EXHIBIT 99.4
MARKETWATCH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------ -----------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 56,383 $ 48,079
Restricted cash 920 --
Accounts receivable, net 12,687 7,022
Prepaid expenses 2,298 685
--------------- ---------------
Total current assets 72,288 55,786
Property and equipment, net 3,844 4,387
Goodwill 88,389 22,429
Intangibles, net 6,973 --
Prepaid acquisition costs -- 2,498
Restricted cash, net of current portion 175 --
Other assets 1,165 128
--------------- ---------------
Total assets $ 172,834 $ 85,228
=============== ===============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 4,590 $ 1,216
Accrued expenses 11,535 6,605
Capital lease obligations 487 --
Deferred revenue 7,058 1,377
--------------- ---------------
Total current liabilities 23,670 9,198
Other liabilities 1,095 865
--------------- ---------------
Total liabilities 24,765 10,063
--------------- ---------------
Stockholders' equity:
Preferred stock -- --
Common stock 254 180
Additional paid-in capital 394,276 323,141
Deferred stock-based compensation (37) --
Accumulated comprehensive loss (15) --
Accumulated deficit (246,409) (248,156)
--------------- ---------------
Total stockholders' equity 148,069 75,165
--------------- ---------------
Total liabilities and
stockholders' equity $ 172,834 $ 85,228
=============== ===============
The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
MARKETWATCH, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------------
2004 2003 2004 2003
-------- -------- --------- ---------
Net revenues:
Advertising $ 7,145 $ 5,907 $ 22,812 $ 16,481
Licensing 12,113 5,214 33,578 16,176
Subscription 516 455 1,389 1,137
-------- -------- ---------- ----------
Total net revenues 19,774 11,576 57,779 33,794
Cost of net revenues 6,247 4,508 17,958 13,137
-------- -------- ---------- ----------
Gross profit 13,527 7,068 39,821 20,657
-------- -------- ---------- ----------
Operating expenses:
Product development 4,498 1,444 13,485 5,040
General and administrative 4,416 2,812 12,897 8,542
Sales and marketing 3,641 2,534 11,292 7,439
Amortization of intangibles 148 -- 709 --
-------- -------- ---------- ----------
Total operating expenses 12,703 6,790 38,383 21,021
-------- -------- ---------- ----------
Income (loss) from operations 824 278 1,438 (364)
Interest income, net of expense 154 115 363 384
Provision for income taxes (29) -- (54) (3)
-------- -------- ---------- ----------
Net income $ 949 $ 393 $ 1,747 $ 17
======== ======== ========== ==========
Basic net income per share $ 0.04 $ 0.02 $ 0.07 $ 0.00
======== ======== ========== ==========
Diluted net income per share $ 0.04 $ 0.02 $ 0.07 $ 0.00
======== ======== ========== ==========
Shares used in the calculation
of basic net income per share 25,190 17,382 24,427 17,267
======== ======== ========== ==========
Shares used in the calculation
of diluted net income per share 26,833 18,754 26,468 18,503
======== ======== ========== ==========
The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
MARKETWATCH, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------
2004 2003
--------- ----------
Cash flows from operating activities:
Net income $ 1,747 $ 17
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for (recovery of) doubtful accounts 282 (66)
Depreciation and amortization 3,669 2,883
Non-cash charges from stockholder -- 56
Amortization of deferred stock compensation 17 --
Loss on disposal of equipment 2 --
Changes in operating assets and liabilities,
net of acquired amounts:
Accounts receivable (5,422) (374)
Prepaid expenses and other assets (776) (540)
Accounts payable and accrued expenses 4,246 1,571
Deferred revenue 586 547
---------- ---------
Net cash provided by
operating activities 4,351 4,094
---------- ---------
Cash flows used in investing activities:
Purchase of property and equipment (513) (778)
Decrease in restricted cash 850 --
Acquisition of business, net of cash acquired (5,950) (313)
---------- ---------
Net cash used in investing activities (5,613) (1,091)
---------- ---------
Cash flows provided by financing activities:
Principal payments under capital lease
obligations (586) --
Issuance of common stock 10,167 1,524
---------- ---------
Net cash provided by financing
activities 9,581 1,524
---------- ---------
Effect of exchange rate changes
on cash and cash equivalents (15) --
---------- ---------
Net change in cash and cash equivalents 8,304 4,527
Cash and cash equivalents at
the beginning of the period 48,079 43,328
---------- ---------
Cash and cash equivalents at
the end of the period $ 56,383 $ 47,855
========== =========
Supplemental disclosure of
