** **

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, DC 20549**

 

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** **

**FORM 10-Q**

 
| **ý** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|---------------------------------------------------------------------------------------------------|

 

**For the quarterly period ended September 30, 2002**

** **

**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**                                         |
|----------------------------------------------------------------|
| (Exact name of Registrant as specified in its charter)         |
|                                                           |
|                                                           |
| **Delaware**                                                   |   | **94-3220749** |
| (State or other jurisdiction ofincorporation or organization)  |   | (IRS Employer  Identification Number**)** |
|                                                           |
|                                                           |
| **11290 Pyrites Way, Suite 200  Gold River, California 95670** |
| (Address of principal executive offices)                       |
|                                                           |
|                                                           |
| **(916) 853-3300**                                             |
| (Registrant’s telephone number, including area code)      |

 

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Indicate by check mark whether the Registrant (1) has filed allreports required to be filed by Sections 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the Registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days. Yes ý No o

 

The number of outstanding shares of the Registrant’s Common Stock, parvalue $0.001 per share, on October 31, 2002 were 7,047,829 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 September 30, 2002 and December 31, 2001                             |
|        | Condensed  Consolidated Statements of Operations for the three and nine months ended  September 30, 2002 and 2001 |
|        | Condensed  Consolidated Statements of Cash Flows for the nine months ended  September 30, 2002 and 2001           |
|        | 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 6:     | Exhibits  and Reports on Form 8-K                                                                                 |
|        |                                                                                                              |
|        | Signature                                                                                                         |
|        |                                                                                                              |
|        | Certification  of Chief Executive Officer                                                                         |
|        |                                                                                                              |
|        | Certification  of Chief Financial Officer                                                                         |

 

2

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**PARTI:  FINANCIAL INFORMATION**

**ITEM 1.  FINANCIAL STATEMENTS**

 

**INSWEB CORPORATION AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

*(in thousands)*

*(unaudited)*

 
|                                                    |   | **September 30,  2002** |   | **December 31,  2001** |   |
|---------------------------------------------------------|--------|-------------------------|--------|------------------------|--------|
| **Assets**                                              |   |                    |   |                   |   |
| Current assets:                                         |   |                    |   |                   |   |
| Cash and cash  equivalents                              |   | $                       | 9,048  |                   | $      | 14,627 |   |
| Short-term investments                                  |   | 21,895                  |   | 20,936                 |   |
| Accounts receivable, net                                |   | 2,461                   |   | 2,672                  |   |
| Prepaid expenses and other current assets               |   | 1,562                   |   | 1,169                  |   |
| Total current assets                                    |   | 34,966                  |   | 39,404                 |   |
| Property and equipment, net                             |   | 2,262                   |   | 3,798                  |   |
| Prepaid marketing costs                                 |   | 4,892                   |   | 6,020                  |   |
|                                                    |   |                    |   |                   |   |
| Deposits and other assets                               |   | 2,411                   |   | 5,120                  |   |
| Total assets                                            |   | $                       | 44,531 |                   | $      | 54,342 |   |
|                                                    |   |                    |   |                   |   |
|                                                    |   |                    |   |                   |   |
| **Liabilities and  stockholders’ equity**          |   |                    |   |                   |   |
| Current liabilities:                                    |   |                    |   |                   |   |
| Accounts payable                                        |   | $                       | 1,161  |                   | $      | 902 |   |
| Accrued expenses                                        |   | 3,952                   |   | 3,851                  |   |
| Deferred revenue                                        |   | 617                     |   | 1,156                  |   |
| Marketing commitment with stockholder,  current portion |   | 4,285                   |   | 2,026                  |   |
| Payable to stockholder, current portion                 |   | 1,237                   |   | 1,145                  |   |
| Total current liabilities                               |   | 11,252                  |   | 9,080                  |   |
| Long-term marketing commitment with  stockholder        |   | —                  |   | 13,490                 |   |
| Total liabilities                                       |   | 11,252                  |   | 22,570                 |   |
|                                                    |   |                    |   |                   |   |
| Commitments  and contingencies                          |   |                    |   |                   |   |
|                                                    |   |                    |   |                   |   |
| Stockholders’ equity:                              |   |                    |   |                   |   |
|                                                    |   |                    |   |                   |   |
|                                                    |   |                    |   |                   |   |
| Common stock                                            |   | 7                       |   | 7                      |   |
| Paid-in capital, less treasury stock                    |   | 202,097                 |   | 202,044                |   |
| Accumulated other comprehensive loss                    |   | (94                     | )      | (95                    | )      |
| Accumulated deficit                                     |   | (168,731                | )      | (170,184               | )      |
| Total stockholders’ equity                         |   | 33,279                  |   | 31,772                 |   |
| Total liabilities and stockholders’ equity         |   | $                       | 44,531 |                   | $      | 54,342 |   |

 

See accompanying notes.

 

3

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**INSWEB CORPORATION AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

*(in thousands, except per share amounts)*

*(unaudited)*

* *
|                                                                                            |   | **Three  Months  Ended September 30,** |       | **Nine Months  Ended September 30,** |       |
|-------------------------------------------------------------------------------------------------|--------|----------------------------------------|------------|--------------------------------------|------------|
|                                                                                            |   | **2002**                               |       | **2001**                             |       | **2002** |   | **2001** |   |
|                                                                                            |   |                                   | ** ** |                                 | ** ** |   | ** ** |   | ** ** |
| Revenues:                                                                                       |   |                                   |       |                                 |       |   |   |   |   |
| Transaction fees                                                                                |   | $                                      | 5,734      |                                 | $          | 5,407 |   | $ | 18,012 |   | $ | 17,176 |   |
| Development and maintenance fees                                                                |   | 282                                    |       | 423                                  |       | 1,157 |   | 1,371 |   |
| Total revenues                                                                                  |   | 6,016                                  |       | 5,830                                |       | 19,169 |   | 18,547 |   |
|                                                                                            |   |                                   |       |                                 |       |   |   |   |   |
| Operating expenses:                                                                             |   |                                   |       |                                 |       |   |   |   |   |
| Technology                                                                                      |   | 2,338                                  |       | 3,523                                |       | 7,956 |   | 11,400 |   |
| Sales and marketing                                                                             |   | 4,376                                  |       | 7,185                                |       | 13,801 |   | 20,653 |   |
| General and administrative                                                                      |   | 1,725                                  |       | 1,731                                |       | 5,489 |   | 5,865 |   |
| Amortization of intangible assets and  other                                                    |   | —                                 |       | 703                                  |       | — |   | 1,980 |   |
| Total operating expenses                                                                        |   | 8,439                                  |       | 13,142                               |       | 27,246 |   | 39,898 |   |
| Loss from operations                                                                            |   | (2,423                                 | )          | (7,312                               | )          | (8,077 | ) | (21,351 | ) |
|                                                                                            |   |                                   |       |                                 |       |   |   |   |   |
| Interest expense                                                                                |   | (67                                    | )          | (18                                  | )          | (414 | ) | (49 | ) |
| Interest income and other                                                                       |   | 181                                    |       | 387                                  |       | 599 |   | 1,776 |   |
| Loss before extraordinary gain                                                                  |   | (2,309                                 | )          | (6,943                               | )          | (7,892 | ) | (19,624 | ) |
| Extraordinary  gain                                                                             |   | —                                 |       | —                               |       | 9,345 |   | — |   |
| Net (loss)  income                                                                              |   | $                                      | (2,309     | )                                    | $          | (6,943 | ) | $ | 1,453 |   | $ | (19,624 | ) |
|                                                                                            |   |                                   |       |                                 |       |   |   |   |   |
| Net (loss)  income per share-basic and diluted:                                                 |   |                                   |       |                                 |       |   |   |   |   |
| Loss before extraordinary gain                                                                  |   | $                                      | (0.33      | )                                    | $          | (0.99 | ) | $ | (1.12 | ) | $ | (2.82 | ) |
| Extraordinary gain                                                                              |   | —                                 |       | —                               |       | 1.33 |   | — |   |
| Net (loss) income per share-basic and  diluted                                                  |   | $                                      | (0.33      | )                                    | $          | (0.99 | ) | $ | 0.21 |   | $ | (2.82 | ) |
|                                                                                            |   |                                   |       |                                 |       |   |   |   |   |
| Weighted average shares used in computing  per share amounts- basic and diluted   (Note 3) |   | 7,045                                  |       | 7,026                                |       | 7,040 |   | 6,949 |   |

 

See accompanying notes.

 

4

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**INSWEBCORPORATION AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

*(in thousands)*

*(unaudited)*

* *
|                                                                                  |   | **Nine Months Ended  September 30,** |       |
|---------------------------------------------------------------------------------------|--------|--------------------------------------|------------|
|                                                                                  |   | **2002**                             |       | **2001** |   |
| Cash flows from operating activities:                                                 |   |                                 | ** ** |   | ** ** |
| Net income (loss)                                                                     |   | $                                    | 1,453      |   | $ | (19,624 | ) |
| Adjustments to reconcile net income (loss) to net cash used in  operating activities: |   |                                 |       |   |   |
| Extraordinary gain                                                                    |   | (9,345                               | )          | — |   |
| Amortization of intangible assets and prepaid marketing costs                         |   | 1,129                                |       | 1,802 |   |
| Depreciation and amortization                                                         |   | 1,530                                |       | 4,231 |   |
| Issuance of common stock warrants                                                     |   | —                               |       | 276 |   |
| Loss on disposal/sale of equipment                                                    |   | —                               |       | 663 |   |
| Other                                                                                 |   | (51                                  | )          | 206 |   |
| Net changes in operating assets and liabilities:                                      |   |                                 |       |   |   |
| Accounts receivable                                                                   |   | 211                                  |       | (230 | ) |
| Prepaid expenses and other current assets                                             |   | (393                                 | )          | 2,547 |   |
| Deposits and other assets                                                             |   | 2,502                                |       | (321 | ) |
| Accounts payable                                                                      |   | 259                                  |       | 144 |   |
| Accrued expenses                                                                      |   | 1,110                                |       | (212 | ) |
| Deferred revenue                                                                      |   | (539                                 | )          | (1,934 | ) |
| Security deposit payable                                                              |   | (1,007                               | )          | — |   |
| Other liabilities                                                                     |   | —                               |       | 359 |   |
| Net cash used in operating activities                                                 |   | (3,141                               | )          | (12,093 | ) |
| Cash flows from investing activities:                                                 |   |                                 |       |   |   |
| Redemptions of short-term investments                                                 |   | 31,971                               |       | 24,481 |   |
| Purchases of short-term investments                                                   |   | (32,930                              | )          | (21,285 | ) |
| Purchases of property and equipment and capitalized website  development costs        |   | (571                                 | )          | (1,516 | ) |
| Sales of property and equipment                                                       |   | 926                                  |       | — |   |
| Acquisition costs relating to assets purchased from Intuit                            |   | —                               |       | (263 | ) |
| Net cash (used in) provided by investing activities                                   |   | (604                                 | )          | 1,417 |   |
| Cash flows from financing activities:                                                 |   |                                 |       |   |   |
| Payments on marketing commitments                                                     |   | (1,887                               | )          | — |   |
| Proceeds from issuance of common stock through stock plans                            |   | 64                                   |       | 94 |   |
| Repurchase of common stock                                                            |   | (11                                  | )          | (204 | ) |
| Net cash used in financing activities                                                 |   | (1,834                               | )          | (110 | ) |
| Net decrease in cash and cash equivalents                                             |   | (5,579                               | )          | (10,786 | ) |
| Cash and cash equivalents, beginning of period                                        |   | 14,627                               |       | 24,795 |   |
| Cash and cash equivalents, end of period                                              |   | $                                    | 9,048      |   | $ | 14,009 |   |
|                                                                                  |   |                                 |       |   |   |
| Supplemental disclosure of cash flow information:                                     |   |                                 |       |   |   |
| Cash paid during the period for interest                                              |   | $                                    | 414        |   | $ | 49 |   |
|                                                                                  |   |                                 |       |   |   |
| Supplemental  disclosure of noncash investing and financing activities:               |   |                                 |       |   |   |
| Issuance  of common stock for Intuit assets                                           |   | $                                    | —     |   | $ | 12,547 |   |
| Payable to stockholder for  Intuit assets                                             |   | $                                    | —     |   | $ | 17,022 |   |

 

See accompanying notes.

