**SECURITIESAND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

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**FORM10-Q**

 
| **ý**                                                 | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                        |
|------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                       |                                                                                                                                                                                                                                                                                                                                      |
| **For the quarterly period ended September 30, 2003** |
|                                                       |                                                                                                                                                                                                                                                                                                                                      |
| **Or**                                                     |
|                                                       |                                                                                                                                                                                                                                                                                                                                      |
| **o**                                                      | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                       |
|                                                       |                                                                                                                                                                                                                                                                                                                                      |
|                                                       | **For the  transition period from                            to                        ** |

 

**Commission file number 0-26083**

 

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**INSWEB CORPORATION**

(Exactname of Registrant as specified in its charter)

 

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

 

**11290 Pyrites Way, Suite 200**

**Gold River, California 95670**

(Addressof principal executive offices)

 

**(916) 853-3300**

(Registrant’stelephone number, including area code)

 

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

 

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

 

The number of outstandingshares of the Registrant’s Common Stock, par value $0.001 per share, onOctober 31, 2003 were 4,683,819 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, 2003 and  December 31, 2002                       |
|        | Condensed  Consolidated Statements of Operations for the three and nine months ended  September 30, 2003 and 2002 |
|        | Condensed  Consolidated Statements of Cash Flows for the nine months ended  September 30, 2003 and 2002           |
|        | Notes  to Condensed Consolidated Financial Statements                                                                  |
| ITEM  2:    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                            |
| ITEM  3:    | Quantitative  and Qualitative Disclosures About Market Risk                                                            |
| ITEM 4:     | Controls and  Procedures                                                                                               |
|        |                                                                                                                   |
| **PART II** | **OTHER INFORMATION**                                                                                                  |
| ITEM 1:     | Legal Proceedings                                                                                                      |
| ITEM 6:     | Exhibits and  Reports on Form 8-K                                                                                      |
|        |                                                                                                                   |
|        | Signature                                                                                                              |

 

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**PART I:  FINANCIAL INFORMATION**

**ITEM 1.  FINANCIAL STATEMENTS**

 

**INSWEB CORPORATIONAND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

*(in thousands)*

*(unaudited)*

* *
|                                                         |   | **September 30,  2003** |   | **December 31,  2002** |   |
|--------------------------------------------------------------|--------|------------------------------|--------|-----------------------------|--------|
| **Assets**                                                   |   |                         |   |                        |   |
| Current  assets:                                             |   |                         |   |                        |   |
| Cash  and cash equivalents                                   |   | $                            | 11,681 |                        | $      | 12,382 |   |
| Short-term  investments                                      |   | 9,764                        |   | 16,541                      |   |
| Other  available for sale securities – Finance All K.K. |   | 3,941                        |   | —                      |   |
| Accounts  receivable, net                                    |   | 2,097                        |   | 2,236                       |   |
| Prepaid  expenses and other current assets                   |   | 955                          |   | 1,232                       |   |
| Total  current assets                                        |   | 28,438                       |   | 32,391                      |   |
| Property  and equipment, net                                 |   | 1,595                        |   | 2,197                       |   |
| Other  assets                                                |   | 949                          |   | 3,104                       |   |
| Total  assets                                                |   | $                            | 30,982 |                        | $      | 37,692 |   |
|                                                         |   |                         |   |                        |   |
| **Liabilities and stockholders’ equity**                |   |                         |   |                        |   |
| Current  liabilities:                                        |   |                         |   |                        |   |
| Accounts  payable                                            |   | $                            | 1,133  |                        | $      | 888 |   |
| Accrued  expenses                                            |   | 5,245                        |   | 5,605                       |   |
| Deferred  revenue                                            |   | 344                          |   | 575                         |   |
| Marketing  commitment                                        |   | 311                          |   | 2,306                       |   |
| Note  payable to stockholder                                 |   | —                       |   | 1,230                       |   |
| Total  current liabilities                                   |   | 7,033                        |   | 10,604                      |   |
|                                                         |   |                         |   |                        |   |
| Commitments  and contingencies                               |   |                         |   |                        |   |
|                                                         |   |                         |   |                        |   |
| Stockholders’  equity:                                  |   |                         |   |                        |   |
| Common  stock                                                |   | 7                            |   | 7                           |   |
| Paid-in  capital, less treasury stock                        |   | 198,096                      |   | 202,051                     |   |
| Accumulated  other comprehensive income (loss)               |   | 3,178                        |   | (208                        | )      |
| Accumulated  deficit                                         |   | (177,332                     | )      | (174,762                    | )      |
| Total  stockholders’ equity                             |   | 23,949                       |   | 27,088                      |   |
| Total  liabilities and stockholders’ equity             |   | $                            | 30,982 |                        | $      | 37,692 |   |

 

Seeaccompanying notes.

 

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# **INSWEB CORPORATIONAND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

*(in thousands, except per share amounts)*

*(unaudited)*

 
|                                                                            |   | **Three Months  Ended September 30,** |       | **Nine Months  Ended September 30,** |       |
|---------------------------------------------------------------------------------|--------|--------------------------------------------|------------|-------------------------------------------|------------|
|                                                                            |   | **2003**                                   |       | **2002**                                  |       | **2003** |   | **2002** |   |
| Revenues:                                                                       |   |                                       | ** ** |                                      | ** ** |   | ** ** |   | ** ** |
| Transaction fees                                                                |   | $                                          | 5,931      |                                      | $          | 5,734 |   | $ | 19,253 |   | $ | 18,012 |   |
| Development and maintenance fees                                                |   | 255                                        |       | 282                                       |       | 738 |   | 1,157 |   |
| Total revenues                                                                  |   | 6,186                                      |       | 6,016                                     |       | 19,991 |   | 19,169 |   |
|                                                                            |   |                                       |       |                                      |       |   |   |   |   |
| Operating  expenses:                                                            |   |                                       |       |                                      |       |   |   |   |   |
| Technology                                                                      |   | 2,091                                      |       | 2,338                                     |       | 6,762 |   | 7,956 |   |
| Sales  and marketing                                                            |   | 4,327                                      |       | 4,376                                     |       | 13,116 |   | 13,801 |   |
| General  and administrative                                                     |   | 1,249                                      |       | 1,725                                     |       | 4,481 |   | 5,489 |   |
| Total  operating expenses                                                       |   | 7,667                                      |       | 8,439                                     |       | 24,359 |   | 27,246 |   |
| Loss  from operations                                                           |   | (1,481                                     | )          | (2,423                                    | )          | (4,368 | ) | (8,077 | ) |
| Interest  expense                                                               |   | (21                                        | )          | (67                                       | )          | (84 | ) | (414 | ) |
| Interest  income                                                                |   | 58                                         |       | 169                                       |       | 224 |   | 522 |   |
| Other  income                                                                   |   | 849                                        |       | 12                                        |       | 1,658 |   | 9,422 |   |
| Net (loss) income                                                               |   | $                                          | (595       | )                                         | $          | (2,309 | ) | $ | (2,570 | ) | $ | 1,453 |   |
|                                                                            |   |                                       |       |                                      |       |   |   |   |   |
| Net  (loss) income per share-basic and diluted                                  |   | $                                          | (0.13      | )                                         | $          | (0.33 | ) | $ | (0.49 | ) | $ | 0.21 |   |
|                                                                            |   |                                       |       |                                      |       |   |   |   |   |
| Weighted  average shares used in computing per share amounts- basic and diluted |   | 4,690                                      |       | 7,045                                     |       | 5,212 |   | 7,040 |   |

 

Seeaccompanying notes**.**

 

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**INSWEB CORPORATIONAND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

*(in thousands)*

*(unaudited)*

 
|                                                                                  |   | **Nine Months Ended  September 30,** |       |
|---------------------------------------------------------------------------------------|--------|-------------------------------------------|------------|
|                                                                                  |   | **2003**                                  |       | **2002** |   |
| Cash  flows from operating activities:                                                |   |                                      | ** ** |   | ** ** |
| Net  (loss) income                                                                    |   | $                                         | (2,570     | ) | $ | 1,453 |   |
| Adjustments  to reconcile net (loss) income to net cash used in operating activities: |   |                                      |       |   |   |
| Gain  on sale of a portion of investment in Finance All K.K.                          |   | (822                                      | )          | — |   |
| Depreciation  and amortization                                                        |   | 775                                       |       | 1,530 |   |
| Amortization  of prepaid marketing costs                                              |   | 272                                       |       | 1,129 |   |
| Other  income                                                                         |   | (36                                       | )          | (9,396 | ) |
| Net  changes in operating assets and liabilities:                                     |   |                                      |       |   |   |
| Accounts  receivable                                                                  |   | 139                                       |       | 211 |   |
| Prepaid  expenses and other current assets                                            |   | 277                                       |       | (393 | ) |
| Deposits  and other assets                                                            |   | 79                                        |       | 2,502 |   |
| Accounts  payable                                                                     |   | 245                                       |       | 259 |   |
| Accrued  expenses                                                                     |   | (361                                      | )          | 103 |   |
| Deferred  revenue                                                                     |   | (231                                      | )          | (539 | ) |
| Changes  in working capital                                                           |   | 148                                       |       | 2,143 |   |
| Net  cash used in operating activities                                                |   | (2,233                                    | )          | (3,141 | ) |
| Cash  flows from investing activities:                                                |   |                                      |       |   |   |
| Redemptions  of short term investments                                                |   | 14,720                                    |       | 31,971 |   |
| Purchases  of short term investments                                                  |   | (7,946                                    | )          | (32,930 | ) |
| Proceeds  from sale of investment in Finance All K.K.                                 |   | 2,097                                     |       | — |   |
| Proceeds  from sales of property and equipment                                        |   | —                                    |       | 926 |   |
| Purchases  of property and equipment and capitalized website development costs        |   | (77                                       | )          | (571 | ) |
| Net  cash provided by (used in) investing activities                                  |   | 8,794                                     |       | (604 | ) |
| Cash  flows from financing activities:                                                |   |                                      |       |   |   |
| Proceeds  from exercise of options                                                    |   | 10                                        |       | — |   |
| Repurchase  of common stock                                                           |   | (4,000                                    | )          | (11 | ) |
| Repayments  of debt                                                                   |   | (3,307                                    | )          | (1,887 | ) |
| Proceeds  from stock issued from employee stock purchase plan                         |   | 35                                        |       | 64 |   |
| Net  cash used in financing activities                                                |   | (7,262                                    | )          | (1,834 | ) |
| Net  decrease in cash and cash equivalents                                            |   | (701                                      | )          | (5,579 | ) |
| Cash  and cash equivalents, beginning of period                                       |   | 12,382                                    |       | 14,627 |   |
| Cash  and cash equivalents, end of period                                             |   | $                                         | 11,681     |   | $ | 9,048 |   |

 

Seeaccompanying notes.