non-cash investing activity:
Acquisition cost for Pinnacor
included in prepaid expenses and
accounts payable $ -- $ 686
========== =========
The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
MARKETWATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS
The Company
MarketWatch, Inc. (the "Company"), is a leading multi-media publisher of
business and financial news and provider of information and analytical
tools. It was formed on October 29, 1997 in the state of Delaware as a
limited liability company and was jointly owned by Data Broadcasting
Corporation ("DBC"), now known as Interactive Data Corporation ("IDC"), and
CBS Broadcasting Inc. ("CBS"), with each member owning a 50% interest in
the Company. In January 1999, the Company reorganized as a corporation and
completed an initial public offering of 3,162,500 shares of common stock.
After the initial public offering, CBS and IDC each owned approximately 38%
of the Company. In January 2001, an affiliate of Pearson plc ("Pearson")
acquired IDC's complete stake in the Company. On January 16, 2004, the
Company completed the acquisition of Pinnacor Inc. ("Pinnacor"), formerly
known as ScreamingMedia, a provider of information services and analytical
applications to financial services companies and global corporations. After
the acquisition, CBS and Pearson each owned approximately 24% of the
Company. On August 4, 2004, the Company changed its name from
MarketWatch.com, Inc. to MarketWatch, Inc.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of the
Company, the interim data includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of the results
for the interim periods. The results of operations for the three and nine
months ended September 30, 2004 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2004 or for
any future period. The balance sheet at December 31, 2003 has been derived
from the audited financial statements at that date, but does not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and related notes included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2003.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
During the nine months ended September 30, 2004 the Company re-classified
certain liabilities previously disclosed as short term liabilities and
liabilities previously disclosed in accounts payable into other liabilities
and accrued expenses, respectively. Prior periods have been adjusted to be
comparable with the current period presentation.
NOTE 2 - STOCK-BASED COMPENSATION
The Company accounts for its stock-based employee compensation agreements
in accordance with the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and its related
interpretations, and has adopted the disclosure-only alternative of
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), as amended by Statement of
Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an Amendment of FASB Statement
No. 123." In accounting for stock-based transactions with non-employees,
the Company records compensation expense in accordance with SFAS No. 123
and Emerging Issues Task Force 96-18, "Accounting for Equity Instruments
That are Issued to Other Than Employees for Acquiring, or in Conjunction
with Selling, Goods or Services."
The following table illustrates the effect on income and earnings per share
if the Company had applied the fair-value recognition provisions of SFAS
No. 123 to stock-based employee compensation. The estimated fair value of
each Company option is calculated using the Black-Scholes option-pricing
model.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------------
2004 2003 2004 2003
-------- -------- --------- ---------
Net income:
As reported $ 949 $ 393 $ 1,747 $ 17
Add: Stock-based employee
compensation expense included
in reported net income, net of
related tax effects 5 -- 17 --
Deduct: Stock-based employee
compensation expense determined
under fair value based method, net
of related tax effects (868) (646) (2,302) (2,091)
-------- -------- ---------- --------
Pro forma net income (loss) $ 86 $ (253) $ (538) $ (2,074)
======== ======== ========== ========
Net income (loss) per share:
As reported, basic $ 0.04 $ 0.02 $ 0.07 $ 0.00
======== ======== ========== ========
As reported, diluted $ 0.04 $ 0.02 $ 0.07 $ 0.00
======== ======== ========== ========
Pro forma net income (loss)
per share, basic $ 0.00 $ (0.01) $ (0.02) $ (0.12)
======== ======== ========== ========
Pro forma net income (loss)
per share, diluted $ 0.00 $ (0.01) $ (0.02) $ (0.12)
======== ======== ========== ========
The Company calculated the fair value compensation expense associated with
its stock-based employee compensation plans using the Black-Scholes model.
