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Overview
TheStreet.com, Inc., together with its wholly owned subsidiaries (collectively, the “Company,” “our,” “we” or “us”) is a leading financial media company. We distribute our content through proprietary properties, including Web sites, email services, print publications and video programming. We also syndicate our content for distribution by other media companies.
The Company pioneered the electronic publishing of business and investment information on the Internet through our creation ofTheStreet.com, which launched in 1996 as a paid subscription news and commentary Web site. TheStreet.com, Inc. went public in May 1999 and trades under the ticker symbol TSCM on the Nasdaq Global Market.
Since its inception, the Company has expanded its network, through acquisitions and internal initiatives, to engage a larger audience of consumers. Through our expanding network, we further establish our properties as sought-after destinations for advertisers who seek to reach our influential audience.
Our goal is to meet consumer and advertiser demands while becoming the leading independent destination web site where issues related life and money intersect by providing:
| • | A broader range of content to our audience, including real estate, politics, entrepreneurship, small business, and luxury living across a growing network of Web sites; and |
| • | Innovative, interactive solutions for our advertisers, across our full range of distribution platforms. |
In August 2006, we acquired the assets of Weiss Ratings, Inc. (“Ratings”), which provides independent ratings and evaluations of mutual funds, stocks and financial institutions, including insurers, healthcare providers, banks and savings and loans. We have rebranded the business as TheStreet.com Ratings, and integrated its content into our free online offerings.
In January 2007, the Company acquired a 49.9% joint venture interest inStockpickr.com, a free Web site with Web 2.0 offerings that combines financial and investing content with social networking. In April 2007, we acquired the remaining 50.1% stake inStockpickr.com. By year-end,Stockpickr had more than 800 professional portfolios and more than 130,000 portfolios posted from individual investors.
In August 2007, the Company acquired Corsis Technology Group II LLC (“Corsis Technology Group”), a leading provider of online and mobile custom interactive solutions for advertisers, marketers and content publishers. The acquisition includedPromotions.com, a full-service online agency that implements interactive promotions for some of the world’s largest brands.Promotions.com creates and develops Web sites, digital commerce, and platforms for third parties and provides the Company with the capabilities to deliver the solutions that its advertisers demand. Subsequent to the completion of the acquisition, the Company consolidated Corsis Technology Group under thePromotions.com brand, reflecting our expectation of the growth opportunity in the interactive marketing and promotions business.
In November 2007, the Company acquired Bankers Financial Products Corp., including BankingMyWay (www.BankingMyWay.com) and RateWatch (www.Rate-Watch.com). Established in 1999, RateWatch is one of the nation’s largest providers of pricing solutions for banks and credit units. RateWatch tracks more than 70,000 financial institutions (including branches) and has more than 5,500 banks and financial institutions subscribing to its services.BankingMyWay.com is a free Web site that leverages that data from RateWatch to enable consumers to conduct free searches to find the best banking rates for CDs, savings accounts, interest checking and money market accounts, mortgages, and home equity and auto loans.
In November, we received an investment of $55 million from Technology Crossover Ventures (TCV), a leading provider of growth capital to late-stage private and public companies. The $55 million investment represents the purchase of convertible preferred stock and warrants to purchase shares of common stock. The Company will use this investment to, among other things, further expand its network through acquisitions.
The Company undertook two major internal initiatives in 2007. First, a complete redesign ofTheStreet.com was completed in early 2008, culminating more than a year of effort delivering a more dynamic environment for our readers and advertisers.
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The Company also began the development ofMainStreet.com in 2007, a free site that features general news articles with a tie to a personal finance topic. The genesis forMainStreet.com was sparked by advertiser demand for personal finance content and the Company’s desire to expand its audience to a new group of readers beyond its traditional business and finance category.MainStreet.com launched in February 2008.
In 2007, the Company’s paid services revenue comprised 59% of total revenue, compared to 70% in 2006. However, we believe that the growth opportunity on the free, advertising supported side of the business is far greater than that on the paid services side. In 2007 marketing services revenue comprised 41% of total revenue, compared to 30% in 2006. We anticipate a continued shift in our revenue mix toward increased marketing services revenue as we pursue our strategy to attract a larger, consumer audience to our expanding array of content, and monetize that content through the increasingly sophisticated interactive marketing and promotional campaigns advertisers demand through ourPromotions.com business.
Critical Accounting Estimates
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 paid and marketing services.
Paid services include subscription fees paid by customers for access to particular services for the term of the subscription as well as syndication and licensing revenue. Subscriptions are generally charged to customers’ credit cards or are directly billed to corporate subscribers. These are generally billed in advance on a monthly or annual basis. The Company calculates net subscription revenue by deducting anticipated 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.
Subscription revenue is subject to estimation and variability due to the fact that, in the normal course of business, subscribers may for various reasons contact us or their credit card companies to request a refund or other adjustment for a previously purchased subscription. Accordingly, we maintain a provision for estimated future revenue reductions resulting from expected refunds and chargebacks related to subscriptions for which revenue was recognized in a prior period. The calculation of this provision is based upon historical trends and is reevaluated each quarter.
Marketing services include advertising revenue, which is derived from the sale of Internet sponsorship arrangements and from the delivery of banner, video 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.
Marketing services also include revenue associated withPromotions.com.Promotions.com revenues are derived principally from management contracts in whichPromotions.com typically provides custom services
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for the creation, implementation, and administration of an online promotion on a customer’s website and for managing the customer’s information technology functions.Promotions.com recognizes revenue related to its services as the services are provided or ratably over the period of the contract, provided that no significant obligations remain and collection of the resulting receivable is reasonably assured.
Advertising revenue is subject to estimation and variability due to our policy of recognizing revenue only for arrangements with customers in which, among other things, management believes that collectibility of amounts due is reasonably assured. Accordingly, we estimate and record a provision for doubtful accounts for estimated losses resulting from the failure of our advertising customers to make required payments. This provision is recorded as a bad debt expense. A considerable amount of judgment is required in assessing the ultimate realization of these receivables, including the current credit-worthiness of each customer.
Promotions.com revenue is subject to estimation and variability due to the judgment involved in estimating the percentage of completion of a particular contract in determining the amount of revenue to be recognized.
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, “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, 2007, 2006 and 2005, the Company capitalized $287,827, $37,963, and $19,605, 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. Amortization of capitalized costs will not commence until the project is completed and placed into service. For the year ended December 31, 2007, the Company capitalized Web site development costs totaling $2,824,784. For the years ended December 31, 2006 and 2005, the Company did not capitalize any Web site development costs. Most of the costs capitalized during the year ended December 31, 2007 involve projects that are expected to become functional in early 2008. As a result, amortization expense has not been recorded for these capitalized costs.
Capitalized software and Web site development costs are amortized using the straight-line method over the estimated useful life of the software or Web site. Total amortization expense was $41,708, $84,849 and $134,991, for the years ended December 31, 2007, 2006 and 2005, respectively.
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, computer software and telephone equipment, and five years for furniture and fixtures. Capitalized software and Web site development costs can vary based upon the project). Leasehold improvements are amortized on a straight-line basis over the shorter of the respective lease term or the
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estimated useful life of the asset. If the useful lives of the assets differ materially from the estimates contained 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 estimated 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 value impairment test on its goodwill and certain other intangible assets, the results of which had no impact on the Company’s financial statements. The Company’s goodwill and intangible assets with indefinite useful lives is tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Based upon annual impairment tests as of October 31, 2007, and September 30, 2006 and 2005, no impairment was indicated for the Company’s goodwill and intangible assets with indefinite lives.
Investment of the Company’s Cash
Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and restricted cash. The Company maintains all of its cash, cash equivalents and restricted cash in five financial institutions and performs periodic evaluations of the relative credit standing of these institutions. However, no assurances can be made that the third party institutions will retain acceptable credit ratings or investment practices.
Credit Risks of Customers and Business Concentrations
The Company’s customers are primarily concentrated in the United States and the Company carries accounts receivable balances. 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.
For the years ended December 31, 2007, 2006 and 2005, the Company’s top five advertisers accounted for approximately 28%, 34% and 33%, respectively, of its total advertising revenue. For the years ended December 31, 2007 and 2005, no advertiser accounted for 10% or more of total advertising revenue, as compared to one advertiser accounting for approximately 14% for the year ended December 31, 2006.
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. SFAS No. 123(R) supersedes the Company’s previous accounting under 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 statements of operations for the years ended December 31, 2007 and 2006 reflect the impact of SFAS No. 123(R). The consolidated statements of operations for the year ended December 31, 2005 only reflects the impact of SFAS No. 123(R) for the period October 1, 2005 to December 31, 2005. Stock-based compensation expense recognized under SFAS No. 123(R) for the years ended December 31, 2007, 2006 and 2005 were $2,115,599, $1,753,429 and $332,175, respectively. As of December 31, 2007, there was approximately $3.7 million of unrecognized stock-based compensation expense remaining to be recognized over a weighted-average period of 2.02 years.
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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 fair value of employee stock options granted during the year ended December 31, 2007 was $4.15, using the Black-Scholes model with the following weighted-average assumptions. Because option-pricing models require the use of subjective assumptions, changes in these assumptions can materially affect the fair value of the options. The assumptions presented in the table below represent the weighted-average value of the applicable assumption used to value stock options at their grant date. In determining the volatility assumption, the Company used a historical analysis of the volatility of the Company’s share price for the preceding three and one half years, which is equal to the expected option lives. The expected option lives, which represent the period of time that options granted are expected to be outstanding, were estimated based upon the “simplified” method for “plain-vanilla” options. 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 future dividend payouts.
 | | |
| Expected option lives | | | 3.5 years | |
| Expected volatility | | | 46.56 | % |
| Risk-free interest rate | | | 4.62 | % |
| Expected dividends | | | 0.94 | % |
The impact of stock-based compensation expense has been significant to reported and pro forma results of operations and per share amounts (see Note 1 to Notes to Consolidated Financial Statements). The fair value of each option grant has been estimated on the date of the grant using the Black-Scholes option pricing model and includes several assumptions, including the risk-free interest rate and the expected volatility of the Company’s common stock price. Because option-pricing models require the use of subjective assumptions, changes in these assumptions can materially affect the fair value of the options. For each 1% increase in the risk-free interest rate used in the Black-Scholes option-pricing model, the resulting estimated impact to the Company’s total operating expense for the year ended December 31, 2007 would increase by approximately $33,000. For each 10% increase in the expected volatility used in the Black-Scholes option-pricing model, the resulting estimated impact to the Company’s total operating expense for the year ended December 31, 2007 would increase by approximately $174,000. Because options are expensed over up to three years from the date of grant, the foregoing estimated increases include potential expense for options granted during the years ended December 31, 2007, 2006, 2005, and 2004. In calculating the amount of each variable that is included in the Black-Scholes options-pricing model (i.e., option exercise price, stock price, option term, risk free interest rate, annual dividend rate, and volatility), the weighted average of such variable for all grants issued in a given year was used.
As stock-based compensation expense recognized in the Consolidated Statements of Operations 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.
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Deferred tax assets pertaining to windfall tax benefits on exercise of share awards and the corresponding credit to additional paid-in capital are recorded if the related tax deduction reduces tax payable. The Company has elected the “with-and –without approach” regarding ordering of windfall tax benefits to determine whether the windfall tax benefit did reduce taxes payable in the current year. Under this approach, the windfall tax benefits would be recognized in additional paid-in capital only if an incremental tax benefit is realized after considering all other tax benefits presently available to the Company.
Legal Contingencies
In December 2001, the Company was named as a defendant in a securities class action filed in United States District Court for the Southern District of New York related to its initial public offering (“IPO”) in May 1999. The lawsuit also named as individual defendants certain of its former officers and directors, James J. Cramer, a current director, and certain of the underwriters of the IPO, including The Goldman Sachs Group, Inc., Hambrecht & Quist LLC (now part of JP Morgan Chase & Co.), Thomas Weisel Partners LLC, Robertson Stephens Inc. (an investment banking subsidiary of BankBoston Corp., later FleetBoston Corp., which ceased operations in 2002), and Merrill Lynch Pierce Fenner & Smith, Inc. Approximately 300 other issuers and their underwriters have had similar suits filed against them, all of which are included in a single coordinated proceeding in the District (the “IPO Litigations”). The complaints allege that the prospectus and the registration statement for the IPO failed to disclose that the underwriters allegedly solicited and received “excessive” commissions from investors and that some investors in the IPO allegedly agreed with the underwriters to buy additional shares in the aftermarket in order to inflate the price of the Company’s stock. An amended complaint was filed April 19, 2002. The Company and the officers and directors were named in the suits pursuant to Section 11 of the Securities Act of 1933, Section 10(b) of the Exchange Act of 1934, and other related provisions. The complaints seek unspecified damages, attorney and expert fees, and other unspecified litigation costs.
On July 1, 2002, the underwriter defendants in the consolidated actions moved to dismiss all of the IPO Litigations, including the action involving the Company. On July 15, 2002, the Company, along with other non-underwriter defendants in the coordinated cases, also moved to dismiss the litigation. On February 19, 2003, the district court ruled on the motions. The district court granted the Company’s motion to dismiss the claims against it under Rule 10b-5, due to the insufficiency of the allegations against the Company. The motions to dismiss the claims under Section 11 of the Securities Act were denied as to virtually all of the defendants in the consolidated cases, including the Company. In addition, the individual defendants in the IPO Litigations, including Mr. Cramer, signed a tolling agreement and were dismissed from the action without prejudice on October 9, 2002.
In June 2003, a proposed collective settlement of this litigation was structured between the plaintiffs, the issuer defendants in the consolidated actions, the issuer officers and directors named as defendants, and the issuers’ insurance companies. On or about June 25, 2003, a committee of the Company’s Board of Directors conditionally approved the proposed settlement. The settlement agreements collectively provide as follows:
The Company and the other issuer defendants would assign their interests in claims against the underwriters for excess compensation in connection with their IPOs to the plaintiffs, and agree not to assert certain other claims against the underwriters, such as underpricing, indemnification and antitrust claims, except in certain defined circumstances. A number of issuers’ assigned claims have been asserted already; these were dismissed by the district court on February 24, 2006. The dismissal is currently on appeal to the Second Circuit Court of Appeals, although the plaintiffs have indicated their intent to withdraw the appeal in light of recent events, detailed below. The Company and the other issuer defendants would also cooperate with the plaintiffs to provide the plaintiffs with informal discovery as the litigation continues as to the underwriter defendants. Further, the plaintiffs would receive an undertaking from the insurers of the Company and the other issuer defendants guaranteeing that the plaintiff class would recover, in the aggregate, $1 billion from their various suits against the underwriters (including the claims assigned by the issuer defendants). The Company’s per capita portion of the maximum amount payable to the plaintiffs under the settlement, assuming the entire $1 billion is payable, would be approximately $3–4 million. The plaintiffs’ actual recoveries from the underwriter defendants (through settlements or damages assessed as a result of litigation) would be applied against the guarantee; and to the extent that the underwriter defendants settle all of the cases for at least $1 billion, no payment would be required under the issuer defendants’ settlement. In exchange for the
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consideration described above, the plaintiffs would release the non-bankrupt issuer defendants from all claims against them (the bankrupt issuers would receive a covenant not to sue) and their individual defendants. Under the terms of the settlement agreements, all costs and expenses of the settlement (including legal expenses after June 1, 2003) would be borne by the insurance carriers of the Company and the other issuer defendants using each issuer defendant’s existing insurance coverage, with deductibles waived.
The plaintiffs have continued to litigate against the underwriter defendants. The district court directed that the litigation proceed within a number of “focus cases” rather than in all of the 310 cases that have been consolidated. The Company’s case is not one of these focus cases. On October 13, 2004, the district court certified the focus cases as class actions. The underwriter defendants appealed that ruling, and on December 5, 2006, the Court of Appeals for the Second Circuit reversed the district court’s class certification decision. On April 6, 2007, the Second Circuit denied plaintiffs’ petition for rehearing. In light of the Second Circuit opinion, counsel to the issuers has informed the district court that the settlement with the plaintiffs described above cannot be approved because the defined settlement class, like the litigation class, cannot be certified with the Court of Appeals. The settlement was terminated pursuant to a Stipulation and Order dated June 25, 2007.
In light of the termination of the settlement, Plaintiffs subsequently submitted Second Amended Complaints for each of the class certification focus cases including the Amended Master Allegations and then moved for certification of the redefined classes identified in their Second Amended Complaints. In response, Defendants moved to dismiss Plaintiffs’ Second Amended Complaints on November 13, 2007. On December 21, 2007 Plaintiffs filed an Opposition to Defendants’ Motion to Dismiss the Second Amended Complaints. On January 28, 2008, Defendants filed a reply brief in further support of their Motion to Dismiss Plaintiffs’ Second Amended Complaints. The court has not yet ruled on the pending motion.
We cannot predict whether we will be able to renegotiate a settlement that complies with the Second Circuit’s mandate. We are presently defending the action vigorously. Any unfavorable outcome of this litigation could have an adverse impact on the Company’s business, financial condition, results of operations, and cash flows.
Results of Operations
Through June 2005 the Company operated its business in two segments, electronic publishing and securities research and brokerage. 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. 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 $1,251,083 for the year ended December 31, 2005.
Comparison of Fiscal Years Ended December 31, 2007 and 2006
Net Revenue
| | | | | | | | | | |
| | For the Year Ended December 31, | | Percent
Change |
| | | 2007 | | (*) | | 2006 | | (*) |
Revenue:
| | | | | | | | |
| Paid services | | $ | 38,421,393 | | | | 59 | % | | $ | 35,441,457 | | | | 70 | % | | | 8 | % |
| Marketing services | | | 26,984,637 | | | | 41 | % | | | 15,447,378 | | | | 30 | % | | | 75 | % |
| Total revenue | | $ | 65,406,030 | | | | 100 | % | | $ | 50,888,835 | | | | 100 | % | | | 29 | % |
| (*) | Percent of total revenue |
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Paid Services
| | | | | | |
| | For the Year Ended December 31, | | Percent
Change |
| | | 2007 | | 2006 |
Paid services:
| | | | | | | | | | | | |
| Subscription | | $ | 34,119,565 | | | $ | 33,514,590 | | | | 2 | % |
| Syndication, licensing and information services | | | 4,301,828 | | | | 1,926,867 | | | | 123 | % |
| Total | | $ | 38,421,393 | | | $ | 35,441,457 | | | | 8 | % |
We believe the growth in subscription revenue, the primary component of paid services, is due largely to our success in (i) increasing overall traffic to our Web sites by signing new agreements and expanding existing relationships with large, high-traffic portal and search engine companies, (ii) promoting our brands, products and services through the television program hosted by contributor James J. Cramer, and (iii) generating interest in our paid subscription services with expanded content offerings, including video and podcasts, personal finance and investor education content and lifestyle-oriented content. Additionally, we added new subscribers as a result of our acquisition of Bankers Financial Products Corporation during November 2007 and TheStreet.com Ratings during August 2006, which contributed to the growth in our subscription revenue as compared to the prior year period.
The increase in Syndication, licensing and information services revenue is primarily the result of a full year of revenue received from the syndication of independent research from Ratings, as compared to five months in 2006 subsequent to the acquisition of Weiss Ratings in August 2006, as well as from the information services revenue received from the operations of Bankers Financial Products since its acquisition in November 2007.
For the year ended December 31, 2007, approximately 71% of the Company’s net subscription revenue was derived from annual subscriptions, as compared to approximately 65% for the year ended December 31, 2006. The Company calculates net subscription revenue by deducting anticipated refunds from cancelled subscriptions and chargebacks of disputed credit card charges from gross revenue. Refunds and chargebacks totaled less than 1% of gross subscription revenue during each of the years ended December 31, 2007 and 2006.