 

5

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**INSWEB CORPORATION AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

***(UNAUDITED)***

 

**1. Business of InsWeb**

 

InsWeb Corporation operates an online insurance marketplace that enablesconsumers to comparison shop online and obtain insurance company-sponsoredquotes for a variety of insurance products, including automobile, term life andhomeowners. InsWeb’s marketplace electronically matches consumers and insurancecompanies. InsWeb has combined extensive knowledge of the insurance industry, technologicalexpertise and close relationships with a significant number of insurancecompanies to develop an integrated online marketplace. InsWeb’s marketplaceenables consumers to research insurance–related topics, search for,analyze and compare insurance products, apply for and receive insurancecompany-sponsored quotes for actual coverage and to purchase automobileinsurance coverage through InsWeb’s insurance agency. Management believes thatInsWeb provides insurance companies with pre-qualified consumers at attractiveacquisition costs, as well as the scalable, cost-efficient distributioncapabilities of InsWeb’s Internet-based model.

 

InsWeb is subject to all of the risks inherent in an early stagebusiness in the electronic commerce industry and special risks related to theonline insurance industry. These risks include, but are not limited to, alimited operating history, limited management resources, dependence uponconsumer acceptance of the Internet, Internet related security risks, thechanging nature of the electronic commerce industry, and variations in consumertraffic and insurance company participation. Due to the foregoing factors,InsWeb’s future operating results may be materially affected.

 

**2.* *Basis of Presentation**

 

The consolidatedfinancial statements include the accounts of InsWeb Corporation and itswholly-owned subsidiary, InsWeb Insurance Services, Inc. (“InsWeb” or the“Company”).   All significantinter-company accounts and transactions have been eliminated in theconsolidated financial statements.

 

The accompanyingunaudited interim financial statements have been prepared in accordance withaccounting principles generally accepted in the United States for interimfinancial information and with the instructions to Form 10-Q and Rule 10-01 ofRegulation S-X.  Accordingly, they donot contain all of the information and footnotes required by accountingprinciples generally accepted in the United States for complete financialstatements.  In the opinion ofmanagement, the accompanying unaudited interim condensed consolidated financialstatements reflect all adjustments, which include only normal recurringadjustments, necessary to present fairly InsWeb’s financial position as ofSeptember 30, 2002 and the results of operations and cash flows for the threeand nine months ended September 30, 2002 and September 30, 2001.  The financial data and other informationdisclosed in these notes to the condensed consolidated financial statementsrelated to these periods are unaudited. The results for the three and nine months ended September 30, 2002 arenot necessarily indicative of the results to be expected for the year endingDecember 31, 2002.

 

These condensed consolidated financial statements should be read inconjunction with the consolidated financial statements and notes theretoincluded in InsWeb’s Annual Report on Form 10-K and other information as filedwith the Securities and Exchange Commission.

 

**3.  Net Loss Per Share– Basic and Diluted**

 

Basic earnings per share is computed using the weighted average numberof shares of common stock outstanding. Diluted earnings per share reflects the potential dilution that wouldoccur if stock options and warrants had been exercised.  Except for the nine month period endedSeptember 30, 2002, common equivalent shares from stock options and warrantshave been excluded from the computation of net loss per share-diluted as theireffect is antidilutive.  For thenine-month period ended September 30, 2002, shares used in the computation ofdiluted earnings per share are not significantly different than the number ofshares used in the computation of basic earnings per share.

 

6

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**4.  Revenues**

 

Revenues by sourcefor the three and nine months ended September 30, 2002 and 2001 were as follows(in thousands):

 
|                             |   | **Three months ended September 30,** |   | **Nine months ended September 30,** |   |
|----------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|
|                             |   | **2002**                             |   | **2001**                            |   | **2002** |   | **2001** |   |
| Transaction revenues:            |   |                                 |   |                                |   |   |   |   |   |
| Auto insurance                   |   | $                                    | 4,670  |                                | $      | 3,812 |   | $ | 14,640 |   | $ | 11,502 |   |
| Term life insurance              |   | 938                                  |   | 1,411                               |   | 3,081 |   | 3,475 |   |
| Other insurance                  |   | 126                                  |   | 184                                 |   | 291 |   | 2,199 |   |
| Total transaction revenue        |   | 5,734                                |   | 5,407                               |   | 18,012 |   | 17,176 |   |
| Development and maintenance fees |   | 282                                  |   | 423                                 |   | 1,157 |   | 1,371 |   |
| Total revenues                   |   | $                                    | 6,016  |                                | $      | 5,830 |   | $ | 19,169 |   | $ | 18,547 |   |

 

**5.  Comprehensive(Loss) Income**

 

Totalcomprehensive (loss) income for the three and nine months ended September 30,2002 and 2001 were as follows (in thousands):

 
|                                             |   | **Three months ended September 30,** |   | **Nine months ended September 30,** |   |
|--------------------------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|
|                                             |   | **2002**                             |   | **2001**                            |   | **2002** |   | **2001** |   |
| Net (loss) income                                |   | $                                    | (2,309 | )                                   | $      | (6,943 | ) | $ | 1,453 |   | $ | (19,624 | ) |
| Other comprehensive loss:                        |   |                                 |   |                                |   |   |   |   |   |
| Foreign currency translation adjustments         |   | —                               |   | —                              |   | — |   | (165 | ) |
| Change in unrealized gain (loss) on  investments |   | 2                                    |   | (1                                  | )      | 10 |   | 2 |   |
| Total comprehensive (loss) income                |   | $                                    | (2,307 | )                                   | $      | (6,944 | ) | $ | 1,463 |   | $ | (19,787 | ) |

 

**6. Related Party Transactions**

 

During the threeand nine months ended September 30, 2002, InsWeb recognized $207,000 and$947,000, respectively, in marketing expenses under a marketing agreement withan Internet company, compared to $1,025,000 and $3,075,000, respectively forthe comparable periods in 2001.  Anaffiliate of the Internet company became a stockholder of InsWeb in December1998.

 

For the three months ended September 30, 2002 and 2001, InsWeb paidIntuit Inc. (“Intuit”) $750,000 and $625,000 under a license and distributionagreement, which was amended on March 28, 2002 (see Note 8).  For the nine months endedSeptember 30, 2002 and 2001, InsWeb paid Intuit $2,250,000 and $1,875,000,respectively, under this license and distribution agreement.

 

**7.   Recent AccountingPronouncement**

 

In April 2002, the Financial Accounting Standards Board (the “FASB”)issued Statement of Financial Accounting Standards No. 145 (“SFAS 145”), the“Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB StatementNo. 13, and Technical Corrections.” SFAS 145 will require gains and losses on extinguishments of debt to beclassified as income or loss from continuing operations rather than asextraordinary items.   SFAS 145 will beeffective for InsWeb’s fiscal year beginning January 1, 2003.  Upon the effective date of SFAS 145, theextraordinary gain of $9,345,000 recorded in connection with the amendment ofthe license and distribution agreement with Intuit (see Note 8) will bereclassified to other income.  Exceptfor this reclassification, the adoption of SFAS 145 is not expected to affectInsWeb’s financial condition, results of operations or cash flows.

 

7

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**8.   Commitments and Contingencies**

 

***Leases***

 

In July 2002, InsWeb and its sublesseeagreed to amend the sublease covering portions of the property InsWeb formerlyoccupied as its headquarters.  Under theterms of the amendment, the sublessee agreed to rent the entire facility forthe duration of the InsWeb lease (through September 2008).  All rent and operating expenses otherwisepayable by InsWeb to the landlord will be paid directly by the sublessee.  As a result, InsWeb anticipates a reductionin its operating lease commitments of $11,139,000 throughout the remainder ofthe lease.  However, the sublessee is astart-up company with limited operating history and therefore there areinherent risks and uncertainties associated with its future performance. In theevent that the sub-lessee defaults on the amended sublease agreement, InsWebwould be responsible for making the required lease payments to the landlordduring the remaining term 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.  These estimates andassumptions 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 increase its existing reserves and record a charge for anadditional loss provision.

 

***Acquisition of IntuitInsurance Services***

 

In January 2001, InsWeb acquired from Intuitcertain assets and related liabilities associated with an online insuranceshopping and purchasing service operated by Intuit InsuranceServices, Inc., a wholly-owned subsidiary of Intuit. InsWeb did notacquire any of Intuit’s revenue producing relationships with insurancecarriers; however, InsWeb acquired the right to be assigned all Internettraffic from the licensing agreements that Intuit had previously negotiatedwith its strategic partners.

 

In connection with the acquisition, InsWeb andIntuit entered into a license and distribution agreement under which Intuit andInsWeb granted one another licenses to create links between their respectivewebsites in order to create and operate a co-****branded insurance center. Under this agreementInsWeb is the exclusive aggregator of online consumer insurance services forQuicken.com, an Intuit website. The original agreement required InsWeb to payIntuit fixed fees totaling $20,500,000 plus additional amounts associated withconsumers linking from the Quicken.com website to the InsWeb co-brandedinsurance center. Intuit also agreed to a not-to-compete covenant for a periodof five years. InsWeb recorded a long-lived asset of $17,022,000 forprepaid marketing costs and an intangible asset of $13,095,000 relating to thebeneficial terms of the license and distribution agreement. The fair value ofthe intangible asset was estimated based on the expected Internet traffic to bereceived from Intuit by InsWeb. Both long-lived assets were amortized over thefive-year term of the license and distribution agreement. Amortization of theseassets was included as a component of sales and marketing expense.

