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UNITED STATES
SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM: _____________________ TO _____________________
COMMISSION FILE NUMBER: 0-26071
EDGAR ONLINE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1447017
STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION IDENTIFICATION NO.)
50 WASHINGTON ST., NORWALK, CT 06854
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(203) 852-5666
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [x] Yes [] No
Number of shares of common stock outstanding at August 14, 2001: 14,908,917
shares
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EDGAR ONLINE, INC.
FORM 10-Q
FOR THE QUARTERS ENDED JUNE 30, 2001 AND 2000
INDEX
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets
June 30, 2001 (unaudited) and December 31, 2000..................................................................3
Consolidated Statements of Operations
Three and Six Months Ended June 30, 2001 (unaudited) and 2000 (unaudited)........................................4
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2001 (unaudited) and 2000 (unaudited)..................................................5
Notes to Unaudited Consolidated Financial Statements......................................................................6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................8
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.......................................................20
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings................................................................................................21
ITEM 2. Changes in Securities and Use of Proceeds........................................................................21
ITEM 3. Defaults Upon Senior Securities..................................................................................21
ITEM 4. Submission of Matters to a Vote of Security Holders..............................................................21
ITEM 5. Other Information................................................................................................21
ITEM 6. Exhibits and Reports on Form 8-K.................................................................................21
Signatures...............................................................................................................22
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
EDGAR ONLINE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
June 30, 2001 December 31,
(unaudited) 2000
------------- -----------
Cash and cash equivalents $2,331 $2,284
Marketable securities -- 1,498
Accounts receivable, less allowance for doubtful accounts of $347
and $345 at June 30, 2001 and December 31, 2000 respectively 2,366 2,790
Income tax receivable -- 979
Other current assets 271 127
------------- -----------
Total current assets 4,968 7,678
Property and equipment, net 3,145 3,356
Goodwill and intangible assets, net 29,448 27,307
Other assets 988 1,125
------------- -----------
Total assets $38,549 $39,466
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $2,029 $2,358
Deferred revenues 1,371 966
Notes payable and accrued interest 550 583
Deferred tax liability, current portion 345 --
Capital lease payable, current portion 40 68
------------- -----------
Total current liabilities 4,335 3,975
Notes payable 6,000 6,000
Deferred tax liability, non-current portion 3,105 --
Capital lease payable, non-current portion 15 8
------------- -----------
Total liabilities 13,455 9,983
------------- -----------
Stockholders' equity:
Common stock, $0.01 par value, 30,000,000 shares authorized,
14,908,917 shares issued and outstanding 149 149
Preferred stock, $0.1 par value, 1,000,000 shares authorized, no
shares issued or outstanding -- --
Additional paid-in capital 53,488 53,483
Unrealized holding losses -- (2)
Accumulated deficit (28,543) (24,147)
------------- -----------
Total stockholders' equity 25,094 29,483
Total liabilities and stockholders' equity $38,549 $39,466
============= ===========
See accompanying notes to consolidated financial statements
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EDGAR ONLINE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
---- ---- ---- ----
Revenues:
Corporate contracts $ 3,265 $ 800 $ 6,536 $ 1,439
Individual subscriptions 619 548 1,198 1,042
Advertising and other 271 1,047 704 1,792
-------- -------- -------- --------
Total revenues 4,155 2,395 8,438 4,273
Cost of revenues 1,144 757 2,546 1,473
-------- -------- -------- --------
Gross profit 3,011 1,638 5,892 2,800
Operating expenses:
Sales and marketing 653 1,394 1,259 2,761
Development expenses 640 535 1,263 1,091
General and administrative 1,910 1,314 4,032 2,782
Depreciation and amortization 1,191 732 2,356 1,435
Office shut down costs 912 - 912 -
-------- -------- -------- --------
5,306 3,975 9,822 8,069
Loss from operations (2,295) (2,337) (3,930) (5,269)
Loss on investment (275) - (275) -
Interest and other income (expense) (103) 290 (174) 625
-------- -------- -------- --------
Loss before income taxes (2,673) (2,047) (4,379) (4,644)
Income tax provision (17) - (17) -
-------- -------- -------- --------
Net loss ($2,690) ($2,047) ($4,396) ($4,644)
======== ======== ======== ========
Weighted average shares outstanding -
basic and diluted 14,909 12,459 14,909 12,459
Net loss per share - basic and diluted ($0.18) ($0.16) ($0.30) ($0.37)
See accompanying notes to consolidated financial statements
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EDGAR ONLINE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
2001 2000
---- ----
Cash flows from operating activities:
Net loss ($4,396) ($4,644)
------ ------
Adjustments to reconcile net loss to net cash flows from operating
activities:
Depreciation 654 427
Amortization of intangibles 1,701 1,010
Provisions for bad debts 2 21
Stock compensation expense 5 6
Loss on investment 275 --
Changes in assets and liabilities:
Accounts receivable 422 (482)
Other assets (390) (372)
Income tax receivable 902 --
Accounts payable and accrued expenses (536) 361
Deferred revenues 405 453
------ ------
Total adjustments 3,440 1,424
Net cash (used in) operating activities (956) (3,220)
Cash flows from investing activities:
Purchases of property and equipment (410) (1,093)
Purchase of other investments -- (401)
Sales of available-for-sale investments 1,499 407
Purchases of available-for-sale investments -- (83)
------ ------
Net cash provided by (used in) investing activities 1,089 (1,170)
Cash flows from financing activities:
Proceeds from issuances of common stock -- 2
Principal payments on notes payable (33) --
Payments on capital lease obligations (53) (32)
------ ------
Net cash (used in) financing activities (86) (30)
Net change in cash and cash equivalents 47 (4,420)
Cash and cash equivalents at beginning of period 2,284 10,109
------ ------
Cash and cash equivalents at end of period $2,331 $5,689
====== ======
Supplemental disclosure of cash flow information:
Cash paid for interest and taxes $339 $8
Equipment acquired under capital leases $32 $--
See accompanying notes to consolidated financial statements.
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EDGAR ONLINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
EDGAR Online, Inc. ("the Company"), formerly Cybernet Data Systems,
Inc., was incorporated in the State of Delaware in November 1995, and launched
its "EDGAR-Online" Internet Web site in January 1996. The Company is a provider
of financial information derived from U.S. Securities and Exchange Commission
data and a developer of financial and business system solutions. In May 1999,
the Company completed an initial public offering ("IPO") of 3,600,000 shares of
the Company's common stock resulting in net proceeds of approximately $30.4
million.
The unaudited interim financial statements of the Company as of June
30, 2001 and for the three and six months ended June 30, 2001 and 2000, included
herein have been prepared in accordance with the instructions for Form 10-Q
under the Securities Exchange Act of 1934, as amended, and Article 10 of
Regulation S-X under the Securities Act of 1934, as amended. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and regulations
relating to interim financial statements.
In the opinion of management, the accompanying unaudited interim
financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position of the
Company as of June 30, 2001, and the results of its operations for the three and
six months ended June 30, 2001 and 2000, respectively and its cash flows for the
six months ended June 30, 2001 and 2000, respectively. The results for the three
and six months ended June 30, 2001 are not necessarily indicative of the
expected results for the full fiscal year or any future period.
