The fair market values of the remaining assets and liabilities of the discontinued operation are as follows:
As of March 31, 2006, current assets consists of a rent security deposit, and current liabilities consists of accrued shutdown costs.
The following table displays the activity and balances of the provision for additional future shutdown costs:
7. 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, and accounts receivable. The Company maintains all of its cash and cash equivalents in five financial institutions and 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, actual losses have been within management’s expectations.
8. RECLASSIFICATIONS
The accompanying consolidated statement of operations and the statement of cash flows for the three months ended March 31, 2005 have been reclassified to conform to the current period presentation.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Statements contained in this quarterly report on Form 10-Q relating to plans, strategies, objectives, economic performance and trends and other statements that are not descriptions of historical facts may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, the factors set forth under the heading “Risk Factors” and elsewhere in this quarterly report, and in other documents filed by the Company with the Securities and Exchange Commission from time to time, including, without limitation, the Company’s annual report on Form 10-K for the year ended December 31, 2005. Forward-looking statements may be identified by terms such as “may”, “will”, “should”, “could”, “expects”, “plans”, “intends”, “anticipates”, “believes”, “estimates”, “predicts”, “forecasts”, “potential”, or “continue” or similar terms or the negative of these terms. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements. The Company has no obligation to update these forward-looking statements.
The following discussion and analysis should be read in conjunction with the Company’s unaudited consolidated financial statements and notes thereto.
Overview
History
TheStreet.com, Inc. (collectively, with its wholly-owned subsidiaries, the “Company”) was organized in June 1996 as a Delaware limited liability company and converted to a Delaware C-corporation in May 1998. The Company creates business and investment content, which it makes available through online publications, content syndication and audio and video programming. The Company receives revenue from subscriptions, advertising and sponsorship sales, syndication and radio programming.
Current State of the Company
The Company’s total net revenue for the three months ended March 31, 2006 totaled approximately $11.1 million, an increase of approximately 43% when compared to approximately $7.8 million for the three months ended March 31, 2005. The Company’s net income from continuing operations for the three months ended March 31, 2006 totaled approximately $2.6 million, an increase of approximately 163% when compared to approximately $1.0 million for the three months ended March 31, 2005.
Subscription Revenue. Subscription revenue, the largest component of net revenue, increased by approximately 41%, to approximately $7.6 million, for the three months ended March 31, 2006, as compared to approximately $5.4 million for the three months ended March 31, 2005. This increase was attributable primarily to an increase of 35% in the average number of subscribers to the Company’s services during the three months ended March 31, 2006 as compared to the three months ended March 31, 2005. We believe this growth is due largely to our success in (i) signing and implementing agreements with large, high-traffic portal companies to direct users to our Web sites, (ii) promoting our brands, products and services through television and radio programs hosted by contributor James J. Cramer, and (iii) publishing proprietary, paid content on our free, flagship Web site to help generate interest in our subscription-based services.
In order to take advantage of these trends, in January 2006, the Company entered into an agreement with CBS Radio, Inc. to broadcast its radio program, ‘RealMoney with Jim Cramer,’ in major markets not accessible with our previous broadcast partner. The Company plans in the remainder of 2006 to increase use of its online, direct response marketing program and to continue to expand its use of co-marketing and other distribution
9
arrangements to attract subscribers to our services. Because a majority of these arrangements are done on a performance basis, rather than on a fixed-fee basis, increases in subscriptions that result from these efforts will necessarily cause our marketing expense to increase. Accordingly, we expect the Company’s sales and marketing expenditures for the remainder of 2006 to increase from 2005 levels. Because the Company’s online advertising contracts generally have the short terms and early cancellation provisions typical of the industry, the Company is able to adjust its expenditures on a weekly or monthly basis, depending on the return-on-investment of the campaigns.