The following weighted average assumptions were used related to option
grants:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------------
2004 2003 2004 2003
-------- -------- --------- ---------
Stock Options
- -------------
Expected dividend 0% 0% 0% 0%
Risk-free interest rate 3.1% 1.9% 2.8% 2.3%
Expected volatility 54% 55% 52% 73%
Expected life (in years) 4 4 4 4
Employee Stock Purchase Plan
- ----------------------------
Expected dividend 0% 0% 0% 0%
Risk-free interest rate 1.8% 1.2% 1.4% 1.4%
Expected volatility 58% 60% 51% 76%
Expected life (in months) 6 6 6 6
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's stock options have
characteristics significantly different from those of traded options, and
because changes with respect to the subjective assumptions can materially
affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair
value of its stock options.
Because additional stock options are expected to be granted each year, the
above pro forma disclosures are not representative of pro forma effects on
reported financial results for future periods.
NOTE 3 - NET INCOME PER SHARE
The Company computes net income per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No.
128"). Under the provisions of SFAS No. 128, basic net income per common
share ("Basic EPS") is computed by dividing net income by the weighted
average number of common shares outstanding. Diluted net income per common
share ("Diluted EPS") is computed by dividing net income by the weighted
average number of common shares and dilutive common share equivalents.
Common equivalent shares of 1,637,406 and 1,372,061 were included in the
computation of diluted net income per share for the three months ended
September 30, 2004 and 2003, respectively, and 2,040,932 and 1,236,108 were
included in the computation of diluted net income per share for the nine
months ended September 30, 2004 and 2003, respectively. The common
equivalent shares were related to shares issuable upon the exercise of
stock options. Options to purchase 522,486 and 407,671 shares of common
stock were excluded from the computation of diluted net loss per share for
the three and nine months ended September 30, 2004, respectively, as the
inclusion would have been anti-dilutive.
NOTE 4 - ACQUISITIONS
On January 16, 2004, the Company completed the acquisition of Pinnacor Inc.
Under the terms of the agreement, a new company ("Holdco") with two
wholly-owned subsidiaries, Pine Merger Sub, Inc. ("Pine Merger Sub") and
Maple Merger Sub, Inc. ("Maple Merger Sub"), were formed to combine the
businesses of the Company and Pinnacor. Each Company stockholder received
one share of Holdco common stock for each share of the Company common stock
held by such stockholder. Each Pinnacor stockholder received either $2.42
in cash or 0.2659 of a share of Holdco common stock for each share of
Pinnacor common stock held by such stockholder, subject to proration. Upon
closing of the acquisition, Maple Merger Sub merged with and into
MarketWatch, which was the surviving corporation, and Pine Merger Sub
merged with and into Pinnacor, which was the surviving corporation.
MarketWatch and Pinnacor became a wholly-owned subsidiary of Holdco, which
was renamed "MarketWatch.com, Inc." MarketWatch, one of Holdco's operating
subsidiaries after the merger, was renamed "MarketWatch Media, Inc." and
Pinnacor, the other Holdco operating subsidiary after the merger, continued
to be named "Pinnacor Inc." Shortly after the acquisition, each of
MarketWatch Media, Inc. and Pinnacor Inc. merged into MarketWatch.com, Inc.
On August 4, 2004, the Company changed its name from MarketWatch.com, Inc.
to MarketWatch, Inc.
