORATION**

**INDEX**

 
| **PART I**  | **FINANCIAL  INFORMATION**                                                                                  |
|-------------|-------------------------------------------------------------------------------------------------------------|
| ITEM 1:     | Financial Statements                                                                                        |
|        | Condensed  Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002                            |
|        | Condensed  Consolidated Statements of Operations for the three and six months ended June  30, 2003 and 2002 |
|        | Condensed  Consolidated Statements of Cash Flows for the six months ended June 30, 2003  and 2002           |
|        | Notes  to Condensed Consolidated Financial Statements                                                       |
| ITEM  2:    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                 |
| ITEM  3:    | Quantitative  and Qualitative Disclosures About Market Risk                                                 |
| ITEM 4:     | Controls and Procedures                                                                                     |
|        |                                                                                                        |
| **PART II** | **OTHER INFORMATION**                                                                                       |
| ITEM  1:    | Legal  Proceedings                                                                                          |
| ITEM  4:    | Submission  of Matters to a Vote of Security Holders                                                        |
| ITEM 6:     | Exhibits and  Reports on Form 8-K                                                                           |
|        |                                                                                                        |
|        | Signature                                                                                                   |

 

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**PART I:  FINANCIAL INFORMATION**

**ITEM 1.  FINANCIAL STATEMENTS**

 

**INSWEB CORPORATIONAND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

*(in thousands)*

*(unaudited)*

* *
|                                             |   | **June 30,  2003** |   | **December 31,  2002** |   |
|--------------------------------------------------|--------|--------------------|--------|------------------------|--------|
| **Assets**                                       |   |               |   |                   |   |
| Current  assets:                                 |   |               |   |                   |   |
| Cash  and cash equivalents                       |   | $                  | 10,720 |                   | $      | 12,382 |   |
| Short-term  investments                          |   | 11,679             |   | 16,541                 |   |
| Accounts  receivable, net                        |   | 2,217              |   | 2,236                  |   |
| Prepaid  expenses and other current assets       |   | 674                |   | 1,232                  |   |
| Total  current assets                            |   | 25,290             |   | 32,391                 |   |
| Property  and equipment, net                     |   | 1,778              |   | 2,197                  |   |
| Prepaid  marketing costs                         |   | 674                |   | 808                    |   |
|                                             |   |               |   |                   |   |
| Deposits  and other assets                       |   | 2,163              |   | 2,296                  |   |
| Total  assets                                    |   | $                  | 29,905 |                   | $      | 37,692 |   |
|                                             |   |               |   |                   |   |
| **Liabilities and stockholders’ equity**    |   |               |   |                   |   |
| Current  liabilities:                            |   |               |   |                   |   |
| Accounts  payable                                |   | $                  | 1,590  |                   | $      | 888 |   |
| Accrued  expenses                                |   | 5,078              |   | 5,605                  |   |
| Deferred  revenue                                |   | 425                |   | 575                    |   |
| Marketing  commitment                            |   | 334                |   | 2,306                  |   |
| Note  payable                                    |   | 1,251              |   | 1,230                  |   |
| Total  current liabilities                       |   | 8,678              |   | 10,604                 |   |
|                                             |   |               |   |                   |   |
| Stockholders’  equity:                      |   |               |   |                   |   |
| Common  stock                                    |   | 7                  |   | 7                      |   |
| Paid-in  capital, less treasury stock            |   | 198,165            |   | 202,051                |   |
| Accumulated  other comprehensive loss            |   | (208               | )      | (208                   | )      |
| Accumulated  deficit                             |   | (176,737           | )      | (174,762               | )      |
| Total  stockholders’ equity                 |   | 21,227             |   | 27,088                 |   |
| Total  liabilities and stockholders’ equity |   | $                  | 29,905 |                   | $      | 37,692 |   |

 

Seeaccompanying notes.

 

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**INSWEB CORPORATION AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

*(in thousands, except per share amounts)*

*(unaudited)*

 
|                                                                          |   | **Three Months  Ended June 30,** |       | **Six Months  Ended June 30,** |       |
|-------------------------------------------------------------------------------|--------|----------------------------------|------------|--------------------------------|------------|
|                                                                          |   | **2003**                         |       | **2002**                       |       | **2003** |   | **2002** |   |
| Revenues:                                                                     |   |                             | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| Transaction fees                                                              |   | $                                | 6,094      |                           | $          | 5,885 |   | $ | 13,322 |   | $ | 12,278 |   |
| Development and maintenance fees                                              |   | 230                              |       | 434                            |       | 483 |   | 875 |   |
| Total revenues                                                                |   | 6,324                            |       | 6,319                          |       | 13,805 |   | 13,153 |   |
|                                                                          |   |                             |       |                           |       |   |   |   |   |
| Operating  expenses:                                                          |   |                             |       |                           |       |   |   |   |   |
| Technology                                                                    |   | 2,223                            |       | 2,598                          |       | 4,671 |   | 5,618 |   |
| Sales  and marketing                                                          |   | 4,106                            |       | 4,583                          |       | 8,789 |   | 9,425 |   |
| General  and administrative                                                   |   | 1,452                            |       | 1,983                          |       | 3,232 |   | 3,764 |   |
| Total  operating expenses                                                     |   | 7,781                            |       | 9,164                          |       | 16,692 |   | 18,807 |   |
| Loss  from operations                                                         |   | (1,457                           | )          | (2,845                         | )          | (2,887 | ) | (5,654 | ) |
| Interest  expense                                                             |   | (23                              | )          | (79                            | )          | (63 | ) | (347 | ) |
| Interest  income                                                              |   | 78                               |       | 176                            |       | 166 |   | 353 |   |
| Other  income                                                                 |   | 16                               |       | 50                             |       | 809 |   | 9,410 |   |
| Net (loss) income                                                             |   | $                                | (1,386     | )                              | $          | (2,698 | ) | $ | (1,975 | ) | $ | 3,762 |   |
|                                                                          |   |                             |       |                           |       |   |   |   |   |
| Net  (loss) income per share-basic and diluted:                               |   |                             |       |                           |       |   |   |   |   |
| Net  (loss) income                                                            |   | $                                | (0.30      | )                              | $          | (0.38 | ) | $ | (0.37 | ) | $ | 0.53 |   |
|                                                                          |   |                             |       |                           |       |   |   |   |   |
| Weighted  average shares used in computing pershare amounts basic and diluted |   | 4,693                            |       | 7,039                          |       | 5,390 |   | 7,037 |   |

 

Seeaccompanying notes**.**

 

4

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**INSWEB CORPORATIONAND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

*(in thousands)*

*(unaudited)*

 
|                                                                                  |   | **Six Months Ended  June 30,** |       |
|---------------------------------------------------------------------------------------|--------|--------------------------------|------------|
|                                                                                  |   | **2003**                       |       | **2002** |   |
| Cash  flows from operating activities:                                                |   |                           | ** ** |   | ** ** |
| Net  (loss) income                                                                    |   | $                              | (1,975     | ) | $ | 3,762 |   |
| Adjustments  to reconcile net (loss) income to net cash used in operating activities: |   |                           |       |   |   |
| Depreciation  and amortization                                                        |   | 554                            |       | 1,215 |   |
| Amortization  of prepaid marketing                                                    |   | 135                            |       | 752 |   |
| Other  income                                                                         |   | (9                             | )          | (9,387 | ) |
| Net  changes in operating assets and liabilities:                                     |   |                           |       |   |   |
| Accounts  receivable                                                                  |   | 19                             |       | 105 |   |
| Prepaid  expenses and other current assets                                            |   | 558                            |       | 472 |   |
| Deposits  and other assets                                                            |   | 67                             |       | 1,826 |   |
| Accounts  payable                                                                     |   | 702                            |       | 180 |   |
| Accrued  expenses                                                                     |   | (442                           | )          | 475 |   |
| Deferred  revenue                                                                     |   | (150                           | )          | (422 | ) |
| Tenant  security deposit payable                                                      |   | (87                            | )          | — |   |
| Changes  in working capital                                                           |   | 667                            |       | 2,636 |   |
| Net  cash used in operating activities                                                |   | (628                           | )          | (1,022 | ) |
| Cash  flows from investing activities:                                                |   |                           |       |   |   |
| Redemptions  of short term investments                                                |   | 11,232                         |       | 23,351 |   |
| Purchases  of short term investments                                                  |   | (6,370                         | )          | (20,939 | ) |
| Purchases  of property and equipment and capitalized website development costs        |   | (39                            | )          | (283 | ) |
| Net  cash provided by investing activities                                            |   | 4,823                          |       | 2,129 |   |
| Cash  flows from financing activities:                                                |   |                           |       |   |   |
| Proceeds  from exercise of options                                                    |   | 2                              |       | — |   |
| Repurchase  of common stock                                                           |   | (3,904                         | )          | — |   |
| Repayments  of debt                                                                   |   | (1,972                         | )          | (1,186 | ) |
| Proceeds  from stock issued from Employee Stock Purchase Plan                         |   | 17                             |       | 42 |   |
| Net  cash used in financing activities                                                |   | (5,857                         | )          | (1,144 | ) |
| Net  decrease in cash and cash equivalents                                            |   | (1,662                         | )          | (37 | ) |
| Cash  and cash equivalents, beginning of period                                       |   | 12,382                         |       | 14,627 |   |
| Cash  and cash equivalents, end of period                                             |   | $                              | 10,720     |   | $ | 14,590 |   |

 

Seeaccompanying notes.

 

5

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**INSWEB CORPORATION AND SUBSIDIARIES**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

***(Amounts in thousands)***

 

**1.  Business of InsWeb**

 

InsWebCorporation operates an online insurance marketplace for a variety of insuranceproducts, including automobile, term life and homeowners. InsWeb’s marketplaceenables consumers to research insurance-related topics, search for, analyze andcompare insurance products, apply for and receive insurance company-sponsoredquotes for actual coverage and purchase automobile insurance coverage throughInsWeb’s insurance agency. InsWeb has combined extensive knowledge of theinsurance industry, technological expertise and close relationships with asignificant number of insurance companies to develop an integrated onlinemarketplace.

 

InsWeb is subjectto all of the risks inherent in an early stage business in the electroniccommerce industry and special risks related to the online insurance industry.These risks include, but are not limited to, a limited operating history,limited management resources, dependence upon consumer acceptance of theInternet, Internet related security risks, the changing nature of theelectronic commerce industry, and variations in consumer traffic and insurancecompany participation. Due to the foregoing factors, InsWeb’s future operatingresults may be materially affected.

 

**2.* *Basisof Presentation**

 

The condensed consolidated financialstatements include the accounts of InsWeb Corporation and its wholly-owned subsidiaries,InsWeb Insurance Services, Inc. and Goldrush Insurance Services, Inc. (“InsWeb”or the “Company”).  All significantintercompany accounts and transactions have been eliminated in the consolidatedfinancial statements.