Marketing Services
| | | | | | |
| | For the Year Ended December 31, | | Percent
Change |
| | | 2007 | | 2006 |
Marketing services:
| | | | | | | | | | | | |
| Advertising | | $ | 21,985,441 | | | $ | 15,447,378 | | | | 42 | % |
| Interactive marketing services | | | 4,999,196 | | | | — | | | | N/A | |
| Total | | $ | 26,984,637 | | | $ | 15,447,378 | | | | 75 | % |
Advertising revenue for the year ended December 31, 2007, increased by 42% when compared to the year ended December 31, 2006. The increase is primarily attributable to the effective monetization of a 32% increase in the average number of monthly unique visitors to the Company’s Web sites, when compared to the year ended December 31, 2006. The increase in reach, combined with continued strength in our audience demographics, and the ability to create new and unique customized advertising solutions enabled us to expand relationships with existing advertisers, acquire new financial advertisers and attract increasing numbers of non-endemic advertisers.
We believe that we have particular appeal to a growing number of non-financial advertisers, who comprised 44% of total advertising revenue in the year ended December 31, 2007, as compared to 27% in the year ended December 31, 2006. Additionally, we believe that the continued shift of advertising spending from traditional media to online advertising has led generally to increased spending by the Company’s advertisers and to an increase in the number of advertisers choosing to place their advertisements in the Company’s publications.
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The number of advertisers for the year ended December 31, 2007 was 186 as compared to 148 for the year ended December 31, 2006. The Company’s top five advertisers accounted for approximately 28% of its total advertising revenue for the year ended December 31, 2007, as compared to approximately 34% for the year ended December 31, 2006. For the year ended December 31, 2007, no advertiser accounted for 10% or more of total advertising revenue, as compared to one advertiser accounting for approximately 14% of total advertising revenue during the year ended December 31, 2006.
The increase in marketing services revenue also reflects incremental interactive marketing services revenue associated withPromotions.com since its acquisition on August 2, 2007.
Operating Expense
| | | | | | |
| | For the Year Ended December 31, | | Percent
Change |
| | | 2007 | | 2006 |
Operating expense:
| | | | | | | | | | | | |
| Cost of services | | $ | 25,559,409 | | | $ | 18,450,110 | | | | 39 | % |
| Sales and marketing | | | 12,208,648 | | | | 9,616,491 | | | | 27 | % |
| General and administrative | | | 12,215,797 | | | | 10,673,705 | | | | 14 | % |
| Depreciation and amortization | | | 2,528,042 | | | | 1,088,679 | | | | 132 | % |
| Total operating expense | | $ | 52,511,896 | | | $ | 39,828,985 | | | | 32 | % |
Cost of services. As a percentage of revenue, cost of services expense was 39.1% for the year ended December 31, 2007, as compared to 36.3% for the year ended December 31, 2006. This increase is in part due to an investment in additional editorial and video staff to increase production of stories and video in areas where we could not meet advertising demand. We believe that these investments have contributed to increased advertising revenue and will deliver stronger gross margins in future periods. In addition, this increase was related to the impact of the acquisition ofPromotions.com.
The increase in absolute dollars during the period was largely the result of increased compensation and related costs totaling approximately $5.2 million, of which approximately $2.0 million was incurred within our Ratings, editorial and video staffs related to the creation of additional content to drive increased advertising revenue. Additionally, the Company experienced increases in hosting, computer maintenance and data costs as well as Ratings fulfillment related expenses, the sum of which totaled approximately $1.4 million. The increased expense also reflects incremental costs associated with the operations ofPromotions.com, TheStreet.com Ratings, Stockpickr and Bankers Financial Products since the dates of their acquisitions.
Sales and marketing. As a percentage of revenue, sales and marketing expense was 18.7% for the year ended December 31, 2007, as compared to 18.9% in the year ended December 31, 2006. This decrease is primarily attributable to the recently acquiredPromotions.com and Bankers Financial Products businesses, both of which have historically invested minimal amounts in sales and marketing activities. This was partially offset by our investment in additional headcount in our advertising sales team in the first quarter of 2007, which has driven additional advertising revenue during the year, as well as expanded promotional efforts to drive advertising revenue growth, free-trial subscriptions to our products and to expose our brands and build our customer databases. The advertising programs consist of promotional campaigns on search engines, online media networks, financial portals and smaller niche Web sites, subscription marketing and distribution arrangements and email marketing campaigns.
The increase in absolute dollars during the period was largely the result of the overall growth of the Company, resulting in higher headcount and compensation and related costs, totaling approximately $1.2 million, to drive the Company’s revenue growth, combined with increased advertising and promotion costs and consulting fees, the sum of which totals approximately $1.4 million. The increased expense also reflects incremental costs associated with the operations ofPromotions.com, TheStreet.com Ratings and Bankers Financial Products since the dates of their acquisitions.
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General and administrative. As a percentage of revenue, general and administrative expense was 18.7% in the year ended December 31, 2007, as compared to 21.0% in the year ended December 31, 2006. This decrease is largely attributable to management’s ability to generate additional revenue with minimal impact on the overhead cost structure.
The increase in absolute dollars during the period was largely the result of the overall growth of the Company, resulting in higher compensation and related costs, occupancy costs, expenses associated with management and analysis tools for our growing network of Web sites, and increased professional fees, the sum of which totals approximately $1.5 million. The increased expense also reflects incremental costs associated with the operations ofPromotions.com, Bankers Financial Products, TheStreet.com Ratings and Stockpickr since the dates of their acquisitions.
Depreciation and amortization. As a percentage of revenue, depreciation and amortization expense was 3.9% in the year ended December 31, 2007, as compared to 2.1% in the year ended December 31, 2006. This increase is largely attributable to amortization of intangible assets related to the Ratings,Promotions.com, Bankers Financial Products and Stockpickr acquisitions, the total of which is approximately $1.1 million, combined with higher depreciation costs due to increased capital expenditures.
Net Interest Income
| | | | | | |
| | For the Year Ended December 31, | | Percent
Change |
| | | 2007 | | 2006 |
| Net interest income | | $ | 2,476,266 | | | $ | 2,037,496 | | | | 22 | % |
The increase in net interest income is primarily the result of increased cash balances combined with higher interest rates.
Discontinued Operations
| | | | | | |
| | For the Year Ended December 31, | | Percent
Change |
| | | 2007 | | 2006 |
| (Loss) income on disposal of discontinued operations | | $ | (12,829 | ) | | $ | 32,321 | | | | N/A | |
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.
The fair market values of the remaining liabilities of the discontinued operation are as follows:
| | | | |
| | December 31,
2007 | | December 31,
2006 |
| Current liabilities | | $ | 232,242 | | | $ | 222,425 | |
Net Income
Net income for the year ended December 31, 2007 totaled $31,050,910, or $1.08 per basic and $1.06 per diluted share, compared to $12,868,447, or $0.48 per basic and $0.47 per diluted share for the year ended December 31, 2006.
Earnings Before Interest, Taxes, Depreciation and Amortization
Earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the year ended December 31, 2007 totaled $15,591,523, as compared to EBITDA of $12,342,350 for the year ended December 31, 2006. The Company utilizes EBITDA to evaluate the performance of its businesses. EBITDA is considered an important indicator of the operational strength of the Company’s business and it provides an indication of the Company’s ability to service debt and fund capital expenditures. EBITDA eliminates the uneven effect of considerable amounts of noncash depreciation of tangible assets and amortization of certain intangible assets that were recognized in business combinations. A limitation of this measure, however, is that
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it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in the Company’s businesses. Management evaluates the investments in such tangible and intangible assets through other financial measures, such as capital expenditure budgets and investment spending levels.
EBITDA should be considered in addition to, not as a substitute for, the Company’s Net Income and various cash flow measures (e.g., Cash provided by operations) as well as other measures of financial performance reported in accordance with U.S. generally accepted accounting principles (“GAAP”).
EBITDA is calculated as follows:
| | | | |
| | For the Year Ended December 31, |
| | | 2007 | | 2006 |
| Net income | | $ | 31,050,910 | | | $ | 12,868,447 | |
| Less net interest income | | | (2,476,266 | ) | | | (2,037,496 | ) |
| Add taxes | | | (15,511,163 | ) | | | 422,720 | |
| Add depreciation and amortization | | | 2,528,042 | | | | 1,088,679 | |
| EBITDA | | $ | 15,591,523 | | | $ | 12,342,350 | |
Comparison of Fiscal Years Ended December 31, 2006 and 2005
Net Revenue
| | | | | | | | | | |
| | For the Year Ended December 31, | | Percent
Change |
| | | 2006 | | (*) | | 2005 | | (*) |
Revenue:
| | | | | | | | | | | | | | | | | | | | |
| Paid services | | $ | 35,441,457 | | | | 70 | % | | $ | 24,221,239 | | | | 72 | % | | | 46 | % |
| Marketing services | | | 15,447,378 | | | | 30 | % | | | 9,522,835 | | | | 28 | % | | | 62 | % |
| Total revenue | | $ | 50,888,835 | | | | 100 | % | | $ | 33,744,074 | | | | 100 | % | | | 51 | % |
| (*) | Percent of total revenue |
Paid Services
| | | | | | |
| | For the Year Ended December 31, | | Percent
Change |
| | | 2006 | | 2005 |
Paid services:
| | | | | | | | | | | | |
| Subscription | | $ | 33,514,590 | | | $ | 23,070,259 | | | | 45 | % |
| Syndication and licensing | | | 1,926,867 | | | | 1,150,980 | | | | 67 | % |
| Total | | $ | 35,441,457 | | | $ | 24,221,239 | | | | 46 | % |
Subscription. The increase in subscription revenue is primarily the result of a 29% increase in the average number of paid subscriptions to the Company’s services during the year ended December 31, 2006, as compared to the year ended December 31, 2005. Since subscription revenue is recognized ratably over the subscription period, the increased subscriber totals have also resulted in an increase of 28% in deferred revenue at December 31, 2006 as compared to December 31, 2005. We believe this growth is due largely to our success in (i) increasing overall traffic to our Web sites by signing new agreements and expanding existing relationships with large, high-traffic portal and search engine companies, (ii) promoting our brands, products and services through television and (until December 2006) radio programs hosted by contributor James J. Cramer, and (iii) generating interest in our paid subscription services with expanded content offerings, including video and podcasts, personal finance and investor education content and lifestyle-oriented content. We also believe that strong trading volume and stock market performance during much of the previous 12 months resulted in increased numbers of investors seeking the type of investment information that the Company offers. Additionally, subscription revenue for the year ended December 31, 2006 includes the operations of TheStreet.com Ratings since the Ratings acquisition on August 7, 2006.
For the year ended December 31, 2006, approximately 65% of the Company’s net subscription revenue was derived from annual subscriptions, as compared to approximately 68% for the year ended December 31,
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2005. The Company calculates net subscription revenue by deducting anticipated refunds from cancelled subscriptions and chargebacks of disputed credit card charges from gross revenue. Refunds and chargebacks totaled less than 1% of gross subscription revenue during each of the years ended December 31, 2006 and 2005.
Syndication and licensing. The increase in syndication and licensing revenue is primarily the result of revenue received from the syndication of independent research from Ratings by certain of the investment banks involved in the global analyst research settlement, partially offset by a decrease in revenue related to the Company’s nationally syndicated daily radio program. The net effect of the foregoing accounted for $755,394 of the $775,887 total increase.
Marketing Services
| | | | | | |
| | For the Year Ended December 31, | | Percent
Change |
| | | 2006 | | 2005 |
Marketing services:
| | | | | | | | | | | | |
| Advertising | | $ | 15,447,378 | | | $ | 9,522,835 | | | | 62 | % |
| Interactive marketing services | | | — | | | | — | | | | N/A | |
| Total | | $ | 15,447,378 | | | $ | 9,522,835 | | | | 62 | % |
Advertising. The increase in advertising revenue is attributable primarily to the attractiveness of our expanded personal finance, lifestyle and video content offerings and our success in implementing marketing relationships with other high-traffic Web sites. These factors resulted in a 46% increase in the average number of monthly unique visitors to the Company’s Web when compared to the year ended December 31, 2005. These factors, as well as the continued shift of advertising spending from traditional media to online advertising, in turn led to a 29% increase in the number of advertisers choosing to place their advertisements in the Company’s publications.
The number of advertisers for the year ended December 31, 2006 was 148 as compared to 115 for the year ended December 31, 2005. The Company’s top five advertisers accounted for approximately 34% of its total advertising revenue for the year ended December 31, 2006, as compared to approximately 33% for the year ended December 31, 2005. For the year ended December 31, 2006, one advertiser accounted for more than 10% (approximately 14%) of total advertising revenue. For the year ended December 31, 2005, no advertiser accounted for 10% of total advertising revenue.
Operating Expense
| | | | | | |
| | For the Year Ended December 31, | | Percent
Change |
| | | 2006 | | 2005 |
Operating expense:
| | | | | | | | | | | | |
| Cost of services | | $ | 18,450,110 | | | $ | 12,727,057 | | | | 45 | % |
| Sales and marketing | | | 9,616,491 | | | | 7,264,114 | | | | 32 | % |
| General and administrative | | | 10,673,705 | | | | 8,176,442 | | | | 31 | % |
| Depreciation and amortization | | | 1,088,679 | | | | 673,967 | | | | 62 | % |
| Total operating expense | | $ | 39,828,985 | | | $ | 28,841,580 | | | | 38 | % |
Operating expenses from continuing operations reported above for year ended December 31, 2005 do not include expenses that, prior to the third quarter in 2005, were 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. The increase in cost of services expense during the period was primarily the result of higher compensation and related costs (including an increase in the average headcount, higher incentive compensation related to improved operating performance and non-cash compensation related to the expensing of awards under the Company’s stock incentive plan), combined with higher revenue sharing costs resulting
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from increased subscription revenue, increased fees paid to non-employee content providers, and increases in costs associated with data, hosting, computer maintenance and consulting. The net effect of the foregoing accounted for $5,480,664 of the total $5,723,053 increase. The increased expense also reflects both the allocation in the year ended December 31, 2005 of cost of services expenses totaling $507,262 to the Company’s securities research and brokerage segment prior to its discontinuation in June 2005 as well as incremental costs associated with the operations of TheStreet.com Ratings since the Ratings acquisition on August 7, 2006.
Sales and marketing. The increase in sales and marketing expense is primarily the result of higher compensation and related costs (including increased advertising commission payments resulting from increased advertising revenue, non-cash compensation related to the expensing of awards under the Company’s stock incentive plan, an increase in the average headcount and higher incentive compensation related to improved operating performance), combined with increased advertising and promotion costs, advertisement serving expenses, credit card fees resulting from higher subscription revenue and deferred revenue balance, and consulting fees. The net effect of the foregoing accounted for $2,127,171 of the $2,352,377 increase. The increased expense also reflects both the allocation in the year ended December 31, 2005 of sales and marketing expenses totaling $11,009 to the Company’s securities research and brokerage segment prior to its discontinuation in June 2005 as well as incremental costs associated with the operations of TheStreet.com Ratings since the Ratings acquisition on August 7, 2006.
General and administrative. The increase in general and administrative expense is primarily the result of higher compensation and related costs (including higher salary expense due to an increase in the average headcount, increased incentive compensation related to improved operating performance and non-cash compensation related to the expensing of awards under the Company’s stock incentive plan), combined with higher accounting and recruiting fees and rent expense, partially offset by reduced legal and consulting fees due to the absence of the costs relating to the Company’s consideration of strategic alternatives incurred during the year ended December 31, 2005. The net effect of the foregoing accounted for $1,930,899 of the $2,497,263 increase. The increased expense also reflects both the allocation in the year ended December 31, 2005 of general and administrative expenses totaling $667,185 to the Company’s securities research and brokerage segment prior to its discontinuation in June 2005 as well as incremental costs associated with the operations of TheStreet.com Ratings since the Ratings acquisition on August 7, 2006.
Depreciation and amortization. The increase in depreciation and amortization expense primarily reflects intangible asset amortization related to the Ratings acquisition totaling $206,833, combined with increased depreciation expense related to increased capital expenditures. The increased expense also reflects both the allocation in the year ended December 31, 2005 of depreciation and amortization expenses totaling $62,250 to the Company’s securities research and brokerage segment prior to its discontinuation in June 2005 as well as incremental costs associated with the operations of TheStreet.com Ratings since the Ratings acquisition on August 7, 2006.
Net Interest Income
| | | | | | |
| | For the Year Ended December 31, | | Percent
Change |
| | | 2006 | | 2005 |
| Net interest income | | $ | 2,037,496 | | | $ | 852,676 | | | | 139 | % |
The increase in net interest income is primarily the result of increased cash balances combined with higher interest rates.
Discontinued Operations
| | | | | | |
| | For the Year Ended December 31, | | Percent
Change |
| | | 2006 | | 2005 |
| Loss from discontinued operations | | $ | — | | | $ | (3,075,402 | ) | | | 100 | % |
| Income (loss) on disposal of discontinued operations | | | 32,321 | | | | (2,428,746 | ) | | | N/A | |
| Income (loss) from discontinued operations | | $ | 32,321 | | | $ | (5,504,148 | ) | | | N/A | |
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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 year ended December 31, 2006, income on disposal of discontinued operations represents an adjustment to previously estimated shutdown costs. For the year ended December 31, 2005, loss on disposal of discontinued operations includes actual losses from the date the Company committed to a plan to discontinue the segment, plus a provision for additional future costs to be incurred to complete the discontinuance process. The Company believes that any remaining costs associated with these discontinued operations have been adequately provided for by this provision.
The fair market values of the remaining assets and liabilities of the discontinued operation are as follows:
| | | | |
| | December 31,
2006 | | December 31,
2005 |
| Current assets | | $ | — | | | $ | 3,200 | |
| Current liabilities | | $ | 222,425 | | | $ | 279,930 | |
As of December 31, 2006, current liabilities of discontinued operations consists of accrued shutdown costs.
Net Income
Net income for the year ended December 31, 2006 totaled $12,868,447, or $0.48 and $0.47 per basic and diluted share, respectively, compared to $246,002, or $0.01 per basic and diluted share for the year ended December 31, 2005. Income from continuing operations for the year ended December 31, 2006 totaled $12,836,126, or $0.48 and $0.47 per basic and diluted share, respectively, compared to $5,750,150, or $0.23 and $0.22 per basic and diluted share, respectively, for the year ended December 31, 2005.
Earnings Before Interest, Taxes Depreciation and Amortization
Earnings before interest, taxes depreciation and amortization (“EBITDA”) for the year ended December 31, 2006, totaled $12,342,350 compared to EBITDA of $393,355 for the year ended December 31, 2005. The Company utilizes EBITDA to evaluate the performance of its businesses. EBITDA is considered an important indicator of the operational strength of the Company’s business and it provides an indication of the Company’s ability to service debt and fund capital expenditures. EBITDA eliminates the uneven effect of considerable amounts of noncash depreciation of tangible assets and amortization of certain intangible assets that were recognized in business combinations. A limitation of this measure, however, is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in the Company’s businesses. Management evaluates the investments in such tangible and intangible assets through other financial measures, such as capital expenditure budgets and investment spending levels.
EBITDA should be considered in addition to, not as a substitute for, the Company’s Net Income and various cash flow measures (e.g., Cash provided by operations) as well as other measures of financial performance reported in accordance with U.S. generally accepted accounting principles (“GAAP”).
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EBITDA is calculated as follows:
| | | | |
| | For the Year Ended December 31, |
| | | 2006 | | 2005 |
| Net income | | $ | 12,868,447 | | | $ | 246,002 | |
| Less net interest income | | | (2,037,496 | ) | | | (872,685 | ) |
| Add taxes | | | 422,720 | | | | 124,105 | |
| Add depreciation and amortization | | | 1,088,679 | | | | 895,933 | |
| EBITDA | | $ | 12,342,350 | | | $ | 393,355 | |
Liquidity and Capital Resources
The Company invests in money market funds and other short-term, investment grade instruments that are highly liquid and of high-quality, with the intent that such funds can easily be made available for operating purposes. As of December 31, 2007, the Company’s cash and cash equivalents and noncurrent restricted cash amounted to $79,747,705, representing 45% of total assets.