Advertising Revenue. Advertising revenue increased by approximately 54% for the three months ended March 31, 2006, to approximately $3.2 million, as compared to approximately $2.1 million for the three months ended March 31, 2005. The increase is attributable primarily to strong growth in the number of unique visitors to the Company’s Web sites and the addition of content to the Company’s free, flagship Web site, both of which helped to increase the number of page views generated by the Company’s Web sites. The continued strength of the online advertising market also contributed to the increase. These factors in turn led to an increase in the number of advertisers choosing to place their advertisements in the Company’s publications.
The Company plans to continue to add content (including video, audio, Web logs, or “blogs,” and non-financial content) to its free, flagship Web site in an effort to increase page views and attract more advertisers from outside the financial industry, and expand its advertising sales staff to take advantage of the current positive trends in the online advertising market. We also anticipate that, due to these trends, the proportion of the Company’s total revenue that comes from advertising is likely to increase in the remainder of 2006.
Expenses. Over the periods, total compensation, revenue sharing costs, fees paid to non-employee content providers and credit card processing fees increased, while legal and consulting fees decreased. As a result, total operating expenses increased by approximately 27%, to approximately $8.9 million for the three months ended March 31, 2006, as compared to approximately $7.0 million for the three months ended March 31, 2005.
The Company believes that its current cash and cash equivalents will be sufficient to meet its anticipated cash needs for at least the next 12 months. See “—Liquidity and Capital Resources.”
Critical Accounting Policies
General
The Company’s discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions, specifically for the allowance for doubtful accounts receivable, the useful lives of fixed assets, the valuation of goodwill and intangible assets, as well as accrued expense estimates 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.
The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.
Revenue Recognition
The Company generates its revenue primarily from subscriptions and advertising.
Subscription revenue represents fees paid by customers for access to particular services for the term of the subscription. 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
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basis. The Company calculates net subscription revenue by deducting actual refunds from cancelled subscriptions and chargebacks of disputed credit card charges from gross revenue. Net subscription revenue is recognized ratably over the subscription periods. Deferred revenue relates to subscription fees for which amounts have been collected but for which revenue has not been recognized.
Advertising revenue is derived from the sale of Internet sponsorship arrangements and from the delivery of banner and email advertisements on the Company’s web sites, and is recognized ratably over the period the advertising is displayed, provided that no significant Company obligations remain and collection of the resulting receivable is reasonably assured. 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.
Other revenue consists primarily of revenue related to the Company’s nationally syndicated daily radio program, “RealMoney with Jim Cramer,” and syndication revenue. Revenue for the radio program is recognized ratably as the program is broadcast. Syndication revenue is recognized ratably over the period the service is provided to the syndication partner.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its advertisers to make required payments and for paid subscriptions that are cancelled and refunded or charged back by the subscriber. A considerable amount of judgment is required in assessing the ultimate realization of these receivables, including the current credit-worthiness of each customer. Although results of prior estimates have been in line with management’s expectations, should the financial condition of the Company’s advertisers and subscribers deteriorate, resulting in an impairment of their ability to make payments, additional allowances might be required. If a major customer’s credit-worthiness deteriorates, or if actual defaults are higher than our historical experience, or if other circumstances arise, our estimates of the recoverability of amounts due to us could be overstated, and additional allowances could be required, which could have an adverse impact on the Company’s revenue.
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 on a straight-line basis over the shorter of the respective lease term or the estimated useful life of the asset. If the useful lives of the assets materially differ from the estimates herein, additional costs could be incurred which could have an adverse impact on the Company’s expenses.
Goodwill and Other Intangible Assets
In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 requires companies to stop amortizing goodwill and certain other intangible assets with indefinite useful lives. 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 useful lives will continue to be amortized over their useful lives (but with no maximum life).
Upon the adoption of SFAS No. 142 in the first quarter of 2002, the Company stopped the amortization of goodwill and certain other intangible assets with indefinite useful lives, and completed the required transitional fair
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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, 2005, 2004 and 2003, no impairment was indicated for the Company’s goodwill and intangible assets with indefinite lives.
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 and accounts receivable. The Company maintains all of its cash and cash equivalents in five financial institutions and 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, actual losses have been within management’s expectations.