 

The accompanying unaudited interimfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States for interim financialinformation and  the instructions toForm 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not contain all of the information and footnotesrequired by accounting principles generally accepted in the United States forcomplete financial statements.  In theopinion of management, the accompanying unaudited interim condensedconsolidated financial statements reflect all adjustments, which include onlynormal recurring adjustments, necessary to present fairly InsWeb’s financialposition as of June 30, 2003, the results of operations for the three and sixmonths ended June 30, 2003 and June 30, 2002 and cash flows for the six monthsended June 30, 2003 and 2002.  Thefinancial data and other information disclosed in these notes to the condensedconsolidated financial statements related to these periods are unaudited.  The results for the three and six monthsended June 30, 2003 are not necessarily indicative of the results to beexpected for the year ending December 31, 2003.

 

In April 2002,the Financial Accounting Standards Board (the “FASB”) issued Statement ofFinancial Accounting Standards No. 145 (“SFAS 145”),  “Rescission of FASB Statements No. 4, 44, and 62, Amendment ofFASB Statement No. 13, and Technical Corrections.” SFAS 145 requires gains andlosses on extinguishments of debt to be classified as income or loss fromcontinuing operations rather than as extraordinary items. SFAS 145 becameeffective for InsWeb’s fiscal year beginning January 1, 2003.  The extraordinary gain of $9,345,000representing a reduction of obligations (fixed payments) which was recorded inconnection with the amendment of the license and distribution agreement withIntuit in the quarter ended March 31, 2002, has been reclassified to otherincome.  Except for thisreclassification, the adoption of SFAS 145 did not affect InsWeb’s financialcondition, results of operations or cash flows.

 

These condensed consolidated financialstatements should be read in conjunction with the consolidated financialstatements and notes thereto included in InsWeb’s Annual Report on Form 10-Kand other information as filed with the Securities and Exchange Commission.

 

**3.  Concentration of Risk —Marketing Partners**

 

We rely on relationships with Internet portals and otheronline 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 clickto jump to our website or to a site that we operate under the online company’sname; as part of the arrangement, we typically pay the online company a portionof the resulting transaction fees and in some cases a fixed fee. Theserelationships may not continue to generate a substantial amount of new trafficon our website, or the revenues generated by these relationships may beinsufficient to justify our payment obligations. We have experienced occasionalfluctuations in the traffic from our online partners as a result of redesignsof their websites or being outbid for promotions by other online insuranceproviders. Furthermore, the value of these relationships is based on thecontinued positive market presence, reputation and growth of these onlinecompanies’ websites and services. Any decline in the market presence, businessor reputation of these online companies’ websites and services will reduce thevalue of these relationships to us and could harm our business.

 

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During 2002 we significantly expanded our on-linemarketing relationship with LowerMyBills.com, Inc., whereby they deliveredapproximately 34% of our website traffic for the year ended December 31, 2002.During the six months ended June 30, 2003, they accounted for 41% of ourwebsite traffic.

 

**4.  Per ShareInformation**

 

Basicearnings per share, is computed using the weighted average number of shares ofcommon stock outstanding. Diluted earnings per share, reflects the potentialdilution that would occur if stock options and warrants had beenexercised.  For the three and six monthperiods ended June 30, 2003, common equivalent shares from stock options andwarrants have been excluded from the computation of net loss per share-dilutedas their effect would be antidilutive. For the six months ended June 30, 2002, shares used in the computationof diluted earnings per share are not significantly different than the numberof shares used in the computation of basic earnings per share.

 

InsWeb accounts for its stock based compensation plansunder the recognition and measurement principles of APB Opinion No. 25,“Accounting for Stock Issued to Employees,” and related interpretations.  The following table illustrates the effecton net loss and net loss per share if InsWeb had applied the fair valuerecognition provisions of Financial Accounting Standards Board Statement No.123,  “Accounting for Stock-BasedCompensation*,*” to stock-basedemployee compensation (in thousands, except per share amounts):

 
|                                                                                                             |   | **Three months ended June 30,** |   | **Six months ended June 30,** |   |
|------------------------------------------------------------------------------------------------------------------|--------|---------------------------------|--------|-------------------------------|--------|
|                                                                                                             |   | **2003**                        |   | **2002**                      |   | **2003** |   | **2002** |   |
| Net  (loss) income                                                                                               |   | $                               | (1,386 | )                             | $      | (2,698 | ) | $ | (1,975 | ) | $ | 3,762 |   |
| Deduct:  Stock-based employee compensation expense  determined under fair value based method for all awards |   | (371                            | )      | (733                          | )      | (773 | ) | (939 | ) |
| Pro  forma net (loss) income                                                                                     |   | $                               | (1,757 | )                             | $      | (3,431 | ) | $ | (2,748 | ) | $ | 2,823 |   |
|                                                                                                             |   |                            |   |                          |   |   |   |   |   |
| Net  (loss) income per share:                                                                                    |   |                            |   |                          |   |   |   |   |   |
| Basic  and diluted-as reported                                                                                   |   | $                               | (0.30  | )                             | $      | (0.38 | ) | $ | (0.37 | ) | $ | 0.53 |   |
|                                                                                                             |   |                            |   |                          |   |   |   |   |   |
| Basic  and diluted-pro forma                                                                                     |   | $                               | (0.37  | )                             | $      | (0.49 | ) | $ | (0.51 | ) | $ | 0.40 |   |

 

Option valuationmodels require the input of highly subjective assumptions. Because InsWeb’semployee and director stock options have characteristics significantly differentfrom those of traded options, and because changes in the subjective inputassumptions can materially affect the fair value estimate, in management’sopinion, the existing models do not necessarily provide a reliable measure ofthe fair value of its employee stock options. For purposes of pro formadisclosures, the estimated fair value of the options is amortized over theoptions’ vesting period. The above pro forma disclosures are not necessarilyrepresentative of the effects on reported income or loss for future periods asadditional grants are made each year and options vest over several years.

 

**5.  Comprehensive (Loss) Income**

 

Total comprehensive (loss) income forthe three and six months ended June 30, 2003 and 2002 were as follows (inthousands):

 
|                                                                              |   | **Three months ended June 30,** |   | **Six months ended June 30,** |   |
|-----------------------------------------------------------------------------------|--------|---------------------------------|--------|-------------------------------|--------|
|                                                                              |   | **2003**                        |   | **2002**                      |   | **2003** |   | **2002** |   |
| Net  (loss) income                                                                |   | $                               | (1,386 | )                             | $      | (2,698 | ) | $ | (1,975 | ) | $ | 3,762 |   |
| Other  comprehensive gain (loss): change in unrealized gain (loss) on investments |   | (3                              | )      | 8                             |   | — |   | (1 | ) |
| Total  comprehensive (loss) income                                                |   | $                               | (1,389 | )                             | $      | (2,690 | ) | $ | (1,975 | ) | $ | 3,761 |   |

 

**6.  Related Party Transactions**

 

During the three and six months endedJune 30, 2003, InsWeb recognized $121,000 and $242,000, respectively, inmarketing expenses under a marketing agreement with an Internet company,compared to $383,000 and $740,000, respectively for the comparable periods in2002.  An affiliate of the Internetcompany became a stockholder of InsWeb in December 1998.

 

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**7.Commitments and Contingencies**

 

***Leases***

 

In July 2002,InsWeb and one of its sublessees agreed to amend the sublease covering portionsof the property InsWeb formerly occupied as its headquarters in Redwood City,California. Under the terms of the amendment, the sublessee agreed to rent theentire facility for the duration of InsWeb’s lease (through September 2008).All rent and operating expenses otherwise payable by InsWeb to the landlord arerequired to be paid directly by the sublessee. Therefore, the amended subleaseoffsets InsWeb’s operating lease commitments by approximately $9.9 million,through the remainder of the lease (which is not reflected in the tableabove).  However, the sublessee is astart-up company with a limited operating history and, therefore, there areinherent risks and uncertainties associated with its future operations and itsability to discharge its obligations through the term of the sublease.  In the event that the sublessee defaults onits obligations under the amended sublease, InsWeb would be responsible formaking the required lease payments to the landlord throughout the remainingterms of the lease.  In connection with this lease and other leaseobligations for formerly occupied facilities, InsWeb must make assumptionsregarding the estimated future sublease income relative to thesefacilities.  As a result of the declinein the real estate market in the geographic area where the properties arelocated and the interest risk associated with its sublessee, the Company has anaccrual of $2,913,000 million as of June 30, 2003 for formerly occupiedfacilities. These estimates and assumptions are affected by area-specificconditions such as new commercial development, market occupancy rates andfuture market prices. If these estimates or their related assumptions change inthe future, InsWeb may be required to record a charge to increase its existingaccrual.

 

***Securities Class Action Lawsuit***

 

Asecurities class action lawsuit was filed on December 5, 2001 in the United StatesDistrict Court for the Southern District of New York, (the “Court”) purportedlyon behalf of all persons who purchased our common stock from July 22, 1999through December 6, 2000.  The complaintnamed as defendants InsWeb, certain current and former officers and directors,and three investment banking firms that served as underwriters for InsWeb’sinitial public offering in July 1999. The complaint, as subsequently amended, alleges violations of Sections11 and 15 of the Securities Act of 1933 and Sections 10 and 20 of theSecurities Exchange Act of 1934, on the grounds that the prospectusesincorporated in the registration statements for the offering failed todisclose, among other things, that (i) the underwriters had solicited andreceived excessive and undisclosed commissions from certain investors inexchange for which the underwriters allocated to those investors materialportions of the shares of our stock sold in the offerings and (ii) theunderwriters had entered into agreements with customers whereby theunderwriters agreed to allocated shares of the stock sold in the offering tothose customers in exchange for which the customers agreed to purchaseadditional shares of InsWeb stock in the aftermarket at pre-determined prices.  No specific damages are claimed.  Similar allegations have been made inlawsuits relating to more than 300 other initial public offerings conducted in1999 and 2000, all of which have been consolidated for pretrial purposes.  In October 2002, all claims against theindividual defendants were dismissed without prejudice.  In February 2003, the Court dismissed theclaims in the InsWeb action alleging violations of the Securities Exchange Actof 1934 but allowed the plaintiffs to proceed with the remaining claims.  In June 2003, the plaintiffs in all of thecases presented a settlement proposal to all of the issuer defendants.  Under the proposed settlement, theplaintiffs will dismiss and release all claims against participating defendantsin exchange for a contingent payment guaranty by the insurance companiescollectively responsible for insuring the issuers in all the related cases, andthe assignment or surrender to the plaintiffs of certain claims the issuerdefendants may have against the underwriters. The settlement is subject toacceptance by a substantial majority of the issuer defendants and execution ofa definitive settlement agreement.  Thesettlement is also subject to approval of the Court, which cannot be assured.  If the settlement is not accepted by therequisite number of defendants or if it is not approved by the Court, InsWebintends to defend the lawsuit vigorously. However, the litigation is in the preliminary stage, and we cannotpredict its outcome.  The litigationprocess is inherently uncertain.  An unfavorable outcome could have a materialadverse effect on InsWeb’s financial condition, results of operations or cashflows.