Cash generated from operations was sufficient to cover expenses during the year ended December 31, 2007. Net cash provided by operating activities totaled $13,437,984 for the year ended December 31, 2007, as compared to net cash provided by operating activities totaling $15,519,063 for the year ended December 31, 2006. The decrease in net cash provided by operating activities is primarily related to the following:
| • | higher annual incentive compensation payments during the year ended December 31, 2007 related to the 2006 fiscal year, as compared to payments made during the year ended December 31, 2006 related to the 2005 fiscal year; and |
| • | a slow-down in the overall growth of deferred revenue in the year ended December 31, 2007, as compared to the year ended December 31, 2006. |
These decreases were partially offset by an increase in the level of noncash expenses.
Net cash provided by operating activities of $13,437,984 for the year ended December 31, 2007 was primarily the result of the Company’s net income combined with noncash expenses, partially offset by an increase in accounts receivable (due to higher advertising revenue) and decreases in accrued expenses (primarily the result of payments related to annual incentive compensation) and deferred revenue (primarily related to a reduction in the number of subscribers to our subscription products).
Net cash used in investing activities of $35,128,727 for the year ended December 31, 2007 was primarily the result of the acquisitions of Bankers Financial Products Corporation, Corsis Technology Group II LLC and the remaining 50.1% of Stockpickr.com, and capital expenditures consisting of capitalized website and software development costs and purchases of computer hardware, leasehold improvements, furniture and fixtures and software.
Net cash provided by financing activities of $54,806,265 for the year ended December 31, 2007 primarily consisted of proceeds from the sale of preferred stock as well as the exercise of stock options, partially offset by cash dividends paid on both common and preferred shares.
The Company has a total of $576,951 of cash invested in certificates of deposit that serve as collateral for outstanding letters of credit, and is therefore restricted. The letters of credit serve as security deposits for the Company’s office space in New York City. The office leases do not expire within the next 12 months, and the restricted cash is therefore classified as a noncurrent asset.
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 $5.6 million through December 31, 2008, in respect of the contractual obligations set forth below under “Commitments and Contingencies.” Additionally, the Company’s Board of Directors declared four quarterly cash dividends in the amount of $0.025 per share of common stock during the year ended December 31, 2007, which resulted in a cash expenditure of approximately $2.9 million. The Company intends, although there can be no assurance, to maintain the dividend at the current annual level of $0.10 per
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share, and will review the dividend on an ongoing basis to ensure that it serves the best interests of shareholders by most effectively utilizing cash balances.
For the year ended December 31, 2006, the Company recorded full valuation allowance against the deferred tax asset. During the quarter ended September 30, 2007, the valuation allowance was reduced by $16 million, as management concluded that it was more likely than not that the Company would realize the benefits of this portion of its deferred tax asset through taxable income to be generated in future years. Due to the reversal of the valuation allowance, this amount was reflected as a benefit to the current year’s tax provision.
The Company recognized a deferred tax asset of approximately $47 million and $53 million as of December 31, 2007 and 2006, respectively, primarily relating to net operating loss carryforwards of approximately $128 million and $132 million, as of December 31, 2007 and 2006, respectively, available to offset future taxable income through 2025. The net operating loss carryforward as of December 31, 2007 and 2006 includes approximately $19 million and $6 million, respectively, related to windfall tax benefits for which a benefit would be recorded in additional paid in capital when realized. The Company also has a capital loss carryforward of approximately $4 million as of December 31, 2007 and 2006 available to offset future capital gains through 2009.
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. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based upon a study that analyzed the Company’s stock ownership activity from inception to December 31, 2007, a change of control was deemed to have occurred in August, 2000. The change of control created an annual limitation on the usage of $35 million of pre-change losses which will become available over the years of 2008 to 2018.
In evaluating the reasonableness of the valuation allowance, management assessed whether it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. Ultimately, the realization of deferred tax assets is dependant upon the generation of future taxable income during those periods in which the temporary differences become deductible and/or credits can be utilized. To this end, management considered that the Company had taxable income in 2007 and anticipates continued taxable income through the year ended December 31, 2010. Based on these considerations management believes it is more likely than not that the Company will not realize all of the benefits of its deferred tax asset as of December 31, 2007, and therefore as a result a partial valuation allowance has been established was at December 31, 2007.
Treasury Stock
As discussed in Note 10 to Notes to 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, from time to time, in private purchases or in the open market. In February 2004, the Company’s Board of Directors approved the resumption of the stock repurchase program under new price and volume parameters, leaving unchanged the maximum amount available for repurchase under the program. During the year ended December 31, 2007, the Company did not purchase any shares of common stock under the program. Since inception of the program, the Company has purchased a total of 5,453,416 shares of common stock at an aggregate cost of $7,321,122. In addition, pursuant to the terms of the Company’s 1998 Stock Incentive Plan, as amended (the “Plan”) and certain additional stock option exercise procedures adopted by the Compensation Committee of the Board of Directors, in connection with the exercise of stock options by certain of the Company’s executive officers in November 2005 and February 2006, the Company withheld 231,602 and 66,982 shares, respectively, issuable upon the exercise of stock options, in lieu of payment of the exercise price and the minimum amount of applicable withholding taxes then due. These shares have been recorded as treasury stock.
Commitments and Contingencies
The Company is committed under operating leases, principally for office space. Certain leases are subject to rent reviews and require payment of expenses under escalation clauses. Rent and equipment rental expenses were $1,876,735, $1,717,158 and $1,575,462 for the years ended December 31, 2007, 2006 and 2005,
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respectively. The increase in rent and equipment rental expenses was primarily due additional office space resulting from the Ratings,Promotions.com and Bankers Financial Products Corporation acquisitions, changes in operating expense escalations and the allocation to the Company’s discontinued securities research and brokerage segment of expenses totaling $63,181 in the year ended December 31, 2005. 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 December 31, 2007, total future minimum cash payments are as follows:
| | | | | | | | | | | | | | |
| | Payments Due by Year |
Contractual
Obligations: | | Total | | 2008 | | 2009 | | 2010 | | 2011 | | 2012 | | After 2012 |
| Operating leases | | $ | 4,810,382 | | | $ | 1,750,492 | | | $ | 1,492,763 | | | $ | 480,055 | | | $ | 354,784 | | | $ | 201,671 | | | $ | 530,617 | |
Employment
agreements | | | 6,112,413 | | | | 3,340,292 | | | | 2,155,454 | | | | 616,667 | | | | — | | | | — | | | | — | |
| Outside contributors | | | 520,791 | | | | 474,958 | | | | 45,833 | | | | — | | | | — | | | | — | | | | — | |
| Leases payable | | | 173,081 | | | | 82,976 | | | | 70,249 | | | | 19,856 | | | | — | | | | — | | | | — | |
| Total contractual cash obligations | | $ | 11,616,667 | | | $ | 5,648,718 | | | $ | 3,764,299 | | | $ | 1,116,578 | | | $ | 354,784 | | | $ | 201,671 | | | $ | 530,617 | |
Item 7A. Quantitative and Qualitative Disclosures About Credit and Counterparty Risk.
The Company maintains all of its cash, cash equivalents and restricted cash in five financial institutions and performs periodic evaluations of the relative credit standing of these institutions. However, no assurances can be made that the third party institutions will retain acceptable credit ratings or investment practices.
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.
A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or 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, 2007, 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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Management Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2007. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management performed an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007 based upon criteria in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management believes that the Company’s internal control over financial reporting was effective as of December 31, 2007 based on those criteria issued by COSO.
The Company’s independent registered public accounting firm, Marcum & Kliegman LLP, has issued an audit report on management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007. Their report appears on page F-2.
Item 9B. Other Information.
None.
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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 29, 2008, 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 athttp://www.thestreet.com/investor-relations/index.html?detailInclude=IROL-govhighlights. 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 Derek Irwin, 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 29, 2008, 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 29, 2008, 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
Under the terms of the Company’s 1998 Stock Incentive Plan, as amended (the “1998 Plan”), 8,900,000 shares of common stock of the Company were reserved for awards of incentive stock options, nonqualified stock options (incentive and nonqualified stock options are collectively referred to as “Options”), restricted stock, deferred stock (also referred to as restricted stock units, or RSUs), or any combination thereof. At the Company’s annual stockholders’ meeting in May 2007, stockholders of the Company approved TheStreet.com, Inc. 2007 Performance Incentive Plan (the “2007 Plan”). Under the terms of the 2007 Plan, 1,250,000 shares of common stock of the Company were reserved for awards of incentive stock options, nonqualified stock options, stock appreciation rights (SARs), restricted stock, restricted stock units (RSUs) or other stock-based awards. The plan also authorized cash performance awards. Additionally, under the terms of the 2007 Plan, unused shares authorized for award under the 1998 Plan are available for issuance under the 2007 Plan. No further awards will be made under the 1998 Plan. Awards may be granted to such directors, employees and consultants of the Company as the Compensation Committee of the Board of Directors shall in its discretion select. Only employees of the Company are eligible to receive grants of incentive stock options. Awards generally vest over a three-year period and have terms of five years. The following table sets forth certain information, as of December 31, 2007, concerning shares of common stock authorized for issuance under that equity compensation plan of the Company.
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| | | | | | |
| | 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
| | | 1,926,354 | | | $ | 6.45 | | | | 1,316,105* | |
| * | Aggregate number of shares available for grant under TheStreet.com, Inc. 2007 Performance Incentive Plan, which grants may be in the form of incentive stock options, nonqualified stock options, stock appreciation rights (SARs), restricted stock, restricted stock units (RSUs) or other stock-based awards 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. The plan also authorized cash performance awards. |
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 29, 2008, 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 Accounting 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 29, 2008, 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.
| (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. |
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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 of the Company, incorporated by reference to the Exhibits to the Company’s Registration Statement on Form S-1 filed February 23, 1999. |
| *3.2 | | Certificate of Designation of the Company’s Series B Preferred Stock, as filed with the Secretary of State of the State of Delaware on November 15, 2007, incorporated by reference to the Exhibits to the Company’s Current Report on Form 8-K filed November 20, 2007. |
| *3.3 | | Amended and Restated Bylaws of the Company, incorporated by reference to the Exhibits to the Company’s Annual Report on Form 10-K filed March 30, 2000. |
| *4.1 | | Amended and Restated Registration Rights Agreement dated December 21, 1998, by and among the Company and the stockholders named therein, incorporated by reference to the Exhibits to the Company’s Registration Statement on Form S-1 filed February 23, 1999. |
| *4.2 | | Form of Rights Agreement incorporated by reference to the Exhibits to the Company’s Registration Statement on Form S-1 filed February 23, 1999. |
| *4.3 | | Amendment No. 1 to the Rights Agreement dated August 7, 2000, incorporated by reference to the Exhibits to the Company’s Annual Report on Form 10-K filed April 2, 2001. |
| *4.4 | | Amendment No. 2 to the Rights Agreement dated November 15, 2007 by and between the Company and American Stock Transfer & Trust Company, as Rights Agent, incorporated by reference to the Exhibits to the Company’s Current Report on Form 8-K filed November 20, 2007. |
| *4.5 | | Option to Purchase Common Stock dated November 1, 2007, incorporated by reference to the Company’s Current Report on Form 8-K filed November 6, 2007. |
| *4.6 | | Investor Rights Agreement dated November 15, 2007 by and among the Company, TCV VI, L.P. and TCV Member Fund, L.P., incorporated by reference to the Exhibits to the Company’s Current Report on Form 8-K filed November 20, 2007. |
| *4.7 | | Warrant dated November 15, 2007 issued by the Company to TCV VI, L.P., incorporated by reference to the Exhibits to the Company’s Current Report on Form 8-K filed November 20, 2007. |
| *4.8 | | Warrant dated November 15, 2007 issued by the Company to TCV Member Fund, L.P., incorporated by reference to the Exhibits to the Company’s Current Report on Form 8-K filed November 20, 2007. |
| *4.9 | | Specimen certificate for the Company’s shares of common stock, incorporated by reference to the Exhibits to Amendment 3 to the Company’s Registration Statement on Form S-1 filed April 19, 1999. |
| *10.1 | | Amended and Restated 1998 Stock Incentive Plan, dated May 29, 2002, incorporated by reference to the Exhibits to the Company’s Quarterly Report on Form 10-Q filed August 14, 2002. |
| *10.2 | | Form of Stock Option Grant Agreement under the 1998 Stock Incentive Plan, incorporated by reference to the Exhibits to the Company’s Annual Report on Form 10-K filed March 16, 2005. |
| *10.3 | | Form of Restricted Stock Unit Grant Agreement under the 1998 Stock Incentive Plan, incorporated by reference to the Exhibits to the Company’s Annual Report on Form 10-K filed March 16, 2006. |
| *10.4 | | 2007 Performance Incentive Plan, incorporated by reference to Appendix A to the Company’s 2007 Definitive Proxy Statement on Schedule 14A filed April 23, 2007. |
| *10.5 | | Form of Stock Option Grant Agreement under the Company’s 2007 Performance Incentive Plan, incorporated by reference to the Exhibits to the Company’s Quarterly Report on Form 10-Q filed August 9, 2007. |
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| | |
| Exhibit Number | | Description |
| *10.6 | | Form of Restricted Stock Unit Grant Agreement under the Company’s 2007 Performance Incentive Plan, incorporated by reference to the Exhibits to the Company’s Quarterly Report on Form 10-Q filed August 9, 2007. |
| *10.7 | | Form of Cash Performance Award Agreement under the Company’s 2007 Performance Incentive Plan, incorporated by reference to the Exhibits to the Company’s Quarterly Report on Form 10-Q filed August 9, 2007. |
| *10.8 | | Employment Agreement, dated August 1, 2005, between James Cramer and the Company, incorporated by reference to the Exhibits to the Company’s Current Report on Form 8-K filed August 5, 2005. |
| *10.9 | | Letter Agreement dated December 7, 2007 amending the Employment Agreement by and between James Cramer and the Company, incorporated by reference to the Exhibits to the Company’s Current Report on Form 8-K filed December 13, 2007. |
| *10.10 | | Letter Agreement dated February 11, 2008 amending the Employment Agreement by and between James Cramer and the Company, incorporated by reference to the Exhibits to the Company’s Current Report on Form 8-K filed February 19, 2008. |
| *10.11 | | Employment Agreement, dated September 13, 2007, by and between Thomas J. Clarke, Jr. and the Company, incorporated by reference to the Exhibits to the Company’s Quarterly Report on Form 10-Q filed November 9, 2007. |
| *10.12 | | Employment Agreement, dated March 1, 2003, by and between James Lonergan and the Company, incorporated by reference to the Exhibits to the Company’s Annual Report on Form 10-K filed March 31, 2003. |
| *10.13 | | Letter Agreement, dated April 29, 2005, by and between James Lonergan and the Company, incorporated by reference to the Exhibits to the Company’s Current Report on Form 8-K filed May 4, 2005. |
| *10.14 | | Letter Agreement, dated March 14, 2006, by and between James Lonergan and the Company, incorporated by reference to the Exhibits to the Company’s Quarterly Report on Form 10-K filed March 16, 2006. |
| *10.15 | | Letter Agreement dated March 1, 2007, by and between James Lonergan and the Company, incorporated by reference to the Exhibits to the Company’s Annual Report on Form 10-K filed March 16, 2007. |
| *10.16 | | Employment Agreement dated July 5, 2006, by and between Eric Ashman and the Company, incorporated by reference to the Exhibits to the Company’s Quarterly Report on Form 10-Q filed August 9, 2006. |
| *10.17 | | Employment Agreement dated March 26, 2007, by and between Steven Elkes and the Company, incorporated by reference to the Exhibits to the Company’s Quarterly Report on Form 10-Q filed May 10, 2007. |
| *10.18 | | Employment Agreement dated August 23, 2007, by and between David Morrow and the Company, incorporated by reference to the Exhibits to the Company’s Quarterly Report on Form 10-Q filed November 9, 2007. |
| *10.19 | | Membership Interest Purchase Agreement dated August 2, 2007 by and among TP Newco LLC, David Barnett, Gregg Alwine and Gregg Alwine as Agent, incorporated by reference to the Exhibits to the Company’s Current Report on Form 8-K filed August 8, 2007. |
| *10.20 | | Stock Purchase Agreement dated November 1, 2007 by and among BFPC Newco LLC, Larry Starkweather, Kyle Selberg, Rachelle Zorn, Robert Quinn and Larry Starkweather as Agent, incorporated by reference to the Exhibits to the Company’s Current Report on Form 8-K filed November 6, 2007. |
| *10.21 | | Securities Purchase Agreement dated November 15, 2007 by and among the Company, TCV VI, L.P. and TCV Member Fund, L.P., incorporated by reference to the Exhibits to the Company’s Current Report on Form 8-K filed November 20, 2007. |
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| | |
| Exhibit Number | | Description |
| *10.22 | | Agreement of Lease, dated July 22, 1999, between 14 Wall Street Holdings 1, LLC (as successor to W12/14 Wall Acquisition Associates LLC), as Landlord, and the Company, as Tenant, incorporated by reference to the Exhibits to the Company’s Quarterly Report on Form 10-Q filed August 16, 1999. |
| *10.23 | | Amendment of Lease dated October 31, 2001, between 14 Wall Street Holdings 1, LLC (as successor to W12/14 Wall Acquisition Associates LLC), as Landlord, and the Company, as Tenant, incorporated by reference to the Exhibits to the Company’s Annual Report on Form 10-K filed March 16, 2005. |
| 10.24 | | Second Amendment of Lease dated March 21, 2007, between 14 Wall Street Holdings 1, LLC, as Landlord, and the Company, as Tenant. |
| *14.1 | | Code of Business Conduct and Ethics, incorporated by reference to the Exhibits to the Company’s Current Report on Form 8-K filed January 31, 2005. |
| 21.1 | | Subsidiaries of the Company. |
| 23.1 | | Consent of Marcum & Kliegman 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. |
| * | Previously filed and incorporated by reference |
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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 14, 2008 | 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.
(Thomas J. Clarke, Jr.) | | Chief Executive Officer and Chairman of the Board | | March 14, 2008 |
/s/ Eric Ashman
(Eric Ashman) | | Chief Financial Officer | | March 14, 2008 |
/s/Richard Broitman
(Richard Broitman) | | Vice President, Finance | | March 14, 2008 |
/s/James J. Cramer
(James J. Cramer) | | Director | | March 14, 2008 |
/s/Jeffrey Cunningham
(Jeffrey Cunningham) | | Director | | March 14, 2008 |
/s/William R. Gruver
(William R. Gruver) | | Director | | March 14, 2008 |
/s/Jay Hoag
(Jay Hoag) | | Director | | March 14, 2008 |
/s/Derek Irwin
(Derek Irwin) | | Director | | March 14, 2008 |
/s/Daryl Otte
(Daryl Otte) | | Director | | March 14, 2008 |
/s/Martin Peretz
(Martin Peretz) | | Director | | March 14, 2008 |
/s/ Jeffrey A. Sonnenfeld
(Jeffrey A. Sonnenfeld) | | Director | | March 14, 2008 |
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THESTREET.COM, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Item 15(a)
F-1
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUTING FIRM
To the Audit Committee of
The Board of Directors and Stockholders of
TheStreet.com, Inc.
We have audited the accompanying consolidated balance sheets of TheStreet.com, Inc. (the “Company”) as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2007. Our audits also included the financial statement schedule listed in the Index at Item 15(a). We have also audited the Company’s internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of TheStreet.com, Inc. at December 31, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ Marcum & Kliegman LLP
New York, New York
March 12, 2008
F-2
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THESTREET.COM, INC.