These financial statements should be read in conjunction with the
financial statements and related footnotes included in the Company's Form 10-K,
filed with the SEC in March 2001.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions 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 revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
(2) RECLASSIFICATIONS
Stock compensation expense has been reported within the functional
expense category for which the employee worked. Prior comparative amounts have
been reclassified to conform to the year 2001 presentation.
(3) BUSINESS COMBINATIONS
On September 10, 1999, the Company acquired Partes Corporation
("Partes"), owner of the FreeEDGAR.com Web site. Under the terms of the
agreement, we purchased all of the outstanding equity of Partes for $9,901,054.
The purchase price included (1) the issuance of 908,877 shares of EDGAR Online
common stock valued at $7,804,981, (2) the issuance of 75,039 EDGAR Online stock
options and warrants, with a fair value of $259,176, in exchange for all
outstanding Partes stock options, (3) the assumption of net liabilities totaling
$847,786 and (4) $989,111 in fees and acquisition related expenses. Subsequent
to the acquisition, we also repaid Partes bank indebtedness of $919,879. The
acquisition was accounted for under the purchase method of accounting and
accordingly the estimated fair value of Partes' assets and liabilities and the
operating results of Partes from the effective date of the acquisition have been
included in the accompanying financial statements. During the fourth quarter of
2000, we performed a reassessment of the recovery of the goodwill and other
long-lived assets related to Partes and as a result recorded an impairment
charge of $5,673,000.
On October 30, 2000, the Company acquired all the outstanding equity of
Financial Insight Systems, Inc. (FIS), pursuant to the terms and conditions of
an agreement and plan of merger dated October 18, 2000 for approximately $29.6
million. The purchase price included (1) the issuance of 2,450,000 restricted
shares of EDGAR Online common stock valued at approximately
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$9.6 million, (2) the payment of $17,765,000 consisting of (i) a cash payment of
$11,765,000 and (ii) a series of two year 7.5% senior subordinated secured
promissory notes in the total principal amount of $6,000,000, (3) approximately
$0.8 million in cash for the payment of fees and acquisition related expenses
and (4) deferred tax liabilities of approximately $3.5 million. The acquisition
was accounted for under the purchase method of accounting and accordingly the
estimated fair value of FIS' assets and liabilities and the operating results of
FIS from the effective date of the acquisition have been included in the
accompanying financial statements. Based upon an independent third party
valuation, the Company has allocated the purchase price as follows (in
thousands):
Accumulated Knowhow $ 9,124
Assembled Workforce 4,194
Customer Based Intangibles 4,045
Excess Cost Over Fair Value of Assets Acquired (Goodwill) 12,235
------
Purchase Price $ 29,598
The amounts allocated to accumulated knowhow, assembled workforce, and
customer based intangibles are being amortized over the assets' estimated useful
lives, which is ten, five, and twelve years, respectively. The excess of cost
over fair value of net assets acquired (goodwill) is being amortized over a
twelve-year period.
The following unaudited information presents the actual consolidated
results for the six months ended June 30, 2001 and the pro forma combined
results of operations of the Company and FIS for the six-month period ended June
30, 2000. The pro forma information gives effect to certain pro forma
adjustments. These pro forma amounts are not necessarily indicative of what the
actual consolidated results of operations might have been if the acquisition had
been effective on January 1, 2000 or of future results of operations of the
consolidated entities (in thousands, except for per share data):
Six Months Ended June 30,
2001 2000
(actual) (pro forma)
---------- -----------
Revenue $ 8,438 $ 8,222
Operating loss $(3,930) $(6,412)
Net loss $(4,396) $(6,552)
Basic and diluted loss per share $ (0.30) $ (0.44)
(4) REVENUE RECOGNITION
Revenues from subscriptions and corporate contracts are recognized
either over the subscription period, which is typically one, three, six or
twelve months or, in the case of certain up-front fees, over the estimated
customer relationship period. Revenue from consulting services and advertising
is recognized as the services are provided.
Barter advertising revenue is non-cash and relates to advertising
placed on the Company's Web sit by other internet companies in exchange for the
Company's advertising placed on their Web sites. Barter advertising is
recognized in the month that banners are exchanged. The amount of barter
advertising revenue and expense is recorded at the fair market value of the
services rendered or provided, whichever is more objectively determinable.
Revenue for the three and six months ended June 30, 2000 has been
restated by reducing corporate contract revenue as compared to amounts
previously reported in the Company's Form 10-Q to reflect the retroactive
application of Staff Accounting Bulletin 101 as of January 1, 2000. The deferral
relates to revenue associated with certain up front fees.
(5) CONCENTRATION OF RISK
Financial instruments that potentially subject the Company to
significant concentration of credit risk consist primarily of accounts
receivable. The most significant concentration of credit risk relates to NASDAQ,
which comprised 14% and 31%, and
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DoubleClick, which comprised 8% and 14% of the Company's total gross receivable
balance at June 30, 2001 and December 31, 2000, respectively. No other customer
accounted for more than 10% of accounts receivable at June 30, 2001 or December
31, 2000. NASDAQ also accounted for 39% and 0% of total sales for the six months
ended June 30, 2001 and 2000, respectively. The Company's other customers are
geographically dispersed throughout the United States with no other customer
accounting for more than 10% of sales for the six months ended June 30, 2001 or
2000.
(6) LOSS ON INVESTMENT
The Company's management performs on-going business reviews and, based
on quantitative and qualitative measures, assesses the need to record impairment
losses on long-lived assets when impairment indicators are present. Where
impairment indicators were identified, management determined the amount of the
impairment charge by comparing the carrying value of long-lived assets to their
fair value.
During the second quarter of 2001, the Company recorded a $275,000 loss
on investment related to an equity investment made in 2000. This investment was
accounted for under the cost method. The company in which the investment was
made had lower than expected financial results over the previous several
quarters as compared to those forecasted at the time of the investment. As a
result, the carrying amount has been reduced to $0.
The impairment factors evaluated by management may change in subsequent
periods, given that the Company operates in a volatile business environment.
This could result in additional material impairment charges in future periods.
(7) OFFICE SHUT DOWN COSTS
In May 2001, the Company announced that it will close the Kirkland,
Washington office. The office closing will complete the Company's consolidation
of its technical operations, which is expected to save $1.5 million on an annual
basis. During the second quarter of 2001, the Company recorded a $912,000
pre-tax charge which is included in operating expenses in the consolidated
statements of operations. These costs include the following (in thousands):
Write down of fixed assets $ 234
Non-recoverable lease liabilities 171
Non-cancelable service contracts 188
Employment termination costs 319
-----
Total office shut down costs $ 912
-----
No payments have been made as of June 30, 2001.
(8) LOSS PER SHARE
Loss per share is presented in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share". Under SFAS No. 128, basic earnings per share ("EPS") excludes dilution
for common stock equivalents and is computed by dividing income or loss
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted and resulted in the issuance of common stock.
Diluted loss per share has not been presented separately, as the
outstanding stock options, warrants and convertible debentures are anti-dilutive
for each of the periods presented.
Anti-dilutive potential common shares outstanding were 405,266 and
494,617 for the three months ended June 2001 and 2000, respectively, and 381,598
and 621,810 for the six months ended June 30, 2001 and 2000, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results and timing of certain events
could differ materially from those anticipated in these forward-
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looking statements as a result of certain factors, including, but not limited
to, those set forth under "Risk Factors that May Affect Future Results" included
elsewhere in this Quarterly Report.