 

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**INSWEB CORPORATION AND SUBSIDIARIES**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

***(Amounts in thousands)***

***(unaudited)***

 

**1.  Business of InsWeb**

 

InsWeb Corporation operates an onlineinsurance marketplace for a variety of insurance products, includingautomobile, term life and homeowners. InsWeb’s marketplace enables consumers toresearch insurance-related topics, search for, analyze and compare insuranceproducts, apply for and receive insurance company-sponsored quotes for actualcoverage and purchase automobile insurance coverage through InsWeb’s insuranceagency. InsWeb has combined extensive knowledge of the insurance industry,technological expertise and close relationships with a significant number ofinsurance companies to develop an integrated online marketplace.

 

InsWeb is subject to all of the risksinherent in an early stage business in the electronic commerce industry andspecial risks related to the online insurance industry. These risks include,but are not limited to, a limited operating history, limited managementresources, dependence upon consumer acceptance of the Internet, Internetrelated security risks, the changing nature of the electronic commerceindustry, and variations in consumer traffic and insurance companyparticipation. Due to the foregoing factors, InsWeb’s future operating resultsmay be materially affected.

 

**2.* *Basisof Presentation**

 

The condensed consolidated financialstatements include the accounts of InsWeb Corporation and its wholly-ownedsubsidiaries, InsWeb Insurance Services, Inc. and Goldrush Insurance Services,Inc. (“InsWeb” or the “Company”).  Allsignificant intercompany accounts and transactions have been eliminated in theconsolidated financial statements.

 

The accompanying unaudited interimfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States for interim financialinformation and the instructions to Form 10-Q and Rule 10-01 of RegulationS-X.  Accordingly, they do not containall of the information and footnotes required by accounting principlesgenerally accepted in the United States for complete financial statements.  In the opinion of management, theaccompanying unaudited interim condensed consolidated financial statementsreflect all adjustments, which include only normal recurring adjustments,necessary to present fairly InsWeb’s financial position as ofSeptember 30, 2003, the results of operations for the three and ninemonths ended September 30, 2003 and September 30, 2002 and cash flowsfor the nine months ended September 30, 2003 and 2002.  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, 2003are not necessarily indicative of the results to be expected for the yearending December 31, 2003.

 

In April 2002, the FinancialAccounting Standards Board (the “FASB”) issued Statement of FinancialAccounting Standards No. 145 (“SFAS 145”), “Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASBStatement No. 13, and Technical Corrections.” SFAS 145 requires gains andlosses on extinguishments of debt to be classified as income or loss fromcontinuing operations rather than as extraordinary items. SFAS 145 becameeffective for InsWeb’s fiscal year beginning January 1, 2003.  The extraordinary gain of $9,345,000representing a reduction of obligations (fixed payments) that was recorded inconnection with the amendment of the license and distribution agreement withIntuit in the quarter ended March 31, 2002, has been reclassified to otherincome (see discussion in Notes to Consolidated FinancialStatements (Note 10) included in InsWeb’s Annual Report on Form 10-K for theyear ended December 31, 2002).  Except for this reclassification, theadoption of SFAS 145 did not affect InsWeb’s financial condition, results ofoperations or cash flows.

 

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

 

**3.  Concentration ofRisk — Significant Customers**

 

For the threemonths ended September 30, 2003, three customers (GE Financial Assurance (“GEFA”), ProgressiveCasualty Insurance Company (“Progressive”) and American Family) accounted for 16%,12% and 11% of total revenues, respectively. For thenine months ended September 30, 2003, three customers (GEFA, Progressive and American Family) accounted for 15%,15% and 11% of total revenues, respectively.

 

InApril 2003, InsWeb was notified by Progressive of their intent toterminate their participation on the InsWeb

 

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insurance marketplace effectiveSeptember 30, 2003. Effective November 16, 2003, GEFA will no longerparticipate as an instant quoting carrier within the InsWeb marketplace, as aresult of its acquisition by AIG, Inc., who is and will continue as a quotingcompany in the InsWeb marketplace.

 

**4.  Concentration ofRisk — Marketing Partners**

 

InsWebrelies on relationships with Internet portals and other online companies toattract consumers to its website. In a typical arrangement, the online companyincludes a “link” on its website on which a user can click to jump to InsWeb’swebsite or to a site that InsWeb operates under the online company’s name; aspart of the arrangement, InsWeb typically pays the online company a portion ofthe resulting transaction fees and in some cases a fixed fee. Theserelationships may not continue to generate a substantial amount of new trafficon InsWeb’s website, or the revenues generated by these relationships may beinsufficient to justify InsWeb’s payment obligations. InsWeb has experiencedfluctuations in the traffic from its online partners as a result of redesignsof their websites or being outbid for promotions by other online insuranceproviders. Furthermore, the value of these relationships is based on thecontinued positive market presence, reputation and growth of these onlinecompanies’ websites and services. Any decline in the market presence, businessor reputation of these online companies’ websites and services will reduce thevalue of these relationships to InsWeb and could harm its business.

 

During2002, InsWeb significantly expanded its on-line marketing relationship withLowerMyBills.com, Inc., as a result of which LowerMyBills.com deliveredapproximately 34% of InsWeb’s website traffic for the year ended December 31,2002. During the three months and nine months ended September 30, 2003,LowerMyBills.com accounted for 34% and 42% of InsWeb’s website traffic,respectively; however, InsWeb expects significantly less traffic fromLowerMyBills.com going forward, as a result of a change in LowerMyBills’insurance offering.  See additionaldiscussion in Item 2, “Management’s Discussion and Analysis of FinancialCondition and Results of Operations - 2003 Developments. ”

 

**5.  Per Share andStock Based Compensation Information**

 

Basicearnings per share, is computed using the weighted average number of shares ofcommon stock outstanding. Diluted earnings per share reflects the potentialdilution that would occur if stock options and warrants had been exercised.  For the three and nine month periods endedSeptember 30, 2003, and for the three months ended September 30, 2002, common equivalent shares from stock options and warrants have been excludedfrom the computation of net loss per share-diluted as their effect would beantidilutive.  For the nine months endedSeptember 30, 2002, shares used in the computation of diluted earnings pershare are not significantly different than the number of shares used in thecomputation of basic earnings per share.

 

InsWebaccounts for its stock-based compensation plans under the recognition andmeasurement principles of APB Opinion No. 25, “Accounting for Stock Issued toEmployees,” and related interpretations. The following table illustrates the effect on net loss and net loss pershare if InsWeb had applied the fair value recognition provisions of FinancialAccounting Standards Board Statement No. 123, “Accounting for Stock-Based Compensation*,*”to stock-based employee compensation (in thousands, except per share amounts):

 
|                                                                                                             |   | **Three months ended September 30,** |   | **Nine months ended September 30,** |   |
|------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|------------------------------------------|--------|
|                                                                                                             |   | **2003**                                  |   | **2002**                                 |   | **2003** |   | **2002** |   |
| Net  (loss) income                                                                                               |   | $                                         | (595   | )                                        | $      | (2,309 | ) | $ | (2,570 | ) | $ | 1,453 |   |
| Deduct:  Stock-based employee compensation expense  determined under fair value based method for all awards |   | (452                                      | )      | (680                                     | )      | (1,225 | ) | (1,619 | ) |
| Pro  forma net loss                                                                                              |   | $                                         | (1,047 | )                                        | $      | (2,989 | ) | $ | (3,795 | ) | $ | (166 | ) |
|                                                                                                             |   |                                      |   |                                     |   |   |   |   |   |
| Net  (loss) income per share:                                                                                    |   |                                      |   |                                     |   |   |   |   |   |
| Basic  and diluted-as reported                                                                                   |   | $                                         | (0.13  | )                                        | $      | (0.33 | ) | $ | (0.49 | ) | $ | 0.21 |   |
|                                                                                                             |   |                                      |   |                                     |   |   |   |   |   |
| Basic  and diluted-pro forma                                                                                     |   | $                                         | (0.22  | )                                        | $      | (0.42 | ) | $ | (0.73 | ) | $ | (0.02 | ) |

 

Option valuation models require theinput of highly subjective assumptions. Because InsWeb’s employee and directorstock options have characteristics significantly different from those of tradedoptions, and because changes in the subjective input assumptions can materiallyaffect the fair value estimate, in management’s opinion, the existing models donot necessarily provide a reliable measure of the fair value of its employeestock options. For purposes of pro forma disclosures, the estimated fair valueof the options is amortized over the options’ vesting period. The above proforma disclosures are not necessarily representative of the effects on reportedincome or loss for future periods as additional grants are made each year andoptions vest over several years.

 

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**6.  Comprehensive (Loss) Income**

 

Total comprehensive income (loss) forthe three and nine months ended September 30, 2003 and 2002 were as follows(in thousands):

 
|                                                                                                                                                     |   | **Three months ended September 30,** |   | **Nine months ended September 30,** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|------------------------------------------|--------|
|                                                                                                                                                     |   | **2003**                                  |   | **2002**                                 |   | **2003** |   | **2002** |   |
| Net  (loss) income                                                                                                                                       |   | $                                         | (595   | )                                        | $      | (2,309 | ) | $ | (2,570 | ) | $ | 1,453 |   |
| Other  comprehensive income:                                                                                                                             |   |                                      |   |                                     |   |   |   |   |   |
| Change  in cumulative translation adjustment due to the partial sale of investment in  Finance All K.K.                                                  |   | 132                                       |   | —                                   |   | 132 |   | — |   |
| Change  in unrealized gain on available for sale securities (principally, Finance All  K.K. for the three and nine months ended September 30, 2003) |   | 3,254                                     |   | 2                                        |   | 3,254 |   | 10 |   |
| Total  comprehensive income (loss)                                                                                                                       |   | $                                         | 2,791  |                                     | $      | (2,307 | ) | $ | 816 |   | $ | 1,463 |   |

 

**7.  Related Party Transactions**

 

During the three and nine months endedSeptember 30, 2003, InsWeb recognized $68,000 and $310,000, respectively,in marketing expenses under a marketing agreement with an Internet company,compared to $207,000 and $947,000, respectively for the comparable periods in2002.  An affiliate of the Internetcompany became a stockholder of InsWeb in December 1998.