 

**8.  StockholdersEquity**

 

In February 2003, the Board of Directors authorizedmanagement to repurchase 2,241,440 shares of InsWeb’s common stock, consistingof 1,169,898 shares held by Intuit Insurance Services, Inc. and 1,071,542shares held by SOFTBANK America, Inc. The shares were purchased for $3,810,000,or $1.70 per share. With the closing of this transaction, SOFTBANK Corporation’sholdings of InsWeb common stock have been reduced to 353,032 shares, whileIntuit Insurance Services, Inc. holds no shares.

 

**9.  Recent AccountingPronouncements**

 

In November 2002, the Emerging Issues Task Force reacheda consensus on Issue 00-21 (“EITF 00-21”), “Revenue Arrangements with MultipleDeliverables.”  EITF 00-21 addresses howto account for arrangements that may involve the delivery or performance ofmultiple products, services, and/or rights to use assets and focuses on when arevenue arrangement should be separated into components or deliverables, oralternatively, when smaller deliverables or elements should be combined forpurposes of recognizing revenue. EITF 00-21 is applicable for agreementsentered into in fiscal periods beginning after June 15, 2003, with earlyadoption permitted.  The adoption ofEITF 00-21 had no impact on InsWeb’s results of operations, financial conditionor cash flows.

 

InJanuary 2003, in an effort to expand upon and strengthen existing accountingguidance that addresses when a company should include in its financialstatements the assets, liabilities and activities of another entity, the FASBissued Interpretation No. 46 

 

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(“FIN 46”), “Consolidation of Variable Interest Entities.” Theobjective of FIN 46 is not to restrict the use of variable interest entitiesbut to improve financial reporting by companies involved with variable interestentities. Prior to the issuance of FIN 46, a company generally  included another entity in its consolidatedfinancial statements only if it controlled the entity through voting interests.FIN 46 changes that by requiring a variable interest entity to be consolidatedby a company if that company is subject to a majority of the risk of loss fromthe variable interest entity’s activities or entitled to receive a majority ofthe entity’s residual returns or both. The consolidation requirements of FIN 46apply immediately to variable interest entities created after January 31, 2003.The consolidation requirements apply to older entities in the first fiscal yearor interim period beginning after June 15, 2003. Certain of the disclosurerequirements apply in all financial statements issued after January 31, 2003,regardless of when the variable interest entity was established. As of June 30,2003, the Company had a minority financial interest in Finance All K.K. (anunconsolidated entity). The Company has evaluated the effect that FIN may have,and has concluded that since it (i) does not have majority voting rights, (ii)does not have majority residual interests in this entity’s assets or income,(iii) does not have obligations to absorb the majority of the losses of this,or any, unconsolidated entity, (iv) has not guaranteed any obligations of this,or any, unconsolidated entity, and (v) does not have any commitment or intentto provide funding to this, or any, such entity, the Company’s maximum exposureto loss is limited to $1,700,000, the carrying value of the investment inFinance All K.K. as of June 30, 2003.

 

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**ITEM 2.  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION****AND RESULTS OF OPERATIONS**

 

*InsWeb has included in this filing certain “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995 concerning InsWeb’s business, operations and financial condition.  The words or phrases “expects,”“anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” andsimilar expressions are generally intended to identify forward-lookingstatements.  Such forward-lookingstatements are subject to various known and unknown risks and uncertainties,and InsWeb cautions you that any forward-looking information provided by, or onbehalf of, InsWeb is not a guarantee of future performance.  Actual results could differ materially fromthose anticipated in such forward-looking statements due to a number offactors, some of which are beyond InsWeb’s control, including, but not limitedto, uncertain economic conditions which could result in lower growth rates,decreasing revenue and reduced participation in InsWeb’s marketplace, limitedoperating history, anticipated losses, the unpredictability of future revenues,reliance on key customers - property and casualty insurance carriers- who arethemselves subject to volatility in their operating cycles, competition, risksassociated with system development and operation risks, management of potentialgrowth and risks of new business areas, business combinations, and strategicalliances.  These risks anduncertainties, as well as other risks and uncertainties are described ingreater detail in the section entitled “Factors That May Affect FuturePerformance.” All forward-looking statements are based on information availableto InsWeb on the date hereof, and InsWeb assumes no obligation to update suchstatements.*

 

**Overview**

 

InsWeb operates an online insurance marketplace thatenables consumers to shop online for a variety of insurance products, includingautomobile, term life, homeowners, renters and health insurance, and obtaininsurance company-sponsored quotes for actual coverage.  In order to create this marketplace, InsWebhas established close relationships with a significant number of insurance companiesthroughout the United States.

 

InsWeb’s principal source of revenues is transaction feesfrom participating insurance companies. While quotes obtained through InsWeb’sonline insurance marketplace are provided to consumers free of charge, InsWebearns revenues from participating insurance companies based on the delivery ofqualified leads. With certain insurance companies, InsWeb is paid a fee onlywhen the consumer purchases an insurance policy, and with others, InsWeb ispaid a transaction fee based on the delivery of a lead, regardless of whetheror not the consumer actually purchases a policy. Qualified leads are producedin two ways: for insurance companies providing instant online quotes, aqualified lead is produced when a consumer clicks to request insurance coveragebased on a specific quote; for insurance companies providing e-mail or otheroffline quotes, a qualified lead is produced when a consumer clicks to requestthe quote itself. Once a lead is generated by the consumer’s request for anapplication or offline quote, InsWeb transmits the lead either to InsWebInsurance Services, or to the selected insurance company or other entity bye-mail, file transfer or direct connection to the insurance company’sinformation system. InsWeb provides each participating insurance company withcustom-formatted lead information based on the insurance companies individualrequirements.

 

In October 1999, InsWeb began generating commissionrevenue as an insurance agent based on activities it performs related to thesale of certain automobile insurance policies in California. Since that date,InsWeb has expanded its insurance agency operations. As of June 30, 2003,InsWeb’s subsidiary, InsWeb Insurance Services, Inc., has been appointed as anauthorized automobile insurance agent by 11 participating insurance companiesand is acting as an agent in ten states. InsWeb receives a commission based ona percentage of the initial insurance policy premium related to each insurancepolicy sale where InsWeb has acted as the agent. InsWeb recognizes the revenuefrom these activities on the effective date of the policy, less an estimate forearly cancellations of the underlying insurance policies. InsWeb alsorecognizes revenue when an applicable policy is renewed. Commission revenue isincluded in transaction fees. InsWeb intends to expand its online insuranceagency operations by adding additional participating insurance companies and byexpanding into additional states.

 

A less significant, but on-going source of revenues forInsWeb are development and maintenance fees that are paid by insurancecompanies that participate on the InsWeb insurance marketplace. Developmentfees are generated from the design and development of customized interfacesbetween an insurance company’s information system and the InsWeb site. InsWebcharges maintenance fees for maintaining and servicing the programs of theindividual insurance companies and for maintaining any hardware at InsWeb’sfacility that is dedicated to specific insurance companies.

 

Technology expenses consist primarily of payroll andrelated expenses, including employee benefits, facility costs,telecommunications and systems costs, for product and site developmentpersonnel involved with the planning and design of carrier implementation andintegration.  InsWeb expects itstechnology expenditures to remain at current levels for the remainder of 2003.

 

Salesand marketing expenses consist of direct marketing expenditures that includeadvertising, promotions and fees paid to online companies with which InsWeb hascontractual relationships to drive consumer traffic to the InsWeb onlinemarketplace.  InsWeb’s current consumermarketing program is focused on maintaining key online relationships andselective cost-effective marketing campaigns designed to maintain consumerawareness of InsWeb and its online insurance marketplace.  Also included in sales and marketingexpenses are payroll and related expenses, including employee benefits, facilitycosts, telecommunications and 

 

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systems costs, for InsWeb’s sales and marketing personnel and thepersonnel and related costs for InsWeb’s insurance agency operations, whichincludes selling agents, underwriters, supervisors and customer service andsupport groups.  Direct marketing costswill fluctuate based on the amount of consumer traffic driven to the InsWebmarketplace, while all other sales and marketing expenditures are expected toremain at current levels for the remainder of 2003.

 

Generaland administrative expenses consist primarily of payroll and related expenses,including employee benefits, facility costs, telecommunications and systemscosts, for InsWeb’s general management, administrative and accountingpersonnel, as well as other general corporate expenses. General andadministrative expenditures are expected to decline slightly over the remainderof 2003 as a result of the settlement of litigation with eHealthInsurance inMarch 2003.

 

Since its inception, InsWeb has incurred significantlosses, and as of June 30, 2003, InsWeb had an accumulated deficit of $176.7million. These losses, and this accumulated deficit, have resulted from thesignificant costs incurred in the development of InsWeb’s technology platform,the establishment of relationships with insurance companies, their integrationwith the InsWeb site, and InsWeb’s marketing and sales activities. InsWebintends to continue to invest in product development and maintenance, sales andmarketing and in its administrative infrastructure. As a result, InsWebbelieves that it will continue to incur operating losses at least through 2003.Although InsWeb has experienced revenue growth in recent periods, its operatingresults for future periods are subject to numerous uncertainties, and there canbe no assurance that InsWeb’s revenue growth will continue or that it will beable to achieve and sustain profitability. In view of the rapidly evolvingnature of InsWeb’s business and its limited operating history, InsWeb believes thatperiod-to-period comparisons of its operating results are not necessarilymeaningful and should not be relied upon as an indication of futureperformance.

 

**Year 2003 Developments**

 

InApril 2003, InsWeb was notified by Progressive Casualty Insurance Company ofits intent to terminate its participation in the InsWeb insurance marketplaceeffective September 30, 2003.  Thisaction reflects Progressive’s evolving brand strategy. For the year endedDecember 31, 2002, Progressive represented approximately 7% of InsWeb’s totalrevenues, and for the three and six months ended June 30, 2003, Progressiverepresented approximately 16% and 14%, respectively, of total revenues.  InsWeb cannot predict the effect of thistermination on its operating results for the fourth quarter of 2003 andbeyond.  Management believes that asubstantial portion of the lost revenue from Progressive may be replaced asconsumers request quotes and purchase insurance policies from other carriersparticipating in the marketplace, including new carriers which the Companyexpects to add.  However, there can beno assurance that other participating carriers will replace the lost revenuefrom Progressive.