 

In late 2001, as a result ofsignificantly lower than anticipated traffic levels, InsWeb reassessed therecoverability of the assets recorded in connection with this transaction, bycomparing the estimated future undiscounted cash flows expected to be generatedrelating to these assets to their carrying amounts. Based on this evaluation,InsWeb determined that the acquired assets were impaired and recorded animpairment charge in the fourth quarter of 2001 as the carrying value of theseassets was in excess of fair value. The fair value of the acquired assets wasbased on estimated future cash flows to be generated from the license anddistribution agreement, discounted using a rate commensurate with the riskinvolved.

 

In assessing the recoverability of InsWeb’slong-lived assets (prepaid marketing costs), InsWeb must make assumptionsregarding estimated future cash flows and other factors to determine the fairvalue of the respective assets. Specifically, the variability in anticipatedtraffic levels, number of completed shopping sessions, and revenue percompleted shopping session affect these estimates and assumptions.  Traffic levels, number of completed shoppingsessions, and revenue per completed shopping session continue to be belowanticipated amounts, which may require InsWeb to record an additionalimpairment charge.

 

8

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On March 28, 2002, the parties amended the licenseand distribution agreement.  Under theamended agreement, InsWeb will make the originally agreed upon fixed payments(long-term marketing commitments) only through July 31, 2003. Fixedpayments previously payable to Intuit after July 31, 2003 were forgiven.Effective August 1, 2003 and through the remainder of the agreement(January 2006), InsWeb will pay Intuit a portion of the transaction feesreceived by InsWeb from the Intuit Internet traffic, payable on a quarterlybasis.  The net result of this amendedcontract was a $9,345,000 extraordinary gain, accounted for in InsWeb’s resultsof operations for the quarter ended March 31, 2002.

 

At September 30, 2002, future minimum paymentsunder this agreement were:  $750,000 in2002; $2,000,000 in 2003; and none thereafter.

 

***eHealthInsurance Litigation***

 

In February 2001, InsWeb temporarilysuspended its online health insurance quoting services due to the decision byeHealthInsurance, Inc. (“eHealthInsurance”), formerly InsWeb’s exclusiveprovider of online health insurance quotes, to unilaterally terminate therelationship. In April 2000, the two companies signed a two-year onlinedistribution agreement by which eHealthInsurance became the exclusive providerof individual health, small-group health and Medicare supplement insurancequotes to InsWeb’s users through a co-branded website. In February 2001,eHealthInsurance filed suit in the U.S. District Court for the NorthernDistrict of California alleging InsWeb’s failure to perform its obligationsunder the agreement. The complaint seeks unspecified compensatory and punitivedamages.  In March 2001, InsWebfiled a counterclaim alleging that eHealthInsurance wrongfully terminated thelinking agreement and pursued a course of conduct aimed at damaging InsWeb’sbusiness.  In October 2002, the partiesagreed to dismiss many of the claims asserted against each other and agreed tostreamline the discovery and trial procedures on the remaining claims. Thetrial is currently expected to take place in March 2003.  Due to the inherent uncertainties oflitigation, InsWeb cannot accurately predict the ultimate outcome of thismatter at this time and therefore, cannot estimate the range of probable loss,if any. InsWeb believes it has meritorious defenses with respect to this claim,however InsWeb cannot assure that it will prevail in this action. Anunfavorable outcome could have a material adverse effect on InsWeb’s financialcondition, results of operations or cash flows.

*** ***

***SecuritiesClass Action Lawsuit***

 

A class action lawsuit was filed onDecember 5, 2001 in the U.S. District Court for the Southern District ofNew York on behalf of purchasers of InsWeb common stock alleging violations offederal securities laws. The case is brought purportedly on behalf of allpersons who purchased InsWeb common stock from July 22, 1999 throughDecember 6, 2000. The complaint names as defendants InsWeb, certain currentand former officers and directors, and three underwriters for InsWeb’s initialpublic offering in July 1999. The complaint alleges violations of theSecurities Act of 1933 and the Securities Exchange Act of 1934, on the groundsthat the prospectus incorporated in the registration statement for the offeringfailed to disclose, among other things, that (i) the underwriters hadsolicited and received excessive and undisclosed commissions from certaininvestors in exchange for which the underwriters allocated to those investorssubstantial blocks of the stock sold in the initial public offering, and(ii) the underwriters had entered into agreements with customers wherebythe underwriters agreed to allocate shares of the stock sold in the initialpublic offering to those customers in exchange for which the customers agreedto purchase additional shares of InsWeb stock in the aftermarket atpre-determined prices that were above the initial public offering price. Nospecific damages are claimed.  InsWebbelieves that the allegations against InsWeb and its current and formerofficers and directors are without merit and intends to contest themvigorously. The litigation is in the preliminary stage, and InsWeb cannotpredict its outcome. The litigation process is inherently uncertain. Anunfavorable outcome could have a material adverse effect on InsWeb’s financialcondition, results of operations or cash flows.

 

**9.  Stockholders Equity**

 

In July 2002, the Board of Directors authorizedmanagement to repurchase shares of InsWeb’s common stock for a total purchaseprice of up to $1,000,000 over the succeeding 12-month period.   As of September 30, 2002, a total of 4,400shares had been repurchased at a cost of $12,000.

 

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**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION**

**AND RESULTS OF OPERATIONS**

 

*InsWebhas included in this filing certain “forward-looking statements” within themeaning of the Private Securities Litigation Reform Act of 1995 concerning InsWeb’sbusiness, operations and financial condition. The words or phrases “expects,” “anticipates,” “intends,” “plans,”“believes,” “seeks,” “estimates,” and similar expressions are generallyintended to identify forward–looking statements.  Such forward-looking statements are subjectto various known and unknown risks and uncertainties, and InsWeb cautions youthat any forward-looking information provided by, or on behalf of, InsWeb isnot a guarantee of future performance. Actual results could differ materially from those anticipated in suchforward-looking statements due to a number of factors, some of which are beyondInsWeb’s control, including, but not limited to, uncertain economic conditionswhich could result in lower growth rates, decreasing revenue and reducedparticipation in InsWeb’s marketplace, limited operating history, anticipatedlosses, the unpredictability of future revenues, reliance on key customers –property and casualty insurance carriers- who are themselves subject tovolatility in their operating cycles, competition, risks associated with systemdevelopment and operation risks, management of potential growth and risks ofnew business areas, business combinations, and strategic alliances.  These risks and uncertainties, as well asother risks and uncertainties are described in greater detail in the sectionentitled “Factors That May Affect Future Performance.” All forward-lookingstatements are based on information available to InsWeb on the date hereof, andInsWeb assumes no obligation to update such statements.*

 

 

**Overview**

 

InsWeb operates anonline insurance marketplace that enables consumers to shop online for avariety of insurance products, including automobile, term life, homeowners,renters and health insurance, and obtain insurance company-sponsored quotes foractual coverage. In order to create this marketplace, InsWeb has establishedclose relationships with a significant number of insurance companies throughoutthe United States.

 

InsWeb’s principalsource of revenues is transaction fees. While quotes obtained through InsWeb’sonline insurance marketplace are provided to consumers free of charge, InsWeb’sparticipating insurance companies pay transaction fees to InsWeb generallybased on qualified leads delivered to them electronically. Qualified leads areproduced in two ways: for insurance companies offering consumers instant onlinequotes, a qualified lead is produced when a consumer requests insurancecoverage based on a specific quote; for insurance companies providing e-mail orother offline quotes, a qualified lead is produced when the consumer clicks torequest the quote itself. In addition, InsWeb’s insurance agency operationsproduce commission revenue related to the sale and renewal of automobileinsurance policies in nine states.

 

InsWeb also generates development andmaintenance fees from its participating insurance companies.  InsWeb charges a fee to design and developcustomized interfaces between an insurance company’s information system and theInsWeb site.  InsWeb recognizes revenue from set-up feesreceived from a participating insurance company ratably over the estimated lifeof the insurance company’s relationship, after the development work is completeand the insurance company’s integration with the Company’s site has becomeoperational (“Live Date”). Additional development fees are charged asinsurance companies add new products, increase their geographic coverage andconvert to instant quoting capability on the InsWeb online insurancemarketplace, as well as for periodic upgrades and changes to insurancecompanies’ information resident on the InsWeb site. InsWeb charges maintenancefees for maintaining and servicing the programs of the individual insurancecompanies and for maintaining any hardware at InsWeb’s facility that isdedicated to specific insurance companies. These maintenance fees are typicallypayable monthly and are recognized as revenue ratably over the term of themaintenance agreement. Prepaid development and maintenance fees are recorded asdeferred revenue until earned. Development and maintenance fees are expected tocontinue to decline as set-up programs have become a less significant componentin an insurance company’s initial participation.

 

Technologyexpenses consist primarily of payroll and related expenses, including employeebenefits, facility costs, telecommunications and systems costs, for product andsite development personnel involved with the planning and design of carrierimplementation and integration.  InsWebexpects its technology expenditures to remain at current levels for theremainder of 2002.

 

Sales and marketing expenses consist of directmarketing expenditures that include advertising, promotions and fees paid toonline companies with which InsWeb has contractual relationships to driveconsumer traffic to the InsWeb online marketplace.  InsWeb’s current consumer marketing program is focused onmaintaining key online relationships and selective cost-effective marketingcampaigns designed to maintain consumer awareness of InsWeb and its onlineinsurance marketplace.  Also included insales and marketing expense are payroll and related expenses, includingemployee benefits, facility costs, telecommunications and systems costs, for InsWeb’ssales and marketing personnel and the personnel and related costs for InsWeb’sinsurance agency operations, which includes selling agents, underwriters,supervisors and customer service and support groups.  Direct marketing costs will fluctuate based on the amount ofconsumer traffic driven to the InsWeb marketplace, while all other sales andmarketing expenditures are expected to remain at current levels for theremainder of 2002.

 

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General and administrative expenses consist primarily of payroll andrelated expenses, including employee benefits, facility costs,telecommunications and systems costs, for InsWeb’s general management, administrative and accountingpersonnel, as well as other general corporate expenses. General and administrativeexpenditures are expected to remain at current levels for the remainder of2002.

 

Since itsinception, InsWeb has incurred significant losses, and as of September 30, 2002InsWeb had an accumulated deficit of $168.7 million.  These losses, and this accumulated deficit, have resulted fromthe significant costs incurred in the development of InsWeb’s technologyplatform, the establishment of relationships with insurance companies, theirintegration with the InsWeb site, and InsWeb’s marketing and sales activities.  InsWeb intends to continue to invest inproduct development, sales and marketing and in its administrativeinfrastructure.  As a result, InsWebbelieves that it will continue to incur operating losses for at least the nexttwelve months.  Although InsWeb hasexperienced revenue growth in recent periods, its operating results for futureperiods are subject to numerous uncertainties, and there can be no assurancethat InsWeb’s revenue growth will continue or that it will be able to achieveand sustain profitability.  Due to therapidly evolving nature of InsWeb’s business and its limited operating history,InsWeb believes that period-to-period comparisons of its operating results arenot necessarily meaningful and should not be relied upon as an indication offuture performance.