The purchase price of $107.7 million was determined as follows (in
thousands):
Fair value of common stock $ 53,676
Fair value of options and warrants 6,718
Cash 44,002
Direct transaction costs 3,342
----------
$ 107,738
==========
The fair value of the common stock was determined based on 6,141,435 shares
of the Company common stock issued and priced using the average market
price of the common stock over the five-day period surrounding the date the
acquisition was announced in July 2003. The fair value of the Company's
stock options and warrants issued was determined using the Black-Scholes
option-pricing model. The following assumptions were used to perform the
calculations: expected life of 48 months for options and a remaining
contractual life of eight to ten months for warrants, risk-free interest
rate of 1.51%, expected volatility of 60% and no expected dividend yield.
The preliminary allocation of the purchase price to the assets acquired and
liabilities assumed based on their estimated fair values was as follows (in
thousands):
Cash acquired $ 41,270
Other tangible assets acquired 6,661
Amortizable intangible assets:
Developed technology 4,050
Acquired customer base 3,750
In-process research and development 300
Goodwill 65,960
----------
121,991
Liabilities assumed (14,307)
Deferred stock-based compensation 54
----------
Total $ 107,738
==========
The assets will be amortized over a period of years shown on the following
table:
Developed technology 4 years
Acquired customer base 7 years
Fixed assets acquired 1 to 5 years
A preliminary estimate of $65.4 million has been allocated to goodwill and
adjustments made to goodwill at September 30, 2004 increased the balance to
$66.0 million (See Note 5). Goodwill represents the excess of the purchase
price over the fair value of the net tangible and intangible assets
acquired, and is not deductible for tax purposes. Goodwill will not be
amortized and will be tested for impairment, at least annually. The
purchase price allocation for Pinnacor is subject to revision as more
detailed analysis is completed and additional information on the fair value
of Pinnacor's assets and liabilities becomes available. Any change in the
fair value of the net assets of Pinnacor will change the amount of the
purchase price allocable to goodwill.
The following attributes of the combination of the two businesses were
considered significant factors to the establishment of the purchase price,
resulting in the recognition of goodwill:
o Pinnacor's acquired technology included certain additional products
that would allow the combined company to develop more
comprehensive products and pursue expanded market opportunities.
o The ability to hire the Pinnacor workforce, which included a
significant number of experienced engineering, development and
technical staff with specialized knowledge of the sector in which
the combined company operates.
o Potential operating synergies are anticipated to arise, including
cost savings from the elimination of redundant data content
provision, data center operations and expenses associated with
operating as a public company and limited reductions in overlapping
staffing positions and general facility costs.
The following unaudited pro forma information presents a summary of the
results of operations of the Company assuming the acquisition of Pinnacor
occurred on January 1, 2003, respectively (in thousands, except per share
amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------------
2004 2003 2004 2003
--------- -------- --------- ---------
Net revenues $ 19,774 $ 19,922 $ 58,646 $ 58,922
======== ======== ========= ========
Net income (loss) $ 949 $ (590) $ 1,719 $ (1,809)
======== ======== ========= ========
Net income (loss) per share:
Basic $ 0.04 $ (0.03) $ 0.07 $ (0.08)
======== ======== ========= ========
Diluted $ 0.04 $ (0.03) $ 0.06 $ (0.08)
======== ======== ========= ========
NOTE 5 - GOODWILL AND INTANGIBLE ASSETS
Intangible Assets
Intangible assets consisted of the following (in thousands):
SEPTEMBER 30, 2004
-----------------------------------------------------
GROSS NET
CARRYING ACCUMULATED INTANGIBLE
AMOUNT AMORTIZATION ASSETS
------------ --------------- --------------
Developed technology $ 4,214 $ 747 $ 3,467
Acquired customer base 3,915 409 3,506
--------- -------- ----------
$ 8,129 $ 1,156 $ 6,973
========= ======== =========
The fair value underlying the $300,000 assigned to in-process research and
development ("IPR&D") from the Pinnacor acquisition was expensed
immediately during the quarter ended March 31, 2004 as amortization of
intangibles and was determined by identifying the research projects in
areas which technological feasibility had not been established and there
was no alternative future use. Intangibles for developed technology and
acquired customer base are being amortized over a period of 4 to 7 years,
respectively. The amortization expense related to identifiable intangible
assets is expected to be $1.9 million for the year ending December 31, 2004
and $1.7 million, $1.7 million, $1.6 million and $578,000 for the years
ending December 31, 2005, 2006, 2007 and 2008, respectively and $1.0
million thereafter. The weighted average amortization period is 4 and 6.8
years for developed technology and acquired customer base, respectively.