 

**8. Commitments andContingencies**

 

***Leases***

 

In July 2002, InsWeb and one ofits sublessees agreed to amend the sublease covering portions of the propertyInsWeb formerly occupied as its headquarters in Redwood City, California. Underthe terms of the amendment, the sublessee agreed to rent the entire facilityfor the duration of InsWeb’s lease (through September 2008). All rent andoperating expenses otherwise payable by InsWeb to the landlord are required tobe paid directly by the sublessee. Therefore, the amended sublease offsetsInsWeb’s aggregate operating lease commitments by approximately $9,439,000through the remainder of the lease. However, the sublessee is a start-up company with a limited operatinghistory and, therefore, there are inherent risks and uncertainties associatedwith its future operations and its ability to discharge its obligations throughthe term of the sublease.  In the eventthat the sublessee defaults on its obligations under the amended sublease,InsWeb would be responsible for making the required lease payments to thelandlord throughout the remaining term of the lease.  In connection with this lease and other lease obligations forformerly occupied facilities, InsWeb must make assumptions regarding theestimated future sublease income relative to these facilities.  As a result of the decline in the realestate market in the geographic area where the properties are located and theinherent risks associated with its sublessee, the Company has an accrual of$2,716,000 as of September 30, 2003 for lease commitments related to theseformerly occupied facilities, as compared to an accrual of $2,800,000 as ofDecember 31, 2002. These estimates and assumptions are affected byarea-specific conditions such as new commercial development, market occupancyrates and future market prices. If these estimates or their related assumptionschange in the future, InsWeb may be required to record a charge to increase itsaccrual.

 

***SecuritiesClass Action Lawsuit***

 

Asecurities class action lawsuit was filed on December 5, 2001 in the UnitedStates District Court for the Southern District of New York, (the “Court”)purportedly on behalf of all persons who purchased InsWeb’s common stock fromJuly 22, 1999 through December 6, 2000.  The complaint named as defendants InsWeb, certain current andformer officers and directors, and three investment banking firms that servedas underwriters for InsWeb’s initial public offering in July 1999.  The complaint, as subsequently amended,alleges violations of Sections 11 and 15 of the Securities Act of 1933 andSections 10 and 20 of the Securities Exchange Act of 1934, on the grounds thatthe prospectuses incorporated in the registration statements for the offeringfailed to disclose, among other things, that (i) the underwriters had solicitedand received excessive and undisclosed commissions from certain investors inexchange for which the underwriters allocated to those investors materialportions of the shares of our stock sold in the offerings and (ii) theunderwriters had entered into agreements with customers whereby theunderwriters agreed to allocated shares of the stock sold in the offering tothose customers in exchange for which the customers agreed to purchaseadditional shares of InsWeb stock in the aftermarket at pre-determined prices.  No specific damages are claimed.  Similar allegations have been made inlawsuits relating to more than 300 other initial public offerings conducted in1999 and 2000, all of which have been consolidated for pretrial purposes.  In October 2002, all claims against theindividual defendants were dismissed

 

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without prejudice.  In February 2003, the Court dismissedthe claims in the InsWeb action alleging violations of the Securities ExchangeAct of 1934 but allowed the plaintiffs to proceed with the remainingclaims.  In June 2003, theplaintiffs in all of the cases presented a settlement proposal to all of theissuer defendants.  Under the proposedsettlement, the plaintiffs will dismiss and release all claims againstparticipating defendants in exchange for a contingent payment guaranty by theinsurance companies collectively responsible for insuring the issuers in allthe related cases, and the assignment or surrender to the plaintiffs of certainclaims the issuer defendants may have against the underwriters. The settlementis subject to acceptance by a substantial majority of the issuer defendants andexecution of a definitive settlement agreement.  The settlement is also subject to approval of the Court, which cannotbe assured.  If the settlement is notaccepted by the requisite number of defendants or if it is not approved by theCourt, InsWeb intends to defend the lawsuit vigorously.  However, the litigation is in thepreliminary stage, and we cannot predict its outcome.  The litigation process is inherently uncertain.  An unfavorable outcome could have a materialadverse effect on InsWeb’s financial condition, results of operations or cashflows.

 

**9.  StockholdersEquity**

 

InFebruary 2003, InsWeb repurchased 2,241,440 shares of InsWeb common stock,consisting of 1,169,898 shares held by Intuit Insurance Services, Inc. and1,071,542 shares held by SOFTBANK America, Inc. The shares were purchased for$3,810,000, or $1.70 per share. With the closing of this transaction, SOFTBANKCorporation’s holdings of InsWeb common stock have been reduced to 353,032shares, while Intuit Insurance Services, Inc. holds no shares.

 

 

**10.  Recent AccountingPronouncements**

 

InNovember 2002, the Emerging Issues Task Force reached a consensus on Issue00-21 (“EITF 00-21”), “Revenue Arrangements with Multiple Deliverables.”  EITF 00-21 addresses how to account forarrangements that may involve the delivery or performance of multiple products,services, and/or rights to use assets and focuses on when a revenue arrangementshould be separated into components or deliverables, or alternatively, whensmaller deliverables or elements should be combined for purposes of recognizingrevenue. EITF 00-21 is applicable for agreements entered into in fiscal periodsbeginning after June 15, 2003, with early adoption permitted.  The adoption of EITF 00-21 did not and isnot expected to have an  impact onInsWeb’s results of operations, financial condition or cash flows.

 

InJanuary 2003, in an effort to expand upon and strengthen existingaccounting guidance that addresses when a company should include in itsfinancial statements the assets, liabilities and activities of another entity,the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.”The objective of FIN 46 is not to restrict the use of variable interestentities but to improve financial reporting by companies involved with variableinterest entities. Prior to the issuance of FIN 46, a company generally includedanother entity in its consolidated financial statements only if it controlledthe entity through voting interests. FIN 46 changes that by requiring avariable interest entity to be consolidated by a company if that company issubject to a majority of the risk of loss from the variable interest entity’sactivities or entitled to receive a majority of the entity’s residual returnsor both. The consolidation requirements of FIN 46 apply immediately to variableinterest entities created after January 31, 2003. The consolidationrequirements apply to older entities in the first fiscal year or interim periodbeginning after June 15, 2003. Certain of the disclosure requirementsapply in all financial statements issued after January 31, 2003, regardlessof when the variable interest entity was established. As of September 30,2003, the Company had a minority financial interest in Finance All K.K. (anunconsolidated entity). The Company has evaluated the effect that FIN 46 mayhave, and has concluded that since it (i) does not have majority voting rights,(ii) does not have majority residual interests in this entity’s assets orincome, (iii) does not have obligations to absorb the majority of the losses ofthis, or any, unconsolidated entity, (iv) has not guaranteed any obligations ofthis, or any, unconsolidated entity, and (v) does not have any commitment orintent to provide funding to this, or any, such entity; the Company’s maximumexposure to loss is limited to $3,941,000, the carrying value of the investmentin Finance All K.K. as of September 30, 2003.  In September 2003, InsWeb recognized a gain of $822,000 fromthe sale of a portion of its investment in Finance All K.K., a Japanesecorporation. Subsequent to September 30, 2003, the Company sold itsremaining interest in Finance All K.K.

 

**11. Subsequent Events**

 

InOctober 2003, InsWeb sold the remaining portion of its investment inFinance All K.K.   As a result of thistransaction, InsWeb received proceeds of $6,781,000 and will record a gain of$6,016,000 during the quarter ending December 31, 2003.

 

TheCompany entered into direct linking agreements with Progressive and GovernmentEmployees Insurance Company (“GEICO”), whereby, starting October 3, 2003,certain consumer segments from much of the country, as well as consumers fromspecific smaller states, will no longer be provided quotes on the InsWeb site,but will be provided direct links to the Progressive and GEICO websites..

 

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

**AND RESULTS OF OPERATIONS**

 

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

 

**Overview**

 

InsWeboperates an online insurance marketplace that enables consumers to shop onlinefor a variety of insurance products, including automobile, term life,homeowners, renters and health insurance, and obtain insurancecompany-sponsored quotes for actual coverage. In order to create this marketplace, InsWeb has established closerelationships with a significant number of insurance companies throughout theUnited States.

 

InsWeb’sprincipal source of revenues is transaction fees from participating insurancecompanies. While quotes obtained through InsWeb’s online insurance marketplaceare provided to consumers free of charge, InsWeb earns revenues fromparticipating insurance companies based on the delivery of qualified leads.With certain insurance companies, InsWeb is paid a fee only when the consumerpurchases an insurance policy, and with others, InsWeb is paid a transactionfee based on the delivery of a lead, regardless of whether or not the consumeractually purchases a policy. Qualified leads are produced in two ways: forinsurance companies providing instant online quotes, a qualified lead isproduced when a consumer clicks to request insurance coverage based on aspecific quote; for insurance companies providing e-mail or other offlinequotes, a qualified lead is produced when a consumer clicks to request thequote itself. Once a lead is generated by the consumer’s request for anapplication or offline quote, InsWeb transmits the lead either to InsWebInsurance Services, or to the selected insurance company or other entity bye-mail, file transfer or direct connection to the insurance company’sinformation system. InsWeb provides each participating insurance company withcustom-formatted lead information based on the insurance companies individualrequirements.

 

As of September 30, 2003, InsWeb’s subsidiary,InsWeb Insurance Services, Inc., has been appointed as an authorized automobileinsurance agent by 12 participating insurance companies and is acting as anagent in ten states. InsWeb receives a commission based on a percentage of theinitial insurance policy premium related to each insurance policy sale whereInsWeb has acted as the agent. InsWeb recognizes the revenue from theseactivities on the effective date of the policy, less an estimate for earlycancellations of the underlying insurance policies. InsWeb also recognizesrevenue when an applicable policy is renewed. Commission revenue is included intransaction fees. InsWeb intends to expand its online insurance agency operationsby adding additional participating insurance companies.

 

Aless significant, but ongoing source of revenues for InsWeb are development andmaintenance fees that are paid by insurance companies that participate on theInsWeb insurance marketplace. Development fees are generated from the designand development of customized interfaces between an insurance company’sinformation system and the InsWeb site. InsWeb charges maintenance fees formaintaining and servicing the programs of the individual insurance companiesand for maintaining any hardware at InsWeb’s facility that is dedicated tospecific insurance companies.

 

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 carrier

 

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implementation andintegration.  InsWeb expects itstechnology expenditures to remain at current levels for the remainder of 2003.