OVERVIEW
EDGAR Online is a provider of financial information derived from U.S.
Securities and Exchange Commission data and a developer of financial and
business system solutions. We sell to the corporate market and Internet portals
as well as running five destination Web sites. We were founded in November 1995
as Cybernet Data Systems, Inc. In January 1999, we changed our corporate name to
EDGAR Online, Inc.
We derive revenues from three primary sources: corporate contracts,
individual subscriptions, and advertising. Revenue from corporate contracts
consists of sales of data and information systems to corporate customers and is
recognized over the term of the contract. Services related to corporate
contracts are typically billed either monthly or quarterly in advance. Revenue
from individual subscriptions is deferred and recognized as income over the
subscription period. Individual subscriptions are typically billed in advance to
subscribers' credit cards and are collected, net of credit card transaction fees
deducted by the credit card processing institution, within one week of the sale.
Revenue from advertising is recognized as the services are provided. Advertising
revenue is paid to us by DoubleClick, net of advertising placed and commission
fees. Barter advertising revenue is a non-cash item and relates to advertising
placed on our Web sites by other Internet companies in exchange for our
advertising placed on their Web sites. Barter advertising revenue is recorded in
the month that banners are exchanged. The amount of barter advertising revenue
and expense is recorded at the fair market value of the services received or
provided, whichever is more objectively determinable.
We intend to increase our operating expenses to fund increased sales
and marketing, to enhance our Web sites and to continue to establish
relationships critical to our success.
On October 30, 2000, the Company acquired all the outstanding equity of
Financial Insight Systems, Inc. (FIS), pursuant to the terms and conditions of
an agreement and plan of merger dated October 18, 2000 for approximately $29.6
million. The purchase price included (1) the issuance of 2,450,000 restricted
shares of EDGAR Online common stock valued at approximately $9.6 million, (2)
the payment of $17,765,000 consisting of (i) a cash payment of $11,765,000 and
(ii) a series of two year 7.5% senior subordinated secured promissory notes in
the total principal amount of $6,000,000, (3) approximately $0.8 million in cash
for the payment of fees and acquisition related expenses and (4) deferred tax
liabilities of approximately $3.5 million. The acquisition was accounted for
under the purchase method of accounting and accordingly the estimated fair value
of FIS' assets and liabilities and the operating results of FIS from the
effective date of the acquisition have been included in the accompanying
financial statements.
RESULTS OF OPERATIONS
Revenues
Revenues increased 73% to approximately $4.2 million in the three-month
period ended June 30, 2001, from $2.4 million for the comparable period in 2000.
The growth in revenues is primarily attributable to a $2.5 million, or 308%,
increase in corporate contract revenues and a $71,000 or 13%, increase in
individual subscription revenues, offset by a $776,000 or 74% decrease in
advertising and other revenues. Revenues increased 97% to approximately $8.4
million in the six-month period ended June 30, 2001 from $4.3 million for the
comparable period in 2000. The growth in revenue is primarily attributable to a
$5.1 million or 354% increase in corporate contract revenues and a $156,000 or
15% increase in individual subscription revenues offset by a $1.1 million or 61%
decrease in advertising and other revenues. The increase in corporate contract
revenue resulted from the FIS acquisition and an increase in the number of
corporate contracts in excess of $500 per month to approximately 135 at June 30,
2001 from approximately 75 at June 30, 2000. The number of individual
subscriptions increased to approximately 20,000 subscriptions at June 30, 2001
from approximately 16,000 subscriptions at June 30, 2000. The decrease in
advertising and other revenues is primarily due to the decrease in the
advertising rates as impressions for the quarter increased to 95 million for the
quarter ended June 30, 2001 from 90 million for the quarter ended June 30, 2000.
Cost of Revenues
Cost of revenues consist primarily of fees paid to acquire the Level I
EDGAR database feed from the SEC, Web site maintenance charges, salaries and
benefits of certain employees, and the costs associated with our computer
equipment and communications lines used in conjunction with our Web sites. In
addition, for each period, online barter advertising expense is recorded equal
to the online barter advertising revenue for that period. Total cost of revenues
increased 51% to $1.1 million in the
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three-month period ended June 30, 2001, from $757,000 for the comparable period
in 2000. Total cost of revenues increased 73% to $2.5 million for the six-month
period ended June 30, 2001 from $1.5 million for the comparable period in 2000.
The increase in cost of revenues is primarily attributable to the FIS
acquisition and increases in software and Web site maintenance and
communications lines needed to handle increased traffic. Gross margins were 72%
in the three-month period ended June 30, 2001 and 68% for the comparable period
in 2000. Gross margins were 70% for the six month period ended June 30, 2001 and
66% for the comparable period in 2000.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and benefits, advertising expenses, public relations, and costs of
marketing materials. Sales and marketing expenses decreased 53% to $653,000 in
the three months ended June 30, 2001 from $1.4 million in the equivalent period
in 2000. As a percentage of revenues, sales and marketing expenses decreased to
16% in the three months ended June 30, 2001 from 58% for the comparable period
in 2000. Sales and marketing expenses decreased 54% to $1.3 million for the
six-month period ended June 30, 2001 from $2.8 million for the comparable period
in 2000. As a percentage of revenues, sales and marketing expenses decreased to
15% for the six months ended June 30, 2001 from 65% in the comparable period in
2000. The decrease in sales and marketing expenses was due to a reduction in our
advertising spending and marketing campaign. The decrease in sales and marketing
expenses as a percentage of revenue is primarily due to the addition of revenue
from FIS which has a smaller percentage of revenue dedicated to sales and
marketing as compared to our subscription business. We expect sales and
marketing expenses to increase as we continue to hire additional sales
personnel.
Development. Development expenses increased 20% to $640,000 for the
three months ended June 30, 2001 from $535,000 in the comparable period of 2000.
As a percentage of revenues, development expenses decreased to 15% in the three
months ended June 30, 2001 from 22% for the comparable period in 2000.
Development expenses increased 16% to $1.3 million in the six month period ended
June 30, 2001 from $1.1 million in the comparable period in 2000. As a
percentage of revenue, development expenses decreased to 15% for the six months
ended June 30, 2001 from 26% for the six months ended June 30, 2000. The
increase in development expenses is primarily due to the expansion of content on
our Web sites and development of corporate products. The decrease as a
percentage of revenues is the result of the addition of revenue from FIS which
has a smaller percentage of revenue dedicated to development as compared to our
subscription business.
General and Administrative. General and administrative expenses consist
primarily of salaries and benefits, fees for professional services, general
corporate expenses and facility expenses. General and administrative expenses
increased 45% to $1.9 million in the three months ended June 30, 2001 from $1.3
million for the comparable period in 2000. As a percentage of revenues, general
and administrative expenses decreased to 46% in the three months ended June 30,
2001 from 55% for the comparable period in 2000. General and administrative
expenses increased 45% to $4.0 million for the six-month period ended June 30,
2001 from $2.8 million in the comparable period in 2000. As a percentage of
revenue, general and administrative expenses decreased to 48% for the six-month
period ended June 30, 2001 from 65% for the comparable period in 2000. The
increase in general and administrative expenses in dollar terms was primarily
due to the FIS acquisition and increased personnel, professional service fees
and general corporate expenses. The decrease in general and administrative
expenses as a percentage of revenue is due to the addition of FIS revenue which
has a smaller percentage of revenue dedicated to general and administrative as
compared to our subscription business. We expect that general and administrative
expenses will continue to increase in future periods as we hire additional
personnel and incur additional costs related to the growth of our business and
our operations as a public company.
