companies to stop amortizing goodwill and certain other intangible assets with an indefinite useful life. Instead, goodwill and other intangible assets deemed to have an indefinite useful life will be subject to an annual review for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives (but with no maximum life).
Upon the adoption of SFAS 142 in the first quarter of 2002, the Company stopped the amortization of goodwill and certain other intangible assets with an indefinite life, and completed the required transitional fair value impairment test on its goodwill and certain other intangible assets, the results of which had no impact on the Company’s financial statements. Based upon annual impairment tests as of September 30, 2003 and 2002, no impairment was indicated for the Company’s goodwill and intangible assets with indefinite lives.
Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, short-term investments, and accounts receivable. The Company maintains all its cash and cash equivalents in four financial institutions. The Company performs periodic evaluations of the relative credit standing of these institutions. The Company’s customers are primarily concentrated in the United States. The Company performs ongoing credit evaluations, generally does not require collateral, and establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of customers, historical trends and other information. To date, such losses have been within management’s expectations.
On December 5, 2001, a class action lawsuit alleging violations of the federal securities laws was filed in the United States District Court for the Southern District of New York naming as defendants TheStreet.com, certain of its former officers and directors and a current director, and certain underwriters of the Company’s initial public offering (The Goldman Sachs Group, Inc., Chase H&Q, Thomas Weisel Partners LLC, FleetBoston Robertson Stephens, and Merrill Lynch Pierce Fenner & Smith, Inc.). Plaintiffs allege that the underwriters of TheStreet.com’s initial public offering violated the securities laws by failing to disclose certain alleged compensation arrangements (such as undisclosed commissions or stock stabilization practices) in the offering’s registration statement. Similar suits were filed against over 300 other issuers that had initial public offerings between 1998 and December 2001, and they have all been consolidated into a single action. On June 25, 2003, a committee of the Company’s Board of Directors conditionally approved a proposed partial settlement of the lawsuit in which the issuers would settle with the plaintiffs. The proposed settlement, if approved by the court, would provide for, among other things, a release of the Company and its individual defendants from any liability for their allegedly wrongful conduct, in return for the assignment by the Company to the plaintiffs of certain potential claims the Company may have against its underwriters. The financial portion of the proposed settlement is expected to be borne by the Company’s insurance carriers. However, in the event the settlement is not approved by the court and the Company or any of its individual defendants remains a defendant in the lawsuit, any unfavorable outcome of this litigation could have an adverse impact on the Company’s business, financial condition, results of operations, and cash flows.
To use administrative and other overhead resources efficiently, certain functions necessary to the operation of the Company’s securities research and brokerage segment, which is operated by IRG, including administrative, financial, legal and technology functions, are handled by the Company’s electronic publishing segment, which is operated by TheStreet.com. Expenses related to the performance of these functions are allocated to the securities research and brokerage segment based upon a services agreement between the two companies. Costs allocated to the securities research and brokerage segment totaled $845,190 for the year ended December 31, 2003. Given the nascent stage of development of the Company’s equity research subsidiary, which was first created in late October 2002,
for the year ended December 31, 2002, the Company allocated resources and assessed performance on a single-segment basis.
Comparison of Fiscal Years Ended December 31, 2003 and 2002
Net Revenue
| | For the Year Ended December 31, | | Change | |
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| | 2003 | | 2002 | | Amount | | Percent | |
Net revenue: | | | | | | | | | | | | | |
Subscription | | $ | 18,502,665 | | $ | 14,908,512 | | $ | 3,594,153 | | 24% | | |
Advertising | | | 5,602,483 | | | 4,371,584 | | | 1,230,899 | | 28% | | |
Commission | | | 805,075 | | | — | | | 805,075 | | N/A | | |
Other | | | 1,188,720 | | | 1,566,590 | | | (377,870 | ) | (24% | ) | |
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Total net revenue | | $ | 26,098,943 | | $ | 20,846,686 | | $ | 5,252,257 | | 25% | | |
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Subscription. Subscription revenue is derived from annual, semi-annual, quarterly and monthly subscriptions. All subscription revenue is attributable to the Company’s electronic publishing segment.
The increase in subscription revenue is primarily the result of increased subscribers associated with Action Alerts PLUS and Street Insight (formerly known as RealMoney Pro), as well as increased revenue from several subscription-based products launched during the year ended December 31, 2002, such as The Trading Reports, launched during October 2002, TheStreet.com Value Investor (formerly known as The Turnaround Report), launched during April 2002, and The Telecom Connection, launched during March 2002, the sum of which totals $4,178,970, partially offset by a decrease in revenue associated with The Chartman’s Top Stocks and RealMoney.com, the sum of which totals $536,839. For the year ended December 31, 2003, approximately 65% of the Company’s net subscription revenue was derived from annual subscriptions, as compared to approximately 56% for the year ended December 31, 2002. This increase in the proportion of annual subscription revenue is primarily attributable to the Company’s efforts to convert monthly subscribers into annual subscribers.
The Company calculates net subscription revenue by deducting refunds and cancellation chargebacks from gross revenue. Refunds and cancellation chargebacks during the year ended December 31, 2003, totaled less than 1% of gross subscription revenue for the period, as compared to approximately 3% during the year ended December 31, 2002.
Advertising. Advertising revenue is derived from internet sponsorship arrangements and from the delivery of banner and e-mail advertisements, as well as from conference sponsorships. All advertising revenue is attributable to the Company’s electronic publishing segment.
The increase in advertising revenue is primarily the result of improved conditions in the online advertising market, increased conference sponsorships, and improvements in the Company’s advertising sales infrastructure and selling techniques. During the year ended December 31, 2003, the Company achieved a 41% increase in revenue per 1,000 revenue generating page views, when compared to the year ended December 31, 2002. This increase was partially offset by a decrease of 14% in total revenue generating page views.
For the year ended December 31, 2003, 75% of the Company’s advertising revenue, excluding conference sponsorship revenue, was derived from sponsorship contracts, as compared to 55% for the year ended December 31, 2002. The number of advertisers, excluding conference sponsorships, for the year ended December 31, 2003 was 102, as compared to 100 for the year ended December 31, 2002.
For the year ended December 31, 2003, the Company’s top five advertisers accounted for approximately 38% of its total advertising revenue, excluding conference sponsorship revenue, as compared to approximately 46% for the year ended December 31, 2002.
Commission. Commission revenue arises from trades placed through the Company’s broker-dealer subsidiary by its institutional clients, allowing it to collect commissions on such trades in payment for both the equity research it provides to them, as well as for the institutional products produced by the
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Company’s electronic publishing segment. The Company’s broker-dealer subsidiary began receiving commission revenue in May, 2003. All commission revenue is attributable to the Company’s securities research and brokerage segment.
Other. Other revenue consists primarily of syndication revenue, revenue related to James J. Cramer’s daily radio program, RealMoney with Jim Cramer, conference attendee revenue and reprint revenue. All of the other revenue is attributable to the Company’s electronic publishing segment.
The decrease in other revenue is primarily the result of the absence of a one-time $150,000 payment received from the WTC Recovery Grant Program during the year ended December 31, 2002 as compensation for revenue lost as a result of the September 11th attacks, the absence in the year ended December 31, 2003 of royalties earned from the Company’s investing book which totaled $136,625 for the year ended December 31, 2002, as well as reduced revenue related to conference attendees ($119,640) and syndication agreements ($94,500). This was partially offset by $177,913 of additional revenue related to Mr. Cramer’s radio program.
Operating Expense
| | For the Year Ended December 31, | | Change | |
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| | 2003 | | 2002 | | Amount | | Percent | |
Operating expense: | | | | | | | | | | | | | |
Cost of services | | $ | 13,491,478 | | $ | 11,765,667 | | $ | 1,725,811 | | 15% | | |
Sales and marketing | | | 7,067,311 | | | 6,319,406 | | | 747,905 | | 12% | | |
General and administrative | | | 7,341,771 | | | 7,537,857 | | | (196,086 | ) | (3% | ) | |
Depreciation and amortization | | | 2,285,320 | | | 4,030,531 | | | (1,745,211 | ) | (43% | ) | |
Noncash compensation | | | 322,897 | | | 998,473 | | | (675,576 | ) | (68% | ) | |
Restructuring | | | — | | | (77,468 | ) | | 77,468 | | (100% | ) | |
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Total operating expense | | $ | 30,508,777 | | $ | 30,574,466 | | $ | (65,689 | ) | (0% | ) | |
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Cost of services. Cost of services for the Company’s electronic publishing segment includes compensation and benefits for its editorial, technology and product development staffs, as well as fees paid to outside contributors, licensing fees payable to content providers, direct costs related to conference hosting, expenses for contract programmers and developers, communication lines and other technology costs. Cost of services for the Company’s electronic publishing segment decreased to $11,421,045 for the year ended December 31, 2003, as compared to $11,701,707 for the year ended December 31, 2002. This decrease is primarily the result of lower content licensing fees, consulting costs and data center hosting fees, the sum of which totals $535,065, partially offset by higher fees paid to outside contributors and computer related service costs, the sum of which totals $227,441.
Cost of services for the Company’s securities research and brokerage segment includes compensation and benefits for its research and broker staffs, as well as licensing fees payable to content providers, communication lines and other technology costs. Cost of services for the Company’s securities research and brokerage segment totaled $2,070,433 for the year ended December 31, 2003, inclusive of costs allocated from the Company’s electronic publishing segment totaling $257,535, as compared to $63,960 for the year ended December 31, 2002.
Sales and marketing. Sales and marketing expense for the Company’s electronic publishing segment consists primarily of advertising and promotion, promotional materials, content distribution fees, and compensation expense for its direct sales force and customer service and conference departments. Sales and marketing expense for the Company’s electronic publishing segment decreased to $6,262,667 for the year ended December 31, 2003, as compared to $6,319,406 for the year ended December 31, 2002. This decrease is primarily the result of reduced advertising, content distribution, and research expenses, the sum of which totals $382,410, partially offset by increased salaries and commissions attributable to the build-up of the segment’s direct sales force, the sum of which totals $360,036.
Sales and marketing expense for the Company’s securities research and brokerage segment consists primarily of compensation expense for its direct sales force, as well as marketing and promotion costs.
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Sales and marketing expense for the Company’s securities research and brokerage segment totaled $804,644 for the year ended December 31, 2003, inclusive of costs allocated from the Company’s electronic publishing segment totaling $8,672. No sales and marketing expense was recorded for the year ended December 31, 2002.
General and administrative. General and administrative expense for the Company’s electronic publishing segment consists primarily of compensation for general management, finance and administrative personnel, occupancy costs, professional fees, equipment rental and other office expenses. General and administrative expense for the Company’s electronic publishing segment decreased to $6,549,217 for the year ended December 31, 2003, as compared to $7,468,735 for the year ended December 31, 2002. This decrease is primarily the result of reductions in compensation and related costs and telephone expenses, the sum of which totals $992,883, partially offset by increased sales and use taxes, professional fees, and insurance costs, the sum of which totals $277,177.
General and administrative expense for the Company’s securities research and brokerage segment consists primarily of occupancy costs, professional fees, insurance costs and other office expenses. General and administrative expense for the Company’s securities research and brokerage segment totaled $792,554 for the year ended December 31, 2003, inclusive of costs allocated from the Company’s electronic publishing segment totaling $468,156, as compared to $69,122 for the year ended December 31, 2002.
Depreciation and amortization. Depreciation and amortization expense for the Company’s electronic publishing segment decreased to $2,175,629 for the year ended December 31, 2003, as compared to $4,030,531 for the year ended December 31, 2002. The decrease is attributable to fully depreciated assets and reduced capital expenditures.
Depreciation and amortization expense for the Company’s securities research and brokerage segment totaled $109,691 for the year ended December 31, 2003, all of which resulted from costs allocated from the Company’s electronic publishing segment. No depreciation and amortization expense was recorded for the year ended December 31, 2002.
Noncash compensation. Noncash compensation expense for the Company’s electronic publishing segment decreased to $321,082 for the year ended December 31, 2003, as compared to $998,473 for the year ended December 31, 2002.
Noncash compensation expense for the Company’s securities research and brokerage segment totaled $1,815 for the year ended December 31, 2003, all of which resulted from costs allocated from the Company’s electronic publishing segment. No noncash compensation expense was recorded for the year ended December 31, 2002.
In 1998 and the first three months of 1999, the Company granted options to purchase shares of its common stock at exercise prices that were less than the fair market value of the underlying shares of common stock on the dates of grant. This resulted in deferred compensation expense incurred over the period that these options vested, the latest of which occurred in March 2003. The Company recorded noncash compensation expense of $190,955 during the year ended December 31, 2003 for these below fair market value options, as compared to $845,848 during the year ended December 31, 2002.
On January 15, 2002, the Company issued options to purchase a total of 50,000 shares of common stock to a non-employee in connection with his outside contributor agreement with the Company. The options vested immediately and have an exercise period of the lesser of five years, or 90 days after the termination of his services. The value of these options was $72,043, which was amortized over the two-year period of his service to the Company. For the year ended December 31, 2003, the Company recorded noncash compensation expense of $36,021 for these options, as compared to $36,022 for the year ended December 31, 2002. Because the two-year period of his service to the Company has been completed, there is no remaining noncash compensation expense to be recognized in the future.
On January 15, 2002, the Company issued options to purchase a total of 100,000 shares of common stock to a non-employee in connection with his outside contributor agreement with the Company. One-half of these options vested immediately and the other half vested on January 15, 2003. These options have an exercise period of the lesser of five years, or 90 days after the termination of his services. The value of these options at January 15, 2003 was $195,124, which was amortized over the two-year
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period of his service to the Company. For the year ended December 31, 2003, the Company recorded noncash compensation expense of $95,921 for these options, as compared to $99,203 for the year ended December 31, 2002. Because the two-year period of his service to the Company has been completed, there is no remaining noncash compensation expense to be recognized in the future.
During the year ended December 31, 2002, the Company recognized $17,400 of noncash compensation expense related to the accelerated vesting of a terminated employee’s stock options.
Restructuring. During the year ended December 31, 2000, the Company recorded restructuring expense totaling $17,575,522 to align its cost structure with changing market conditions and decreased dependence on the advertising market, to create a more flexible and efficient organization. For the year ended December 31, 2002, the Company’s electronic publishing segment recorded a restructuring gain which primarily represented adjustments to the Company’s original estimates related to non-performing assets and the reduction of its lease obligation.
Net Interest Income
| | For the Year Ended
December 31, | | Change | |
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| | 2003 | | 2002 | | Amount | | Percent | |
Net interest income | | $ | 370,336 | | $ | 647,276 | | $ | (276,940 | ) | (43% | ) |
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Net interest income for the Company’s electronic publishing segment decreased to $360,550 for the year ended December 31, 2003, as compared to $645,522 for the year ended December 31, 2002. This decrease is the result of lower interest rates and reduced cash and cash equivalents, restricted cash, and short-term investments balances.
Net interest income for the Company’s securities research and brokerage segment totaled $9,786 for the year ended December 31, 2003, inclusive of net interest income allocated from the Company’s electronic publishing segment totaling $679, as compared to $1,754 for the year ended December 31, 2002.
Gain on Sale of Investment
| | For the Year Ended
December 31, | | Change | |
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| | 2003 | | 2002 | | Amount | | Percent | |
Gain on sale of investment | | $ | — | | $ | 184,667 | | $ | (184,667 | ) | (100% | ) |
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In July 2002, the Company sold a U.S. Treasury Note (the “Treasury Note”) that bore interest at the rate of 3% per annum and had a maturity date of February 29, 2004. Management’s original intention was to hold the Treasury Note until maturity. However, because of changes in market conditions, the Company revised its plan and sold the Treasury Note, realizing a gain on the sale.
Gain on Disposal of Discontinued Operations
| | For the Year Ended
December 31, | | Change | |
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| | 2003 | | 2002 | | Amount | | Percent | |
Gain on Disposal of Discontinued Operations | | $ | — | | $ | 209,929 | | $ | (209,929 | ) | (100% | ) |
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In November 2000, the Company’s Board of Directors decided to discontinue and liquidate the Company’s U.K. operations. On April 30, 2002, the final meeting of the members was held to bring the liquidation to a close. A final return in the liquidation was filed on July 25, 2002 in order to formally dissolve the U.K. operations, and the dissolution became effective on October 25, 2002. As of December 31, 2002, the liquidation process has been completed, and there are no remaining assets or liabilities related to the discontinued operations.