 

Salesand marketing expenses consist of direct marketing expenditures that includeadvertising, promotions and fees paid to online companies with which InsWeb hascontractual relationships to drive consumer traffic to the InsWeb onlinemarketplace.  InsWeb’s current consumermarketing program is focused on maintaining key online relationships andselective cost-effective marketing campaigns designed to maintain consumerawareness of InsWeb and its online insurance marketplace. InsWeb hasexperienced occasional fluctuations in the traffic from its online partners asa result of redesigns of their websites or being outbid for promotions by otheronline insurance providers. During 2002, InsWeb significantly expanded its on-linemarketing relationship with LowerMyBills.com, Inc., as a result of whichLowerMyBills.com delivered approximately 34% of InsWeb’s website traffic forthe year ended December 31, 2002. During the three months and nine monthsended September 30, 2003, LowerMyBills.com accounted for 34% and 42% ofInsWeb’s website traffic, respectively; however, InsWeb expects significantlyless traffic from LowerMyBills.com going forward, as a result of a change inLowerMyBills’ insurance offering. Also included in sales and marketing expensesare payroll and related expenses, including employee benefits, facility costs,telecommunications and systemscosts, for InsWeb’s sales and marketing personnel and the personnel and relatedcosts for InsWeb’s insurance agency operations, which includes selling agents,underwriters, supervisors and customer service and support groups.  Direct marketing costs will fluctuate basedon the amount of consumer traffic driven to the InsWeb marketplace, while allother sales and marketing expenditures are expected to remain at current levelsfor the remainder of 2003.

 

Generaland administrative expenses consist primarily of payroll and related expenses,including employee benefits, facility costs, telecommunications and systemscosts, for InsWeb’s general management, administrative and accountingpersonnel, as well as other general corporate expenses. General andadministrative expenditures are expected to decline slightly over the remainderof 2003 as a result of the settlement of litigation with eHealthInsurance inMarch 2003. See discussion in Notes to Consolidated Financial Statements(Note 16) included in InsWeb’s Annual Report on Form 10-K for the year endedDecember 31, 2002.

 

Sinceits inception, InsWeb has incurred significant losses, and as ofSeptember 30, 2003, InsWeb had an accumulated deficit of $177.3 million.These losses, and this accumulated deficit, have resulted from the significantcosts incurred in the development of InsWeb’s technology platform, theestablishment of relationships with insurance companies, their integration withthe InsWeb site, and InsWeb’s marketing and sales activities. InsWeb intends tocontinue to invest in product development and maintenance and sales andmarketing activities. As a result, InsWeb believes that it will continue toincur operating losses at least through early 2004. InsWeb’s operating resultsfor future periods are subject to numerous uncertainties, and there can be noassurance that InsWeb  will be able toachieve and sustain profitability. In view of the rapidly evolving nature ofInsWeb’s business and its limited operating history, InsWeb believes thatperiod-to-period comparisons of its operating results are not necessarilymeaningful and should not be relied upon as an indication of futureperformance.

 

**2003 Developments**

 

InFebruary 2003, InsWeb repurchased 2,241,440 shares of its common stock,consisting of 1,169,898 shares held by Intuit Insurance Services, Inc. and1,071,542 shares held by SOFTBANK America, Inc. The shares were purchased for$3.8 million, or $1.70 per share. With the closing of this transaction,SOFTBANK Corporation’s holdings of InsWeb common stock have been reduced to353,032 shares, while Intuit Insurance Services, Inc. holds no shares.

 

InMarch 2003, InsWeb and eHealthInsurance agreed to settle ongoinglitigation in the U.S. District Court for the Northern California. Thelitigation stemmed from eHealthInsurance’s decision in February 2001 toterminate an agreement concerning the marketing of health insurance to consumersoriginating at InsWeb. Although specific terms of the settlement agreement areconfidential, eHealthInsurance paid InsWeb $0.8 million for the servicesperformed by InsWeb prior to the termination of the marketing agreement, whichis classified as other income for the nine months ended September 30,2003. In addition, the parties have released all claims against each otherrelating to the marketing agreement.

 

InSeptember 2003, InsWeb recognized a gain of $0.8 million from the sale ofa portion of its investment in Finance All K.K., a Japanese corporation. In October 2003, InsWeb sold the remaining portion ofits investment and received proceeds of $6.8 million and as a result willrecord a gain of $6.0 million during the quarter ending December 31, 2003.

 

During2002, InsWeb significantly expanded its on-line marketing relationship withLowerMyBills.com, Inc., as a result of which LowerMyBills.com deliveredapproximately 34% of InsWeb’s website traffic for the year endedDecember 31, 2002. During the three months and nine months endedSeptember 30, 2003, LowerMyBills.com accounted for 34% and 42% of InsWeb’swebsite traffic, respectively; however, InsWeb expects significantly lesstraffic from LowerMyBills.com going forward, as a result of a change inLowerMyBills’ insurance offering.

 

EffectiveOctober 2003, Progressive commenced transitioning from an instant quotingcarrier on the InsWeb auto

 

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insurance marketplace to an arrangement thatprovides certain InsWeb consumer segments with the option of direct linking tothe Progressive website.  For the year ended December 31, 2002, Progressiverepresented approximately 7% of InsWeb’s total revenues, and for the three andnine months ended September 30, 2003, Progressive representedapproximately 16% and 15%, respectively, of total revenues.

 

EffectiveNovember 16, 2003, GE Financial Assurance (“GEFA”)will no longer participate as an instant quoting carrier within theInsWeb marketplace, as a result of its acquisition by AIG, Inc., who is andwill continue as a quoting company in the InsWeb marketplace. Forthe year ended December 31, 2002, GEFA represented approximately 14% ofInsWeb’s total revenues, and for the three and nine months endedSeptember 30, 2003, GEFA represented approximately 12% and 15%,respectively, of total revenues.

 

The Companyexpects fourth quarter results to be impacted by the reduction in consumertraffic from LowerMyBills.com, the carrier shifts occurring within our autoinsurance marketplace (Progressive and GEFA, as mentioned above), as well asthe traditional seasonal softness in the insurance business.  These factors will have a negative impact onrevenues and operating earnings in the fourth quarter and possibly beyond. Takingthese factors into account, the Company expects auto insurance transactionrevenues in the fourth quarter to be reduced by more than $1.0 millionsequentially. However, InsWeb expects to report net income in the fourthquarter as a result of the gain on the sale of the remaining investment inFinance All K.K.

 

**Results of Operations**

 

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

 
|                             |   | **Three months  ended  September 30,** |   | **Nine months  ended  September 30,** |   |
|----------------------------------|--------|---------------------------------------------|--------|--------------------------------------------|--------|
|                             |   | **2003**                                    |   | **2002**                                   |   | **2003** |   | **2002** |   |
| Revenues:                        |   |                                        |   |                                       |   |   |   |   |   |
| Transaction fees                 |   | 96                                          | %      | 95                                         | %      | 96 | % | 94 | % |
| Development and maintenance fees |   | 4                                           | %      | 5                                          | %      | 4 | % | 6 | % |
| Total                            |   | 100                                         | %      | 100                                        | %      | 100 | % | 100 | % |
| Operating expenses:              |   |                                        |   |                                       |   |   |   |   |   |
| Technology                       |   | 34                                          | %      | 39                                         | %      | 34 | % | 41 | % |
| Sales and marketing              |   | 70                                          | %      | 73                                         | %      | 66 | % | 72 | % |
| General and administrative       |   | 20                                          | %      | 28                                         | %      | 22 | % | 29 | % |
| Total                            |   | 124                                         | %      | 140                                        | %      | 122 | % | 142 | % |
| Loss from operations             |   | (24                                         | )%     | (40                                        | )%     | (22 | )% | (42 | )% |

 

## ***Revenues***

 
|                                     |   | **Three months  ended  September 30,** |   | **Three months  ended  September 30,** |   |
|------------------------------------------|--------|---------------------------------------------|--------|---------------------------------------------|--------|
| **(Amounts in thousands)**               |   | **2003**                                    |   | **2002**                                    |   | **2003** |   | **2002** |   |
| Transaction  revenues:                   |   |                                        |   |                                        |   |   |   |   |   |
| Auto  insurance                          |   | $                                           | 4,711  |                                        | $      | 4,670 |   | $ | 15,624 |   | $ | 14,640 |   |
| Term  life insurance                     |   | 1,123                                       |   | 938                                         |   | 3,223 |   | 3,081 |   |
| Other  insurance                         |   | 97                                          |   | 126                                         |   | 406 |   | 291 |   |
| Total  transaction revenues              |   | $                                           | 5,931  |                                        | $      | 5,734 |   | $ | 19,253 |   | $ | 18,012 |   |
|                                     |   |                                        |   |                                        |   |   |   |   |   |
| Completed  Shopping Sessions - Auto      |   | 812                                         |   | 708                                         |   | 2,513 |   | 2,218 |   |
| Consumer  Quotes Presented - Auto        |   | 2,858                                       |   | 2,216                                       |   | 8,208 |   | 6,586 |   |
|                                     |   |                                        |   |                                        |   |   |   |   |   |
| Completed  Shopping Sessions - Term life |   | 90                                          |   | 81                                          |   | 273 |   | 275 |   |
| Consumer  Quotes Presented - Term life   |   | 1,660                                       |   | 1,490                                       |   | 4,749 |   | 4,325 |   |

 

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Auto insurance transaction revenuesremained relatively constant for the three months ended September 30, 2003compared to same period in 2002. While the number of completed shoppingsessions increased, the impact of this increase was offset by a decrease in theamount of revenue per completed shopping session.  The increase in completed shopping sessions resulted fromincreased consumer traffic from InsWeb’s online marketing activities. However,revenue per completed shopping session decreased during the three months endedSeptember 30, 2003, due to lower than expected close rates of autoinsurance policies by many of InsWeb’s participating insurance carriers, whicheffectively resulted in lower revenue per lead generated. The increase in autotransaction fees for the nine months ended September 30, 2003 was primarilyattributable to the increased number of leads generated by an increased numberof completed shopping sessions, due to an increase in consumer traffic fromInsWeb’s online marketing activities.

 

Term life insurance transactionrevenues increased for the three and nine months ended September 30, 2003compared to the same periods in 2002. The increase was due to a change in the compensation arrangement withone of InsWeb’s customers in the fourth quarter of 2002, as a result of whichthe customer now compensates InsWeb when the consumer purchases an insurancepolicy, rather than on the delivery of a qualified lead.