Stock Based Compensation
As of October 1, 2005, the Company elected early adoption of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share Based Payment: An Amendment of FASB Statements 123 and 95.” This statement requires that the cost resulting from all share-based payment transactions be recognized in the financial statements based upon estimated fair values. Prior to adoption of SFAS No. 123(R), the Company accounted for stock-based compensation expense on a pro forma basis in accordance with Accounting Principles Board No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS No. 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS No. 123(R).
The Company adopted SFAS No. 123(R) using the modified prospective transition method. The accompanying consolidated statement of operations for the three months ended March 31, 2006 reflects the impact of SFAS No. 123(R). In accordance with the modified prospective transition method, prior periods have not been restated to reflect, and do not include, the impact of SFAS No. 123(R). Stock-based compensation expense recognized under SFAS No. 123(R) for the three months ended March 31, 2006 was $348,965.
Upon adoption of SFAS No. 123 (R), the Company continued its practice of estimating the value of employee stock options on the date of grant using the Black-Scholes option-pricing model. This determination is affected by the Company’s stock price as well as assumptions regarding expected volatility, risk-free interest rate, and expected dividends. The weighted-average estimated value of employee stock options granted during the three months ended March 31, 2006 was $2.62 per share, using the Black-Scholes model with the following weighted-average assumptions:
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| | Three Months Ended
March 31, 2006 | |
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Expected volatility | | | 42.11 | % | |
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Risk-free interest rate | | | 4.29 | % | |
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Expected dividends | | | 1.25 | % | |
In determining the expected volatility assumption for the three months ended March 31, 2006, the Company used an historical analysis of the volatility of the Company’s share price for the preceding two years, based on management’s assessment that recent historical volatility is representative of future stock price trends.
The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of the Company’s employee stock options. The dividend yield assumption is based on the history and expectation of
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future dividend payouts.
As stock-based compensation expense recognized in the Consolidated Statement of Operations for the first quarter of fiscal 2006 is based on awards that are ultimately expected to vest, it has been reduced for expected forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience.
If factors change and the Company employs different assumptions in the application of SFAS No. 123(R) in future periods, the compensation expense that the Company records under SFAS No. 123(R) may differ significantly from what it has recorded in the current period.
Income Taxes
The Company accounts for its income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” 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 than not that some or all of the deferred tax asset will not be realized.
Results of Operations
Through June 2005 the Company operated its business in two segments. During that period, certain functions necessary to operate the Company’s securities research and brokerage segment, including administrative, financial, legal and technology functions, were handled by the Company’s electronic publishing operations – currently the sole operating segment. Expenses related to the performance of these functions were allocated to the discontinued segment based upon a services agreement. Through April 2005, costs were allocated pro rata, based upon the average number of personnel employed by IRG Research each month as a percentage of the average of the total number of personnel employed each month by the Company as a whole. During May and June 2005, shared costs were allocated based on the Company’s annual budget. In June 2005, the operations of the Company’s securities research and brokerage segment were discontinued, and no further allocations have been made. Costs allocated to the discontinued segment totaled $587,842 for the three-month period ended March 31, 2005.
Comparison of Three Months Ended March 31, 2006 and March 31, 2005
Net Revenue
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| | For the Three Months Ended
March 31, | | Change | |
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| | 2006 | | 2005 | | Amount | | Percent | |
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Net revenue: | | | | | | | | | | | | | | |
Subscription | | $ | 7,628,039 | | $ | 5,427,280 | | $ | 2,200,759 | | | 41 | % | |
Advertising | | | 3,242,749 | | | 2,106,274 | | | 1,136,475 | | | 54 | % | |
Other | | | 276,317 | | | 271,632 | | | 4,685 | | | 2 | % | |
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Total net revenue | | $ | 11,147,105 | | $ | 7,805,186 | | $ | 3,341,919 | | | 43 | % | |
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Subscription. Subscription revenue is derived from annual, semi-annual, quarterly and monthly subscriptions.