 

In March 2003, InsWeb and eHealthInsurance agreed tosettle ongoing litigation in the U.S. District Court for the NorthernCalifornia. The litigation stemmed from eHealthInsurance’s decision in February2001 to terminate an agreement concerning the marketing of health insurance toconsumers originating at InsWeb. Although specific terms of the settlementagreement are confidential, eHealthInsurance has paid InsWeb $800,000 for theservices performed by InsWeb prior to the termination of the marketingagreement. In addition, the parties have released all claims against each otherrelating to the marketing agreement.

 

In February 2003, the Board of Directors authorizedmanagement to repurchase 2,241,440 shares of InsWeb’s common stock, consistingof 1,169,898 shares held by Intuit Insurance Services, Inc. and 1,071,542shares held by SOFTBANK America, Inc. The shares were purchased for $3,810,000,or $1.70 per share. With the closing of this transaction, SOFTBANKCorporation’s holdings of InsWeb common stock have been reduced to 353,032shares, while Intuit Insurance Services, Inc. holds no shares.

 

**Concentration of Risk — MarketingPartners**

 

We rely on relationships with Internet portals and otheronline companies to attract consumers to our website. We have experiencedoccasional fluctuations in the traffic from our online partners as a result ofredesigns of their websites or being outbid for promotions by other onlineinsurance providers. Furthermore, the value of these relationships is based onthe continued positive market presence, reputation and growth of these onlinecompanies’ websites and services. Any decline in the market presence, businessor reputation of these online companies’ websites and services will reduce thevalue of these relationships to us and could harm our business.

 

During 2002 we significantly expanded our on-linemarketing relationship with LowerMyBills.com, Inc., whereby they deliveredapproximately 34% of our website traffic for the year ended December 31, 2002.During the six months ended June 30, 2003, they accounted for 41% of ourwebsite traffic.

 

**Results of Operations**

 

Thefollowing table sets forth certain statement of operations items as apercentage of total revenues for the three and six months ended June 30, 2003and 2002:

 

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|                             |   | **Three months  ended  June 30,** |   | **Six months ended  June 30,** |   |
|----------------------------------|--------|-----------------------------------|--------|--------------------------------|--------|
|                             |   | **2003**                          |   | **2002**                       |   | **2003** |   | **2002** |   |
| Revenues:                        |   |                              |   |                           |   |   |   |   |   |
| Transaction fees                 |   | 96                                | %      | 93                             | %      | 97 | % | 93 | % |
| Development and maintenance fees |   | 4                                 | %      | 7                              | %      | 3 | % | 7 | % |
| Total                            |   | 100                               | %      | 100                            | %      | 100 | % | 100 | % |
| Operating expenses:              |   |                              |   |                           |   |   |   |   |   |
| Technology                       |   | 35                                | %      | 41                             | %      | 34 | % | 43 | % |
| Sales and marketing              |   | 65                                | %      | 73                             | %      | 64 | % | 72 | % |
| General and administrative       |   | 23                                | %      | 31                             | %      | 23 | % | 28 | % |
| Total                            |   | 123                               | %      | 145                            | %      | 121 | % | 143 | % |
| Loss from operations             |   | (23                               | )%     | (45                            | )%     | (21 | )% | (43 | )% |

 

***Revenues***

 
|                                     |   | **Three months  ended June 30,** |   | **Six months ended  June 30,** |   |
|------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
| **(Amounts in thousands)**               |   | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
| Transaction  revenues:                   |   |                             |   |                           |   |   |   |   |   |
| Auto  insurance                          |   | $                                | 4,699  |                           | $      | 4,750 |   | $ | 10,913 |   | $ | 9,970 |   |
| Term  life insurance                     |   | 1,191                            |   | 1,054                          |   | 2,100 |   | 2,143 |   |
| Other  insurance                         |   | 204                              |   | 81                             |   | 309 |   | 165 |   |
| Total  transaction revenues              |   | $                                | 6,094  |                           | $      | 5,885 |   | $ | 13,322 |   | $ | 12,278 |   |
|                                     |   |                             |   |                           |   |   |   |   |   |
| Completed  Shopping Sessions - Auto      |   | 738                              |   | 738                            |   | 1,701 |   | 1,446 |   |
| Consumer  Quotes Presented - Auto        |   | 2,351                            |   | 2,112                          |   | 5,350 |   | 4,248 |   |
|                                     |   |                             |   |                           |   |   |   |   |   |
| Completed  Shopping Sessions - Term life |   | 87                               |   | 94                             |   | 183 |   | 174 |   |
| Consumer  Quotes Presented - Term life   |   | 1,456                            |   | 1,408                          |   | 3,089 |   | 2,757 |   |

 

Auto transaction revenues remainedrelatively constant for the three months ended June 30, 2003 compared to sameperiod in 2002, as the number of shopping sessions remained constant.  The increase in auto transaction fees forthe six months ended June 30, 2003 was primarily attributable to the increasednumber of leads generated by an increased number of completed shopping sessions.The increase in completed shopping sessions resulted from increased consumertraffic from InsWeb’s online marketing activities.

 

Term life transaction revenuesincreased for the three months ended June 30, 2003 compared to the same periodin 2002.  The increase was due to achange in the compensation arrangement with one of InsWeb’s customers in thefourth quarter of 2002, as a result of which the customer now compensatesInsWeb when the consumer purchases an insurance policy, rather than on thedelivery  of a qualified lead.  This change in the timing of recognition ofrevenue for this customer resulted in increased revenues in the secondquarter.  Term life transaction revenuesremained constant for the six months ended June 30, 2003, compared to the sameperiod in 2002.

 

Other insurance transaction revenuesincreased for the three and six months ended June 30, 2003, compared to thesame periods in 2002. The increase for the three and six months ended June 30,2003 was primarily due to revenue generated from the sale of certainstatistical data in the quarter ended June 30, 2003.

 

Development and maintenance feesaccounted for $0.2 million and $0.5 million of total revenues, for the threeand six months ended June 30, 2003, compared to $0.5 million and $0.9 million,for the comparable periods in 2002. Development and maintenance fees areexpected to continue to decline as set-up programs have become a lesssignificant component in an insurance company’s initial participation.

 

***OperatingExpenses***

 

*Technology.* Technology expenses decreased to $2.2 million and $4.7 million for thethree and six months ended June 30, 2003, from $2.6 million and $5.6 millionfor the comparable periods in 2002.  Thedecrease was primarily attributableto reduced headcount and decreased amortization of capitalized website costs.

 

*Sales and Marketing.* Sales and marketing expenses decreased to $4.1 million and $8.8 millionfor the three and six months ended June 30, 2003, from $4.6 million and $9.4million for the comparable periods in 2002. Direct marketing expenses, a component of sales and marketing expenses,decreased to $2.2 million and $5.1 million for the three and six months endedJune 30, 2002, from $2.8 million and $5.7 million for the comparable periods in2002.

 

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*General andAdministrative.*  General and administrative expensesdecreased to $1.5 million for the three months ended June 30, 2003, from $2.0million for the comparable period in 2002 and decreased to $3.2 million for thesix months ended June 30, 2003, from $3.8 million for the comparable period in2002. General and administrative expenses decreased for the three and sixmonths ended June 30, 2003 due to a decrease in legal expenses incurred duringthe periods as a result of the eHealthInsurance litigation settlement.

 

***InterestIncome***

 

Interest incomedecreased to $0.1 million and $0.2 million for the three and six months endedJune 30, 2003, from $0.2 million and $0.4 million for the comparable period in2002. Interest income is earned on InsWeb’s investments.  The decrease in interest income was a resultof lower average cash and short-term investment balances and lower marketinterest rates during 2003.

 

***Interest Expense***

 

Interest expensedecreased to $23,000 and $63,000 during the three and six months ended June 30,2003, from $0.1 million and $0.3 million for the comparable periods in 2002.The decrease in interest expense was primarily attributable to lower imputedinterest associated with the long-term marketing commitments (fixed payments).  Lower imputed interest is due to thereduction of these obligations resulting from the amendment of the license anddistribution agreement with Intuit in March 2002.

 

***Other******Income***

 

Other incomedecreased to $16,000 for the three months ended June 30, 2003, from $50,000 forthe comparable period in 2002. For the six months ended June 30, 2003, otherincome primarily consisted of the $0.8 million that eHealthinsurance paid toInsWeb for the services performed by InsWeb prior to the termination of themarketing agreement.  For the six monthsended June 30, 2002, other income consisted primarily of the $9.3 million gainrecognized in connection with the renegotiation of an online marketingdistribution agreement.

 

**CriticalAccounting Policies**

 

InsWeb’sdiscussion and analysis of its financial condition and results of operationsare based on InsWeb’s consolidated financial statements which have beenprepared in accordance with accounting principles generally accepted in theUnited States. The preparation of these financial statements requires InsWeb tomake estimates and judgments that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring the reporting period. InsWeb bases its estimates and judgments onhistorical experience and on various other factors that are believed to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions. InsWeb believes thefollowing critical accounting policies affect its more significant judgmentsand estimates used in the preparation of its consolidated financial statements.

 

***Accrual for Lease Obligations.***  InsWeb is contractually obligated to makefuture lease payments on certain formerly occupied facilities through September2008. As of June 30, 2003, total future obligations for these facilitiesamounted to $12.7 million; these obligations are offset by total futuresublease income of approximately $10.0 million.  Substantially all future sublease income is due from a sublesseewhich is a start-up company with a limited operating history and, therefore,there are inherent risks and uncertainties associated with its futureoperations and its ability to discharge its obligations through the term of thesublease. In the event that the sublessee defaults on its obligations under theamended sublease, InsWeb would be responsible for making the required leasepayments to the landlord through the remaining term of the lease. In connectionwith this lease and other lease obligations for formerly occupied facilities,InsWeb must make assumptions regarding the estimated future sublease incomerelative to these facilities.  As aresult of the decline in the real estate market in the geographic area wherethe properties are located and the interest risk associated with its sublessee,the Company has an accrual of $2.9 million as of June 30, 2003 for formerlyoccupied facilities. These estimates and assumptions are affected byarea-specific conditions such as new commercial development, market occupancyrates and future market prices. If these estimates or their related assumptionschange in the future, InsWeb may be required to record a charge to increase itsexisting accrual.

 

***Impairment of Long-Lived Assets.***  In assessing the recoverability of InsWeb’slong-lived assets, including prepaid marketing costs, InsWeb must makeassumptions regarding estimated future cash flows and other factors todetermine the fair value of the respective assets. Specifically, thevariability in anticipated traffic levels, number of completed shoppingsessions, and revenue per completed shopping session affect these estimates andassumptions. If the number of completed shopping sessions, and/or revenue percompleted shopping session is below currently anticipated amounts, InsWeb maybe required to record an impairment charge.