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For the year ended December 31, 2002, the Company’s electronic publishing segment recorded a gain on disposal of discontinued operations. The gain primarily represented adjustments to the Company’s original estimate related to costs to be incurred in completing the liquidation process for the Company’s U.K. operations.
Comparison of Fiscal Years Ended December 31, 2002 and 2001
During the year ended December 31, 2002, the chief operating decision maker allocated resources and assessed performance on a single-segment basis, as IRG had not yet commenced full operations. Therefore, the following discussion of operating results is presented on a consolidated basis.
Net Revenue
Subscription. Subscription revenue increased to $14,908,512 for the year ended December 31, 2002, as compared to $9,073,369 for the year ended December 31, 2001. This increase was primarily the result of revenue from several new subscription-based products, such as Street Insight (formerly known as RealMoney Pro), The Turnaround Report (now known as TheStreet.com Value Investor) and The Daily Swing Trade, as well as increased revenue associated with Action Alerts PLUS, TheStreetTM View, and The Chartman’s Top Stocks, which had launched during the year ended December 31, 2001. For the year ended December 31, 2002, approximately 56% of the Company’s net subscription revenue was derived from annual subscriptions, as compared to 71% for the year ended December 31, 2001. This decrease in the proportion of annual subscription revenue is partially attributable to the Company’s initial need to outsource fulfillment of new email subscription products to a third party and that third party’s technological inability to provide annual subscriptions. The Company has since internally developed the requisite technological infrastructure for its subscription products fulfilled via email. The Company migrated these monthly subscribers to its own commerce system in March 2002 and, by the end of the year, had successfully converted many of these monthly subscribers into annual subscribers. Also contributing to the decrease in the proportion of annual versus monthly net subscription revenue was the expiration of two-year grandfathered subscriptions to RealMoney that had been issued at a 50% discount to current price points and the expiration of a number of discounted annual RealMoney bulk subscription deals.
The Company calculates net subscription revenue by deducting refunds and cancellation chargebacks from gross revenues. Refunds and cancellation chargebacks issued during the year ended December 31, 2002, totaled approximately 3% of gross subscription revenues for the year.
Advertising. Advertising revenue decreased to $4,371,584 for the year ended December 31, 2002, as compared to $5,022,916 for the year ended December 31, 2001. This was attributable to a decrease of $1,233,395 in the first quarter 2002 when compared with the first quarter 2001. During this period, the Company’s advertising sales group was being revamped to better address the market needs. A new Advertising Sales Director was hired in February 2002. In each of the subsequent three quarters of 2002, advertising revenue increased when compared to the corresponding periods in 2001. Additionally, contributing to the annual reduction in advertising revenue was a decrease of 24% in revenue generating page views for the year ended December 31, 2002, when compared to the year ended December 31, 2001. The reduction in available revenue generating page views, which was due in part to poor general market conditions, was partially offset by the Company’s ability to more effectively monetize the page views by achieving a 21% increase in the revenue generated by these page views.
For the year ended December 31, 2002, 55% of the Company’s advertising revenue, excluding conference sponsorship revenue, was derived from sponsorship contracts, as compared to 35% for the year ended December 31, 2001. The number of the Company’s advertisers, excluding conference sponsorships, for the year ended December 31, 2002 was 100, as compared to 134 for the year ended December 31, 2001.
For the year ended December 31, 2002, the Company’s top five advertisers, excluding conference sponsorship revenues, accounted for approximately 46% of its total advertising revenue, as compared to approximately 34% for the year ended December 31, 2001.
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Other. Other revenue increased to $1,566,590 for the year ended December 31, 2002, as compared to $1,162,091 for the year ended December 31, 2001. This increase was primarily the result of revenue from James J. Cramer’s daily radio program, RealMoney with Jim Cramer, $150,000 that the Company received from the World Trade Center Business Recovery Grant Program in 2002 as compensation for revenue lost as a result of the September 11th attacks, and higher conference attendee revenue, partially offset by the elimination of revenue associated with barter advertising arrangements during the year ended December 31, 2002, which, by contrast, totaled $200,000 during the year ended December 31, 2001. Barter advertising transactions in 2001 were recognized at the fair value as determined by the comparable advertising market rates at the time of placement.
Operating Expense
Cost of services. Cost of services decreased to $11,765,667 for the year ended December 31, 2002, as compared to $16,440,920 for the year ended December 31, 2001. The decrease in cost of services was primarily the result of reduced compensation and related expenses resulting from a lower average headcount, lower consulting fees during the year ended December 31, 2002 as compared to those that had been expended during the year ended December 31, 2001 as the Company re-developed its commerce system, decreased costs associated with content licensing fees, reduced hosting fees as a result of renegotiated and/or terminated hosting agreements, lower maintenance and internet access fees partially offset by increased outside contributor expenses.
Sales and marketing. Sales and marketing expenses decreased to $6,319,406 for the year ended December 31, 2002, as compared to $10,804,419, for the year ended December 31, 2001. This decrease was primarily the result of lower distribution and advertisement-serving expenses attributable to renegotiated and expired agreements, reduced advertising and promotion expenses, as well as the elimination of costs associated with barter advertising arrangements during the year ended December 31, 2002, which, by contrast, totaled $200,000 during the year ended December 31, 2001. This decrease was partially offset by increased commission expense attributable to the build up of the Company’s direct sales force, as well as higher credit card processing fees attributable to increased amounts of cash receipts from the sale of subscriptions.
General and administrative. General and administrative expenses decreased to $7,537,857 for the year ended December 31, 2002, as compared to $9,173,354 for the year ended December 31, 2001. This decrease was primarily the result of reductions in equipment lease ($1,059,666), occupancy ($753,037), professional ($571,035), bad debt ($498,377), and franchise tax ($288,836) expenses. Such decreases were partially offset by increased compensation and related expenses ($959,958) and directors and officers insurance costs ($225,047).
Depreciation and amortization. Depreciation and amortization expense decreased to $4,030,531 for the year ended December 31, 2002, as compared to $5,359,431 for the year ended December 31, 2001. This decrease was primarily the result of the elimination of goodwill amortization ($1,026,380) in accordance with the Company’s adoption of the Financial Accounting Standards Board Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets,” together with reduced depreciation and amortization expenses attributable to lower capital expenditures and fully depreciated assets.
Noncash compensation. Total noncash compensation expense decreased to $998,473 for the year ended December 31, 2002, as compared to $1,063,838 for the year ended December 31, 2001. This decrease was primarily the result of the absence in the year ended December 31, 2002 of costs incurred in the year ended December 31, 2001 related to shares of common stock issued to James J. Cramer in connection with his employment agreement, partially offset by additional charges related to stock options issued to a non-employee on January 15, 2002, as more fully described below.
In 1998 and the first three months of 1999, the Company granted options to purchase shares of its common stock at exercise prices that were less than the fair market value of the underlying shares of common stock on the dates of grant. This resulted in noncash compensation expense incurred over the period that these specific options vest, the latest of which occurred in March 2003. The Company recorded noncash compensation expense of $845,848 during the year ended December 31, 2002 for
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these less than fair market value options, as compared to $776,338 during the year ended December 31, 2001.
As mentioned above, on January 15, 2002, the Company issued options to purchase a total of 50,000 shares of common stock to a non-employee in connection with his outside contributor agreement with the Company. The options vested immediately and have an exercise period of the lesser of five years, or 90 days after the termination of his services. The value of the options was $72,043, which was amortized over the two-year period of his service to the Company. For the year ended December 31, 2002, the Company recorded noncash compensation expense of $36,022 for these options.
As mentioned above, on January 15, 2002, the Company issued options to purchase a total of 100,000 shares of common stock to a non-employee in connection with his outside contributor agreement with the Company. One-half of the options vested immediately and the other half vested on January 15, 2003. The options have an exercise period of the lesser of five years, or 90 days after the termination of his services. The value of the options was $198,407 at December 31, 2002. For the year ended December 31, 2002, the Company recorded noncash compensation expense of $99,203 for these options.
During the year ended December 31, 2002, the Company recognized $17,400 of noncash compensation expense related to the accelerated vesting of a terminated employee’s stock options.
During the year ended December 31, 2001, the Company issued 100,000 shares of common stock to James J. Cramer in connection with a previously announced award of restricted stock in lieu of his 2001 salary under his employment agreement with the Company. This resulted in $287,500 of noncash compensation expense for the year.
Restructuring. During the year ended December 31, 2000, the Company recorded restructuring expenses totaling $17,575,522 to align its cost structure with changing market conditions and decreased dependence on the advertising market, to create a more flexible and efficient organization. For the year ended December 31, 2002, the Company recorded a gain of $77,468, which primarily represented adjustments to the Company’s original estimates related to non-performing assets and the reduction of its lease obligation. For the year ended December 31, 2001, the Company recorded a gain of $3,336,931 which primarily represented adjustments to the Company’s original estimates related to negotiated settlements for less than the amounts initially estimated, and the reduction of its lease obligation and non-performing assets.
Settlement charge. No settlement charge was recorded for the year ended December 31, 2002. For the year ended December 31, 2001, the Company recognized a settlement charge of $2,535,660 in connection with the termination of a strategic alliance agreement with Go2Net, Inc., now a subsidiary of Infospace, Inc. The companies agreed to an early termination of the agreement, which had obligated the Company to pay Go2Net a total of $7,500,000 over a three-year period beginning in August 2000, when the agreement was signed in connection with a $7,452,257 investment in the Company by Go2Net and Vulcan Ventures.
Asset impairment. No asset impairment was recorded for the year ended December 31, 2002. For the year ended December 31, 2001, the Company recognized an impairment of $4,054,354 related to its investment in BusinessNet Online Ltd., a joint venture with Israeli newspaper publisher the Ha’aretz Group Ltd.
Net Interest Income
For the year ended December 31, 2002, net interest income was $647,276, as compared to $2,178,791 for the year ended December 31, 2001. This decrease was the result of significantly lower interest rates and reduced cash and cash equivalents, restricted cash, and short-term investments balances.
Gain on Sale of Investment
For the year ended December 31, 2002, gain on sale of investment was $184,667 for the reasons described above. No gain was recorded for the year ended December 31, 2001.
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Discontinued Operations
In November 2000, the Company’s Board of Directors decided to discontinue and liquidate the Company’s U.K. operations. On April 30, 2002, the final meeting of the members was held to bring the liquidation to a close. A final return in the liquidation was filed on July 25, 2002 in order to formally dissolve the U.K. operations, and the dissolution became effective on October 25, 2002. As of December 31, 2002, the liquidation process has been completed, and there are no remaining assets or liabilities related to the discontinued operations.
For the year ended December 31, 2002, the Company recorded a gain on disposal of discontinued operations of $209,929, as compared to a gain of $400,000 for the year ended December 31, 2001. The gains primarily represented adjustments to the Company’s original estimate related to costs to be incurred in completing the liquidation process for the Company’s U.K. operations.
Liquidity and Capital Resources
The Company invests in money market funds and other short-term, investment grade instruments that are highly liquid, of high-quality, and can have maturities of up to two years, with the intent that such funds can easily be made available for operating purposes. As of December 31, 2003, the Company’s cash and cash equivalents, current and noncurrent restricted cash, and short-term investments amounted to $28,458,304, representing 77% of total assets.
Cash generated from operations was insufficient to cover expenses during the year ended December 31, 2003. Net cash used in operating activities of $539,942 for the year ended December 31, 2003 was primarily a function of a net loss of $4,039,498, a decrease in accounts payable and accrued expenses, and increases in prepaid expenses and other current assets and other receivables. This was partially offset by noncash charges, an increase in deferred revenue, and decreases in other assets, receivables from related parties, and accounts receivable.
Net cash provided by investing activities of $253,123 for the year ended December 31, 2003 consisted of net sales of short-term investments, partially offset by capital expenditures. Capital expenditures generally consisted of purchases of computer software and hardware, as well as purchases of telephone equipment, office furniture and fixtures and leasehold improvements related to the office space now occupied by IRG.
Net cash provided by financing activities of $969,201 for the year ended December 31, 2003 consisted primarily of the proceeds from the exercise of stock options and a decrease in restricted cash, partially offset by a decrease in note payable.
The Company has a total of $2,200,000 of cash invested in certificates of deposit and money market investments that serves as collateral for outstanding letters of credit, and is therefore restricted. The letters of credit serve as security deposits for operating leases. Of this total, the Company anticipates that $300,000 will become unrestricted within the next 12 months, and is therefore classified as a current asset on the Consolidated Balance Sheet. The Company anticipates that the remaining $1,900,000 of restricted cash will become unrestricted at various times through 2009.
The Company believes that its current cash and cash equivalents and short-term investments will be sufficient to meet the Company’s anticipated cash needs for at least the next 12 months. The Company is committed to expenditures in an aggregate amount of approximately $3.4 million through December 31, 2004, in respect of the contractual obligations set forth in the table below under “Commitments and Contingencies.” Thereafter, if cash generated from operations is insufficient to satisfy the Company’s liquidity requirements, the Company may need to raise additional funds through public or private financings, strategic relationships or other arrangements. There can be no assurance that additional funding, if needed, will be available on terms attractive to the Company, or at all. Strategic relationships, if necessary to raise additional funds, may require the Company to provide rights to certain of its content. The failure to raise capital when needed could materially adversely affect the Company’s business, results of operations and financial condition. If additional funds are raised through the issuance of equity securities, the percentage ownership of the Company’s then-current stockholders would be reduced. Furthermore, these equity securities might have rights, preferences or privileges senior to those of the Company’s common stock.
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Treasury Stock
As discussed in Note 13 to the consolidated financial statements, in December 2000 the Company’s Board of Directors authorized the repurchase of up to $10 million worth of the Company’s common stock. To date, the Company has purchased 5,422,100 shares of common stock at an aggregate cost of $7,215,410. In February 2004, the Company’s Board of Directors approved the resumption of its stock repurchase program under new price and volume parameters.
Commitments and Contingencies
The Company is committed under operating leases, principally for office space, furniture and fixtures, and equipment. Certain leases are subject to rent reviews and require payment of expenses under escalation clauses. Rent and equipment rental expenses were $1,695,858, $1,579,152 and $3,274,773 for the years ended December 31, 2003, 2002 and 2001, respectively. Additionally, the Company has employment agreements with certain of its employees and outside contributors, whose future minimum payments are dependent on the future fulfillment of their services thereunder. Total future minimum payments are as follows:
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Contractual obligations: | | Total | | 2004 | | 2005 | | 2006 | | 2007 | | 2008 | | After
2008 | |
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Operating leases | | $ | 6,874,821 | | $ | 1,331,063 | | $ | 1,354,224 | | $ | 1,339,419 | | $ | 1,130,302 | | $ | 941,130 | | $ | 778,683 | |
Employment agreements | | | 2,109,866 | | | 1,428,033 | | | 681,833 | | | — | | | — | | | — | | | — | |
Outside contributor agreements | | | 602,750 | | | 586,083 | | | 16,667 | | | — | | | — | | | — | | | — | |
Note payable | | | 311,164 | | | 89,895 | | | 96,192 | | | 102,931 | | | 22,146 | | | — | | | — | |
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Total contractual cash obligations | | $ | 9,898,601 | | $ | 3,435,074 | | $ | 2,148,916 | | $ | 1,442,350 | | $ | 1,152,448 | | $ | 941,130 | | $ | 778,683 | |
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company believes that its market risk exposures are immaterial as the Company does not have instruments for trading purposes, and reasonable possible near-term changes in market rates or prices will not result in material near-term losses in earnings, material changes in fair values or cash flows for all instruments.
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RISK FACTORS
You should carefully consider the following material risks facing the Company. If any of the following risks occur, the Company’s business, results of operations or financial condition could be materially adversely affected. The Company may also face other risks that are not discussed in the following description of its risk factors either because it is unaware of such risks or because it presently believes that such risks are immaterial. The Company cannot assure you that any of these other risks, if they were to occur, would not materially adversely affect the Company’s business, results of operations or financial condition.