 

Other insurance transaction revenuesremained relatively constant for the three months ended September 30, 2003compared to same period in 2002, as the number of shopping sessions remainedconstant.  Other insurance transactionrevenues increased for the nine months ended September 30, 2003, comparedto the same period in 2002  primarilydue to revenue generated from the sale of certain statistical data in thequarter ended June 30, 2003.

 

Development and maintenance feesaccounted for $0.3 million and $0.7 million of total revenues for the three andnine months ended September 30, 2003, compared to $0.3 million and $1.2million, for the comparable periods in 2002. Development and maintenance fees,while an ongoing source of revenues, are expected to continue to decline asset-up programs have become a less significant component in an insurancecompany’s initial participation in the InsWeb market place.

 

***OperatingExpenses***

 

*Technology.* Technology expenses decreased to $2.1 million and $6.8 million for thethree and nine months ended September 30, 2003, from $2.3 million and $8.0million for the comparable periods in 2002. These decreases were primarily attributable to reduced headcount anddecreased amortization of capitalized website costs.

 

*Sales and Marketing.* Sales and marketing expenses decreased to $4.3 million and $13.1 millionfor the three and nine months ended September 30, 2003, from $4.4 millionand $13.8 million for the comparable periods in 2002.  Direct marketing expenses, a component of sales and marketingexpenses, remained constant at $2.5 million for the three months endedSeptember 30, 2003 compared to the same period in 2002.  Direct marketing expenses decreased to $7.7million for the nine months ended September 30, 2003 from $8.2 million forthe comparable period in 2002. During 2002, InsWeb significantlyexpanded its on-line marketing relationship with LowerMyBills.com, Inc., as aresult of which LowerMyBills.com delivered approximately 34% of InsWeb’swebsite traffic for the year ended December 31, 2002. During the threemonths and nine months ended September 30, 2003, LowerMyBills.comaccounted for 34% and 42% of InsWeb’s website traffic, respectively; however,InsWeb expects significantly less traffic from LowerMyBills.com going forward,as a result of a change in LowerMyBills’ insurance offering.  The impact of this change on InsWeb’s fourthquarter financial results will be a significant decrease in auto transactionrevenues, offset somewhat by a decrease in direct marketing expenses.

 

*General andAdministrative.*  General and administrative expensesdecreased to $1.2 million and $4.5 million for the three and nine months endedSeptember 30, 2003, from $1.7 million and $5.5 million for the comparableperiods in 2002. These decreases were primarily due to a decrease in legalexpenses incurred during the periods as a result of the settlement of theeHealthInsurance litigation in March 2003.

 

***InterestIncome***

 

Interest income decreased to $0.1million and $0.2 million for the three and nine months ended September 30,2003, from $0.2 million and $0.5 million for the comparable periods in 2002.Interest income is earned on InsWeb’s investments.  The decrease in interest income was a result of lower averagecash and short-term investment balances and lower market interest rates during2003.

 

***InterestExpense***

 

Interest expense decreased to $21,000and $0.1 million during the three and nine months ended September 30,2003, from $0.1 million and $0.4 million for the comparable periods in 2002.The decrease in interest expense was primarily attributable to lower imputedinterest associated with long-term marketing commitments (fixed payments).  Lower imputed interest is due to thereduction of these obligations resulting from the amendment of the license anddistribution agreement with Intuit in March 2002.

 

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***OtherIncome***

 

Other income increased to $0.8 millionfor the three months ended September 30, 2003, from $12,000 for thecomparable period in 2002. For the three months ended September 30, 2003,other income included the $0.8 million gain from the sale of a portion ofInsWeb’s interest in Finance All K.K. For the nine months ended September 30, 2003, other incomedecreased to $1.7 million from $9.4 million for the comparable period in2002.  For the nine months endedSeptember 30, 2003, other income included a $0.8 million gain from the saleof a portion of InsWeb’s investment in Finance All K.K. and $0.8 millionrelating to the eHealthinsurance litigation settlement. For the nine monthsended September 30, 2002, other income consisted primarily of the $9.3million gain recognized in connection with the renegotiation of an onlinemarketing distribution agreement.

 

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**Critical AccountingPolicies**

 

InsWeb’s discussion and analysis ofits financial condition and results of operations are based on InsWeb’sconsolidated financial statements which have been prepared in accordance withaccounting principles generally accepted in the United States. The preparationof these financial statements requires InsWeb to make estimates and judgmentsthat affect the reported amounts of assets and liabilities and the disclosureof contingent assets and liabilities at the date of the financial statementsand the 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.

 

***Accrualfor Lease Obligations.***  InsWeb is contractually obligated to makefuture lease payments on certain formerly occupied facilities throughSeptember 2008. As of September 30, 2003, total future obligationsfor these facilities amounted to $12.1 million; these obligations are offset bytotal future sublease income of approximately $9.6 million.  Substantially all future sublease income isdue from a sublessee which is a start-up company with a limited operating historyand, therefore, there are inherent risks and uncertainties associated with itsfuture operations and its ability to discharge its obligations through the termof the sublease. In the event that the sublessee defaults on its obligationsunder the amended sublease, InsWeb would be responsible for making the requiredlease payments to the landlord through the remaining term of the lease. Inconnection with this lease and other lease obligations for formerly occupiedfacilities, InsWeb must make assumptions regarding the estimated futuresublease income relative to these facilities. As a result of the decline in the real estate market in the geographicarea where the properties are located and the inherent risks associated withits sublessee, the Company has an accrual of $2.7 million as ofSeptember 30, 2003 for lease commitments related to these formerlyoccupied facilities, as compared to an accrual of $2.8 million as ofDecember 31, 2002. These estimates and assumptions are affected by area-specificconditions such as new commercial development, market occupancy rates andfuture market prices. If these estimates or their related assumptions change inthe future, InsWeb may be required to record a charge to increase its accrual.

 

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

 

 

***Contingencies.*** As discussed in “Part I - Item 1, Note 6 - “Notes to CondensedConsolidated Financial Statements” and Part II – Item 1,” aclass action lawsuit has been filed that alleges InsWeb violated certainfederal securities laws at the time of its initial public offering. Althoughsome claims against InsWeb in this class action have been dismissed, InsWebcannot accurately predict the ultimate outcome of this matter at this time andtherefore, cannot estimate the range of probable loss, if any, due to theinherent uncertainties of litigation. InsWeb believes it has meritoriousdefenses; 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 and cash flows.

 

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### **Liquidity andCapital Resources**

 

Summarized cash flow information is as follows (in thousands):

 
|                                            |   | **Nine months  ended  September 30,** |   |
|-------------------------------------------------|--------|--------------------------------------------|--------|
|                                            |   | **2003**                                   |   | **2002** |   |
|                                            |   |                                       |   |   |   |
| Cash used in operating activities               |   | $                                          | (2,233 | ) | $ | (3,141 | ) |
| Cash provided by (used in) investing activities |   | 8,794                                      |   | (604 | ) |
| Cash provided used in financing activities      |   | (7,262                                     | )      | (1,834 | ) |
|                                                 |        |                                            |        |  |  |  |  |

 

At September 30, 2003,InsWeb’s principal source of liquidity was $21.4 million in cash, cashequivalents and short-term investments (excluding InsWeb’s remaining investmentin Finance All K.K., which was sold in October 2003 for $6.8 million),which decreased from $28.9 million as of December 31, 2002.  At September 30, 2002, InsWeb’sprincipal source of liquidity was $30.9 million in cash, cash equivalents andshort-term investments, which decreased from $35.6 million as of December 31,2001.

 

Forthe nine months ended September 30, 2003, net cash used by operatingactivities was $2.2 million compared to $3.1 million for the comparable periodin 2002.  For the nine months endedSeptember 30, 2003, non-cash items included depreciation and amortizationof assets of $1.0 million.  Theoperating loss of $2.6 million and a decrease of accrued expenses of $0.4million, partially offset by a decrease in prepaid expenses and other currentassets of $0.3 million and an increase in accounts payable of $0.3 million,contributed to the cash used by operations for the nine months endedSeptember 30, 2003. For the nine months ended September 30,2002, non-cash items included an extraordinary gain of $9.3 million,amortization of intangibles and prepaid marketing costs of $1.1 million, anddepreciation and amortization of assets of $1.5 million.  A decrease in deposits and other assets of$2.5 million offset by a security deposit payable of $1.0 million and an increasein accrued expenses of $1.1 million, also contributed to the cash used inoperations for the nine months ended September 30, 2002.

 

Forthe nine months ended September 30, 2003, net cash provided by investingactivities was $8.8 million, which primarily consisted of the redemptions of short-terminvestments offset by the purchase of short-term investments and the gain onthe sale of the investment in Finance All K.K. For the nine months ended September 30,2002, net cash used by investing activities was $0.6 million, which primarilyconsisted of the redemptions of short-term investments offset by the purchaseof short-term investments and $0.6 million of expenditures for property andequipment.

 

Forthe nine months ended September 30, 2003, net cash used in financingactivities was $7.3 million.  Cashoutflows were attributable to the repurchase of common stock of $4.0 million, apayment of $2.0 million made to Intuit for marketing commitments pursuant tothe agreement entered into with Intuit in January 2001, as amended inMarch 2002, and payment of InsWeb’s note payable to SOFTBANK Corporationin the amount of $1.3 million. For the nine months endedSeptember 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, asamended in March 2002, offset partially by the proceeds from the issuanceof common stock through InsWeb’s stock plans.

 

Asof September 30, 2003, InsWeb had the following contractual commitments(in thousands):

 
|                  |   | **Total** |   | **2003** |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **Thereafter** |   |
|-----------------------|--------|-----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------------|--------|
|                  |   |      |   |     |   |     |   |     |   |     |   |     |   |           |   |
| Operating leases      |   | $         | 19,801 |     | $      | 862      |   | $        | 3,356  |     | $      | 3,257    |   | $              | 3,391  |   | $ | 3,483 |   | $ | 5,452 |   |
| Marketing commitments |   | 288       |   | 288      |   | —   |   | —   |   | —   |   | —   |   | —         |   |
|                  |   | $         | 20,089 |     | $      | 1,150    |   | $        | 3,356  |     | $      | 3,257    |   | $              | 3,391  |   | $ | 3,483 |   | $ | 5,452 |   |
|                       |        |           |        |          |        |          |        |          |        |          |        |          |        |                |        |  |  |  |  |  |  |  |  |

 

Inaddition to the fixed payments for marketing commitments paid to Intuit throughJuly 2003, InsWeb will pay Intuit a portion of the transaction feesreceived by InsWeb from Intuit Internet traffic, payable on a quarterly basisthrough the remainder of the agreement (January 2006).