Depreciation and Amortization. Depreciation and amortization expenses
include the depreciation of property and equipment and the amortization of
goodwill and intangible assets. Depreciation and amortization increased 63% to
$1.2 million for the three months ended June 30, 2001 from $732,000 for the
three months June 30, 2000. As a percentage of revenues, depreciation and
amortization decreased to 29% for the three months ended June 30, 2001 from 31%
for the three months ended June 30, 2000. Depreciation and amortization expenses
increased 64% to $2.4 million for the six-month period ended June 30, 2001 from
$1.4 million in the comparable period in 2000. As a percentage of revenue,
general and administrative expenses decreased to 28% for the six-month period
ended June 30, 2001 from 34% for the comparable period in 2000. The increase in
depreciation and amortization in dollar terms is due to the additional
amortization expense related to the FIS acquisition and the increase in property
and equipment.
Loss on Investment. Loss on investment represents a one-time non-cash
charge associated with the write-off of an equity investment made in 2000 as we
have determined that the fair value of the investment is $0 due to declines in
the operating results of the company in which the investment was made. This
investment was accounted for under the cost method.
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Office Shut Down Costs. Office shut down costs are comprised of
expenses associated with the shut down of the Kirkland, WA office. These costs
include severance payments, non-recoverable lease liabilities, loss on fixed
assets, and the cost of non-cancelable contracts for operating expenses such as
phone lines and equipment leases.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $956,000 and $3.2 million for
the six months ended June 30, 2001 and 2000, respectively. We have historically
financed these activities through private debt placements and the sale of equity
instruments to investors. As a result of our acquisition of FIS, our continued
focus on growing our corporate customer base, and recent expense reductions, we
expect to be cash flow positive by the third quarter of 2001, although no
assurance can be given in this regard.
Capital expenditures, primarily for computers, office and
communications equipment, totaled $410,000 for the six months ended June 30,
2001 and $1.1 million for the six months ended June 30, 2000. The purchases were
required to support our expansion and increased infrastructure.
At June 30, 2001, we had cash and cash equivalents on hand of $2.3
million. We believe that our existing capital resources and the cash generated
from operations will be sufficient to meet our anticipated cash needs for
working capital and capital expenditures for at least the next 12 months. We
expect to be cash flow positive in the third quarter of 2001 due to our expected
growth in revenues, as well as the closing of the Kirkland, WA office. This
restructuring will complete the Company's consolidation of its technical
operations and is expected to save $1.5 million on an annual basis. Thereafter,
if cash generated from operations is insufficient to satisfy our liquidity
requirements, we may need to raise additional funds through public or private
financings, strategic relationships or other arrangements to fund more and rapid
expansion, to develop new or enhance existing services, or to respond to
competitive pressures. There can be no assurance that such additional funding,
if needed, will be available on terms attractive to us, or at all. The failure
to raise capital when needed could materially adversely affect our business,
results of operations and financial condition. If additional funds are raised
through the issuance of equity securities, the percentage ownership of our
then-current stockholders would be reduced.
In connection with our acquisition of FIS, we issued $6,000,000 in
notes with all principal due October 27, 2002. We expect that our cash generated
from operations will be sufficient to pay the debt upon maturity. If cash
generated from operations is insufficient to satisfy the debt repayment, we may
need to raise additional funds through public or private financings, strategic
relationships or other arrangements. There can be no assurance that such
additional funding, if needed, will be available on terms attractive to us, or
at all. The failure to raise capital when needed could materially adversely
effect our business, results of operations and financial condition. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of our then-current stockholders would be reduced.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the FASB issued Statement No. 141, Business Combinations,
and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. Statement 141 also
specifies criteria intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill.
Statement 142 will require that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of Statement 142. Statement 142 will
also require that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviews for impairment in accordance with SFAS No.121, Accounting for the
Impairment of Long-Lived Assets and for Ling-Lived Assets to Be Disposed Of.
The Company is required to adopt the provisions of Statement 141
immediately and Statement 142 effective January 1, 2002. Furthermore, any
goodwill and any intangible asset determined to have an indefinite useful life
that are acquired in a purchase business combination completed after June 30,
2001 will not be amortized, but will continue to be evaluated for impairment in
accordance with the appropriate pre-Statement 142 accounting literature.
Goodwill and intangible assets acquired in business combinations completed
before July 1, 2001 will continue to be amortized prior to the adoption of
Statement 142.
Statement 141 will require upon adoption of Statement 142, that the
Company evaluate its existing intangible assets and goodwill that were acquired
in a prior purchase business combination, and to make any necessary
reclassifications in order to conform with the new criteria in Statement 141 for
recognition apart from goodwill. Upon adoption of Statement 142, the
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Company will be required to reassess the useful lives and residual values of all
intangible assets acquired in purchase business combinations, and make any
necessary amortization period adjustments by the end of the first interim period
after adoption. In addition, to the extent and intangible asset is identified as
having an indefinite useful life, the Company will be required to test the
intangible asset for impairment in accordance with the provisions of Statement
142 within the first interim period. Any impairment loss will be measured as of
the date of adoption and recognized as the cumulative effect of a change in
accounting principle in the first interim period.
In connection with the transitional goodwill impairment evaluation,
Statement 142 will require the Company to perform an assessment of whether there
is an indication that goodwill is impaired as of the date of adoption. To
accomplish this the Company must identify its reporting units and determine the
carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those reporting units
as of the date of adoption. The Company will then have up to six months from the
date of adoption to determine the fair value of each reporting unit and compare
it to the reporting unit's carry amount. To the extent a reporting unit's
carrying amount exceeds its fair value, an indication exists that the reporting
unit's goodwill may be impaired and the Company must perform the second step of
the transitional impairment test. In the second step, the Company must compare
the implied fair value of the reporting unit's goodwill, determined by
allocating the reporting unit's fair value to all of it assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with Statement 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but no later than the end of the year adoption.
Any transitional impairment loss will be recognized as the cumulative effect of
a change in accounting principle in the Company's statement of earnings.
As of date of adoption, the Company expects to have unamortized
goodwill in the amount of $11.3 million and unamortized identifiable intangible
assets in the amount of $16.3 million all of which will be subject to the
transition provisions of Statements 141 and 142. Amortization expense related to
goodwill was $782,000 and $432,000 for the year ended December 31, 2000 and the
six months ended June 30, 2001, respectively. Because of the extensive effort
needed to comply with adopting Statement 141 and 142, it is not practicable to
reasonably estimate the impact of adopting these Statements on the Company's
financial statements at the date of this report, including whether any
transitional impairment losses will be required to be recognized as the
cumulative effect of a change in accounting principle.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
WE HAVE A LIMITED OPERATING HISTORY AND OUR FUTURE SUCCESS WILL DEPEND ON OUR
ABILITY TO INCREASE REVENUES.