The Company Has a History of Losses and May Incur Further Losses
Although the Company earned net income of $154,000, or $0.01 per share, for the fourth quarter of 2003, the Company had previously incurred operating losses in each fiscal quarter since its formation, and may again experience operating losses in the future. As of December 31, 2003, the Company had an accumulated deficit of $151.6 million. The Company will need to generate significant revenue in order to cover the significant operating expenses it expects to incur during 2004. Accordingly, the Company can make no assurances that it will be able to achieve profitability, under accounting principles generally accepted in the United States, on a quarterly or annual basis in the future.
The Company’s Quarterly Financial Results May Fluctuate and its Future Revenue Is Difficult to Forecast
The Company’s quarterly operating results may fluctuate significantly in the future as a result of a variety of factors, many of which are outside the Company’s control, including:
| • | the level of interest and investment in the stock market by both individual and institutional investors; |
| • | demand for advertising on the Company’s web sites, which is affected by seasonal weakness in the first and third quarters, advertising budget cycles of our customers, and the demand for advertising on the internet generally; |
| • | subscription price reductions attributable to decreased demand or increased competition; |
| • | new products or services introduced by the Company’s competitors; |
| • | content distribution fees or other costs incurred by the Company; |
| • | costs associated with system downtime affecting the internet generally or the Company’s web sites in particular; and |
| • | general economic and market conditions. |
Although we generated net income in the fourth quarter of 2003, you should not rely on the results for that period as an indication of future performance. In particular, given the above factors, we may not generate net income for fiscal 2004 or any quarter therein. The Company forecasts its current and future expense levels based on expected revenue and the Company’s operating plans. Because of the above factors, the Company’s operating results may be below the expectations of public market analysts and investors in some future quarters. In such an event, the price of the Company’s common stock is likely to decline.
The Company May Have Difficulty Increasing its Subscription Revenue, a Significant Portion of Which is Generated by James J. Cramer and Other Key Writers
The Company continues to seek to increase its subscription revenue, which represents the single most significant portion of the Company’s total revenues, approximately 71% for the year ended December 31, 2003 and 72% for the year ended December 31, 2002. The Company believes it has significantly enhanced its subscription offerings to differentiate them from other financial and investing products available in the marketplace, having introduced, in recent years, publications containing a broad variety of features from a multitude of contributors, as well as more narrowly targeted, trading- oriented newsletters, some of which are the work of an individual writer. While the Company believes
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that the success of its publications is dependent in part upon its brands, some of these publications, particularly the newsletters, nonetheless reflect the talents, efforts, personalities and reputations of their respective writers. As a result, the services of these key writers, particularly Company co-founder James J. Cramer, form an essential element of our subscription revenues. Accordingly, the Company seeks to compensate and provide incentives for these key writers through competitive salaries, stock ownership and bonus plans, and has entered into employment agreements with several of them. However, the Company can make no assurances that these programs will enable it to retain key writers or, should the Company lose the services of one or more of its key writers to death, disability, loss of reputation or other reason, to attract new writers acceptable to readers of the Company’s publications. The loss of services of one or more of the Company’s key writers could have a material adverse affect on the Company’s business, results of operations and financial condition.
The Loss of the Services of Other Key Employees Could Affect the Company’s Business
The Company’s continued success also depends upon the retention of other key employees, including executives to operate its business, technology personnel to run its publishing, commerce, communications and other systems, and salespersons to sell its subscription products and its advertising space. In addition, the success of the Company’s proprietary equity research business, operated through its IRG subsidiary, depends on its executives, as well as research analysts and traders. Several of the Company’s key employees are bound by employment or non-competition agreements. In addition, the Company seeks to compensate its key executives, as well as other employees, through competitive salaries, stock ownership and bonus plans, but the Company can make no assurances that these programs will allow it to retain key employees or hire new employees. The loss of one or more of the Company’s key employees, or the Company’s inability to attract experienced and qualified replacements, could materially adversely affect the Company’s business, results of operations and financial condition.
The Company Is Subject to Risks and Uncertainties Associated With its Proprietary Equity Research Business, Which Is in the Early Stages of Development
In October 2002, the Company formed IRG as a wholly-owned subsidiary to operate its proprietary equity research business. IRG began coverage of equities in the second quarter of 2003, when it became a registered broker-dealer. Since its formation, IRG has incurred start-up costs and expenses, but as of December 31, 2003 has not generated significant revenue. As it develops and operates this new business, the Company will continue to encounter risks, uncertainties, expenses and difficulties relating to staffing, regulatory compliance, brand development, market acceptance of its products, trading errors, and the strength of the market for equity securities and equity research overall, among others. The limited operating history of IRG makes it difficult to evaluate the business and its prospects or to accurately predict future revenue or results of operations for the business. Accordingly, the prospects for this business should be considered in light of the risks, uncertainties, expenses and difficulties frequently encountered by companies in an early stage of development. The Company can make no assurances that it will successfully develop and operate its proprietary equity research business or achieve profitability for this business.
IRG’s Revenue May Not Be Sufficient to Cover its Expenses
IRG’s current business plan involves the production of proprietary equity research, the marketing of investment analysis and research products produced by TheStreet.com, and the dissemination of the foregoing to institutional money managers and hedge funds at no charge to these customers. In return, IRG expects that these institutional money managers and hedge funds will voluntarily pay for this research using so-called “soft dollars,” by electing to execute transactions through IRG. See “Business—Marketing—Marketing of Professional Products—Soft Dollar Brokers” and “Business—Marketing—Marketing of Institutional Research and Brokerage Services.” However, IRG does not expect to conduct other revenue generating activities at this time, and there is no guarantee that these activities will generate sufficient revenue to cover IRG’s expenses. Furthermore, in response to the recent mutual fund scandal, several members of Congress have introduced mutual fund reform
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legislation that could, if passed, affect the use of soft dollars to pay for research services. See “Risk Factors—Government Regulation and Legal Uncertainties—Securities Industry Regulation.”
The Company May Have Difficulty Increasing its Advertising Revenue, a Significant Portion of Which Is Concentrated Among the Company’s Top Advertisers
The Company’s ability to increase its advertising revenue depends on a variety of factors, including general market conditions, seasonal fluctuations in financial news consumption and overall online usage, the Company’s ability to increase its unique visitors and page view inventory, and the Company’s ability to win its share of advertisers’ total advertising budgets from other web sites, television, radio and print media. If the Company’s advertising revenue decreases because of these factors, the Company’s business, results of operations and financial condition could be materially adversely affected.
In the fourth quarter of 2003, the Company’s top five advertisers accounted for approximately 42% of its total advertising revenue, excluding conference sponsorship revenue, as compared to approximately 46% for the three months ended September 30, 2003 and approximately 51% for the three months ended December 31, 2002. Furthermore, although the Company continues to work to attract advertisers from outside the financial services industry, such as automotive and luxury goods, a large proportion of the Company’s top advertisers are concentrated in financial services, particularly in the online brokerage business. If these industries were to weaken significantly, or if other factors caused the Company to lose a number of its top advertisers, the Company’s business, results of operations and financial condition could be materially adversely affected. As is typical in the advertising industry, the Company’s advertising contracts have short notice cancellation provisions.
Intense Competition Could Reduce the Company’s Market Share and Harm its Financial Performance
The Company’s ability to compete successfully depends on many factors, including the quality and timeliness of its content and that of the Company’s competitors, the success of the Company’s recommendations and research, the ease of use of services developed either by the Company or its competitors and the effectiveness of the Company’s sales and marketing efforts. We face competition for customers, advertisers, employees and contributors from a wide variety of financial news and information sources, as well as other types of companies, including:
| • | online business, finance or investing web sites; |
| • | publishers and distributors of traditional media focused on finance and investing, including print publications and radio and television programs; and |
| • | investment newsletter publishers. |
As our business has expanded into new areas, such as equity research and brokerage services, and advisory reports, the Company also faces significant competition from a new set of competitors, including:
| • | established Wall Street investment banking firms; |
| • | large financial institutions; |
| • | equity research boutiques; and |
| • | other securities professionals that offer similar information and that have firmly established customer relationships. |
Many of these competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources than the Company does. Increased competition could result in price reductions, reduced margins or loss of market share, any of which could materially adversely affect the Company’s business, results of operations and financial condition. Accordingly, the Company cannot guarantee that it will be able to compete effectively with its current or future competitors or that this competition will not significantly harm its business.
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The Company Faces Risks Associated with the Growth and Diversification of its Business
The Company’s business has grown and diversified in recent quarters and now includes a variety of professional and consumer subscription products, as well as a separate, wholly owned, broker-dealer subsidiary, which offers proprietary equity research and trading to its institutional clients. We intend to continue to grow and diversify our business, both organically and possibly through acquisitions of other companies. Such growth and diversification may require significant time and resource commitments from the Company’s senior management, which will limit the amount of time these individuals will have available to devote to the Company’s existing operations. Growth in diversity and complexity may also impact our evolving business in ways we have not anticipated. The efficient operation of the Company will depend on our ability to successfully manage the increasing complexity of the commerce, publishing, financial reporting, and other systems we depend on. Acquisitions by the Company could result in the incurrence of debt and contingent liabilities. Any failure or any inability to effectively manage and integrate the growth and diversification of the Company could have a material adverse effect on its business, financial condition and results of operations.
System Failure May Result in Reduced Traffic, Reduced Revenue and Harm to the Company’s Reputation
The Company’s ability to provide timely, updated information depends on the efficient and uninterrupted operation of its computer and communications hardware and software systems. Similarly, the Company’s ability to track, measure and report the delivery of advertisements on its site depends on the efficient and uninterrupted operation of a third-party system. The Company’s operations depend in part on the protection of its data systems and those of its third party provider against damage from human error, natural disasters, fire, power loss, water damage, telecommunications failure, computer viruses, acts of terrorism, vandalism, sabotage, and similar unexpected adverse events. Although the Company utilizes the services of a third party data-center host, there is no guarantee that the Company’s internet access and other data operations will be uninterrupted, error-free or secure. The Company’s data center host filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code in December 2003 and certain of its businesses, including internet hosting, are in the process of being purchased out of bankruptcy. Although the sale transaction is expected to close in the first quarter of 2004 and services are not expected to be affected, the Company cannot assure you that the sale will close on schedule or that the services provided by the hosting company or its successor will continue to be at the level the Company has heretofore received. Any system failure, including network, software or hardware failure, that causes an interruption in the Company’s service or a decrease in responsiveness of its web sites could result in reduced traffic, reduced revenue and harm to the Company’s reputation, brand and the Company’s relations with its advertisers and strategic partners. The Company’s insurance policies may not adequately compensate the Company for such losses. In such event, the Company’s business, results of operations and financial condition could be materially adversely affected.
Difficulties In New Product Development Could Harm the Company’s Business
In the past few years, the Company has introduced a significant number of new products and services, and expects to continue to do so. However, the Company may experience difficulties that could delay or prevent it from introducing new products and services in the future, or cause the costs to be higher than anticipated. Additionally, the Company at times relies on third parties, including software companies, application service providers and technology consulting firms, to help it develop and implement new products and services. If these third parties are not able to fulfill their responsibilities to the Company on schedule or if the technology developed by them for the Company’s use does not function as anticipated, implementation may be delayed and costs may be higher than anticipated. Any of the foregoing occurrences could materially adversely affect the Company’s business, results of operations and financial condition.
We have also invested significant resources to enhance the design, production and distribution of our products, and to accommodate the high volume of traffic we often receive as a result of important financial news events. Nevertheless, the Company’s web sites and distributed products have in the past experienced, and may in the future experience, publishing problems, slower response times or other
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problems for a variety of reasons. These occurrences could cause the Company’s readers to choose other methods to obtain their financial and investment commentary, analysis and news. In such a case, the Company’s business, results of operations and financial condition could be materially adversely affected.
Failure to Establish and Maintain Successful Strategic Relationships With Other Companies Could Decrease the Company’s Subscriber and Reader Base
The Company still relies on establishing and maintaining such relationships for a portion of its current subscriber and reader base. There is intense competition for relationships with these firms and placement on these sites, and the Company may have to pay significant fees to establish additional relationships with large, high-traffic partners or maintain existing relationships in the future. From time to time, we enter into agreements with advertisers that require us to exclusively feature these parties in sections of our web sites. Existing and future exclusivity arrangements may prevent us from entering into other advertising or sponsorship arrangements or other strategic relationships. If the Company does not successfully establish and maintain its strategic relationships on commercially reasonable terms or if these relationships do not attract significant numbers of subscribers or readers, the Company’s business, results of operations and financial condition could be materially adversely affected.
Difficulties Associated With the Company’s Brand Development May Harm its Ability to Attract Subscribers
The Company believes that maintaining and growing awareness about its products is an important aspect of its efforts to continue to attract users. The Company’s new products do not have widely recognized brands, and the Company will need to increase awareness of these brands among potential users. Additionally, the Company’s broker-dealer subsidiary, Independent Research Group LLC, does not have a widely recognized brand. The Company’s efforts to build brand awareness may not be cost effective or successful in reaching potential users, and some potential users may not be receptive to the Company’s marketing efforts or advertising campaigns. Accordingly, the Company can make no assurances that such efforts will be successful in raising awareness of TheStreet.com, RealMoney, Street Insight, Action Alerts PLUS or other brands or in persuading potential users to subscribe to the Company’s products or potential clients to utilize the equity research and trading services of IRG.
Failure to Maintain the Company’s Reputation for Trustworthiness May Harm its Business
It is very important that the Company maintain its reputation as a trustworthy organization. The occurrence of events, including the Company’s misreporting a news story, the non-disclosure of a stock ownership position by one or more of the Company’s writers, the manipulation of a security by one or more of the Company’s outside contributors, or other breach of the Company’s compliance policies, could harm the Company’s reputation for trustworthiness and reduce readership. These events could materially adversely affect the Company’s business, results of operations and financial condition.
The Company May Face Liability for, or Incur Costs to Defend, Information Published in its Products
The Company may be subject to claims for defamation, libel, copyright or trademark infringement or based on other theories relating to the information the Company publishes in its products. These types of claims have been brought, sometimes successfully, against online services as well as other print publications in the past. The Company could also be subject to claims based upon the content that is accessible from its web sites through links to other web sites. The Company’s insurance may not adequately protect it against these claims.
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The Company May Not Adequately Protect its Own Intellectual Property and May Incur Costs to Defend Against, or Face Liability for, Intellectual Property Infringement Claims of Others
To protect the Company’s rights to its intellectual property, the Company relies on a combination of trademark and copyright law, trade secret protection, confidentiality agreements and other contractual arrangements with its employees, affiliates, customers, strategic partners and others. The protective steps the Company has taken may be inadequate to deter misappropriation of its proprietary information. The Company may be unable to detect the unauthorized use of, or take appropriate steps to enforce, its intellectual property rights. The Company has registered several trademarks in the United States and also has pending U.S. applications for other trademarks. Failure to adequately protect the Company’s intellectual property could harm its brand, devalue its proprietary content and affect its ability to compete effectively. In addition, although the Company believes that its proprietary rights do not infringe on the intellectual property rights of others, other parties may assert infringement claims against the Company or claims that the Company has violated a patent or infringed a copyright, trademark or other proprietary right belonging to them. The Company incorporates licensed third-party technology in some of its services. In these license agreements, the licensors have generally agreed to defend, indemnify and hold the Company harmless with respect to any claim by a third party that the licensed software infringes any patent or other proprietary right. The Company cannot assure you that these provisions will be adequate to protect it from infringement claims. Protecting the Company’s intellectual property rights, or defending against infringement claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources on the Company’s part, which could materially adversely affect the Company’s business, results of operations and financial condition.