CONSOLIDATED BALANCE SHEETS
| | | | |
| | December 31, |
| | | 2007 | | 2006 |
ASSETS
| | | | | | | | |
Current Assets:
| | | | | | | | |
| Cash and cash equivalents | | $ | 79,170,754 | | | $ | 46,055,232 | |
| Accounts receivable, net of allowance for doubtful accounts of $242,807 as of December 31, 2007 and $216,077 as of December 31, 2006 | | | 11,848,252 | | | | 6,314,553 | |
| Other receivables | | | 512,849 | | | | 368,496 | |
| Deferred taxes | | | 5,800,000 | | | | — | |
| Prepaid expenses and other current assets | | | 1,652,608 | | | | 1,436,618 | |
| Total current assets | | | 98,984,463 | | | | 54,174,899 | |
Property and equipment, net of accumulated depreciation and amortization of $17,493,847 as of December 31, 2007 and
$14,420,638 as of December 31, 2006 | | | 7,730,922 | | | | 3,018,132 | |
| Other assets | | | 328,117 | | | | 178,396 | |
| Goodwill | | | 40,245,413 | | | | 4,509,666 | |
| Other intangibles, net | | | 18,368,792 | | | | 2,188,500 | |
| Deferred taxes | | | 10,200,000 | | | | — | |
| Restricted cash | | | 576,951 | | | | 500,000 | |
| Total assets | | $ | 176,434,658 | | | $ | 64,569,593 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY
| | | | | | | | |
Current Liabilities:
| | | | | | | | |
| Accounts payable | | $ | 2,189,259 | | | $ | 1,165,705 | |
| Accrued expenses | | | 5,006,635 | | | | 6,179,091 | |
| Deferred revenue | | | 16,240,008 | | | | 12,705,038 | |
| Current portion of note payable | | | — | | | | 22,146 | |
| Other current liabilities | | | 214,654 | | | | 83,800 | |
| Current liabilities of discontinued operations | | | 232,242 | | | | 222,425 | |
| Total current liabilities | | | 23,882,798 | | | | 20,378,205 | |
| Other liabilities | | | 90,105 | | | | — | |
| Total liabilities | | | 23,972,903 | | | | 20,378,205 | |
Stockholders’ Equity
| | | | | | | | |
Preferred stock; $0.01 par value; 10,000,000 shares authorized; 5,500 issued and outstanding at December 31, 2007 and none issued and outstanding at December 31, 2006; the aggregate liquidation
preference as of December 31, 2007 totals $55,096,424 | | | 55 | | | | — | |
| Common stock; $0.01 par value; 100,000,000 shares authorized; 36,006,137 shares issued and 30,254,137 shares outstanding at December 31, 2007, and 33,606,835 shares issued and 27,854,835 shares outstanding at December 31, 2006 | | | 360,061 | | | | 336,068 | |
| Additional paid-in capital | | | 270,752,308 | | | | 193,556,899 | |
| Treasury stock at cost; 5,752,000 shares at December 31, 2007 and December 31, 2006 | | | (9,033,471 ) | | | | (9,033,471 ) | |
| Accumulated deficit | | | (109,617,198 ) | | | | (140,668,108 ) | |
| Total stockholders’ equity | | | 152,461,755 | | | | 44,191,388 | |
| Total liabilities and stockholders’ equity | | $ | 176,434,658 | | | $ | 64,569,593 | |
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
F-3
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THESTREET.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | |
| | For the Year Ended December 31, |
| | | 2007 | | 2006 | | 2005 |
Net revenue:
| | | | | | | | | | | | |
| Paid services | | $ | 38,421,393 | | | $ | 35,441,457 | | | $ | 24,221,239 | |
| Marketing services | | | 26,984,637 | | | | 15,447,378 | | | | 9,522,835 | |
| Total net revenue | | | 65,406,030 | | | | 50,888,835 | | | | 33,744,074 | |
Operating expense:
| | | | | | | | | | | | |
| Cost of services | | | 25,559,409 | | | | 18,450,110 | | | | 12,727,057 | |
| Sales and marketing | | | 12,208,648 | | | | 9,616,491 | | | | 7,264,114 | |
| General and administrative | | | 12,215,797 | | | | 10,673,705 | | | | 8,176,442 | |
| Depreciation and amortization | | | 2,528,042 | | | | 1,088,679 | | | | 673,967 | |
| Total operating expense | | | 52,511,896 | | | | 39,828,985 | | | | 28,841,580 | |
| Operating income | | | 12,894,134 | | | | 11,059,850 | | | | 4,902,494 | |
| Net interest income | | | 2,476,266 | | | | 2,037,496 | | | | 852,676 | |
| Income from continuing operations before income taxes | | | 15,370,400 | | | | 13,097,346 | | | | 5,755,170 | |
| Benefit (provision) for income taxes | | | 15,693,339 | | | | (261,220 ) | | | | (5,020 ) | |
| Income from continuing operations | | | 31,063,739 | | | | 12,836,126 | | | | 5,750,150 | |
Discontinued operations:
| | | | | | | | | | | | |
| Loss from discontinued operations | | | — | | | | — | | | | (3,075,402 ) | |
| (Loss) income on disposal of discontinued operations | | | (12,829 ) | | | | 32,321 | | | | (2,428,746 ) | |
| (Loss) income from discontinued operations | | | (12,829 ) | | | | 32,321 | | | | (5,504,148 ) | |
| Net income | | | 31,050,910 | | | | 12,868,447 | | | | 246,002 | |
| Preferred stock deemed dividend | | | 1,802,733 | | | | — | | | | — | |
| Preferred stock cash dividend | | | 96,424 | | | | — | | | | — | |
| Preferred Stock Dividends | | | 1,899,157 | | | | — | | | | — | |
| Net income attributable to common stockholders | | $ | 29,151,753 | | | $ | 12,868,447 | | | $ | 246,002 | |
Basic net income (loss) per share:
| | | | | | | | | | | | |
| Income from continuing operations | | $ | 1.08 | | | $ | 0.48 | | | $ | 0.23 | |
| Loss from discontinued operations | | | — | | | | — | | | | (0.12 ) | |
| (Loss) income on disposal of discontinued operations | | | (0.00 ) | | | | 0.00 | | | | (0.10 ) | |
| (Loss) income from discontinued operations | | | (0.00 ) | | | | 0.00 | | | | (0.22 ) | |
| Net income | | | 1.08 | | | | 0.48 | | | | 0.01 | |
| Preferred Stock Dividends | | | (0.07 ) | | | | — | | | | — | |
| Net income attributable to common stockholders | | $ | 1.01 | | | $ | 0.48 | | | $ | 0.01 | |
Diluted net income (loss) per share:
| | | | | | | | | | | | |
| Income from continuing operations | | $ | 1.06 | | | $ | 0.47 | | | $ | 0.22 | |
| Loss from discontinued operations | | | — | | | | — | | | | (0.12 ) | |
| (Loss) income on disposal of discontinued operations | | | (0.00 ) | | | | 0.00 | | | | (0.09 ) | |
| (Loss) income from discontinued operations | | | (0.00 ) | | | | 0.00 | | | | (0.21 ) | |
| Net income | | | 1.06 | | | | 0.47 | | | | 0.01 | |
| Preferred Stock Dividends | | | (0.07 ) | | | | — | | | | — | |
| Net income attributable to common stockholders | | $ | 0.99 | | | $ | 0.47 | | | $ | 0.01 | |
| Weighted average basic shares outstanding | | | 28,830,366 | | | | 27,014,047 | | | | 24,953,463 | |
| Weighted average diluted shares outstanding | | | 29,387,727 | | | | 27,546,137 | | | | 26,164,880 | |
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
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THESTREET.COM, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2007, 2006, and 2005
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | Common Stock | | Series B Preferred Stock | | Additional Paid in Capital | | Treasury Stock | | Accumulated
Deficit | | Total
Stockholders’ Equity |
| | | Shares | | Par Value | | Shares | | Par Value | | Shares | | Cost |
Balance at
December 31, 2004 | | | 30,153,144 | | | $ | 301,531 | | | | — | | | $ | — | | | $ | 186,185,339 | | | | (5,453,416 | ) | | $ | (7,321,122 | ) | | $ | (153,782,557 | ) | | $ | 25,383,191 | |
| Exercise of options | | | 1,066,979 | | | | 10,670 | | | | — | | | | — | | | | 2,650,381 | | | | — | | | | — | | | | — | | | | 2,661,051 | |
Stock-based
Compensation expense related to employee stock options | | | — | | | | — | | | | — | | | | — | | | | 332,175 | | | | — | | | | — | | | | — | | | | 332,175 | |
| Stock repurchase | | | — | | | | — | | | | — | | | | — | | | | — | | | | (231,602 | ) | | | (1,181,188 | ) | | | — | | | | (1,181,188 | ) |
| Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 246,002 | | | | 246,002 | |
Balance at
December 31, 2005 | | | 31,220,123 | | | | 312,201 | | | | — | | | | — | | | | 189,167,895 | | | | (5,685,018 | ) | | | (8,502,310 | ) | | | (153,536,555 | ) | | | 27,441,231 | |
| Exercise of options | | | 2,386,712 | | | | 23,867 | | | | — | | | | — | | | | 5,372,125 | | | | — | | | | — | | | | — | | | | 5,395,992 | |
Stock-based
Compensation expense related to employee stock options | | | — | | | | — | | | | — | | | | — | | | | 1,753,429 | | | | — | | | | — | | | | — | | | | 1,753,429 | |
| Stock repurchase | | | — | | | | — | | | | — | | | | — | | | | — | | | | (66,982 | ) | | | (531,161 | ) | | | — | | | | (531,161 | ) |
Dividend paid to
stockholders | | | — | | | | — | | | | — | | | | — | | | | (2,736,550 | ) | | | — | | | | — | | | | — | | | | (2,736,550 | ) |
| Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 12,868,447 | | | | 12,868,447 | |
Balance at
December 31, 2006 | | | 33,606,835 | | | | 336,068 | | | | — | | | | — | | | | 193,556,899 | | | | (5,752,000 | ) | | | (9,033,471 | ) | | | (140,668,108 | ) | | | 44,191,388 | |
| Exercise of options | | | 739,424 | | | | 7,394 | | | | — | | | | — | | | | 3,010,029 | | | | — | | | | — | | | | — | | | | 3,017,423 | |
| Issuance of common stock for acquisitions | | | 1,659,878 | | | | 16,599 | | | | — | | | | — | | | | 20,258,848 | | | | — | | | | — | | | | — | | | | 20,275,447 | |
| Issuance of preferred stock | | | — | | | | — | | | | 5,500 | | | | 55 | | | | 54,839,028 | | | | — | | | | — | | | | — | | | | 54,839,083 | |
| Stock repurchase | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Stock-based
Compensation expense related to employee stock options | | | — | | | | — | | | | — | | | | — | | | | 2,115,599 | | | | — | | | | — | | | | — | | | | 2,115,599 | |
Common stock cash
dividends | | | — | | | | — | | | | — | | | | — | | | | (2,931,671 | ) | | | — | | | | — | | | | — | | | | (2,931,671 | ) |
Preferred stock cash
dividends | | | — | | | | — | | | | — | | | | — | | | | (96,424 | ) | | | — | | | | — | | | | — | | | | (96,424 | ) |
| Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 31,050,910 | | | | 31,050,910 | |
Balance at
December 31, 2007 | | | 36,006,137 | | | $ | 360,061 | | | | 5,500 | | | $ | 55 | | | $ | 270,752,308 | | | | (5,752,000 | ) | | $ | (9,033,471 | ) | | $ | (109,617,198 | ) | | $ | 152,461,755 | |
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
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TABLE OF CONTENTS
THESTREET.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | |
| | For the Years Ended December 31, |
| | | 2007 | | 2006 | | 2005 |
Cash Flows from Operating Activities:
| | | | | | | | | | | | |
| Net income | | $ | 31,050,910 | | | $ | 12,868,447 | | | $ | 246,002 | |
| Loss (income) from discontinued operations | | | 12,829 | | | | (32,321 ) | | | | 5,504,148 | |
| Income from continuing operations | | | 31,063,739 | | | | 12,836,126 | | | | 5,750,150 | |
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
| | | | | | | | | | | | |
| Stock-based compensation expense | | | 2,115,599 | | | | 1,753,429 | | | | 332,175 | |
| Provision for doubtful accounts | | | 175,000 | | | | 84,500 | | | | 47,000 | |
| Depreciation and amortization | | | 2,528,042 | | | | 1,088,679 | | | | 673,967 | |
| Deferred tax benefit | | | (16,000,000 ) | | | | — | | | | — | |
| Deferred rent | | | 119,317 | | | | 89,370 | | | | 63,136 | |
Changes in operating assets and liabilities:
| | | | | | | | | | | | |
| Accounts receivable | | | (3,124,728 ) | | | | (3,203,875 ) | | | | (1,745,060 ) | |
| Other receivables | | | (350,638 ) | | | | (182,640 ) | | | | (99,657 ) | |
| Prepaid expenses and other current assets | | | (143,765 ) | | | | (335,048 ) | | | | (232,764 ) | |
| Other assets | | | (52,965 ) | | | | (15,836 ) | | | | (100 ) | |
| Accounts payable | | | 134,663 | | | | 30,387 | | | | 371,048 | |
| Accrued expenses | | | (1,601,575 ) | | | | 2,036,858 | | | | (506,258 ) | |
| Deferred revenue | | | (1,406,786 ) | | | | 1,323,067 | | | | 2,617,497 | |
| Other current liabilities | | | 31,373 | | | | 36,030 | | | | (66,962 ) | |
| Other liabilities | | | (46,280 ) | | | | — | | | | — | |
| Net cash provided by continuing operations | | | 13,440,996 | | | | 15,541,047 | | | | 7,204,172 | |
| Net cash used in discontinued operations. | | | (3,012 ) | | | | (21,984 ) | | | | (5,959,761 ) | |
| Net cash provided by operating activities | | | 13,437,984 | | | | 15,519,063 | | | | 1,244,411 | |
Cash Flows from Investing Activities:
| | | | | | | | | | | | |
| Purchase of short-term investments | | | — | | | | — | | | | (500,000 ) | |
| Sale of short-term investments | | | — | | | | 500,000 | | | | — | |
| Purchase of Bankers Financial Products Corporation | | | (16,811,966 ) | | | | — | | | | — | |
| Purchase of Corsis Technology Group II LLC | | | (11,890,071 ) | | | | — | | | | — | |
| Purchase of Stockpickr LLC | | | (1,572,106 ) | | | | — | | | | — | |
| Purchase of Weiss Ratings, Inc | | | 124,663 | | | | (3,316,048 ) | | | | — | |
| Capital expenditures | | | (4,979,247 ) | | | | (1,687,672 ) | | | | (697,778 ) | |
| Net cash used in investing activities | | | (35,128,727 ) | | | | (4,503,720 ) | | | | (1,197,778 ) | |
Cash Flows from Financing Activities:
| | | | | | | | | | | | |
| Proceeds from the exercise of stock options | | | 3,017,423 | | | | 5,395,992 | | | | 2,661,051 | |
| Net proceeds from the sale of preferred stock | | | 54,839,083 | | | | — | | | | — | |
| Cash dividends paid on common stock | | | (2,931,671 ) | | | | (2,736,550 ) | | | | — | |
| Cash dividends paid on preferred stock | | | (96,424 ) | | | | — | | | | — | |
| Repayment of note payable | | | (22,146 ) | | | | (102,931 ) | | | | (96,192 ) | |
| Restricted cash | | | — | | | | 600,000 | | | | 1,205,000 | |
| Purchase of treasury stock | | | — | | | | (531,161 ) | | | | (1,181,188 ) | |
| Net cash provided by financing activities | | | 54,806,265 | | | | 2,625,350 | | | | 2,588,671 | |
| Net increase in cash and cash equivalents | | | 33,115,522 | | | | 13,640,693 | | | | 2,635,304 | |
| Cash and cash equivalents, beginning of period | | | 46,055,232 | | | | 32,414,539 | | | | 29,779,235 | |
| Cash and cash equivalents, end of period | | $ | 79,170,754 | | | $ | 46,055,232 | | | $ | 32,414,539 | |
Supplemental disclosures of cash flow information:
| | | | | | | | | | | | |
| Cash payments made for interest | | $ | 41,146 | | | $ | 27,360 | | | $ | 24,043 | |
| Cash payments made for income taxes | | $ | 242,771 | | | $ | 411,851 | | | $ | 126,891 | |
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
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TABLE OF CONTENTS
THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
(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,” “our,” “we” or “us”) is a leading financial media company. We distribute our content through proprietary properties, including Web sites, email services, print publications and video programming. We also syndicate our content for distribution by other media companies. Our goal is to provide information and services that empower a growing audience of investors and consumers through our expanding network of properties to become the leading online destination where issues related to life and money intersect.
In June 2005, the Company committed to a plan to discontinue the operations of its wholly owned subsidiary, Independent Research Group LLC, which operated 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. See Note 2 to Notes to Consolidated Financial Statements.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions. Significant estimates include the allowance for doubtful accounts receivable, valuation allowance of deferred taxes, 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.
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 paid and marketing services.
Paid services include subscription fees paid by customers for access to particular services for the term of the subscription as well as syndication and licensing revenue. Subscriptions are generally charged to customers’ credit cards or are directly billed to corporate subscribers. These are generally billed in advance on a monthly or annual basis. The Company calculates net subscription revenue by deducting anticipated 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.
Subscription revenue is subject to estimation and variability due to the fact that, in the normal course of business, subscribers may for various reasons contact us or their credit card companies to request a refund or other adjustment for a previously purchased subscription. Accordingly, we maintain a provision for estimated future revenue reductions resulting from expected refunds and chargebacks related to subscriptions for which revenue was recognized in a prior period. The calculation of this provision is based upon historical trends and is reevaluated each quarter.
Marketing services include advertising revenue, which is derived from the sale of Internet sponsorship arrangements and from the delivery of banner, video 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
F-7
TABLE OF CONTENTS
THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
(1) Organization, Nature of Business and Summary of Operations and Significant Accounting Policies – (continued)
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.
Marketing services also include revenue associated with Promotions.com, which the Company acquired as part of its acquisition of Corsis Technology Group II LLC in August 2007. Promotions.com revenues are derived principally from management contracts in which Promotions.com typically provides custom services for the creation, implementation, and administration of an online promotion on a customer’s website and for managing the customer’s information technology functions. Promotions.com recognizes revenue related to its services as the services are provided or ratably over the period of the contract, provided that no significant obligations remain and collection of the resulting receivable is reasonably assured.
Advertising revenue is subject to estimation and variability due to our policy of recognizing revenue only for arrangements with customers in which, among other things, management believes that collectibility of amounts due is reasonably assured. Accordingly, we estimate and record a provision for doubtful accounts for estimated losses resulting from the failure of our advertising customers to make required payments. This provision is recorded as a bad debt expense. A considerable amount of judgment is required in assessing the ultimate realization of these receivables, including the current credit-worthiness of each customer.
Promotions.com revenue is subject to estimation and variability due to the judgment involved in estimating the percentage of completion of a particular contract in determining the amount of revenue to be recognized.
Cash, Cash Equivalents and Restricted Cash
The Company considers all short-term investment grade securities with original maturities of three months or less from the date of purchase to be cash equivalents. The Company has a total of $576,951 of cash invested in certificates of deposit that serve as collateral for outstanding letters of credit, and is therefore restricted. The letters of credit serve as security deposits for the Company’s office space in New York City. The office leases do not expire within the next 12 months, and the restricted cash is therefore classified as a noncurrent asset.
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, computer software and telephone equipment, and five years for furniture and fixtures. Capitalized software and Web site development costs can vary based upon the project). 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 differ materially from the estimates contained herein, additional costs could be incurred, which could have an adverse impact on the Company’s expenses.
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, “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
F-8
TABLE OF CONTENTS
THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
(1) Organization, Nature of Business and Summary of Operations and Significant Accounting Policies – (continued)
the years ended December 31, 2007, 2006 and 2005, the Company capitalized $287,827, $37,963, and $19,605, 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. Amortization of capitalized costs will not commence until the project is completed and placed into service. For the year ended December 31, 2007, the Company capitalized Web site development costs totaling $2,824,784. For the years ended December 31, 2006 and 2005, the Company did not capitalize any Web site development costs. Most of the costs capitalized during the year ended December 31, 2007 involve development projects that are expected to become functional in early 2008. As a result, amortization expense has not yet been recorded for these capitalized costs.