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The increase in subscription revenue is primarily the result of a 35% increase in the average number of subscribers to the Company’s services during the three months ended March 31, 2006 as compared to the three months ended March 31, 2005. We believe this growth is due largely to our success in (i) signing and implementing agreements with large, high-traffic portal companies to direct users to our Web sites, (ii) promoting our brands, products and services through television and radio programs hosted by contributor James J. Cramer, and (iii) publishing proprietary, paid content on our free, flagship Web site to help generate interest in our subscription-based services. Since subscription revenue is recognized ratably over the subscription period, the increased subscriber totals have also resulted in an increase of 58% in the March 31, 2006 deferred revenue balance when compared to March 31, 2005. For the three months ended March 31, 2006, approximately 65% of the Company’s net subscription revenue was derived from annual subscriptions, as compared to approximately 68% for the three months ended March 31, 2005.
The Company calculates net subscription revenue by deducting refunds from cancelled subscriptions and chargebacks of disputed credit card charges from gross revenue. Refunds and chargebacks totaled approximately 1% of gross subscription revenue for the three months ended March 31, 2006, as compared to less than 1% for the three months ended March 31, 2005.
Advertising. Advertising revenue is derived from Internet sponsorship arrangements, and from the delivery of banner and email advertisements on the Company’s web sites.
The increase in advertising revenue is primarily the result of continued improvements in the online advertising market, the successful overall performance of advertising campaigns delivered by the Company and by an increase in the number of unique visitors to the Company’s web sites and the addition of content to the Company’s free, flagship web site, both of which helped to increase the number of page views generated by the Company’s web sites. These factors in turn led to an increase in the number of advertisers choosing to place their advertisements in the Company’s publications. During the three months ended March 31, 2006, the Company achieved a 120% increase in revenue generating page views, when compared to the three months ended March 31, 2005.
The number of advertisers for the three months ended March 31, 2006 was 69 as compared to 48 for the three months ended March 31, 2005. The Company’s top five advertisers accounted for approximately 46% of its total advertising revenue for the three months ended March 31, 2006, as compared to approximately 38% for the three months ended March 31, 2005. For the three months ended March 31, 2006, one advertiser accounted for approximately 23% of total advertising revenue. For the three months ended March 31, 2005, one advertiser accounted for approximately 10.5% of total advertising revenue.
Other. Other revenue consists primarily of revenue related to the Company’s nationally syndicated daily radio program,RealMoney with Jim Cramer and syndication revenue.
The increase in other revenue is primarily the result of a small increase in radio program revenue, partially offset by a small decrease in syndication revenue.
Operating Expense
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| | For the Three Months Ended
March 31, | | Change |
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| | 2006 | | 2005 | | Amount | | Percent |
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Operating expense: | | | | | | | | | | | | |
Cost of services | | $ | 4,146,912 | | $ | 2,900,684 | | $ | 1,246,228 | | 43 | % |
Sales and marketing | | | 2,146,915 | | | 1,988,351 | | | 158,564 | | 8 | % |
General and administrative | | | 2,371,850 | | | 1,946,843 | | | 425,007 | | 22 | % |
Depreciation and amortization | | | 186,988 | | | 142,361 | | | 44,627 | | 31 | % |
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Total operating expense | | $ | 8,852,665 | | $ | 6,978,239 | | $ | 1,874,426 | | 27 | % |
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Operating expenses from continuing operations reported above for the three-month period ended March 31, 2005 do not include expenses that were previously allocated to the Company’s securities research and brokerage segment. Such expenses are reported below under discontinued operations. While some of the expenses that were previously allocated to the securities research and brokerage segment have been eliminated or reduced as a result of the discontinuation of operations of IRG Research, which occurred in June 2005, the remaining portion of these expenses will continue to be incurred by the Company in its continuing operations.
Cost of services. Cost of services expense includes compensation and benefits for the Company’s editorial and technology staffs, as well as fees paid to non-employee content providers, expenses for contract programmers and developers, communication lines and other technology costs.