Government Regulation and Legal Uncertainties
Internet Communications, Commerce and Privacy Regulation. The growth and development of the market for internet commerce and communications has prompted both federal and state laws and regulations concerning the collection and use of personally identifiable information (including consumer credit and financial information under the Gramm-Leach-Bliley Act), consumer protection, the content of online publications, the taxation of online transactions and the transmission of unsolicited commercial email, popularly known as “spam.” More laws and regulations are under consideration by various governments, agencies and industry self-regulatory groups. Although the Company’s compliance with applicable federal and state laws, regulations and industry guidelines has not had a material adverse effect on it, new laws and regulations may be introduced and modifications to existing laws may be enacted that require the Company to make changes to its business practices. On December 16, the President signed into law the “Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003,” also known as the “CAN-SPAM Act of 2003.” This federal law, which became effective on January 1, 2004, pre-empted the even more rigorous “anti-spam” statute passed by the state of California in September 2003, and established uniform standards, penalties, and an enforcement regime for the sending of unsolicited commercial email. Although the Company believes that its practices are in compliance with applicable laws, regulations and policies, if the Company were required to defend its practices against investigations of state or federal agencies or if the Company’s practices were deemed to be violative of applicable laws, regulations or policies, the Company could be penalized and its activities enjoined. Any of the foregoing could increase the cost of conducting online activities, decrease demand for the Company’s products and services, lessen the Company’s ability to effectively market its products and services, or otherwise materially adversely affect the Company’s business, financial condition and results of operations.
Securities Industry Regulation. Over the past three years, the Company’s activities have evolved to include, among other things, the offering of stand-alone products providing stock recommendations and analysis to subscribers, in contrast to providing such information as part of a larger online financial publication of more general and regular circulation. As a result, the Company registered in 2002 with the SEC as an investment advisor under the Investment Advisers Act of 1940. In addition, IRG has registered with the SEC and been admitted as a member of the NASD as a broker-dealer in connection with its recently begun activities as an introducing broker and provider of proprietary and third-party research. The securities industry in the United States is subject to extensive regulation under both
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federal and state laws. A failure to comply with regulations applicable to securities industry participants could materially and adversely affect the Company’s and IRG’s business, results of operations and financial condition.
Investment advisors such as TheStreet.com are subject to SEC regulations covering all aspects of the operation of their business, including, among others:
| • | conduct of directors, officers and employees, and |
| • | supervision of advisory activities. |
Likewise, broker-dealers are subject to regulations of the SEC, state regulators and self-regulatory organizations, such as the NASD, covering all aspects of the operation of their business, including, among others:
| • | recommendations of securities, |
| • | execution of customers’ orders, |
| • | conduct of directors, officers and employees, and |
| • | supervision of securities and research activities. |
Violations of the regulations governing the actions of investment advisors and broker-dealers may result in the imposition of censures or fines, the issuance of cease-and-desist orders, and the suspension or expulsion of a firm, its officers, or its employees from the securities business.
The Company’s ability to comply with all applicable securities laws and rules is largely dependent on its establishment and maintenance of appropriate compliance systems (including proper supervisory procedures and books and records requirements), as well as its ability to attract and retain qualified compliance personnel.
Furthermore, because the Company operates in industries subject to extensive regulation, new regulation, changes in existing regulation, or changes in the interpretation or enforcement of existing laws and rules can have a significant impact on the Company’s ability to compete in the securities industry. For example, the enactment of the Sarbanes-Oxley Act of 2002 and other actions by various regulatory authorities and industry organizations imposed significant new requirements on broker-dealers and securities analysts issuing research reports on equity securities and their supervisors. The requirements include an obligation to disclose conflicts and prohibitions designed to promote objectivity and independence of securities analysts. The Company does not expect these changes to materially adversely affect the growth and development of IRG.
Additionally, the recent scandal over late trading and market timing in the mutual fund industry has intensified regulatory scrutiny of trading and other practices of mutual funds, including the use of soft dollars to pay for research. Soft dollar practices evolved after the 1975 passage of an amendment to the Exchange Act that permitted money managers, so long as they followed certain rules, to pay higher than the lowest available commission rates in exchange for research products that assist them in the performance of their investment decision-making responsibilities, without violating their fiduciary duty to clients to obtain the best possible execution at the lowest commission rate available. Since then, there have been sporadic efforts by regulators and industry reformers to curb or abolish the practice, which some money managers use to pay for products and services that do not fall within the rules, in potential breach of this duty.
As a result, although the mutual fund scandal has little to do with soft dollar practices, of the five mutual fund industry reform bills currently pending in Congress, four, as currently drafted, would impose additional disclosure requirements on mutual funds and their investment advisers concerning
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their usage of soft dollars, and one, the “Mutual Fund Reform Act of 2004,” would prohibit mutual funds from using them altogether. IRG’s products are purely research, and thus their use by money managers in accordance with the rules is comfortably within the regulatory “safe harbor” for lawful and appropriate use of commissions. However, the passage of any new or currently proposed legislation that significantly curbed or abolished soft dollar practices, or action by the SEC or other federal and state governmental regulatory authorities or self-regulatory organizations to further regulate the activities of broker-dealers and investment advisors, could affect the Company’s business in the future in a manner that could harm the Company’s business, results of operations and financial condition.
Any Failure of the Company’s Internal Security Measures or Breach of its Privacy Protections Could Cause the Company to Lose Users and Subject it to Liability
Users who subscribe to the Company’s subscription-based products are required to furnish certain personal information (including name, mailing address, phone number, email address and credit card information), which the Company uses to administer its services. The Company also requires users of some of its free products and features to provide the Company with some personal information during the membership registration process. Additionally, the Company relies on security and authentication technology licensed from third parties to perform real-time credit card authorization and verification.
In this regard, the Company’s users depend on the Company to keep their personal information safe and private and not to disclose it to third parties or permit its security to be breached. If the Company’s users perceive that the Company is not protecting their privacy, or if the information security measures of the Company or its agents are breached, the Company’s users could be discouraged from registering to use the Company’s web sites or other products, which could have a material adverse effect on the Company’s business, results of operations and financial condition.
Control by Principal Stockholders, Officers and Directors Could Adversely Affect the Company’s Stockholders
The Company’s officers, directors and greater-than-five-percent stockholders (and their affiliates), acting together, have the ability to control substantially all matters submitted to its stockholders for approval (including the election and removal of directors and any merger, consolidation or sale of all or substantially all of the Company’s assets) and to control its management and affairs. Accordingly, this concentration of ownership may have the effect of delaying, deferring or preventing a change in control of the Company, impeding a merger, consolidation, takeover or other business combination involving the Company or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of the Company, which in turn could materially adversely affect the market price of the common stock.
Volatility of the Company’s Stock Price Could Adversely Affect the Company’s Stockholders
The stock market has experienced significant price and volume fluctuations and the market prices of securities of technology companies, particularly internet-related companies, have been highly volatile. The trading price of the Company’s stock has been and may continue to be subject to wide fluctuations. From October 1 through December 31, 2003, the closing sale price of the Company’s common stock on the Nasdaq National Market ranged from $4.06 to $5.11. As of March 9, 2004, the closing sale price was $5.00. The Company’s stock price may fluctuate in response to a number of events and factors, such as quarterly variations in operating results, announcements of technological innovations or new products and media properties by the Company or its competitors, changes in financial estimates and recommendations by securities analysts, the operating and stock price performance of other companies that investors may deem comparable, and news reports relating to trends in the Company’s markets. In addition, the stock market in general, and the market prices for internet-related companies in particular, have experienced extreme volatility. These fluctuations may adversely affect the price of the Company’s common stock, regardless of its operating performance.
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Anti-Takeover Provisions Could Prevent or Delay a Change of Control
Provisions of the Company’s amended and restated certificate of incorporation and amended and restated bylaws and Delaware law could make it more difficult for a third party to acquire the Company, even if doing so would be beneficial to the Company’s stockholders.
The Company Does Not Intend to Pay Dividends
The Company has never declared or paid any cash dividends on its common stock. The Company currently intends to retain any future earnings for funding growth.
Item 8. Financial Statements and Supplementary Data.
The Company’s consolidated financial statements required by this item are included in Item 15 of this report.
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures
The Company carried out, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the annual period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2003, the design and operation of these disclosure controls and procedures were effective. During the annual period covered by this report, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART III
Item 10. Directors and Executive Officers of the Registrant.
Other than the information provided below, the information required by this Item is incorporated herein by reference to the Company’s definitive Proxy Statement for its Annual Meeting of Stockholders to be held on May 26, 2004, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Report.
Code of Ethics
The Company has adopted a Code of Business Conduct and Ethics that applies to all of its directors, officers and employees, as well as outside contributors to its publications. This code is publicly available on the Company’s web site at http://www.thestreet.com/ir/codeofconduct and is filed as Exhibit 14 to this Form 10-K. Any substantive amendments to the code and any grant of waiver from a provision of the code requiring disclosure under applicable SEC or Nasdaq rules will be disclosed in a report on Form 8-K.
Audit Committee Financial Expert
The Board of Directors of the Company has determined that Daryl Otte, the Chairman of the Audit Committee, is an “audit committee financial expert” as defined under Item 401(h) of Regulation S-K, and that he is independent as defined under applicable Nasdaq listing standards and as required under Rule 10A-3(b)(1) under the Securities Exchange Act of 1934, as amended.
Item 11. Executive Compensation.
The information required by this Item is incorporated herein by reference to the Company’s definitive Proxy Statement for its Annual Meeting of Stockholders to be held on May 26, 2004, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Report.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Other than the information provided below, information required by this Item is incorporated herein by reference to the Company’s definitive Proxy Statement for its Annual Meeting of Stockholders to be held on May 26, 2004, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Report.
Equity Compensation Plan Information
The Company has only one equity compensation plan, TheStreet.com 1998 Stock Incentive Plan, as amended and restated, which was approved most recently by the Company’s stockholders at its annual meeting on May 29, 2002. The following table sets forth certain information, as of December 31, 2003, concerning shares of common stock authorized for issuance under that equity compensation plan of the Company.
| | Number of
securities to be
issued upon
exercise of
outstanding options | | Weighted-average
exercise price of
outstanding options | | Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities reflected
in column (a)) | |
| | (a) | | (b) | | (c) | |
Equity compensation plans approved by security holders | | 5,138,609 | | $4.29 | | 1,821,076* | |
______________
| * | Aggregate number of shares available for grant under TheStreet.com 1998 Stock Incentive Plan, which grants may be in the form of stock options, restricted stock or deferred stock in the discretion of the Board of Directors, with respect to non-employee director grants, or the Compensation Committee, with respect to all other grants. |
38
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is incorporated herein by reference to the Company’s definitive Proxy Statement for its Annual Meeting of Stockholders to be held on May 26, 2004, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Report.
Item 14. Principal Accountant Fees and Services.
The information required by this Item is incorporated herein by reference to the Company’s definitive Proxy Statement for its Annual Meeting of Stockholders to be held on May 26, 2004, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Report.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
| (a) 1. | Consolidated Financial Statements:
See TheStreet.com, Inc. Index to Consolidated Financial Statements on page F-1. |
| 2. | Consolidated Financial Statement Schedules:
See TheStreet.com, Inc. Index to Consolidated Financial Statements on page F-1. |
| 3. | Exhibits: |
The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the Commission:
Exhibit
Number | | Description |
| | |
*3.1 | | Amended and Restated Certificate of Incorporation |
**3.2 | | Amended and Restated Bylaws |
*4.1 | | Amended and Restated Registration Rights Agreement, dated as of December 21, 1998, among TheStreet.com and the stockholders named therein |
*4.2 | | TheStreet.com Rights Agreement |
†4.3 | | Amendment No. 1, dated as of August 7, 2000, to Rights Agreement |
††4.4 | | Specimen Certificate for TheStreet.com’s common stock |
| 10.1 | | Amended and Restated 1998 Stock Incentive Plan, dated as of May 29, 2002 |
| 10.2 | | Annual Incentive Plan |
| 10.3 | | Employment Agreement, dated February 22, 2003, between James Cramer and TheStreet.com, Inc. |
10.4 | | Employment Agreement, dated February 22, 2004, between James Cramer and TheStreet.com, Inc. |
10.4 | | Employment Agreement, dated January 1, 2004, between Thomas J. Clarke, Jr. and TheStreet.com, Inc. |
| 10.5 | | Employment Agreement, dated March 1, 2003, between James Lonergan and TheStreet.com, Inc. |
14 | | Code of Business Conduct and Ethics |
23.1 | | Consent of Ernst & Young LLP |
| 23.2 | | Information Regarding Consent of Arthur Andersen LLP |
31.1 | | Rule 13a-14(a) Certification of CEO |
31.2 | | Rule 13a-14(a) Certification of CFO |
32.1 | | Section 1350 Certification of CEO |
32.2 | | Section 1350 Certification of CFO |
______________
* | | Incorporated by reference to Exhibits to the Company’s Registration Statement on Form S-1 filed February 23, 1999 (File No. 333-72799). |
** | | Incorporated by reference to Exhibits to the Company’s 1999 Annual Report on Form 10-K filed March 30, 2000. |
(footnotes continued on next page)
39
(footnotes continued from previous page)
† | | Incorporated by reference to Exhibits to the Company’s 2000 Annual Report on Form 10-K filed April 2, 2001. |
†† | | Incorporated by reference to Exhibits to Amendment 3 to the Company’s Registration Statement on Form S-1 filed April 19, 1999. |
| | Incorporated by reference to Exhibits to the Company’s Quarterly Report on Form10-Q filed August 14, 2002. |
| | Incorporated by reference to Exhibits to the Company’s 2002 Annual Report on Form 10-K filed March 31, 2003. |
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended December 31, 2003.
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | THESTREET.COM, INC. |
Dated: March 15, 2004
| | By: |
/s/ Thomas J. Clarke, Jr.
|
| | |
|
| | | Thomas J. Clarke, Jr.
Chief Executive Officer and Chairman of the Board |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature | | Title | | Date |
| | | | |
/s/ THOMAS J. CLARKE, JR. | | Chief Executive Officer and
Chairman of the Board | | March 15, 2004 |
|
(Thomas J. Clarke, Jr.) |
| | | | |
/s/ LISA A. MOGENSEN | | Chief Financial Officer
| | March 15, 2004 |
|
(Lisa A. Mogensen) |
| | | | |
/s/ RICHARD BROITMAN | | Controller | | March 15, 2004 |
|
(Richard Broitman) |
| | | | |
/s/ JAMES J. CRAMER | | Director | | March 15, 2004 |
|
(James J. Cramer) |
| | | | |
/s/ WILLIAM R. GRUVER | | Director | | March 15, 2004 |
|
(William R. Gruver) |
| | | | |
/s/ DOUGLAS MCINTYRE | | Director | | March 15, 2004 |
|
(Douglas McIntyre) |
| | | | |
/s/ JAMES M. MEYER | | Director | | March 15, 2004 |
|
(James M. Meyer) |
| | | | |
/s/ DARYL OTTE | | Director | | March 15, 2004 |
|
(Daryl Otte) |
| | | | |
/s/ MARTIN PERETZ | | Director | | March 15, 2004 |
|
(Martin Peretz) |
| | | | |
/s/ JEFFREY A. SONNENFELD | | Director | | March 15, 2004 |
|
(Jeffrey A. Sonnenfeld) |
| | | | |
41
THESTREET.COM, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Item 15(a)
| Page |
| |
Report of Independent Auditor | F-2 |
Report of Independent Public Accountants | F-3 |
Consolidated Balance Sheets as of December 31, 2003 and 2002 | F-4 |
Consolidated Statements of Operations for the Years Ended December 31, 2003, 2002 and 2001 | F-5 |
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2003, 2002 and 2001 | F-6 |
Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001 | F-7 |
Notes to Consolidated Financial Statements | F-9 |
Schedule II— Valuation and Qualifying Accounts for the Years Ended December 31, 2003, 2002 and 2001 | F-24 |
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
THESTREET.COM, INC.