 

  **Results ofOperations**

 

The followingtable sets forth certain statement of operations items as a percentage of totalrevenues for the three and nine months ended September 30, 2002 and 2001:

 
|                                         |   | **Three  months ended  September 30,** |   | **Nine  months ended  September 30,** |   |
|----------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                         |   | **2002**                               |   | **2001**                              |   | **2002** |   | **2001** |   |
| Revenues:                                    |   |                                   |   |                                  |   |   |   |   |   |
| Transaction fees                             |   | 95                                     | %      | 93                                    | %      | 94 | % | 93 | % |
| Development and  maintenance fees            |   | 5                                      | %      | 7                                     | %      | 6 | % | 7 | % |
| Total                                        |   | 100                                    | %      | 100                                   | %      | 100 | % | 100 | % |
| Operating  expenses:                         |   |                                   |   |                                  |   |   |   |   |   |
| Technology                                   |   | 39                                     | %      | 60                                    | %      | 41 | % | 62 | % |
| Sales and  marketing                         |   | 73                                     | %      | 123                                   | %      | 72 | % | 111 | % |
| General and  administrative                  |   | 28                                     | %      | 30                                    | %      | 29 | % | 32 | % |
| Amortization of  intangible assets and other |   | —                                 |   | 12                                    | %      | — |   | 10 | % |
| Total                                        |   | 140                                    | %      | 225                                   | %      | 142 | % | 215 | % |
| Loss from  operations                        |   | (40                                    | )%     | (125                                  | )%     | (42 | )% | (115 | )% |

 

***Revenues***

 

*TransactionFees:*

 
| ***(Amounts in thousands)***                 |   | **Three months ended September 30,** |   | **Nine months ended September 30,** |   |
|----------------------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|
|                                         |   | **2002**                             |   | **2001**                            |   | **2002** |   | **2001** |   |
| Transaction revenues:                        |   |                                 |   |                                |   |   |   |   |   |
| Auto insurance                               |   | $                                    | 4,670  |                                | $      | 3,812 |   | $ | 14,640 |   | $ | 11,502 |   |
| Term life insurance                          |   | 938                                  |   | 1,411                               |   | 3,081 |   | 3,475 |   |
| Other insurance                              |   | 126                                  |   | 184                                 |   | 291 |   | 2,199 |   |
| Total transaction revenues                   |   | $                                    | 5,734  |                                | $      | 5,407 |   | $ | 18,012 |   | $ | 17,176 |   |
|                                         |   |                                 |   |                                |   |   |   |   |   |
| Completed Shopping Sessions - Auto           |   | 708                                  |   | 596                                 |   | 2,218 |   | 1,679 |   |
| Consumer Quotes Presented - Auto             |   | 2,216                                |   | 1,740                               |   | 6,586 |   | 4,496 |   |
|                                         |   |                                 |   |                                |   |   |   |   |   |
| Completed Shopping Sessions – Term life |   | 81                                   |   | 99                                  |   | 275 |   | 279 |   |
| Consumer Quotes Presented - Term life        |   | 1,490                                |   | 1,768                               |   | 4,325 |   | 5,248 |   |

 

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The increase inauto transaction fees for the three and nine months ended September 30, 2002was primarily attributable to the increased number of leads generated by anincreased number of shopping sessions. The increase in shopping sessionsresulted from increased consumer traffic from InsWeb’s online marketingactivities.

 

Term life transaction fees decreased for the three andnine months ended September 30, 2002 compared to the same periods in 2001.These decreases were a result of a similar decline in term life leads and fewerterm life shopping sessions.

 

Other insurancetransaction revenues accounted for $0.1 million and $0.3 million of totalrevenues for the three and nine months ended September 30, 2002, compared to$0.2 million and $2.2 million of total revenue, for the comparable periods in2001. The decrease for the three months ended September 30, 2002 was primarilydue to decreased leads and shopping sessions related to home product insuranceofferings.  The decrease for the ninemonths ended September 30, 2002 was primarily attributable to the loss ofeHealthInsurance, effective February 2001. eHealthInsurance represented none ofInsWeb’s other transaction revenues for the nine months ended September 30,2002 versus $1.5 million  in the comparableprior period.  This decrease was alsopartially due to decreased leads and shopping sessions for home productofferings as compared to the prior period.

 

*Developmentand Maintenance Fees.* Development and maintenance feesaccounted for $0.3 million and $1.2 million of total revenues, for the threeand nine months ended September 30, 2002, compared to $0.4 million and $1.4million of total revenue, for the comparable periods in 2001.Development and maintenance fees are expected to continue to decline as set-upprograms have become a less significant component in an insurance company’sinitial participation.

 

***Operating Expenses***

 

*Technology.* Technology expenses decreased to $2.3 million and $8.0 million for thethree and nine months ended September 30, 2002, from $3.5 million and $11.4million for the comparable periods in 2001. The decreases were primarily attributable to reduced headcount anddecreased amortization of capitalized website costs.

 

*Sales and Marketing.* Sales and marketing expenses decreased to $4.4 million and $13.8 millionfor the three and nine months ended September 30, 2002, from $7.2 million and$20.7 million for the comparable periods in 2001.  Direct marketing expenses decreased to $2.5 million and $8.2million for the three and nine months ended September 30, 2002, from $4.6million and $13.2 million for the comparable periods in 2001.  The decreases were primarily attributable toa significant reduction in on-line advertising rates and a reduction inheadcount.

 

*General and Administrative.* General and administrative expenses were $1.7 million for each of thethree month periods ended September 30, 2002 and 2001.  General and administrative expensesdecreased to $5.5 million for the nine months ended September 30, 2002, from $5.9million for the comparable period in 2001. General and administrative expenses remained level for the three monthsand decreased for the nine months ended September 30, 2002 due to a reductionin personnel and related costs, offset by an increase in legal expensesincurred during the period in connection with the ongoing litigation with eHealthInsurance.

 

*Amortization of Intangible Assets and Other.* Amortization of intangible assets and other during the three and ninemonths ended September 30, 2001 was $0.7 million and $2.0 million.  These amounts primarily represent theamortization of intangibles associated with the acquisition of certain assetsfrom Intuit in January 2001.  Theseintangible assets were evaluated for impairment and written-off during thequarter ended December 31, 2001.

 

***InterestExpense***

 

Interest expense increased to $67,000 and $414,000 during the threeand nine months ended September 30, 2002, from $18,000 and $49,000 for thecomparable periods in 2001. The increase in interest expense was primarilyattributable to imputed interest associated with the long-term marketingcommitments (fixed payments) recorded in conjunction with the acquisition ofcertain assets from Intuit in January 2001. See Note 8 of notes to condensedconsolidated financial statements.

 

***Interest Income and Other***

 

Interest income and other decreased to $0.2million and $0.6 million for the three and nine months ended September 30,2002, from $0.4 million and $1.8 million for the comparable periods in 2001.Interest income and other includes income earned on InsWeb’s investments andthe gain (loss) on foreign currency exchange rate fluctuations associated withInsWeb investment in Finance All K.K. as well as a note payable to a strategicpartner and stockholder incurred in connection with InsWeb’s investment inFinance All K.K. The decrease in interest income and other was primarily aresult of decreased interest income due to lower average cash and short-terminvestments balances during 2002 and, to a lesser extent, lower interest rates.

 

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***ExtraordinaryGain***

 

On March 28, 2002, InsWeb amended its license anddistribution agreement with Intuit. Under the amended agreement, InsWeb will make the originally agreed uponfixed payments (long–term marketing commitments) through July 31,2003.   The net result of this amendedcontract was a $9.3 million extraordinary gain, accounted for in InsWeb’sresults of operations for the quarter ended March 31, 2002.  See additional discussion at Note 8 of notesto condensed consolidated financial statements.

 

**Critical Accounting Policies**

 

InsWeb’s discussion and analysis of its financialcondition and results of operations are based on InsWeb’s consolidatedfinancial statements which have been prepared in accordance with accountingprinciples generally accepted in the United States. The preparation of thesefinancial statements requires InsWeb to make estimates and judgments thataffect the reported amounts of assets and liabilities and the disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.InsWeb bases its estimates and judgments on historical experience and onvarious other factors that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates underdifferent assumptions or conditions. InsWeb believes the following criticalaccounting policies affect its more significant judgments and estimates used inthe preparation of its consolidated financial statements.

 

***Impairmentof Long-Lived Assets.***  In assessing the recoverability of InsWeb’slong-lived assets (prepaid marketing costs), InsWeb must make assumptionsregarding estimated future cash flows and other factors to determine the fairvalue of the respective assets. Specifically, the variability in anticipatedtraffic levels, number of completed shopping sessions, and revenue percompleted shopping session affect these estimates and assumptions.  Traffic levels, number of completed shoppingsessions, and revenue per completed shopping session continue to be belowanticipated amounts, which may require InsWeb to record an additionalimpairment charge.

 

***Cost-MethodInvestments.***  InsWeb holds a minority ownership interestin Finance All K.K., a privately-held corporation.  As of September 30, 2002, the carrying value of this investmentwas $1.7 million.  InsWeb would recordan investment impairment charge if and when it believes an investment hasexperienced a decline in value that is other than temporary. Future adversechanges in market conditions or poor operating results of Finance All K.K.could result in losses or an inability to recover the carrying value of theinvestment that is not currently reflected in the investment’s carrying value,thereby possibly requiring an impairment charge in the future.

 

***Reservefor Lease Obligations.***  InsWeb is contractually obligated to makefuture lease payments on certain formerly occupied facilities through September2008. As of September 30, 2002, total future obligations for these facilitiesamounted to $14.6 million; this obligation is offset by future sublease incomeof $11.4 million. However, the sublessee is a start-up company with limitedoperating history and therefore there are inherent risks and uncertaintiesassociated with its future performance. In the event that the sublesseedefaults on the amended sublease agreement, InsWeb would continue to beresponsible for making the required lease payments during the remaining term ofthe lease.  In connection with theselease obligations for formerly occupied facilities, InsWeb must makeassumptions regarding the estimated future sublease income relative to thesefacilities. Specifically, 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 increase its existing reservesand record a charge for this additional loss provision.

 

***Contingencies.***  Asdiscussed above, eHealthInsurance has filed suit in U.S. District Court againstInsWeb alleging InsWeb’s failure to perform its obligations under the linkingagreement, and a class action lawsuit has been filed that alleges that InsWebviolated certain federal securities laws at the time of its initial publicoffering. InsWeb is required to assess the likelihood of any adverse judgmentsor outcomes to these matters as well as the potential range of probable loss.Due to the inherent uncertainties of litigation, InsWeb cannot accuratelypredict the ultimate outcome of these matters at this time and, therefore,cannot estimate the range of probable loss, if any. InsWeb believes it hasmeritorious defenses with respect to these claims. However, InsWeb cannotassure that it will prevail in these actions and therefore, a reserve may berequired in the future due to new developments in these actions or changes inapproach, such as a change in settlement strategy.