 

***Cost-Method Investments.***  InsWeb holds a minority ownership interestin a privately-held corporation, Finance All K.K. (an unconsolidatedentity).  As of June 30, 2003, the carryingvalue of this investment was $1.7 million. InsWeb will record an investment impairment charge if and when itbelieves an investment has experienced a decline in value that is other thantemporary.  

 

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Future adverse changes in market conditionsor poor operating results of Finance All K.K. could result in an inability torecover the carrying value of the investment, thereby possibly requiring animpairment charge in the future.

 

In addition, the Company has evaluatedthe effect that FASB Interpretation No. 46, “Consolidation of Variable InterestEntities,” may have, and has concluded that since it (i) does not have majorityvoting rights, (ii) does not have majority residual interests in this entity’sassets or income, (iii) does not have obligations to absorb the majority of thelosses of this, or any, unconsolidated entity, (iv) has not guaranteed anyobligations of this, or any, unconsolidated entity, and (v) does not have anycommitment or intent to provide funding to this, or any, such entity, theCompany’s maximum exposure to loss is limited to $1.7 million, the carryingvalue of the investment in Finance All K.K. as of June 30, 2003.

 

InsWeb does nothave any relationships with unconsolidated entities or financial partnerships,such as entities often referred to as structured finance or special purposeentities, which would have been established for the purpose of facilitatingoff-balance sheet arrangements or other contractually narrow or limitedpurposes.

 

***Contingencies.***  As discussed in“Part I - Item 1, Note 6 - “Notes to Condensed Consolidated FinancialStatements” and Part II – Item 1,” a class action lawsuithas been filed that alleges InsWeb violated certain federal securities laws atthe time of its initial public offering. Although some claims against InsWeb inthis class action have been dismissed, InsWeb cannot accurately predict theultimate outcome of this matter at this time and therefore, cannot estimate therange of probable loss, if any, due to the inherent uncertainties oflitigation. InsWeb believes it has meritorious defenses; however InsWeb cannotassure that it will prevail in this action. An unfavorable outcome could have amaterial adverse effect on InsWeb’s financial condition, results of operationsand cash flows.

 

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**Liquidity and Capital Resources**

 

AtJune 30, 2003, InsWeb’s principal source of liquidity was $22.4 million incash, cash equivalents and short-term investments, which decreased from $28.9million as of December 31, 2002.  Thedecrease resulted from the use of $5.9 million in financing activities(primarily for the repurchase of its common stock) and a decrease of $0.6 millionfrom operating activities.

 

Forthe six months ended June 30, 2003, net cash used by operating activities was$0.6 million compared to  $1.0 millionfor the comparable period in 2002.  Forthe six months ended June 30, 2003, non-cash items included depreciation andamortization of assets of $0.6 million. The operating loss of $2.0 million and a decrease of accrued expenses of$0.4 million, partially offset by a decrease in prepaid expenses and othercurrent assets of $0.6 million and an increase in accounts payable of $0.7million, contributed to the cash used by operations for the six months endedJune 30, 2003.

 

Forthe six months ended June 30, 2003, net cash provided by investing activitieswas $4.8 million, which primarily consisted of the redemptions of short-terminvestments offset by the purchase of short-term investments.

 

Forthe six months ended June 30, 2003, net cash used in financing activities was$5.9 million.  Cash outflows wereattributable to the repurchase of common stock of $3.9 million and a fixedpayment made to Intuit for marketing commitments pursuant to the agreemententered into with Intuit in January 2001, as amended in March 2002, for $2.0million.

 

As of June 30, 2003, InsWeb had the following contractualcommitments (in thousands):

 
|                                    |   | **Total** |   | **2003** |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **Thereafter** |   |
|-----------------------------------------|--------|-----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------------|--------|
|                                    |   |      |   |     |   |     |   |     |   |     |   |     |   |           |   |
| Operating  leases                       |   | $         | 20,638 |     | $      | 1,699    |   | $        | 3,356  |     | $      | 3,257    |   | $              | 3,391  |   | $ | 3,483 |   | $ | 5,452 |   |
| Other  marketing commitments            |   | 642       |   | 642      |   | —   |   | —   |   | —   |   | —   |   | —         |   |
| Promissory  note payable to stockholder |   | 1,251     |   | 1,251    |   | —   |   | —   |   | —   |   | —   |   | —         |   |
|                                    |   | $         | 22,531 |     | $      | 3,592    |   | $        | 3,356  |     | $      | 3,257    |   | $              | 3,391  |   | $ | 3,483 |   | $ | 5,452 |   |

 

Inaddition to the fixed payments for marketing commitments paid to Intuit throughJuly 2003, InsWeb will pay Intuit a portion of the transaction fees received byInsWeb from Intuit Internet traffic, payable on a quarterly basis through theremainder of the agreement (January 2006).

 

InJuly 2002, InsWeb and its sublessee agreed to amend the sublease coveringportions of the property InsWeb formerly occupied as its headquarters inRedwood City, California.  Under theterms of the amendment, the sublessee agreed to rent the entire facility forthe duration of InsWeb’s lease (through September 2008).  All rent and operating expenses otherwisepayable by InsWeb to the landlord are required to be paid directly by thesublessee.  Therefore, the amendedsublease offsets InsWeb’s operating lease commitments by approximately $9.9million, through the remainder of the lease (which is not reflected in thetable above).  However, the sublessee isa start-up company with a limited operating history and, therefore, there areinherent risks and uncertainties associated with its future operations and itsability to discharge its obligations through the term of the sublease.  In the event that the sublessee defaults onits obligations under the amended sublease, InsWeb would be responsible formaking the required lease payments to the landlord throughout the remainingterms of the lease.  In connection with this lease and other lease obligationsfor formerly occupied facilities, InsWeb must make assumptions regarding theestimated future sublease income relative to these facilities.  As a result of the decline in the realestate market in the geographic area where the properties are located and theinterest risk associated with its sublessee, the Company has an accrual of $2.9million as of June 30, 2003 for formerly occupied facilities. These estimatesand assumptions are affected by area-specific conditions such as new commercialdevelopment, market occupancy rates and future market prices. If theseestimates or their related assumptions change in the future, InsWeb may berequired to record a charge to increase its existing accrual.

 

InsWeb currently anticipates that its cash, cash equivalentsand short-term investments will be sufficient to meet its anticipated cashneeds for working capital and capital expenditures for at least the next 12months. Although InsWeb does not anticipate the need for additional financing,InsWeb nevertheless may require additional funds to meet operating needs, or toexpand its business internally or through acquisition. InsWeb cannot be certainthat additional financing will be available when required, on favorable termsor at all. If InsWeb is not successful in raising additional capital asrequired, its business could be materially harmed. If additional funds wereraised through the issuance of equity securities, the percentage ownership ofInsWeb’s then-current stockholders would be reduced.

 

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**Factors That May Affect Our FuturePerformance**

 

*Our future business, operating resultsand financial condition are subject to various risks and uncertainties,including those described below.*

 

**Our business is difficult to evaluatebecause we did not begin to generate significant revenues from our corebusiness until 1998**

 

We were incorporated in February 1995, but we did notbegin to generate significant transaction fees from our online marketplaceuntil 1998. Our limited operating history makes an evaluation of our futureprospects very difficult. An investor in our common stock must consider theuncertainties frequently encountered by early stage companies in new andrapidly evolving markets. These uncertainties include:

 

•                                          an evolving and unpredictable business model, which makesprediction of future results uncertain and an investment in our common stockhighly speculative;

 

•                                          the development of comparable services by competitors,which may reduce our market share;

 

•                                          the uncertainty of the extent to which the consumermarket will adopt the Internet as the preferred medium for comparison shoppingfor and purchase of insurance products, which may limit our ability to generaterevenue from consumers that visit our online marketplace or our insuranceagency;

 

•                                          our potential inability to successfully manage growth,which could lead to management distractions and increased operating expenses;

 

•                                          our ability to retain key employees; and

 

•                                          our reliance on key customers and ability to retaincustomers.

 

Our business strategy may not be successful and we maynot be able to successfully address these uncertainties. Moreover, our abilityto take the necessary steps to address these uncertainties may be hampered byour limited financial resources should we fail to rapidly increase revenues orshould increased revenues be more than offset by increased operating expenses.

 

**We have a history of losses, we expectfuture losses, and we may not achieve or maintain profitability**

 

Given planned investment levels, our ability to achieveprofitability will depend upon our ability to generate and sustainsubstantially increased revenues. As a result, we believe that we will incuroperating losses at least through the balance of 2003. We incurred operatinglosses of $15.5 million for the year ended December 31, 2002, $46.0 million forthe year ended December 31, 2001, and $53.6 million for the year ended December31, 2000. For the six months ended June 30, 2003 we incurred an operating loss of$2.9 million. As of June 30, 2003, our accumulated deficit was $176.7 million.Our operating results for future periods are subject to numerous uncertainties,and we may not achieve sufficient revenues to become profitable. Even if weachieve profitability, we may not sustain or increase profitability on aquarterly or annual basis in the future. If we are unable to achieveprofitability, or if our profitability is delayed we may need to seekadditional financing to continue our business operations. Such financing couldbe on terms that are dilutive to our existing stockholders or could involve theissuance of securities that have rights and preferences that are senior tothose associated with our common stock. Moreover, if such financing were notavailable or were available only upon terms that were unacceptable to us, wecould be required to significantly curtail our operations.

 

**Our future revenues are unpredictable,our operating results are likely to fluctuate from quarter to quarter, and ifwe fail to meet the expectations of securities analysts or investors, our stockprice could decline significantly**

 

Due to our limited operating history, the emerging natureof the market in which we compete and the high proportion of our revenues thatare derived from consumer traffic on our website, our future revenues areinherently difficult to forecast. We believe that period-to-period comparisonsof our operating results may not be meaningful, and you should not rely uponthem as an indication of our future performance. Moreover, our expense levelsare based largely on our investment plans and estimates of future revenues. Wemay be unable to adjust our spending to compensate for an unexpected shortfallin revenues. Accordingly, any

 

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significant shortfall in revenues relative to our plannedexpenditures would harm our results of operations and could cause our stockprice to fall sharply, particularly following quarters in which our operatingresults fail to meet the expectations of securities analysts or investors.