As an early stage company in the new and rapidly evolving market for
the delivery of financial and business information over the Internet, we face
numerous risks and uncertainties in achieving increased revenues. We were
incorporated in November 1995 and launched our EDGAR Online Web site in January
1996. Accordingly, we have a limited operating history on which you can evaluate
our business and prospects. During this period, we have invested heavily in our
proprietary technologies to enable us to carry out our business plan. These
expenditures, in advance of revenues, have resulted in operating losses in each
of the last three years. In order to be successful, we must increase our
revenues from the sale of our services to corporate customers, individual
subscription fees and advertising sales. In order to increase our revenues, we
must successfully:
- implement our marketing plan to (1) increase corporate sales, (2)
attract more individual online users to our services and (3) convert
visitors to paying subscribers;
- continue to improve our market position as a commercial provider of
information services based on EDGAR filings;
- maintain our current, and develop new, content distribution
relationships with popular Web sites and providers of business and
financial information;
- maintain our current, and continue to increase, advertising revenues
by increasing traffic to our Web sites and by increasing the number of
advertisers;
- respond effectively to competitive pressures from other Internet
providers of EDGAR content;
- continue to develop and upgrade our technology;
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- integrate our acquisition of Financial Information Systems, Inc.; and
- attract, retain and motivate qualified personnel with Internet
experience to serve in various capacities, including IT services,
sales and marketing positions.
If we are not successful in addressing these uncertainties through the
execution of our business strategy, our business, results of operations and
financial condition will be materially adversely affected.
WE HAVE A HISTORY OF LOSSES AND CANNOT ASSURE THAT WE WILL ATTAIN PROFITABILITY.
As of June 30, 2001, we had an accumulated deficit of $28,543,000. We
incurred net losses of $2,221,000 for the year ended December 31, 1998,
$4,163,000 for the year ended December 31, 1999, $15,237,000 for the year ended
December 31, 2000 and $4,396,000 for the six months ended June 30, 2001. We
expect to continue to incur significant operating costs and capital
expenditures. As a result, we will need to generate significant revenues to
achieve and maintain profitability. Even if we do achieve profitability, we
cannot assure you that we can sustain or increase profitability on a quarterly
or annual basis in the future. In addition, if revenues grow slower than we
anticipate, or if operating expenses exceed our expectations or cannot be
adjusted accordingly, our business, results of operations and financial
condition will be materially adversely affected. As a result of these and other
costs, we may incur operating losses in the future, and we cannot assure you
that we will attain profitability.
WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL FINANCING.
We currently anticipate that our available cash resources combined with
cash generated from operations will be sufficient to meet our anticipated
working capital and capital expenditure requirements for at least the next 12
months. We may need to raise additional funds, however, to fund potential
acquisitions, more rapid expansion, to develop new or enhance existing services,
to fund payments due to noteholders in connection with our acquisition of FIS,
or to respond to competitive pressures. We cannot assure you that additional
financing will be available on terms favorable to us, or at all. If adequate
funds are not available or are not available on acceptable terms, our ability to
fund our expansion, take advantage of unanticipated opportunities, develop or
enhance services or products or otherwise respond to competitive pressures would
be significantly limited. Our business, results of operations and financial
condition could be materially adversely affected by these financing limitations.
FUTURE ENHANCEMENTS TO THE SEC'S EDGAR SYSTEM MAY ERODE DEMAND FOR OUR SERVICES.
Our future success will depend on our ability to continue to provide
value-added services that distinguish our Web sites from the type of
EDGAR-information available from the SEC on its Web site. Through its Web site,
the SEC provides free access to EDGAR filings on a time-delayed basis of 24 to
72 hours. If the SEC, which has announced that it intends to modernize the EDGAR
system, were to make changes to its Web site such as providing (1) free
real-time access to EDGAR filings or (2) value-added services comparable to
those provided on our Web sites, our business, results of operations and
financial condition would be materially adversely affected.
WE FACE INTENSE COMPETITION FROM OTHER PROVIDERS OF BUSINESS AND FINANCIAL
INFORMATION.
We compete with many providers of business and financial information,
including other Internet companies, for consumers' and advertisers' attention
and spending. Because our market poses no substantial barriers to entry, we
expect this competition to continue to intensify. The types of companies with
which we compete for users and advertisers include:
- traditional vendors of financial information, such as Disclosure;
- proprietary information services and Web sites targeted to business,
finance and investing needs, including those providing EDGAR content,
such as Bloomberg, and LIVEDGAR; and
- Web-based providers of free EDGAR information such as 10K Wizard.com.
Our future success will depend on our ability to maintain and enhance
our market position by: (1) using technology to add value to raw EDGAR
information, (2) keeping our pricing models below those of our competitors, (3)
maintaining a strong corporate sales presence in the marketplace and (4) signing
high-traffic Web sites to distribution contracts.
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Our potential commercial competitors include entities that currently
license our content, but which may elect to purchase a real-time EDGAR database
feed (called a Level I EDGAR feed) directly from the SEC and use it to create
value-added services, similar to services provided by us, for their own use or
for sale to others. This risk is particularly serious in light of the fact that
the cost of Level I feed has fallen significantly since we started our business.
The cost of the feed is now approximately $45,000 per year.
Many of our existing competitors, as well as a number of potential
competitors, have longer operating histories, greater name recognition, larger
customer bases and significantly greater financial, technical and marketing
resources than we do. This may enable them to respond more quickly to new or
emerging technologies and changes in the types of services sought by users of
EDGAR-based information, or to devote greater resources to the development,
promotion and sale of their services than we can. These competitors and
potential competitors may be able to undertake more extensive marketing
campaigns, adopt more aggressive pricing policies and make more attractive
offers to potential employees, subscribers and content distribution partners.
Our competitors may also develop services that are equal or superior to the
services offered by us or that achieve greater market acceptance than our
services. In addition, current and prospective competitors may establish
cooperative relationships among themselves or with third parties to improve
their ability to address the needs of our existing and prospective customers. If
these events occur, they could have a materially adverse effect on our revenue.
Increased competition could also result in price reductions, reduced margins or
loss of market share, any of which would adversely affect our business, results
of operations and financial condition.
WE RISK BEING DELISTED FROM NASDAQ WHICH COULD REDUCE OUR ABILITY TO RAISE FUNDS
If our stock price were to drop below $1.00 per share and remain below
$1.00 per share for an extended period of time, we would be in violation the
continued listing requirements of The Nasdaq Stock Market ("Nasdaq") and we risk
the delisting of our shares from Nasdaq. Delisting from Nasdaq and inclusion of
our common stock on the OTC Bulletin Board or similar quotation system could
adversely affect the liquidity and price of our common stock and make it more
difficult for us to raise additional capital on favorable terms, if at all.
Even if the minimum per share bid price of our common stock is
maintained, the Company must also satisfy other listing requirements of the
Nasdaq National Market ("NNM"), such as maintaining equity of at least $10
million. Failure to satisfy any of the maintenance requirements could result in
our common stock being delisted from the NNM. Although in that event we could
apply to list our shares with the Nasdaq SmallCap Market, its delisting from the
NNM could adversely affect the liquidity of our common stock. In addition,
delisting from the NNM might negatively impact the Company's reputation and, as
a consequence, its business.
THE PRICE OF OUR COMMON STOCK HAS BEEN VOLATILE.
The market price of our common stock has been, and is likely to
continue to be, volatile, experiencing wide fluctuations. In recent years, the
stock market has experienced significant price and volume fluctuations that have
particularly affected the market prices of equity securities of many technology
companies. Some of these fluctuations appear to be unrelated or disproportionate
to the operating performance of such companies. Future market movements may
materially and adversely affect the market price of our common stock.