Goodwill
Goodwill consisted of the following (in thousands):
Balance at December 31, 2003 $ 22,429
Goodwill acquired during period 65,425
Goodwill adjustments pertaining to
preliminary purchase price allocation 535
----------
Balance at September 30, 2004 $ 88,389
==========
The increase in goodwill at September 30, 2004 was due to the acquisition
of Pinnacor on January 16, 2004 (See Note 4). The goodwill adjustments were
primarily related to the recognition of additional liabilities, offset by
an increase in the estimated value of a marketable security, both as a
result of the Pinnacor acquisition.
NOTE 6 - RELATED PARTY TRANSACTIONS
Under its license agreement with CBS, the Company expensed $810,000 and
$746,000 for the three months ended September 30, 2004 and 2003,
respectively, and $1.8 million and $2.2 million for the nine months ended
September 30, 2004 and 2003, respectively, related to the licensing of CBS
news content and trademarks. In addition, the Company recorded advertising
expenses of $0 at rate card value for the three months ended September 30,
2004 and 2003, and $0 and $56,000 for the nine months ended September 30
2004 and 2003, respectively, for in-kind advertising and promotion provided
by CBS. Rental payments to CBS for leasing of certain facilities were
$315,000 and $320,000 for the three months ended September 30, 2004 and
2003, respectively, and $937,000 and $949,000 for the nine months ended
September 30, 2004 and 2003, respectively.
Licensing revenues from FT.com and Financial Times, subsidiaries of Pearson
plc, were $329,000 and $367,000 for the three months ended September 30,
2004 and 2003, respectively, and $1.1 million and $1.2 million for the nine
months ended September 30, 2004 and 2003, respectively. The Company
recognized costs to IDC of $136,000 and $119,000 for the three months ended
September 30, 2004 and 2003, respectively, and $484,000 and $516,000 for
the nine months ended September 30, 2004 and 2003, respectively, for data
feeds. In March 2003, IDC purchased Comstock, Inc. and the Company expensed
$491,000 for the three months ended September 30, 2004 and $1.4 million for
the nine months ended September 30, 2004 for data feeds from Comstock, Inc.
Direct charges for subscription revenues for certain IDC data feeds were
$5,000 and $9,000 for the three months ended September 30, 2004 and 2003,
respectively, and $18,000 and $30,000 for the nine months ended September
30, 2004 and 2003, respectively. In addition, the Company recognized
revenues of $602,000 and $610,000 for the three months ended September 30,
2004 and 2003, respectively, and $1.9 million for the nine months ended
September 30, 2004 and 2003 from television and radio programming on CBS
stations. The Company recognized costs to CBS of $333,000 and $337,000 for
the three months ended September 30, 2004 and 2003, respectively, and $1.0
million and $923,000 for the nine months ended September 30, 2004 and 2003,
respectively, for production of television and radio programming.
At September 30, 2004 and December 31, 2003, $7,000 and $453,000,
respectively, were included in accounts receivable for radio and television
revenue due from CBS. In addition, $7,000 and $11,000, respectively, were
included in the Company's accounts receivable related to licensing and
subscription revenues due from IDC, and $102,000 and $92,000, respectively,
were included in the Company's accounts receivable related to licensing
revenues due from FT.com and Financial Times, subsidiaries of Pearson plc.
At September 30, 2004 and December 31, 2003, the Company had a liability of
$1.0 million and $972,000, respectively, recorded for CBS royalty fees, a
liability of $286,000 and $266,000, respectively, owed to CBS for
television production and facilities costs, and a liability of $654,000 and
$203,000, respectively, to IDC and Comstock, Inc. for data feeds.