 

Factors that may cause fluctuations in our operatingresults include the following, many of which are outside our control:

 

•                                          We may experience consumer dissatisfaction with ouronline marketplace as we add or change features, or as the insurance coverageoffered by participating insurance companies varies;

 

•                                          Consumer traffic on our online marketplace may decline asa result of the announcement or introduction of a competing online insurancemarketplace or other new websites, products or services offered by ourcompetitors;

 

•                                           Consumer traffic may also fluctuate as a result ofchanges in level of advertising  byentities with which we have insurance marketing relationships;

 

•                                          Our revenues may be harmed if we lose one or moresignificant insurance company relationships or if any of our participatinginsurance companies merge with one another;

 

•                                          Use of the Internet by consumers may fluctuate due toseasonal factors or other uncontrollable factors affecting consumer behaviorand may be affected by slow Internet performance due to technical problems ortraffic bottlenecks on the network;

 

•                                          Our ability to convert site visits into transaction feesand/or revenue from insurance agency activities may fluctuate due to changes inour user interface or other features on our site;

 

•                                          Our ability to generate transaction fees may be adverselyaffected by changes in the underwriting criteria used by our participatinginsurance companies to determine which consumers will be offered quotes; and

 

•                                          Our ability to generate transaction fees and/or revenuefrom insurance agency activities may also be harmed due to technicaldifficulties on our website that hamper a consumer’s ability to start orcomplete a shopping session.

 

**Seasonality affecting insurance shoppingand Internet usage may cause fluctuations in our operating results**

 

We have experienced seasonality in our businessassociated with general slowness in the insurance industry during the year-endholiday period. We expect to continue to experience seasonality as our businessmatures. Because of this seasonality, investors may not be able to predict ourannual operating results based on a quarter-to-quarter comparison of ouroperating results. We believe seasonality will have an ongoing impact on ourbusiness.

 

**Because a significant portion of ourrevenue is attributable to automobile insurance shopping on our onlinemarketplace, we are especially vulnerable to risks related to the online marketfor automobile insurance or the automobile insurance industry generally**

 

Automobile insurance accounted for approximately 83% ofour transaction revenues in 2002, approximately 67% in 2001 and approximately69% in 2000. For the six months ended June 30, 2003 auto insurance account forapproximately 82% of our transaction revenues. We anticipate that automobile insurance will continue to account for asubstantial portion of our revenues for the foreseeable future. As a result, ifwe fail to attract a broad base of consumers to shop for automobile insuranceon our site, or if changes in the automobile insurance industry make electroniccommerce a less attractive means to shop for this type of insurance, ourability to generate revenue will be reduced and our business will be harmed. Inaddition, property and casualty insurance, including automobile insurance, issubject to operating cycles. During a cycle in which loss ratios rise,insurance companies may choose to restrict the amount of business they writewhile they await approval of rate increases from the various state insurancedepartments. Our business could be harmed if our participating insurancecompanies reduce their participation in our online marketplace.

 

**Competition in the market for onlinedistribution of insurance is intense, and if we are unable to competeeffectively with current competitors or new competitors that enter the market,the fees paid to us by participating insurance companies may fall, the feescharged by online companies with which we have strategic relationships mayrise, and our market share may suffer**

 

A growing number of websites offer services that aresimilar to and competitive with the services offered on our online insurancemarketplace. Increased competition, particularly by companies offering onlineinsurance distribution, could reduce the fees we are able to charge ourparticipating insurance companies or increase the fees we are required to payto online companies with which we 

 

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have strategic relationships, resulting in reduced margins or loss ofmarket share, any of which could harm our business. Therefore, a positiverecognition of our brand is critical to attracting additional consumers to ourwebsite, strengthening our relationships with participating insurance companiesand attracting new insurance companies. In order to attract and retainconsumers and insurance companies and to promote and maintain our brand, we arecontinuing our financial commitment to create and maintain brand awareness. Ourcurrent marketing program consists of the maintenance of certain network onlinerelationships and other selective cost effective marketing campaigns, designedto maintain consumer awareness of InsWeb and our online insurance marketplace.If our marketing efforts do not generate a corresponding increase in revenuesor we otherwise fail to successfully promote our brand, or if these effortsrequire excessive expenditures, our business will be harmed. Moreover, ifvisitors to our website do not perceive our existing services or the productsand services of our participating insurance companies to be of high quality, orif we alter or modify our brand image, introduce new services or enter into newbusiness ventures that are not favorably received, the value of our brand couldbe harmed.

 

Our ability to maintain a positive recognition of ourbrand also depends in part on the quality of the products and servicesconsumers receive from our participating insurance companies or our insuranceagency, including timely response to requests for quotes or coverage. If we areunable to provide consumers with high-quality products and services, the valueof our brand may be harmed and the number of consumers using our services maydecline.

 

**Our plan to expand our online insuranceagency operations will require significant resources and we may not be able togenerate sufficient revenues to recover our expenses**

 

Since October 1999, InsWeb has been operating an onlineinsurance agency business. Our online agency receives a commission on the saleand renewal of the automobile insurance polices sold though its offices. Ourplan to expand our online agency operations requires that we attract and retainhighly skilled sales agents and customer care personnel. We face competitionfrom other agencies and insurance companies for these agents. In addition, wewill need additional insurance companies to appoint us as an agent and pay uscommissions. Although the agency infrastructure is already in place,integration of additional insurance companies into our online agency operationsmay take more time and be more expensive than we project. If we are unable toimplement our expansion in a timely and cost-effective manner, we may not beable to recover our costs and our business will be harmed.

 

**Because a limited number of insurancecompanies account for a majority of our revenues, the loss of a singleinsurance company relationship could result in a substantial drop in ourrevenues**

 

Revenues from Amica, GE Financial Assurance and KemperDirect accounted for approximately 14%, 14%, and 10%, respectively, of ourrevenues in 2002. Revenues from Amica, GE Financial Assurance and AIG accountedfor approximately 11%, 11%, and 10%, respectively, of our revenues in 2001.  Revenues from GE Financial Assurance,Progressive and American Family accounted for approximately 17%, 14% and 10% ,respectively, of our revenues for the six months ended June 30, 2003.  In April 2003, we were notified that ProgressiveCasualty Insurance Company will discontinue its participation effectiveSeptember 30, 2003. The discontinuation of Progessive’s participation mayadversely affect our operating results beginning in the fourth quarter of2003.  Should one or more of our otherkey insurance company partners cease to participate in our online marketplace,change its underwriting criteria or geographic coverage in a way that reducesthe proportion of consumers that are offered quotes from that insurancecompany, or suffer a significant decline in its ratings, our operating resultscould be materially harmed. Because of the broad market presence of some of ourparticipating insurance companies, we expect to continue to generate asubstantial portion of our revenues from a limited number of insurancecompanies for the foreseeable future. Although InsWeb continually seeks newinsurance companies to participate in the online marketplace, we may be unableto add any new insurance companies.

 

**In most jurisdictions, we rely on theparticipation of a limited number of insurance companies on our onlinemarketplace, and the loss of any of these insurance companies could make ouronline marketplace less attractive to consumers**

 

Consumer demand for the services offered on our websitein any jurisdiction is substantially dependent upon the participation ofcompeting brand-name insurance companies offering competitive quotes for agiven insurance product in that jurisdiction. Accordingly, the success of ourbusiness depends on our ability to attract and retain well-known insurancecompanies to participate in our marketplace. Although we currently haverelationships with a significant number of insurance companies overall, inindividual jurisdictions where competing quotes for comparable products areavailable on our online marketplace, the number of companies offering quotesranges from one to 15. If we are unable to increase the number of insurancecompanies that participate in our online marketplace, particularly in thejurisdictions where we currently offer comparable insurance products from onlythree or fewer insurance companies, we may not be able to attract additionalconsumers or may lose our existing consumers to other online competitorsoffering a wider variety of insurance companies. At June 30, 2003, there were14 jurisdictions in which three or fewer insurance companies were offeringautomobile insurance quotes on our online marketplace. No automobile insurancequotes are available in New Jersey and Massachusetts as of June 30, 2003. Ifany insurance company participating in a number of jurisdictions discontinuedor significantly reduced its participation in our online marketplace, theattractiveness of the marketplace to consumers in these jurisdictions would begreatly diminished.

 

**We may have difficulty integrating newinsurance companies into our online marketplace or agency operations, whichcould harm our ability to offer improved comparison-shopping opportunities and thus limit theattractiveness of our service to consumers**

 

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Integration of an insurance company into our onlinemarketplace requires a significant commitment of time and resources on our partand on the part of the insurance company, and is a technologically difficultprocess. This integration process typically takes from three to six months tocomplete and typically requires us to expend between 160 and 2,000 man-hours.To develop company-sponsored quotes for consumers, the integration requireseither the development of a customized interface with the insurance company’sown rating system, accessing a third-party rating engine of the insurancecompany’s choice, or adding the insurance company’s rating information intoInsWeb’s proprietary rating engines. Though integration into our agencyoperations may require fewer resources to implement than integration of aninsurance company into our online marketplace, potential participatinginsurance companies may not be willing to invest the time and resourcesnecessary to achieve this integration, or we may not be able to overcome thetechnological difficulties associated with, or devote the time and resourcesnecessary to, successfully integrate the insurance company into our onlinemarketplace or our agency operations.

 

**We do not have exclusive relationships orlong-term contracts with insurance companies, which may limit our ability toretain these insurance companies as participants in our marketplace andmaintain the attractiveness of our services to consumers**

 

We do not have an exclusive relationship with any of theinsurance companies whose insurance products are offered on our onlinemarketplace, and thus, consumers may obtain quotes and coverage from theseinsurance companies without using our website. Our participating insurancecompanies offer their products directly to consumers through insurance agents,mass marketing campaigns or through other traditional methods of insurancedistribution. These insurance companies can also offer their products andservices over the Internet, either directly to consumers or through one or moreof our online competitors, or both. In addition, most of our agreements withour participating insurance companies are cancelable at the option of eitherparty upon 90 days’ notice or less. We have experienced, and expect to continueto experience, reductions in the level of participation in our marketplace orcomplete termination by participating insurance companies. These reductions inparticipation, terminations, or an inability to attract additional insurancecompanies to our marketplace could materially affect our revenues and harm ourbusiness.