The increase in cost of services expense during the period was primarily the result of higher compensation and related costs resulting from increased headcount and non-cash compensation related to the expensing of stock, combined with higher revenue sharing costs and fees paid to non-employee content providers, the sum of which totals $1,095,353. The increased expense also reflects the allocation in the three months ended March 31, 2005 of cost of services expenses totaling $248,833 to the Company’s discontinued securities research and brokerage segment. Such allocation was not made in the three months ended March 31, 2006.
Sales and marketing. Sales and marketing expense consists primarily of advertising and promotion, promotional materials, content distribution fees, and compensation expense for the direct sales force and customer service departments.
The increase in sales and marketing expense is primarily the result of higher credit card fees related to the increased subscription revenue and deferred revenue balance, combined with higher advertisement serving and promotion expenses, the sum of which totals $292,145, partially offset by lower compensation and related costs, primarily due to reduced headcount, totaling $162,882. The increased expense also reflects the allocation in the three months ended March 31, 2005 of sales and marketing expenses totaling $4,989 to the Company’s discontinued securities research and brokerage segment. Such allocation was not made in the three months ended March 31, 2006.
General and administrative. General and administrative expense consists primarily of compensation for general management, finance and administrative personnel, occupancy costs, professional fees, equipment rental and other office expenses.
The increase in general and administrative expense is primarily the result of higher compensation and related costs, due in large part to non-cash compensation related to the expensing of stock options and incentive compensation, combined with higher rent expense, the sum of which totals $621,850, partially offset by lower legal and consulting fees, the sum of which totals $308,241. The increased expense also reflects the allocation in the three-month period ended March 31, 2005 of general and administrative expenses totaling $305,695 to the Company’s discontinued securities research and brokerage segment. Such allocation was not made in the three months ended March 31, 2006.
Depreciation and amortization. The increase in depreciation and amortization expense primarily reflects the allocation of expenses totaling $27,011 in the three months ended March 31, 2005 to the Company’s discontinued securities research and brokerage segment. Such allocation was not made in the three months ended March 31, 2006.
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Net Interest Income
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| | For the Three Months
Ended March 31, | | Change |
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| | 2006 | | 2005 | | Amount | | Percent |
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Net interest income | | $ | 340,056 | | $ | 154,126 | | $ | 185,930 | | 121 | % |
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The increase in net interest income is primarily the result of higher interest rates and increased cash balances.
Discontinued Operations
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| | For the Three Months
Ended March 31, | | Change |
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| | 2006 | | 2005 | | Amount | | Percent |
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Loss from discontinued operations | | $ | — | | $ | (1,835,551 | ) | $ | 1,835,551 | | 100 | % |
Loss on disposal of discontinued operations | | | (5,517 | ) | | — | | | (5,517 | ) | N/A | |
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Loss from discontinued operations | | $ | (5,517 | ) | $ | (1,835,551 | ) | $ | 1,830,034 | | 100 | % |
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In June 2005, the Company committed to a plan to discontinue the operations of the Company’s securities research and brokerage segment. Accordingly, the operating results relating to this segment have been segregated from continuing operations and reported as a separate line item on the consolidated statements of operations.
For the three months ended March 31, 2006, loss on disposal of discontinued operations represents additional legal fees incurred in connection with the liquidation process and adjustments to previously estimated shutdown costs.
The fair market values of the remaining assets and liabilities of the discontinued operation are as follows:
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| | March 31, | | December 31, |
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| | 2006 | | 2005 |
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Current assets | | $ | 3,200 | | $ | 3,200 |
Current liabilities | | $ | 275,492 | | $ | 279,930 |
As of March 31, 2006, current assets of discontinued operations consists of a rent security deposit, and current liabilities of discontinued operations consists primarily of accrued shutdown costs.
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 March 31, 2006, the Company’s cash and cash equivalents and current and non-current restricted cash amounted to $39,835,072, representing 81% of total assets.