We have audited the accompanying consolidated balance sheets of TheStreet.com, Inc. (the “Company”) as of December 31, 2003 and 2002 and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years then ended. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. The consolidated financial statements of the Company as of December 31, 2001 and for the year then ended were audited by other auditors who have ceased operations and whose report dated February 12, 2002, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2003 and 2002 and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed above, the consolidated financial statements of the Company as of December 31, 2001 and for the year then ended, were audited by other auditors who have ceased operations. As described in Note 1, these consolidated financial statements were revised to include the transitional disclosures required by Statement of Financial Accounting Standards (Statement) No. 142, “Goodwill and Other Intangible Assets”, which was adopted by the Company as of January 1, 2002. Our audit procedures with respect to the disclosures in Note 11 with respect to 2001 included (a) agreeing the previously reported net loss to the previously issued financial statements and the adjustments to reported net loss representing amortization expense recognized in that period related to goodwill and other intangible assets that are no longer being amortized as a result of initially applying Statement No. 142 to the Company’s underlying records obtained from management, and (b) testing the mathematical accuracy of the reconciliation of adjusted net loss to reported net loss, and the related net loss per share amounts. In our opinion, the disclosures for 2001 in Note 11 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2001 consolidated financial statements of the Company other than with respect to such disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 consolidated financial statements taken as a whole.
| | | |
| | |
/s/ ERNST & YOUNG LLP
|
New York, New York
February 6, 2004 | | | |
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The following audit report of Arthur Andersen LLP, our former independent auditors, is a copy of the original report dated February 12, 2002, rendered by Arthur Andersen LLP on the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K filed on April 1, 2002, and has not been reissued by Arthur Andersen LLP since that date, nor has it provided a consent to the inclusion of its report in this Annual Report on Form 10-K.
TO THESTREET.COM, INC.:
We have audited the accompanying consolidated balance sheets of TheStreet.com, Inc. (a Delaware corporation) and subsidiary as of December 31, 2001 and 2000 and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of TheStreet.com, Inc. and subsidiary as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to consolidated financial statements is presented for the purpose of complying with the Securities and Exchange Commission’s rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements, and in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP | | | |
New York, New York
February 12, 2002 | | |
|
| | | |
F-3
THESTREET.COM, INC.
CONSOLIDATED BALANCE SHEETS
| | December 31, | |
| |
| |
| | 2003 | | 2002 | |
A S S E T S | | | | | | | |
Current Assets: | | | | | | | |
Cash and cash equivalents | | $ | 22,247,400 | | $ | 21,565,018 | |
Restricted cash | | | 300,000 | | | 372,629 | |
Short-term investments | | | 4,010,904 | | | 4,811,164 | |
Accounts receivable, net of allowance for doubtful accounts of $129,096 as of December 31, 2003 and $212,312 as of December 31, 2002 | | | 1,637,822 | | | 1,676,974 | |
Other receivables | | | 202,336 | | | 91,622 | |
Receivables from related parties | | | 214,788 | | | 105,439 | |
Prepaid expenses and other current assets | | | 1,303,891 | | | 1,020,433 | |
| |
|
| |
|
| |
Total current assets | | | 29,917,141 | | | 29,643,279 | |
Property and equipment, net of accumulated depreciation and amortization of $11,744,173 as of December 31, 2003 and $9,995,998 as of December 31, 2002 | | | 2,553,063 | | | 3,643,275 | |
Other assets | | | 343,450 | | | 491,875 | |
Receivables from related parties | | | — | | | 206,222 | |
Goodwill | | | 1,990,312 | | | 1,990,312 | |
Other intangibles, net | | | 493,333 | | | 1,153,333 | |
Restricted cash | | | 1,900,000 | | | 2,300,000 | |
| |
|
| |
|
| |
Total assets | | $ | 37,197,299 | | $ | 39,428,296 | |
| |
|
| |
|
| |
L I A B I L I T I E S A N D S T O C K H O L D E R S ’ E Q U I T Y | | | | | | | |
Current Liabilities: | | | | | | | |
Accounts payable | | $ | 787,409 | | $ | 733,409 | |
Accrued expenses | | | 3,144,949 | | | 3,660,029 | |
Deferred revenue | | | 6,839,171 | | | 5,512,669 | |
Current portion of note payable | | | 89,895 | | | 84,010 | |
Other current liabilities | | | 71,859 | | | 18,127 | |
| |
|
| |
|
| |
Total current liabilities | | | 10,933,283 | | | 10,008,244 | |
Note payable | | | 221,269 | | | 311,164 | |
Other liabilities | | | 55,399 | | | — | |
| |
|
| |
|
| |
Total liabilities | | | 11,209,951 | | | 10,319,408 | |
Stockholders’ Equity | | | | | | | |
Preferred stock; $0.01 par value; 10,000,000 shares authorized; none issued and outstanding | | | — | | | — | |
Common stock; $0.01 par value; 100,000,000 shares authorized; 29,463,299 shares issued and 24,041,199 shares outstanding at December 31, 2003, and 29,007,394 shares issued and 23,585,294 shares outstanding at December 31, 2002 | | | 294,633 | | | 290,074 | |
Additional paid-in capital | | | 184,502,124 | | | 183,794,159 | |
Deferred compensation | | | — | | | (205,434 | ) |
Treasury stock at cost; 5,422,100 shares at December 31, 2003 and December 31, 2002 | | | (7,215,410 | ) | | (7,215,410 | ) |
Accumulated deficit | | | (151,593,999 | ) | | (147,554,501 | ) |
| |
|
| |
|
| |
Total stockholders’ equity | | | 25,987,348 | | | 29,108,888 | |
| |
|
| |
|
| |
Total liabilities and stockholders’ equity | | $ | 37,197,299 | | $ | 39,428,296 | |
| |
|
| |
|
| |
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
F-4
THESTREET.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| | For the Year Ended December 31, | |
| |
| |
| | 2003 | | 2002 | | 2001 | |
Net revenue: | | | | | | | | | | |
Subscription | | $ | 18,502,665 | | $ | 14,908,512 | | $ | 9,073,369 | |
Advertising | | | 5,602,483 | | | 4,371,584 | | | 5,022,916 | |
Commission | | | 805,075 | | | — | | | — | |
Other | | | 1,188,720 | | | 1,566,590 | | | 1,162,091 | |
| |
|
| |
|
| |
|
| |
Total net revenue | | | 26,098,943 | | | 20,846,686 | | | 15,258,376 | |
| |
|
| |
|
| |
|
| |
Operating expense: | | | | | | | | | | |
Cost of services | | | 13,491,478 | | | 11,765,667 | | | 16,440,920 | |
Sales and marketing | | | 7,067,311 | | | 6,319,406 | | | 10,804,419 | |
General and administrative | | | 7,341,771 | | | 7,537,857 | | | 9,173,354 | |
Depreciation and amortization | | | 2,285,320 | | | 4,030,531 | | | 5,359,431 | |
Noncash compensation | | | 322,897 | | | 998,473 | | | 1,063,838 | |
Restructuring | | | — | | | (77,468 | ) | | (3,336,931 | ) |
Settlement charge | | | — | | | — | | | 2,535,660 | |
Asset impairment | | | — | | | — | | | 4,054,354 | |
Severance expense | | | — | | | — | | | 971,668 | |
| |
|
| |
|
| |
|
| |
Total operating expense | | | 30,508,777 | | | 30,574,466 | | | 47,066,713 | |
| |
|
| |
|
| |
|
| |
Operating loss | | | (4,409,834 | ) | | (9,727,780 | ) | | (31,808,337 | ) |
Net interest income | | | 370,336 | | | 647,276 | | | 2,178,791 | |
Gain on sale of investment | | | — | | | 184,667 | | | — | |
| |
|
| |
|
| |
|
| |
Net loss from continuing operations | | | (4,039,498 | ) | | (8,895,837 | ) | | (29,629,546 | ) |
Gain on disposal of discontinued operations | | | — | | | 209,929 | | | 400,000 | |
| |
|
| |
|
| |
|
| |
Net loss | | $ | (4,039,498 | ) | $ | (8,685,908 | ) | $ | (29,229,546 | ) |
| |
|
| |
|
| |
|
| |
Net (loss) income per share—basic and diluted: | | | | | | | | | | |
Continuing operations | | $ | (0.17 | ) | $ | (0.38 | ) | $ | (1.14 | ) |
Discontinued operations | | | — | | | 0.01 | | | 0.02 | |
| |
|
| |
|
| |
|
| |
Net loss per share | | $ | (0.17 | ) | $ | (0.37 | ) | $ | (1.12 | ) |
| |
|
| |
|
| |
|
| |
Weighted average basic and diluted shares outstanding | | | 23,863,918 | | | 23,558,886 | | | 26,031,677 | |
| |
|
| |
|
| |
|
| |
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
F-5
THESTREET.COM, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
| |
Common Stock
| | | Additional
Paid in
Capital | | Deferred
Compensation | |
Treasury Stock
| | Accumulated
Deficit | | | Total
Stockholders’
Equity | |
| |
| | | | |
| | | | |
| | Shares | | | Par Value | | | | | Shares | | | Cost | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2000 | | 28,074,483 | | | $ | 280,745 | | $ | 182,888,343 | | | | ($2,149,572 | ) | | 0 | | $ | 0 | | ($109,639,047 | ) | | $ | 71,380,469 | |
Issuance of common stock for acquisition | | 77,984 | | | | 780 | | | 155,188 | | | | — | | | — | | | — | | — | | | | 155,968 | |
Exercise of options | | 79,416 | | | | 794 | | | 5,668 | | | | — | | | — | | | — | | — | | | | 6,462 | |
Stock repurchase | | — | | | | — | | | — | | | | — | | | (4,824,956 | ) | | (6,565,732 | ) | — | | | | (6,565,732 | ) |
Noncash compensation expense: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Compensation expense | | — | | | | — | | | — | | | | 1,163,838 | | | — | | | — | | — | | | | 1,163,838 | |
UK compensation expense | | — | | | | — | | | — | | | | (100,000 | ) | | — | | | — | | — | | | | (100,000 | ) |
Decrease due to resignations | | — | | | | — | | | (312,919 | ) | | | 312,919 | | | — | | | — | | — | | | | — | |
Issuance of common stock for services | | 100,000 | | | | 1,000 | | | 286,500 | | | | (287,500 | ) | | — | | | — | | — | | | | — | |
Net loss | | — | | | | — | | | — | | | | — | | | — | | | — | | (29,229,546 | ) | | | (29,229,546 | ) |
| |
| | |
|
| |
|
| | |
|
| | |
| |
|
| |
| | |
|
| |
Balance at December 31, 2001 | | 28,331,883 | | | | 283,319 | | | 183,022,780 | | | | (1,060,315 | ) | | (4,824,956 | ) | | (6,565,732 | ) | (138,868,593 | ) | | | 36,811,459 | |
Issuance of common stock for acquisition | | 489,644 | | | | 4,896 | | | 425,990 | | | | — | | | — | | | — | | — | | | | 430,886 | |
Exercise of options | | 185,867 | | | | 1,859 | | | 201,797 | | | | — | | | — | | | — | | — | | | | 203,656 | |
Stock repurchase | | — | | | | — | | | — | | | | — | | | (597,144 | ) | | (649,678 | ) | — | | | | (649,678 | ) |
Noncash compensation expense: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Compensation expense | | — | | | | — | | | — | | | | 845,848 | | | — | | | — | | — | | | | 845,848 | |
Decrease due to resignations | | — | | | | — | | | (9,033 | ) | | | 9,033 | | | — | | | — | | — | | | | — | |
Modification of stock option | | — | | | | — | | | 17,400 | | | | — | | | — | | | — | | — | | | | 17,400 | |
Options issued to outside contributor | | — | | | | — | | | 135,225 | | | | — | | | — | | | — | | — | | | | 135,225 | |
Net loss | | — | | | | — | | | — | | | | — | | | — | | | — | | (8,685,908 | ) | | | (8,685,908 | ) |
| |
| | |
|
| |
|
| | |
|
| | |
| |
|
| |
| | |
|
| |
Balance at December 31, 2002 | | 29,007,394 | | | | 290,074 | | | 183,794,159 | | | | (205,434 | ) | | (5,422,100 | ) | | (7,215,410 | ) | (147,554,501 | ) | | | 29,108,888 | |
Exercise of options | | 455,905 | | | | 4,559 | | | 576,023 | | | | — | | | — | | | — | | — | | | | 580,582 | |
Noncash compensation expense | | — | | | | — | | | — | | | | 205,434 | | | — | | | — | | — | | | | 205,434 | |
Options issued to outside contributor | | — | | | | — | | | 131,942 | | | | — | | | — | | | — | | — | | | | 131,942 | |
Net loss | | — | | | | — | | | — | | | | — | | | — | | | — | | (4,039,498 | ) | | | (4,039,498 | ) |
| |
| | |
|
| |
|
| | |
|
| | |
| |
|
| |
| | |
|
| |
Balance at December 31, 2003 | | 29,463,299 | | | $ | 294,633 | | $ | 184,502,124 | | | $ | 0 | | | (5,422,100 | ) | | ($7,215,410 | ) | ($151,593,999 | ) | | $ | 25,987,348 | |
| |
| | |
|
| |
|
| | |
|
| | |
| |
|
| |
| | |
|
| |
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
F-6
THESTREET.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | For the Years Ended December 31, | |
| |
| |
| | 2003 | | 2002 | | 2001 | |
Cash Flows from Operating Activities: | | | | | | | | | | |
Net loss | | $ | (4,039,498 | ) | $ | (8,685,908 | ) | $ | (29,229,546 | ) |
Adjustments to reconcile net loss to cash used in operating activities: | | | | | | | | | | |
Noncash compensation expense | | | 322,897 | | | 998,473 | | | 1,063,838 | |
Noncash advertising expense | | | — | | | 121,054 | | | 30,000 | |
Noncash asset impairment | | | — | | | — | | | 4,054,354 | |
Noncash restructuring expense | | | — | | | — | | | (3,610,561 | ) |
Gain on disposal of discontinued operations | | | — | | | (209,929 | ) | | — | |
Gain on sale of investment | | | — | | | (184,667 | ) | | — | |
Loss on sale of fixed assets | | | — | | | 90,514 | | | — | |
(Recovery) provision for doubtful accounts | | | (46,839 | ) | | 41,444 | | | 355,714 | |
Depreciation and amortization | | | 2,285,320 | | | 4,030,531 | | | 5,359,431 | |
Non-current assets of discontinued operations | | | — | | | — | | | 426,218 | |
Net current assets of discontinued operations | | | — | | | 45,480 | | | 1,796,500 | |
Changes in operating assets and liabilities: | | | | | | | | | | |
Accounts receivable | | | 85,991 | | | (714,491 | ) | | 2,742,447 | |
Other receivables | | | (110,714 | ) | | 22,752 | | | (57,064 | ) |
Receivables from related parties | | | 96,873 | | | 33,582 | | | (185,243 | ) |
Prepaid expenses and other current assets | | | (283,458 | ) | | 64,899 | | | 1,863,895 | |
Other assets | | | 271,280 | | | 281,140 | | | 90,703 | |
Accounts payable and accrued expenses | | | (446,601 | ) | | (455,078 | ) | | (4,864,593 | ) |
Restructuring reserve | | | — | | | (1,487,829 | ) | | (1,565,753 | ) |
Deferred revenue | | | 1,326,502 | | | 2,347,393 | | | (891,963 | ) |
Other current liabilities | | | (1,695 | ) | | (9,112 | ) | | (987,912 | ) |
| |
|
| |
|
| |
|
| |
Net cash used in operating activities | | | (539,942 | ) | | (3,669,752 | ) | | (23,609,535 | ) |
| |
|
| |
|
| |
|
| |
Cash Flows from Investing Activities: | | | | | | | | | | |
Purchase of short-term investments | | | (10,000,000 | ) | | (10,902,082 | ) | | (14,000,000 | ) |
Sale of short-term investments | | | 10,800,260 | | | 11,639,417 | | | 32,822,265 | |
Purchase of marketable security | | | — | | | (9,911,651 | ) | | — | |
Sale of marketable security | | | — | | | 10,096,318 | | | — | |
Purchase of investment in held to maturity securities | | | — | | | — | | | (6,000,000 | ) |
Sale of investment in held to maturity securities | | | — | | | — | | | 6,000,000 | |
Loans to Business Net Online Ltd. | | | — | | | — | | | (1,254,354 | ) |
Capital expenditures | | | (547,137 | ) | | (703,670 | ) | | (1,598,159 | ) |
Proceeds from the disposal of discontinued operations | | | — | | | 15,091 | | | — | |
Proceeds from the sale of fixed assets | | | — | | | 8,000 | | | — | |
Acquisition of business, net of cash acquired | | | — | | | — | | | (5,400,000 | ) |
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| |
Net cash provided by investing activities | | | 253,123 | | | 241,423 | | | 10,569,752 | |
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Cash Flows from Financing Activities: | | | | | | | | | | |
Proceeds from the exercise of stock options | | | 580,582 | | | 203,656 | | | 6,462 | |
Note payable | | | (84,010 | ) | | (78,510 | ) | | — | |
Restricted cash | | | 472,629 | | | 777,371 | | | — | |
Purchase of treasury stock | | | — | | | (649,678 | ) | | (6,565,732 | ) |
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Net cash provided by (used in) financing activities | | | 969,201 | | | 252,839 | | | (6,559,270 | ) |
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Net increase (decrease) in cash and cash equivalents | | | 682,382 | | | (3,175,490 | ) | | (19,599,053 | ) |
Cash and cash equivalents, beginning of year | | | 21,565,018 | | | 24,740,508 | | | 44,339,561 | |
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Cash and cash equivalents, end of year | | $ | 22,247,400 | | $ | 21,565,018 | | $ | 24,740,508 | |
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The accompanying notes to the consolidated financial statements
are an integral part of these statements.