 

**The outcome and impact of a securitiesclass action lawsuit involving InsWeb is uncertain**

 

Asecurities class action lawsuit was filed on December 5, 2001 in the UnitedStates District Court for the Southern District of New York, (the “Court”)purportedly on behalf of all persons who purchased our common stock from July22, 1999 through December 6, 2000.  Thecomplaint named as defendants InsWeb, certain current and former officers anddirectors, and three investment banking firms that served as underwriters for InsWeb’s initial public offering inJuly 1999.  The complaint, assubsequently amended, alleges violations of Sections 11 and 15 of theSecurities Act of 1933 and Sections 10 and 20 of the Securities Exchange Act of1934, on the grounds that the prospectuses incorporated in the registrationstatements for the offering failed to disclose, among other things, that (i)the underwriters had solicited and received excessive and undisclosedcommissions from certain investors in exchange for which the underwritersallocated to those investors material portions of the shares of our stock soldin the offerings and (ii) the underwriters had entered into agreements withcustomers whereby the underwriters agreed to allocated shares of the stock soldin the offering to those customers in exchange for which the customers agreedto purchase additional shares of InsWeb stock in the aftermarket atpre-determined prices.  No specificdamages are claimed.  Similarallegations have been made in lawsuits relating to more than 300 other initialpublic offerings conducted in 1999 and 2000, all of which have beenconsolidated for pretrial purposes.  InOctober 2002, all claims against the individual defendants were dismissedwithout prejudice.  In February 2003,the Court dismissed the claims in the InsWeb action alleging violations of theSecurities Exchange Act of 1934 but allowed the plaintiffs to proceed with theremaining claims.  In June 2003, the plaintiffsin all of the cases presented a settlement proposal to all of the issuerdefendants.  Under the proposedsettlement, the plaintiffs will dismiss and release all claims againstparticipating defendants in exchange for a contingent payment guaranty by theinsurance companies collectively responsible for insuring the issuers in allthe related cases, and the assignment or surrender to the plaintiffs of certainclaims the issuer defendants may have against the underwriters.  The settlement is subject to acceptance by asubstantial majority of the issuer defendants and execution of a definitivesettlement agreement.  The settlement isalso subject to approval of the Court, which cannot be assured.  If the settlement is not accepted by therequisite number of defendants or if it is not approved by the Court, InsWebintends to defend the lawsuit vigorously. However, the litigation is in the preliminary stage, and we cannotpredict its outcome.  The litigationprocess is inherently uncertain.  An unfavorable outcome could have a materialadverse effect on InsWeb’s financial condition, results of operations or cashflows.

 

**Traffic on our website is heavilydependent on our online relationships. These relationships may not generatesufficient revenues to justify the fees we pay to online companies. Further,our consumer traffic may decline in the event an online relationship isunsuccessful**

 

We rely on relationships with a variety of Internetportals, financial institutions, and other online companies to attractconsumers to our website. In a typical arrangement, the online company includesa “link” on its website on which a user can click to jump to our website or toa site that we operate under the online company’s name; as part of thearrangement, we typically pay the online company a portion of the resultingtransaction fees and in some cases a fixed fee. These relationships may notcontinue to generate a substantial amount of new traffic on our website, or therevenues generated by these relationships may be insufficient to justify ourpayment obligations. We have experienced occasional fluctuations in the trafficfrom our online partners as a result of redesigns of their websites or beingoutbid for promotions by other online insurance providers. Furthermore, thevalue of these relationships is based on the 

 

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continued positive market presence, reputation and growth of theseonline companies’ websites and services. Any decline in the market presence,business or reputation of these online companies’ websites and services willreduce the value of these relationships to us and could harm our business.

 

For the years ended December 31, 2002, 2001 and 2000, wereceived approximately 11%, 32% and 25%, respectively, of our website trafficfrom the major Internet portals Yahoo! Inc., MSN and AOL.  For the six months ended June 30, 2003, wereceived approximately 10% of our website traffic from these onlinerelationships.  We did not renew ouragreement with MSN for 2002 but did sign a non-exclusive agreement effectiveFebruary 15, 2003, and our status as exclusive provider to Yahoo! and AOL wasconverted to non-exclusive, effective November 1, 2001 and January 1, 2002,respectively. Additionally, during 2002 we significantly expanded our on-linemarketing relationship with LowerMyBills.com, Inc., whereby they deliveredapproximately 34% of our website traffic for the year ended December 31, 2002.During the six months ended June 30, 2003, LowerMyBills.com Inc., accounted for41% of our website traffic.  Our abilityto increase our revenues will depend, in part, on our ability to generateincreased traffic to our website through these significant onlinerelationships.

 

Most of our relationships with online companies areterminable by either party on 30 to 90 days’ notice. We may not be able tonegotiate or renew marketing agreements with online companies on terms that areacceptable to us. The termination, non-renewal or renewal on unfavorable termsof a relationship from which we generate significant traffic to our websitewould harm our business. If the recent trend of failing online companiescontinues, the traffic currently being received as well as the ability toattract new consumer traffic to our site could be harmed. Additionally, anonline company’s failure to maintain efficient and uninterrupted operation ofits computer and communications hardware systems would likely reduce the amountof traffic we receive at our site, harming our business.

 

**Laws and regulations that govern theinsurance industry could expose us, or our participating insurance companies,our officers,or agents with whom we contract, to legal penalties if we fail tocomply, and could require changes to our business**

 

We perform functions for licensed insurance companies andare, therefore, required to comply with a complex set of rules and regulationsthat often vary from state to state. If we fail to comply with these rules andregulations, we, an insurance company doing business with us, our officers, oragents with whom we contract, could be subject to various sanctions, includingcensure, fines, a cease-and-desist order or other penalties. This risk, as wellas changes in the regulatory climate or the enforcement or interpretation ofexisting law, could expose us to additional costs, including indemnification ofparticipating insurance companies for their costs, and could require changes toour business or otherwise harm our business. Furthermore, because theapplication of online commerce to the consumer insurance market is relativelynew, the impact of current or future regulations on InsWeb’s business isdifficult to anticipate.

 

**Our intended expansion of our business,including, in particular, our agency activities, will subject us to additionalregulations which may delay or prevent our expansion and harm our business**

 

Over time, we intend to expand our operations to includenew products and services and to offer existing and new products in newjurisdictions, which may require us to comply with additional laws andregulations. If we fail to adequately comply with these laws and regulations,our ability to offer some of our products or services in a particularjurisdiction could be delayed or prevented and our business could be harmed.Compliance with these laws and regulations and those of other jurisdictionsinto which we expand may require us to obtain appropriate business licenses,make necessary filings and obtain necessary bonds, appoint foreign agents andmake periodic business reports.

 

**If we are unable to safeguard thesecurity and privacy of consumers’ and participating insurance companies’confidential data, consumers and insurance companies may not use our servicesand our business may be harmed**

 

A significant barrier to electronic commerce andcommunications is the secure transmission of personally identifiableinformation of Internet users as well as other confidential information overpublic networks. If any compromise or breach of security were to occur, itcould harm our reputation and expose us to possible liability. A party who isable to circumvent our security measures could misappropriate proprietaryinformation or cause interruptions in our operations. We may be required tomake significant expenditures to protect against security breaches or toalleviate problems caused by any breaches. To date, we have experienced nobreaches in our network security. We rely on encryption and authenticationtechnology licensed from third parties to provide the security andauthentication necessary to effect secure transmission of confidentialinformation, such as names, addresses, Social Security and credit card numbers,user names and passwords and insurance company rate information. Advances incomputer capabilities, new discoveries in the field of cryptography, or otherevents or developments could result in a compromise or breach of the algorithmswe use to protect consumers’ and insurance companies’ confidential information.

 

**Uncertainty in the marketplace regardingthe use of Internet users’ personal information, or proposed legislationlimiting such use, could reduce demand for our services and result in increasedexpenses**

 

Concern among consumers and legislators regarding the useof personal information gathered from Internet users could create uncertaintyin the marketplace. This could reduce demand for our services, increase thecost of doing business as a result of litigation costs or increased servicedelivery costs, or otherwise harms our business. Laws have been enacted at boththe federal and state levels that limit the uses of personally identifiableinformation of Internet users gathered online or require online services toestablish privacy 

 

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policies Many state insurance codes also limit the collection and useof personal information by insurance companies, agents, or insurance serviceorganizations. Failure to adhere to the growing body of privacy regulationscould result in administrative actions or private litigation and harm ourbusiness.

 

**System failures could reduce or limittraffic on our website and harm our ability to generate revenue**

 

Since launching our online marketplace, we haveexperienced occasional minor system failures or outages that have resulted inthe online marketplace being out of service for a period ranging from severalminutes to three hours while our technicians brought backup systems online. Wemay experience further system failures or outages in the future that coulddisrupt the operation of our website and could harm our business. Our revenuesdepend in large part on the volume of traffic on our website and, moreparticularly, on the number of insurance quotes generated by our website inresponse to consumer inquiries. Accordingly, the performance, reliability andavailability of our website, quote-generating systems and networkinfrastructure are critical to our reputation and our ability to attract a high volume of traffic to ourwebsite and to attract and retain participating insurance companies. Moreover,we believe that consumers who have a negative experience with an electroniccommerce website may be reluctant to return to that site. Thus, a significantfailure or outage affecting our systems could result in severe long-term damageto our business.

 

**Our facilities and systems arevulnerable to natural disasters and other unexpected losses, and we may nothave adequate insurance to cover such losses**

 

Our computer hardware operations are located in leasedfacilities in Gold River, California. A third-party service provider located inRancho Cordova, California maintains a full backup system. If both of theselocations experienced a system failure, the performance of our website would beharmed. These systems are also vulnerable to damage from fire, power loss,telecommunications failures, break-ins, natural disasters and similar events.If we seek to replicate our systems at other locations, we will face a numberof technical challenges, particularly with respect to database replications,which we may not be able to address successfully. Although we carry propertyand business interruption insurance, our coverage may not be adequate tocompensate us for all losses that may occur. Our servers may also be vulnerableto computer viruses, physical or electronic break-ins and similar disruptions.

 

**We may experience technological problemsor service interruptions with individual insurance companies, which could harmthe quality of service on our website**

 

Several of our participating insurance companies have chosena technical solution that requires that our website servers communicate withthese insurance companies’ computer systems in order to perform theunderwriting and risk analysis and rating functions required to generatequotes. Thus, the availability of quotes from a given insurance company maydepend in large part upon the reliability of that insurance company’s owncomputer systems, over which we have no control. A malfunction in an insurancecompany’s computer system or in the Internet connection between our websiteservers and the insurance company’s system, or an excess of data traffic onthat system, could result in a delay in the delivery of e-mail quotes or couldcause an insurance company that provides instant quotes to go offline until theproblem can be remedied. Moreover, the malfunction could cause the insurancecompany to dispute the number of leads it received from InsWeb. Further, acomputer malfunction could cause an insurance company to quote erroneous rates,in which case the insurance company would be required to take itself offlineuntil the malfunction can be corrected. Any technological problems with orinterruption of communications with an insurance company’s computer systemscould materially reduce the number of competing insurance companies availableto provide quotes, and therefore the level of service perceived by consumers,on our online marketplace.

 

**We rely on the services of our executiveofficers and other key personnel, whose knowledge of our business and theinsurance industry and technical expertise would be extremely difficult toreplace**

 

Our future success is substantially dependent on thecontinued services and continuing contributions of our senior management andother key personnel, particularly Hussein A. Enan, Chairman of our Board, andMark P. Guthrie, our President and Chief Executive Officer, and the loss of theservices of any of our executive officers or other key employees could harm ourbusiness.