WE MAY NOT BE SUCCESSFUL IN INCREASING BRAND AWARENESS.
Our future success will depend, in part, on our ability to increase the
brand awareness of our Web-based customized corporate services. If our marketing
efforts are unsuccessful or if we cannot increase our brand awareness, our
business, financial condition and results of operations would be materially
adversely affected. In order to build our brand awareness, we must succeed in
our marketing efforts, provide high quality services and increase the number of
people who are aware of the services we offer. We have devoted significant funds
to expand our sales and marketing efforts as part of our brand-building efforts.
These efforts may not be successful.
WE MAY NOT BE SUCCESSFUL IN DEVELOPING NEW AND ENHANCED SERVICES AND FEATURES
FOR OUR WEB SITES.
Our market is characterized by rapidly changing technologies, evolving
industry standards, frequent new product and service introductions and changing
customer demands. To be successful, we must adapt to our rapidly changing market
by
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continually enhancing our existing services and adding new services to address
our customers' changing demands. We could incur substantial costs if we need to
modify our services or infrastructure to adapt to these changes. Our business
could be adversely affected if we were to incur significant costs without
generating related revenues or if we cannot adapt rapidly to these changes.
Our business could also be adversely affected if we experience
difficulties in introducing new or enhanced services or if these services are
not favorably received by users. We may experience technical or other
difficulties that could delay or prevent us from introducing new or enhanced
services. Furthermore, after these services are introduced, we may discover
errors in these services which may require us to significantly modify our
software or hardware infrastructure to correct these errors.
WE ARE DEPENDENT ON THE CONTINUED GROWTH OF THE EMERGING MARKET FOR ONLINE
BUSINESS AND FINANCIAL INFORMATION.
The success of our business will depend on the growing use of the
Internet for the dissemination of business and financial information. The number
of individuals and institutions that use the Internet as a primary source of
business and financial information may not continue to grow. The market for the
distribution of business and financial information, including EDGAR-based
content, over the Internet has only recently begun to develop, is rapidly
evolving and is characterized by an increasing number of market entrants who
have introduced or developed electronic distribution services over the Internet
and private networks. As is typical of a rapidly evolving industry, demand and
market acceptance for new services are subject to a high level of uncertainty.
Because the market for our products and services is new and rapidly
evolving, it is difficult to predict with any certainty what the growth rate, if
any, and the ultimate size of this market will be. We cannot be certain that the
market for our services will continue to develop or that our services will ever
achieve a significant level of market acceptance. If the market fails to
continue to develop, develops more slowly than expected or becomes saturated
with competitors, or if our services do not achieve significant market
acceptance, or if pricing becomes subject to considerable competitive pressures,
our business, results of operations and financial condition would be materially
adversely affected.
MAINTAINING EXISTING AND ESTABLISHING NEW CONTENT DISTRIBUTION RELATIONSHIPS
WITH HIGH-TRAFFIC WEB SITES IS CRUCIAL TO OUR FUTURE SUCCESS.
Because our advertising revenues depend to a great extent on the
traffic to our Web sites, our business could be adversely affected if we do not
maintain our current, and establish additional, content distribution
relationships on commercially reasonable terms or if a significant number of our
content distribution relationships do not result in increased use of our Web
sites. We rely on establishing and maintaining content distribution
relationships with high-traffic Web sites for a significant portion of the
traffic on our Web sites. There is intense competition for placements on
high-traffic Web sites, and we may not be able to maintain our present
contractual relationships or enter into any additional relationships on
commercially reasonable terms, if at all. Even if we maintain our existing
relationships or enter into new content distribution relationships with other
Web sites, they themselves may not continue to attract significant numbers of
users. Therefore, our Web sites may not continue to receive significant traffic
or receive additional new users from these relationships.
OUR BUSINESS COULD BE ADVERSELY AFFECTED BY A DOWNTURN IN THE FINANCIAL SERVICES
INDUSTRY.
We are dependent upon the continued demand for the distribution of
business and financial information over the Internet, making our business
susceptible to a downturn in the financial services industry. For example, a
decrease in the expenditures that corporations and individuals are willing to
make to purchase these types of information could result in a decrease in the
number of customers purchasing our information services and subscribers
utilizing our Web sites. This downturn could have a material adverse effect on
our business, results of operations and financial condition.
SOME OF OUR CLIENTS MAY BE UNABLE TO RAISE ADDITIONAL CAPITAL NEEDED TO RETAIN
OUR SERVICE OR PAY US FOR SERVICES PERFORMED.
Some of our current and potential clients need to raise additional
funds in order to continue their business and operations as planned. We cannot
be certain that these companies will be able to obtain additional financing on
favorable terms or at all. As a result of their inability to raise additional
financing, some clients may be unable to pay us for services we have already
provided them or they may terminate our services earlier than planned, either of
which could have a material adverse effect on our business, financial condition
and operating results.
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WE DEPEND ON DOUBLECLICK FOR ADVERTISING REVENUES.
We anticipate that our results of operations in any given period will
continue to depend to a significant extent upon advertising revenues generated
through our relationship with DoubleClick, Inc., which has provided us with a
full range of advertising services for the last three years. DoubleClick's
failure to enter into a sufficient number of advertising contracts during a
particular period could have a material adverse effect on our business,
financial condition and results of operations. Historically, a limited number of
customers, all represented by DoubleClick, have accounted for a significant
percentage of our paid advertising revenues. For the quarter ended June 30,
2001, our DoubleClick-related paid advertising revenue was 3% of our total
revenues.
Our existing agreement with DoubleClick can be canceled by either party
on 90 days notice. In addition, this agreement does not prohibit DoubleClick
from selling the same type of service that we currently receive from them to Web
sites that compete with our Web sites. If DoubleClick is unable or unwilling to
provide these advertising services to us in the future, we would be required to
obtain them from another provider or perform them ourselves. We would likely
lose significant advertising revenues while we are in the process of replacing
DoubleClick's services.
WE FACE INTENSE COMPETITION FOR ADVERTISING REVENUES AND THE VIABILITY OF THE
INTERNET AS AN ADVERTISING MEDIUM IS UNCERTAIN.
We compete with both traditional advertising media, such as print,
radio and television, and other Web sites for a share of advertisers' total
advertising budgets. Paid advertising revenues represented 3% and 24% of our
total revenues for the quarters ended June 30, 2001 and June 30, 2000,
respectively. If advertisers do not perceive the Internet to be an effective
advertising medium, companies like ours will be unable to compete successfully
with traditional media for advertising revenues. In addition, if we are unable
to generate sufficient traffic on our Web sites, we could potentially lose
advertising revenues to other Web sites that generate higher user traffic. If
advertising on the Web shrinks due to a general business downturn, this could
also cause us to lose advertising revenue. Because advertising sales make up a
significant component of our revenues, any of these developments could have a
significant adverse impact on our business, results of operations or financial
condition.
WE MAY NOT BE ABLE TO CREATE AND DEVELOP AN EFFECTIVE DIRECT SALES FORCE.