Capitalized software and Web site development costs are amortized using the straight-line method over the estimated useful life of the software or Web site. Total amortization expense was $41,708, $84,849 and $134,991, for the years ended December 31, 2007, 2006 and 2005, respectively.
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 estimated 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 value impairment test on its goodwill and certain other intangible assets, the results of which had no impact on the Company’s financial statements. The Company’s goodwill and intangible assets with indefinite useful lives is tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Based upon annual impairment tests as of October 31, 2007, and September 30, 2006 and 2005, no impairment was indicated for the Company’s goodwill and intangible assets with indefinite lives.
Long-Lived Assets
The Company adopted SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” 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, 2007.
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TABLE OF CONTENTS
THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
(1) Organization, Nature of Business and Summary of Operations and Significant Accounting Policies – (continued)
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.
Deferred tax assets pertaining to windfall tax benefits on exercise of share awards and the corresponding credit to additional paid-in capital are recorded if the related tax deduction reduces tax payable. The Company has elected the “with-and –without approach” regarding ordering of windfall tax benefits to determine whether the windfall tax benefit did reduce taxes payable in the current year. Under this approach, the windfall tax benefits would be recognized in additional paid-in capital only if an incremental tax benefit is realized after considering all other tax benefits presently available to the Company.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, restricted cash, accounts and other receivables, accounts payable, accrued expenses, deferred revenue and note payable approximate fair value due to the short-term maturities 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 and accounts receivable. The Company maintains all of its cash, cash equivalents and restricted cash 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.
For the years ended December 31, 2007, 2006 and 2005, the Company’s top five advertisers accounted for approximately 28%, 34% and 33%, respectively, of its total advertising revenue. For the years ended December 31, 2007 and 2005, no advertiser accounted for 10% or more of total advertising revenue, as compared to one advertiser accounting for approximately 14% for the year ended December 31, 2006.
Net Income or Loss Per Share of Common Stock
Basic net income per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of restricted stock units (using the treasury stock method), the incremental common shares issuable upon the exercise of stock options (using the treasury stock method), and the conversion of the Company’s convertible preferred stock and warrants (using the if-converted method). For 2007, 2006 and 2005, approximately 1.6 million, 0.3 million, and 0.1 million options and warrants to purchase common stock, respectively, were excluded from the calculation, as the exercise prices were greater than the average market price of the common stock during the respective years. In addition, 3,856,942 shares associated with the convertible preferred stock were also excluded from the calculation of diluted net income per share in 2007, as the results would have been antidilutive.
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TABLE OF CONTENTS
THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
(1) Organization, Nature of Business and Summary of Operations and Significant Accounting Policies – (continued)
Advertising Costs
Advertising costs are expensed as incurred. For the years ended December 31, 2007, 2006, and 2005, advertising costs were $1,981,320, $1,254,360 and $988,683, respectively.
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. SFAS No. 123(R) supersedes the Company’s previous accounting under 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 statements of operations for the years ended December 31, 2007 and 2006 reflect the impact of SFAS No. 123(R). The consolidated statements of operations for the year ended December 31, 2005 only reflects the impact of SFAS No. 123(R) for the period October 1, 2005 to December 31, 2005. Stock-based compensation expense recognized under SFAS No. 123(R) for the years ended December 31, 2007, 2006 and 2005 were $2,115,599, $1,753,429 and $332,175, respectively. As of December 31, 2007, there was approximately $3.7 million of unrecognized stock-based compensation expense remaining to be recognized over a weighted-average period of 2.02 years.
SFAS No. 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant. The value of stock options granted to employees and directors is estimated using an option-pricing model. The value of each restricted stock unit, which the Company issued for the first time during the three-month period ended March 31, 2006, is equal to the closing price per share of the Company’s common stock on the trading day immediately prior to the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods. Prior to the adoption of SFAS No. 123(R), the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as allowed under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation.” Under the intrinsic value method, no stock-based compensation expense had been recognized, as the exercise price of the Company’s stock options granted to employees and directors equaled the fair market value of the underlying stock at the date of grant.
Stock-based compensation expense recognized in the Company’s Consolidated Statements of Operations for the years ended December 31, 2007 and 2006 includes compensation expense for all share-based payment awards granted prior to, but not yet vested as of January 1, 2006, based upon the grant date fair value estimated in accordance with the pro forma provision of SFAS No. 123, and compensation expense for the share-based payment awards granted subsequent to January 1, 2006, based upon the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). The Company recognizes compensation expense for share-based payment awards on a straight-line basis over the requisite service period of the award. As stock-based compensation expense recognized in the years ended December 31, 2007 and 2006 is based upon awards ultimately expected to vest, it has been reduced for estimated 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.
F-11
TABLE OF CONTENTS
THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
(1) Organization, Nature of Business and Summary of Operations and Significant Accounting Policies – (continued)
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 fair value of employee stock options granted during the years ended December 31, 2007, 2006 and 2005 was $4.15, $3.50 and $1.96, respectively, using the Black-Scholes model with the weighted-average assumptions presented below. Because option-pricing models require the use of subjective assumptions, changes in these assumptions can materially affect the fair value of the options. The assumptions presented below represent the weighted-average value of the applicable assumption used to value stock options at their grant date. In determining the volatility assumption, the Company used a historical analysis of the volatility of the Company’s share price for the preceding period equal to the expected option lives. The expected option lives, which represent the period of time that options granted are expected to be outstanding, were estimated based upon the “simplified” method for “plain-vanilla” options. 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 future dividend payouts. The periodic expense is determined based on the valuation of the options, and at that time an estimated forfeiture rate is used to reduce the expense recorded. The Company’s estimate of pre-vesting forfeitures is primarily based on the Company’s historical experience and is adjusted to reflect actual forfeitures as the options vest.
| | | | | | |
| | For the Year Ended December 31, |
| | | 2007 | | 2006 | | 2005 |
| Expected option lives | | | 3.5 years | | | | 3.5 years | | | | 4.0 years | |
| Expected volatility | | | 46.56 | % | | | 44.84 | % | | | 59.00 | % |
| Risk-free interest rate | | | 4.62 | % | | | 4.76 | % | | | 3.45 | % |
| Expected dividends | | | 0.94 | % | | | 1.08 | % | | | 0 | % |
On November 10, 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. FAS 123(R)-3 “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards.” The Company has elected to adopt the alternative transition method provided in the FASB Staff Position for calculating the tax effects of stock-based compensation pursuant to SFAS No. 123(R). The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool (“APIC pool”) related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and cash flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS 123(R).
Had compensation for the Company’s outstanding share-based payment awards granted to employees and directors been determined consistent with the provisions of SFAS No. 123, the effect on the Company’s net income or loss and basic and diluted net income or loss per share for the year ended December 31, 2005 would have been as follows:
| | |
| |
| Net income, as reported. | | $ | 246,002 | |
| Add: noncash compensation, as reported. | | | 332,175 | |
| Less: noncash compensation, pro forma | | | (1,333,082 ) | |
| Net loss, pro forma. | | $ | (754,905 ) | |
| Basic net income per share, as reported. | | $ | 0.01 | |
| Basic net loss per share, pro forma | | $ | (0.03 ) | |
| Diluted net income per share, as reported | | $ | 0.01 | |
| Diluted net loss per share, pro forma | | $ | (0.03 ) | |
F-12
TABLE OF CONTENTS
THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
(1) Organization, Nature of Business and Summary of Operations and Significant Accounting Policies – (continued)
Executive Incentive Plan
In 2007, the Company adopted an executive incentive plan, whereby executive officers and other key employees are eligible to receive cash performance awards based on set performance criteria.
In March 2007, the Compensation Committee granted such cash performance awards, payable to certain executive officers upon the Company’s achievement of specified 2007 performance goals. The target short term and long term bonus opportunity for executive officers each range from 75% of salary for the CEO to 50% of salary for the other named executive officers.
The short-term incentive is based 50% on achievement of a revenue target and 50% on achievement of a net income target. Potential payout with respect to each measure ranges from 50% of the bonus opportunity for that measure for achievement of 80% of target performance to 200% of the bonus opportunity for achievement of 120% or more of target performance. As of December 31, 2007, no short-term incentive payments have been earned.
The long-term incentive is based on a comparison of the Company’s Enterprise Multiple as compared to a peer group, on a sliding scale calculated within a range whose target is benchmarked at the Company’s performance against the peer group in 2006. If the Company’s 2007 performance is at 100% of the target performance, the executive will earn 100% of the target long-term incentive. If the Company’s 2007 performance is within the range of 50% to 150% of the target level, the portion of the long-term incentive award payable to the executive will be calculated on a sliding scale using a one-to one relationship. Performance below the 50% level will result in no long-term incentive compensation being paid, and performance above it will result in payment of 150% of the target long-term incentive. The amount of long-term incentive earned will be determined following the end of the 2007 plan year and converted into phantom shares of the Company whereby the value of the grant in shares will be recorded as a liability until paid. The value of the liability will be adjusted each reporting period to equal the market value of the underlying shares until vested. The account will be credited with dividend equivalents, which will be converted into additional phantom shares. On December 31, 2008 (provided the executive is still employed by the Company), one-third of the phantom shares will vest, and the value thereof will be distributed to the executive in cash within 60 days. On December 31, 2009 (provided the executive is still employed by the Company), one-half of the remaining phantom shares will vest, and the value thereof will be distributed to the executive in cash within 60 days. Finally, on December 31, 2010 (provided the executive is still employed by the Company), the remaining phantom shares will vest, and the value thereof will be distributed to the executive in cash within 60 days.
As of December 31, 2007, $431,783 in awards have been earned by key executives. The Company will amortize this amount to compensation expense over the three year vesting period.
Common Stock Purchase Warrants
The Company accounts for the issuance of common stock purchase warrants issued in connection with capital financing transactions in accordance with the provisions of Emerging Issues Task Force (“EITF”) Issue No. 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” Based upon the provisions of EITF Issue No. 00-19, the Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event is outside the control of the Company) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).
F-13
TABLE OF CONTENTS
THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
(1) Organization, Nature of Business and Summary of Operations and Significant Accounting Policies – (continued)
The Company assessed the classification of its derivative financial instruments as of December 31, 2007, which consist of common stock purchase warrants, and determined that such derivatives meet the criteria for equity classification under EITF 00-19.
Convertible Instruments
The Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) and EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (EITF 00-19).
SFAS 133 generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments in accordance with EITF 00-19. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not remeasured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument subject to the requirements of SFAS133. SFAS 133 and EITF 00-19 also provide an exception to this rule when the host instrument is deemed to be conventional (as that term is described in the implementation guidance to SFAS 133 and further clarified in EITF 05-2 “The Meaning of “Conventional Convertible Debt Instrument” in Issue No. 00-19).
The Company accounts for convertible instruments (when it has determined that the embedded conversion options should not be bifurcated from their host instruments) in accordance with the provisions of EITF 98-5 “Accounting for Convertible Securities with Beneficial Conversion Features,” (“EITF 98-5”) and EITF 00-27 “Application of FITF 98-5 to Certain Convertible Instruments.” Accordingly, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their earliest date of redemption. The Company also records when necessary deemed dividends for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note.
The Company evaluated the conversion option embedded in the Convertible Preferred Stock that it issued during the year ended December 31, 2007 and determined, in accordance with the provisions of these statements, that such conversion option does not meet the criteria requiring bifurcation of these instruments. The characteristics of the common stock that is issuable upon a holder’s exercise of the conversion option embedded in the Convertible Preferred Stock are deemed to be clearly related to the characteristics of the preferred shares (as that term is clarified in paragraph 61.1 of the implementation guidance included in Appendix A of SFAS 133). Additionally, the Company’s conversion options, if free standing, would not be considered derivatives subject to the accounting guidelines prescribed under SFAS 133.
Preferred Stock
The Company applies the guidance in SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” and EITF Topic D-98 “Classification and Measurement of Redeemable Securities,” when determining the classification and measurement of its convertible preferred shares. Preferred shares subject to mandatory redemption (if any) are classified as liability instruments and are
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TABLE OF CONTENTS
THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
(1) Organization, Nature of Business and Summary of Operations and Significant Accounting Policies – (continued)
measured at fair value in accordance with SFAS 150. All other issuances of preferred stock are subject to the classification and measurement principles of EITF Topic D-98. Accordingly the Company classifies conditionally redeemable preferred shares (if any), which includes preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control, as temporary equity. At all other times, the Company classifies its preferred shares as a component of stockholders’ equity.
The Company’s convertible preferred shares do not feature any redemption rights within the holders’ control or conditional redemption features not solely within the Company’s control as of December 31, 2007. Accordingly, the Series B Convertible Preferred shares are presented as a component of stockholders’ equity.
New Accounting Pronouncements
In June 2006, the Emerging Issues Task Force (“EITF”) of the Financial Accounting Standards Board (“FASB”) reached a consensus on Issue No. 06-3 (“EITF 06-3”), “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)”. The consensus allows companies to choose between two acceptable alternatives based on their accounting policies for transactions in which the company collects taxes on behalf of a governmental authority, such as sales taxes. Under the gross method, taxes collected are accounted for as a component of sales revenue with an offsetting expense. Conversely, the net method allows a reduction to sales revenue. If such taxes are reported on a gross basis and are significant, companies should disclose the amount of those taxes. The guidance should be applied to financial reports through retrospective application for all periods presented, if amounts are significant, for interim and annual reporting periods beginning after December 15, 2006. The Company adopted the provisions of this EITF and accounts for the collection of sales taxes using the gross method. The implementation of EITF 06-3 did not have a material effect on the Company’s consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). This Statement defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and accordingly, does not require any new fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is in the process of evaluating the potential impact, if any, of the adoption of SFAS No. 157 will have on our results of operations, financial condition and cash flows.
Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. Differences between tax positions taken or expected to be taken in a tax return and the benefit recognized and measured pursuant to the interpretation are referred to as “unrecognized benefits.” A liability is recognized for an unrecognized tax benefit because it represents an enterprise’s potential future obligation to the taxing authority for a tax position that was not recognized as a result of applying the provisions of FIN 48.
The adoption of the provisions of FIN 48 did not have a material impact on the Company’s consolidated financial position and results of operations. As of December 31, 2007, no liability for unrecognized tax benefits was required to be recorded.
F-15
TABLE OF CONTENTS
THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
(1) Organization, Nature of Business and Summary of Operations and Significant Accounting Policies – (continued)
In accordance with FIN 48, interest costs related to unrecognized tax benefits are required to be calculated (if applicable) and would be classified as “Net interest income” in the consolidated statements of operations. Penalties would be recognized as a component of “General and administrative” expenses. There is no interest expense or penalty related to tax uncertainties reported in the consolidated statements of operations.
In many cases the Company’s uncertain tax positions are related to tax years that remain subject to examination by relevant tax authorities. The Company files income tax returns in the United States (federal) and in various state and local jurisdictions. In most instances, the Company is no longer subject to federal, state and local income tax examinations by tax authorities for years prior to 2004, and is not currently under examination by any federal, state or local jurisdiction. It is not anticipated that unrecognized tax benefits will significantly change in the next twelve months.
In February, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 provides Companies with an option to report selected financial assets and liabilities at fair value. SFAS No. 159’s objective is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between Companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 requires Companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the Company’s choice to use fair value on its earnings. It also requires entities to display the fair value of those assets and liabilities for which the Company has chosen to use fair value on the face of the balance sheet. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS No. 157. The Company did not early adopt SFAS No. 159. The Company is in the process of evaluating the potential impact, if any, of the adoption of SFAS No. 159 will have on our results of operations, financial condition and cash flows.
In March 2007, the FASB ratified Emerging Issues Task Force No. 06-11 (“EITF 06-11”), “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards.” EITF 06-11 requires companies to recognize the income tax benefit realized from dividends or dividend equivalents that are charged to retained earnings and paid to employees for nonvested equity-classified employee share-based payment awards as an increase to additional paid-in capital. EITF 06-11 is effective for fiscal years beginning after September 15, 2007. The Company does not expect EITF 06-11 will have a material impact on its consolidated financial position, results of operations or cash flows.
In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141R, “Business Combinations” (“SFAS 141R”), which replaces SFAS No. 141, “Business Combinations.” SFAS 141R establishes principles and requirements for determining how an enterprise recognizes and measures the fair value of certain assets and liabilities acquired in a business combination, including noncontrolling interests, contingent consideration, and certain acquired contingencies. SFAS 141R also requires acquisition-related transaction expenses and restructuring costs be expensed as incurred rather than capitalized as a component of the business combination. SFAS 141R will be applicable prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. SFAS 141R will have an impact on accounting for any businesses acquired after the effective date of this pronouncement.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes accounting and
F-16
TABLE OF CONTENTS
THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
(1) Organization, Nature of Business and Summary of Operations and Significant Accounting Policies – (continued)
reporting standards for the noncontrolling interest in a subsidiary (previously referred to as minority interests). SFAS 160 also requires that a retained noncontrolling interest upon the deconsolidation of a subsidiary be initially measured at its fair value. Upon adoption of SFAS 160, the Company will be required to report any noncontrolling interests as a separate component of stockholders’ equity. The Company will also be required to present any net income allocable to noncontrolling interests and net income attributable to the stockholders of the Company separately in its consolidated statement of operations. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. SFAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of SFAS 160 shall be applied prospectively. SFAS 160 will have an impact on the presentation and disclosure of the noncontrolling interests of any non wholly-owned businesses acquired in the future.
(2) Discontinued Operations
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 in the accompanying Consolidated Statements of Operations. The Company has reclassified the accompanying Consolidated Statements of Operations and Statements of Cash Flows for the year ended December 31, 2005 to conform to the presentation as of and for the years ended December 31, 2007 and 2006.
For the years ended December 31, 2007, 2006 and 2005, net revenue and net loss from discontinued operations were as follows:
| | | | | | |
| | For the Year Ended December 31, |
| | | 2007 | | 2006 | | 2005 |
| Net revenue | | $ | — | | | $ | — | | | $ | 2,565,081 | |
| Loss from discontinued operations | | $ | — | | | $ | — | | | $ | (3,075,402 | ) |
| (Loss) income on disposal of discontinued operations | | | (12,829 ) | | | | 32,321 | | | | (2,428,746 | ) |
| (Loss) income from discontinued operations. | | $ | (12,829 ) | | | $ | 32,321 | | | $ | (5,504,148 | ) |
For the year ended December 31, 2005, loss on disposal of discontinued operations includes actual losses from the date the Company committed to a plan to discontinue the operations of the segment, plus a provision for additional future costs to be incurred to complete the discontinuance process.
The fair market values of the remaining liabilities of the discontinued operation as of December 31, 2007 and 2006 are as follows:
| | | | |
| | December 31, |
| | | 2007 | | 2006 |
| Current liabilities. | | $ | 232,242 | | | $ | 222,425 | |
As of December 31, 2007, current liabilities of discontinued operations consists of accrued shutdown costs.
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TABLE OF CONTENTS
THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
(2) Discontinued Operations – (continued)
The following table displays the activity and balances of the provisions related to discontinued operations:
| | | | | | | | | | | | |
| | Initial Charge | | Year 2005 Activity | | Year 2006 Activity | | Balance 12/31/2006 | | Year 2007 Activity | | Balance 12/31/2007 |
| Net asset write-off | | $ | 666,546 | | | $ | (666,546 | ) | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Severance payments | | | 1,134,323 | | | | (905,566 | ) | | | (6,332 | ) | | | 222,425 | | | | — | | | | 222,425 | |
| Extinguishment of lease and other obligations | | | 582,483 | | | | (531,310 | ) | | | (51,173 | ) | | | — | | | | 9,817 | | | | 9,817 | |
| | | $ | 2,383,352 | | | $ | (2,103,422 | ) | | $ | (57,505 | ) | | $ | 222,425 | | | $ | 9,817 | | | $ | 232,242 | |
(3) Acquisitions
Weiss Ratings, Inc.