 

InJuly 2002, InsWeb and its sublessee agreed to amend the sublease coveringportions of the property InsWeb formerly occupied as its headquarters inRedwood City, California.  Under theterms of the amendment, the sublessee agreed to rent the entire facility forthe duration of InsWeb’s lease (through September 2008).  All rent and operating expenses otherwisepayable

 

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by InsWeb to the landlordare required to be paid directly by the sublessee.  Therefore, the amended sublease offsets InsWeb’s operating leasecommitments by approximately $9.4 million through the remainder of the lease (whichis not reflected in the table above). However, the sublessee is a start-up company with a limited operatinghistory and, therefore, there are inherent risks and uncertainties associatedwith its future operations and its ability to discharge its obligations throughthe term of the sublease.  In the eventthat the sublessee defaults on its obligations under the amended sublease,InsWeb would be responsible for making the required lease payments to thelandlord throughout the remaining term of the lease.  In connection with this lease and other lease obligations forformerly occupied facilities, InsWeb must make assumptions regarding theestimated future sublease income relative to these facilities.  As a result of the decline in the realestate market in the geographic area where the properties are located and theinherent risks associated with its sublessee, the Company has an accrual of$2.7 million as of September 30, 2003 for lease commitments related tothese formerly occupied facilities,as compared to an accrual of $2.8 million as of December 31, 2002.These estimates and assumptions are affected by area-specific conditions suchas new commercial development, market occupancy rates and future market prices.If these estimates or their related assumptions change in the future, InsWebmay be required to record a charge to increase its accrual.

 

InsWebcurrently anticipates that its cash, cash equivalents and short-terminvestments will be sufficient to meet its anticipated cash needs for workingcapital and capital expenditures for at least the next 12 months. AlthoughInsWeb does not anticipate the need for additional financing, InsWebnevertheless may require additional funds to meet operating needs, or to expandits business internally or through acquisition. InsWeb cannot be certain thatadditional financing will be available when required, on favorable terms or atall. If InsWeb is not successful in raising additional capital as required, itsbusiness could be materially harmed. If additional funds were raised throughthe issuance of equity securities, the percentage ownership of InsWeb’sthen-current stockholders would be reduced.

 

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**Factors That May Affect Our Future Performance**

 

*Our future business, operating results and financialcondition are subject to various risks and uncertainties, including thosedescribed below.*

 

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

 

Wewere incorporated in February 1995, but we did not begin to generatesignificant transaction fees from our online marketplace until 1998. Ourlimited operating history makes an evaluation of our future prospects verydifficult. An investor in our common stock must consider the uncertaintiesfrequently encountered by early stage companies in new and rapidly evolvingmarkets. These uncertainties include:

 

•                                          anevolving and unpredictable business model, which makes prediction of futureresults uncertain and an investment in our common stock highly speculative;

 

•                                          thedevelopment of comparable services by competitors, which may reduce our marketshare;

 

•                                          theuncertainty of the extent to which the consumer market will adopt the Internetas the preferred medium for comparison shopping for and purchase of insuranceproducts, which may limit our ability to generate revenue from consumers thatvisit our online marketplace or our insurance agency;

 

•                                          ourpotential inability to successfully manage growth, which could lead tomanagement distractions and increased operating expenses;

 

•                                          ourability to retain key employees; and

 

•                                          ourreliance on key customers and ability to retain customers.

 

Ourbusiness strategy may not be successful and we may not be able to successfullyaddress these uncertainties. Moreover, our ability to take the necessary stepsto address these uncertainties 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**

 

Givenplanned investment levels, our ability to achieve profitability will dependupon our ability to generate and sustain substantially increased revenues. As aresult, we believe that we will incur operating losses at least through early2004. We incurred operating losses of $15.5 million for the year endedDecember 31, 2002, $46.0 million for the year ended December 31,2001, and $53.6 million for the year ended December 31, 2000. For the ninemonths ended September 30, 2003 we have incurred an operating loss of $4.4million. As of September 30, 2003, our accumulated deficit was $177.3 million.Our operating results for future periods are subject to numerous uncertainties,and we may not achieve sufficient revenues to become profitable. Even if weachieve profitability, we may not sustain or increase profitability on aquarterly or annual basis in the future. If we are unable to achieveprofitability, or if our profitability is delayed we may need to seekadditional financing to continue our business operations. Such financing couldbe on terms that are dilutive to our existing stockholders or could involve theissuance of securities that have rights and preferences that are senior tothose associated with our common stock. Moreover, if such financing were notavailable or were available only upon terms that were unacceptable to us, wecould be required to significantly curtail our operations.

 

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

 

Dueto our limited operating history, the emerging nature of the market in which wecompete and the high proportion of our revenues that are derived from consumertraffic on our website, our future revenues are inherently difficult toforecast. We believe that period-to-period comparisons of our operating resultsmay not be meaningful, and you should not rely upon them as an indication ofour future performance. Moreover, our expense levels are based largely on ourinvestment plans and estimates of future revenues. We may be unable to adjustour spending to compensate for an unexpected shortfall in revenues.Accordingly, anysignificantshortfall in revenues relative to our planned expenditures would harm ourresults of operations and could cause our stock price to fall sharply,particularly following quarters in which our operating results fail to meet theexpectations of investors.

 

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Factorsthat may cause fluctuations in our operating results include the following,many of which are outside our control:

 

•                                          Wemay experience consumer dissatisfaction with our online marketplace as we addor change features, or as the insurance coverage offered by participatinginsurance companies varies;

 

•                                          Consumertraffic on our online marketplace may decline as a result of the announcementor introduction of a competing online insurance marketplace or other newwebsites, products or services offered by our competitors;

 

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

 

•                                          Ourrevenues may be harmed if we lose one or more significant insurance companyrelationships or if any of our participating insurance companies merge with oneanother;

 

•                                          Useof the Internet by consumers may fluctuate due to seasonal factors or otheruncontrollable factors affecting consumer behavior and may be affected by slowInternet performance due to technical problems or traffic bottlenecks on thenetwork;

 

•                                          Ourability to convert site visits into transaction fees and/or revenue frominsurance agency activities may fluctuate due to changes in our user interfaceor other features on our site;

 

•                                          Ourability to generate transaction fees may be adversely affected by changes inthe underwriting criteria used by our participating insurance companies todetermine which consumers will be offered quotes; and

 

•                                          Ourability to generate transaction fees and/or revenue from insurance agencyactivities may also be harmed due to technical difficulties on our website thathamper a consumer’s ability to start or complete a shopping session.

 

**Seasonality affecting insurance shopping and Internet usagemay cause fluctuations in our operating results**

 

Wehave experienced seasonality in our business associated with general slownessin the insurance industry during the year-end holiday period. We expect tocontinue to experience seasonality as our business matures. Because of thisseasonality, investors may not be able to predict our annual operating resultsbased on a quarter-to-quarter comparison of our operating results. We believeseasonality 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**

 

Automobileinsurance accounted for approximately 83% of our transaction revenues in 2002,approximately 67% in 2001 and approximately 69% in 2000. For the nine monthsended September 30, 2003, auto insurance accounted for approximately 81%of our transaction revenues.  Weanticipate that automobile insurance will continue to account for a substantialportion of our revenues for the foreseeable future. As a result, if we fail toattract a broad base of consumers to shop for automobile insurance on our site,or if changes in the automobile insurance industry make electronic commerce aless attractive means to shop for this type of insurance, our ability togenerate revenue will be reduced and our business will be harmed. In addition,property and casualty insurance, including automobile insurance, is subject tooperating cycles. During a cycle in which loss ratios rise, insurance companiesmay choose to restrict the amount of business they write while they awaitapproval of rate increases from the various state insurance departments. Ourbusiness could be harmed if our participating insurance companies reduce theirparticipation in our online marketplace.

 

**Competition in the market for online distribution ofinsurance is intense, and if we are unable to compete effectively with currentcompetitors or new competitors that enter the market, the fees paid to us byparticipating insurance companies may fall, the fees charged by onlinecompanies with which we have strategic relationships may rise, and our marketshare may suffer**

 

Agrowing number of websites offer services that are similar to and competitive withthe services offered on our online insurance marketplace. Increasedcompetition, particularly by companies offering online insurance distribution,could reduce the fees we are able to charge our participating insurancecompanies or increase the fees we are required to pay to online companies withwhich we havestrategic relationships, resulting in reduced margins or loss of market share,any of which could harm our business. 

 

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Therefore, apositive recognition of our brand is critical to attracting additionalconsumers to our website, strengthening our relationships with participatinginsurance companies and attracting new insurance companies. In order to attractand retain consumers and insurance companies and to promote and maintain ourbrand, we are continuing our financial commitment to create and maintain brandawareness. Our current marketing program consists of the maintenance of certainnetwork online relationships and other selective cost effective marketingcampaigns, designed to maintain consumer awareness of InsWeb and our onlineinsurance marketplace. If our marketing efforts do not generate a correspondingincrease in revenues or we otherwise fail to successfully promote our brand, orif these efforts require excessive expenditures, our business will be harmed.Moreover, if visitors to our website do not perceive our existing services orthe products and services of our participating insurance companies to be ofhigh quality, or if we alter or modify our brand image, introduce new servicesor enter into new business ventures that are not favorably received, the valueof our brand could be harmed.

 

Ourability to maintain a positive recognition of our brand also depends in part onthe quality of the products and services consumers receive from ourparticipating insurance companies or our insurance agency, including timelyresponse to requests for quotes or coverage. If we are unable to provideconsumers with high-quality products and services, the value of our brand maybe harmed and the number of consumers using our services may decline.

 

**Because a limited number of insurance companies account for amajority of our revenues, the loss of a single insurance company relationshipcould result in a substantial drop in our revenues**

 

Revenuesfrom Amica, GE Financial Assurance and Kemper Direct accounted forapproximately 14%, 14%, and 10%, respectively, of our revenues in 2002.Revenues from Amica, GE Financial Assurance and AIG accounted for approximately11%, 11%, and 10%, respectively, of our revenues in 2001.  Revenues from GE Financial Assurance,Progressive Casualty Insurance Company and American Family accounted forapproximately 15%, 15% and 11%, respectively, of our revenues for the ninemonths ended September 30, 2003. In April 2003, we were notified that Progressive would discontinueits participation in the InsWeb market place effective September 30, 2003.The discontinuation of Progressive’s participation will adversely affect ouroperating results beginning in the fourth quarter of 2003.  In addition, effectiveNovember 16, 2003, GE Financial Assurance will no longer participate as aninstant quoting carrier within the InsWeb marketplace, as a result of itsacquisition by AIG, Inc., who is and will continue as a quoting company in theInsWeb marketplace.