Because a significant component of our growth strategy relates to
increasing our revenues from sales of our corporate services, our business would
be adversely affected if we were unable to develop and maintain an effective
sales force to market our services to this customer group. Until mid-1999, we
had not employed any sales executives to sell our corporate services. Our sales
force now consists of 11 people. Seven of these people were added during the six
months ended June 30, 2001. Seven of our sales people have been hired from
outside the company. Four of our sales people have been reassigned from other
duties within the company. Our efforts to build an effective sales force may not
be successful.
WE MAY NOT BE ABLE TO SUCCESSFULLY MANAGE OUR GROWTH.
We have experienced and are currently experiencing a period of
significant growth. If we are unable to manage our growth effectively, our
business will be adversely affected. This growth has placed, and our anticipated
future growth will continue to place, a significant strain on our technical,
financial and managerial resources. As part of this growth, we may have to
implement new operational and financial systems and procedures and controls to
expand, train and manage our employees, especially in the areas of sales and
product development.
WE FACE RISKS IN CONNECTION WITH OUR RECENT ACQUISITION AND OTHER ACQUISITIONS
AND BUSINESS COMBINATIONS THAT WE MAY CONSUMMATE.
We plan to continue to expand our operations and market presence by
making acquisitions, such as the recent acquisition of Financial Insight
Systems, Inc. and entering into business combinations, investments, joint
ventures or other strategic alliances with other companies. These transactions
create risks such as:
- difficulty assimilating the operations, technology and personnel of
the combined companies;
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- disruption of our ongoing business;
- problems retaining key technical and managerial personnel;
- expenses associated with amortization of goodwill and other purchased
intangible assets;
- additional operating losses and expenses of acquired businesses; and
- impairment of relationships with existing employees, customers and
business partners.
We may not succeed in addressing these risks. In addition, some of the
businesses we have acquired, and in the future may acquire, may continue to
incur operating losses.
WE DEPEND ON KEY PERSONNEL.
Our future success will depend to a significant extent on the continued
services of our senior management and other key personnel, particularly Susan
Strausberg, Chief Executive Officer, Marc Strausberg, Chairman and Chief
Information Officer, Albert E. Girod, Executive Vice President and Chief
Technology Officer, Tom Vos, President and Chief Operating Officer, Greg Adams,
Chief Financial Officer, Paul Sappington, Chief Software Officer and Vice
President, and Jay Sears, Senior Vice President, Strategy and Business
Development, each of whom are parties to written employment agreements. The loss
of the services of these, or certain other key employees, would likely have a
material adverse effect on our business. We do not maintain "key person" life
insurance for any of our personnel. Our future success will also depend on our
continuing to attract, retain and motivate other highly skilled employees.
Competition for personnel in our industry is intense. We may not be able to
retain our key employees or attract, assimilate or retain other highly qualified
employees in the future. If we do not succeed in attracting new personnel or
retaining and motivating our current personnel, our business will be adversely
affected. In addition, the employment agreements with our key employees contain
restrictive covenants that restrict their ability to compete against us or
solicit our customers. These restrictive covenants, or some portion of these
restrictive covenants, may be deemed to be against public policy and may not be
fully enforceable. If these provisions are not enforceable, these employees may
be in a position to leave us and work for our competitors or start their own
competing businesses.
WE MAY NOT ADEQUATELY PERFORM CERTAIN ASPECTS OF OUR BUSINESS WHICH WERE
PREVIOUSLY PROVIDED BY THIRD PARTIES.
Until February 2001, we depended on third parties to develop and
maintain the software and hardware we use to operate a number of our Web sites.
Prior to this date, iXL Enterprises, Inc., an Internet strategy consulting
company, developed, maintained and upgraded our proprietary software, including
those features which enable users to locate and retrieve data, as well as one of
our databases of EDGAR filings, Web-based customer interfaces and customer
support and billing systems. Beginning in December 2000, we started to assume
full responsibility from iXL for the development and maintenance of our own
software and hardware configurations. As of the end of February 2001, we have
become solely responsible for these functions. If we are unable to perform these
services as well as iXL did previously, this could materially adversely affect
our business, results of operations and financial condition.
WE DEPEND ON THIRD PARTIES FOR IMPORTANT ASPECTS OF OUR BUSINESS OPERATIONS.
We have a hosting contract with Globix Corporation, a provider of
Internet services, pursuant to which Globix operates and maintains the Web
servers owned by us in their New York City data center. Our hosting contract
with Globix expires in July 2003. If Globix were unable or unwilling to provide
these services, we would have to find a suitable replacement. Our operations
could be disrupted while we were in the process of finding a replacement for
Globix and the failure to find a suitable replacement or to reach an agreement
with an alternate provider on terms acceptable to us could materially adversely
affect our business, results of operations and financial condition.
WE FACE A RISK OF SYSTEM FAILURE.
Our ability to provide EDGAR content on a real-time basis and
technology-based solutions to our corporate clients depends on the efficient and
uninterrupted operation of our computer and communications hardware and software
systems. Similarly, our ability to track, measure and report the delivery of
advertisements on our site depends on the efficient and uninterrupted operation
of a third-party system provided by DoubleClick. These systems and operations
are vulnerable to damage
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or interruption from human error, natural disasters, telecommunication failures,
break-ins, sabotage, computer viruses, intentional acts of vandalism and similar
events. Any system failure, including network, software or hardware failure,
that causes an interruption in our service or a decrease in responsiveness of
our Web sites could result in reduced traffic, reduced revenue and harm to our
reputation, brand and relations with advertisers.
Our operations depend on Globix's ability to protect its and our
systems in its data center against damage from fire, power loss, water damage,
telecommunications failure, vandalism and similar unexpected adverse events.
Although Globix provides comprehensive facilities management services, including
human and technical monitoring of all production servers 24 hours-per-day, seven
days-per-week, Globix does not guarantee that our Internet access will be
uninterrupted, error-free or secure. Any disruption in the Internet access to
our Web sites provided by Globix could materially adversely affect our business,
results of operations and financial condition. Our insurance policies may not
adequately compensate us for any losses that we may incur because of any
failures in our system or interruptions in the delivery of our services. Our
business, results of operations and financial condition could be materially
adversely affected by any event, damage or failure that interrupts or delays our
operations.
THERE ARE RISKS OF INCREASED USERS STRAINING OUR SYSTEMS AND OTHER SYSTEM
MALFUNCTIONS.
In the past, our Web sites and the technology-based solutions we sell
to our corporate customers have experienced significant increases in traffic
when there have been important business or financial news stories and during the
seasonal periods of peak SEC filing activity. In addition, the number of users
of our information and technology-based solutions has continued to increase over
time and we are seeking to further increase the size of our user base and the
frequency with which they use our services. Therefore, our Web sites and
business solutions must accommodate an increasingly high volume of traffic and
deliver frequently updated information. Our Web sites and business solutions
have in the past, and may in the future, experience slower response times or
other problems for a variety of reasons, including hardware capacity restraints
and software failures. These strains on our system could cause customer
dissatisfaction and could discourage visitors from becoming paying subscribers.
We also depend on the Level I EDGAR feed we purchase in order to provide SEC
filings on a real-time basis. Our Web sites could experience disruptions or
interruptions in service due to the failure or delay in the transmission or
receipt of this information.
These types of occurrences could cause users to perceive our Web sites
and technology solutions as not functioning properly and cause them to use other
methods, including the SEC's Web site or services of our competitors, to obtain
EDGAR-based information and technology solutions.