On August 7, 2006, the Company, through its newly formed, wholly-owned subsidiary, TheStreet.com Ratings, Inc., acquired substantially all of the assets and certain liabilities of Weiss Ratings, Inc. (“Ratings”), a wholly owned subsidiary of Weiss Group, Inc. that provides independent ratings and evaluations of mutual funds, exchange-traded funds, stocks and financial institutions, including insurers, healthcare providers, banks and savings and loans. The Company paid cash consideration of $3.2 million, equal to the total purchase price of $4.7 million less the value of assumed deferred revenue liabilities totaling approximately $1.5 million. The acquired deferred revenue was subsequently reduced by approximately $125,000 with the offset being a reduction to goodwill.
The acquisition provides the Company with a rich new data set that will provide valuable information to our growing audience across our network of Web sites and subscription services, and provide new advertising and sponsorship opportunities for our advertisers. Ratings has proprietary quantitative models that have built an excellent reputation over the years. These models, and the data they produce on a daily basis, in collaboration with the Company’s distribution capabilities, provide significant growth opportunities for the Company. These factors contributed to a purchase price in excess of the fair value of net tangible and intangible assets acquired from Ratings, and as a result, the Company recorded goodwill in connection with this transaction.
The results of operations have been included in the accompanying consolidated financial statements from the date of acquisition. Based on the Company’s evaluation, the allocation of the purchase price for the acquisition was as follows:
| | |
Assets acquired:
| | | | |
| Property and equipment | | $ | 348,411 | |
| Intangible assets (amortizable over 3 – 5 years) | | | 1,902,000 | |
| Goodwill | | | 2,394,691 | |
| Total assets acquired | | | 4,645,102 | |
Liabilities assumed:
| | | | |
| Deferred revenue | | | 1,328,436 | |
| Total liabilities assumed | | | 1,328,436 | |
| Total consideration (including legal fees of approximately $150,000) | | $ | 3,316,666 | |
In accordance with the requirements of Statement of Financial Accounting Standards No. 141 (“SFAS No. 141”), “Business Combinations,” the Company recognized certain intangible assets acquired, primarily a syndication agreement, software models and a covenant not to compete. In accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” the syndication agreement of $870,000, software
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TABLE OF CONTENTS
THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
(3) Acquisitions – (continued)
models of $562,000 and covenant not to compete of $470,000 will be amortized over their estimated useful lives ranging from three to five years. The goodwill recorded as a result of the acquisition is deductible for Federal, New York State and New York City income tax purposes over a period of 15 years. The estimated amortization expense of amortizable intangible assets for the next five years is as follows:
| | |
| For the Year Ended December 31, | | Amount |
| 2008 | | $ | 496,400 | |
| 2009 | | | 375,567 | |
| 2010 | | | 206,400 | |
| 2011 | | | 120,400 | |
| 2012 | | | — | |
| Total | | $ | 1,198,767 | |
Stockpickr.com
On January 3, 2007, the Company formed a joint venture with A.R. Partners, a New York-based media holding company, to operate a Web site called Stockpickr — “The Stock Idea Network.” Stockpickr, located at www.stockpickr.com, allows its members to compare their portfolios to others in the network, scan portfolios for investment ideas and open a dialogue with like-minded investors in a secure environment. A.R. Partners owned 50.1% and TheStreet.com 49.9% of the venture. On April 25, 2007, the Company announced the acquisition of the remaining 50.1% stake in Stockpickr.com business that it did not already own. The Company paid consideration of $1.5 million in cash and issued 329,567 shares of unregistered shares of the Company’s common stock, having a value on the closing date of approximately $3.5 million.
The acquisition provides the Company with several competitive advantages, including: a Web site that provides a Web 2.0 community to TheStreet.com network, engaging active investors in an ongoing dialog about the over 800 professional portfolios and thousands of individual investor portfolios on the site; a Web site that serves as an ongoing source of innovative audience engagement technologies and tools; and insight into advertiser demand for community generated content and user demand for ever evolving Web 2.0 tools and features. These factors contributed to a purchase price in excess of the fair value of net tangible and intangible assets acquired from Ratings, and as a result, the Company recorded goodwill in connection with this transaction.
The results of operations have been included in the accompanying consolidated financial statements from the date of acquisition. Based on the Company’s evaluation, the allocation of the purchase price for the acquisition was as follows:
| | |
Assets acquired:
| | | | |
| Accounts receivable | | $ | 22,780 | |
| Intangible assets (amortizable over 5 years) | | | 500,000 | |
| Goodwill | | | 4,560,907 | |
| Total assets acquired | | | 5,083,687 | |
Liabilities assumed:
| | | | |
| Accounts payable | | | 11,581 | |
| Total liabilities assumed | | | 11,581 | |
| Total consideration (including legal fees of approximately $72,000) | | $ | 5,072,106 | |
F-19
TABLE OF CONTENTS
THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
(3) Acquisitions – (continued)
In accordance with the requirements of Statement of Financial Accounting Standards No. 141 (“SFAS No. 141”), “Business Combinations,” the Company recorded the estimated value of $500,000 related to the software models acquired within intangible assets. In accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” the intangible asset will be amortized over its estimated useful life of five years. The goodwill recorded as a result of the acquisition is deductible for Federal, New York State and New York City income tax purposes over a period of 15 years. The estimated amortization expense of amortizable intangible assets for the next five years is as follows:
| | |
| For the Year Ended December 31, | | Amount |
| 2008 | | $ | 100,000 | |
| 2009 | | | 100,000 | |
| 2010 | | | 100,000 | |
| 2011 | | | 100,000 | |
| 2012 | | | 33,333 | |
| Total | | $ | 433,333 | |
Corsis Technology Group II LLC
On August 2, 2007, the Company acquired, through a newly created subsidiary, 100% of the membership interests of Corsis Technology Group II LLC, a leading provider of custom solutions for advertisers, marketers and content publishers. The acquisition of Corsis also included the Promotions.com business, which is a full-service online promotions agency that implements interactive promotions campaigns for some of the largest brands in the world. The purchase price of the acquisition was approximately $20.7 million, consisting of approximately $12.5 million in cash and the issuance of 694,230 shares of unregistered common stock of TheStreet.com, having a value on the closing date of approximately $8.2 million.
The acquisition provides the Company with several competitive advantages, including: the expertise to deliver the integrated interactive marketing and promotional campaigns that its advertisers are increasingly demanding; providing the Company with the promotional capabilities to engage its audience across the Company’s network of sites to increase page views and time spent on the sites through the use of the promotions engines developed by the acquired company; and a technology platform that will support the Company’s growing network of sites, providing greater scale and cost efficiencies than the Company could have achieved on its own. These factors contributed to a purchase price in excess of the fair value of net tangible and intangible assets acquired from Corsis and as a result, the Company recorded goodwill in connection with this transaction.
F-20
TABLE OF CONTENTS
THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
(3) Acquisitions – (continued)
The results of operations were included in the accompanying consolidated financial statements from the date of acquisition. Based on the Company’s evaluation, the allocation of the purchase price for the acquisition was as follows:
| | |
Assets acquired:
| | | | |
| Cash | | $ | 3,257 | |
| Accounts receivable | | | 2,432,137 | |
| Other receivables | | | 715,222 | |
| Prepaid expenses | | | 77,000 | |
| Property and equipment | | | 440,812 | |
| Other assets | | | 146,579 | |
| Goodwill | | | 14,311,448 | |
| Other intangibles | | | 5,000,000 | |
| Restricted cash | | | 76,951 | |
| Total assets acquired | | | 23,203,406 | |
Liabilities assumed:
| | | | |
| Accounts payable | | | 545,611 | |
| Accrued expenses | | | 207,000 | |
| Deferred revenue | | | 1,337,885 | |
| Other current liabilities | | | 392,175 | |
| Total liabilities assumed | | | 2,482,671 | |
| Total consideration (including legal fees of approximately $134,300) | | $ | 20,720,735 | |
In accordance with the requirements of Statement of Financial Accounting Standards No. 141 (“SFAS No. 141”), “Business Combinations,” the Company recorded the estimated value of $3,040,000 related to the customer relationships, $1,000,000 related to a noncompete agreement, $660,000 related to software models and $300,000 related to the Promotions.com trade name within intangible assets. In accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” the intangible assets will be amortized over their estimated useful lives of nine years (customer relationships), five years (noncompete agreement) and three years (software). The Promotions.com trade name was deemed to have an indefinite life. The goodwill recorded as a result of the acquisition is deductible for Federal, New York State and New York City income tax purposes over a period of 15 years. The estimated amortization expense of amortizable intangible assets for the next five years is as follows:
| | |
| For the Year Ended December 31, | | Amount |
| 2008 | | $ | 757,778 | |
| 2009 | | | 757,778 | |
| 2010 | | | 666,111 | |
| 2011 | | | 537,778 | |
| 2012 | | | 454,444 | |
| Thereafter | | | 1,210,370 | |
| Total | | $ | 4,384,259 | |
Bankers Financial Products Corporation
On November 2, 2007, the Company acquired, through a newly created subsidiary, 100% of the common stock of Bankers Financial Products Corporation (“Bankers”), Bankers, using its trade name RateWatch, offers pricing information (such as certificates of deposit. IRAs, money market accounts, savings accounts,
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TABLE OF CONTENTS
THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
(3) Acquisitions – (continued)
checking accounts, home mortgages, home equity loans, credit cards, and auto loans) to more than 5,500 financial institutions (including banks, credit unions, internet banks and mortgage companies). The information is obtained from more than 70,000 financial institutions (including branches) through surveys, phone calls, data feeds, and online internet searches. The acquisition also includesbankingMyway.com (“BMW”), a wholly-owned subsidiary of Bankers. BMW is an online search engine that leverages the data set of RateWatch, allowing customers to perform searches of the rate information by zip code, city or state. BMW derives its revenue from advertising contracts with its financial institution clients and other advertisers. The purchase price of the acquisition was approximately $25.4 million, consisting of approximately $16.9 million in cash (net of $3.9 million in debt repayment) and 636,081 shares of unregistered common stock of TheStreet.com, having a value on the payment date of approximately $8.0 million. 79,510 of the common shares were issued to the sellers and 556,571 common shares were placed in escrow pursuant to the terms of an escrow agreement. 159,020 of the escrowed shares will be used to secure indemnity obligations until the earlier of two years from the closing date or the date of the last distribution from the escrow fund. The remaining 397,551 shares placed in escrow represent deferred stock to be released to the sellers under terms of the escrow agreement on each of the first, second and third anniversaries of the acquisition. In addition, the principal stockholder of Bankers received an option to purchase up to 175,600 shares of common stock priced at $12.577, vesting ratably over three years, and valued at $0.5 million.
The acquisition provides the Company with several competitive advantages, including: a rich data set of rate information from 70,000 financial institutions (including branches) through the Rate Watch business that serves as the foundation for BMW; the BMW domain name and web site, which as a part of the expandingTheStreet.com network of Web sites, presents a significant opportunity to expand our audience and advertisers; and new advertising models, including higher CPM and new hyperlink models to contribute to continued growth in the advertising side of our business and expanding margins. These factors contributed to a purchase price in excess of the fair value of net tangible and intangible assets acquired from Bankers and as a result, the Company recorded goodwill in connection with this transaction.
The results of operations were included in the accompanying consolidated financial statements from the date of acquisition. Based on the Company’s evaluation, the allocation of the purchase price for the acquisition was as follows:
| | |
| Cash and cash equivalents | | $ | 90,057 | |
| Accounts receivable | | | 93,538 | |
| Prepaid expenses and other current assets | | | 48,104 | |
| Property and equipment | | | 835,534 | |
| Deferred taxes | | | 4,335,000 | |
| Goodwill | | | 16,988,055 | |
| Other intangibles | | | 11,787,000 | |
| Total assets acquired | | | 34,177,288 | |
| Accounts payable | | | 37,201 | |
| Accrued expenses | | | 280,664 | |
| Deferred revenue | | | 3,603,871 | |
| Current portion of note payable | | | 39,953 | |
| Other current liabilities | | | 94,008 | |
| Deferred taxes | | | 4,335,000 | |
| Note payable | | | 71,946 | |
| Other liabilities | | | 20,718 | |
| Total liabilities acquired | | | 8,483,361 | |
| Total consideration (including legal fees of approximately $263,900) | | $ | 25,693,927 | |
F-22
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THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
(3) Acquisitions – (continued)
In accordance with the requirements of Statement of Financial Accounting Standards No. 141 (“SFAS No. 141”), “Business Combinations,” the Company recorded the estimated value of $8,460,000 related to the customer relationships, $2,000,000 related to a noncompete agreement, $720,000 related to the trade name, $470,000 related to software and $137,000 related to the client data base within intangible assets. In accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” the intangible assets will be amortized over their estimated useful lives of ten years (customer relationships) and five years (noncompete agreement, software and client data base). The trade name was deemed to have an indefinite life. The estimated amortization expense of amortizable intangible assets for the next five years is as follows:
| | |
| For the Year Ended December 31, | | Amount |
| 2008 | | $ | 1,367,400 | |
| 2009 | | | 1,367,400 | |
| 2010 | | | 1,367,400 | |
| 2011 | | | 1,367,400 | |
| 2012 | | | 1,280,500 | |
| Thereafter | | | 4,089,000 | |
| Total | | $ | 10,839,100 | |
Proforma Information for all Acquisitions
Unaudited pro forma consolidated financial information is presented below as if all of the acquisitions had occurred as of the first day of the earliest period presented. The results have been adjusted to account for the amortization of acquired intangible assets. The pro forma information presented below does not purport to present what actual results would have been if the acquisitions had occurred at the beginning of such periods, nor does the information project results for any future period. The unaudited pro forma consolidated financial information should be read in conjunction with the historical financial information of the Company included in this report, as well as the historical financial information included in other reports and documents filed with the Securities and Exchange Commission. The unaudited pro forma consolidated financial information for the years ended December 31, 2007, 2006 and 2005 is as follows:
| | | | | | |
| | For the Year Ended December 31, |
| | | 2007 | | 2006 | | 2005 |
| Total net revenue | | $ | 77,178,492 | | | $ | 70,517,706 | | | $ | 51,635,201 | |
| Net income (loss) | | $ | 25,901,386 | | | $ | 10,373,196 | | | $ | (3,320,669 | ) |
| Basic net income (loss) per share | | $ | 0.90 | | | $ | 0.37 | | | $ | (0.13 | ) |
| Diluted net income (loss) per share | | $ | 0.89 | | | $ | 0.36 | | | $ | (0.12 | ) |
| Weighted average basic shares outstanding | | | 28,830,366 | | | | 28,344,358 | | | | 26,283,774 | |
| Weighted average diluted shares outstanding | | | 29,387,727 | | | | 28,876,448 | | | | 27,495,191 | |
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THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
(4) Net Income (Loss) Per Share
As discussed in Note 1 to Notes to Consolidated Financial Statements, 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, |
| | | 2007 | | 2006 | | 2005 |
Numerator:
| | | | | | | | | | | | |
| Income from continuing operations | | $ | 31,063,739 | | | $ | 12,836,126 | | | $ | 5,750,150 | |
| Loss from discontinued operations | | | — | | | | — | | | | (3,075,402 ) | |
| (Loss) income on disposal of discontinued operations | | | (12,829 ) | | | | 32,321 | | | | (2,428,746 ) | |
| Preferred stock deemed dividends | | | (1,802,733 | ) | | | — | | | | — | |
| Preferred stock cash dividends | | | (96,424 ) | | | | — | | | | — | |
Numerator for basic and diluted earnings per share —
Net income available to common stockholders | | $ | 29,151,753 | | | $ | 12,868,447 | | | $ | 246,002 | |
Denominator:
| | | | | | | | | | | | |
| Weighted average basic shares outstanding | | | 28,830,366 | | | | 27,014,047 | | | | 24,953,463 | |
Weighted average effect of dilutive securities:
| | | | | | | | | | | | |
| Employee stock options and restricted stock units | | | 557,361 | | | | 532,090 | | | | 1,211,417 | |
| Weighted average diluted shares outstanding | | | 29,387,727 | | | | 27,546,137 | | | | 26,164,880 | |
Net income (loss) per share-basic:
| | | | | | | | | | | | |
| Continuing operations | | $ | 1.08 | | | $ | 0.48 | | | $ | 0.23 | |
| Discontinued operations | | | — | | | | — | | | | (0.12 ) | |
| Disposal of discontinued operations | | | (0.00 ) | | | | 0.00 | | | | (0.10 ) | |
| Preferred stock | | | (0.07 ) | | | | — | | | | — | |
| Net income per share | | $ | 1.01 | | | $ | 0.48 | | | $ | 0.01 | |
Net income (loss) per share-diluted:
| | | | | | | | |
| Continuing operations | | $ | 1.06 | | | $ | 0.47 | | | $ | 0.22 | |
| Discontinued operations | | | — | | | | — | | | | (0.12 ) | |
| Disposal of discontinued operations | | | (0.00 ) | | | | 0.00 | | | | (0.09 ) | |
| Preferred stock | | | (0.07 ) | | | | — | | | | — | |
| Net income per share | | $ | 0.99 | | | $ | 0.47 | | | $ | 0.01 | |
F-24
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THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
(5) Property and Equipment
Property and equipment as of December 31, 2007 and 2006 consists of the following:
| | | | |
| | December 31, |
| | | 2007 | | 2006 |
| Computer equipment | | $ | 19,844,869 | | | $ | 13,605,255 | |
| Furniture and fixtures | | | 2,218,862 | | | | 1,266,232 | |
| Leasehold improvements | | | 3,161,038 | | | | 2,567,283 | |
| | | | 25,224,769 | | | | 17,438,770 | |
| Less accumulated depreciation and amortization | | | 17,493,847 | | | | 14,420,638 | |
| Property and equipment, net | | $ | 7,730,922 | | | $ | 3,018,132 | |
Included in computer equipment are capitalized software and Web site development costs of $4,351,635 and $1,239,024 at December 31, 2007 and 2006, respectively. A summary of the activity of capitalized software and Web site development costs is as follows:
| | |
| Balance December 31, 2006 | | $ | 1,239,024 | |
| Additions | | | 3,112,611 | |
| Balance December 31, 2007 | | $ | 4,351,635 | |
Depreciation and amortization expense for the above noted property and equipment aggregated $1,542,804, $1,005,158 and $868,098 for the years ended December 31, 2007, 2006, and 2005, respectively. The Company does not include depreciation and amortization expense in cost of services.