 

Shouldone or more of our other key insurance company partners cease to participate inour online marketplace, change its underwriting criteria or geographic coveragein a way that reduces the proportion of consumers that are offered quotes fromthat insurance 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 insurance companies to participate in the onlinemarketplace, we may be unable to add any new insurance companies.

 

**In most jurisdictions, we rely on the participation of alimited number of insurance companies on our online marketplace, and the lossof any of these insurance companies could make our online marketplace lessattractive to consumers**

 

Consumerdemand for the services offered on our website in any jurisdiction issubstantially dependent upon the participation of competing brand-nameinsurance companies offering competitive quotes for a given insurance productin that jurisdiction. Accordingly, the success of our business depends on ourability to attract and retain well-known insurance companies to participate inour marketplace. Although we currently have relationships with a significantnumber of insurance companies overall, in individual jurisdictions wherecompeting quotes for comparable products are available on our onlinemarketplace, the number of companies offering quotes ranges from one to 15. Ifwe are unable to increase the number of insurance companies that participate inour online marketplace, particularly in the jurisdictions where we currentlyoffer comparable insurance products from only three or fewer insurancecompanies, we may not be able to attract additional consumers or may lose our existingconsumers to other online competitors offering a wider variety of insurancecompanies. At September 30, 2003, there were 12 jurisdictions in whichthree or fewer insurance companies were offering automobile insurance quotes onour online marketplace. No automobile insurance quotes are available in NewJersey and Massachusetts as of September 30, 2003. If any insurancecompany participating in a number of jurisdictions discontinued orsignificantly reduced its participation in our online marketplace, theattractiveness of the marketplace to consumers in these jurisdictions would begreatly diminished.

 

**We may have difficulty integrating new insurance companiesinto our online marketplace or agency operations, which could harm our abilityto offer improved comparison-shopping opportunities and thus limit theattractiveness of our service to consumers**

 

Integrationof an insurance company into our online marketplace requires a significantcommitment of time and resources on our part and on the part of the insurancecompany, and is a technologically difficult process. This integration processtypically takes from three to nine months to complete and typically requires usto expend between 160 and 2,000 man-hours. To develop

 

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company-sponsored quotes forconsumers, the integration requires either the development of a customizedinterface with the insurance company’s own rating system, accessing athird-party rating engine of the insurance company’s choice, or adding theinsurance company’s rating information into InsWeb’s proprietary ratingengines. Though integration into our agency operations may require fewerresources to implement than integration of an insurance company into our onlinemarketplace, potential participating insurance companies may not be willing toinvest the time and resources necessary to achieve this integration, or we maynot be able to overcome the technological difficulties associated with, ordevote the time and resources necessary to, successfully integrate theinsurance company into our online marketplace or our agency operations.

 

**We do not have exclusive relationships or long-term contractswith insurance companies, which may limit our ability to retain these insurancecompanies as participants in our marketplace and maintain the attractiveness ofour services to consumers**

 

Wedo not have an exclusive relationship with any of the insurance companies whoseinsurance products are offered on our online marketplace, and thus, consumersmay obtain quotes and coverage from these insurance companies without using ourwebsite. 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. We haveexperienced, and expect to continue to experience, reductions in the level ofparticipation 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 a securities class action lawsuitinvolving InsWeb is uncertain**

 

Asecurities class action lawsuit was filed on December 5, 2001 in theUnited States District Court for the Southern District of New York, (the“Court”) purportedly on behalf of all persons who purchased our common stockfrom July 22, 1999 through December 6, 2000.  The complaint named as defendants InsWeb,certain current and former officers and directors, and three investment bankingfirms that served as underwriters for InsWeb’s initial public offering inJuly 1999.  The complaint, assubsequently amended, alleges violations of Sections 11 and 15 of theSecurities Act of 1933 and Sections 10 and 20 of the Securities Exchange Act of1934, on the grounds that the prospectuses incorporated in the registrationstatements for the offering failed to disclose, among other things, that (i)the underwriters had solicited and received excessive and undisclosedcommissions from certain investors in exchange for which the underwritersallocated to those investors material portions of the shares of our stock soldin the offerings and (ii) the underwriters had entered into agreements withcustomers whereby the underwriters agreed to allocated shares of the stock soldin the offering to those customers in exchange for which the customers agreedto purchase additional shares of InsWeb stock in the aftermarket atpre-determined prices.  No specificdamages are claimed.  Similarallegations have been made in lawsuits relating to more than 300 other initialpublic offerings conducted in 1999 and 2000, all of which have beenconsolidated for pretrial purposes.  InOctober 2002, all claims against the individual defendants were dismissedwithout prejudice.  InFebruary 2003, the Court dismissed the claims in the InsWeb action allegingviolations of the Securities Exchange Act of 1934 but allowed the plaintiffs toproceed with the remaining claims.  InJune 2003, the plaintiffs in all of the cases presented a settlementproposal to all of the issuer defendants. Under the proposed settlement, the plaintiffs will dismiss and releaseall claims against participating defendants in exchange for a contingentpayment guaranty by the insurance companies collectively responsible forinsuring the issuers in all the related cases, and the assignment or surrenderto the plaintiffs of certain claims the issuer defendants may have against theunderwriters.  The settlement is subjectto acceptance by a substantial majority of the issuer defendants and executionof a definitive settlement agreement. The settlement is also subject to approval of the Court, which cannot beassured.  If the settlement is notaccepted by the requisite number of defendants or if it is not approved by theCourt, InsWeb intends to defend the lawsuit vigorously.  However, the litigation is in thepreliminary stage, and we cannot predict its outcome.  The litigation process is inherently uncertain.  An unfavorable outcome could have a materialadverse effect on InsWeb’s financial condition, results of operations or cashflows.

 

**Traffic on our website is heavily dependent on our onlinerelationships. These relationships may not generate sufficient revenues tojustify the fees we pay to online companies. Further, our consumer traffic maydecline in the event an online relationship is unsuccessful**

 

Werely on relationships with a variety of Internet portals, financialinstitutions, and other online companies to attract consumers to our website.In a typical arrangement, the online company includes a “link” on its websiteon which a user can click to jump to our website or to a site that we operateunder the online company’s name; as part of the arrangement, we typically paythe online company a portion of the resulting transaction fees and in somecases a fixed fee. These relationships may not continue to generate asubstantial amount of new traffic on our website, or the revenues generated bythese relationships may be insufficient to justify our payment obligations. Wehave experienced occasional fluctuations in the traffic from our onlinepartners as a result of redesigns of their websites or being outbid forpromotions by other online insurance providers. Furthermore, the value of these

 

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relationships is based onthe continuedpositive market presence, reputation and growth of these online companies’websites and services. Any decline in the market presence, business orreputation of these online companies’ websites and services will reduce thevalue of these relationships to us and could harm our business.

 

Forthe years ended December 31, 2002, 2001 and 2000, we receivedapproximately 11%, 32% and 25%, respectively, of our website traffic from themajor Internet portals Yahoo! Inc., MSN and AOL.  For the nine months ended September 30, 2003, we receivedapproximately 12% of our website traffic from these online relationships.  We did not renew our agreement with MSN for2002 but did sign a non-exclusive agreement effective February 15, 2003,and our status as exclusive provider to Yahoo! and AOL was converted tonon-exclusive, effective November 1, 2001 and January 1, 2002,respectively. Additionally, during 2002 InsWeb significantly expanded itson-line marketing relationship with LowerMyBills.com, Inc., as a result ofwhich LowerMyBills.com delivered approximately 34% of InsWeb’s website trafficfor the year ended December 31, 2002. During the three months and ninemonths ended September 30, 2003, LowerMyBills.com accounted for 34% and42% of InsWeb’s website traffic, respectively; however, InsWeb expectssignificantly less traffic from LowerMyBills.com going forward, as a result ofa change in LowerMyBills’ insurance offering. See additional discussion in Item 2, “Management’s Discussion andAnalysis of Financial Condition and Results of Operations - 2003 Developments.”

 

Mostof our relationships with online companies are terminable by either party on 30to 90 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.

 

**Laws and regulations that govern the insurance industry couldexpose us, or our participating insurance companies, our officers, or agentswith whom we contract, to legal penalties if we fail to comply, and couldrequire changes to our business**

 

Weperform functions for licensed insurance companies and are, therefore, requiredto comply with a complex set of rules and regulations that often vary fromstate to 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.

 

**Our intended expansion of our business, including, inparticular, our agency activities, will subject us to additional regulationswhich may delay or prevent our expansion and harm our business**

 

Overtime, we intend to expand our operations to include new products and servicesand to offer existing and new products in new jurisdictions, which may requireus to comply with additional laws and regulations. If we fail to adequatelycomply with these laws and regulations, our ability to offer some of ourproducts or services in a particular jurisdiction could be delayed or preventedand our business could be harmed. Compliance with these laws and regulationsand those of 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 the security and privacy ofconsumers’ and participating insurance companies’ confidential data, consumersand insurance companies may not use our services and our business may be harmed**

 

Asignificant barrier to electronic commerce and communications is the securetransmission of personally identifiable information of Internet users as wellas other confidential information over public networks. If any compromise orbreach of security were to occur, it could harm our reputation and expose us topossible liability. A party who is able to circumvent our security measurescould misappropriate 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.

 

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**Uncertainty in the marketplace regarding the use of Internetusers’ personal information, or proposed legislation limiting such use, couldreduce demand for our services and result in increased expenses**

 

Concernamong consumers and legislators regarding the use of personal informationgathered from Internet users could create uncertainty in the marketplace. Thiscould reduce demand for our services, increase the cost of doing business as aresult of litigation costs or increased service delivery costs, or otherwiseharms our business. Laws have been enacted at both the federal and state levelsthat limit the uses of personally identifiable information of Internet users gatheredonline or require online services to establish privacy policies Many stateinsurance codes also 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.

 

**System failures could reduce or limit traffic on our websiteand harm our ability to generate revenue**

 

Sincelaunching our online marketplace, we have experienced occasional minor systemfailures or outages that have resulted in the online marketplace being out ofservice for a period ranging from several minutes to three hours while ourtechnicians brought backup systems online. We may experience further systemfailures or outages in the future that could disrupt the operation of ourwebsite and could harm our business. Our revenues depend in large part on thevolume of traffic on our website and, more particularly, on the number ofinsurance quotes generated by our website in response to consumer inquiries.Accordingly, the performance, reliability and availability of our website,quote-generating systems and network infrastructure are critical to ourreputation and our ability to attract a high volume of traffic to our websiteand to attract and retain participating insurance companies. Moreover, webelieve that consumers who have a negative experience with an electroniccommerce website may be reluctant to return to that site. Thus, a significantfailure or outage affecting our systems could result in severe long-term damageto our business.