 

We have no long-term employment agreements with any ofour key personnel, although Mr. Guthrie is entitled to certain severancebenefits should his employment be involuntarily terminated. We maintain a $2million life insurance policy on each of Mr. Enan and Mr. Guthrie that names usas the beneficiary, but maintain no similar insurance on any of our other keyemployees. Additionally, InsWeb has granted stock options as incentives toexecutive officers and new employees, including Mr. Guthrie, and certain otherkey personnel. As the value of these incentives are highly dependent on anincrease in the market price of our common stock, we may be unable to retainsuch key employees, nor retain or recruit other officers and key employees inthe future.

 

**We may not be able to recruit or retainnecessary personnel, which could slow the process of adding new insurancecompanies to our website or otherwise harm our business**

 

Our future success depends on our continuing ability toattract, retain and motivate highly skilled employees, particularly withrespect to technology development and implementation. The implementation of newinsurance companies on our site is a technologically complex andlabor-intensive process. Accordingly, any difficulty we face in attracting andretaining talented development and 

 

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implementation personnel could slow the process of adding new insurancecompanies to our online marketplace and therefore limit our ability to increasethe attractiveness of our services to consumers. If we are not able to attractand retain new personnel, particularly within our technology development andimplementation team, our business will be harmed.

 

**Regulation of the Internet is unsettled,and future regulations could inhibit the growth of the Internet and otherwise harmour business**

 

The laws governing the Internet remain largely unsettled,even in areas where there has been some legislative action. Furthermore, thegrowth and development of the market for electronic commerce may prompt theenactment of more stringent consumer protection laws that may impose additionalburdens on companies conducting business online. For example, many states haveadopted laws or regulations relating to unsolicited commercial email or “spam”.These laws typically prohibit the sending of a commercial email to a recipientunless the recipient has consented in some manner. However, there areinconsistencies in these state laws that make it difficult to implementnational email-based marketing campaigns. These laws may inhibit the growth of theInternet as a medium for commerce and comparison insurance shopping, whichcould, in turn, decrease demand for our services, increase our cost of doingbusiness, or otherwise harm our business. In addition, applicability to theInternet of existing laws governing issues including property ownership,copyrights and other intellectual property issues, taxation, libel and personalprivacy is uncertain. The vast majority of these laws was adopted prior to theadvent of the Internet and related technologies and, as a result, do notcontemplate or address the unique issues of the Internet and relatedtechnologies.

 

**Any acquisitions that we undertake couldbe difficult to integrate, disrupt our business, dilute stockholder value andharm our operating results**

 

We may acquire or make investments in complementarybusinesses, technologies, services or products if appropriate opportunitiesarise. The process of integrating any acquired business, technology, service orproduct into our business and operations may result in unforeseen operatingdifficulties and expenditures. Integration of an acquired company also mayconsume much of our management’s time and attention that would otherwise beavailable for ongoing development of our business. Moreover, the anticipated benefitsof any acquisition may not be realized. We may be unable to identify, negotiateor finance future acquisitions successfully, or to integrate successfully anyacquisitions with our current business. Future acquisitions could result inpotentially dilutive issuances of equity securities or the incurrence of debt,contingent liabilities or amortization expenses related to goodwill and otherintangible assets, any of which could harm our business.

 

**We may be subject to claims forinfringement of intellectual property, with or without merit, which could becostly to defend or settle**

 

We may from time to time be subject to claims ofinfringement of other parties’ proprietary rights or claims that our owntrademarks, patents or other intellectual property rights are invalid. We havebeen subject to infringement claims in the ordinary course of business,including claims of alleged infringement of the patent and trademark rights ofthird parties by companies and us with which we have business relationships. Anyclaims of this type, with or without merit, could be time-consuming to defend,result in costly litigation, divert management attention and resources orrequire us to enter into royalty or license agreements. License agreements maynot be available on reasonable terms, if at all, and the assertion orprosecution of any infringement claims could significantly harm our business.

 

**We incorporate third**-**party technologies andservices into our online marketplace, and if the providers of thesetechnologies and services fail in a timely manner to develop, license orsupport technology necessary to our services, market acceptance of our onlinemarketplace could be harmed**

 

We have incorporated technology developed by thirdparties into our online marketplace, and we will continue to incorporatethird-party technology in our future products and services. We have limitedcontrol over whether or when these third-party technologies will be developedor enhanced. If a third-party fails to timely develop, license or supporttechnology necessary to our services, market acceptance of our onlinemarketplace could be harmed.

 

**Our stock price has fluctuated widely,and Internet stocks in general have been extremely volatile**

 

The trading price of our common stock has been highlyvolatile and may be significantly affected by factors including actual oranticipated fluctuations in our operating results, new products or newcontracts by us or our competitors, loss of key customers, conditions andtrends in the electronic commerce and insurance industries, changes infinancial estimates by securities analysts, general market conditions and otherfactors. The trading prices of many Internet stocks have experienced extremeprice and volume fluctuations. These fluctuations often have been unrelated ordisproportionate to the operating performance of these companies. Thesefluctuations may continue and could harm our stock price. Any negative changein the public’s perception of the prospects of Internet or electronic commercecompanies could also depress our stock price regardless of our results.

 

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**Delaware law and our charter documentscontain provisions that could discourage or prevent a potential takeover, evenif such a transaction would be beneficial to our stockholders**

 

Provisions of Delaware law and our certificate ofincorporation and bylaws could make more difficult the acquisition of us bymeans of a tender offer, a proxy contest, or otherwise, and the removal ofincumbent officers and directors.

 

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**ITEM 3.**** **** QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.**

 

There have been no material changes to the Company’sdisclosures related to certain market risks as reported under Part II, Item 7A,“Quantitative and Qualitative Disclosures About Market Risk,” in the AnnualReport of InsWeb to the U.S. Securities and Exchange Commission on Form 10-Kfor the year ended December 31, 2002.

 

**ITEM 4.**** ****CONTROLS AND PROCEDURES**

 

The Company’s principal executive officer and itsprincipal financial officer, based on their evaluation of the Company’sdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c)) as of June 30, 2003, have concluded that the Company’s disclosure controlsand procedures are adequate and effective for the purposes set forth in thedefinition in Exchange Act rules.

 

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**PART II:  OTHER INFORMATION**

 

**ITEM 1.**** ****LEGAL PROCEEDINGS**

 

Asecurities class action lawsuit was filed on December 5, 2001 in the UnitedStates District Court for the Southern District of New York, (the “Court”)purportedly on behalf of all persons who purchased our common stock from July22, 1999 through December 6, 2000.  Thecomplaint named as defendants InsWeb, certain current and former officers anddirectors, and three investment banking firms that served as underwriters forInsWeb’s initial public offering in July 1999. The complaint, as subsequently amended, alleges violations of Sections11 and 15 of the Securities Act of 1933 and Sections 10 and 20 of theSecurities Exchange Act of 1934, on the grounds that the prospectusesincorporated in the registration statements for the offering failed todisclose, among other things, that (i) the underwriters had solicited andreceived excessive and undisclosed commissions from certain investors inexchange for which the underwriters allocated to those investors materialportions of the shares of our stock sold in the offerings and (ii) theunderwriters had entered into agreements with customers whereby theunderwriters agreed to allocated shares of the stock sold in the offering tothose customers in exchange for which the customers agreed to purchaseadditional shares of InsWeb stock in the aftermarket at pre-determinedprices.  No specific damages areclaimed.  Similar allegations have beenmade in lawsuits relating to more than 300 other initial public offeringsconducted in 1999 and 2000, all of which have been consolidated for pretrial purposes.  In October 2002, all claims against theindividual defendants were dismissed without prejudice.  In February 2003, the Court dismissed theclaims in the InsWeb action alleging violations of the Securities Exchange Actof 1934 but allowed the plaintiffs to proceed with the remaining claims.  In June 2003, the plaintiffs in all of thecases presented a settlement proposal to all of the issuer defendants.  Under the proposed settlement, theplaintiffs will dismiss and release all claims against participating defendantsin exchange for a contingent payment guaranty by the insurance companiescollectively responsible for insuring the issuers in all the related cases, andthe assignment or surrender to the plaintiffs of certain claims the issuerdefendants may have against the underwriters. The settlement is subject to acceptance by a substantial majority of theissuer defendants and execution of a definitive settlement agreement.  The settlement is also subject to approvalof the Court, which cannot be assured. If the settlement is not accepted by the requisite number of defendantsor if it is not approved by the Court, InsWeb intends to defend the lawsuitvigorously.  However, the litigation isin the preliminary stage, and we cannot predict its outcome.  The litigation process is inherentlyuncertain.  An unfavorable outcome couldhave a material adverse effect on InsWeb's financial condition, results ofoperations or cash flows.

 

**ITEM 4.**** ****SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

InsWeb’s 2003 Annual Meeting of Stockholders was held onJune 3, 2003. At the meeting, Robert A. Puccinelli and Mark P. Guthrie, thenominees of management, were elected to serve as Class I directors, untilInsWeb’s 2006 Annual Meeting of Stockholders. Mr. Puccinelli and Mr. Guthriereceived a vote of 3,253,505 shares in favor of their election with 197,672shares withheld.

 

The following additional items were voted at the meeting:

 

1.                             A proposal to ratify the appointment of Ernst & YoungLLP as InsWeb’s independent auditor for the year ending December 31, 2003 wasapproved by a vote of 3,436,800 shares for; 8,751 shares against; and 5,626shares abstaining.

 

2.                             Aproposal to amend InsWeb’s 1997 Stock Option Plan to increase the size ofoptions granted automatically to members of the Board of Directors was approvedby a vote of 2,720,005 shares for; 723,623 shares against and 7,549 sharesabstaining.

 

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**ITEM6.  EXHIBITS AND REPORTS ON FORM 8-K**

 

(a)           Exhibits

 
| **Exhibit  Number** |   | **Description of Document**                                                                                 |
|---------------------|--------|-------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                        |
| 31.1                |   | Certification of Chief Executive Officer, pursuant to  Rule 13a-14(a).                                      |
|                |   |                                                                                                        |
| 31.2                |   | Certification of Chief Financial Officer, pursuant to  Rule 13a-14(a).                                      |
|                |   |                                                                                                        |
| 32                  |   | Certification of  Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C.  Section 1350. |

 

(b)           Reportson Form 8-K:

 

On April 24, 2003, we filed a Form 8-K, under Item 12,announcing InsWeb Corporation’s financial results for the quarter ended March31, 2003.

 

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**SIGNATURE**

 

Inaccordance with the requirements of the Securities Exchange Act of 1934, theregistrant has caused this report to be signed on its behalf by the undersignedthereunto duly authorized.

 

 
| Dated: August 13, 2003 | **INSWEB CORPORATION**  |
|------------------------|-------------------------|
|                   | **(Registrant)**        |
|                   |                    |
|                   |                    |
|                   | /s/ WILLIAM D. GRIFFIN  |   |
|                   | William D. Griffin      |
|                   | Chief Financial Officer |

 

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