F-7
Supplemental disclosures of cash flow Information: | | | | | | | | | | |
Cash payments made for interest | | $ | 37,049 | | $ | 42,820 | | $ | — | |
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Supplemental disclosures of noncash investing and financing activities:
During 2003, the Company purchased software costing $131,541, of which $108,365 was financed through extended payment terms.
During 2002, the Company issued 489,644 shares of common stock in connection with its purchase of SmartPortfolio.com, Inc. The shares were valued at $430,886.
During 2001, the Company issued 77,984 shares of common stock in connection with its purchase of SmartPortfolio.com, Inc. The shares were valued at $155,968.
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
F-8
THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003
(1) | Organization, Nature of Business and Summary of Operations and Significant Accounting Policies |
Organization and Nature of Business
TheStreet.com, Inc., together with its wholly-owned subsidiaries (collectively, the “Company”), operates its businesses in two segments, electronic publishing and securities research and brokerage. The Company’s electronic publishing segment provides investment commentary, analysis and news to both retail and professional customers, which it distributes through its production of web sites, email reports and newsletters, syndicated radio programming, and conferences. The electronic publishing segment receives revenue from subscription sales, advertising and sponsorship sales, as well as content syndication and conference attendees. The Company’s securities research and brokerage segment provides proprietary equity research and brokerage services to institutional clients, and, as a broker-dealer, receives revenue from trading commissions, a standard payment method in the professional markets.
Independent Research Group LLC (“IRG”), of which TheStreet.com Inc. is the sole member, is a registered broker-dealer under the Securities and Exchange Act of 1934. IRG was organized as a Delaware limited liability company on October 31, 2002, and was admitted to the National Association of Securities Dealers Inc. as a member on April 22, 2003. IRG provides proprietary equity research and brokerage services to institutional clients, and receives commission revenue for such services. On January 5, 2004, IRG announced the commencement of equity trading execution operations on behalf of its clients. Security transactions introduced (or executed) by IRG are cleared on a fully disclosed basis in accordance with clearing agreements executed with two registered broker-dealers.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions, specifically for the allowance for doubtful accounts receivable, the useful lives of fixed assets and the valuation of goodwill, intangible assets and investments, that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates.
Consolidation
The consolidated financial statements include the accounts of TheStreet.com, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Revenue Recognition
The Company generates its revenue primarily from subscriptions, advertising, and commissions.
Subscription revenue represents customer subscriptions that provide subscribers access to investment commentary, advice, research, analysis and news. Subscriptions are generally charged to customers’ credit cards or are charged directly to companies that subscribe to the service. These are generally billed in advance on a monthly, quarterly, semi-annual or annual basis. The Company calculates net subscription revenue by deducting refunds and cancellation chargebacks from gross revenue. Net subscription revenue is recognized ratably over the subscription period. Deferred revenue liabilities relate to subscription fees for which amounts have been collected but for which revenue has not been recognized.
F-9
THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
December 31, 2003
Advertising revenue, derived from the sale of internet sponsorship arrangements, and from the delivery of banner and email advertisements on the Company’s web sites, as well as from conference sponsorships, is recognized ratably over the period the advertising is displayed, provided that no significant Company obligations remain and collection of the resulting receivable is probable. Although infrequent, Company obligations could include guarantees of a minimum number of times that users of the Company’s web sites “click-through” to the advertisers web site, or take additional specified action, such as opening an account. In such cases, revenue is recognized as the guaranteed “click-throughs” or other relevant delivery criteria are fulfilled.
Commission revenue arises from trades placed through the Company’s broker-dealer subsidiary by its institutional clients. Commission revenue and related expenses are recognized on a trade date basis.
Other revenue consists primarily of revenue related to James J. Cramer’s daily radio program, RealMoney with Jim Cramer, syndication revenue, conference attendee revenue, reprint revenue, royalties earned from the Company’s investing book and barter advertising arrangements (only for fiscal years in which such arrangements occurred). Revenue from barter transactions was recognized in accordance with the provisions of Emerging Issues Task Force No. 99-17 (EITF 99-17) during the period in which the advertisements were displayed on the Company’s web sites. Under the provisions of EITF 99-17, barter transactions were recorded at the fair value of the advertising surrendered. There was no barter revenue recognized during the years ended December 31, 2003 and 2002. Barter revenue recognized during the year ended December 31, 2001 totaled $200,000. Fair value was determined by the comparable advertising market rates at the time of placement. There were no royalties earned from the Company’s investing book during the year ended December 31, 2003. Royalty revenue recognized during the years ended December 31, 2002 and 2001 was $136,625 and $68,375, respectively.
Cash, Cash Equivalents, Restricted Cash, and Short-Term Investments
The Company considers all short-term investment grade securities with a maturity of three months or less from the date of purchase to be cash equivalents. Short-term investments consist primarily of commercial paper and certificates of deposit with maturities of less than one-year and are considered available for sale. The Company has a total of $2,200,000 of cash that is invested in certificates of deposit and money market investments that serve as collateral for outstanding letters of credit, and is therefore classified as restricted cash at December 31, 2003. The letters of credit serve as security deposits for operating leases. Of this total, the Company anticipates that $300,000 will become unrestricted within the next 12 months, and is therefore classified as a current asset on the Company’s consolidated balance sheet at December 31, 2003. The Company anticipates that the remaining $1,900,000 of restricted cash will become unrestricted at various times through 2009.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Property and equipment are depreciated on a straight-line basis over the estimated useful lives of the assets (three years for computer equipment, including capitalized software and web site development costs, and five years for furniture and fixtures). Leasehold improvements are amortized using the straight-line method over the shorter of the respective lease term or the estimated useful life of the asset.
Capitalized Software and Web Site Development Costs
The Company expenses all costs incurred in the preliminary project stage for software developed for internal use and capitalizes all external direct costs of materials and services consumed in developing or obtaining internal-use computer software in accordance with Statement of Position (“SOP”) 98-1,
F-10
THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
December 31, 2003
“Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” In addition, for employees who are directly associated with and who devote time to internal-use computer software projects, to the extent of the time spent directly on the project, the Company capitalizes payroll and payroll-related costs of such employees incurred once the development has reached the applications development stage. For the years ended December 31, 2003 and 2002, the Company capitalized $101,276 and $190,482, respectively. All costs incurred for upgrades, maintenance and enhancements that do not result in additional functionality are expensed.
In December 1999, the Company adopted Emerging Issues Task Force Abstract (“EITF”) Issue number 00-2, “Accounting for Web Site Development Costs.” EITF 00-2 provides guidance on the accounting for the costs of development of company web sites, dividing the web site development costs into five stages: (1) the planning stage, during which the business and/or project plan is formulated and functionalities, necessary hardware and technology are determined, (2) the web site application and infrastructure development stage, which involves acquiring or developing hardware and software to operate the web site, (3) the graphics development stage, during which the initial graphics and layout of each page are designed and coded, (4) the content development stage, during which the information to be presented on the web site, which may be either textual or graphical in nature, is developed, and (5) the operating stage, during which training, administration, maintenance and other costs to operate the existing web site are incurred. The costs incurred in the web site application and infrastructure stage, the graphics development stage and the content development stage are capitalized; all other costs are expensed as incurred. For the year ended December 31, 2003, the Company capitalized $36,737 of web site development costs. For the year ended December 31, 2002, the Company did not capitalize any web site development costs.
Capitalized software and web site development costs are amortized using the straight-line method over the estimated three year useful life of the software or web site. Total amortization expense was $209,230, $323,302 and $264,471, for the years ended December 31, 2003, 2002 and 2001, respectively.
Goodwill and Other Intangible Assets
In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS 142 requires companies to stop amortizing goodwill and certain other intangible assets with an indefinite useful life. Instead, goodwill and other intangible assets deemed to have an indefinite useful life will be subject to an annual review for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives (but with no maximum life).
Upon the adoption of SFAS 142 in the first quarter of 2002, the Company stopped the amortization of goodwill and certain other intangible assets with an indefinite life, and completed the required transitional fair value impairment test on its goodwill and certain other intangible assets, the results of which had no impact on the Company’s financial statements. Based upon annual impairment tests as of September 30, 2003 and 2002, no impairment was indicated for the Company’s goodwill and intangible assets with indefinite lives.
Long-Lived Assets
As of January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). Long-lived assets held for use are subject to an impairment assessment if the carrying value is no longer recoverable based upon the undiscounted cash flows of the assets. The amount of the impairment is the difference between the carrying amount and the fair value of the asset. Management does not believe that there is any impairment of long-lived assets at December 31, 2003.
F-11
THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
December 31, 2003
Income Taxes
The Company accounts for its income taxes in accordance with Statement of Financial Accounting Standards No. 109 “Accounting for Income Taxes” (“SFAS No. 109”). Under SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets or liabilities of a change in tax rates is recognized in the period that the tax change occurs. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely that some or all of the deferred tax asset will not be realized.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, restricted cash, short term investments, accounts and other receivables, and accounts payable and accrued expenses approximate fair value due to the short-term maturity of these instruments.
Business Concentrations and Credit Risk
Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, short-term investments, and accounts receivable. The Company maintains all its cash and cash equivalents in four financial institutions. The Company performs periodic evaluations of the relative credit standing of these institutions. The Company’s customers are primarily concentrated in the United States. The Company performs ongoing credit evaluations, generally does not require collateral, and establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of customers, historical trends and other information. To date, such losses have been within management’s expectations.
Net Loss Per Share of Common Stock
The Company computes net loss per share in accordance with Statement of Financial Accounting Standards No. 128, “Earnings Per Share” (“SFAS No. 128”). Under the provisions of SFAS No. 128, basic net loss per common share (“Basic EPS”) is computed by dividing net loss by the weighted average number of common shares outstanding. Diluted net loss per common share (“Diluted EPS”) is computed by dividing net loss by the weighted average number of common shares and dilutive common share equivalents then outstanding. Diluted EPS is identical to basic EPS since stock options were excluded from the calculation, as their effect is anti-dilutive.
Advertising Costs
Advertising costs are expensed as incurred. For the years ended December 31, 2003, 2002, and 2001, advertising costs were $280,700, $554,598, and $1,371,631, respectively.
Stock-Based Compensation
The Company has adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), and elected to continue to account for stock options granted to employees and directors based on the accounting set forth in Accounting Principles Board No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”). Stock options granted during the year ended December 31, 2003 were exercisable at prices
F-12
THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
December 31, 2003
equal to the fair market value of the Company’s common stock on the dates the options were granted; accordingly, no compensation expense has been recognized for the stock options granted.
On December 31, 2002, the Company adopted Financial Accounting Standards Board Statement No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure” (“FASB No. 148”). FASB No. 148 amends SFAS No. 123 to provide alternative methods of transition to SFAS No. 123’s fair value method of accounting for stock-based employee compensation. FASB No. 148 also amends the disclosure provisions of SFAS No. 123 and APB No. 28, “Interim Financial Reporting,” to require disclosure in the summary of significant accounting policies on reported net income and earnings per share in annual and interim financial statements. While FASB No. 148 does not amend SFAS No. 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of FASB No. 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of SFAS No. 123 or the intrinsic value method of APB No. 25.
Had compensation for the Company’s 1998 Stock Incentive Plan, as amended and restated, been determined consistent with the provisions of SFAS No. 123, the effect on the Company’s net loss and basic and diluted net loss per share would have been changed to the following pro forma amounts:
| | For the Year Ended December 31, | |
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| | 2003 | | 2002 | | 2001 | |
Net loss, as reported | | $ | (4,039,498 | ) | $ | (8,685,908 | ) | $ | (29,229,546 | ) |
Add: noncash compensation, as reported | | | 322,897 | | | 998,473 | | | 1,063,838 | |
Less: noncash compensation, pro forma | | | (3,395,987 | ) | | (4,020,789 | ) | | (4,101,827 | ) |
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Net loss, pro forma | | $ | (7,112,588 | ) | $ | (11,708,224 | ) | $ | (32,267,535 | ) |
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Basic and diluted net loss per share, as reported | | $ | (0.17 | ) | $ | (0.37 | ) | $ | (1.12 | ) |
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Basic and diluted net loss per share, pro forma | | $ | (0.30 | ) | $ | (0.50 | ) | $ | (1.24 | ) |
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Reclassifications
Certain prior period amounts have been reclassified to conform to current year presentation.
On December 20, 2000, the Company acquired substantially all of the assets and assumed certain liabilities of SmartPortfolio.com, Inc. The Company paid initial consideration in January 2001 of $5,400,000 cash and 77,984 shares of the Company’s common stock, having a value on the payment date of approximately $156,000. In January 2002, in connection with the purchase agreement, the Company issued 489,644 additional shares of the Company’s common stock to the former owners of SmartPortfolio.com, Inc., which was subsequently repurchased for approximately $430,900. This represented the final consideration to be paid in connection with the acquisition. Additionally, the Company incurred legal fees in connection with the acquisition totaling approximately $91,900 during the year ended December 31, 2000.
The acquisition was accounted for under the purchase method of accounting and, accordingly, the purchase price was allocated to the tangible and intangible net assets acquired and liabilities assumed on the basis of their respective fair values on the acquisition date. As a result of this acquisition and the subsequent issuance and repurchase of 489,644 shares of the Company’s common stock, the Company recorded total goodwill of $2,770,025, which was the excess purchase price over the value of the net assets acquired. During the year ended December 31, 2001, goodwill was amortized using the straight-line method over a useful life of three years. As of December 31, 2001, a total of $779,713 had been recorded as amortization expense, and is included within general and administrative expenses in the
F-13
THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
December 31, 2003
accompanying consolidated statements of operations. The Company also acquired other intangible assets of $2,720,000, of which $1,980,000 are being amortized using the straight-line method over a useful life of three years. As of January 1, 2002, in accordance with SFAS 142, the goodwill and certain acquired other intangible assets are no longer amortized (See Note 11).
(3) | Discontinued Operations |
In September 1999, TheStreet.com, Inc. and a syndicate of investors (the “Syndicate”) invested a total of $17 million in TheStreet.com (Europe) Limited. Members of the Syndicate included Chase Capital Partners, Barclays Private Equity, ETF Group, 3i, Intel Corporation and others. The terms of the investment included the following:
(1) a preferred dividend of $5 million (plus interest) payable to the Syndicate which would convert into shares upon a public offering of shares or a sale of TheStreet.com (Europe) Limited;
(2) the license of certain intellectual property of TheStreet.com, Inc. (including, without limitation, use of the name “TheStreet.com”) to TheStreet.com (Europe) Limited for $1 million;
(3) the transfer of certain software from TheStreet.com, Inc. to TheStreet.com (Europe) Limited for $9 million; and
(4) the subscription by TheStreet.com, Inc. for a $10 million loan note, the principal of and interest upon which would accrue and convert into shares on a public offering or sale of TheStreet.com (Europe) Limited.