Cash generated from operations was sufficient to cover expenses during the three months ended March 31, 2006. Net cash provided by operating activities totaled $4,138,831 for the three months ended March 31, 2006, as compared to net cash used in operating activities totaling $3,458,738 for the three months ended March 31, 2005. The increase in net cash provided by operating activities was primarily the result of the following:
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| • | Improved operating results from continuing operations; |
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| • | Lower incentive compensation payments during the three months ended March 31, 2006 related to the 2005 fiscal year, as compared to payments made during the three months ended March 31, 2005 related to the 2004 fiscal year; |
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| • | Reduced expenditures due to the shutdown of IRG Research’s operations; and |
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| • | Increased cash from strong sales of subscription services leading to an increase in the growth of deferred revenue. |
Net cash provided by operating activities of $4,138,831 for the three months ended March 31, 2006 was primarily the result of the Company’s net income of $2,576,381 combined with an increase in deferred revenue (resulting from strong subscription sales) and non-cash expenses, the sum of which totals $3,126,438. This total was partially offset by a decrease in accounts payable and accrued expenses (primarily the result of payments related to annual incentive compensation) combined with an increase in accounts receivable (primarily the result of increased billings caused by higher advertising revenue), the sum of which totals $1,478,860.
Net cash provided by investing activities of $305,029 for the three months ended March 31, 2006 was the result of the sale of a short-term investment partially offset by capital expenditures. Capital expenditures generally consisted of purchases of computer software and hardware.
Net cash provided by financing activities of $1,876,673 for the three months ended March 31, 2006 consisted of the proceeds from the exercise of stock options, totaling $3,101,497, partially offset by cash dividends paid, the purchase of treasury stock and a decrease in note payable, the sum of which totals $1,224,824.
The Company has a total of $1,100,000 of cash invested in certificates of deposit and money market investments which 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 amount, 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 $800,000 of restricted cash will become unrestricted at various times through 2009.
The Company believes that its current cash and cash equivalents will be sufficient to meet its anticipated cash needs for at least the next 12 months. The Company is committed to cash expenditures in an aggregate amount of approximately $3.6 million through March 31, 2007, in respect of the contractual obligations set forth below under “Commitments and Contingencies.” Additionally, the Company’s Board of Directors declared a first quarter cash dividend in the amount of $0.025 per share of common stock, which resulted in a cash expenditure of approximately $0.7 million in the first quarter of 2006. The Company intends, although there can be no assurance, to pay regular quarterly cash dividends in the future.
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 increased to $402,693 for the three months ended March 31, 2006, as compared to $337,658 for the three months ended March 31, 2005. The increase in rent and equipment rental expenses reflects the allocation to the Company’s discontinued securities research and brokerage segment of expenses totaling $31,103 in the three months ended March 31, 2005. Such allocation was not made in the three months ended March 31, 2006. The change in rent and equipment rental expense is also the result of the timing and amount of retroactive operating expense escalation charges. 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. As of March 31, 2006, total future minimum cash payments are as follows:
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| | Payments Due by Period |
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Contractual obligations: | | Total | | Less Than
1 Year | | 1 – 3 Years | | 4 – 5 Years | | After
5 Years |
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Operating leases | | $ | 3,850,978 | | $ | 1,330,536 | | $ | 1,954,127 | | $ | 566,315 | | $ | — |
Employment agreements | | | 2,826,125 | | | 1,768,625 | | | 1,057,500 | | | — | | | — |
Outside contributor agreements | | | 363,494 | | | 363,494 | | | — | | | — | | | — |
Note payable | | | 99,993 | | | 99,993 | | | — | | | — | | | — |
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Total contractual cash obligations | | $ | 7,140,590 | | $ | 3,562,648 | | $ | 3,011,627 | | $ | 566,315 | | $ | — |
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Item 3. 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 are not expected to result in material near-term losses in earnings, material changes in fair values or cash flows for all instruments.
Item 4. Controls and Procedures.