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THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
(6) Goodwill and Other Intangible Assets
The Company’s goodwill and other intangible assets and related accumulated amortization as of December 31, 2007 and 2006 consists of the following:
| | | | |
| | December 31, |
| | | 2007 | | 2006 |
Goodwill not subject to amortization:
| | | | | | | | |
| SmartPortfolio.com, Inc. goodwill | | $ | 1,990,312 | | | $ | 1,990,312 | |
| TheStreet.com Ratings, Inc. goodwill | | | 2,394,691 | | | | 2,519,354 | |
| Stockpickr.com goodwill | | | 4,560,907 | | | | — | |
| Promotions.com goodwill | | | 14,311,448 | | | | — | |
| Bankers Financial Products goodwill | | | 16,988,055 | | | | — | |
| Total goodwill not subject to amortization | | $ | 40,245,413 | | | $ | 4,509,666 | |
Other intangible assets not subject to amortization:
| | | | | | | | |
| SmartPortfolio.com, Inc. trade name | | $ | 493,333 | | | $ | 493,333 | |
| Promotions.com trade name | | | 300,000 | | | | — | |
| Bankers Financial Products Corporation trade name | | | 720,000 | | | | — | |
| Total other intangible assets not subject to amortization | | | 1,513,333 | | | | 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 | |
| TheStreet.com Ratings, Inc. syndication agreement | | | 870,000 | | | | 870,000 | |
| TheStreet.com Ratings, Inc. software models | | | 562,000 | | | | 562,000 | |
| TheStreet.com Ratings, Inc. noncompete agreement | | | 470,000 | | | | 470,000 | |
| Stockpickr.com software models | | | 500,000 | | | | — | |
| Promotions.com customer relationships | | | 3,040,000 | | | | — | |
| Promotions.com noncompete | | | 1,000,000 | | | | — | |
| Promotions.com software models | | | 660,000 | | | | — | |
| Bankers Financial Products Corporation customer relationships | | | 8,460,000 | | | | — | |
| Bankers Financial Products Corporation noncompete agreement | | | 2,000,000 | | | | — | |
| Bankers Financial Products software models | | | 470,000 | | | | — | |
| Bankers Financial Products database | | | 137,000 | | | | — | |
| Total other intangible assets subject to amortization | | | 20,149,000 | | | | 3,882,000 | |
| Less accumulated amortization | | | (3,293,541 | ) | | | (2,186,833 ) | |
| Net other intangible assets subject to amortization | | | 16,855,459 | | | | 1,695,167 | |
| Total other intangible assets | | $ | 18,368,792 | | | $ | 2,188,500 | |
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TABLE OF CONTENTS
THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
(6) Goodwill and Other Intangible Assets – (continued)
Amortization expense totaled $1,106,707 and $206,833 for the years ended December 31, 2007 and 2006. There was no amortization expense recorded for the year ended December 31, 2005. The estimated amortization expense for the next five years is as follows:
| | |
| For the Year Ended December 31, | | Amount |
| 2008 | | $ | 2,721,578 | |
| 2009 | | | 2,600,745 | |
| 2010 | | | 2,339,911 | |
| 2011 | | | 2,125,578 | |
| 2012 | | | 1,768,277 | |
| Thereafter | | | 5,299,370 | |
| Total | | $ | 16,855,459 | |
(7) Accrued Expenses
Accrued expenses as of December 31, 2007 and 2006 consists of the following:
| | | | |
| | December 31, |
| | | 2007 | | 2006 |
| Bonuses | | $ | 1,001,885 | | | $ | 2,795,650 | |
| Other liabilities | | | 940,170 | | | | 867,597 | |
| Professional fees | | | 830,831 | | | | 580,146 | |
| Payroll and related costs | | | 821,529 | | | | 742,320 | |
| Tax related costs | | | 331,198 | | | | 127,432 | |
| Distribution fees | | | 270,378 | | | | 197,751 | |
| Advertising fees | | | 242,242 | | | | 261,457 | |
| Third party content and data costs | | | 197,319 | | | | 310,874 | |
| Insurance | | | 222,207 | | | | 52,114 | |
| Statistical services fees | | | 109,644 | | | | 107,793 | |
| Consulting fees | | | 39,232 | | | | 135,957 | |
| Total accrued expenses | | $ | 5,006,635 | | | $ | 6,179,091 | |
(8) Note Payable
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% per annum. The monthly payment of principal plus interest totaled $9,022. The final payment under the note was made in March 2007.
(9) Income Taxes
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.
For the year ended December 31, 2006, the Company recordeda full valuation allowance against the deferred tax asset. During the quarter ended September 30, 2007, the valuation allowance was reduced by $16 million, as management concluded that it was more likely than not that the Company would realize the
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TABLE OF CONTENTS
THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
(9) Income Taxes – (continued)
benefits of this portion of its deferred tax asset through taxable income to be generated in future years. Due to the reversal of the valuation allowance, this amount was reflected as a benefit to the current year’s tax provision.
The Company recognized a deferred tax asset of approximately $47 million and $53 million as of December 31, 2007 and 2006, respectively, primarily relating to net operating loss carryforwards of approximately $128 million and $132 million as of December 31, 2007 and 2006, respectively, available to offset future taxable income through 2025. The net operating loss carryforward as of December 31, 2007 and 2006 includes approximately$19 million and $6 million, respectively, related to windfall tax benefits for which a benefit would be recorded in additional paid in capital when realized. The Company also has a capital loss carryforward of approximately $4 million as of December 31, 2007 and 2006 available to offset future capital gains through 2009.
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. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based upon a study that analyzed the Company’s stock ownership activity from inception to December 31, 2007, a change of control was deemed to have occurred in August, 2000. The change of control created an annual limitation on the usage of $35 million of pre-change losses which will become available over the years of 2008 to 2018.
In evaluating the reasonableness of the valuation allowance, management assessed whether it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. Ultimately, the realization of deferred tax assets is dependant upon the generation of future taxable income during those periods in which the temporary differences become deductible and/or credits can be utilized. To this end, management considered that the Company had taxable income in 2007 and anticipates continued taxable income through the year ended December 31, 2010. Based on these considerations management believes it is more likely than not that the Company will not realize all of the benefits of its deferred tax asset as of the December 31, 2007, and therefore a partial valuation allowance was established.
The current year’s Federal and State income tax benefit consists substantially of the change in the valuation allowance as a result of the utilization of prior year net operating loss carryforwards. The principal reasons for the variation between income taxes at the statutory federal rate and that shown in the statement of operations for the years ended December 31, 2007, 2006 and 2005 were as follows:
| | | | | | |
| | For the Year Ended December 31, |
| | | 2007 | | 2006 | | 2005 |
| Statutory federal income tax rate | | | 34 | % | | | 34 | % | | | 34 | % |
| State income taxes, net of federal tax benefit | | | 6 | % | | | 6 | % | | | 6 | % |
| Effect of permanent differences | | | 1 | % | | | 2 | % | | | 17 | % |
| Change to valuation allowance | | | (144%) | | | | (40%) | | | | (55%) | |
| Other | | | (1%) | | | | — | | | | — | |
| Net tax rate | | | (102%) | | | | 2 | % | | | 2 | % |
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TABLE OF CONTENTS
THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
(9) Income Taxes – (continued)
Temporary differences between the financial statement and tax basis of assets and liabilities may give rise to deferred tax assets and deferred tax liabilities. The composition of deferred taxes is primarily as follows:
| | | | |
| | For the Year Ended December 31, |
| | | 2007 | | 2006 |
Deferred tax assets:
| | | | | | | | |
| Operating loss carryforward | | $ | 52,000,000 | | | $ | 53,000,000 | |
| Windfall tax benefits carryforward | | | (7,000,000 | ) | | | (3,000,000 | ) |
| Capital loss carryforward | | | 1,000,000 | | | | 1,000,000 | |
| Depreciation and amortization | | | — | | | | 1,000,000 | |
| Accrued expenses | | | 1,000,000 | | | | 1,000,000 | |
| Total deferred tax assets | | | 47,000,000 | | | | 53,000,000 | |
Deferred tax liabilities:
| | | | | | | | |
| Purchased intangible assets | | | (4,000,000 | ) | | | — | |
| Deferred tax liabilities | | | (4,000,000 | ) | | | — | |
| Less: valuation allowance | | | (27,000,000 | ) | | | (53,000,000 | ) |
| Net tax assets | | $ | 16,000,000 | | | $ | — | |
(10) Equity Investments
Preferred Stock
Securities Purchase Agreement
On November 15, 2007, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with TCV VI, L.P., a Delaware limited partnership, and TCV Member Fund, L.P., a Delaware limited partnership. TCV VI, L.P. and TCV Member Fund, L.P. are referred to as the “Purchasers.”
Pursuant to the Purchase Agreement the Company sold the Purchasers an aggregate of 5,500 shares of its newly-created Series B preferred stock, par value $0.01 per share (“Series B Preferred Stock”), that are immediately convertible into an aggregate of 3,856,942 shares of its common stock, par value $0.01 per share (“Common Stock”) at a conversion price of $14.26 per share, and warrants (the “Warrants”) to purchase an aggregate of 1,157,083 shares of Common Stock for $15.69 per share. The consideration paid for the Series B Preferred Stock and the Warrants was $55 million.
The issuance of the Series B Preferred Stock and Warrants to the Purchasers was completed through a private placement to accredited investors and is exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”). The shares of the Series B Preferred Stock, the shares of the Common Stock issuable upon the conversion of the Series B Preferred Stock, the Warrants and the shares of the Common Stock issuable upon the exercise of the Warrants have not been registered under the Securities Act or any state securities laws. Unless so registered, such securities may not be offered or sold in the United States absent an exemption from, or in a transaction not subject to, the registration requirement of the Securities Act and any applicable state securities laws.
Investor Rights Agreement
On November 15, 2007, the Company also entered into an Investor Rights Agreement with the Purchasers (the “Investor Rights Agreement”) pursuant to which, among other things, the Company has agreed to grant the Purchasers certain registration rights including the right to require the Company to file a registration statement within 30 days to register the Common Stock issuable upon conversion of the Series B Preferred Stock and upon exercise of the Warrants and to use its reasonable best efforts to cause the registration to be declared effective within 90 days after the date the registration is filed.
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THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
(10) Equity Investments – (continued)
Certificate of Designation
On November 15, 2007, the Company also filed a Certificate of Designation for the Series B Preferred Stock (the “Certificate of Designation”) with the Secretary of State of the State of Delaware. The Certificate of Designation authorizes the Company to issue 5,500 of its 10,000,000 authorized shares of preferred stock as shares of Series B Preferred Stock.
The Series B Preferred Stock has a purchase price per share equal to $10,000 (the “Original Issue Price”). In the event of any Liquidation Event (as defined in the Certificate of Designation), the holders of shares of Series B Preferred Stock are entitled to receive, prior to any distribution to the holders of the Common Stock, an amount per share equal to the Original Issue Price, plus any declared and unpaid dividends.
The holders of the Series B Preferred Stock have the right to vote on any matter submitted to a vote of the stockholders of the Company and are entitled to vote that number of votes equal to the aggregate number of shares of Common Stock issuable upon the conversion of such holders’ shares of Series B Preferred Stock. For so long as 40% of the shares of Series B Preferred Stock remain outstanding, the holders of a majority of such shares will have the right to elect one person to the Company’s board of directors.
The Series B Preferred Stock automatically converts into an aggregate of 3,856,942 shares of Common Stock in the event that the Common Stock trades on a trading market at or above a closing price equal to $28.52 per share for 90 consecutive trading days and any demand registration previously requested by the holders of the Series B Preferred Stock has become effective.
Warrants
As discussed above, the Warrants entitle the Purchasers to purchase an aggregate of 1,157,083 shares of Common Stock for $15.69 per share. The Warrants expire on the fifth anniversary of the date they were first issued, or earlier in certain circumstances.
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, from time to time, in private purchases or in the open market. In February 2004, the Company’s Board of Directors approved the resumption of the stock repurchase program under new price and volume parameters, leaving unchanged the maximum amount available for repurchase under the program. During the years ended December 31, 2007 and 2006, the Company did not purchase any shares of common stock under the program. Since inception of the program, the Company has purchased a total of 5,453,416 shares of common stock at an aggregate cost of $7,321,122. In addition, pursuant to the terms of the Company’s 1998 Stock Incentive Plan, as amended (the “Plan”) and certain additional stock option exercise procedures adopted by the Compensation Committee of the Board of Directors, in connection with the exercise of stock options by certain of the Company’s executive officers in November 2005 and February 2006, the Company withheld 231,602 and 66,982 shares, respectively, issuable upon the exercise of stock options, in lieu of payment of the exercise price and the minimum amount of applicable withholding taxes then due. These shares have been recorded as treasury stock.
Stock Options
Under the terms of the Company’s 1998 Stock Incentive Plan, as amended (the “1998 Plan”), 8,900,000 shares of common stock of the Company were reserved for awards of incentive stock options, nonqualified stock options (incentive and nonqualified stock options are collectively referred to as “Options”), restricted stock, deferred stock (also referred to as restricted stock units, or RSUs), or any combination thereof. At the Company’s annual stockholders’ meeting in May 2007, stockholders of the Company approved TheStreet.com, Inc. 2007 Performance Incentive Plan (the “2007 Plan”). Under the terms of the 2007 Plan, 1,250,000 shares
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TABLE OF CONTENTS
THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
(10) Equity Investments – (continued)
of common stock of the Company were reserved for awards of incentive stock options, nonqualified stock options, stock appreciation rights (SARs), restricted stock, restricted stock units (RSUs) or other stock-based awards. The plan also authorized cash performance awards. Additionally, under the terms of the 2007 Plan, unused shares authorized for award under the 1998 Plan are available for issuance under the 2007 Plan. No further awards will be made under the 1998 Plan. Awards may be granted to such directors, employees and consultants of the Company as the Compensation Committee of the Board of Directors shall in its discretion select. Only employees of the Company are eligible to receive grants of incentive stock options. Awards generally vest over a three-year period and have terms of five years. As of December 31, 2007, there remained 1,316,105 shares available for future awards under the 2007 Plan.
A stock option represents the right, once the option has vested and become exercisable, to purchase a share of the Company’s common stock at a particular exercise price set at the time of the grant. An RSU represents the right to receive one share of the Company’s common stock on the applicable vesting date for such RSU. Until the stock certificate for a share of common stock represented by an RSU is delivered, the holder of an RSU does not have any of the rights of a stockholder with respect to the common stock. However, the grant of an RSU includes the grant of dividend equivalents with respect to such RSU. The Company records cash dividends for RSUs to be paid in the future at an amount equal to the rate paid on a share of common stock for each then-outstanding RSU granted. The accumulated dividend equivalents vest on the applicable vesting date for the RSU with respect to which such dividend equivalents were credited, and are paid in cash at the time a stock certificate evidencing the shares represented by such vested RSU is delivered.
A summary of the activity of the 1998 and 2007 Stock Incentive Plans is as follows:
| | | | | | | | |
| | Shares
Underlying
Awards | | Weighted Average Exercise Price | | Aggregate
Intrinsic
Value ($000) | | Weighted Average
Remaining
Contractual
Life (In Years) |
| Awards outstanding, December 31, 2004 | | | 4,992,655 | | | $ | 2.93 | | | | | | | | | |
| Options granted | | | 1,203,000 | | | $ | 4.08 | | | | | | | | | |
| Options exercised | | | (1,066,979 | ) | | $ | 2.49 | | | | | | | | | |
| Options cancelled | | | (1,159,527 | ) | | $ | 4.55 | | | | | | | | | |
| Awards outstanding, December 31, 2005 | | | 3,969,149 | | | $ | 2.93 | | | | | | | | | |
| Options granted | | | 644,500 | | | $ | 9.76 | | | | | | | | | |
| Restricted stock units granted | | | 129,500 | | | $ | 0.00 | | | | | | | | | |
| Options exercised | | | (2,386,712 | ) | | $ | 2.26 | | | | | | | | | |
| Options cancelled | | | (131,848 | ) | | $ | 4.39 | | | | | | | | | |
| Restricted stock units cancelled | | | (18,500 | ) | | $ | 0.00 | | | | | | | | | |
| Awards outstanding, December 31, 2006 | | | 2,206,089 | | | $ | 5.40 | | | | | | | | | |
| Options granted | | | 566,900 | | | $ | 11.28 | | | | | | | | | |
| Restricted stock units granted | | | 247,210 | | | $ | 0.00 | | | | | | | | | |
| Options exercised | | | (692,428 | ) | | $ | 4.36 | | | | | | | | | |
| Restricted stock units issued | | | (46,996 | ) | | $ | 0.00 | | | | | | | | | |
| Options cancelled | | | (307,253 | ) | | $ | 9.37 | | | | | | | | | |
| Restricted stock units cancelled | | | (47,168 | ) | | $ | 0.00 | | | | | | | | | |
| Awards outstanding, December 31, 2007 | | | 1,926,354 | | | $ | 6.45 | | | $ | 18,246 | | | | 2.61 | |
| Awards vested and expected to vest at December 31, 2007 | | | 1,801,315 | | | $ | 6.30 | | | $ | 17,338 | | | | 1.58 | |
| Options exercisable at December 31, 2007 | | | 723,232 | | | $ | 4.78 | | | $ | 8,058 | | | | 1.57 | |
Restricted stock units exercisable at
December 31, 2007 | | | 0 | | | $ | 0.00 | | | $ | 0 | | | | 1.86 | |
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TABLE OF CONTENTS
THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
(10) Equity Investments – (continued)
The following table summarizes information about options outstanding at December 31, 2007:
| | | | | | | | | | |
Range of
Exercise Price | | Options
Outstanding | | Options Outstanding Weighted Average Remaining Contractual Life | | Options Outstanding Weighted Average Exercise Price | | Options
Exercisable | | Weighted Average
Exercise Price of Options Exercisable |
| $4.06 – $4.71 | | | 810,406 | | | | 1.5 | | | $ | 4.10 | | | | 641,567 | | | $ | 4.10 | |
| $7.97 – $11.94 | | | 572,502 | | | | 3.8 | | | $ | 9.75 | | | | 48,332 | | | $ | 8.24 | |
| $11.99 – $13.19 | | | 279,400 | | | | 4.1 | | | $ | 12.60 | | | | 33,333 | | | $ | 12.78 | |
| Total | | | 1,662,308 | | | | 2.7 | | | $ | 7.47 | | | | 723,232 | | | $ | 4.78 | |
A summary of the status of the Company’s unvested share-based payment awards as of December 31, 2007 and changes in the year then ended is as follows:
| | | | |
| Unvested Awards | | Awards | | Weighted
Average
Grant Date
Fair Value |
| Shares underlying awards unvested at January 1, 2007 | | | 1,369,320 | | | $ | 3.20 | |
| Shares underlying options granted | | | 556,900 | | | $ | 4.15 | |
| Shares underlying restricted stock units granted | | | 247,210 | | | $ | 8.71 | |
| Shares underlying options vested | | | (579,135 | ) | | $ | 2.46 | |
| Shares underlying restricted stock units issued | | | (46,996 | ) | | $ | 7.90 | |
| Shares underlying unvested options cancelled | | | (297,004 | ) | | $ | 3.47 | |
| Shares underlying unvested restricted stock units cancelled | | | (47,168 | ) | | $ | 8.55 | |
| Shares underlying awards unvested at December 31, 2007 | | | 1,203,127 | | | $ | 4.66 | |
For the years ended December 31, 2007 and 2006, the total fair value of share-based awards vested were $1,448,986 and $1,365,896, respectively. For the years ended December 31, 2007 and 2006, the total intrinsic value of options exercised was $4,906,279 and $15,388,676, respectively.
(11) Commitments and Contingencies
Operating Leases and Employment Agreements
The Company is committed under operating leases, principally for office space. Certain leases are subject to rent reviews and require payment of expenses under escalation clauses. Rent and equipment rental expenses were $1,876,735, $1,717,158 and $1,575,462 for the years ended December 31, 2007, 2006 and 2005, 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. As of December 31, 2007, total future minimum cash payments are as follows:
| | | | | | | | | | | | | | |
| | Payments Due by Year |
| Contractual Obligations: | | Total | | 2008 | | 2009 | | 2010 | | 2011 | | 2012 | | After
2012 |
| Operating leases | | $ | 4,810,382 | | | $ | 1,750,492 | | | $ | 1,492,763 | | | $ | 480,055 | | | $ | 354,784 | | | $ | 201,671 | | | $ | 530,617 | |
Employment
agreements | | | 6,112,413 | | | | 3,340,292 | | | | 2,155,454 | | | | 616,667 | | | | — | | | | — | | | | — | |
| Outside contributors | | | 520,791 | | | | 474,958 | | | | 45,833 | | | | — | | | | — | | | | — | | | | — | |
| Leases payable | | | 173,081 | | | | 82,976 | | | | 70,249 | | | | 19,856 | | | | — | | | | — | | | | — | |
| Total contractual cash obligations | | $ | 11,616,667 | | | $ | 5,648,718 | | | $ | 3,764,299 | | | $ | 1,116,578 | | | $ | 354,784 | | | $ | 201,671 | | | $ | 530,617 | |
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TABLE OF CONTENTS
THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
(11) Commitments and Contingencies – (continued)
Concentration of 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, cash equivalents and restricted cash 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.
For the years ended December 31, 2007, 2006 and 2005, the Company’s top five advertisers accounted for approximately 28%, 34% and 33%, respectively, of its total advertising revenue. For the years ended December 31, 2007 and 2005, no advertiser accounted for 10% or more of total advertising revenue, as compared to one advertiser accounting for approximately 14% for the year ended December 31, 2006.