 

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**Liquidity and Capital Resources**

 

At September 30,2002, InsWeb’s principal source of liquidity was $30.9 million in cash, cashequivalents and short-term investments, which decreased from $35.6 million asof December 31, 2001.  The decreaseresulted from the use of $3.1 million, and $1.8 million in operating andfinancing activities, respectively, partially offset by an increase of $0.2million from investing activities.

 

For the ninemonths ended September 30, 2002, net cash used in operating activities was $3.1million compared to  $12.1 million forthe comparable period in 2001.  For thenine months ended September 30, 2002, non-cash items included an extraordinarygain of $9.3 million, amortization of intangibles and prepaid marketing costsof $1.1 million, and depreciation and amortization of assets of $1.5million.  A decrease in deposits andother assets of $2.5 million offset by a security deposit payable of $1.0million and an increase in accrued expenses of $1.1 million, also contributedto the cash used in operations for the nine months ended September 30, 2002.

 

For the nine months endedSeptember 30, 2002, net cash used by investing activities was $0.6 million,which primarily consisted of the redemptions of short-term investments offset bythe purchase of short-term investments and $0.6 million of expenditures forproperty and equipment.

 

For the ninemonths ended September 30, 2002, net cash used in financing activities was $1.8million.  Cash outflows wereattributable to a fixed payment made to Intuit for marketing commitmentspursuant to the agreement entered into with Intuit in January 2001, as amendedin March 2002, offset partially by the proceeds from the issuance of commonstock through InsWeb’s stock plans.

 

As of September 30, 2002, InsWeb had thefollowing contractual commitments (in thousands):

 
|                                       |   | **Total** |   | **2002** |   | **2003** |   | **2004** |   | **2005** |   | **2006** |   | **Thereafter** |   |
|--------------------------------------------|--------|-----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------------|--------|
|                                       |   |      |   |     |   |     |   |     |   |     |   |     |   |           |   |
| Long-term marketing commitment with Intuit |   | $         | 2,750  |     | $      | 750      |   | $        | 2,000  |     | $      | —   |   | $              | — |   | $ | — |   | $ | — |   |
| Operating leases                           |   | 23,162    |   | 863      |   | 3,360    |   | 3,356    |   | 3,257    |   | 3,391    |   | 8,935          |   |
| Other marketing commitments                |   | 500       |   | 300      |   | 200      |   | —   |   | —   |   | —   |   | —         |   |
| Promissory note payable to stockholder     |   | 1,237     |   | 1,237    |   | —   |   | —   |   | —   |   | —   |   | —         |   |
|                                       |   | $         | 27,649 |     | $      | 3,150    |   | $        | 5,560  |     | $      | 3,356    |   | $              | 3,257  |   | $ | 3,391 |   | $ | 8,935 |   |

 

In addition to the fixed payments for long-termmarketing commitments due to Intuit through July 2003, effective August 1, 2003and through the remainder of the agreement (January 2006), InsWeb will payIntuit a portion of the transaction fees received by InsWeb from IntuitInternet traffic, payable on a quarterly basis.

 

In July 2002, InsWeb andits sublessee agreed to amend the sublease covering portions of the propertyInsWeb formerly occupied as its headquarters in Redwood City.  Under the terms of the amendment, thesublessee agreed to rent the entire facility for the duration of InsWeb’s lease(through September 2008).  All rent andoperating expenses otherwise payable by InsWeb to the landlord will be paiddirectly by the sublessee.  As a result,InsWeb anticipates a reduction in its operating lease commitments of $11.1million throughout the remainder of the lease. However, in the event that the sublessee defaults on the amendedsublease agreement, InsWeb would be responsible for making the required leasepayments to the landlord totaling $11.1 million during the remaining term ofthe lease..

 

InsWeb currently anticipates thatits cash, cash equivalents and short-term investments will be sufficient tomeet its anticipated cash needs for working capital and capital expendituresfor at least the next 12 months. Although InsWeb does not anticipate theneed for additional financing, InsWeb nevertheless may require additional fundsto meet operating needs, or to expand its business internally or throughacquisition. InsWeb cannot be certain that additional financing will beavailable when required, on favorable terms or at all. If InsWeb is notsuccessful in raising additional capital as required, its business could bematerially harmed. If additional funds were raised through the issuance ofequity securities, the percentage ownership of InsWeb’s then-currentstockholders would be reduced.

 

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**Factors That May Affect Our Future Performance**

 

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

 

**Our business is difficult to evaluate because we did notbegin to generate significant revenues from our core business until 1998**

 

We were incorporated in February 1995, but wedid not begin to generate significant transaction fees from our onlinemarketplace until 1998. Our limited operating history makes an evaluation ofour future prospects very difficult. An investor in our common stock mustconsider the uncertainties frequently encountered by early stage companies innew and rapidly evolving markets. These uncertainties include:

 

•              an evolving and unpredictable business model,which makes prediction of future results uncertain and an investment in ourcommon stock highly speculative;

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

•              the uncertainty of the extent to which theconsumer market will adopt the Internet as the preferred medium for comparisonshopping for and purchase of insurance products, which may limit our ability togenerate revenue from consumers that visit our online marketplace or ourinsurance agency;

•              our potential inability to successfullymanage  growth, which could lead tomanagement distractions and increased operating expenses;

•              our ability to retain key employees; and

•              our reliance on key customers and ability toretain customers.

 

To address these uncertainties, we must, among other things:

 

•              refine our business model;

•              work to expand the efficiencies and geographiccoverage of our agency activities;

•              enhance the brand identity of our online insurancemarketplace;

•              maintain and increase our strategic alliances withother online businesses to increase traffic to our website;

•              maintain, increase and geographically diversifyour base of participating insurance companies;

•              continue to ensure that our participatinginsurance companies offer competitive insurance products;

•              satisfy legal and regulatory requirementsapplicable to the insurance industry; and

•              continue to address consumer privacy concerns.

 

Our business strategy may not be successful and wemay not be able to successfully address these uncertainties. Moreover, ourability to take the foregoing steps may be hampered by our limited financialresources should we fail to rapidly increase revenues or should increasedrevenues be more than offset by increased operating expenses.

 

**We have a history of losses, we expect future losses, and wemay not achieve or maintain profitability**

 

Given planned investment levels, our ability toachieve profitability will depend upon our ability to generate and sustainsubstantially increased revenues. As a result, we believe that we will incuroperating losses for the foreseeable future. We incurred operating losses of$46.0 million for the year ended December 31, 2001,$53.6 million for the year ended December 31, 2000, and$38.4 million for the year ended December 31, 1999. For the ninemonths ended September 30, 2002 we incurred an operating loss of $8.1million.  As of September 30, 2002,our accumulated deficit was $168.7 million. Our operating results forfuture periods are subject to numerous uncertainties, and we may not achievesufficient revenues to become profitable. Even if we achieve profitability, wemay not sustain or increase profitability on a quarterly or annual basis in thefuture. If we are unable to achieve profitability, or if our profitability isdelayed we may need to seek additional financing to continue our businessoperations. Such financing could be on terms that are dilutive to our existingstockholders or could involve the issuance of securities that have rights andpreferences that are senior to those associated with our common stock.Moreover, if such financing were not available or were available only uponterms that were unacceptable to us, we could be required to significantlycurtail our operations.

 

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**Our future revenues are unpredictable, our operating resultsare likely to fluctuate from quarter to quarter, and if we fail to meet theexpectations of securities analysts or investors, our stock price could declinesignificantly**

 

Due to our limited operating history, the emergingnature of the market in which we compete and the high proportion of ourrevenues that are derived from consumer traffic on our website, our futurerevenues are inherently difficult to forecast. We believe that period-to-periodcomparisons of our operating results may not be meaningful, and you should notrely upon them as an indication of our future performance. Moreover, ourexpense levels are based largely on our investment plans and estimates offuture revenues. We may be unable to adjust our spending to compensate for anunexpected shortfall in revenues. Accordingly, any significant shortfall inrevenues relative to our planned expenditures would harm our results ofoperations and could cause our stock price to fall sharply, particularlyfollowing quarters in which our operating results fail to meet the expectationsof securities analysts or investors.

 

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

 

•              We may experience consumer dissatisfaction withour online marketplace as we add or change features, or as the insurancecoverage offered by participating insurance companies varies;

•              Consumer traffic on our online marketplace maydecline as a result of the announcement or introduction of a competing onlineinsurance marketplace or other new websites, products or services offered byour competitors;

•              Such consumer traffic may also fluctuate as aresult of changes in consumer acceptance of Internet commerce, particularly inconnection with shopping for insurance;

•              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 dueto seasonal 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 intotransaction fees and/or revenue from insurance agency activities may fluctuatedue to changes in our user interface or other features on our site or changesin the underwriting criteria used by our participating insurance companies todetermine which consumers will be offered quotes; and

•              Our ability to generate transaction fees and/orrevenue from 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 shopping and Internet usagemay 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 our operatingresults. We believe seasonality will have an ongoing impact on our business.

 

**Because a significant portion of our revenue is attributableto automobile insurance shopping on our online marketplace, we are especiallyvulnerable to risks related to the online market for automobile insurance orthe automobile insurance industry generally**

 

Automobile insurance accounted for approximately67% of our transaction revenues in 2001, approximately 69% in 2000 andapproximately 78% in 1999. For the nine months ended September 30, 2002automobile insurance accounted for approximately 81% of our transactionrevenues.  We anticipate that automobileinsurance will continue to account for a substantial portion of our revenues forthe foreseeable future. As a result, if we fail to attract a broad base ofconsumers to shop for automobile insurance on our site, or if changes in theautomobile insurance industry make electronic commerce a less attractive meansto shop for this type of insurance, our ability to generate revenue will bereduced and our business will be harmed. In addition, property and casualtyinsurance, including automobile insurance, is subject to operating cycles.During a cycle in which loss ratios rise, insurance companies may choose torestrict the amount of business they write while they await approval of rateincreases from the various state insurance departments. Our business could beharmed if our participating insurance companies reduce their participation inour online marketplace.

 

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**If we are unable to promote our brand and expand our brandrecognition, our ability to draw consumers to our website will be limited**

 

A growing number of websites offer services thatare similar to and competitive with the services offered on our onlineinsurance marketplace. Therefore, a positive recognition of our brand iscritical to attracting additional consumers to our website, strengthening ourrelationships with participating insurance companies and attracting newinsurance companies. In order to attract and retain consumers and insurancecompanies and to promote and maintain our brand, through the first quarter of2000, we increased our financial commitment to creating and maintainingprominent brand awareness. Beginning in the second quarter of 2000, ourconsumer-marketing program has been reduced and our radio and televisionmarketing campaigns have been discontinued. Our current marketing programconsists of the maintenance of certain network online relationships and otherselective cost effective marketing campaigns, designed to maintain consumerawareness of InsWeb and our online insurance marketplace. If our marketingefforts do not generate a corresponding increase in revenues or we otherwisefail to successfully promote our brand, or if these efforts require excessiveexpenditures, our business will be harmed. Moreover, if visitors to our websitedo not perceive our existing services or the products and services of ourparticipating insurance companies to be of high quality, or if we alter ormodify our brand image, introduce new services or enter into new businessventures that are not favorably received, the value of our brand could beharmed.