WE LICENSE THE TERM EDGAR FROM THE SEC AND DEPEND ON OTHER INTELLECTUAL
PROPERTY.
Trademarks and other proprietary rights, principally our proprietary
database technology, are important to our success and our competitive position.
The SEC is the owner of a United States trademark registration covering the use
of the term EDGAR. We have obtained a non-exclusive, royalty-free license from
the SEC to use the term EDGAR in our trademarks, service marks and corporate
name. This license is due to expire in September 2008. Since we have built
significant brand recognition through the use of the term EDGAR in our service
offerings, company name and Web sites, our business, results of operations and
financial condition could be adversely affected if we were to lose the right to
use the term EDGAR in the conduct of our business.
We seek to protect our trademarks and other proprietary rights by
entering into confidentiality agreements with our employees, consultants and
content distribution partners, and attempting to control access to and
distribution of our proprietary information. Despite our efforts to protect our
proprietary rights from unauthorized use or disclosure, third parties may
attempt to disclose, obtain or use our proprietary information. The precautions
we take may not prevent this type of misappropriation. In addition, our
proprietary rights may not be viable or of value in the future since the
validity, enforceability and scope of protection of proprietary rights in
Internet-related industries is uncertain and still evolving.
Finally, third parties could claim that our database technology
infringes their proprietary rights. Although we have not been subjected to
litigation relating to these types of claims, such claims and any resultant
litigation, should it occur, could subject us to significant liability for
damages and could result in the invalidation of our proprietary rights. Even if
we prevail, such litigation could be time-consuming and expensive, and could
result in the diversion of our time and attention, any of which could materially
adversely affect our business, results of operations and financial condition.
Any claims or litigation could also result in limitations on our ability to use
our trademarks and other intellectual property unless we enter into license or
royalty agreements, which agreements may not be available on commercially
reasonable terms, if at all.
WE ARE DEPENDENT ON THE INTERNET INFRASTRUCTURE.
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Our future success will depend, in significant part, upon the
maintenance of the various components of the Internet infrastructure, such as a
reliable backbone network with the necessary speed, data capacity and security,
and the timely development of enabling products, such as high-speed modems,
which provide reliable and timely Internet access and services. To the extent
that the Internet continues to experience increased numbers of users, frequency
of use or increased user bandwidth requirements, we cannot be sure that the
Internet infrastructure will continue to be able to support the demands placed
on it or that the performance or reliability of the Internet will not be
adversely affected. Furthermore, the Internet has experienced a variety of
outages and other delays as a result of damage to portions of its infrastructure
or otherwise, and such outages or delays could adversely affect our Web sites
and the Web sites of our co-branded partners, as well as the Internet service
providers and online service providers our customers use to access our services.
In addition, the Internet could lose its viability as a commercial medium due to
delays in the development or adoption of new standards and protocols that can
handle increased levels of activity. We cannot predict whether the
infrastructure and complementary products and services necessary to maintain the
Internet as a viable commercial medium will be developed or maintained.
WE ARE SUBJECT TO UNCERTAIN GOVERNMENT REGULATION AND OTHER LEGAL UNCERTAINTIES
RELATING TO THE INTERNET.
There are currently few laws or regulations that specifically regulate
communications or commerce on the Internet. Any new laws or regulations relating
to the Internet could adversely affect our business. In addition, current laws
and regulations may be applied and new laws and regulations may be adopted in
the future that address issues such as user privacy, pricing, taxation and the
characteristics and quality of products and services offered over the Internet.
For example, several telecommunications companies have petitioned the Federal
Communications Commission to regulate Internet service providers and online
service providers in a manner similar to long distance telephone carriers and to
impose access fees on these companies. This could increase the cost of
transmitting data over the Internet, which could increase our expenses and
discourage people from using the Internet to obtain business and financial
information. Moreover, it may take years to determine the extent to which
existing laws relating to issues such as property ownership, libel and personal
privacy are applicable to the Internet.
WE FACE WEB SECURITY CONCERNS THAT COULD HINDER INTERNET COMMERCE.
Any well-publicized compromise of Internet security could deter more
people from using the Internet or from using it to conduct transactions that
involve transmitting confidential information, such as stock trades or purchases
of goods or services. Because a portion of our revenue is based on individuals
using credit cards to purchase subscriptions over the Internet and a portion
from advertisers who seek to encourage people to use the Internet to purchase
goods or services, our business could be adversely affected by this type of
development. We may also incur significant costs to protect against the threat
of security breaches or to alleviate problems, including potential private and
governmental legal actions, caused by such breaches.
WE COULD FACE LIABILITY AND OTHER COSTS RELATING TO OUR STORAGE AND USE OF
PERSONAL INFORMATION ABOUT OUR USERS.
Our policy is not to willfully disclose any individually identifiable
information about any user to a third party without the user's consent. This
policy statement is available to users of our subscription services when they
initially register. We also alert and seek the consent of registered subscribers
and users to use some of the information that they provide to market them
additional services provided by EDGAR Online or third party providers. Despite
this policy and consent, however, if third persons were able to penetrate our
network security or otherwise misappropriate our users' personal or credit card
information, we could be subject to liability. These could include claims for
unauthorized purchases with credit card information, impersonation or other
similar fraud claims. They could also include claims for other misuses of
personal information such as for unauthorized marketing purposes. These claims
could result in litigation. In addition, the Federal Trade Commission and
several states have been investigating certain Internet companies regarding
their use of personal information. We could incur additional expenses if new
regulations regarding the use of personal information are introduced or if these
regulators chose to investigate our privacy practices.
WE MAY BE LIABLE FOR INFORMATION DISPLAYED ON OUR WEB SITES.
We may be subjected to claims for defamation, negligence, copyright or
trademark infringement, violation of the securities laws or other claims
relating to the information that we publish on our Web sites, which may
materially adversely affect our business. These types of claims have been
brought, sometimes successfully, against online services as well as other print
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publications in the past. We could also be subjected to claims based upon the
content that is accessible from our Web sites through links to other Web sites.
Our general liability insurance may not cover these claims and may not be
adequate to protect us against all liabilities that may be imposed.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE FLUCTUATIONS
We are exposed to market risk primarily through our investments in
available-for-sale investments. Our policy calls for investment in short-term,
low risk investments. As of June 30, 2001, available-for-sale investments were
$0. Any decrease in interest rates would not have a material effect on our
financial statements.
CURRENCY RATE FLUCTUATIONS
Our results of operations, financial position and cash flows are not
materially affected by changes in the relative values of non-U.S. currencies to
the U.S. dollar. We do not use derivative financial instruments to limit our
foreign currency risk exposure.
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PART II. OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
FEES BILLED FOR SERVICES RENDERED BY PRINCIPAL ACCOUNTANT
For the fiscal year ended December 31, 2000, KPMG LLP, our independent
auditor and principal accountant, billed approximately $203,000 in
audit fees, $0 fees relating to financial information systems design
and implementation matters, and $189,000 in all other fees.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits: There are no exhibits filed as part of this Report on Form
10-Q
b. Reports on Form 8-K: There were no reports on Form 8-K filed during
the quarter ended June 30, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EDGAR ONLINE, INC.
(Registrant)
Dated: August 14, 2001 /s/ Greg D. Adams
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Greg D. Adams
Chief Financial Officer
Dated: August 14, 2001 /s/ Tom Vos
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Tom Vos
President and Chief Operating Officer
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