Legal Proceedings
In December 2001, the Company was named as a defendant in a securities class action filed in United States District Court for the Southern District of New York related to its initial public offering (“IPO”) in May 1999. The lawsuit also named as individual defendants certain of its former officers and directors, James J. Cramer, a current director, and certain of the underwriters of the IPO, including The Goldman Sachs Group, Inc., Hambrecht & Quist LLC (now part of JP Morgan Chase & Co.), Thomas Weisel Partners LLC, Robertson Stephens Inc. (an investment banking subsidiary of BankBoston Corp., later FleetBoston Corp., which ceased operations in 2002), and Merrill Lynch Pierce Fenner & Smith, Inc. Approximately 300 other issuers and their underwriters have had similar suits filed against them, all of which are included in a single coordinated proceeding in the District (the “IPO Litigations”). The complaints allege that the prospectus and the registration statement for the IPO failed to disclose that the underwriters allegedly solicited and received “excessive” commissions from investors and that some investors in the IPO allegedly agreed with the underwriters to buy additional shares in the aftermarket in order to inflate the price of the Company’s stock. An amended complaint was filed April 19, 2002. The Company and the officers and directors were named in the suits pursuant to Section 11 of the Securities Act of 1933, Section 10(b) of the Exchange Act of 1934, and other related provisions. The complaints seek unspecified damages, attorney and expert fees, and other unspecified litigation costs.
On July 1, 2002, the underwriter defendants in the consolidated actions moved to dismiss all of the IPO Litigations, including the action involving the Company. On July 15, 2002, the Company, along with other non-underwriter defendants in the coordinated cases, also moved to dismiss the litigation. On February 19, 2003, the district court ruled on the motions. The district court granted the Company’s motion to dismiss the claims against it under Rule 10b-5, due to the insufficiency of the allegations against the Company. The motions to dismiss the claims under Section 11 of the Securities Act were denied as to virtually all of the defendants in the consolidated cases, including the Company. In addition, the individual defendants in the IPO Litigations, including Mr. Cramer, signed a tolling agreement and were dismissed from the action without prejudice on October 9, 2002.
In June 2003, a proposed collective settlement of this litigation was structured between the plaintiffs, the issuer defendants in the consolidated actions, the issuer officers and directors named as defendants, and the issuers’ insurance companies. On or about June 25, 2003, a committee of the Company’s Board of Directors conditionally approved the proposed settlement. The settlement agreements collectively provide as follows:
The Company and the other issuer defendants would assign their interests in claims against the underwriters for excess compensation in connection with their IPOs to the plaintiffs, and agree not to assert certain other claims against the underwriters, such as underpricing, indemnification and antitrust claims, except
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TABLE OF CONTENTS
THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
(11) Commitments and Contingencies – (continued)
in certain defined circumstances. A number of issuers’ assigned claims have been asserted already; these were dismissed by the district court on February 24, 2006. The dismissal is currently on appeal to the Second Circuit Court of Appeals, although the plaintiffs have indicated their intent to withdraw the appeal in light of recent events, detailed below. The Company and the other issuer defendants would also cooperate with the plaintiffs to provide the plaintiffs with informal discovery as the litigation continues as to the underwriter defendants. Further, the plaintiffs would receive an undertaking from the insurers of the Company and the other issuer defendants guaranteeing that the plaintiff class would recover, in the aggregate, $1 billion from their various suits against the underwriters (including the claims assigned by the issuer defendants). The Company’s per capita portion of the maximum amount payable to the plaintiffs under the settlement, assuming the entire $1 billion is payable, would be approximately $3–4 million. The plaintiffs’ actual recoveries from the underwriter defendants (through settlements or damages assessed as a result of litigation) would be applied against the guarantee; and to the extent that the underwriter defendants settle all of the cases for at least $1 billion, no payment would be required under the issuer defendants’ settlement. In exchange for the consideration described above, the plaintiffs would release the non-bankrupt issuer defendants from all claims against them (the bankrupt issuers would receive a covenant not to sue) and their individual defendants. Under the terms of the settlement agreements, all costs and expenses of the settlement (including legal expenses after June 1, 2003) would be borne by the insurance carriers of the Company and the other issuer defendants using each issuer defendant’s existing insurance coverage, with deductibles waived.
The plaintiffs have continued to litigate against the underwriter defendants. The district court directed that the litigation proceed within a number of “focus cases” rather than in all of the 310 cases that have been consolidated. The Company’s case is not one of these focus cases. On October 13, 2004, the district court certified the focus cases as class actions. The underwriter defendants appealed that ruling, and on December 5, 2006, the Court of Appeals for the Second Circuit reversed the district court’s class certification decision. On April 6, 2007, the Second Circuit denied plaintiffs’ petition for rehearing. In light of the Second Circuit opinion, counsel to the issuers has informed the district court that the settlement with the plaintiffs described above cannot be approved because the defined settlement class, like the litigation class, cannot be certified with the Court of Appeals. The settlement was terminated pursuant to a Stipulation and Order dated June 25, 2007.
In light of the termination of the settlement, Plaintiffs subsequently submitted Second Amended Complaints for each of the class certification focus cases including the Amended Master Allegations and then moved for certification of the redefined classes identified in their Second Amended Complaints. In response, Defendants moved to dismiss Plaintiffs’ Second Amended Complaints on November 13, 2007. On December 21, 2007 Plaintiffs filed an Opposition to Defendants’ Motion to Dismiss the Second Amended Complaints. On January 28, 2008, Defendants filed a reply brief in further support of their Motion to Dismiss Plaintiffs’ Second Amended Complaints. The court has not yet ruled on the pending motion.
We cannot predict whether we will be able to renegotiate a settlement that complies with the Second Circuit’s mandate. We are presently defending the action vigorously. Any unfavorable outcome of this litigation could have an adverse impact on the Company’s business, financial condition, results of operations, and cash flows.
(12) 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, through June 30, 2006, was funded solely by employee contributions. Effective July 1, 2006, the Company modified the 401(k) plan to provide an employer match of 50% of employee
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TABLE OF CONTENTS
THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
(12) Employee Benefit Plan – (continued)
contributions, up to a maximum of 4% of each employee’s total compensation. The Company’s matching contribution totaled $266,742 and $84,729 for the years ended December 31, 2007 and December 31, 2006, respectively.
(13) Selected Quarterly Financial Data (Unaudited)
| | | | | | | | |
| | For the Year Ended December 31, 2007 |
| | | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter |
| | | (In Thousands, Except Per Share Data) |
| Total revenue | | $ | 14,508 | | | $ | 14,899 | | | $ | 16,118 | | | $ | 19,881 | |
| Total operating expense | | | 12,043 | | | | 11,902 | | | | 12,848 | | | | 15,719 | |
| Income from continuing operations before income taxes | | | 3,065 | | | | 3,622 | | | | 3,842 | | | | 4,841 | |
| (Provision) benefit for income tax | | | (61 | ) | | | (72 | ) | | | 15,923 | | | | (96 | ) |
| Income from continuing operations | | | 3,004 | | | | 3,550 | | | | 19,765 | | | | 4,745 | |
(Loss) income on disposal of discontinued
operations | | | (1 | ) | | | 0 | | | | (1 | ) | | | (11 | ) |
| Net income | | | 3,003 | | | | 3,550 | | | | 19,764 | | | | 4,734 | |
| Preferred stock dividends | | | — | | | | — | | | | — | | | | 1,899 | |
Net income attributable to common
stockholders | | $ | 3,003 | | | $ | 3,550 | | | $ | 19,764 | | | $ | 2,835 | |
Basic net income (loss) per share:
| | | | | | | | | | | | | | | | |
| Income from continuing operations | | | 0.11 | | | | 0.12 | | | | 0.68 | | | | 0.16 | |
| (Loss) income on disposal of discontinued operations | | | (0.00 | ) | | | 0.00 | | | | (0.00 | ) | | | (0.00 | ) |
| Net income | | | 0.11 | | | | 0.12 | | | | 0.68 | | | | 0.16 | |
| Preferred stock dividends | | | — | | | | — | | | | — | | | | (0.07 | ) |
Net income attributable to common
stockholders | | $ | 0.11 | | | $ | 0.12 | | | $ | 0.68 | | | $ | 0.09 | |
Diluted net income (loss) per share:
| | | | | | | | | | | | | | | | |
| Income from continuing operations | | $ | 0.11 | | | $ | 0.12 | | | $ | 0.67 | | | $ | 0.16 | |
| (Loss) income on disposal of discontinued operations | | | (0.00 | ) | | | 0.00 | | | | (0.00 | ) | | | (0.00 | ) |
| Net income | | | 0.11 | | | | 0.12 | | | | 0.67 | | | | 0.16 | |
| Preferred stock dividends | | | — | | | | — | | | | — | | | | (0.07 | ) |
Net income attributable to common
stockholders | | $ | 0.11 | | | $ | 0.12 | | | $ | 0.67 | | | $ | 0.09 | |
F-35
TABLE OF CONTENTS
THESTREET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
(13) Selected Quarterly Financial Data (Unaudited) – (continued)
| | | | | | | | |
| | For the Year Ended December 31, 2006 |
| | | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter |
| | | (In Thousands, Except Per Share Data) |
| Total net revenue | | $ | 11,147 | | | $ | 12,396 | | | $ | 12,950 | | | $ | 14,396 | |
| Total operating expense | | | 8,853 | | | | 9,638 | | | | 10,375 | | | | 10,963 | |
| Income from continuing operations before income taxes | | | 2,634 | | | | 3,277 | | | | 3,159 | | | | 4,027 | |
| Provision for income tax | | | 52 | | | | 67 | | | | 63 | | | | 79 | |
| Income from continuing operations | | | 2,582 | | | | 3,210 | | | | 3,096 | | | | 3,948 | |
(Loss) income on disposal of discontinued
operations | | | (6 | ) | | | 18 | | | | — | | | | 20 | |
| Net income | | | 2,576 | | | | 3,228 | | | | 3,096 | | | | 3,968 | |
Basic net income (loss) per share:
| | | | | | | | | | | | | | | | |
| Income from continuing operations | | $ | 0.10 | | | $ | 0.12 | | | $ | 0.11 | | | $ | 0.14 | |
(Loss) income on disposal of discontinued
operations | | | (0.00 | ) | | | 0.00 | | | | — | | | | 0.00 | |
| Net (loss) income | | $ | 0.10 | | | $ | 0.12 | | | $ | 0.11 | | | $ | 0.14 | |
| Diluted net income (loss) per share: | |
| Income from continuing operations | | $ | 0.09 | | | $ | 0.12 | | | $ | 0.11 | | | $ | 0.14 | |
(Loss) income on disposal of discontinued
operations | | | (0.00 | ) | | | 0.00 | | | | — | | | | 0.00 | |
| Net (loss) income | | $ | 0.09 | | | $ | 0.12 | | | $ | 0.11 | | | $ | 0.14 | |
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TABLE OF CONTENTS
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2007, 2006 and 2005
| | | | | | | | |
| 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, 2007 | | $ | 216,077 | | | $ | 175,000 | | | $ | 148,270 | | | $ | 242,807 | |
| For the year ended December 31, 2006. | | $ | 131,840 | | | $ | 84,500 | | | $ | 263 | | | $ | 216,077 | |
| For the year ended December 31, 2005. | | $ | 107,794 | | | $ | 47,000 | | | $ | 22,954 | | | $ | 131,840 | |
F-37
TABLE OF CONTENTS
EXHIBIT INDEX
| | |
| Exhibit Number | | Description |
| *3.1 | | Amended and Restated Certificate of Incorporation of the Company, incorporated by reference to the Exhibits to the Company’s Registration Statement on Form S-1 filed February 23, 1999. |
| *3.2 | | Certificate of Designation of the Company’s Series B Preferred Stock, as filed with the Secretary of State of the State of Delaware on November 15, 2007, incorporated by reference to the Exhibits to the Company’s Current Report on Form 8-K filed November 20, 2007. |
| *3.3 | | Amended and Restated Bylaws of the Company, incorporated by reference to the Exhibits to the Company’s Annual Report on Form 10-K filed March 30, 2000. |
| *4.1 | | Amended and Restated Registration Rights Agreement dated December 21, 1998, by and among the Company and the stockholders named therein, incorporated by reference to the Exhibits to the Company’s Registration Statement on Form S-1 filed February 23, 1999. |
| *4.2 | | Form of Rights Agreement incorporated by reference to the Exhibits to the Company’s Registration Statement on Form S-1 filed February 23, 1999. |
| *4.3 | | Amendment No. 1 to the Rights Agreement dated August 7, 2000, incorporated by reference to the Exhibits to the Company’s Annual Report on Form 10-K filed April 2, 2001. |
| *4.4 | | Amendment No. 2 to the Rights Agreement dated November 15, 2007 by and between the Company and American Stock Transfer & Trust Company, as Rights Agent, incorporated by reference to the Exhibits to the Company’s Current Report on Form 8-K filed November 20, 2007. |
| *4.5 | | Option to Purchase Common Stock dated November 1, 2007, incorporated by reference to the Company’s Current Report on Form 8-K filed November 6, 2007. |
| *4.6 | | Investor Rights Agreement dated November 15, 2007 by and among the Company, TCV VI, L.P. and TCV Member Fund, L.P., incorporated by reference to the Exhibits to the Company’s Current Report on Form 8-K filed November 20, 2007. |
| *4.7 | | Warrant dated November 15, 2007 issued by the Company to TCV VI, L.P., incorporated by reference to the Exhibits to the Company’s Current Report on Form 8-K filed November 20, 2007. |
| *4.8 | | Warrant dated November 15, 2007 issued by the Company to TCV Member Fund, L.P., incorporated by reference to the Exhibits to the Company’s Current Report on Form 8-K filed November 20, 2007. |
| *4.9 | | Specimen certificate for the Company’s shares of common stock, incorporated by reference to the Exhibits to Amendment 3 to the Company’s Registration Statement on Form S-1 filed April 19, 1999. |
| *10.1 | | Amended and Restated 1998 Stock Incentive Plan, dated May 29, 2002, incorporated by reference to the Exhibits to the Company’s Quarterly Report on Form 10-Q filed August 14, 2002. |
| *10.2 | | Form of Stock Option Grant Agreement under the 1998 Stock Incentive Plan, incorporated by reference to the Exhibits to the Company’s Annual Report on Form 10-K filed March 16, 2005. |
| *10.3 | | Form of Restricted Stock Unit Grant Agreement under the 1998 Stock Incentive Plan, incorporated by reference to the Exhibits to the Company’s Annual Report on Form 10-K filed March 16, 2006. |
| *10.4 | | 2007 Performance Incentive Plan, incorporated by reference to Appendix A to the Company’s 2007 Definitive Proxy Statement on Schedule 14A filed April 23, 2007. |
| *10.5 | | Form of Stock Option Grant Agreement under the Company’s 2007 Performance Incentive Plan, incorporated by reference to the Exhibits to the Company’s Quarterly Report on Form 10-Q filed August 9, 2007. |
| *10.6 | | Form of Restricted Stock Unit Grant Agreement under the Company’s 2007 Performance Incentive Plan, incorporated by reference to the Exhibits to the Company’s Quarterly Report on Form 10-Q filed August 9, 2007. |
TABLE OF CONTENTS
| | |
| Exhibit Number | | Description |
| *10.7 | | Form of Cash Performance Award Agreement under the Company’s 2007 Performance Incentive Plan, incorporated by reference to the Exhibits to the Company’s Quarterly Report on Form 10-Q filed August 9, 2007. |
| *10.8 | | Employment Agreement, dated August 1, 2005, between James Cramer and the Company, incorporated by reference to the Exhibits to the Company’s Current Report on Form 8-K filed August 5, 2005. |
| *10.9 | | Letter Agreement dated December 7, 2007 amending the Employment Agreement by and between James Cramer and the Company, incorporated by reference to the Exhibits to the Company’s Current Report on Form 8-K filed December 13, 2007. |
| *10.10 | | Letter Agreement dated February 11, 2008 amending the Employment Agreement by and between James Cramer and the Company, incorporated by reference to the Exhibits to the Company’s Current Report on Form 8-K filed February 19, 2008. |
| *10.11 | | Employment Agreement, dated September 13, 2007, by and between Thomas J. Clarke, Jr. and the Company, incorporated by reference to the Exhibits to the Company’s Quarterly Report on Form 10-Q filed November 9, 2007. |
| *10.12 | | Employment Agreement, dated March 1, 2003, by and between James Lonergan and the Company, incorporated by reference to the Exhibits to the Company’s Annual Report on Form 10-K filed March 31, 2003. |
| *10.13 | | Letter Agreement, dated April 29, 2005, by and between James Lonergan and the Company, incorporated by reference to the Exhibits to the Company’s Current Report on Form 8-K filed May 4, 2005. |
| *10.14 | | Letter Agreement, dated March 14, 2006, by and between James Lonergan and the Company, incorporated by reference to the Exhibits to the Company’s Quarterly Report on Form 10-K filed March 16, 2006. |
| *10.15 | | Letter Agreement dated March 1, 2007, by and between James Lonergan and the Company, incorporated by reference to the Exhibits to the Company’s Annual Report on Form 10-K filed March 16, 2007. |
| *10.16 | | Employment Agreement dated July 5, 2006, by and between Eric Ashman and the Company, incorporated by reference to the Exhibits to the Company’s Quarterly Report on Form 10-Q filed August 9, 2006. |
| *10.17 | | Employment Agreement dated March 26, 2007, by and between Steven Elkes and the Company, incorporated by reference to the Exhibits to the Company’s Quarterly Report on Form 10-Q filed May 10, 2007. |
| *10.18 | | Employment Agreement dated August 23, 2007, by and between David Morrow and the Company, incorporated by reference to the Exhibits to the Company’s Quarterly Report on Form 10-Q filed November 9, 2007. |
| *10.19 | | Membership Interest Purchase Agreement dated August 2, 2007 by and among TP Newco LLC, David Barnett, Gregg Alwine and Gregg Alwine as Agent, incorporated by reference to the Exhibits to the Company’s Current Report on Form 8-K filed August 8, 2007. |
| *10.20 | | Stock Purchase Agreement dated November 1, 2007 by and among BFPC Newco LLC, Larry Starkweather, Kyle Selberg, Rachelle Zorn, Robert Quinn and Larry Starkweather as Agent, incorporated by reference to the Exhibits to the Company’s Current Report on Form 8-K filed November 6, 2007. |
| *10.21 | | Securities Purchase Agreement dated November 15, 2007 by and among the Company, TCV VI, L.P. and TCV Member Fund, L.P., incorporated by reference to the Exhibits to the Company’s Current Report on Form 8-K filed November 20, 2007. |
| *10.22 | | Agreement of Lease, dated July 22, 1999, between 14 Wall Street Holdings 1, LLC (as successor to W12/14 Wall Acquisition Associates LLC), as Landlord, and the Company, as Tenant, incorporated by reference to the Exhibits to the Company’s Quarterly Report on Form 10-Q filed August 16, 1999. |
TABLE OF CONTENTS
| | |
| Exhibit Number | | Description |
| *10.23 | | Amendment of Lease dated October 31, 2001, between 14 Wall Street Holdings 1, LLC (as successor to W12/14 Wall Acquisition Associates LLC), as Landlord, and the Company, as Tenant, incorporated by reference to the Exhibits to the Company’s Annual Report on Form 10-K filed March 16, 2005. |
| 10.24 | | Second Amendment of Lease dated March 21, 2007, between 14 Wall Street Holdings 1, LLC as Landlord, and the Company, as Tenant. |
| *14.1 | | Code of Business Conduct and Ethics, incorporated by reference to the Exhibits to the Company’s Current Report on Form 8-K filed January 31, 2005. |
| 21.1 | | Subsidiaries of the Company. |
| 23.1 | | Consent of Marcum & Kliegman 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. |
| * | Previously filed and incorporated by reference |