 

**Our plans to offer additional services could result in significantexpenditures, and we may not generate sufficient revenue to offset theseexpenditures**

 

We intend to offeradditional services including, among other things:

 

•              performingactivities on behalf of an increased number of insurance companies as an authorizedagent;

•              addingnew insurance companies and helping our existing insurance companies to expandthe number of states in which they are offering coverage in our onlinemarketplace;

•              increasingthe level of technology integration between our platform and the systems of ourparticipating insurance companies; and

•              continuing our market presence throughrelationships with Internet portals, financial institutions, websites orientedto activities that involve the purchase of insurance, such as automobileshopping sites, and other online companies.

 

We may not be ableto offer these additional services in a cost-effective or timely manner, orthese efforts may not increase the overall market acceptance of our productsand services. Expansion of our operations in this manner could also requiresignificant additional expenditures and strain our management, financial andoperational resources. The lack of market acceptance of these efforts,regulatory issues, or our inability to generate enough revenue from theseexpanded services or products to offset their cost could harm our business.

 

**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**

 

The onlineinsurance distribution market is a new industry and, like the broaderelectronic commerce market, is both rapidly evolving and highly competitive.Increased competition, particularly by companies offering online insurancedistribution, could reduce the fees we are able to charge our participatinginsurance companies or increase the fees we are required to pay to onlinecompanies with which we have strategic relationships, resulting in reducedmargins or loss of market share, any of which could harm our business. Inaddition, our current and future competitors may be able to:

 

•              undertakemore extensive marketing campaigns for their brands and services;

•              devotemore resources to website and systems development;

•              adoptmore aggressive pricing policies; and

•              makemore attractive offers to potential employees, online companies and third-partyservice providers.

 

Accordingly, wemay not be able to maintain or grow consumer traffic to our website and ourbase of participating insurance companies, our competitors may grow faster thanwe do, or companies with whom we have strategic relationships may discontinuetheir relationships with us, any of which would harm our business.

 

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**If our participating insurancecompanies or our insurance agency do not continue to provide high qualityproducts and service to consumers, our brand will be harmed and our ability toattract consumers to our website will be limited**

 

Our ability tomaintain a positive recognition of our brand depends in part on the quality ofthe products and services consumers receive from our participating insurancecompanies or our insurance agency, including timely response to requests forquotes or coverage. If we are unable to provide consumers with high-qualityproducts and services, the value of our brand may be harmed and the number ofconsumers using our services may decline. We have from time to time receivedcomplaints from consumers who have not received a timely response to a requestfor an insurance quote. Although we have taken steps to increase responsivenessto consumer requests, these steps and future efforts we may make may not besuccessful. In addition, if any of our major participating insurance companieswere to discontinue their business, be downgraded by insurance company ratingservices or be financially harmed by trends in the insurance industry, ourbrand may be harmed.

 

**Our plan to expand our onlineinsurance agency operations will require significant resources and we may notbe able to generate sufficient revenues to recover our expenses**

 

SinceOctober 1999, InsWeb has been operating an online insurance agencybusiness. Our online agency receives a commission on the sale and renewal ofthe automobile insurance polices sold though its offices. Our plan to expand ouronline agency operations requires that we attract and retain highly skilledsales agents and customer care personnel. We face competition from otheragencies and insurance companies for these agents. In addition, we will needadditional carriers to appoint us as an agent and pay us commissions. Althoughthe agency infrastructure is already in place, integration of additionalcarriers into our online agency operations may take more time and be moreexpensive than we project. If we are unable to implement our expansion in atimely and cost-effective manner, we may not be able to recover our costs andour business will be harmed.

 

**Because a limited number of customersaccount for a majority of our revenues, the loss of a single customerrelationship could result in a substantial drop in our revenues**

 

Revenues fromAmica, GE Financial Assurance and AIG accounted for approximately 11%, 11%, and10%, respectively, of our revenues in 2001. Revenues from State Farm, AIG, andGE Financial Assurance accounted for approximately 14%, 11% and 9%,respectively, of our revenues in 2000, and revenues from State Farm, AIG andAmerican Family accounted for approximately 31%, 11% and 11%, respectively, ofour revenues in 1999. Revenues from Amica, GE Financial Assurance and KemperDirect accounted for 16%, 13% and 10%, respectively, of our revenues for thenine months ended September 30, 2002. In May 2000, State Farm discontinued participating in InsWeb’smarketplaces for automobile, term life, homeowners, condominium and rentersinsurance.  Should one or more of ourother key insurance company partners cease to participate in our onlinemarketplace, change its underwriting criteria or geographic coverage in a waythat reduces the proportion of consumers that are offered quotes from thatinsurance company, or suffer a significant decline in its ratings, ouroperating results could be materially harmed. Because of the broad marketpresence of some of our participating insurance companies, we expect tocontinue to generate a substantial portion of our revenues from a limitednumber of insurance companies for the foreseeable future. Although InsWebcontinually seeks new carriers to participate in the online marketplace, we maybe unable to add any new carriers.

 

**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 demandfor the services offered on our website in any jurisdiction is substantiallydependent upon the participation of competing brand-name insurance companiesoffering competitive quotes for a given insurance product in that jurisdiction.Accordingly, the success of our business depends on our ability to attract andretain well-known insurance companies to participate in our marketplace.Although we currently have relationships with a significant number of insurancecompanies overall, in individual jurisdictions where competing quotes forcomparable products are available on our online marketplace, the number ofcompanies offering quotes ranges from one to 14. If we are unable to increasethe number of insurance companies that participate in our online marketplace,particularly in the jurisdictions where we currently offer comparable insuranceproducts from only three or fewer insurance companies, we may not be able toattract additional consumers or may lose our existing consumers to other onlinecompetitors offering a wider variety of insurance companies. AtSeptember 30, 2002, there were 17 jurisdictions in which three or fewerinsurance companies were offering automobile insurance quotes on our onlinemarketplace. No automobile insurance quotes are available in New Jersey, NorthCarolina and Massachusetts as of September 30, 2002.  If any insurance company participating in anumber of jurisdictions discontinued or significantly reduced its participationin our online marketplace, the attractiveness of the marketplace to consumersin these jurisdictions would be greatly diminished.

 

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In addition, webelieve that there is a general trend toward consolidation in the insuranceindustry. In the jurisdictions where we currently offer comparable insuranceproducts from three or fewer insurance companies, the loss of one or more ofthese companies, whether due to industry consolidation or otherwise, couldmaterially reduce the selection of insurance companies available to consumerson our website, thereby substantially reducing the attraction of our onlinemarketplace to consumers.

 

**We may have difficulty integratingnew insurance companies into our online marketplace or agency operations, whichcould harm our ability to offer improved comparison-shopping opportunities andthus limit the attractiveness of our service to consumers**

 

Integration of aninsurance company into our online marketplace requires a significant commitmentof time and resources on our part and on the part of the insurance company, andis a technologically difficult process. This integration process typicallytakes from three to six months to complete and typically requires us to expendbetween 160 and 2,000 man-hours. To develop company-sponsored quotes forconsumers, the integration requires either the development of a customizedinterface with the carrier’s own rating system, accessing a third-party ratingengine of the carrier’s choice, or adding the carrier’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 resources necessaryto 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 exclusiverelationships or long-term contracts with insurance companies, which may limitour ability to retain these insurance companies as participants in ourmarketplace and maintain the attractiveness of our services to consumers**

 

We do not have anexclusive relationship with any of the insurance companies whose insuranceproducts are offered on our online marketplace, and thus, consumers may obtainquotes and coverage from these insurance companies without using our website.Our participating insurance companies offer their products directly toconsumers through insurance agents, mass marketing campaigns or through othertraditional methods of insurance distribution. These insurance companies canalso offer their products and services over the Internet, either directly toconsumers or through one or more of our online competitors, or both. Inaddition, most of our agreements with our participating insurance companies arecancelable at the option of either party upon 90 days’ notice or less. Wehave experienced, and expect to continue to experience, reductions in the levelof participation in our marketplace or complete termination by participatinginsurance companies. These reductions in participation, terminations, or aninability to attract additional insurance companies to our marketplace couldmaterially affect our revenues and harm our business.

 

**The outcome and impact of litigationwith our former health insurance provider is uncertain**

 

In February 2001, InsWeb temporarily suspended its online healthinsurance quoting services due to the decision by eHealthInsurance, formerlyInsWeb’s exclusive provider of online health insurance quotes, to unilaterallyterminate the relationship. In April 2000, the two companies signed a two-yearonline distribution agreement by which eHealthInsurance became the exclusiveprovider of individual health, small-group health and Medicare supplementinsurance quotes to InsWeb’s users through a co-branded website. InFebruary 2001, eHealthInsurance disabled the co-branded website and filedsuit in the U.S. District Court for the Northern District of Californiaalleging InsWeb’s failure to perform its obligations under the agreement. InMarch 2001, eHealthinsurance amended its suit to add allegations that InsWebinterfered with its business relationships. The complaint as amended seeksunspecified compensatory and punitive damages. InsWeb filed a counterclaim inMarch 2001 alleging that eHealthInsurance wrongfully terminated thelinking agreement and pursued a course of conduct aimed at damaging InsWeb’sbusiness. In October 2002, the partiesagreed to dismiss many of the claims asserted against each other and agreed tostreamline the discovery and trial procedures on the remaining claims. Thetrial is currently expected to take place in March 2003. The outcome ofthe lawsuit is uncertain. Even if InsWeb is successful in its counterclaim andreceives a significant judgment at trial, it may be difficult to collect.Moreover, our business would be harmed if a significant portion of our assetswould have to be used to satisfy an adverse judgment, and an adverse judgmentcould damage our reputation and make it more difficult to maintain or expandour business relationships. Although InsWeb maintains customary types ofinsurance, these policies may not provide adequate coverage for the types ofclaims asserted by eHealthInsurance.  An unfavorable outcome could have a materialadverse effect on InsWeb’s financial condition, results of operations or cashflows.