NOTE 7 - SEGMENT REPORTING
The Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," establishes standards
for reporting information about operating segments in a company's financial
statements. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision making group,
in deciding how to allocate resources and in assessing performance. The
Company operates in one reportable segment.
NOTE 8 - LITIGATION AND ASSERTED CLAIMS
In 2001, several plaintiffs filed class action lawsuits in federal court
against the Company, certain of its current and former officers and
directors and its underwriters in connection with its January 1999 initial
public offering. The complaints generally assert claims under the
Securities Act, the Exchange Act and rules promulgated by the Securities
and Exchange Commission. The complaints seek class action certification,
unspecified damages in an amount to be determined at trial, and costs
associated with the litigation, including attorneys' fees. The action
against the Company is being coordinated with approximately three hundred
other nearly identical actions filed against other companies. On June 25,
2003, a committee of the Company's board of directors approved a Memorandum
of Understanding ("MOU"), which has now been memorialized in a settlement
agreement and related agreements that set forth the terms of a settlement
between the Company, the plaintiff class and a vast majority of the other
approximately 300 issuer defendants. Among other provisions, the settlement
provides for a release of the Company and the individual defendants for the
conduct alleged in the action to be wrongful. The Company would agree to
undertake certain responsibilities, including agreeing to assign, not
assert, or release certain potential claims the Company may have against
its underwriters. No estimate can be made of the possible loss or possible
range of losses associated with the resolution of this matter and it is
anticipated that any potential financial obligation of the Company to
plaintiffs pursuant to the terms of the settlement agreement and related
agreements will be covered by existing insurance. Therefore, the Company
does not expect that the settlement will involve any material payment by
the Company and no liability associated with these lawsuits has been
recorded at September 30, 2004. The settlement agreement has been submitted
to the Court for approval. Approval by the Court cannot be assured. On
October 13, 2004, the Court certified a class in six of the approximately
300 other nearly identical actions and noted that the decision is intended
to provide strong guidance to all parties regarding class certification in
the remaining cases. Plaintiffs have not yet moved to certify a class in
the Company's case.
On June 7, 2002, an action was commenced against Pinnacor alleging a breach
of contract claim and, as amended, sought damages in the amount of
$290,280. On February 7, 2003, Pinnacor filed counterclaims against the
plaintiff for breach of contract, breach of warranty and misrepresentation.
Motions for summary judgment were filed in early 2003. These motions are
still pending. The Company has established an appropriate accrual based on
the expected outcome of the legal proceeding and does not expect the
ultimate resolution of the claim to have a material impact on the balance
sheet, results of operations and cash flows.
On July 24, 2003, a shareholder class action lawsuit was filed against
Pinnacor, Pinnacor's then-current directors, a then-current Pinnacor
officer, and the Company in the Delaware Court of Chancery. The lawsuit
alleged that Pinnacor's directors breached their fiduciary duties in
proceeding with the acquisition by agreeing to an inadequate proposed
purchase price and alleged that the Company aided and abetted these
breaches of fiduciary duty in some unspecified way. The parties have
settled the action, pursuant to which the Company has paid plaintiff's
counsel $300,000 in attorney's fees and $15,000 in actual costs. The action
has been dismissed with prejudice and all defendants have been released
from liability. The Company has accrued the costs associated with this
matter as of September 30, 2004 and the fees were paid in October 2004.
On September 8, 2003, an action was commenced in the Supreme Court of the
State of New York against Tendagio, Inc. (formerly Inlumen, Inc.), Pinnacor
and several unnamed defendants. The lawsuit alleged a breach of contract
claim and a fraudulent conveyance claim. In April 2004, the Company served
upon the plaintiff its cross motion for summary judgment seeking dismissal
of the complaint with prejudice. In May 2004, the Company was served with
plaintiff's cross motion seeking dismissal of the action in its entirety,
without prejudice, or alternatively, additional time to respond to
defendants' summary judgment motions. In July 2004, the parties settled the
action, pursuant to which the action has been dismissed with prejudice, all
defendants have been released from liability and the Company has no
financial obligation to the plaintiff.