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
The Company carried out, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Controller, who performed the functions associated with the position of Chief Financial Officer during the quarterly period covered by this report, 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 quarterly period covered by this report. Based upon that evaluation, the Chief Executive Officer and Controller concluded that, as of March 31, 2006, the design and operation of these disclosure controls and procedures were effective. During the quarterly 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.
18
PART II - OTHER INFORMATION
Item 1. 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, Inc., certain of its former officers and directors and James J. Cramer, 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, Inc.’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. The plaintiffs seek damages and statutory compensation against each defendant in an amount to be determined at trial, plus pre-judgment interest thereon, together with costs and expenses, including attorneys’ fees. 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. Pursuant to a Court Order dated October 9, 2002, each of the individual defendants to the action, including Mr. Cramer, has been dismissed without prejudice. On June 8, 2004, the Company and its individual defendants (together with the Company’s insurance carriers) entered into a settlement with the plaintiffs. The settlement is subject to a hearing on fairness and approval by the court overseeing the litigation.
Although the lawsuit against us is an independent cause of action vis-a-vis the lawsuits pending against other issuers in the consolidated proceeding, and no issuer is liable for any wrongdoing allegedly committed by any other issuer, the proposed settlement between the plaintiffs and the issuers is being done on a collective basis. Generally, under the terms of the settlement, in exchange for the delivery by our insurers and those of the other defendants of an undertaking guaranteeing that the plaintiffs will recover, in the aggregate, at least $1 billion from the underwriters, and the assignment to the plaintiffs by the issuers of their interests in claims against the underwriters for excess compensation in connection with their IPOs, the plaintiffs will release the non-bankrupt issuers from all claims against them (the bankrupt issuers will receive a covenant not to sue) and their individual defendants. The costs and expenses of the settlement are expected to be borne by the Company’s insurers.
Pursuant to an Opinion and Order dated February 15, 2005, the settlement was preliminarily approved by the court, subject to certain minor modifications. Such modifications have been made and were approved by the Court pursuant to an Order dated August 31, 2005. The court also appointed the Notice Administrator for the settlement and ordered that notice of the settlement be distributed to all settlement class members beginning on November 15, 2005. The settlement fairness hearing was held on April 24, 2006. A decision from the court on whether the settlement is fair to the class members is expected in the near future. In the event the settlement does not receive final approval and the Company remains a defendant or any of its former individual defendants is again named as 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.
In the ordinary course of our business, we are from time to time subject to various other legal proceedings. We do not believe that any such other legal proceedings, individually or in the aggregate, will have a material adverse effect on our business, financial condition, results of operations or cash flows.
Item 1A. Risk Factors.
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2005, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
19
We Have a History of Losses and May Incur Further Losses
We earned net income of $2.6 million, or $0.09 per share on a fully diluted basis, for the three months ended March 31, 2006. For many of the previous quarters, we have incurred operating losses, and may again experience operating losses in the future. As of March 31, 2006, we had an accumulated deficit of approximately $151.0 million. We will need to generate significant revenue in order to cover the operating expenses we expect to incur during the remainder of 2006. Accordingly, we can make no assurances that we will be able to remain profitable on a quarterly or annual basis in the future.
We May Have Difficulty Increasing Our Advertising Revenue, a Significant Portion of Which Is Concentrated Among Our Top Advertisers
Our ability to increase our advertising revenue depends on a variety of factors, including general market conditions, seasonal fluctuations in financial news consumption and overall online usage, our ability to increase our unique visitors and page view inventory, and our ability to win our share of advertisers’ total advertising budgets from other Web sites, television, radio and print media. While we have recently experienced increases in our online advertising revenue, there can be no assurance that such increases will continue. If our advertising revenue decreases because of the foregoing, our business, results of operations and financial condition could be materially adversely affected.