In November 2000, the Company’s Board of Directors decided to discontinue and liquidate the Company’s U.K. operations and entered into an agreement with the other shareholders in TheStreet.com (Europe) Limited pursuant to which the Company purchased the minority interest for an aggregate consideration of $3 million in cash and 1,250,000 shares of the Company’s common stock. In accordance with British law, the operation went into Members Voluntary Liquidation in May 2001. On April 30, 2002, the final meeting of the members was held to bring the liquidation to a close. A final return in the liquidation was filed on July 25, 2002 in order to formally dissolve the U.K. operations, and the dissolution became effective on October 25, 2002.
Under accounting principles generally accepted in the United States, the year 2000 loss on disposal of discontinued operations included actual losses from the date the Company’s Board of Directors resolved to discontinue the operations, plus a provision for additional future costs to be incurred to complete the liquidation process. For the years ended December 31, 2002 and 2001, the Company recorded a gain on disposal of discontinued operations of $209,929 and $400,000, respectively, representing adjustments to the Company’s original estimate related to the costs to be incurred in completing the liquidation process.
(4) | Restructuring Expenses |
During the year ended December 31, 2000, the Company recorded restructuring expenses of $17,575,522. These restructuring charges were taken to align the cost structure with changing market conditions and decreased dependence on the advertising market to create a more flexible and efficient organization. The plan resulted in approximately a 20% headcount reduction, or about 40 full-time employees, throughout the organization.
The following table displays the activity and balances of the restructuring reserve account from the initial charges until its completion in the year ended December 31, 2002:
F-14
THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
December 31, 2003
| | | Year 2000 Activity | | | | | Year 2001 Activity | | | | | | Year 2002 Activity | | | | | | |
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| | | Initial
Charge | | | Deductions | | Adjustments | | | Balance
12/31/00 | | | Deductions | | Adjustments | | | Balance
12/31/01 | | | Deductions | | Adjustments | | Balance
12/31/02 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Headcount reductions | | $ | 478,278 | | $ | (478,278 | ) | | $ | 0 | | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | | $ | 0 | | | $ | 0 | | |
Consolidation of facilities and reduction in non-performing assets | | | 3,695,648 | | | (1,643,896 | ) | | | 0 | | | | 2,051,752 | | | (1,131,943 | ) | | (909,809 | ) | | 10,000 | | | 67,468 | | | | (77,468 | ) | | | 0 | | |
Extinguishment of marketing and technology related contracts | | | 13,401,596 | | | (8,968,223 | ) | | | 0 | | | | 4,433,373 | | | (649,476 | ) | | (2,427,122 | ) | �� | 1,356,775 | | | (1,356,775 | ) | | | 0 | | | | 0 | | |
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| | $ | 17,575,522 | | $ | (11,090,397 | ) | | $ | 0 | | | $ | 6,485,125 | | $ | (1,781,419 | ) | $ | (3,336,931 | ) | $ | 1,366,775 | | $ | (1,289,307 | ) | | $ | (77,468 | ) | | $ | 0 | | |
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The above deductions from the reserve primarily represent write-offs of previously capitalized costs and cash payments. The above adjustments primarily represent revisions to the Company’s original estimates.
In October 2001, the Company entered into an amendment of its lease agreement for the office space in New York City. Based upon the amendment, the Company was released from its lease obligations for one of the two floors of such office space. As a result, the Company recognized a gain of approximately $1,060,000 related to a deferred rent credit previously recorded in connection with such space. In addition, the agreement provided for approximately $1,570,000 future rent reduction for the floor maintained by the Company, which was recognized as a reduction in restructuring expense for the year ended December 31, 2001. The Company classified such deferred rent asset net of approximately $1,000,000 previously recorded deferred rent credit, among other assets in the accompanying consolidated balance sheet ($73,682 and $67,412 current and $258,737 and $378,300 non-current as of December 31, 2003 and 2002, respectively). Such amounts are being amortized over the life of the lease.
As discussed in Note 1, net loss per share is calculated in accordance with SFAS No. 128. The following table reconciles the numerator and denominator for the calculation.
| | For the Year Ended December 31, | |
| |
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| | 2003 | | 2002 | | 2001 | |
| | | | | | | |
Numerator: | | | | | | | | | | |
Net loss from continuing operations | | $ | (4,039,498 | ) | $ | (8,895,837 | ) | $ | (29,629,546 | ) |
Gain from discontinued operations | | | — | | | 209,929 | | | 400,000 | |
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Net loss available to common shareholders | | $ | (4,039,498 | ) | $ | (8,685,908 | ) | $ | (29,229,546 | ) |
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Denominator: | | | | | | | | | | |
Weighted average basic and diluted shares outstanding | | | 23,863,918 | | | 23,558,886 | | | 26,031,677 | |
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|
| |
|
| |
|
| |
Net (loss) gain per share—basic and diluted: | | | | | | | | | | |
Continuing operations | | $ | (0.17 | ) | $ | (0.38 | ) | $ | (1.14 | ) |
Discontinued operations | | | — | | | 0.01 | | | 0.02 | |
| |
|
| |
|
| |
|
| |
Net loss per share | | $ | (0.17 | ) | $ | (0.37 | ) | $ | (1.12 | ) |
| |
|
| |
|
| |
|
| |
Outstanding options of 5,138,609, 4,861,912 and 3,810,056 for the years ended December 31, 2003, 2002 and 2001, respectively, have been excluded from the above calculations as they were anti-dilutive.
(6) | Receivable From Related Parties |
In 2001, the Company loaned a total of $359,900 to two employees. The loans include interest at an approximate weighted average rate of 4.6%. One loan was due in December 2003 and was repaid in
F-15
THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
December 31, 2003
full. The second loan is due in April 2004. As of December 31, 2003 and 2002, the outstanding aggregate balance is $214,788 and $311,661, respectively. Effective January 1, 2002, the Personnel and Compensation Committee of the Board of Directors adopted a policy prohibiting any further employee loans.
(7) | Property and Equipment |
Property and equipment consists of the following:
| | December 31, | |
| |
| |
| | 2003 | | 2002 | |
| | | | | |
Computer equipment | | $ | 10,699,616 | | $ | 10,157,996 | |
Furniture and fixtures | | | 935,669 | | | 874,053 | |
Leasehold improvements | | | 2,661,951 | | | 2,607,224 | |
| |
|
| |
|
| |
| | | 14,297,236 | | | 13,639,273 | |
Less accumulated depreciation and amortization | | | 11,744,173 | | | 9,995,998 | |
| |
|
| |
|
| |
Property and equipment, net | | $ | 2,553,063 | | $ | 3,643,275 | |
| |
|
| |
|
| |
Included in computer equipment are capitalized software and web site development costs of $1,050,714 and $912,701 at December 31, 2003 and 2002, respectively. During the year ended December 31, 2002, the Company wrote off capitalized software costs totaling $190,396.
Depreciation and amortization expense for the above noted property and equipment aggregated $1,748,175, $3,442,443, and $3,804,581 for the years ended December 31, 2003, 2002, and 2001, respectively.
Accrued expenses consist of the following:
| | December 31, | |
| |
| |
| | 2003 | | 2002 | |
| | | | | |
Accrued bonuses | | $ | 1,030,426 | | $ | 1,507,557 | |
Accrued other | | | 934,858 | | | 970,059 | |
Accrued professional fees | | | 484,751 | | | 505,900 | |
Accrued payroll and related costs | | | 476,802 | | | 379,330 | |
Accrued statistical services fees | | | 149,160 | | | 148,760 | |
Accrued distribution fees | | | 57,825 | | | 45,210 | |
Accrued consulting fees | | | 11,127 | | | 103,213 | |
| |
|
| |
|
| |
Total accrued expenses | | $ | 3,144,949 | | $ | 3,660,029 | |
| |
|
| |
|
| |
In connection with the termination of the Company’s lease obligation for 50% of its principal office space in October 2001, the Company was required to dispose of the furniture associated with that portion of the space. As this furniture was leased, the Company required the consent of the leasing company to sell the furniture. Pursuant to a restructuring arrangement with the leasing company, dated October 19, 2001, the furniture was permitted to be sold, and the lease amount corresponding to that portion of the furniture was converted to a note in the amount of $486,259, bearing interest at a rate of 6.79%, payable through March 2007. The monthly payment of principal plus interest totals $9,022. (See Note 14)
F-16
THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
December 31, 2003
Severance expense totaling $971,668 for the year ended December 31, 2001 represents costs associated with a headcount reduction throughout the organization and a severance payment the Company was contractually obligated to pay in connection with the termination of a senior executive.
(11) | Goodwill and Other Intangible Assets |
As of December 31, 2003 and December 31, 2002, the Company’s goodwill and other intangible assets and related accumulated amortization consisted of the following:
| | December 31, | |
| |
| |
| | 2003 | | 2002 | |
| | | | | |
Goodwill and other intangible assets not subject to amortization: | | | | | | | |
SmartPortfolio.com, Inc. goodwill | | $ | 1,990,312 | | $ | 1,990,312 | |
| |
|
| |
|
| |
SmartPortfolio.com, Inc. trade name | | $ | 493,333 | | $ | 493,333 | |
| |
|
| |
|
| |
Other intangible assets subject to amortization: | | | | | | | |
SmartPortfolio.com, Inc. customer list | | | 1,250,000 | | | 1,250,000 | |
SmartPortfolio.com, Inc. technology | | | 730,000 | | | 730,000 | |
ipoPros.com, Inc. non-compete agreement | | | — | | | 150,000 | |
| |
|
| |
|
| |
| | | 1,980,000 | | | 2,130,000 | |
Less accumulated amortization | | | (1,980,000 | ) | | (1,470,000 | ) |
| |
|
| |
|
| |
Total other intangible assets subject to amortization | | | — | | | 660,000 | |
| |
|
| |
|
| |
Total other intangible assets | | $ | 493,333 | | $ | 1,153,333 | |
| |
|
| |
|
| |
The Company recorded amortization expense of $660,000, $710,000 and $1,736,380 during the years ended December 31, 2003 and 2002 and 2001, respectively. There are no other remaining intangible assets subject to amortization. Should acquisitions or dispositions occur in the future, these amounts may vary.
The 2001 historical results do not reflect the provisions of FAS 142. Had the Company adopted FAS 142 on January 1, 2000, the historical net loss and basic and diluted net loss per common share for the year ended December 31, 2001 would have been changed as follows:
| | For the Year Ended
December 31, 2001 | |
| | | |
Net loss as reported—historical basis | | | $ | (29,229,546 | ) | |
Add: goodwill amortization | | | | 779,713 | | |
Add: other intangible amortization | | | | 246,667 | | |
| | |
|
| | |
Pro forma net loss | | | $ | (28,203,166 | ) | |
| | |
|
| | |
Pro forma net loss per share | | | $ | (1.08 | ) | |
| | |
|
| | |
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
The Company recognized a deferred tax asset of approximately $55 million, $54 million, and $41 million, as of December 31, 2003, 2002, and 2001, respectively, primarily relating to net operating loss carryforwards of approximately $137 million, $134 million, and $102 million as of December 31, 2003,
F-17
THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
December 31, 2003
2002, and 2001, respectively, available to offset future taxable income through 2023. In accordance with Section 382 of the Internal Revenue code, the usage of the Company’s net operating loss carryforward could be limited in the event of a change in ownership. A full valuation allowance has been recorded related to the deferred tax assets as a result of management’s uncertainty as to the realization of such assets. Accordingly, no provision has been recorded. There are no other significant temporary differences.
During July 2001, the Company issued 100,000 shares of common stock to James J. Cramer in connection with a previously announced award of restricted stock in lieu of his salary under his employment agreement with the Company. The shares were valued at $287,500 based upon the fair market value at the date of the award and were recorded as noncash compensation expense in the accompanying consolidated statements of operations.
On August 7, 2000, the Company entered into a Securities Purchase Agreement with Go2Net, Inc. (“Go2Net”) and Vulcan Ventures Inc. (“Vulcan”), pursuant to which, among other things, each of Go2Net and Vulcan purchased 670,167 shares of the Company’s common stock, par value $.01 per share, at a purchase price of $5.56 per share. In addition, the Company granted each of Go2Net and Vulcan an option to purchase up to an additional 7.45% (for a total of 14.9%) of its common stock outstanding immediately after the issuance of such stock, at a purchase price of $13.50 per share. Each option was exercisable at any time during the six months after its grant. The Company also entered into a strategic alliance agreement with Go2Net, pursuant to which, among other things, the Company was to have licensed Go2Net’s proprietary message board technology platform for the three-year period beginning on August 4, 2000. Under the terms of the original agreement, the Company was obligated to pay a total of $7,500,000 over the three-year license period. As of December 31, 2000, $2,000,000 had been paid, and was included on the consolidated balance sheet within prepaid expenses and other current assets, together with the fair market value of the stock options issued, net of a price fluctuation in the value of the shares of common stock issued. In September, 2001, the Company and Go2Net, Inc., then a subsidiary of Infospace, Inc., agreed to an early termination of the agreement, and the Company recorded a settlement charge of $2,535,660 in connection therewith.
Treasury Stock
In December 2000, the Company’s Board of Directors authorized the repurchase of up to $10 million worth of the Company’s common stock, in private purchases or in the open market. During the year ended December 31, 2003, the Company did not purchase any shares of common stock under this program. Since the inception of the program, the Company has purchased a total of 5,422,100 shares of common stock at an aggregate cost of $7,215,410. In February 2004, the Company’s Board of Directors approved the resumption of its stock repurchase program under new price and volume parameters.
Stock Options
Under the terms of the Company’s 1998 Stock Incentive Plan (the “Stock Option Plan”), 6,900,000 shares of common stock of the Company had been reserved for incentive stock options, nonqualified stock options (incentive and nonqualified stock options are collectively referred to as “Options”), restricted stock, or any combination thereof. In May 2002, the shareholders approved another amendment to the Stock Option Plan to increase the number of shares of common stock available for grant by 2,000,000, to a total of 8,900,000 and to make certain other changes in the terms of the Stock Option Plan. Awards (which can now include awards of deferred stock as well as restricted stock and Options, although no deferred stock awards have been made to date) may be granted to such directors, employees and consultants of the Company as the Compensation Committee of the Board of Directors
F-18
THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
December 31, 2003
shall in its discretion select. Only employees of the Company are eligible to receive grants of incentive stock options. As of December 31, 2003, there remained 1,821,076 options available for future grant.
A summary of the activity of the Stock Option Plan is as follows:
| | Options | | Weighted
Average
Exercise Price | |
| | | | | |
Options outstanding, December 31, 2000 | | 3,276,326 | | $ | 8.20 | | |
Options granted | | 1,650,117 | | | 2.17 | | |
Options exercised | | (82,275 | ) | | 0.26 | | |
Options cancelled | | (1,034,112 | ) | | 7.61 | | |
| |
| | | | | |
Options outstanding, December 31, 2001 | | 3,810,056 | | | 5.98 | | |
Options granted | | 1,934,400 | | | 1.53 | | |
Options exercised | | (185,867 | ) | | 1.10 | | |
Options cancelled | | (696,677 | ) | | 6.31 | | |
| |
| | | | | |
Options outstanding, December 31, 2002 | | 4,861,912 | | | 4.35 | | |
Options granted | | 941,000 | | | 3.19 | | |
Options exercised | | (455,923 | ) | | 1.27 | | |
Options cancelled | | (208,380 | ) | | 7.43 | | |
| |
| | | | | |
Options outstanding, December 31, 2003 | | 5,138,609 | | $ | 4.29 | | |
| |
| | | | | |
Options exercisable as of December 31, 2003, 2002, and 2001 were 3,477,035, 2,510,032, and 1,521,397, respectively, at weighted average exercise prices of $5.03, $5.54, and $7.63, respectively. Options generally vest over a four-year period and have terms not to exceed 10 years. Effective December 10, 2002, stock option grant agreements to members of the senior management team were amended to provide that in the event of a change of control of the Company, as defined, 50% of each member’s then unvested options would vest and become exercisable. For the years ended December 31, 2003, 2002 and 2001, the Company recorded noncash compensation expense of $190,955, $845,848, and $776,338, respectively, which relate to the grant of stock options with exercise prices that were less than the fair market value of the underlying shares of common stock on the date of the grant in 1998 and 1999.