On October 18, 2004, an action was commenced in the United States District
Court for the Southern District of New York against the Company. The
lawsuit alleges a breach of contract claim in the amount of $400,000. The
Company is currently drafting an answer to the complaint. No estimate can
be made of the possible loss or possible range of losses associated with
the resolution of this matter. As a result, no losses have been accrued in
the Company's financial statements as of September 30, 2004. Accordingly,
the result of this lawsuit could have a material impact on the balance
sheet, results of operations and cash flows.
On or about November 2, 2004, a former employee of Pinnacor Inc. filed a
demand for arbitration before Judicial Arbitration and Mediation Services
seeking compensation related to the termination agreement he entered into
with the Company. The former employee claims he is entitled to lost wages
of $284,375 plus certain additional fees and damages. The Company's
management has not had an opportunity to review and evaluate this claim.
The Company has established an appropriate accrual based on the expected
outcome of the legal proceeding and does not expect the ultimate resolution
of the claim to have a material impact on the balance sheet, results of
operations and cash flows.
On or about November 5, 2004, a shareholder class action lawsuit was filed
against the Company, the Company's directors, and Viacom, Inc. ("Viacom")
in the Delaware Court of Chancery in connection with an amendment to a
Schedule 13D filed by Viacom. The lawsuit alleges, among other things, that
the Company's directors breached their fiduciary duties. The Complaint
seeks, among other things, a court order, an injunction and unspecified
damages. The Company's management has not had an opportunity to review and
evaluate this claim. As a result, no losses have been accrued in the
Company's financial statements as of September 30, 2004. Accordingly, the
result of this lawsuit could have a material impact on the balance sheet,
results of operations and cash flows.
On November 5, 2004, the Company received a preliminary report from a third
party auditor representing a data provider. The audit was routine in nature
and intended to ensure the Company's compliance with the data vendor's
contractual obligations. Although the Company has not yet received any
formal notification from the data provider, the preliminary report reflects
a potential exposure of approximately $7.4 million, with a possible
additional liability for retroactive payment of 8% thereon. Until the
Company receives a formal demand letter, the Company's management cannot
fully review and evaluate the claim and no estimate can be made of the
possible loss or possible range of losses associated with the resolution of
this matter. As a result, no losses have been accrued in the Company's
financial statements as of September 30, 2004. The result of this audit
resolution could have a material impact on the balance sheet, results of
operations and cash flow.
In addition, the Company from time to time is subject to legal proceedings
and claims in the ordinary course of business. The Company is not currently
aware of any other legal proceedings or claims that will have a material
adverse effect on its financial position or results of operations.
NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS
In March 2004, the FASB issued a proposed Statement, "Share-Based Payment,
an amendment of FASB Statements Nos. 123 and 95," that addresses the
accounting for share-based payment transactions in which a Company receives
employee services in exchange for either equity instruments of the Company
or liabilities that are based on the fair value of the Company's equity
instruments or that may be settled by the issuance of such equity
instruments. The proposed statement would eliminate the ability to account
for share-based compensation transactions using the intrinsic method that
the Company currently uses and generally would require that such
transactions be accounted for using a fair-value-based method and
recognized as expense in the consolidated statement of operations. In
October 2004, the FASB decided to defer the effective date for public
companies to interim and annual periods beginning after June 15, 2005. It
is expected that the final standard will be issued before December 31, 2004
and should it be finalized in its current form, it will have a significant
impact on the consolidated statement of operations as the Company will be
required to expense the fair value of stock option grants and stock
purchases under employee stock purchase plan.
In September 2004, the EITF delayed the effective date for the recognition
and measurement guidance previously discussed under EITF Issue No. 03-01,
"The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments" ("EITF 03-01") as included in paragraphs 10-20 of the
proposed statement. The proposed statement will clarify the meaning of
other-than-temporary impairment and its application to investments in debt
and equity securities, in particular investments within the scope of FASB
Statement No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," and investments accounted for under the cost method. The
Company is currently evaluating the effect of this proposed statement on
its financial position and results of operations.