In the first quarter of 2006, our top five advertisers accounted for approximately 46% of our total advertising revenue, as compared to approximately 32% for the fourth quarter of 2005 and approximately 38% for the first quarter of 2005. Furthermore, although we have had success attracting advertisers from outside the financial services industry, such as advertisers of automotive and luxury goods, a large proportion of our top advertisers are concentrated in financial services, particularly in the online brokerage business. If these industries were to weaken significantly or to consolidate, or if other factors caused us to lose a number of our top advertisers, our business, results of operations and financial condition could be materially adversely affected. As is typical in the advertising industry, our advertising contracts have short notice cancellation provisions.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table presents information related to repurchases of its common stock made by the Company during the three months ended March 31, 2006.
| | | | | | | | | | | | | |
Period | | (a) Total
Number
of Shares
(or Units)
Purchased | | (b)
Average
Price
Paid per
Share
(or Unit) | | (c) Total Number
of Shares (or
Units) Purchased
as Part of Publicly
Announced Plans
or Programs | | (d) Maximum Number
(or Approximate Dollar
Value) of Shares (or
Units) that May Yet Be
Purchased Under the
Plans or Programs * | |
| |
| |
| |
| |
| |
January 1 – 31, 2006 | | | — | | $ | — | | | — | | $ | 2,678,878 | |
February 1 – 28, 2006 | | | — | | $ | — | | | — | | $ | 2,678,878 | |
March 1 – 31, 2006 | | | — | | $ | — | | | — | | $ | 2,678,878 | |
| |
|
| |
|
| |
|
| | | | |
Total | | | — | | $ | — | | | — | | $ | 2,678,878 | |
| |
|
| |
|
| |
|
| | | | |
* In December 2000, the Company’s Board of Directors authorized the repurchase of up to $10 million worth of the Company’s common stock, from time to time, in private purchases or in the open market. In February 2004, the Company’s Board approved the resumption of this program under new price and volume parameters, leaving unchanged the maximum amount available for repurchase under the program. The program does not have a specified expiration date.
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Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. 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 | | Employment Agreement, dated January 1, 2006, between Thomas J. Clarke, Jr. and TheStreet.com, Inc.² |
+10.2 | | Letter Agreement, dated March 14, 2006, between James Lonergan and TheStreet.com, Inc.² |
+10.3 | | Amendment, dated February 3, 2006, to Letter Agreement, dated October 31, 2000, between Lisa A. Mogensen and TheStreet.com, Inc.² |
31.1 | | Rule 13a-14(a) Certification of CEO |
31.2 | | Rule 13a-14(a) Certification of Chief Accounting Office |
32.1 | | Section 1350 Certification of CEO |
32.2 | | Section 1350 Certification of Chief Accounting Officer |
| | |
* | | 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 2005 Annual Report on Form 10-K filed March 16, 2006. |
|
² | | Indicates compensatory plan or arrangement. |
21
SIGNATURES
Pursuant to the requirements 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. |
| | |
Date: May 10, 2006 | | By: | /s/ Thomas J. Clarke, Jr. |
| | |
| |
| | | | Thomas J. Clarke, Jr. |
| | | | Chairman of the Board and Chief Executive Officer |
| | | | |
Date: May 10, 2006 | | By: | /s/ Richard Broitman |
| | |
| |
| | | | Richard Broitman |
| | | | Controller, Chief Accounting Officer |
22
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 | | Employment Agreement, dated January 1, 2006, between Thomas J. Clarke, Jr. and TheStreet.com, Inc.² |
10.2 | | Letter Agreement, dated March 14, 2006, between James Lonergan and TheStreet.com, Inc.² |
10.3 | | Amendment, dated February 3, 2006, to Letter Agreement, dated October 31, 2000, between Lisa A. Mogensen and TheStreet.com, Inc.² |
31.1 | | Rule 13a-14(a) Certification of CEO |
31.2 | | Rule 13a-14(a) Certification of Chief Accounting Officer |
32.1 | | Section 1350 Certification of CEO |
32.2 | | Section 1350 Certification of Chief Accounting Officer |
| | |
* | | 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. |
|
² | | Indicates compensatory plan or arrangement. |
23