 

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**The outcome and impact of thesecurities class action lawsuit involving InsWeb is uncertain**

 

A class action lawsuit was filed on December 5, 2001in the U.S. District Court for the Southern District of New York on behalf ofpurchasers of InsWeb common stock alleging violations of federal securitieslaws. The case is brought purportedly on behalf of all persons who purchasedInsWeb common stock from July 22, 1999 through December 6, 2000. The complaintnames as defendants InsWeb, certain officers and directors, and threeunderwriters for InsWeb’s initial public offering in July 1999.  The complaint alleges violations of theSecurities Act of 1933 and the Securities Exchange Act of 1934, on the groundsthat the prospectus incorporated in the registration statements for theoffering failed to disclose, among other things, that (i) the underwriters hadsolicited and received excessive and undisclosed commissions from certaininvestors in exchange for which the underwriters allocated to those investorssubstantial blocks of the stock sold in the initial public offering, and (ii)the underwriters had entered into agreements with customers whereby theunderwriters agreed to allocate shares of the stock sold in the initial publicoffering to those customers in exchange for which the customers agreed topurchase additional shares of InsWeb stock in the aftermarket at pre-determinedprices that were above the initial public offering price. No specific damagesare claimed. However, InsWeb believes that the allegations against InsWeb andits current and former officers and directors are without merit and intends tocontest them vigorously. The litigation is in the preliminary stage, and InsWebcannot predict its outcome. The litigation process is inherently uncertain. Anunfavorable outcome could have a material adverse effect on InsWeb’s financialcondition, results of operations or cash flows.

 

**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 onrelationships with a variety of Internet portals, financial institutions, andother online companies to attract consumers to our website. In a typicalarrangement, the online company includes a “link” on its website on which auser can click to jump to our website or to a site that we operate under theonline company’s name; as part of the arrangement, we typically pay the onlinecompany a portion of the resulting transaction fees and in some cases a fixedfee. These relationships may not continue to generate a substantial amount ofnew traffic on our website, or the revenues generated by these relationshipsmay be insufficient to justify our payment obligations. 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.

 

We have enteredinto significant marketing arrangements with Yahoo! Inc., MSN and AOL. For theyears ended December 31, 2001, 2000 and 1999, we received approximately32.2%, 24.5% and 10.1% of our website traffic from these online relationships,respectively.  For the nine months endedSeptember 30, 2002 we received approximately 11.8% of our traffic from these onlinerelationships.  Although we are not ableto determine the revenue attributed to each of these relationships withprecision, we estimate that traffic from these relationships accounted for7.8%, 17.2% and 2.7% of our revenues for the years ended December 31,2001, 2000 and 1999, respectively. For the nine months ended September 30,2002, we estimate that traffic from these relationships accounted for 10.6% ofour revenues.  In January 2001, weentered into an agreement with Intuit under which InsWeb serves as theexclusive aggregator of online consumer insurance services for Quicken.com®,QuickenInsurance and certain Quicken consumer desktop products. We did notrenew our agreement with MSN for 2002, and our status as exclusive provider toYahoo! and AOL was converted to non–exclusive, effective November 1,2001 and January 1, 2002, respectively. Our ability to increase ourrevenues will depend, in part, on our ability to generate increased traffic toour web-site through these significant online relationships.

 

Most of ourrelationships with online companies, excluding Yahoo!,  Lycos, AOL and Intuit  are terminable by either party on 30 to90 days’ notice. We may not be able to negotiate or renew marketingagreements with online companies on terms that are acceptable to us. Thetermination, non-renewal or renewal on unfavorable terms of a relationship fromwhich we generate significant traffic to our website would harm our business.If the recent trend of failing online companies continues, the traffic currentlybeing received as well as the ability to attract new consumer traffic to oursite could be harmed. Additionally, an online company’s failure to maintainefficient and uninterrupted operation of its computer and communicationshardware systems would likely reduce the amount of traffic we receive at oursite, harming our business.

 

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**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 performfunctions for licensed insurance companies and are, therefore, required tocomply with a complex set of rules and regulations that often vary from stateto state. If we fail to comply with these rules and regulations, we, aninsurance company doing business with us, our officers, or agents with whom wecontract, could be subject to various sanctions, including censure, fines, acease-and-desist order or other penalties. This risk, as well as changes in theregulatory climate or the enforcement or interpretation of existing law, couldexpose us to additional costs, including indemnification of participatinginsurance companies for their costs, and could require changes to our businessor otherwise harm our business. Furthermore, because the application of onlinecommerce to the consumer insurance market is relatively new, the impact ofcurrent or future regulations on InsWeb’s business is difficult to anticipate.

 

**The Gramm-Leach-Bliley Act may alterthe traditional structure of insurance regulation and impose new or additionallegal requirements on our business**

 

TheNovember 1999 passage of the Gramm-Leach-Bliley Act (S.900) increased thepotential for significant changes in the structure and regulation of theinsurance industry. Traditionally, regulation of insurance has been almostexclusively the province of the states, including regulation of salespractices, underwriting requirements and claims payments. Moreover, withlimited exceptions, securities firms and banking institutions historically wereprohibited from engaging in the business of insurance, and were regulated byfederal agencies. The Gramm-Leach-Bliley Act eliminated these legislativebarriers between segments of the financial services industry. Althoughinsurance will still be regulated primarily by the states, insurance entitiesthat become part of a financial services institution may be indirectly affectedby the federal regulatory requirements pertaining to banks or securities firms.

 

**Our intended expansion of ourbusiness, including, in particular, our agency activities, will subject us toadditional regulations which may delay or prevent our expansion and harm ourbusiness**

 

Over time, weintend to expand our operations to include new products and services and tooffer existing and new products in new jurisdictions, which may require us tocomply with additional laws and regulations. If we fail to adequately complywith these laws and regulations, our ability to offer some of our products orservices in a particular jurisdiction could be delayed or prevented and ourbusiness could be harmed. Compliance with these laws and regulations and thoseof other jurisdictions into which we expand may require us to obtainappropriate business licenses, make necessary filings and obtain necessarybonds, appoint foreign agents and make 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 significantbarrier to electronic commerce and communications is the secure transmission ofpersonally identifiable information of Internet users as well as otherconfidential information over public networks. If any compromise or breach ofsecurity were to occur, it could harm our reputation and expose us to possibleliability. A party who is able to circumvent our security measures couldmisappropriate proprietary information or cause interruptions in ouroperations. We may be required to make significant expenditures to protectagainst security breaches or to alleviate problems caused by any breaches. Todate, we have experienced no breaches in our network security. We rely onencryption and authentication technology licensed from third parties to providethe security and authentication necessary to effect secure transmission ofconfidential information, such as names, addresses, Social Security and creditcard numbers, user names and passwords and insurance company rate information.Advances in computer capabilities, new discoveries in the field ofcryptography, or other events or developments could result in a compromise orbreach of the algorithms we use to protect consumers’ and insurance companies’confidential information.

 

**Uncertainty in the marketplaceregarding the use of Internet users’ personal information, or proposedlegislation limiting such use, could reduce demand for our services and resultin increased expenses**

 

Concern amongconsumers and legislators regarding the use of personal information gatheredfrom Internet users could create uncertainty in the marketplace. This couldreduce demand for our services, increase the cost of doing business as a resultof litigation costs or increased service delivery costs, or otherwise harms ourbusiness. Laws have been enacted at both the federal and state levels that limit the uses of personally identifiableinformation of Internet users gathered online or require online services toestablish privacy policies. In addition, the Federal Trade Commission hasadopted regulations affecting the information gathering practices of onlinecompanies, and it has brought suit against several high profile companies forfailing to adhere to the privacy policies posted on their websites. Many stateinsurance codes limit the collection and use of personal information byinsurance companies, agents, or insurance service organizations. Failure toadhere to the growing body of privacy regulations could result inadministrative actions or private litigation and harm our business.

 

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

 

Since launchingour online marketplace, we have experienced occasional minor system failures oroutages that have resulted in the online marketplace being out of service for aperiod ranging from several minutes to three hours while our techniciansbrought backup systems online. We may experience further system failures oroutages in the future that could disrupt the operation of our website and couldharm our business. Our revenues depend in large part on the volume of trafficon our website and, more particularly, on the number of insurance quotesgenerated by our website in response to consumer inquiries. Accordingly, theperformance, reliability and availability of our website, quote-generatingsystems and network infrastructure are critical to our reputation and ourability to attract a high volume of traffic to our website and to attract andretain participating insurance companies. Moreover, we believe that consumerswho have a negative experience with an electronic commerce website may bereluctant to return to that site. Thus, a significant failure or outageaffecting our systems could result in severe long-term damage to our business.

 

**Our website may not perform at levelsthat are satisfactory to consumers**

 

We are continuallyenhancing and expanding our technology, quote generating systems, networkinfrastructure and other technologies to accommodate the volume of traffic onour website. We may be unsuccessful in these efforts or we may be unable toaccurately project the rate or timing in the volume of traffic on our website.In addition, we cannot predict whether additional network capacity will beavailable from third party suppliers, as we need it. Also, our network or oursuppliers’ networks might be unable to timely achieve or maintain asufficiently high capacity of data transmission to timely process orders oreffectively download data, especially if our website traffic increases. Ourfailure to achieve or maintain high capacity data transmission couldsignificantly reduce consumer demand for our services.

 

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

 

Our computerhardware operations are located in leased facilities in Gold River, California.A third-party service provider located in Rancho Cordova, California maintainsa full backup system. If both of these locations experienced a system failure,the performance of our website would be harmed. These systems are alsovulnerable to damage from fire, power loss, telecommunications failures,break-ins, natural disasters and similar events. If we seek to replicate oursystems at other locations, we will face a number of technical challenges,particularly with respect to database replications, which we may not be able toaddress successfully. Although we carry property and business interruptioninsurance, our coverage may not be adequate to compensate us for all lossesthat may occur. Our servers may also be vulnerable to computer viruses,physical or electronic break-ins and similar disruptions.

 

**We may experience technologicalproblems or service interruptions with individual insurance companies, whichcould harm the quality of service on our website**

 

Several of ourparticipating insurance companies have chosen a technical solution thatrequires that our website servers communicate with these insurance companies’computer systems in order to perform the underwriting and risk analysis andrating functions required to generate quotes. Thus, the availability of quotesfrom a given insurance company may depend in large part upon the reliability ofthat insurance company’s own computer systems, over which we have no control. Amalfunction in an insurance company’s computer system or in the Internetconnection between our website servers and the insurance company’s system, oran excess of data traffic on that system, could result in a delay in thedelivery of e-mail quotes or could cause an insurance company that providesinstant quotes to go offline until the problem can be remedied. Moreover, themalfunction could cause the carrier to dispute the number of leads it receivedfrom InsWeb. Further, a computer malfunction could cause an insurance companyto quote erroneous rates, in which case the insurance company would be requiredto take itself offline until the malfunction can be corrected. Anytechnological problems with or interruption of communications with an insurancecompany’s computer systems could materially reduce the number of competinginsurance companies available to provide quotes, and therefore the level ofservice perceived by consumers, on our online marketplace.

 

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

 

Our future successis substantially dependent on the continued services and continuingcontributions of our senior management and other key personnel, particularlyHussein A. Enan, Chairman of our Board, and Mark P. Guthrie, our President andChief Executive Officer, and the loss of the services of any of our executiveofficers or other key employees could harm our business.