 

**Our facilities and systems are vulnerable to naturaldisasters and other unexpected losses, and we may not have adequate insuranceto cover such losses**

 

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

 

**We may experience technological problems or serviceinterruptions with individual insurance companies, which could harm the qualityof service on our website**

 

Severalof our participating 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 insurance company to dispute the number of leads itreceived from InsWeb. Further, a computer malfunction could cause an insurancecompany to quote erroneous rates, in which case the insurance company would berequired to 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 our executive officers and otherkey personnel, whose knowledge of our business and the insurance industry andtechnical expertise would be extremely difficult to replace**

 

Ourfuture success is substantially dependent on the continued services andcontinuing contributions of our senior management and other key personnel,particularly Hussein A. Enan, Chairman of our Board, and Mark P. Guthrie, ourPresident and Chief Executive Officer, and the loss of the services of any ofour executive officers or other key employees could harm our business.

 

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Wehave no long-term employment agreements with any of our key personnel, althoughMr. Guthrie is entitled to certain severance benefits should his employment beinvoluntarily terminated. We maintain a $2 million life insurance policy oneach of Mr. Enan and Mr. Guthrie that names us as the beneficiary, but maintainno similar insurance on any of our other key employees. Additionally, InsWebhas granted stock options as incentives to executive officers and newemployees, including Mr. Guthrie, and certain other key personnel. As the valueof these incentives are highly dependent on an increase in the market price ofour common stock, we may be unable to retain such key employees, nor retain orrecruit other officers and key employees in the future.

 

**We may not be able to recruit or retain necessary personnel,which could slow the process of adding new insurance companies to our websiteor otherwise harm our business**

 

Ourfuture success depends on our continuing ability to attract, retain andmotivate highly skilled employees, particularly with respect to technologydevelopment and implementation. The implementation of new insurance companieson our site is a technologically complex and labor-intensive process.Accordingly, any difficulty we face in attracting and retaining talenteddevelopment and implementationpersonnel could slow the process of adding new insurance companies to ouronline marketplace and therefore limit our ability to increase theattractiveness of our services to consumers. If we are not able to attract andretain new personnel, particularly within our technology development andimplementation team, our business will be harmed.

 

**Regulation of the Internet is unsettled, and futureregulations could inhibit the growth of the Internet and otherwise harm ourbusiness**

 

Thelaws governing the Internet remain largely unsettled, even in areas where therehas been some legislative action. Furthermore, the growth and development ofthe market for electronic commerce may prompt the enactment of more stringentconsumer protection laws that may impose additional burdens on companiesconducting business online. For example, many states have adopted laws orregulations relating to unsolicited commercial email or “spam”. These lawstypically prohibit the sending of a commercial email to a recipient unless therecipient has consented in some manner. However, there are inconsistencies inthese state laws that make it difficult to implement national email-basedmarketing campaigns. These laws may inhibit the growth of the Internet as amedium for commerce and comparison insurance shopping, which could, in turn,decrease demand for our services, increase our cost of doing business, orotherwise harm our business. In addition, applicability to the Internet ofexisting laws governing issues including property ownership, copyrights andother intellectual property issues, taxation, libel and personal privacy isuncertain. The vast majority of these laws was adopted prior to the advent ofthe Internet and related technologies and, as a result, do not contemplate oraddress the unique issues of the Internet and related technologies.

 

**Any acquisitions that we undertake could be difficult tointegrate, disrupt our business, dilute stockholder value and harm ouroperating results**

 

Wemay acquire or make investments in complementary businesses, technologies,services or products if appropriate opportunities arise. The process ofintegrating any acquired business, technology, service or product into ourbusiness and operations may result in unforeseen operating difficulties andexpenditures. Integration of an acquired company also may consume much of ourmanagement’s time and attention that would otherwise be available for ongoingdevelopment of our business. Moreover, the anticipated benefits of anyacquisition may not be realized. We may be unable to identify, negotiate orfinance future acquisitions successfully, or to integrate successfully anyacquisitions with our current business. Future acquisitions could result inpotentially dilutive issuances of equity securities or the incurrence of debt,contingent liabilities or amortization expenses related to goodwill and otherintangible assets, any of which could harm our business.

 

**We may be subject to claims for infringement of intellectualproperty, with or without merit, which could be costly to defend or settle**

 

Wemay from time to time be subject to claims of infringement of other parties’proprietary rights or claims that our own trademarks, patents or otherintellectual property rights are invalid. We have been subject to infringementclaims in the ordinary course of business, including claims of allegedinfringement of the patent and trademark rights of third parties by companiesand us with which we have business relationships. Any claims of this type, withor without merit, could be time-consuming to defend, result in costlylitigation, divert management attention and resources or require us to enterinto royalty or license agreements. License agreements may not be available onreasonable terms, if at all, and the assertion or prosecution of anyinfringement claims could significantly harm our business.

 

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**We incorporate third**-**party technologies and services into our online marketplace, and if theproviders of these technologies and services fail in a timely manner todevelop, license or support technology necessary to our services, marketacceptance of our online marketplace could be harmed**

 

Wehave incorporated technology developed by third parties into our onlinemarketplace, and we will continue to incorporate third-party technology in ourfuture products and services. We have limited control over whether or whenthese third-party technologies will be developed or enhanced. If a third-partyfails to timely develop, license or support technology necessary to ourservices, market acceptance of our online marketplace could be harmed.

 

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

 

Thetrading price of our common stock has been highly volatile and may besignificantly affected by factors including actual or anticipated fluctuationsin our operating results, new products or new contracts by us or ourcompetitors, loss of key customers, conditions and trends in the electroniccommerce and insurance industries, changes in financial estimates by securitiesanalysts, general market conditions and other factors. The trading prices ofmany Internet stocks have experienced extreme price and volume fluctuations.These fluctuations often have been unrelated or disproportionate to theoperating performance of these companies. These fluctuations may continue andcould harm our stock price. Any negative change in the public’s perception ofthe prospects of Internet or electronic commerce companies could also depressour stock price regardless of our results.

 

**Delaware law and our charter documents contain provisionsthat could discourage or prevent a potential takeover, even if such atransaction would be beneficial to our stockholders**

 

Provisionsof Delaware 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.

 

 

**ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURE ABOUT MARKET RISK.**

 

Therehave been no material changes to the Company’s disclosures related to certainmarket risks as reported under Part II, Item 7A, “Quantitative and QualitativeDisclosures About Market Risk,” in the Annual Report of InsWeb to the U.S.Securities and Exchange Commission on Form 10-K for the year endedDecember 31, 2002.

 

 

**ITEM4.  CONTROLS AND PROCEDURES**

 

Underthe supervision and with the participation of our management, including ourChief Executive Officer and our Chief Financial Officer, we evaluated theeffectiveness of our disclosure controls and procedures (as defined in ExchangeAct Rule 13a – 15 (e)).  Based upon thisevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat our  disclosure controls andprocedures were adequate as of the end of the period covered by this quarterlyreport.

 

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**PARTII:  OTHER INFORMATION**

 

**ITEM 1.  LEGAL PROCEEDINGS**

 

Asecurities class action lawsuit was filed on December 5, 2001 in theUnited States District Court for the Southern District of New York, (the “Court”)purportedly on behalf of all persons who purchased our common stock fromJuly 22, 1999 through December 6, 2000.  The complaint named as defendants InsWeb, certain current andformer officers and directors, and three investment banking firms that servedas underwriters for InsWeb’s initial public offering in July 1999.  The complaint, as subsequently amended,alleges violations of Sections 11 and 15 of the Securities Act of 1933 andSections 10 and 20 of the Securities Exchange Act of 1934, on the grounds thatthe prospectuses incorporated in the registration statements for the offeringfailed to disclose, among other things, that (i) the underwriters had solicitedand received excessive and undisclosed commissions from certain investors inexchange for which the underwriters allocated to those investors materialportions of the shares of our stock sold in the offerings and (ii) theunderwriters had entered into agreements with customers whereby theunderwriters agreed to allocated shares of the stock sold in the offering tothose customers in exchange for which the customers agreed to purchaseadditional shares of InsWeb stock in the aftermarket at pre-determinedprices.  No specific damages areclaimed.  Similar allegations have beenmade in lawsuits relating to more than 300 other initial public offeringsconducted in 1999 and 2000, all of which have been consolidated for pretrialpurposes.  In October 2002, allclaims against the individual defendants were dismissed without prejudice.  In February 2003, the Court dismissedthe claims in the InsWeb action alleging violations of the Securities ExchangeAct of 1934 but allowed the plaintiffs to proceed with the remainingclaims.  In June 2003, theplaintiffs in all of the cases presented a settlement proposal to all of theissuer defendants.  Under the proposedsettlement, the plaintiffs will dismiss and release all claims againstparticipating defendants in exchange for a contingent payment guaranty by theinsurance companies collectively responsible for insuring the issuers in allthe related cases, and the assignment or surrender to the plaintiffs of certainclaims the issuer defendants may have against the underwriters.  The settlement is subject to acceptance by asubstantial majority of the issuer defendants and execution of a definitivesettlement agreement.  The settlement isalso subject to approval of the Court, which cannot be assured.  If the settlement is not accepted by therequisite number of defendants or if it is not approved by the Court, InsWebintends to defend the lawsuit vigorously. However, the litigation is in the preliminary stage, and we cannotpredict its outcome.  The litigationprocess is inherently uncertain.  Anunfavorable outcome could have a material adverse effect on InsWeb’s financialcondition, results of operations or cash flows.

 

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

 

(a)                                  Exhibits

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

 

(b)                                 Reportson Form 8-K:

 

OnJuly 17, 2003, we filed a report on Form 8-K, under Item 12, announcingInsWeb Corporation’s financial results for the quarter ended June 30,2003.

 

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**SIGNATURE**

 

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

 
| Dated: November 12, 2003 | **INSWEB CORPORATION**  |
|-------------------------------|-------------------------|
|                          | **(Registrant)**        |
|                          |                    |
|                          |                    |
|                          | /s/ WILLIAM D. GRIFFIN  |   |
|                          | William D.  Griffin     |
|                          | Chief Financial Officer |

 

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