On January 15, 2002, the Company issued options to purchase a total of 50,000 shares of common stock to a non-employee in connection with his outside contributor agreement with the Company. The options vested immediately and have an exercise period of the lesser of five years, or 90 days after the termination of his services. The value of these options was $72,043, which was amortized over the two-year period of his service to the Company. For the years ended December 31, 2003 and 2002, the Company recorded noncash compensation expense of $36,021 and $36,022, respectively.
On January 15, 2002, the Company issued options to purchase a total of 100,000 shares of common stock to a non-employee in connection with his outside contributor agreement with the Company. One-half of these options vested immediately and the other half vested on January 15, 2003. These options have an exercise period of the lesser of five years, or 90 days after the termination of his services. The value of these options at January 15, 2003 was $195,124, which was amortized over the two-year period of his service to the Company. For the years ended December 31, 2003 and 2002, the Company recorded noncash compensation expense of $95,921 and $99,203, respectively.
During the year ended December 31, 2002, the Company recognized $17,400 of noncash compensation expense related to the accelerated vesting of a terminated employee’s stock options.
For the years ended December 31, 2003, 2002 and 2001, the weighted average fair market value of options granted was $1.85, $0.95, and $1.47, respectively. The fair value of each option grant has been
F-19
THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
December 31, 2003
estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
| | For the Years Ended December 31, | |
| |
| |
| | 2003 | | 2002 | | 2001 | |
| | | | | | | |
Expected option lives | | 4 years | | 4 years | | 4 years | |
Risk-free interest rates | | 2.57% | | 3.86% | | 4.55% | |
Expected volatility | | 69% | | 78% | | 93% | |
Dividend yield | | 0% | | 0% | | 0% | |
The following table summarizes information about options outstanding at December 31, 2003:
| | | | | Options Outstanding | | | | | | | | |
| | | | |
| | | | | | | | |
Range of
Exercise Price | | Options
Outstanding | | Weighted
Average
Remaining
Contractual
Life | | Weighted
Average
Exercise
Price | | Options
Exercisable | | Weighted
Average
Exercise
Price of
Options
Exercisable | |
$ 1.01–$ 1.50 | | | 1,383,123 | | | 2.9 | | | | $ | 1.26 | | | 1,040,297 | | | $ | 1.27 | | |
$ 1.66–$ 2.44 | | | 372,750 | | | 3.0 | | | | $ | 1.87 | | | 184,490 | | | $ | 1.85 | | |
$ 2.50–$ 3.75 | | | 2,387,771 | | | 2.5 | | | | $ | 2.81 | | | 1,436,633 | | | $ | 2.72 | | |
$ 4.09–$ 6.00 | | | 283,500 | | | 2.8 | | | | $ | 5.43 | | | 117,375 | | | $ | 5.95 | | |
$ 6.31–$ 9.00 | | | 109,633 | | | 1.2 | | | | $ | 6.98 | | | 100,683 | | | $ | 6.98 | | |
$11.94–$17.75 | | | 311,666 | | | 0.9 | | | | $ | 14.93 | | | 307,941 | | | $ | 14.93 | | |
$18.00–$25.81 | | | 285,700 | | | 0.8 | | | | $ | 20.24 | | | 285,150 | | | $ | 20.24 | | |
$30.00–$35.50 | | | 4,466 | | | 0.6 | | | | $ | 32.57 | | | 4,466 | | | $ | 32.57 | | |
| | |
| | |
| | | |
|
| | |
| | | | | | |
| | | 5,138,609 | | | 2.5 | | | | $ | 4.29 | | | 3,477,035 | | | $ | 5.03 | | |
| | |
| | |
| | | |
|
| | |
| | | | | | |
(14) | Commitments and Contingencies |
Operating Leases and Employment Agreements
The Company is committed under operating leases, principally for office space, furniture and fixtures, and equipment. Certain leases are subject to rent reviews and require payment of expenses under escalation clauses. Rent and equipment rental expenses were $1,695,858, $1,579,152 and $3,274,773 for the years ended December 31, 2003, 2002 and 2001, respectively. Additionally, the Company has employment agreements with certain of its employees and outside contributors, whose future minimum payments are dependent on the future fulfillment of their services thereunder. Total future minimum payments are as follows:
| | Payments Due by Year | |
| |
| |
Contractual obligations: | | Total | | 2004 | | 2005 | | 2006 | | 2007 | | 2008 | | After
2008 | |
| | | | | | | | | | | | | | | | | | | | | | |
Operating leases | | $ | 6,874,821 | | $ | 1,331,063 | | $ | 1,354,224 | | $ | 1,339,419 | | $ | 1,130,302 | | $ | 941,130 | | $ | 778,683 | |
Employment agreements | | | 2,109,866 | | | 1,428,033 | | | 681,833 | | | — | | | — | | | — | | | — | |
Outside contributor agreements | | | 602,750 | | | 586,083 | | | 16,667 | | | — | | | — | | | — | | | — | |
Note payable | | | 311,164 | | | 89,895 | | | 96,192 | | | 102,931 | | | 22,146 | | | — | | | — | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total contractual cash obligations | | $ | 9,898,601 | | $ | 3,435,074 | | $ | 2,148,916 | | $ | 1,442,350 | | $ | 1,152,448 | | $ | 941,130 | | $ | 778,683 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
F-20
THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
December 31, 2003
Legal Proceedings
On December 5, 2001, a class action lawsuit alleging violations of the federal securities laws was filed in the United States District Court for the Southern District of New York naming as defendants TheStreet.com, certain of its former officers and directors and a current director, and certain underwriters of the Company’s initial public offering (The Goldman Sachs Group, Inc., Chase H&Q, Thomas Weisel Partners LLC, FleetBoston Robertson Stephens, and Merrill Lynch Pierce Fenner & Smith, Inc.). Plaintiffs allege that the underwriters of TheStreet.com’s initial public offering violated the securities laws by failing to disclose certain alleged compensation arrangements (such as undisclosed commissions or stock stabilization practices) in the offering’s registration statement. Similar suits were filed against over 300 other issuers that had initial public offerings between 1998 and December 2001, and they have all been consolidated into a single action. On June 25, 2003, a committee of the Company’s Board of Directors conditionally approved a proposed partial settlement of the lawsuit in which the issuers would settle with the plaintiffs. The proposed settlement, if approved by the court, would provide for, among other things, a release of the Company and its individual defendants from any liability for their allegedly wrongful conduct, in return for the assignment by the Company to the plaintiffs of certain potential claims the Company may have against its underwriters. The financial portion of the proposed settlement is expected to be borne by the Company’s insurance carriers. However, in the event the settlement is not approved by the court and the Company or any of its individual defendants remains a defendant in the lawsuit, any unfavorable outcome of this litigation could have an adverse impact on the Company’s business, financial condition, results of operations, and cash flows.
(15) | Employee Benefit Plan |
Effective January 1, 1997, the Company adopted a noncontributory savings plan with a salary reduction arrangement in accordance with Section 401(k) of the Internal Revenue Code. The 401(k) plan covers all eligible employees and is funded solely by employee contributions.
(16) | Long-term Investments, at Cost |
In December 1999, the Company purchased a 19.99% interest for $2,250,000 in BusinessNet Online Ltd., which launched an online business publication serving the Israeli market. As of December 31, 1999, approximately $1,125,000 of this investment was unpaid and was reflected in accrued expenses, which was subsequently paid in 2000. The investment was being accounted for on a cost basis. In July 2000, the Company agreed to provide to Business Net Online Ltd., pursuant to a Convertible Bridge Loan Agreement, a loan in the amount of $554,351, which was funded in the second half of 2000. Under the terms of the agreement, the loan would convert to equity upon the earlier of 12 months from the date of disbursement or the occurrence of an investment transaction in which BusinessNet Online Ltd. received a certain level of proceeds. The loan was included within other receivables within the December 31, 2000 balance sheet. In March 2001, the Company agreed to provide to BusinessNet Online Ltd., pursuant to a second agreement, a loan in the amount of $1,250,000, which was funded during 2001. Under the terms of the agreement, this loan and the prior loan, would convert to equity upon the earlier of 12 months from the date of disbursement or the occurrence of an investment transaction in which BusinessNet Online Ltd. received a certain level of proceeds. In December 2001, the Company concluded that its original investment and subsequent bridge loans to BusinessNet Online Ltd. were not realizable. As a result, the Company determined that this asset was fully impaired, and recorded an impairment charge in the amount of the full value ($4,054,354) of the investment and loans. During 2002, there was a change to the conversion terms of the loans, which did not have any impact on the Company as the loans were fully written off.
F-21
THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
December 31, 2003
(17) | Business Segment Information |
During the year ended December 31, 2002, the chief operating decision maker allocated resources and assessed performance on a single-segment basis, as IRG had not yet commenced full operations. Effective January 1, 2003, the Company’s operations were classified into two business segments, media and financial services. Effective July 1, 2003, these segments have been renamed “electronic publishing” and “securities research and brokerage” to better reflect the Company’s operating activities. The Company’s electronic publishing segment provides investment commentary, analysis and news to both retail and professional customers. The Company’s securities research and brokerage segment generates independent proprietary equity research for use by institutional clients, and as a broker-dealer, is able to accept payment for its product through trading commissions, a standard payment method in the professional markets. Commission revenue is recorded on the trade date. Beginning with the first quarter of 2003, these segments were evaluated separately by key management in assessing performance and allocating resources. The information presented below includes certain intercompany transactions and, therefore, is not necessarily indicative of the results had the operations existed as stand-alone businesses. Eliminations include intercompany sales of subscription-based products, which are billed at rates consistent with pricing arrangements for bulk product subscription sales. These intercompany transactions are eliminated in consolidation.
| | For the Year Ended December 31, 2003 | |
| |
| |
| | Electronic
publishing | | Securities
research and
brokerage | | Eliminations | | Total | |
Statement of Operations Data: | | | | | | | | | | | | | |
Subscription revenue | | $ | 18,742,985 | | $ | — | | $ | 240,320 | | $ | 18,502,665 | |
Advertising revenue | | | 5,602,483 | | | — | | | — | | | 5,602,483 | |
Commission revenue | | | — | | | 805,075 | | | — | | | 805,075 | |
Other revenue | | | 1,188,720 | | | — | | | — | | | 1,188,720 | |
| |
|
| |
|
| |
|
| |
|
| |
Total net revenue | | $ | 25,534,188 | | $ | 805,075 | | $ | 240,320 | | $ | 26,098,943 | |
| |
|
| |
|
| |
|
| |
|
| |
Net loss | | $ | (834,902 | ) | $ | (3,204,596 | ) | $ | — | | $ | (4,039,498 | ) |
| |
|
| |
|
| |
|
| |
|
| |
| | | As of December 31, 2003 | |
| | |
| |
| | Electronic
publishing | | Securities
research and
brokerage | | Eliminations | | Total | |
Balance Sheet Data: | | | | | | | | | | | | | |
Total assets | | $ | 40,038,484 | | $ | 1,202,446 | | $ | (4,043,631 | ) | $ | 37,197,299 | |
| |
|
| |
|
| |
|
| |
|
| |
(18) | Selected Quarterly Financial Data (Unaudited) |
| | For the Year Ended December 31, 2003 | |
| |
| |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | |
| | (In Thousands, Except Per Share Data) | |
Total net revenue | | | $ | 5,656 | | | $ | 6,394 | | | $ | 6,666 | | | $ | 7,383 | | |
Total operating expense | | | | 7,830 | | | | 7,776 | | | | 7,600 | | | | 7,303 | | |
Net (loss) income | | | | (2,056 | ) | | | (1,273 | ) | | | (865 | ) | | | 154 | | |
Basic net (loss) income per common share | | | | (0.09 | ) | | | (0.05 | ) | | | (0.04 | ) | | | 0.01 | | |
Diluted net (loss) income per common share | | | | (0.09 | ) | | | (0.05 | ) | | | (0.04 | ) | | | 0.01 | | |
F-22
THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
December 31, 2003
| | For the Year Ended December 31, 2002 | |
| |
| |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | |
| | | (In Thousands, Except Per Share Data) | |
Total net revenue | | | $ | 4,073 | | | | $ | 5,487 | | | | $ | 5,334 | | | | $ | 5,953 | | |
Total operating expense | | | | 8,187 | | | | | 7,654 | | | | | 7,500 | | | | | 7,234 | | |
Net loss from continuing operations | | | | (3,894 | ) | | | | (1,983 | ) | | | | (1,853 | ) | | | | (1,166 | ) | |
Gain from discontinued operations | | | | 193 | | | | | 5 | | | | | 3 | | | | | 9 | | |
Net loss | | | | (3,701 | ) | | | | (1,978 | ) | | | | (1,850 | ) | | | | (1,157 | ) | |
Net (loss) income per share—basic and diluted: | | | | | | | | | | | | | | | | | | | | | |
Continuing operations | | | $ | (0.17 | ) | | | $ | (0.08 | ) | | | $ | (0.08 | ) | | | $ | (0.05 | ) | |
Discontinued operations | | | | 0.01 | | | | | — | | | | | — | | | | | — | | |
| | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
Net loss per share | | | $ | (0.16 | ) | | | $ | (0.08 | ) | | | $ | (0.08 | ) | | | $ | (0.05 | ) | |
| | |
|
| | | |
|
| | | |
|
| | | |
|
| | |
F-23
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2003, 2002 and 2001
Allowance for Doubtful Accounts | | Balance
at
Beginning
of Period | | Provisions
Charged to
(Recovery from)
Expense | | Write-offs | | Balance at End
of Period |
| | | | | | | | | | | | | | | | |
For the year ended December 31, 2003 | | $ | 212,312 | | | $ | (46,839 | ) | | $ | 36,377 | | | $ | 129,096 | |
For the year ended December 31, 2002 | | $ | 490,263 | | | $ | 41,444 | | | $ | 319,395 | | | $ | 212,312 | |
For the year ended December 31, 2001 | | $ | 749,159 | | | $ | 355,714 | | | $ | 614,610 | | | $ | 490,263 | |
F-24
EXHIBIT INDEX
Exhibit
Number | Description |
| |
*3.1— | Amended and Restated Certificate of Incorporation |
**3.2— | Amended and Restated Bylaws |
*4.1— | Amended and Restated Registration Rights Agreement, dated as of December 21, 1998, among TheStreet.com and the stockholders named therein |
*4.2— | TheStreet.com Rights Agreement |
†4.3— | Amendment No. 1, dated as of August 7, 2000, to Rights Agreement |
††4.4— | Specimen Certificate for TheStreet.com’s common stock |
| 10.1— | Amended and Restated 1998 Stock Incentive Plan, dated as of May 29, 2002 |
| 10.2— | Annual Incentive Plan |
| 10.3— | Employment Agreement, dated February 22, 2003, between James Cramer and TheStreet.com, Inc. |
10.4— | Employment Agreement, dated February 22, 2004, between James Cramer and TheStreet.com, Inc. |
10.5— | Employment Agreement, dated January 1, 2004, between Thomas J. Clarke, Jr. and TheStreet.com, Inc. |
| 10.6— | Employment Agreement, dated March 1, 2003, between James Lonergan and TheStreet.com, Inc. |
14— | Code of Business Conduct and Ethics |
23.1— | Consent of Ernst & Young LLP |
| 23.2— | Information Regarding Consent of Arthur Andersen LLP |
31.1— | Rule 13a-14(a) Certification of CEO |
31.2— | Rule 13a-14(a) Certification of CFO |
32.1— | Section 1350 Certification of CEO |
32.2— | Section 1350 Certification of CFO |
______________
| * | Incorporated by reference to Exhibits to the Company’s Registration Statement on Form S-1 filed February 23, 1999 (File No. 333-72799). |
| ** | Incorporated by reference to Exhibits to the Company’s 1999 Annual Report on Form 10-K filed March 30, 2000. |
| † | Incorporated by reference to Exhibits to the Company’s 2000 Annual Report on Form 10-K filed April 2, 2001. |
| †† | Incorporated by reference to Exhibits to Amendment 3 to the Company’s Registration Statement on Form S-1 filed April 19, 1999. |
|
| Incorporated by reference to Exhibits to the Company’s Quarterly Report on Form 10-Q filed August 14, 2002. |
|
| Incorporated by reference to Exhibits to the Company’s 2002 Annual Report on Form 10-K filed March 31, 2003. |