 

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We have nolong-term employment agreements with any of our key personnel, although Mr.Guthrie is entitled to certain severance benefits should his employment beinvoluntarly terminated. We maintain a $2 million life insurance policy oneach of Mr. Enan and Mr. Guthrie that names us as the beneficiary,but maintain no similar insurance on any of our other key employees.Additionally, InsWeb has granted stock options as incentives to executive officersand new employees, including Mr. Guthrie, and certain other key personnel.As the value of these incentives are highly dependent on an increase in themarket price of our common stock, we may be unable to retain such keyemployees, nor retain or recruit other officers and key employees in thefuture.

 

**Because of intense competition forpersonnel, we may not be able to recruit or retain necessary personnel, whichcould slow the process of adding new insurance companies to our website orotherwise harm our business**

 

Our future successdepends on our continuing ability to attract, retain and motivate highlyskilled employees, particularly with respect to technology development andimplementation, including integration of insurance companies into our online marketplace.If we are not able to attract and retain new personnel, particularly within ourtechnology development and implementation team, our business will be harmed.The implementation of new insurance companies on our site is a technologicallycomplex and labor-intensive process. Accordingly, any difficulty we face inattracting and retaining talented development and implementation personnelcould slow the process of adding new insurance companies to our onlinemarketplace and therefore limit our ability to increase the attractiveness ofour services to consumers. As competition for personnel is intense, we may beunable to retain our key employees or attract, assimilate or retain otherhighly qualified employees in the future. We have from time to timeexperienced, and we may experience in the future, difficulty in hiring andretaining employees with appropriate qualifications.

 

**If the Internet does not continue todevelop and reliably support the demands placed on it by electronic commerceand other high volume applications, our business will suffer**

 

The Internet maynot become a viable medium for commerce or comparison insurance shopping for anumber of reasons, including potentially inadequate development of thenecessary network infrastructure or delayed development of enablingtechnologies and performance improvements. If the Internet continues toexperience significant growth in the number of users, levels of traffic ornetworks’ capacities for transmitting large amounts of data, the Internet’s infrastructuremay not be able to support the demands placed upon it. The Internet hasexperienced a variety of outages and other delays as a result of damage toportions of its infrastructure, and it could face additional outages and delaysin the future. These outages and delays could reduce the level of traffic andtherefore the number of consumer insurance inquiries on our website. Inaddition, the Internet could lose its viability due to delays in thedevelopment or adoption of new standards and protocols required to handleincreased levels of Internet activity, or due to increased governmentalregulation. Changes in or insufficient availability of telecommunicationsservices to support the Internet could also result in slower response times andreduced use of the Internet.

 

**Regulation of the Internet isunsettled, and future regulations could inhibit the growth of the Internet andotherwise harm our business**

 

The laws governingthe Internet remain largely unsettled, even in areas where there has been somelegislative action. Furthermore, the growth and development of the market forelectronic commerce may prompt the enactment of more stringent consumerprotection laws that may impose additional burdens on companies conductingbusiness online. The adoption of additional laws or regulations may inhibit thegrowth of the Internet as a medium for commerce and comparison insuranceshopping, which could, in turn, decrease demand for our services, increase ourcost of doing business, or otherwise harm our business. In addition,applicability to the Internet of existing laws governing issues includingproperty ownership, copyrights and other intellectual property issues,taxation, libel and personal privacy is uncertain. The vast majority of theselaws was adopted prior to the advent of the Internet and related technologiesand, as a result, do not contemplate or address the unique issues of theInternet and related technologies.

 

**Any acquisitions that we undertakecould be difficult to integrate, disrupt our business, dilute stockholder valueand harm our operating results**

 

We may acquire ormake investments in complementary businesses, technologies, services orproducts if appropriate opportunities arise. The process of integrating anyacquired business, technology, service or product into our business andoperations may result in unforeseen operating difficulties and expenditures.Integration of an acquired company also may consume much of our management’stime and attention that would otherwise be available for ongoing development ofour business. Moreover, the anticipated benefits of any acquisition may not berealized. We may be unable to identify, negotiate or finance futureacquisitions successfully, or to integrate successfully any acquisitions withour current business. Future acquisitions could result in potentially dilutiveissuances of equity securities or the incurrence of debt, contingentliabilities or amortization expenses related to goodwill and other intangibleassets, any of which could harm our business.

 

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**We may be unable to protect ourintellectual property rights**

 

We regard ourintellectual property as critical to our success. We rely on trademark,copyright and trade secret laws to protect our proprietary rights. We haveregistered the INSWEB mark in the United States, Japan, France, Germany, SouthKorea, Japan and the United Kingdom and applications are pending in severalother countries. Other United States and worldwide trademark applications include,but are not limited to, eAgent, InsWeb.com, Powered by InsWeb, and Where Youand Your Insurance Really Click. We have patent applications on file in theUnited States. Our trademark registration and patent applications may not beapproved or granted, or, if granted, may be successfully challenged by othersor invalidated through administrative process or litigation. Notwithstandingthese laws, we may be unsuccessful in protecting our intellectual propertyrights or in obtaining patents or registered trademarks for which we apply.

 

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

 

We may from timeto time be subject to claims of infringement of other parties’ proprietaryrights or claims that our own trademarks, patents or other intellectualproperty rights are invalid. We have been subject to infringement claims in theordinary course of business, including claims of alleged infringement of thepatent and trademark rights of third parties by companies and us with which wehave business relationships. Any claims of this type, with or without merit,could be time-consuming to defend, result in costly litigation, divertmanagement attention and resources or require us to enter into royalty orlicense agreements. License agreements may not be available on reasonableterms, if at all, and the assertion or prosecution of any infringement claimscould significantly harm our business.

 

**We incorporate third-partytechnologies and services into our online marketplace, and if the providers ofthese technologies 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 haveincorporated technology developed by third parties into our online marketplace,and we will continue to incorporate third-party technology in our futureproducts and services. We have limited control over whether or when thesethird-party technologies will be developed or enhanced. If a third-party failsto timely develop, license or support technology necessary to our services,market acceptance of our online marketplace could be harmed.

 

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

 

The trading priceof our common stock has been highly volatile and may be significantly affectedby factors including actual or anticipated fluctuations in our operatingresults, new products or new contracts by us or our competitors, loss of keycustomers, conditions and trends in the electronic commerce and insuranceindustries, changes in financial estimates by securities analysts, generalmarket conditions and other factors. The trading prices of many Internet stockshave experienced extreme price and volume fluctuations. These fluctuationsoften have been unrelated or disproportionate to the operating performance ofthese companies. These fluctuations may continue and could harm our stockprice. Any negative change in the public’s perception of the prospects ofInternet or electronic commerce companies could also depress our stock priceregardless of our results.

 

**Delaware law and our charterdocuments contain provisions that could discourage or prevent a potential takeover,even if such a transaction would be beneficial to our stockholders**

 

Provisions ofDelaware law and our certificate of incorporation and bylaws could make moredifficult the acquisition of us by means of a tender offer, a proxy contest, orotherwise, and the removal of incumbent officers and directors.

 

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**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKETRISK.**

 

There have been no material changes to theCompany’s disclosures related to certain market risks as reported under PartII, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” inthe Annual Report of InsWeb to the U.S. Securities and Exchange Commission onForm 10-K for the year ended December 31, 2001.

 

**ITEM 4.  CONTROLS ANDPROCEDURES**

 

(a)                                        Evaluation of disclosure controls andprocedures.  The Company’s principalexecutive officer and its principal financial officer, based on theirevaluation of the Company’s disclosure controls and procedures (as defined inExchange Act Rules 13a-14 (c)) as of a date within 90 days prior to the filingof this Quarterly Report on Form 10Q, have concluded that the Company’sdisclosure controls and procedures are adequate and effective for the purposesset forth in the definition in Exchange Act rules.

 

(b)                                       Changes in internal controls.  There were no significant changes in theCompany’s internal controls or in other factors that could significantly affectthe Company’s internal controls subsequent to the date of their evaluation.

 

 

**PART II: OTHER INFORMATION**

**ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K**

 

(a)    Exhibits

 

| **Exhibit****Number** |   | **Description of Document**                                                   |
|-----------------------|--------|-------------------------------------------------------------------------------|
| 99.1                  |   | Certification of Chief Executive Officer, pursuant  to 18 U.S.C. Section 1350 |
|                  |   |                                                                          |
| 99.2                  |   | Certification of Chief Financial Officer, pursuant  to 18 U.S.C. Section 1350 |

 

(b)    Reports onForm 8-K: None

 

25

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SIGNATURE

 

In accordance with the requirements of the Securities Exchange Act of1934, the registrant has caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
| Dated: November 13, 2002 | **INSWEB CORPORATION**   |
|--------------------------|--------------------------|
|                     | **(Registrant)**         |
|                     |                     |
|                     |                     |
|                     | /s/  William D. Griffin  |   |
|                     | William  D. Griffin      |
|                     | Chief  Financial Officer |

 

26

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**INSWEBCORPORATION**

 

**CERTIFICATIONOF CHIEF EXECUTIVE OFFICER**

 

 

I, Mark P. Guthrie, President and Chief Executive Officer of InsWebCorporation, certify that:

 

(1)          I have reviewed thisquarterly report on Form 10-Q of InsWeb Corporation;

 

(2)          Based on my knowledge,this quarterly report does not contain any untrue statement of a material factor omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

(3)          Based on my knowledge,the financial statements, and other financial information included in thisreport, fairly present in all material respects the financial condition,results of operations and cash flows of the registrant as of, and for, theperiods presented in this quarterly report;

 

(4)          The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a.               designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

b.              evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

c.               presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

(5)          The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors:

 

a.               all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

b.              any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

(6)          The registrant’s othercertifying officers and I have indicated in this quarterly report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

 
|                            | /s/ Mark P. Guthrie                   |   |
|---------------------------------|---------------------------------------|--------|
| Dated:   November 13, 2002 | **Mark P. Guthrie**                   |
|                            | President and Chief Executive Officer |

 

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**INSWEBCORPORATION**

 

**CERTIFICATIONOF CHIEF FINANCIAL OFFICER**

 

 

I, William D. Griffin, Chief Financial Officer of InsWeb Corporation,certify that:

 

(1)          I have reviewed thisquarterly report on Form 10-Q of InsWeb Corporation;

 

(2)          Based on my knowledge,this quarterly report does not contain any untrue statement of a material factor omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

(3)          Based on my knowledge,the financial statements, and other financial information included in thisreport, fairly present in all material respects the financial condition,results of operations and cash flows of the registrant as of, and for, theperiods presented in this quarterly report;

 

(4)          The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a.               designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

b.              evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

c.               presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

(5)          The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors:

 

a.               all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

b.              any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

(6)          The registrant’s othercertifying officers and I have indicated in this quarterly report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

 
|                            | /s/ William D. Griffin  |   |
|---------------------------------|-------------------------|--------|
| Dated:   November 13, 2002 | **William D. Griffin**  |
|                            | Chief Financial Officer |

 

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